Category: Research & Analysis

Toward a unified measure of U.S. housing insecurity

Posted on by Kavya Vaghul
Townhouses for sale in Beaverton, Oregon.

The consequences of the Trump administration’s proposed steep cuts to the housing social safety net are serious but unquantifiable. Policymakers should look to the development of the U.S. Household Food Security Survey Module as a roadmap to create a standard instrument to measure housing security.

New Working Paper
Roadmap to a unified measure of housing insecurity

Housing is often used as a barometer of achievement in U.S. society. The type of home we live in and our neighborhoods are signals of pedigree, of where we fall on the socioeconomic ladder. Nevertheless, housing is in fact one of life’s few necessities. Although many of us might take it for granted, we need stable quality housing to be healthy, productive citizens. Housing and neighborhoods influence our emotional and physical well-being, human capital development, and social networks. At its core, housing is a human right.

When we think of those who experience housing insecurity, we often think of the extreme: the homeless. Yet many individuals and families struggle daily to find and maintain affordable, quality housing. These struggles often go unseen until some major event such as the housing market crash a decade ago or last year’s tragic Oakland, California, warehouse fire. The housing market crash, in particular, brought to light that no matter our status in society, we are all susceptible to a housing crisis.

Housing insecurity is often invisible to the public. In fact, we do not really know the true extent to which Americans, or others in the world, suffer from housing problems. Unlike food insecurity, there is no uniform measure for housing insecurity that captures all of housing’s various dimensions. More basic than that, we do not have shared language or a common definition that defines and guides our understanding of what constitutes housing insecurity.

Some housing experts describe housing problems as “housing instability.” Others utilize the chosen term for this article, “housing insecurity.” Still others use “housing insufficiency.” Likewise, housing problems are measured in various ways; some look strictly at housing affordability—spending more than 50 percent of one’s annual income on housing—while others incorporate behavioral aspects of housing insecurity such as multiple moves and overcrowding.

The lack of a unifying term and definition inhibits the mobilization of research, resources, and public policy surrounding this issue. But there is a model that could be used to fix this problem. The food insecurity measure came about after the 1984 President’s Task Force on Food Assistance found that the lack of a credible indicator for hunger inhibited public policy regarding this issue. By October 1990, the National Nutrition Monitoring and Related Research Act passed in the U.S. Senate and U.S. House of Representatives requiring the preparation and implementation of a 10-year plan, which included as a goal to “establish and improve the quality of national nutritional and health status data and related data bases and networks, and stimulate research necessary to develop uniform indicators, standards, methodologies, technologies, and procedures for nutrition monitoring.”

In 1995, the first federal food security instrument was included in the U.S. Census Bureau’s Current Population Survey, and since then, our understanding of food insecurity has grown tremendously. We now know more about food insecurity’s risk factors and whether it is a chronic state or temporary. Food security has become an important indicator for the well-being of households and children, as well as an outcome in the evaluation of food assistance programs. All of this is the result of a transdisciplinary effort that included practitioners, policymakers, and academics committed to developing a validated instrument that could be used to understand, similar to housing, one of society’s most intractable and often hidden problems.

As we enter into a period of increasing wealth inequality, gentrification, and threats to the housing social safety net, it is imperative that policymakers revisit housing insecurity so that they can understand the degree to which individuals and families suffer from the more hidden dimensions of housing insecurity, determine the burden of housing insecurity on society, and devise strategies and solutions to address this problem.

As you may have already surmised, the common term endorsed by my co-authors and me is “housing insecurity.” While this is not the most frequently used term in the literature, we argue that it will provide familiar, accessible language to society given the widespread adoption and success of the concept of food insecurity. We also put forth a definition of housing insecurity based on the 1969 indicators of housing instability described by the U.S. Department of Health and Human Services. Specifically, we define housing insecurity as:

Limited or uncertain availability of stable, safe, adequate, and affordable housing and neighborhoods; limited or uncertain access to stable, safe, adequate, and affordable housing and neighborhoods; or the inability to acquire stable, safe, adequate, and affordable housing and neighborhoods in socially acceptable ways.

We believe our definition is sound. But we also believe it is imperative for all key stakeholders to convene in order to agree upon a common language and definition. Regardless of what these turn out to be, we argue that there are six domains of housing insecurity that should be considered in any measure:

  • Housing stability
  • Housing affordability
  • Housing quality
  • Housing safety
  • Neighborhood safety
  • Neighborhood quality

We also argue that behavioral measures of housing insecurity should be incorporated within the measure, such as choosing to forgo other necessities such as food to pay for rent, and that the instrument used to measure this metric should have the ability to define housing insecurity along a continuum, such that the most housing secure and insecure can be represented within one measure.

On May 23, President Donald Trump released his official budget proposing to reduce spending on means-tested social safety net programs, such as the Supplemental Nutrition Assistance Program and housing vouchers, by $272 billion over the next 10 years. Because there already is a validated food security measure, we can assess how these cuts will affect the food insecurity of American families and respond with key indicators of the damage that these cuts would cause to families and communities nationwide. Because we do not have a common housing insecurity instrument, we cannot confidently predict how the proposed $7.4 billion—15 percent—budget cut to the U.S. Department of Housing and Urban Development for fiscal year 2018 will affect the housing insecurity of U.S. households.

Although it is clear that these cuts to federal housing programs would, if enacted, reduce or eliminate funding to programs such as housing vouchers, Community Development Block Grants, and public housing, we cannot estimate the full extent to which American families will suffer due to increased homelessness and housing hardships. Leaders in Congress should both oppose these ill-intentioned cuts to the housing safety net and understand that any future proposed change to housing security programs needs to be accompanied by clear data that can inform decision-making moving forward. Now is the time to develop a uniform measure of housing insecurity. While this is a tall task, we are confident that it can be done. After all, we do not have to look very far in history to find a blueprint on how we could develop such a national instrument, given the relatively recent creation and implementation of the U.S. Household Food Security Survey Module.

—Robynn Cox is an assistant professor at the University of Southern California’s Suzanne Dworak-Peck School of Social Work and the Leonard D. Schaeffer Center for Health Policy and Economics.

In conversation with David Weil

Posted on by Nick Bunker

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability. In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks to David Weil, currently the Peter and Deborah Wexler professor of management at Boston University’s Questrom School of Business. Weil will become the dean of the Heller School for Social Policy and Management at Brandeis University in the fall. They talk about Weil’s research on the “fissured workplace,” the influence of monopsony power, the rise of interfirm inequality, and his experience in government.

Heather Boushey: Thank you so much for taking the time to do this interview. Your research and writing on the fissured workplace has been so important for understanding what’s happening to the U.S. labor market over the past several decades. I want to run through your ideas, but I also want to tap into your experience as a policymaker. You just spent three years working for the Obama administration, putting your ideas into action, and I’d like to hear a little bit about that.

We can come back to that in the end, though.

I had the pleasure of co-editing “After Piketty: The Agenda for Economics and Inequality,” which of course is a volume you contributed to. And your chapter was on the fissured workplace. I’d like to start off this conversation by asking you to explain what you mean by that. Not everyone who’s listening to this or reading this will have heard your argument. What does a fissured labor market look like?

David Weil: The whole idea of the fissured workplace grew out of thinking about a bunch of phenomena that had been happening to the labor market, with business organizations outsourcing, subcontracting, and third-party management. I had been studying in various projects the changes in business organizations and thinking about some of their impacts on compliance with workplace standards and other labor market outcomes. And at a certain point, it started to strike me that there were common elements about these different activities.

First of all, public and private capital markets were pushing businesses throughout the 1980s to talk about what’s their core competencies and to kind of focus increasingly on what were they delivering to their customers? And what were they delivering to investors in terms of the value they’re creating. Living in a business school has made this sort of something I hear a lot as well. And as you know in economics, there’s nothing inherently wrong with specialization. It has been a driver in so much of economic history and business development. But the pressure over the past decade seemed to be at an almost laser focus.

So you started to have companies really shedding anything that wasn’t core to their definition of value creation. And that led to the second element you see in fissuring, which is this desire to shed anything that doesn’t contribute to the perceived core competency. If you look at different businesses and industries, the process of shedding plays out somewhat differently, but the basic evolution is they start by shedding things like payroll, accounting, information technology, publications, things that they can find other players to provide, usually at a lower cost.

But then you start seeing that the activities they’re shedding continues. It’s like businesses started to say, “Hey, this is actually kind of cool. I can get this stuff done, and instead of paying, let’s say a wage, to a person to do something, I am paying a price to get the same activity.” And so that shedding starts moving inward to more and more activities that are pretty central to what that business does.

So, for example, in the hotel industry in the 1980s, the branded hotel industry got out of the business of actually owning properties. Instead, they came to define their core competency as managing portfolios of brands. And so you married a strategy of franchising the property to a strategy of simply owning the brand and making sure that the brand was being delivered by these properties. The property owners would pay you revenue for the use of the brand name or the brand affiliation through royalties, advertising, and licensing fees. The franchise owners get the benefits of the brand recognition but now face the problem of managing the property and hiring the workforce. We can talk about any number of industries where this process also started to happen. The pathways differ, but in each case, they’re shedding activities as almost a complement to pursuit of the chosen core competency.

But the third piece, which is really important in my mind to understand both the fissuring phenomenon and its public policy implications, is that companies needed some kind of glue to hold the first two elements together—like the hotel brand’s standards in the above example. Why? Because if I’m trying to maximize the value of my core competency but I’m shedding activities to other players, those businesses can undermine my core competency. So the third piece is creating some kind of organizational glue to make sure those other entities don’t stray, that they keep to task, that their incentives are aligned with the main company’s in a way that you still have the product delivered to quality or technical or time specifications, or all of the above.

This is why I think franchising started to spread to lots of sectors. It’s a form of business organization that allows you to shed and yet control. That’s the nature of a franchise agreement.

