Category: Vision 2020

A modest tax reform proposal to roll back federal tax policy to 1997

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

The fiscal position of the United States was much healthier in the late 1990s than it is today. The federal government now collects 3 percent less of Gross Domestic Product than it did two decades ago, yet the nation faces a number of pressing needs for new spending, including on infrastructure, research and development, education, and healthcare. This essay draws on new research to present a modest proposal to address this problem: roll back federal tax policy to 1997.

We propose a set of reforms to the individual income tax and estate tax, with particular attention to the tax treatment of “pass-through” income—profits from certain types of businesses that, for tax purposes, pass through to individual owners who then pay income tax on those profits. These reforms would raise revenues by $5 trillion over the next decade and reduce after-tax income inequality.

In terms of tax revenues, it’s important to recognize that pass-through firms generate more taxable income than traditional C corporations, so the tax treatment of these business entities and their owners is key. Higher tax rates on individual income and these reforms for pass-through taxation represent important steps for taxing substantial amounts of income.

Top incomes and U.S. tax policy

The rise in income inequality over the past several decades presents a natural place for federal policymakers to start to raise revenue. The rise of top incomes since the mid-1990s coincided with a series of changes to tax policy that reduced top tax burdens and contributed to rising federal budget deficits. These revenue reductions include the 2001 income tax cuts, the 2003 dividend tax cut, the 2001 estate tax cuts, and the reduction in capital gains taxes in 1997 and again in the early 2000s.

More recently, changes include the permanent extension of part of the 2001 income tax cuts and the personal and business income cuts in the 2017 tax law. While there were modest increases in income taxes in 2013, the net effect over the past 25 years of federal income tax policy has been to reduce the overall revenue collected from top earners. (See Figure 1.)

Figure 1

Our research seeks to characterize the nature of top income inequality and understand the drivers of its recent rise. Within the base of taxable income, nearly half of the rise since 1980 in the top 1 percent of income share comes from pass-through businesses, which includes the ordinary income earned by partners in partnerships and the profits of S corporation owners.1 While this income is taxed as business profits, its underlying nature more closely reflects the labor income of the business owners.2

We highlight three implications of these findings. First, policymakers need to look at income beyond wage income to understand top incomes and how to tax them. More than sixty cents of every dollar of income for top earners comes from nonwage sources. (See Figure 2.)

Figure 2

Second, the data reveal a striking world of business owners who prevail at the top of the income distribution. Most top earners are pass-through business owners—a group that encompasses consultants, lawyers, doctors, and owners of large nonpublicly traded businesses such as autodealers and beverage distributors. More than 69 percent of the top 1 percent of income earners and more than 84 percent of the top 0.1 percent of income earners accrued some pass-through business income in 2014, the most recent year for which complete data are available.3

In 2014, in absolute terms, that amounts to more than 1.1 million pass-through owners with annual incomes of more than $390,000, and 140,000 pass-through owners with annual incomes of more than $1.6 million. In both number and aggregate income, these groups far surpass that of top public company executives, who have been the focus of much inequality commentary. (See Figure 3.)

Figure 3

Third, policymakers need to take seriously the nebulous boundary between labor and capital income, especially among business owners who can flexibly characterize their income to minimize taxes. Politicians in both parties, for example, have successfully lowered their taxes through the so-called Gingrich-Edwards loophole, named after former Speaker of the House Newt Gingrich (R-GA) and former Sen. John Edwards (D-NC), which involves characterizing compensation for consulting and speaking fees as business profits rather than wages.

Our tax reform proposal

The growth of pass-through businesses in recent decades and the concentration of ownership make the taxation of pass-throughs a central element of reform. While we believe that reforming the broader corporate tax system is important, detailing reforms to the corporate tax system is beyond the scope of this proposal. In terms of tax revenues, however, it’s important to recognize that pass-through firms generate more taxable income than traditional C corporations.4

The tax treatment of these pass-through business entities and their owners is a critical part of reform. Higher tax rates on individual income and these reforms for pass-through taxation represent important steps for taxing substantial amounts of income. Rolling back tax policy to 1997 entails reforms in four main areas: marginal income tax rates, business income taxes, taxes on dividends and capital gains, and estate taxes. Let’s consider each one in turn.

Marginal income tax rates

We propose returning the personal tax rate and bracket structure, adjusted for inflation, to where it was in January 1997. For married couples, taxes would amount to 36 cents instead of 24 cents of their 300,001st dollar. For those making $500,000, marginal rates would increase to 39.6 percent from 35 percent.

These changes will raise average tax rates on top incomes considerably. Rolling back the 2001 and 2017 income tax cuts would also entail modest increases throughout the income distribution. Under our proposal, a tax credit similar to the Making Work Pay tax credit from the 2009 Recovery Act would offset tax increases for low- and middle-class earners in a targeted way. Figure 4 shows how this change (without the Making Work Pay credit) would affect marginal tax rates relative to the 2016 and 2019 tax rate schedules.

Figure 4

Business income taxes

We propose removing the active business income exclusion from the net investment income tax and repealing the recently enacted deduction for people who receive income from pass-through businesses. These provisions offer lower tax rates on income from some pass-through firms. These changes will increase taxes on private business owners who prevail at the top of the income distribution and ensure parity in the tax rates between people who receive income in different forms.

We also propose taxing nonpublicly listed C corporations at the top personal income tax rate rather than the otherwise applicable corporate rate of 21 percent. This change would prevent entrepreneurs from using retained earnings and deferral as a strategy for avoiding higher income tax rates.

Dividends and capital gains

We propose returning the dividend and capital gains tax rates to their 1997 levels. This change would increase the top federal tax rate to 39.6 percent from 20 percent for the recipients of most taxable dividends. For capital gains, this change would bring maximum long-term capital gains tax rates back to 28 percent from 20 percent today.

We also propose extending the time horizon for preferential capital gains rates to 10 years to treat more carried-interest compensation as wage income while preserving incentives for long-term investment. Dividends, and especially capital gains realizations, are quite concentrated at the top of the income distribution. In recent years, more than 50 percent of taxable dividends and 80 percent of capital gains realizations have gone to the top 1 percent of income earners.5 These changes will increase taxes at the top of the income distribution.

Estate taxes

We propose unwinding the 2001 and 2017 reductions in estate and gift taxation by returning to a 55 percent top rate and setting a $1 million effective exemption. We also propose eliminating the so-called step up in basis at death, a policy that exempts from income tax any capital gains on assets held by a taxpayer at death.

Our proposal also treats charitable contributions and gifts as realization events, meaning that taxes would be due on any unrealized capital gains at that time. Reinvigorating the estate tax should also be paired with careful steps to curtail abusive private business valuations.6 These changes will help reduce wealth concentration, raise revenue, and increase the fairness of the tax system.

Revenue and distribution analysis

Our proposal would raise $5.1 trillion over the next 10 years, according to the Penn Wharton Budget Model. The largest contributors to this increase are $1.8 trillion from the increase in tax rates on ordinary income net of the Making Work Pay credit, $1.7 trillion from taxing privately held C corporations as pass-throughs, and $0.6 trillion from increasing taxes on capital gains and dividends. Without the Making Work Pay Credit, the other changes raise $6.9 trillion, with the increase in tax rates on ordinary income accounting for $3.6 trillion instead of $1.8 trillion. (See Table 1.)

Table 1

Most of the revenues from our proposal come from the top of the income distribution. Specifically, the top 10 percent, 5 percent, 1 percent, and 0.1 percent account for 83 percent, 70 percent, 46 percent, and 23 percent of the increase, respectively. The average after-tax income of the top 0.1 percent, whose average pretax income is $2.1 million, would fall by 14 percent, or $220,000. The average after-tax income of the fourth quintile, whose average pretax income is $98,000, would fall by 2.5 percent, or $2,000. In contrast, the bottom three quintiles do not face tax increases due to the Making Work Pay credit. The estimates highlight the extent to which the changes since 1997 have been concentrated at the top. (See Table 2.)

Table 2

Addressing potential criticisms

In 1997, tax revenue was 3 percent higher as a share of GDP. Top federal rates were approximately 40 percent, tax rates on labor and capital income for entrepreneurs were more closely aligned, and the tax base was broader. The subsequent evolution in pass-through income has raised the stakes in how we tax nonwage income, especially for closely held firms. Our proposal would directly address this development in aligning the taxation of private C corporations with pass-through businesses.

One might criticize this proposal for jeopardizing economic growth. Recent research, however, about the growth effects of taxing top incomes suggests this criticism is overstated. In response to the dividend tax cut of 2003—one of the exact policies we propose to roll back—economist Danny Yagan at the University of California, Berkeley finds a large increase in payout and no change in investment in a large sample of private firms, whose ownership likely skews toward top incomes.7

One of the co-authors of this essay finds that tax changes of the magnitude seen in the post-World War II period for top earners have small impacts on employment growth.8 These findings suggest returning to modestly higher top income tax rates and to a dividend tax closer to the personal rate will have small effects on investment and growth. Indeed, estimates of this plan prepared by the Penn Wharton Budget Model suggest it would have no discernable impact on growth in the first two decades but ultimately would increase growth by 2050.

While some critics may cite large taxable income elasticities as evidence for large distortions, Matthew Smith at the U.S. Department of the Treasury, UC Berkeley’s Yagan, and the two co-authors of this essay document a large shifting response to the difference between top entrepreneurial income treated as wages versus that treated as profits.9 Prior to the 2017 tax reform, the tax-preferred form was pass-through profits because this form benefited from lower social insurance and passive investment income tax.

Because much of this income is better thought of as reflecting human capital, the literature documenting small labor-supply responses to income taxes applies to most pass-through income as well. Proposals that align tax rates on different income sources receive additional support in the literature that finds large reporting responses to tax changes.

A second criticism is that this proposal is modest. Indeed it is! We view it as a point of departure for tax reform and are sympathetic to additional steps that focus on top incomes and enforcement. We view our approach as complementary to more ambitious revenue-raising proposals, such as a national value-added tax, a carbon tax, and a wealth tax.

—Owen Zidar is an associate professor of economics and public affairs at Princeton University. Eric Zwick is an associate professor of finance at the University of Chicago’s Booth School of Business.

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Good U.S. monetary policy can’t fix bad U.S. fiscal policy

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

In August 2018, Federal Reserve Chair Jerome Powell gave a speech in which he explained the macroeconomic “stars” that guide monetary policy.10 The three stars are the values for the unemployment rate (u), inflation (π), and the short-term interest rate (r), which together are consistent with long-run macroeconomic equilibrium. These three equilibrium variables are generally written with “stars”—as in u*, π*, and r*—in the mathematical representation of the New Keynesian macroeconomic models used by macroeconomists to discern the direction of economic activities. Powell stated in his speech that the stars were all aligned, with the exception that the Fed probably needed to continue gradually raising the federal funds rate, as in previous expansions.

U.S. stock markets became rattled shortly after Powell’s speech because the Fed continued to signal that it intended to move gradually to “normalize” (meaning raise) interest rates over the next few years. The steep decline in stock prices in October 2018 led to a change of tone by Fed officials by the end of 2018. Fed officials at first suggested there might be no need for future interest rate increases, and then completely switched direction and cut the target range for the federal funds rate by 50 basis points in 2019, from 2.25–2.5 to 1.75–2.0.