I think information technology facilitated this because you have lower-cost mechanisms to monitor subsidiary organizations or the networks of organizations that make up a fissured workplace. I think Uber is an example of exactly this, in probably the most technologically advanced form out there. But years ago I had studied the evolution of the supply chain in the retail industry, and the standards that came with those business arrangements are also about the glue. So you can find this glue manifesting itself in different places. That’s the key third element.

The idea of fissuring is really the combination of those three things applied in different settings that has the net effect of breaking apart the employee-employer relationship. Take the hotel example. Once the property was franchised, the owners of the property had limited knowledge about running a hotel. So you’ve got third-party managers running the hotel owned by a different entity under the specifications of the brand. And those third-party managers typically started hiring staffing agencies. They didn’t want to be the employers either. And so you have this deepening of the fissures. Subcontracting begets subcontracting.

Fissures like this also spread. They spread to other industries. They spread to other parts of the occupational distribution of a given industry. And the end result is you have broken apart the employment relationships. Sometimes this reflects employers trying to avoid their own liability under workplace laws and regulations. And that’s an important part of it.

But I think another part of the phenomenon that I’ve always been trying to emphasize is that it goes beyond avoidance of liability. Because if you think this is just about employers trying to weasel out of their responsibilities, you miss this more fundamental change, in my mind, that’s happening in business organization. And if you’re trying to ultimately deal with the consequences of that, then you’re underestimating the difficulty of unwinding that behavior or changing that behavior in some way to deal with the consequences in the labor market.

Boushey: So part of what firms got rid of are the management problems with all the subcontracting because managing humans is difficult, and nobody wants that piece, and so they want to separate that from all of the actually profitable parts of the enterprise. But they’re paying a price rather than a wage, right, which of course is what Uber does. Yet there are all these rules, which means the company is still in control. Traditionally, we’d have this distinction between a contract and being an employee. But it seems like you’re suggesting that there’s something more to the management problem than just the responsibility.

Weil: No, I think you’re exactly right about both elements. Managing people is messy. And businesses, if they can push that to someone else who can do that problem for them more effectively, they’re going to do it.

There’s a really interesting guy in capital markets. You’ve probably met this guy, in the financial services industry, Steven Berkenfeld, who’s at Barclays Bank. Steve has been thinking a lot about the future of work, and I’ve appeared in some of these future-work seminars with him. He likes to quote Henry Ford, who asked why he had to get the rest of the worker when all he wanted was his hands. Steve has talked about this insight in the financial services industry after the financial collapse, when there was a scrambling to cut costs as much as possible. Some of that was accomplished by companies shifting work out of financial services industries to contractors.

This vignette from that industry, which I think is suggestive of what you’re talking about, is once they did it, they suddenly said, “Oh my gosh, so much better. We don’t have to deal with messy humans. We can just pay for this other company to deal with it. And we don’t have to look into that box anymore.”

But I think this is a public policy fallacy because they are still setting so many of the terms about what that box does. In terms of how we think about this in terms of public policies, what I sometimes call the lead company is still dictating outcomes, performance goals, and very specific things that they want those entities to do. In so many ways, their hands are still all over matters that are still about the employment relationship. But they have created this market distinction between their activities and those of the subsidiary.

I think the management piece is a big part of it, but again, with the caveat that they have created a glue to make sure they follow what is required to achieve core outcomes for the lead business.

But another critical impact of fissuring that you noted is its impact on the setting of wages. This is what I wrote about in my chapter for “After Piketty” that you edited. The wage-setting process is transformed by shifting out work. Why is it that companies set single wages for a job? Why do they set standard wages rather than be a price discriminator and set a wage so that each worker gets only their marginal product of labor? It’s because people are working within the four walls of the same entity. We are social animals, and equity norms come up. And people compare their wages, whether they are allowed to or not.

Boushey: Yes, they do.

Weil: People know. People know. They are very aware. And because people are aware, employers are aware. And so you have more uniform wage policies. You have standard wages.

There was a big literature in the 1990s about why did large firms pay more to certain workers than otherwise equal workers in smaller firms? And the answer, to me the most compelling answer, is things like fairness and equity. That if you’re in the structure, if you are a janitor working at a GM facility, you know what the people on the assembly line are earning. And that tends to pull up your pay.

And we know from the work of [University of Massachusetts-Amherst economist] Arindrajit Dube and [Boston University economist] Johannes Schmieder that there is a premium for being in-house versus broken away from the mothership. Once work is being paid for by a price as opposed to a wage, then it’s no longer a wage-setting problem, and so a lot of those equity norms change.

From an employer’s point of view, they can breathe a sigh of relief. They don’t have to deal with that anymore. They don’t have to deal with the fact that it’s complicated to think about “What should I be paying the folks who are doing the landscaping because they’re no longer my employees? They’re just this thing I outsource.”

I think that has consequences. What’s driving inequality, to me, comes back to the fissured workplace. It comes from the consequence of shifting the wage-setting problem to all these other entities and kind of getting out of that fairness bind that employers otherwise have to deal with differently.

Boushey: Exactly. Saying that a janitor is going to be paid a higher wage in a larger firm means that labor markets aren’t perfectly competitive, right? So one of the questions we’ve become a little obsessed with at Equitable Growth is market structure and competition and monopoly and monopsonies. Talk to us for a little bit about the role of monopsony in the fissuring of the workplace.

Weil: Part of the way I view fissuring is as a way to deal with the problem of setting monopsony wages. It’s hard to do that if they’re your employees. It’s much easier to do if I am setting prices for a bunch of janitorial firms in different facilities. Then I have a bunch of prices and I put it out to competition. And if the janitor in Facility A is being paid differently than the janitor in Facility B, that’s not my problem. I’ve just hired two different firms. And once you break out of the problem of having a single price, what do you do? You do price discrimination.

In my mind, by fissuring, you are able to do essentially wage discrimination without having to set wages. You’re doing it through the pricing mechanism. I think this has had a big effect, in particular, on lower-wage work. You are pushing that kind of work to a set of firms who are in higher levels of competition with each other. Studying the labor market from my perspective would certainly lead me to believe that labor markets are far from perfect, but I think companies are pushing wages closer and closer to what we would think of as marginal productivity. And some of the rents that used to be collected by workers because they were inside a firm, even a nonunion firm and certainly in a unionized setting, are now going back to the companies because the companies are playing close to what they actually need to pay to entice people to do that work.

At the same time, you have these firms that are shedding activities but also are rapidly moving up. So if you are lucky enough to be in the Google mothership, you soar up with that wage structure. You’re moving up because your company is moving up. And wherever you are, whether you’re an engineer or an executive, the whole pay structure’s moving up. And then you have these businesses in the shedded parts of the economy where those pay structures are being pushed downward, closer to the marginal productivity of labor. And even the executives in those businesses who are providing these services for the lead companies in the economy are not doing nearly as well because they’ve been separated from the same kind of mothership relationship. I think we really need to better understand how a wage is determined in those enterprises.

Boushey: So this leads to the issue around who captures the rents. There’s a body of research showing that the distribution between the amount of national income going to labor versus going to capital has been changing over time. Increasingly, it seems like one of the big research questions out there is “What is the connection between the two?” Where do you think some of the research questions are that you think are most pressing for us to start investigating?

Weil: There’s this paper right now that [Massachusetts Institute of Technology economist David] Autor and [Harvard University economist Lawrence] Katz and [MIT economist John] Van Reenan have about the diminishing labor share tied to essentially increased concentration of firms, or those industries with higher concentration ratios on the product market side are also ones where you see diminished share of income going to labor. I think that is a phenomenon very consistent with what I’m talking about, about the separation and the rushing apart of businesses from those that are still able to capture the value and capture the rents. And at the end of the day, they might have a lower labor share because of the part of the work they’re doing.

If you are a major hotel chain right now, a hotel brand, a big part of what you do has to do with creating and sustaining brands. It’s not employing people who are cleaning rooms anymore. That’s going to other entities. This is the mechanism that actually allows or enables that separation to exist. And what I think we don’t know enough about is whether the wage-setting policies in both the entities are moving down in the distribution of businesses and the entities that are quickly moving up the distribution.

You know, I think in one sense the entities that—and here I’m thinking about this interesting experimental literature that I associate with people like Ernst Fehr, who has studied equity norms and fairness norms inside businesses, inside firms. I think a lot of that probably still holds. That you still are very cognizant of pay differentials.

You were joking before about everyone in firms knowing what other people are being paid, and therefore employers want to keep everyone happy because they don’t want to lose people. But I think we need to know more about the moment when employers say, “You know what, wouldn’t it be nicer if we shifted them out?”

I don’t think the shifting out has stopped. I am fascinated and concerned by the increasing number of higher-education jobs that are being shifted out. And I think that again becomes the operative question. It isn’t so much “How do I set salaries of all of those in the mothership?” It’s “Who am I deciding to jettison next?” And if you look at the structure of law firms, they’ve been transformed too. More and more of the mundane, day-to-day legal work has been shifted out to contract kinds of operations in the legal field. And you’ve had this separation of earnings. If you are a lawyer but no longer in one of these decreasingly common big law firms, then your returns as a lawyer have gone down substantially.

I’ve always found it very interesting when I talk about some of these things with journalists. They quickly say, “Oh yes, you’ve just described my life.” You know, “I would have been a full-time reporter.”

Boushey: Now they’re doing freelance.

Weil: Yes. Everyone’s freelance. A lot of the underlying logic of the fissured workplace I think has now spread to lead companies and caused them to think more and more about “Who else can I shed?” That, to me, is part of what the research agenda needs to continue to look at. What are noncompete agreements about? Why are noncompete agreements becoming so common? There’s the absurd noncompete agreement that Jimmy John’s hourly employees had to sign. It would not surprise me a bit that we’re going to see more and more of that work of people with higher educations also being affected by these trends.