Many academic economists and other voices across the political spectrum argued that the Fed simply misjudged the value of r* (the equilibrium short-term interest rate, which in this essay will be used interchangeably) in recent years. John C. Williams, president of the New York Fed and vice chair of the Federal Open Market Committee, has long advanced the idea that r* has declined in recent decades.11 Williams is certainly not alone, with voices from both ends of the political spectrum arguing that maintaining low interest rates is crucial for continued economic expansion.12

In terms of the macroeconomic stars invoked by Fed Chairman Powell, there is widespread agreement that the U.S. economy today seems to be at or near full employment (u=u* in mathematical parlance) and that inflation is not rising (π ≤ π*). Therefore, higher interest rates would only do harm to an otherwise well-functioning economy. In contrast, fiscal policy (government revenues and spending) is holding back the U.S. economy because needed government investments in human capital, scientific research, or infrastructure are not happening.

This is the conundrum facing the monetary policymakers at the Fed. Lowering its benchmark federal funds rate will increase asset valuations and provide some economic stimulus, but without boosting potential long-run economic growth. The Fed may have little choice because fiscal policymakers, most of whom remain mistakenly fixated on rising government spending rather than on falling government revenue, will not support the government investments needed to boost long-term economic growth and prosperity. Should a recession occur, as one eventually will, Fed efforts to boost growth by lowering the short-term interest rate will be ineffective. Thus, in the event of a downturn, fiscal policymakers may once again be forced by events to provide short-term stimulus spending, but they will likely again fail to make the real investments necessary to boost long-run growth.

In this essay, I examine why a falling r* matters to the Fed, how lower interest rates increase asset valuations in the economy without boosting necessary investments, and then why fiscal policy has to change by recognizing that it is not rising government budget deficits that are a danger to future U.S. economic growth but rather falling government revenues. In short, I argue that appropriate monetary and fiscal policies in tandem will boost the income of the many—not just the value of assets owned by the few—to create the macroeconomic conditions most suitable for sustained and road-based economic growth.

Why has r* fallen, and why does it matter?

There is an active academic literature about a declining equilibrium short-term interest rate ( r* ) and the implications for Fed policy.13 The research on why r* has fallen mostly focuses on two key determinants: productivity growth and an aging population. Through the lens of New Keynesian macroeconomic models, when productivity growth slows, the demand for investment falls, and when populations age, the supply of saving rises. Declining demand for borrowed funds along with an increasing supply of saving pushes r* down.

Accepting the proposition that r* has fallen does not mean the crucial monetary policy questions are all resolved. When r* is low, for example, monetary policymakers have to be more concerned about limits on nominal interest rates. The real interest rate—the nominal rate minus inflation—is what impacts real behavior in New Keynesian models. So, if inflation and real interest rates are both low when the economy is expanding, then there is little room for monetary policymakers to cut real rates in the event of a downturn, because zero is a natural lower bound on nominal rates.14

A second practical issue associated with lower r* is that the return to risk-free savings is reduced. Low risk-free rates of return are most important for securing retirement incomes for both individual savers and institutional funds with guaranteed pension benefits and other forms of annuities. Savers are forced to accept greater risks in order to get positive financial returns in a world with low r* or to compensate for low returns in some other way, such as saving even more.

One potential benefit in a low-r* economy is that the cost of borrowing is also lower, but that assumes the risk premium—the wedge between private and government borrowing costs—remains stable. Unfortunately, risk premia are not stable, and large increases in risk premia are generally associated with the end of an economic expansion. At the end of an expansion, investors become worried that growth will slow, and thus borrowers will have difficulty repaying their debts. Lenders are willing to supply less in the way of new loans to businesses and consumers at any given interest rate. Even if the Fed can lower the risk-free interest rate, movements in the actual cost of borrowing for businesses and consumers will depend on what is happening with risk premia.

Movements in risk premia and other economic fundamentals affecting r* point to a broader set of questions connecting risk, return, and asset values. In particular, the value of corporate stock is the discounted present value of the future profits the corporation is expected to earn. For a given stream of expected profits and a given risk premium to compensate for the uncertainty of those profits, a lower r* increases the value of a share of stock.15 If the owners of the corporation can borrow to fund their operations more cheaply, then their profits will be higher, everything else equal.

What can the current level of U.S. stock markets tell us about r* and other economic fundamentals? The famous value investor Warren Buffet has long advocated the following measure of stock market valuation: Add up all outstanding shares of corporate stock at current market values and divide by the size of the overall economy. A high ratio of stock market valuation to Gross Domestic Product indicates an overvalued market. At the end of 2018. the so-called Buffett Ratio was near the recent historical high that had occurred before the crash of 2000, and, in general, the ratio has been higher and much more volatile in recent decades. (See Figure 1.)

Figure 1

One possible explanation for a higher Buffett Ratio is more corporate investment, which will happen if people save more and capital markets convert that additional saving into real investment. Yet the other line in Figure 1 shows that accumulated investment in nonresidential capital stock relative to GDP has been stable. This means the level of interest rates and stock market valuations are not associated with greater real investments in the U.S. economy.

The share of national income going to corporate profits can also push up the Buffett Ratio because a higher profit share means the expected level of profits is higher. The ratio of measured corporate profits to GDP, however, cannot explain the increasing Buffett Ratio either, because there has been no corresponding increase in the corporate profits share.16

All of this evidence suggests that current stock market values are being maintained at historically high levels by the combination of low risk-free interest rates and low-risk premia. This ties the hands of the Fed because maintaining high asset-valuation ratios becomes essential for sustaining aggregate demand. Asset owners are willing to borrow, spend, and invest in productive capital when they feel wealthier. But if risk premia rise and asset values fall, then the resulting decreases in asset values will have disproportionate negative effects on spending and investment.17

Is U.S. monetary policy constrained by bad U.S. fiscal policy?

Evidence about asset valuation and asset price volatility suggests that describing economic fluctuations in terms of deviations from a New Keynesian equilibrium that ignores the risk premium is at best incomplete. The now-widespread belief that the Fed should simply acknowledge that r* has fallen goes hand in hand with accepting the inherent risk of keeping the economy growing by boosting the values of assets owned by the few, rather than boosting the incomes earned by the many.