Boushey: Are there any other research questions that you think are really pressing? And I ask in part because Equitable Growth is a grantmaking entity. We are looking for scholarship to support, and we’re trying to entice people to ask research questions that are really important to policymakers. Your advice would be super helpful.

Weil: I think we don’t understand enough about wage norms. I’m primarily now thinking about those labor markets where people are more subjected to the brutal pressure of the market. We still don’t know enough about where referent wages are and how you can affect those, and what people look to, and how that might vary. How important are social networks to the propagation of wage norms? How do they work out? How geographically focused are they? How do they play out in labor markets where ethnicity is important?

I think all this is important for its own sake in understanding the dynamics of this increasingly fissured workplace. But I also think from a public policy point of view, our policies don’t pay enough attention to how wage norms are set and then as a matter of policy to how to move those upward. I would offer as an anecdote the “Fight for $15,” which I would cast as a really successful social movement. By trying to affect the wage norm, that $15 becomes salient. I think it’d be fascinating to know where you have labor markets that feed, let’s say the fast food industry, where you’ve seen that change in the reservation wage because of the impact of that social movement.

Boushey: In an era where so few workers are unionized, to what extent does that become the marker of a good firm? A personal anecdote before you answer the question. I’m working with someone, and we’re looking for a venue for an event. But it’s in a place where there are no unionized hotels. And so one question we have is “Could we use $15 as the demarcation that takes into account some sort of labor standards?”

Weil: Right. Right. Right. Yes, and I think that’s a great example. I think I’ve always been somewhat of a skeptic of corporate codes of conduct and things like that. I think I’ve been more skeptical because I find often that people who are promoting those codes don’t seem to have an understanding of some of the issues of wage norms and how what they’re trying to do might fit into that. That being said, I think if we did have a better understanding, you could see how the decisions of private players and other innovative forms might be able to ultimately affect things that we care about in a public policy consequence.

Right now, in a world where we don’t know what the federal government’s going to be doing in terms of protecting basic labor standards, it seems to me that’s even more important because you need to then act on those wage norms, to try to do what we would normally do through minimum wage or basic labor standards policies.

Boushey: Well, so let’s use that as a segue to you just coming out of surveying for three years in [the U.S. Labor Department’s] Wage and Hour [Division], making decisions around policy. Is there an example of something where your research influenced what you and other policymakers did?

Is there a good example of something where you were studying something and then made something happen or tried to make it happen?

Weil: I came into Wage and Hour having had the wonderful opportunity of advising it for a number of years. I was lucky enough to think about some of these issues before coming into it. I think one of the hardest things walking into an agency like that is if you don’t have an agenda, the day-to-day problems that come across the desk can completely swamp you. And if you don’t have a vision about what you’re trying to do as an agency, or as a leader in an agency, it’s very difficult to chart a course.

I came in very much with having had an opportunity already to think about and, in some sense, engage with the department on what kind of changes you needed to make to deal with the fissured workplace. I really thought about my job in terms of two huge external pressures.

One was the fissured workplace and the complexities it creates for a labor standards agency. Who’s the employer and who should we be worried about compliance is a very complicated thing to deal with. That problem overlays on a long-standing problem, which is a resources allocation problem. The Wage and Hour Division oversees laws that cover 135 million workers in 7.3 million workplaces. President Barack Obama had increased the size of our investigation force from its all-time low to 1,000 investigators. So we had 1,000 investigators to oversee 7.3 million workplaces. And those workplaces were increasingly fissured.

My obsession was how do we move more and more of our resources to a proactive approach on enforcement where you’re explicitly trying really to change behavior. Not just to recover back wages for workers. That’s obviously really important. But in my view, given those two forces, what you really have to be thinking about is changing the behavior of organizations so they comply in the future. And using every tool you have available to you, which starts with enforcement.

We had not historically used all of our enforcement tools. We had tools in the tool chest we had neglected to use. So we started to aggressively recover liquidated damages along with back wages. We started to use civil monetary penalties much more aggressively. We started to dust off what the law gave us and use those tools more effectively. We changed the relationship with our solicitor’s office so that our investigators were often thinking about “What or how can this translate into something that will really have greater effect through a litigation-based strategy?” Those are all tools of trying to use your enforcement tools to greater effect.

Secondly, we shifted away from being an agency where 75 percent of our investigations came out of complaints, which is typical for most enforcement agencies. Our view was that if you do that, you’re inherently reactive. And even more so, we wanted to focus on low-wage, vulnerable workers, who are obviously the ones most affected by violations. If you just follow complaints, you’re kind of thinking that the people who complain are those people, and they’re not. And so we had a lot of statistical analysis done.

And this was one of the projects I’d worked on years before, to show that industries with the highest levels of problems, objectively measured, were some of the ones with the lowest complaint rates. So you have to move an agency away from a complaint-driven culture toward one that’s using more of its resources for proactive, essentially agency-initiated investigations.

And by the time I left, almost 50 percent of our investigations were directed proactive ones. And the 50 percent that remained, complaints, we had changed the mechanism used for triaging. We were triaging incoming complaints so that it was no longer first in, first out but rather evaluating the incoming complaint and asking questions like “Does this complaint suggest a bigger problem? Is this a complaint that maps onto our larger proactive initiatives?”

And then another major element we focused on, and this goes to the fissured workplace, is where the back wages are owed because those workers are usually living on the bottom of some fissured structure, such as at the subcontractor level. And if you think about it, that subcontractor’s CEO, so-called CEO, is probably a small-time operator who’s got a very thin margin because the price they’re being paid is being set by someone up the chain, and so on. We really took a lot of heat from saying, “Well, the statute says there’s joint employer responsibility.” But we had a major initiative on joint employment so that we could make sure that pressure was applied to all relevant parties that contributed to the violation.

We put a lot of energy into misclassification of workers because, again, I think that misclassifying someone as an independent contractor rather than an employee is often something that happens at the bottom of a fissured structure. We wanted to say, “Look, you can’t just call people independent contractors because you don’t want to have to bother with all of the things associated with an employment relationship.”

Whether through the mechanism of joint employment, or simply the mechanism of saying “Look, you might not be the employer of record but if you are sitting as a key player in this whole structure, then you are setting standards. You are hiring staffing agencies. And therefore, we want you at the table.” And we did a lot of different initiatives to pursue this broader approach to enforcement and outreach.

One of the best examples, I think, is in the summer of 2016, when I signed an agreement with president and CEO Suzanne Greco of Subway sandwiches to create a voluntary compliance arrangement across that company’s franchise system. Subway understood and acknowledged their interest in improving compliance among their 13,000 franchised outlets and the tens of thousands of employees who worked for them. The company had a history of years and years of problems and violations. The agreement was built on my agency’s and the company’s mutual interest in addressing those problems in a more systemic fashion. That was the kind of agreement I was happy to sign partly because I wanted to see if that kind of thing could also work and partly because it was another way of bringing in a higher level of a fissured structure to the table and figuring out “How can you move compliance in that way?”

All of those ways and many other efforts were the long game we were trying to play. And I think we really did move the needle in a lot of those areas.

Boushey: Well, it also just shows the importance of government spending if you’re asking resource questions that are important in the real world, and thinking about how we’re going to apply them so that when you have that opportunity, you’re really able to take that depth of knowledge and make it into something real. It’s very impressive.

Thank you so much for the interview. But mostly, thank you for your service and all the work you’ve done to make workplaces better for millions of Americans.

Weil: Thank you.

It’s no surprise that the Kansas tax cut experiment failed to create jobs

Posted on by Meghan Miller
A joint session of the legislature meets in the House Chambers in Topeka, Kansas.

A supermajority of Kansas legislators last week voted to roll back Gov. Sam Brownback’s (R) signature tax cuts, overriding his veto. The tax cuts, enacted in two stages in 2012 and 2013, caused a recurring series of budget crises and cutbacks that angered voters and in turn spurred a bipartisan coalition of legislators to reverse several of their most harmful elements.

Proponents of the tax cuts argued that they would unleash economic growth and job creation. Yet as numerous subsequent analyses demonstrate, the promised economic growth did not materialize. Tax revenues fell sharply. Job growth and output growth disappointed. Population growth, whether as a cause or consequence of the economic growth, failed to materialize. Finally, last week, state legislators recognized the experiment’s failure and reversed course.

Understanding the reasons that the Kansas tax cut experiment failed to create jobs is particularly important given that the outline for tax reform rolled out by the Trump administration in April shares many features with the Kansas model. U.S. Treasury Secretary Steven Mnuchin says the administration’s plan “is all about jobs, jobs, jobs,” much as Gov. Brownback did in Kansas five years ago. In fact, subsequent reporting suggests that the Trump administration’s tax plan was rolled out in an incomplete state because the president read an op-ed in The New York Times co-authored by some of the same advocates who provided advice to Brownback on his tax plan.

The failure of the Kansas tax cut experiment to create jobs has little to do with Kansas, however, and everything to do with the fact that the underlying economics of tax reform—as envisioned by Gov. Brownback and President Donald Trump—isn’t a good path to jobs. To understand this point, it’s worth considering in turn the two primary types of taxes that were cut under the Kansas plan and in the Trump administration’s outline: taxes on labor income and taxes on business profits.

Claims of supply-side growth from labor income tax cuts rely on the idea that people will be more willing to work when their after-tax wages are higher. This theory posits that labor income tax cuts result in growth because people who could increase their earnings choose not to because tax rates are too high, but it does not take much to see why cutting tax rates for middle- and higher-income families does not create jobs through this mechanism. Middle- and higher-income families already have jobs, even if they are not the jobs they necessarily want.

Claims of supply-side growth from tax cuts on business profits rely on the idea that those cuts will increase the level of investment and that, in turn, will increase productivity. Under this theory, a tax cut on business profits could increase employment by spurring investment, increasing wages, and attracting people into the labor force who are not willing to take a job at current wage rates. For this theory to work, however, it would need to be the case that cutting statutory business tax rates would meaningfully reduce the effective tax rate on an incremental investment such that the tax cut causes businesses to increase investment. Second, it would need to be the case that the reduced tax rate causes businesses to increase investment in a way that increases the wages they would be willing to pay to people who currently choose not to work because wages are too low. Third, it would need to be the case that this increase in wages would be large enough to spur people who currently choose not to work to enter the labor force and seek jobs. And finally, the deficits resulting from the tax cuts would need to be small enough that they increase businesses’ cost of capital by less than the reduction resulting from the lower tax rate, as a higher cost of capital would cause businesses to reduce investment rather than increase it.

These conditions are highly unlikely to hold in practice. Businesses already pay relatively little tax on the incremental return from investments in tangible capital due to tax benefits such as accelerated depreciation and interest deductibility, and they often pay no tax—or even receive a tax subsidy—on marginal investments in intangible capital. Moreover, reducing the statutory tax rate on business income actually increases the effective tax rate on debt-financed investment, which is a common source of financing for investments in tangible capital because businesses deduct interest payments from taxable income.

The so-called crowd out effect from government deficits on debt markets was not a significant concern in Kansas because of balanced-budget requirements and the small size of the state relative to U.S. debt markets, but tax cuts such as those proposed by the Trump administration would cause a substantial increase in federal borrowing and likely lead to meaningful crowd out. Finally, even if there were an impact on wages despite the questionable empirical validity of the links between business tax rates and take-home pay, it would be tiny relative to the other costs and benefits of work and therefore would likely generate little impact on employment.

Thus, given the underlying economic logic, it should come as no surprise that the Kansas tax cut experiment failed to deliver job growth. Similar reforms at the national level would be no different.

If federal policymakers are looking for a supply-side tax reform that would create jobs, then they could expand the Earned Income Tax Credit, or EITC, for low-income families, particularly workers without dependent children. The EITC provides a substantial boost in take-home pay for low-income workers with children and encourages workers who are out of the labor force to seek jobs. A substantial academic literature finds that the EITC boosts labor supply, creating jobs. Notably, these labor supply effects result from a boost in wages far larger than anything on offer from even the most optimistic assessment of the impact of business tax cuts. The EITC boosts pre-tax wages for families with one, two, and three or more children by 34 percent, 40 percent, and 45 percent, respectively. Even an unprecedentedly large expansion of the EITC could be accomplished for a fraction of the cost of President Trump’s high-income and business tax cuts.

The persistence of earnings differences among white and black men

Posted on by Kavya Vaghul

Slavery in the United States ended more than 150 years ago. In that time, black men have seen their relative earnings rise compared with those of white men, but the pace of progress has been slow, and racial economic inequality remains strongly persistent. In 2015, when including those out of the labor force, the median African American man in his prime working years—ages 25 to 54—earned $23,000 compared with the $44,000 earned by his white counterpart.

But what explains this gap? Is it possible that the weak pace of economic convergence reflects the very low average starting position of black men at the time of emancipation? Is this earnings gap a legacy of the abject poverty of the enslaved? Or perhaps instead, do black men face unique challenges in escaping poor backgrounds—a legacy of race and discrimination rooted in the history of slavery yet persistent in other ways after emancipation?

New Working Paper
Up from slavery? African American intergenerational economic mobility since 1880

Most likely, today’s earnings gap is a combination of both factors, but to shed light on the relative importance of the initial poverty level of newly emancipated black men and race-specific barriers to economic convergence since then, we assembled new data to measure the rate of father-to-son economic status transmission over the past century and a half. Because we cannot observe income in the data from the late 19th century and early 20th century, we estimate income based on occupation, race, and geography.

We were particularly interested in whether poor white families in America experienced slow convergence toward the population’s mean earnings historically. If so, then that would suggest that poverty’s historical legacy has been powerful and that the slow pace of black men’s advance may largely reflect their initial concentration at the bottom of the U.S. economic and social ladders. If not, then it would suggest that race-specific factors have been paramount.

For cohorts of black and white sons born after 1940, federally collected and publicly available data sets provide sufficient information to compare the economic status of father-son pairs by income. But for earlier cohorts, observing father-son relationships requires more work. We created new data sets of father-son pairs by using samples of the U.S. census from 1880, 1900, 1910, and 1930, observing sons in their fathers’ households when the fathers were at work and then observing sons again 20 years later when they were in the labor force themselves. These linkages across time reveal father-son economic status relationships akin to those we see for later cohorts—even though we cannot measure income itself among those pre-World War II generations of black and white men.

Our results indicate that the “penalty” for being black in the intergenerational mobility process has been large and persistent since 1880. For each cohort we observe, black sons, on average, ranked roughly 20 percentile points lower in the national income distribution than whites with similarly situated fathers. This is true even within the South, where 95 percent of black Americans lived at the time of emancipation. In short, poor black and poor white children have faced sharply different prospects for their adult earnings throughout U.S. history.

This means that the racial economic inequality we observe in each cohort was primarily the product of race. These disadvantages for black children are readily apparent when we compare the fortunes of black and white sons of fathers at the 10th percentile of the national economic status distribution in each period. (See Figure 1.)

Figure 1

Our research also finds that the differences in average outcomes conditional on parental economic status among black and white men are not explained by differences in many nonincome personal attributes, such as childhood location, education, and their parents’ marital status. But controlling for educational test scores—through which we measure acquisition of human capital skills rather than the traditional standard measurement of educational achievement—substantially reduces the gap in earnings among black men and white men.

These findings provide a window into possible remedies for the persistent earnings gaps among white and black men. Equalizing children’s opportunities to build human capital may be critical first steps toward ameliorating racial inequality in adulthood.

—William J. Collins is the Terence E. Adderley Jr. Professor of Economics at Vanderbilt University and Research Associate of the National Bureau of Economic Research, or NBER. Marianne H. Wanamaker is an Associate Professor of Economics at the University of Tennessee, a Research Fellow of the Institute for the Study of Labor, and Faculty Research Fellow of the NBER.

Is growing inequality hurting our economies?

Posted on by Ed Paisley

The debate over the legitimacy of powerful elites seizing a bigger share of the national income and wealth pie year after year has been gaining prominence in the public conversation. Mark Zuckerberg himself—one of the wealthiest men in the world—remarked that “today, we have a level of wealth inequality that hurts everyone” during his recent speech at Harvard University after receiving an honorary degree.

Researchers and scholars have also begun to clearly break the recurrent classic dichotomy between equity and efficiency pervading conventional economic theory, which led to the neglect of distributional issues for many decades. More broadly, the idea that the understanding of economic inequality “assists our understanding of various fields of economics”1 is now put at the forefront. A clear example of this paradigm change is the realization that transmission mechanisms of monetary policy may be substantially affected by distribution considerations.2

The recent 2007–2008 collapse of the global financial system naturally acted as a catalyst for growing concerns around the increasing dispersion of economic resources within most advanced economies. Subsequently, the landmark book by Thomas Piketty, Capital in the Twenty-First Century, underlined very clearly the risk of the rising importance of inherited intergenerational advantages in transforming our societies into patrimonial capitalistic economies dominated by wealthy dynasties. Yet the main argument of the book rests on how wealth inequality evolution over time may be affected by macroeconomic circumstances—namely by the difference between the average return to capital and the rate of growth of the economy.3 The reverse direction of inquiry—how macroeconomic performance may be affected by the extent of inequality—rests instead outside the scope of Piketty’s analysis and modeling.

A review on the inequality-macroeconomics nexus

The idea that inequality may be one of the factors affecting macroeconomic performance and financial stability is the object of inquiry of a chapter that I wrote in the newly published book After Piketty: The Agenda for Economics and Inequality.4

In fact, the investigation of the (fairly complex) relationship between inequality and economic growth has been featured prominently in the empirical literature on inequality, with disparate findings and hypotheses pointing in different directions. Theoretically speaking, this should be expected, as, on the one hand, income and wealth dispersion stemming from differences in effort, productivity, and risk attitude are a fundamental prerequisite for investment and innovation incentives. On the other hand, high levels of economic inequality can, through a variety of channels—consumption, investment in physical and human capital, or rent-seeking behavior—negatively affect economic growth.

As more and more reliable data became available to researchers, the subject has fallen again under active empirical scrutiny. In fact, a growing body of empirical evidence is now suggesting that the idea that a fairer distribution of economic resources damages economic growth is clearly not supported by the available data.5

Why would economic growth benefit from a fairer distribution of resources?

Economic theory provides different anchors as to why the so-called equity-efficiency trade-off may fall apart.

First, if most of the dispersion of economic outcomes of individuals results from inequality of opportunities—in other words, from circumstances outside their own control such as family background, race, and gender—the potential and aspirations of individuals can be constrained, the allocation of resources may be distorted as economic opportunities are not necessarily given to the most talented but to individuals with predetermined circumstances, and economic growth may in turn be weakened.

Second, high levels of income and wealth inequality, in combination with imperfection of both capital and insurance markets, may be detrimental to the level of economic activity as only those who inherit sufficiently high wealth may be able to pay the fixed cost of entrepreneurial activity or education, becoming more productive and better-paid skilled workers.6 This is detrimental, as education may be precluded to people with the highest possible marginal gain from education and if we believe that entrepreneurial skills are randomly distributed and not themselves acquired dynastically in house/firm.