This is where better fiscal policy becomes important. Although targeting a lower r* may be the best monetary policy given current fiscal policy, it is possible to change fiscal policy in ways that address the underlying reasons for declining r*. Better fiscal policy would make it possible for the Fed to conduct better monetary policy, meaning the Fed could achieve full employment and stable inflation—the U.S. central bank’s “dual mandate”—without the inherent financial market valuation issues and instability associated with a low r* equilibrium.

Examining the composition of federal spending and the composition of federal revenues relative to GDP can provide a high-level perspective on fiscal policy over the past 50 years. The data clearly reject the narrative that increased government spending is the primary reason for rising government deficits in recent years. Total spending, at about 20 percent of GDP in 2018, is close to its 50-year average. (See Figure 2.)

Figure 2

In contrast, total federal revenue relative to GDP is well below its 50-year average. (See Figure 3.)

Figure 3

A closer look at the composition of spending in Figure 2 cuts further against the narrative about rising government spending. The component of spending associated with direct government intervention in the real economy—nondefense discretionary spending—has fallen as a share of GDP in recent decades. The fastest growing categories of outlays are for programs such as Social Security, Medicare, and Medicaid, all of which are government programs generally financed by payroll taxes on the same group of low- and moderate-wage earners who also are the beneficiaries of these programs. The increase in payroll taxes used to fund these programs is evident in Figure 3. Thus, another crucial takeaway from this high-level perspective is that the overall decline in total revenues relative to GDP is because corporate, estate, gift, and income taxes have fallen even more than payroll taxes have increased.

Most analysis of fiscal policy focuses on the economic effect of deficits, without regard for why the deficits were created. The trends in the composition of spending and revenue shown above are suggestive that all deficits are not created equal. A deficit created by increased nondefense discretionary spending focused on investment in human capital, scientific research, or infrastructure has positive effects on aggregate demand and boosts productivity. Such policies have the potential to reverse the downward pressure on r*.

A deficit generated by reducing taxes on capital incomes, in contrast, has only short-run effects on aggregate demand, mostly through increased asset prices. Indeed, the effect of such fiscal policies is to reinforce a low-r* equilibrium because the after-tax return from owning stock is higher, and thus standard asset-valuation models tell us the stock should be worth more. Yet experience with those sorts of policies over the past two decades shows they do not lead to the sorts of investments that will make the U.S. economy grow and help alleviate the downward pressure on r*.18

The recent history of fiscal and monetary policies suggests that bad fiscal policy and constrained monetary policy have increasingly reinforced each other in recent decades, contributing to a slowdown in overall U.S. economic growth alongside rising income and wealth inequality and financial instability. Fiscal policymakers have abdicated their responsibility to make the investments in people, technology, and infrastructure that private investors cannot and will not make.

The good news is that a continued slowdown in economic growth and lower r* is not inevitable. Understanding how to reverse the decline in r* just involves a deeper understanding of the proper role of government in today’s economy.

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Good U.S monetary policy can’t fix bad U.S. fiscal policy

Policies for the next Congress and administration

Bad fiscal policy has increasingly constrained monetary policy, and thus the first set of policies to embrace involve rethinking government intervention more broadly. On the spending side, the federal government needs to step up and identify areas where more investment is warranted in human capital, science and technology, and infrastructure. Federal investment in these areas will not be displacing private investments because those investments are simply not happening now. These sorts of investments will increase productivity growth, providing a direct offset to the otherwise-declining r*.

Increasing government investment may involve deficit spending in the short run, thus the second policy recommendation is to transform the way policymakers and the public think about spending and taxes. When a private citizen makes an investment, the payoff is in the form of profits, dividends, or interest. When government makes an investment, the fiscal payoff is in the form of higher taxes on the additional income that is generated. Most of the policy discussion about taxes involves the negative consequences of taxing some positive outcomes, but policymakers need to remember that those positive outcomes are, sometimes in large part, the payoff on public investment. Our tax system is increasingly allowing those who have benefitted the most from public investments in science and technology to pay less in taxes.

Although better fiscal policy is the key to better monetary policy, there are some monetary policy principles the Fed can and should embrace if economic conditions deteriorate. Economic shocks generally involve both financial effects and real effects in the economy, with the wealthy experiencing declines in their net worth but the less wealthy experiencing job losses. In the past, the Fed has focused on propping up the financial system—for example, bailing out mortgage lenders but not mortgage borrowers. The Fed needs to expand their policy purview if the fiscal authorities won’t act in the interests of all the people, and make sure the next round of Quantitative Easing—Fed speak for the central bank’s purchase of financial securities in the marketplace to boost liquidity in the economy—or other extraordinary monetary policy actions do not simply rescue those who benefitted from the mistakes that led to problems in the first place.

—John Sabelhaus is a visiting scholar at the Washington Center for Equitable Growth. Previously, from 2011 to mid-2019, he was assistant director in the Division of Research and Statistics at the Board of Governors of the Federal Reserve System, and prior to that, his roles at the Federal Reserve Board included oversight of the Microeconomic Surveys and Household and Business Spending sections, including primary responsibility for the Survey of Consumer Finances.

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Fighting the next recession in the United States with law and regulation, not just fiscal and monetary policies

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Is the United States ready for the next recession? According to many experts, the answer is no.19 Our nation’s primary recession-fighting tools—monetary stimulus by the Federal Reserve and fiscal stimulus by Congress—appear hamstrung. New policy options are desperately needed. In this essay, I outline what I call countercyclical regulatory policy as a new macroeconomic policy option. Like monetary and fiscal policy, regulatory policy affects total spending in the U.S. economy. Regulatory actions that encourage banks to lend, firms to invest, and consumers to spend can increase demand and reduce unemployment when the next recession hits—even if (as is likely) monetary and fiscal stimulus falter.

In the next recession, the Fed will be constrained in its ability to reduce interest rates to stimulate investment and consumption spending and lower unemployment. Today’s historically low rates leave the Fed little space to stimulate the economy by lowering interest rates before they hit their effective lower bound around zero. Interest rates cannot go deeply into negative territory because savers will hoard cash or prepay taxes rather than accept a negative return.20

When monetary policy is constrained during a recession, the textbook macroeconomic policy response is fiscal stimulus.21 Increases in government spending and decreases in taxes raise total spending—also known as aggregate demand—to offset the weakness in spending causing the recession. Yet partisan gridlock and fears about excessive deficits during the most recent economic downturn, the Great Recession of 2007–2009, caused the size of fiscal stimulus passed by Congress in 2009 to fall well short of what was needed to effectively relieve unemployment.22 Because partisan gridlock is, if anything, worse than a decade ago and public debt as a percentage of Gross Domestic Product has increased since 2009, we cannot depend on fiscal stimulus during the next recession.

As I explain in my latest book, Law and Macroeconomics: Legal Remedies to Recessions,23 law and regulation offer a wide variety of stimulus options in recessions across many parts of the U.S. economy. Many federal regulatory program affect the business cycle. Regulatory options are not subject to the constraints of monetary and fiscal policy. If regulators and administrators systematically favor policies promoting spending and employment in recessions, then they could collectively have an important stimulating effect on the U.S. economy. At the very least, these proposed countercyclical regulatory policy options could avoid the unintentionally pro-cyclical effects of many current laws and regulations.

What is countercyclical regulatory policy?

Countercyclical regulatory policy directs regulators to apply a rule that promotes spending during recessions and a different and more restrictive rule during periods of robust economic growth. In financial regulation, conventional wisdom favors countercyclical regulatory policy. The Basel III accords—a set of international standards of bank regulation—highlight the value of “countercyclical capital buffers,” which apply a relatively strict regulatory regime to financial institutions in good times and a more lenient one during recessions.24

Unfortunately, U.S. financial regulators have been reluctant to implement countercyclical rules in practice.25 With countercyclical monetary and fiscal policy constrained, the next administration should appoint financial regulators more willing to implement countercyclical financial regulation as a means of avoiding lending bubbles during the next boom and stimulating the economy in the next recession.

The logic of countercyclical regulation does not apply to financial regulation alone. It should apply to every regulatory regime that affects aggregate demand and unemployment, among them energy, housing, and utility regulation.

Using permits and mandates as countercyclical regulatory policy tools

Many investment projects require approval from federal regulators. The federal Bureau of Ocean Energy Management, for example, reviews applications for the construction of offshore wind turbines.26 Federal regulations grant this agency within the U.S. Department of the Interior considerable discretion over applications, authorizing rejection of projects that cause “undue harm” to other interests.27

Outside of recessions, decisions made by the Bureau of Ocean Energy Management have relatively little effect on unemployment. If unemployment is already low, then the approval of a new wind turbine project is unlikely to significantly reduce unemployment or increase investment. Instead, project approval shifts workers and capital from other uses to offshore wind turbine construction. During recessions, however, many workers are unemployed and capital lies dormant. If the agency approves an outstanding offshore turbine application during a recession that it might not have approved otherwise, then investment spending increases and unemployment decreases. Regulatory policy can stimulate the economy.

Of course, the business cycle should not be the sole determinant of regulatory decisions during recessions. The Bureau of Ocean Energy Management must still determine whether the project causes “undue harm” to other interests. Because of the stimulus value of a new investment project during a recession, however, some projects should be approved that might be rejected at other times. The economic value of the project to the economy as a whole changes with the business cycle. As a result, the determination of what is “undue harm” should change as well.

Because federal regulators are generally reviewing many billions of dollars of investment proposals at any given time, systematic countercyclical regulatory policy, in financial regulation and outside of it, offers the prospect of significant stimulus during a recession. Yet countercyclical regulatory policy does not always entail deregulation during recessions.28 In some cases, new mandates can increase spending and reduce unemployment.

Consider Section 8 housing vouchers, which provide rental assistance to low-income families. The U.S. Department of Housing and Urban Development, which oversees the program, determines a housing property’s compliance with “housing quality standards” and thus eligibility for Section 8 vouchers.29 If HUD imposed a more robust energy efficiency requirement to its housing quality standards during the next recession, then the new mandate would likely increase property investment in millions of units.

Utility regulation as a countercyclical regulatory policy tool

While countercyclical regulatory policy could deliver meaningful stimulus during a recession, the first policy task is simply to avoid making business cycles worse. Too many legal and regulatory regimes are implicitly pro-cyclical, exacerbating recessions without intending to do so. The regulation of utilities, implemented jointly by federal and state regulators, provides an example of regulation that unintentionally affects private-sector spending pro-cyclically. Ending this pro-cyclical bias and moving to a neutral or even countercyclical stance should enable tens of billions of dollars of stimulus during the next recession—without increasing the national debt.

At present, utility regulators generally approve proposed utility prices consistent with returns of 8 percent to 10 percent on invested capital per year.30 When profits fall below this baseline, regulators often permit price increases.31 In recessions, demand for utilities goes down. Utility profits follow, falling below the profit baseline used by the regulators. In response, utilities request rate increases from their regulators. The regulators oblige. Retail prices in electricity (the largest rate-regulated sector) have increased substantially amid the past two recessions. Prices in the regulated water and trash-collection sectors, set by a combination of regulation and direct government provision, also experienced their highest price increases of the past 20 years during late 2008 and 2009.32 (See Figure 1.)

Figure 1

The pro-cyclical pattern of utility prices approved by regulators exacerbates recessions. A utility rate increase resembles a tax increase, decreasing discretionary income and spending by consumers when unemployment is high. While the rate increase supports utility profits and thus benefits utility shareholders, comparatively wealthy shareholders have a much lower propensity to consume out of an additional dollar than the typical utility consumer. Higher utility prices in recessions therefore decrease spending and raise unemployment.