Third, investments in productive capital and risky activities themselves can also be discouraged by highly unequal distribution of resources as a result of increasing rent-seeking behavior and other expropriation actions, which can be undertaken by the government or relatively poor or rich people alike (depending on the specific political economy model we have in mind). In particular, the expropriation may be perpetrated by wealthy elites even in our modern advanced economies via “subverting legal, political and regulatory institutions to work in their favour,” further increasing their level of wealth.7

But does wealth inequality really promote rent-seeking behavior? A recent work by Bonica and Rosenthal documented the U.S. campaign contributions of the Forbes 400 wealthiest individuals between 1982 and 2012. Their figures imply an average individual donation of $10,000 for each $1 million increase in wealth—presumably a relatively easy achievement for a billionaire.8 The high degree of political activism of wealthy Americans also features in research by Page, Bartels, and Seawright showing that almost half of very wealthy respondents of a survey conducted in the metropolitan area of Chicago made at least one contact with a congressional office within the previous six months of the interview. Moreover, about half of the contacts that could be coded “acknowledged a focus on fairly narrow economic self-interest.”9 Unsurprisingly, the latter does not always coincide with the overall general interest. In line with this framework, a recent work by Bagchi and Svejnar documented a negative relationship between wealth inequality and economic growth in those countries where the extent of wealth inequality is mainly ascribed to “political connections”.10

Going beyond economic growth

Economic growth is certainly one important aspect of macroeconomic performance. However, other features of the growth process and macroeconomic performance may be relevant too. For instance, the volatility of the growth path, the sustainability of economic growth, the resilience of the economy to a shock, the duration of economic recessions, and the incidence of financial imbalance and instability can all be very important characteristics of macroeconomic performance that are worth exploring. These issues are treated in turn below.

Is inequality leading to volatile aggregate performance and to short-lived growth?

Research by the IMF certainly does not reject these hypotheses. On the one hand, countries with higher income inequality appear not to be able to sustain GDP growth for long once it started.11 On the other hand, 70 percent of changes in U.S. consumption during the decade from 2003 to 2013 was found to be associated to the behavior of individuals in the top decile of the income distribution.12 Indeed, these numbers suggest, as remarked by Robert Frank, that “America’s dependence on the rich plus great volatility among the rich equals a more volatile America.”13 The influential work by Mian and Sufi suggested instead that poorer U.S. households (highly leveraged and with high marginal propensity to consume) took the largest hit from the drop in post-2007 U.S. house prices and therefore were responsible for the large drop in aggregate consumption and subsequent employment losses.14 At a first glance, the two ideas may appear at odds with each other but they can perhaps be reconciled if seen as different sides of the same inequality coin.

Are recessions in more unequal countries deeper and do they last longer?

Support for the idea that income inequality can retard full economic recovery following recessions is found in studies for the case of the United States, both at the aggregate level and at a state level.15 In addition, an earlier cross-country study by Rodrik highlighted how countries with greater social cleavages and weaker institutions experienced the sharpest drops in GDP growth from 1975 to the late 1980s (a highly turbulent period from the macroeconomic point of view)—the idea being that policies implemented in response to an external shock usually carry substantial distributional implications, while the latent social conflict and high social division (“along the lines of wealth, ethnic identity, geographical region or other divisions”) that permeates the economy may delay their implementation and lead to “macroeconomic mismanagement.” It is reasonable to assume that each independent group would seek to bargain a lower burden of a negative shock and the share of resources devoted to counterproductive rent-seeking activities increases.16 As a result, the magnitude of the collapse of growth due to external shocks can be higher, and the resilience of the economy to external shocks can be damaged.

Is inequality leading to financial instability or the accumulation of financial imbalances?

A number of theoretical considerations have been put forward to suggest that the degree of inequality can have a direct effect on aggregate savings and consumption and on both demand for and a supply of credit. Relative income and spending comparisons may, for instance, have important influence on what people spend their money on, how much they save, and even how much debt they accumulate.

Empirical findings are so far controversial: Research based on aggregate data and cross-country analysis emphasize positive correlations between inequality, household overconsumption, and indebtedness, whereas the evidence based on microdata appears less consistent and supportive of this hypothesis. Similarly, little evidence was found in support of the idea that rising inequality may increase the probability of a financial crises to occur.17 Yet further investigation of the alleged relationship between inequality and private debt becomes particularly relevant, as the latest crisis was largely the result of the burst of a debt-financed housing and consumption bubble that involved the private sector of the economy.

Growing inequality does not benefit the macroeconomy

After surveying a growing body of new and old evidence on inequality and the macroeconomy, one would easily conclude that increasing income and wealth inequality appear to be sanding the wheels of economic growth, making the ride bumpier, with short ups and deep downs, and potentially increasing the risk of a fatal crash. This may generate an instrumental justification for effective coordinated actions by governments to reduce income and wealth inequality that goes beyond classic concerns about distributional equity and fairness.

At the same time, as I recalled in the chapter from which this article draws on, “no relationships have been robustly demonstrated without qualification.” Furthermore, because establishing a causal relationship even when the empirical association is confirmed is an extremely tricky business, it is imperative to conduct fresh empirical research, also outside the United States, to corroborate some of the empirical findings discussed above, test new hypotheses, and enrich our scientific knowledge to better inform policies. Most importantly, the understanding of the determinants of economic inequality is fundamental to substantiate, case by case, the inevitable contingent nature of the relationship between aggregate performances and inequality. This would caution everyone from the adoption of a new generic consensus on the detrimental effects of inequality on economic stability that “is as likely to mislead as the old one was.”18

If anything, we can now confidently stop justifying increasing inequalities in income and wealth on mere economic grounds.

Reducing inequality, the constraints on substantial freedom and opportunities of individuals, will not frustrate, but possibly will enhance the path of economic prosperity and stability; it is a gain that every democratic society must strive for.

Salvatore Morelli is a visiting scholar at the Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, and associate member of Nuffield College at Oxford as well as a research associate at the Center for the Study of Economics and Finance (CSEF).

In conversation with Sandra Black

Posted on by Nick Bunker

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability.

In this installment, John Schmitt, then Equitable Growth’s research director, talks to Sandra Black, the Audre and Bernard Rapoport Centennial Chair in Economics and Public Affairs and professor of economics at The University of Texas at Austin. They talk about Black’s experience as a member of former President Barack Obama’s Council of Economic Advisers, her transition from academia to the policymaking world, and what she’ll take away from her time on the CEA.

John Schmitt: So you studied economics as an undergrad at the University of California, Berkeley, you got your Ph.D. in economics at Harvard. You went from assistant to full professor at the University of California, Los Angeles, before getting named a chair at UT-Austin. It’s, I think, fair to say that you are very steeped in academia and very successful as an academic economist! What made you decide to take a break from that world and come to Washington to work on economic policy on the Council of Economic Advisers?

Sandra Black: It was an unexpected change. I had been asked in the past if I was interested in working for the Department of Labor. But at that time I wasn’t interested, I think in part because I was really focused on the academic track and my research, and I didn’t feel like I could afford the time off. So this time, I got an email from [member of the CEA] Betsey Stevenson saying, “Do you have a minute to chat?” When we talked, she said, “I’m leaving the Council of Economic Advisers; might this be something that you were interested in?” And I had that moment of “Well, I’ve said ‘no’ in the past, but maybe now.”

It was actually not something that I had always thought I wanted to do. I really like doing research. I really like being a professor. I was quite happy with what I was doing. This seemed very scary in a lot of ways because it was so different and unfamiliar to me, having not done anything like this before. It felt like being thrown into the ocean and trying to learn to swim, not even the swimming pool. This is the ocean.

I decided to visit the CEA. I was going to give a talk in New York and decided to fly to DC to meet Jason Furman and other people at the CEA. I remember walking up to the Eisenhower Executive Office Building, wearing a suit that I had to buy for this very purpose and thinking that this was such a strange life that I could not imagine at all. And at the time, I met with [former Director of the National Economic Council] Jeff Zients; I met with [former Senior Adviser to the President] Valerie Jarrett; and I did not realize how influential they were because I was not part of that world at all. But it seemed so different, and it seemed like an opportunity that I couldn’t pass up. It felt really important.

So I said yes, and all of a sudden my life totally changed.

Schmitt: How so?

Black: It was really a shock, coming here. The whole transition was really overwhelming. There’s no sense of privacy. Someone is scheduling you every 15 minutes, and there are no bathroom breaks unless you ask them to schedule in a bathroom break. The tasks that you perform, even the lifestyle, are very different. Even the way you think is very different—you are thinking about 20 different projects all within one day, so you don’t get to think deeply about things. As an academic, we spend a lot of time focusing on one topic and try to become an expert on that topic. At the CEA, you don’t have the luxury to spend so much time on one topic. Instead, you have a more superficial knowledge about a lot of things. I would work late at night or in the early morning to try to expand my knowledge and process an issue so that I would be better prepared for a meeting the next day.

That’s a skill that I think academics may have, but we don’t exercise that muscle very much. It took me a while before I was comfortable going into a meeting without a deeper understanding of the topic, with only a basic understanding. A lot of policy involves basic economic principles or basic research. Interestingly, the transition back to academia has required undoing all that. And I found that hard. At the beginning, just sitting and thinking about one project for a whole day, it was hard for me to focus on one topic for so long. And it used to be that I was really good at that! That’s what I could do, and that’s what I liked. I was joking that it’s only been in the last three weeks that I can really sit for a day and just do research on one project.

So it’s been a really interesting transition in and transition out.

Schmitt: You described having a kind of broad set of things that you had to do each day and not the same depth that you might do in academics. But for people who are unfamiliar with the CEA, what is it that you do as an economist there? What kind of questions do you get asked? How much time do you have to answer them? And how do you answer them?

Black: There are a number of different tasks that we perform on the Council of Economic Advisers. One is if there is a policy process, where we discuss the pros and cons of different policy options. In this case, there would be meetings, and the CEA would have representatives at these meetings. And so someone like Greg Lieserson [then a senior economist at the CEA, now at Equitable Growth], who had been to a number of meetings on a topic, would come and talk to me and say, “This is where we are, this is what I think, here’s what you need to know,” and then I would go and represent the CEA at a meeting. Sometimes it would be a big picture meeting, where we were talking about the big picture of “What do we think about this policy?”, and other times it would be very detail-oriented on a specific policy.