A better regulatory framework from a macroeconomic perspective would hold utility prices down and keep returns below 5 percent during recessions, raising consumer discretionary incomes and spending. To ensure regulated utilities earn an average return of 8 percent to 10 percent over the business cycle, regulators should allow utility returns to rise above 10 percent during booms.33 This kind of countercyclical utility regulation would shift recession risk from utility consumers to utility investors, who are better equipped to manage the risk. The existing regulatory framework, by contrast, imposes the risk of recession on utility consumers, forcing consumers to reduce their spending during a recession to stabilize utility profits.

Although state public utility commissions directly regulate electricity and other utility prices, the Federal Energy Regulatory Commission enjoys considerable supervisory authority over the process for electricity. FERC “regulates the transmission and wholesale sales of electricity in interstate commerce” and “reviews certain mergers and acquisitions and corporate transactions by electricity companies.”34 If one factor in the commission’s review of electricity mergers were the merging companies’ demonstrated ability to tolerate temporarily lower profits in recessions, then utility regulation could cease exacerbating recessions. An even more ambitious regulatory reform that used lower utility prices as a stimulus during recessions would have even greater countercyclical effects.

Government insurance rates as countercyclical regulatory policy tools

Utility regulation is not the only area of regulation that produces pro-cyclical prices. Government insurance programs often yield the same result. Government insurance programs maintain reserve funds to ensure that future claims will be paid. In recessions, these reserve funds shrink as claims against the funds exceed insurance premiums. In response, the administrators of these funds raise rates. As a result, government insurance fund charges are highest during recessions, reducing discretionary income and spending at precisely the worst time.

One case in point is the Federal Housing Administration’s mortgage insurance program. During the Great Recession, unexpectedly high mortgage defaults depleted the FHA’s insurance reserves. In response, the FHA raised mortgage insurance rates considerably from 2009 to 2013—when the U.S. housing market was at its weakest. Once the housing market recovered, the FHA dropped mortgage insurance rates to historical norms. (See Figure 2.)

Figure 2

This increase in mortgage insurance rates from 2009–2012 lowered borrowers’ discretionary incomes, reducing their spending at the worst possible time. Even worse, higher insurance rates discouraged borrowers from refinancing mortgages to take advantage of lower interest rates during the Great Recession and the extremely slow recovery that followed.

Instead of pro-cyclical insurance rates, the Federal Housing Agency and other government insurance programs that show similar patterns, such as unemployment insurance and deposit insurance rates set by the Federal Deposit Insurance Corporation, should strive for business cycle neutral premiums. During ordinary times, insurance premiums that exceed claims buoy insurance reserves. Program administrators and regulators need to resist the temptation to lower rates during these times. The reserves are needed for the next recession. When the next recession strikes and claims against government insurance funds rise, then program administrators should allow the insurance reserve funds to be depleted without raising rates. Keeping insurance rates low in the next recession increases discretionary incomes for the consumers of government insurance programs, raising spending and lowering unemployment.

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Fighting the next recession in the United States with law and regulation, not just fiscal and monetary policies

Coordinating countercyclical regulatory policy within overall macroeconomic policy

Predicting how a regulatory regime affects the business cycle demands expertise. So does determining when the economy needs stimulus. Every regulator and administrator acting across many different sectors of the U.S. economy cannot be expected to have that needed expertise. As a result, effective countercyclical regulatory policy requires a coordinating office staffed by a mix of experts in macroeconomics and regulation. A White House office, the Office of Management and Budget’s Office of Information and Regulatory Affairs, and one White House council, the National Economic Council, could be where that expertise could reside.

The Office of Information and Regulatory Affairs currently coordinates and supervises the implementation of microeconomic tools such as cost-benefit analysis in federal regulation. The National Economic Council currently provides overall macroeconomic policy advice to the president. A new office to coordinate countercyclical regulatory policy could be located within or alongside either of these offices. The next administration could create this office either by modifying the Executive Order creating the National Economic Council35 or by modifying the Executive Order instructing the Office of Information and Regulatory Affairs to focus on cost-benefit analysis.36 The countercyclical regulatory policy office would have two roles.

First, this new office would work with other agencies to determine how each regulatory regime affects the business cycle. This process would identify programs that offer the potential for meaningful stimulus during a recession if applied in an appropriate countercyclical fashion. It would also identify regimes that were unintentionally pro-cyclical and ripe for reform.

Second, the new office, working in conjunction with macroeconomic experts throughout government, would evaluate macroeconomic conditions and the ability of discretionary fiscal and monetary policies to respond to the business cycle, and instruct regulators to implement pre-identified countercyclical regulatory programs accordingly. By creating an office to coordinate the making of macroeconomic policy across the federal government’s many agencies, the next administration would build countercyclical policy into the regulatory framework, rather than making macroeconomic policy on an ad hoc basis.

The wide variety of policy proposals described here, ranging from bank capital requirements to utility regulation, demonstrates countercyclical regulatory policy’s potential. Every federal regulatory program affects the business cycle. The proposals here are merely representative examples. Countercyclical regulatory policy offers an infinite variety of macroeconomic policy options that are not subject to the constraints of monetary and fiscal policy. By paying attention to these effects and managing them, policymakers can stimulate the economy in the next recession.

—Yair Listokin is the Shibley Family Fund Professor of Law at Yale Law School.

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Race and the lack of intergenerational economic mobility in the United States

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Intergenerational economic mobility—the likelihood that children achieve a higher standard of living than the household in which they were reared—varies considerably throughout the United States. In addition to the geographic variability of mobility, there also are significant racial and gender differences in mobility. Mobility, in short, is a complex nexus of individual, community, state, and national policies and circumstances.

Geographic and racial differences in economic mobility are particularly important from a policy perspective for three reasons. First, racial differences in mobility can exacerbate racial differences in other areas such as in housing, education, and health. Second, inequalities in opportunity are antithetical to our nation’s creed of equal opportunity for all. And third, structural differences in mobility limit the potential for overall U.S. economic growth.