Often, I was briefed by people on our staff who knew a lot of the details so that I would go in there knowing about the topic. This was really different from my life as an academic, where I do my own research and is something that I really like about being an academic. I like to look at the data so I know what’s going on, and then I feel comfortable standing up and talking about it. In the world of the CEA, someone is telling you “This is the research.” And sometimes you have time to actually look at the research, but a lot of times things are time-sensitive and you’re taking what they tell you and saying “Okay.” So you count on having good colleagues you can count on, which is really important and something I valued very much about being at the CEA.

So that’s the policy process. Another aspect of my job was representing the CEA on public panels, talking about the policies that we were promoting. And that, to me, again involved a very different set of skills because that’s very public-facing. At the CEA, I was representing the Obama administration, not just Sandy Black. I needed to be prepped in terms of how to respond to questions, which was very strange to me because, as an academic, you’re very used to just kind of saying whatever’s on your mind. You can see that that might not always be a good strategy if you are representing the administration.

When I started at the CEA, my first presentation was at the Brookings Institution on the research the CEA had done surrounding the updating of the College Scorecard. I was presenting a paper that the CEA had produced, and it was an excellent document, but I was actually not there when they had done most of the work. Going and presenting something that was not my own work was really challenging. And again, I think I got better over time, but these are all skills that you don’t go in necessarily having.

We also would do internal analysis, keeping the administration up to date on what the research is saying, or what’s going on with the economy, writing memos for the president or for the other principals. I think this was something I was most comfortable with because that’s really using the expertise that I felt I already had.

Schmitt: You talk about the internal policy process, about representing the CEA and the administration, and about keeping the administration up to date on what the research is saying. What role does research play across these three areas? Does it help? Does it hurt? Is it beside the point?

Black: I was really heartened by the fact that people value research—I did not know if that would be the case when I arrived. There were a number of good surprises that I discovered early on. One was that I really felt like the people working for the Obama administration genuinely wanted to help people. We may not always have agreed on what the best way to do that was, but I always felt like people were coming from a good place, which was really nice. As an outsider, I did not think that was necessarily what I was going to find. And I really liked working with them.

The other thing that was a really nice surprise was that people did value research, even when the research didn’t support the policy they wanted. They would say, “Okay, this new research may provide information about a specific policy, and it is good to know this. Do we still want to support that policy?” Policies can have some negative consequences and still be overall good policies, so you then want to try to mitigate these negative consequences. But it’s important to know what the consequences are, right? You’re always better off knowing what might happen than not knowing.

And so I really feel like the policymakers that I met and worked with seemed to really value that approach to research. I don’t know that it’s a universal quality, but it was certainly something that was gratifying as an academic and made me feel like that’s something I’d like to continue, making the link between academic research and disseminating it more broadly to policymakers.

Schmitt: Which leads to a natural question: Have you learned things here that will help in your teaching or in your research when you go back into academia?

Black: I think it definitely spills over. I mean, I can show students pictures of me with the president.

(LAUGHTER)

I think it will definitely help with my teaching, in that people like real-world examples and now I have them. Now I can say, “And then President Obama said this,” and how can you not believe that a topic is important when you know that it’s something that the president was thinking about? I think it makes the topics more relatable. And I teach undergrad econometrics, usually, which is not a super-hot topic, which makes my ability to use real-world examples even more important, highlighting the econometrics we use when making suggestions for the president.

Schmitt: Did [former president Obama] follow econometrics?

Black: He’s really smart. I’m just going to put that out there. [Former member of the CEA] Jay Shambaugh and I once sat down and talked to the president about skill-biased technological change and the academic research on that topic. It was the most amazing conversation—the president was so smart, and so informed, and so genuinely interested. When we walked out of the Oval Office, we turned to each other and said, “That was cool.” That was a really cool experience.

In terms of my research, I think that it will change. I now know a lot more about macroeconomics and the link between macro and micro, whereas before I was very micro-focused. Now that I have better big picture understanding of this relationship, I’m going to want to do more macro labor. And the questions that I’m interested in thinking about going forward are different. I want to think about topics such as worker bargaining power, and rents, and rent sharing, and where firms’ profits are going in. Those are topics that, three years ago, I probably wouldn’t have had any interest in. Now, I think they’re really important.

Schmitt: Do you have any advice for economists who are in academia now about whether they should go into the policy world? And if so, what should they do when they get there?

Black: I think it gives you really useful perspective for your research, if that’s what you’re interested in, especially if your research is empirical and you want to see how empirical research is used. I think it’s a worthwhile endeavor, certainly. It’s very humbling. You go from being the expert on your topic into an environment where you are discussing policies you don’t know very well, and some of the people around you may have been working on that specific policy or program for the last 10 years, and it is very humbling.

I also think it really does change your perspective on what’s important. I hope, going forward, that institutions such as the Washington Center for Equitable Growth can help researchers make their work more accessible because that is something that is really challenging and not something they teach you in grad school. And it is very hard, especially as an assistant professor. Even tenured faculty don’t typically have the experience and the network to make sure their research reaches the policy world.

I think as more places help facilitate the translation of academic work to the policy world, people will also want to become more involved. I think there’s too much of a disconnect right now between academia and the policy world. There are certainly academics who are very involved in policy, but that’s definitely the exception more than the rule. My hope going forward is places like your organization will help bring in academics and say, “What can we learn broadly from this research agenda?” And then you can work with the academics to help translate their work in a way that is useful to those making the policies. I think a lot of academics have a hard time making that link.

Will the Trump administration double-count its magic asterisk?

Posted on by Austin Clemens

Press reports indicate that President Donald Trump’s budget, scheduled for release tomorrow, will assert that administration policies can deliver a balanced budget in 10 years by combining sharp cuts to anti-poverty and safety net programs with growth from unspecified or minimally detailed tax and regulatory reforms. According to these reports, the forthcoming budget assumes that the rate of economic growth will reach 3 percent by 2021. In contrast, the Congressional Budget Office projects a growth rate of 1.9 percent for the same year.

Assuming large growth effects from policies that have yet to be specified in detail certainly qualifies as fantasy budgeting or, in Washington terms, a magic asterisk. But what’s even more striking about the anticipated budget plan is the expected assertion that revenue-neutral tax reform will contribute to deficit reduction. Administration officials and congressional Republicans have been explicit that they plan to credit the revenue feedback from any growth delivered by tax reform against the cost of tax reform. Yet counting the revenue feedback from growth in assessing whether a tax reform proposal increases or decreases revenues means that there is no additional revenue to reduce the deficit below the level that would be realized under current law.

In short, the Trump administration seems prepared to double-count the gains from its magic asterisk.

A back-of-the-envelope calculation suggests that the assumed growth rates could add $2 trillion to revenues relative to the CBO’s current-law baseline. Thus, a budget that purports to achieve balance predicated on this growth could be short by well more than $1 trillion—even if the growth projections were realized—by failing to recognize that the revenues from tax-reform-induced growth are going to be used to offset the cost of that reform. (The exact overstatement of revenues would depend on how much growth is attributed to tax reform and how much growth is attributed to other policies in justifying the economic assumptions.)

This estimate of the overstatement of revenues would be conservative even if large growth effects were realized, as it ignores both the implausibility of the administration’s growth forecasts and the large revenue losses that would result from the tax reform plans that the Trump campaign and the administration have put forth previously. The Tax Policy Center, for example, estimated that then-candidate Trump’s plan would cost $6 trillion while delivering less than $200 billion in revenue feedback from growth in the first decade of its implementation—before ultimately harming growth in the long run by running up the debt and thus reducing investment. These estimates suggest that the administration’s budget documents could be understating deficits by well more than $6 trillion relative to the actual impact of its policies.

Even by the standards of the federal budget, which operates at a scale that is sometimes difficult to comprehend, these numbers are large. If only $1 trillion is attributable to double-counting the gains from tax reform, that’s still more than the savings that the American Heath Care Act realizes by taking health insurance away from 14 million Americans through Medicaid cuts. Moreover, the CBO’s most recent deficit projections under current law total $9 trillion for the next 10 years. Assuming the administration will achieve balance by the 10th year but not before, the Tax Policy Center’s estimates of the Trump tax plan suggest that the president and his economic policy team could be claiming to reach balance while actually making the 10-year deficit outlook worse—even with harsh cuts to anti-poverty programs and policies that sharply reduce the number of Americans with health insurance.

How will it be apparent that the administration is not merely assuming implausible growth from its policies but actually double-counting those same growth projections? Traditionally, the president’s budget is presented on a set of post-policy economic assumptions. That is, the economic assumptions underlying the budget assume the enactment of the president’s policies. Judged against this set of economic assumptions, a revenue-neutral tax plan with implausible growth effects, such as those previously promised by the administration, should appear as a large tax cut, measured in the low trillions of dollars. Since the administration is pointing to tax reform as a justification for the rosy economic assumptions, this is the most likely approach—and the most likely criteria by which the budget should be judged.

While the traditional approach to budgeting includes the impact of proposed policies in setting the economic assumptions, there is an alternative approach that would be more consistent with the administration’s rhetoric on tax reform. In fact, the Obama administration used this approach when it counted deficit reduction resulting from economic growth generated by certain elements of immigration reform as a policy impact in its budgets. Under this alternative approach, the economic effects of a policy change are ignored when setting the economic assumptions. But by ignoring the growth impacts when setting the economic assumptions, those growth impacts can be included in the budget estimate for the proposal without double-counting the gains.