Our essay first examines the historic links between intergenerational economic mobility and race and income inequality—trends heavily influenced by changing patterns in geographic mobility—and how these trends are tied to explicit policy decisions in the past that persist today in terms of housing, education, and health inequality among low- and middle-income black Americans. We then examine the known policy remedies for persistently low intergenerational economic mobility among African Americans and how these policies could be put into action and paid for. We recommend a mix of policies to promote more equitable housing and educational opportunities alongside moves to boost income security and wealth accumulation.

What we know about race and mobility in the United States

Past research on mobility revealed a strong relationship between parental economic circumstances and childrens’ socioeconomic outcomes in adulthood. Still, this research generally relied upon smaller population samples, with limited ability to discern geographic patterns in that data. More recent research has used administrative tax records to link parents and children, allowing us to explore intergenerational economic mobility with greater precision than ever before.

Scholars have long known that race is related to both intra- and intergenerational economic mobility—within a single generation and between multiple generations. Major research volumes have documented large black-white gaps in employment and incarceration, particularly among black males.37 Today, newer evidence demonstrates that the lack of black intergenerational income mobility is driven in large part by the extremely poor socioeconomic outcomes of black children, according to research by economist Raj Chetty and his colleagues at Harvard University. (See Figure 1.)

Figure 1

Areas with large black population shares are also areas where black individuals experience particularly low levels of economic mobility, with black children born into below-median-income families tending to remain below the median income.38 For every 10 percentage point increase in the share of the black population in an area, the expected mean income rank of children drops by 0.7 percentage points. These differences exacerbate racial inequality in economic mobility.

In nearly all areas of the country, the same mean income rank for black children from Figure 1 relative to white children is negative, suggesting that black children growing up in the 25th income percentile reach much lower rungs on the income ladder relative to white children growing up at the same income level in the same commuting zone. In other words, the racial differences in mobility amplify the geographic differences. (See Figure 2).

Figure 2

Research has documented several correlates of the large intergenerational mobility gap by race, each of which is important for policy. The presence of fathers is correlated with a lower black-white gap, as are marriage rates.39 And segregation, poverty, and education are all related to larger black-white gaps in mobility.40 Each of these underlying correlates is itself influenced by a number of existing policies, suggesting that changes in these policies could also change the trajectory of racial gaps in mobility.

But first, it’s important to understand that historic geographic mobility patterns overlay these economic inequality markers. Black mobility in earlier generations lagged white mobility in every area of the United States.41 The regions where the gap was largest, however, were quite different than they are today. In earlier generations, the South was the epicenter of racial inequality, while today, the South and the Northeast and Midwest are fairly indistinguishable with respect to racial inequality.

The process through which areas that once were more racially equitable but today are not is a complicated story of policy-driven choices that affected intergenerational mobility across the country. Recent research highlights that factors such as school segregation, disinvestment from public goods, and divergent levels of investment in education since the 1950s have combined to create a nexus of low mobility for blacks in general and for black men in particular.42

These correlates of intergenerational mobility reinforce what the policymaking community has long known about poverty, wealth formation, and public policy.43 Areas with higher levels of segregation have a range of features that contribute negatively to economic development, including lower investment in public goods, worse health outcomes, and longer commute times. Areas that had more entrenched redlining—federal policies that enforced segregation in homeownership—have larger racial gaps, not just in homeownership but also in wealth and earnings.

Indeed, recent research links the racial legacies of segregation, lynchings, and Confederate monuments in specific locations to present-day black-white wage gaps, suggesting that continuing racial animus may play a role in contemporary U.S. labor market outcomes.44 Similarly, geographic variation in publicly funded schools, social services, and access to enriching child development programs follows a racial demographic pattern. These factors within cities at the neighborhood-level combine with family-level circumstances to create more economic insecurity. When taken together, many children face an array of adverse neighborhood, school, and family-level factors that are harmful for development and potentially impede upward social and economic mobility.45

The evidence that policy interventions can improve mobility

The crisis of intergenerational poverty and low socioeconomic outcomes among black Americans must be properly contextualized. Many black Americans have succeeded in the face of substantial adversity and labor market discrimination—and in spite of limited access to wealth, networks, connections, and educational opportunities. Still, exceptionalism in the face of adversity is not a sufficient policy prescription.

Fortunately, we know quite a bit about how to raise socioeconomic outcomes. As noted above, policies that improve upon the overall quality of neighborhoods—including schooling, safety, and housing quality—have been shown to raise the eventual adult socioeconomic outcomes of children.46 Second, a relatively contemporary body of evidence confirms the positive impacts of higher school expenditures on fighting poverty and improving economic opportunities.47 And large-scale expansion of safety net programs such as supplemental nutrition assistance and financial assistance for needy families lowered poverty and improved socioeconomic outcomes.48

In addition, reforms within the U.S. higher education and workforce training systems have, in specific instances and regions, provided career training and subsequent employment opportunities via a commitment between employers, educational institutions, and student trainees. Such efforts, if scaled up to meet the needs of low- and middle-income African Americans today, could help to overcome the relatively lower levels of social capital, the labor market bias, and the discrimination that many black Americans face.49

For many families, wealth operates as a primary mechanism that unlocks access to the nation’s best neighborhoods, along with the full range of amenities that this entails. Wealth also provides a buffer in the event of adverse and unanticipated negative economic shocks, which are more likely to occur among black families. Wealth gaps have very clear implications for upward mobility, including educational attainment and occupation status.50 Wealth promotes enriching opportunities, while also cushioning against a range of events that can derail households, including health shocks, relationship changes, and job loss.

Black Americans largely lack high levels of wealth to unlock opportunity. Most also operate without even emergency levels of savings or access to credit needed to withstand unanticipated shocks. Accordingly, policy solutions that provide greater liquidity and wealth to black Americans have the potential to greatly improve intergenerational economic mobility.