Thus, while the CBO concluded in 2013 that immigration reform would add 3.3 percent to gross domestic product 10 years after enactment, the economic assumptions underlying the last budget submitted by the Obama administration incorporated growth of only 0.7 percent attributable to immigration reform in its economic assumptions. The difference between 0.7 percent and 3.3 percent reflected the growth that had been included in estimating the budgetary impact of the proposed immigration reform. Critically, if the Trump administration takes this second course in estimating the impact of tax reform on the budget, then budget documents would appropriately show no impact of tax reform on revenues—but the administration would then need to justify its economic assumptions without reference to tax reform.

The analysis above takes administration officials’ previous public statements as informative about the direction of policy. Another option would be to recognize the budget as a statement of administration policy that supersedes those previous statements. Under this view, including the growth impacts of tax reform in setting the economic assumptions for the budget while showing no revenue impact of tax reform would amount to a statement that the administration now believes tax reform should be revenue-neutral based on conventional scoring—excluding impacts on growth—and any gains from growth should thus be used to reduce the deficit.

Recognizing the long-term fiscal challenges the country faces, this approach would be a wise policy choice on the part of the new administration. And in combination with Treasury Secretary Steven Mnuchin’s previous statements ruling out a tax cut for the upper class—the so-called Mnuchin rule—this addendum would provide a solid foundation for real tax reform. Yet it is unlikely that this is the course the administration intends to pursue.

So when the administration presents the budget tomorrow, watch not only for rosy economic assumptions to improve the deficit outlook but also for double-counting of the benefits of those economic assumptions. If the administration does in fact double-count the benefits, then recognize and understand the implied policy content of that choice. And if the administration tries to justify its harsh cuts to anti-poverty and safety net programs on the basis of clear-eyed fiscal accounting, then remember that these same officials are anything but clear-eyed when it comes to accounting for their plans for tax reform.

After Piketty: “A Political Economy Take on W/Y”

Posted on by Shonda Williams

The following is an excerpt from chapter five of After Piketty: The Agenda for Economics and Inequality, entitled “A Political Economy Take on W/Y” by Suresh Naidu:

In her “Open Letter from a Keynesian to a Marxist,” Joan Robinson writes: “Ricardo was followed by two able and well-trained pupils— Marx and Marshall. Meanwhile English history had gone right round the corner, and landlords were not any longer the question. Now it was capitalists. Marx turned Ricardo’s argument round this way: Capitalists are very much like landlords. And Marshall turned it round the other way: Landlords are very much like capitalists.”19 In his big red book, Piketty tries, like Henry George and a long stream of economists of the left before him, to perform the Marxian maneuver of turning what he sees as an upside-down argument right-side-up. Piketty argues that modern capital is very much like land—a source of rent. It is supplied inelastically, commands a share of output despite having little in the way of opportunity cost sacrificed in its provision, and in its influence and skewed distribution returns us to a financialized neofeudal Gilded Age. Thus, an economy dominated by modern capital winds up as a rentier economy: an economy of robber barons, credentialed aristocrats, social conflict over distribution, and government captured by the rich.

But Piketty cannot quite manage to pull his maneuver off. He winds up trapped by the Marshallian apparatus he has built. In it, capital— wealth—is treated more as a stock of accumulated savings rather than a claim on future output, and so it looks less like Ricardo’s land owned by parasites and more like, well, neoclassical- economic capital, the profit from which is the proper and socially useful reward for thrift.

As Piketty’s book shows, capital—wealth—takes many forms, which run from real estate to financial assets, such as corporate shares and loans, and even to slaves. Wealth is most accurately conceptualized as a claim on future resources. It results from purchases of durable property rights over assets, such as machines, houses, patents, or oilfields, that are either productive (in which case people bid to use them) or extractive (in which case people pay to keep legal process from being used against them). The salience of wealth matters, and depends on how much of the economic pie it lays claim to. If the economy has produced a lot of output relative to capital, then it can cover the claims owed to holders of wealth with little effort. But if economy-wide output is relatively low, it will take much more of society’s resources to cover the obligations owed to wealth holders. Piketty’s book suggests that as global income growth (g) slows, society will need to fetter capital with taxes at the global level—or else see a new class of owner-rentiers gobble down more and more of the social pie.

The book is a template for good popular economics: historical and substantively important insights disciplined by original, carefully constructed data and an analytical framework inspired, but not fettered, by the mathematical models of the field.

This is not normal economics.

But unlike much economic writing on the left, economists would recognize it as economics (for better or worse).

In the text, if not in the models, the book also brings politics to the forefront of the analysis. The big movements in the series Piketty documents are driven by politics and policies. But the politics are exogenous to the model. They are not an endogenous part of the framework. Thus, Piketty has to delicately sail his way between the Scylla that is the “market fundamentals” of supply and demand for capital and labor, and the Charybdis that is the independent role of politics and policies.

More from After Piketty

Extracted from After Piketty, edited by Heather Boushey, J. Bradford DeLong & Marshall Steinbaum published by Harvard University Press, $35. Copyright @ 2017 by the President and Fellows of Harvard College. All rights reserved.

The importance of raising the minimum wage to boost broad-based U.S. economic growth

Posted on by David Evans

The federal minimum wage today stands at $7.25 per hour, unchanged since 2009 despite rising prices and rising nominal wages for other workers. Indeed, the purchasing power of the minimum wage has been deteriorating for decades. Without legislative action by Congress every year—a very difficult policy endeavor—the minimum wage for the nation will continue to stagnate. This issue brief examines the importance of raising the minimum wage to boost broad-based U.S. economic growth amid rising U.S. income inequality and a still-tepid economic recovery. Policymakers need to understand the broad benefits of raising the minimum wage and whether there are any trade-offs to be made.

Sure to be in the spotlight are questions about whether and how the minimum wage:

  • Improves family incomes, especially in women-led households
  • Affects job prospects for low-wage workers, the unemployed, and youth entering the labor market
  • Boosts broad-based aggregate economic demand
  • Should be indexed to the rate of inflation or other macroeconomic indicators

This issue brief provides the most relevant details about the minimum wage, drawn from the Washington Center for Equitable Growth’s broad network of academic scholars studying this issue.

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The importance of raising the minimum wage to boost broad-based U.S. economic growth

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What are the effects of raising the U.S. minimum wage?

In a new working paper and issue brief for the Washington Center for Equitable Growth on the overall economic benefits of increasing the minimum wage for U.S. households, associate professor of economics Arindrajit Dube at the University of Massachusetts, Amherst, finds:20

robust evidence that higher minimum wages lead to increases in incomes among families at the bottom of the income distribution, and that these wages reduce the poverty rate. A 10 percent increase in the minimum wage reduces the nonelderly poverty rate by about 5 percent. At the same time, I find evidence for some substitution of government transfers with earnings, as evidenced by the somewhat smaller income increases after accounting for tax credits such as the Earned Income Tax Credit and noncash transfers such as Supplemental Nutrition Assistance Program. The overall increase in post-tax income is about 70 percent as large as the increase in pretax income.

Dube concludes that a “substantial increase in the federal minimum wage can play an important role in reducing poverty and raising family incomes in the United States at the bottom of the income ladder while reducing the use of public assistance.” He notes that “the loss in cash and noncash transfers and tax credits among those who would benefit the most from minimum wage increases is likely to dampen some of the benefits, especially among those around the poverty line, yet the resulting public savings could be ploughed back into further shoring up the safety net—in turn further increasing the complementarity between minimum wages and income support for raising the incomes of families at the bottom of the income ladder.”

Dube says “these findings are consistent with some individuals losing eligibility for benefits as a result of increased income.” He notes that “typically, eligibility for supplemental nutrition assistance, for example, requires income to be less than 130 percent of the federal poverty threshold, which for this population binds just under the 15th percentile. On average, those in the bottom quartile of the income distribution can expect an approximately $525 increase in annual income from the minimum-wage policy; the gains are largest around the 15th percentile.” (See Figure 1.)

Figure 1

Many U.S. households rely on the incomes of women, especially those headed by single mothers. A recent study by economists David Autor of the Massachusetts Institute of Technology (and a member of Equitable Growth’s Research Advisory Board), Alan Manning of the London School of Economics, and Christopher Smith of the Federal Reserve Board examines all state and federal minimum wage increases from 1979 through 2012, and measures the effect of the raises at each point of the wage distribution.21 One key piece of their findings is that because women are generally paid less than men—and therefore fall closer to the bottom of the wage spectrum—the minimum wage has larger effects on female wage inequality. For wage inequality among women, Autor, Manning, and Smith find that the minimum wage had particularly strong consequences. Between 1979 and 2012, the declining minimum wage was responsible for 48 percent of the increase in female wage inequality between the bottom and middle of the wage distribution. (See Figure 2.)

Figure 2

Women are hit particularly hard by anomalies in pay in industries where tipped pay is prevalent such as the restaurant industry. These industries boast many working mothers. Sylvia A. Allegretto, an economist and co-chair of the Center on Wage and Employment Dynamics at the Institute for Research on Labor and Employment at the University of California, Berkeley, wrote an essay for Equitable Growth about the vagaries of the minimum wage for tipped employees.22 In it, she shows that tipped workers are overwhelming female who typically earn low wages. They also have few workplace benefits, live disproportionately in poverty, and experience high rates of sexual harassment. One overall finding about the difference in the regular minimum wage and the lower tipped minimum wage illustrates the problem at hand. (See Figure 3.)

Figure 3

Former Equitable Growth economist Ben Zipperer trained his eye on the impact of the minimum wage on youth employment. In a working paper, he and his co-authors examine one group of low-wage workers—teenagers—whose hourly wages are significantly raised by minimum-wage increases.25 They note that a common objection to raising minimum wages is that doing so will reduce the employment opportunities of low-skilled workers such as teenagers. They show, however, that some studies find negative effects of the minimum wage on teen employment because they fail to control for other economic factors that independently reduced employment around the time of a minimum-wage increase. After controlling for these factors, they demonstrate that the large negative effect on teen employment disappears.

Zipperer and his co-authors note that economists have developed a large body of research comparing the labor-market outcomes in states that raise their minimum wage versus those that don’t. Yet a naive comparison of these two groups of states can lead to misleading conclusions because the variation of state-level minimum-wage policies is not random (which is ideal for assessing the impact of government policies) and is instead geographically concentrated. (See Figure 4.)

Figure 4

Zipperer and his co-authors show that this map divides states into two groups: states with high average minimum wages and states with low average minimum wages during the 1979–2014 period. States that have high minimum wages were more likely to have been raising their respective wage floors above the federal floor. States with low minimum wages typically followed federal policy. This difference is clearly region-specific.

This clustering of minimum-wage policies within regions of the country is an obstacle for credible research on the minimum wage because comparing the employment of minimum-wage raising and nonraising states effectively compares regions such as the Northeast versus the South. Employment patterns differ in these regions because of a host of economic and political reasons not affected by the minimum wage. High minimum-wage states, for example, also boast higher unionization rates and experienced smaller declines in unionization over the past three decades.

Zipperer in 2015 also did an analysis of how raising the minimum wage ripples through the workforce.26 In it, he says that “although the minimum wage enhances the bargaining power of many low-wage workers, an increased minimum wage’s effectiveness in doing so dissipates as it spreads across the wage spectrum, essentially disappearing for middle-class wage earners.” This ripple effect, he says, “has important implications for wage inequality among workers in the United States.” (See Figure 5.)

Figure 5

How policymakers should think about unemployment and the minimum wage

Policymakers need to ask whether the ongoing debate about raising the minimum wage and any resulting job losses is misplaced. David Howell, a professor of economics and public policy and director of the doctoral program in public and urban policy at The New School, argues persuasively that the stalemated academic debate about the minimum wage and any job losses whatsoever ignores the net benefits of raising the minimum wage.27 Howell, an Equitable Growth 2014 academic grantee, notes that “when the criterion for raising the minimum wage is concerned only with the cost side of an increase, the costs of some predicted job losses are all that matters.” But his research, and that of others he points to in his working paper for Equitable Growth, highlights that “there are obviously benefits to raising the legal wage floor that should be counted and compared to the costs.”28

Howell points out that workers receiving wage increases as a result of a rise in the minimum wage benefit directly either because they are earning between the old minimum wage and the new one or because they earn a bit above the new minimum wage since employers increase wages to maintain wage differentials among workers by skill or seniority. The benefits are also evident for taxpayers, he says, because a much higher minimum wage means there is less need for means-tested government programs such as the Earned Income Tax Credit and Supplemental Nutrition Assistance Program for working families.

“If we really care about maximizing employment opportunities, then we should not hold a decent minimum wage hostage to the no-job-loss standard,” says Howell. “Rather, we should put a much higher priority on full-employment fiscal and monetary macroeconomic policy, minor variations of which would have massively greater employment effects than even the highest statutory wage floors that have been proposed.”

Indeed, Howell argues, “it’s worthwhile to look at the experiences of other advanced economies of the world.” In another analysis for Equitable Growth, he looks at lessons from other rich countries.29 He examines an array of data to show that the United States is at the low end of the minimum-wage level in terms of the median wage and purchasing power, pointing in particular to the purchasing power of a McDonald’s Corp. restaurant employee in select advanced countries. (See Figure 6.)

Figure 6

He concludes this research with the finding that “properly designed and implemented, much higher living standards are possible for working families in the United States by setting the federal minimum wage far above the current level of $7.25 without affecting overall employment opportunities for minimum-wage workers.”

How would indexing the minimum wage affect hourly workers?

Zipperer notes that “economic research on the minimum wage shows that between 1979 and 2012, more than 38 percent of the rise in inequality between the wage paid to the 10th percentile wage (the bottom 10 percent of U.S. workers earn this wage or less) and the median wage is due to the minimum wage failing to keep up with the median wage.”30 By indexing the minimum wage to the median wage, he argues that policymakers would “help prevent widening disparities between those at the bottom and the middle of the wage distribution.”

Importantly, wage indexing allows the minimum wage to rise in ways that the labor market can easily accommodate. Indexing the minimum wage to the general wage level means that roughly the same proportion of workers will earn the minimum wage year after year when the minimum wage rises, says Zipperer. As long as underlying wage inequality does not change too much, fixing the distance between the minimum and median wage will keep constant the share of workers earning at or near the minimum wage.

Because a regularly indexed minimum-wage increase will not substantially alter the share of workers earning the minimum wage, employers will more easily adjust to these indexed increases than they would to the irregular and larger increases typical of the current federal procedure and many of the state and local procedures, Zipperer says. Indexing to the median wage would require employers to raise wages for roughly the same proportion of their employees each year, whereas failing to index typically results in employers being required to raise wages for a much larger share of their workforces on less predictable basis. Here’s how indexing the minimum wage to the median wage—or alternatively to the rate of inflation—would guarantee minimum-wage increases every year. (See Figure 7.)

Figure 7

Conclusion

In testimony by Equitable Growth Executive Director and Chief Economist Heather Boushey before the U.S. Senate Committee on Health, Education, Labor, and Pensions on “From Poverty to Opportunity: How A Fair Minimum Wage will Help Families Succeed,” Boushey pointed out the three overarching benefits of raising the minimum wage:31

  • It would reduce poverty. According to various economic estimates, raising the minimum wage would lift millions of working families out of poverty.
  • It would help family breadwinners support their children. The typical minimum-wage earner brings in half of their family’s income. Congress should also take care to make sure that other benefits for low-wage workers provide a full package for low-wage workers and their families, as families will also need help with access to affordable and quality health care, childcare, and housing, even at a higher minimum wage.
  • It would deliver positive economic effects above and beyond lowering the poverty rate. Economic research points to the conclusion that a higher minimum wage does not cause greater unemployment, boosts productivity, and addresses the growing problem of rising income inequality.

Boushey concluded her testimony by noting that “the minimum wage is not a silver bullet in the fight against poverty [yet] any effort to reduce poverty and increase economic mobility at the bottom rungs of the income ladder into the middle class needs to include an increase in the minimum wage.” She said that, “the weight of economic research shows that raising the minimum wage would reduce poverty and work in tandem with other poverty-reducing programs to promote income mobility from the bottom up. In the largest economy on the planet, we need to work harder to reduce poverty. Increasing the minimum wage needs to be part of that effort.”

“Capital in the Twenty-First Century,” Three Years Later

Posted on by Shonda Williams

The following is an excerpt from After Piketty: The Agenda for Economics and Inequality, edited by J. Bradford DeLong, Heather Boushey, and Marshall Steinbaum and published by Harvard University Press:

Thomas Piketty’s Capital in the Twenty-First Century, which we will abbreviate to C21, is a surprise best seller of astonishing dimensions.

Its enormous mass audience speaks to the urgency with which so many wish to hear about and participate in the political-economic conversation regarding this Second Gilded Age in which we in the Global North now find ourselves enmeshed.32 C21’s English-language translator, Art Goldhammer, reports in Chapter 1 that there are now 2.2 million copies of the book scattered around the globe in thirty different languages. Those 2.2 million copies will surely have an impact. They ought to shift the spirit of the age into another, different channel: post-Piketty, the public-intellectual debate over inequality, economic policy, and equitable growth ought to focus differently.

Yet there are counterbalancing sociopolitical forces at work. One way to look at Piketty’s project is to note that, for him, the typical low-inequality industrialized economy looks, in many respects, like post–World War II Gaullist France during its Thirty Glorious Years of economic growth, while the typical high-inequality industrialized economy looks, in many respects, like the 1870–1914 Belle Époque version of France’s Third Republic. The dominant current in the Third Republic was radically egalitarian (among the male native born) in its politics, radically opposed to ascribed authority—especially religious authority—in its ideology, and yet also radically tolerant of and extremely eager to protect and reinforce wealth. All those who had or who sought to acquire property—whether a shop to own, a vineyard, rentes, a factory, or broad estates—were brothers whose wealth needed to be protected from the envious and the alien of the socialist-leaning laboring classes.

Underlying Piketty’s book is a belief that this same cultural-ideological-economic-political complex—that all those with any property at all—need to band together to protect any threats to the possession or the profitability of such property—will come to dominate the twenty-first century political economy, in the North Atlantic at least. It will thus set in motion forces to keep the rate of profit high enough to drive the rise of the plutocracy Piketty sees in our future.

Two years ago we editors would have said, “Maybe, but also maybe not.” In the wake of the 2016 presidential election in the United States, however, Piketty’s underlying belief looks stronger. While we will not repeat the cultural dominance of property of the 1870–1914 Belle Époque French Third Republic, we do look to be engaged in the process of echoing many of its main characteristics.

It is important to note that Donald Trump won the 2016 presidential election thanks to the electoral college and not because he got more votes. But he got a lot of votes, and he got them in some places that have historically voted Democratic but faced extreme economic dislocation in the recent past. Moreover, Hillary Clinton failed to achieve the margins among young voters and racial minorities that Barack Obama did, plagued as they are with historically low employment rates, despite the record-high student debt they were promised would lead to security in the labor market. And so Piketty’s analytical political-economic case looks to us to have been greatly strengthened by Trump’s presidential election victory.

Thus we believe our book is even more important now. And so we have assembled our authors and edited their papers to highlight what we, at least, believe economists should study After Piketty as they use the book to trigger a focus on what is relevant and important.

More from After Piketty

Extracted from After Piketty edited by Heather Boushey, J. Bradford DeLong & Marshall Steinbaum published by Harvard University Press, $35. Copyright @ 2017 by the President and Fellows of Harvard College. All rights reserved.