Translating the evidence into policy

The importance of neighborhoods cannot be understated. Many Americans across the political spectrum remain resistant to racial and economic integration, which means the prospect of a large-scale economic integration program shifting low- and middle-income income black families into relatively affluent neighborhoods seems unlikely. But a “second-best” set of solutions still could attack the root causes of racial differences in intergenerational economic mobility.

First and foremost, enforcement of anti-discrimination lending policies, aggressive affordable housing policies, and more equitable education finance policies would work to improve access to affordable, safe, quality housing. Efforts at the state and local level could provide support for land trusts, which preserve affordable housing for low- and moderate-income residents by removing housing land from the marketplace—typically facilitated via purchases and land donations from philanthropic and nonprofit organizations51—and longer-term agreements between local governments and housing developers to maintain home affordability.

Policymakers also could reconsider the efficacy of public housing, including whether and how such housing can be improved and maintained and whether mixed-income arrangements resulting in a net-loss of low-income housing should provide cautionary lessons moving forward. Because housing across most of the country is taking an increasingly high share of income among even middle-class families, efforts to address affordable housing via neighborhood improvements could have spillover benefits for many middle-class families, irrespective of race.

Additional educational expenditures also have been shown to improve student outcomes and so should be taken seriously. Such expenditures should also expand social and employment services available within primary and secondary educational settings.52 In this way, policymakers could better direct resources toward families and aggressively target the link between income and educational achievement.

Promoting wealth accumulation and greater access to credit for low-income black families also would promote opportunity, while cushioning against adverse events. One innovative policy option is the issuance of Baby Bonds.53 These proposed new bonds would give children an asset account predicated on the wealth of their parents. In adulthood, the child would have access to those resources to engage in wealth-enhancing activities such as postsecondary schooling, purchasing a home, or financing entrepreneurial activity.54 By design, Baby Bonds close a significant portion of the wealth gap between black and white households.

Another set of options include reforms to the Temporary Assistance for Needy Families program to expand expenditures on cash benefits.55 This reform would enable low-income families of any race to have greater access to needed liquidity.56 Such interventions are most effective if targeted toward economically disadvantaged and racially segregated neighborhoods, including rural areas.57

Finding the revenue for these reforms

The suggestions put forth above do not come without a cost, though we believe the societal benefits of intervening outweigh the costs of inaction. Thus, another needed “prescription” includes increased tax revenue at the federal and state level to help break the transmission of poverty across generations.58 As hard as this may seem, the politics required to make these investments seems more likely than large-scale racial integration and the transition of low-income black Americans into more affluent and safer neighborhoods with higher-quality schools.

Indeed, the tax system is perhaps the main vehicle to promote redistribution, to reduce black-white income and wealth gaps. While many tax policies provide important benefits to black households, the tax system also provides an array of deductions and benefits that favor wealth over income, potentially worsening racial economic inequality.59

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Race and the lack of intergenerational economic mobility in the United States

Why policymakers should intervene to improve intergenerational mobility

There is a moral argument for intervening on behalf of low-income black Americans, many of whom remain mired in intergenerational poverty, alongside an efficiency rationale for the broader U.S. population. The data from Harvard’s Chetty and his co-authors can be interpreted many ways. One view is that middle-class families, including many white families, are paying for disinvestment in poor, predominantly black neighborhoods.60 How so? Many of America’s cities have clear defining lines, within which lie reliable police protection and low crime, a rich array of private amenities, and higher-quality public and private school choices. The disinvestment in poor, predominantly minority-inhabited neighborhoods therefore bids up the value of “preferred” locations that are in limited supply.

The upshot: Investments that improve school quality, lower crime, and encourage private-sector amenities will have positive spillovers by creating a wider set of quality housing alternatives. Most American families have not experienced substantial wage growth over the past several decades. Lowering housing costs—and therefore reducing the amount each family must spend on housing costs every month—will ease pressures on take-home pay. Of course, such investments will make it all the more important to maintain spaces for low-income families as such places become more desirable.

What’s key, though, is that improvements to the overall neighborhood infrastructure in the poorest neighborhoods around our country—which are disproportionately black and minority inhabited—would improve the well-being of poor Americans of all races and provide affordable housing and schooling alternatives for middle-class families of all races. More robust intergenerational mobility in the future, for black Americans in particular, would be the end result.

—Bradley Hardy is an associate professor of public administration and policy at American University. Trevon Logan is the Hazel C. Youngberg Trustees Distinguished Professor of Economics at The Ohio State University and a Research Associate at the National Bureau of Economic Research.

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Overcoming social exclusion: Addressing race and criminal justice policy in the United States

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

The United States incarcerates more people than any other country in the world, at a rate of 860 per 100,000 U.S. residents age 18 or older.61 The majority of the growth in the nation’s prison population can be attributed to changes in public policies.62 By the mid to late 1970s, American society became more punitive, and the shift in demand for more retributive policies led to an exponential increase in the incarceration rate.

Specifically, many states moved from indeterminate sentencing systems to determinate ones. Determinate sentencing systems set fixed or narrow ranges for statutory terms outlined for each crime, which replaced the sentencing discretion of judges, where the exact sentence is unknown but typically has a wider range, and discretionary parole boards. Determinate sentencing led to more draconian sentencing policies such as mandatory minimums (state statutes requiring individuals to be imprisoned for a definite amount of time), truth-in-sentencing laws (which limit the possibility of early release by requiring those imprisoned to serve a significant proportion of their prison sentence), and three-strikes laws (which result in more severe prison punishments after a third criminal offense).

These policies resulted in more individuals being incarcerated for less serious offenses, as well as individuals being incarcerated for longer periods of time. While incarceration is the most visible representation of the misaligned U.S. criminal justice system, less discussed is the number of individuals who have a criminal record in general, and a felony conviction in particular, within the United States. According to the 2014 Bureau of Justice Statistics Survey of State Criminal History Information Systems, there are more than 100 million recorded criminal records in the United States.63 University of Georgia sociologist Sarah K.S. Shannon and her co-authors estimate that by 2010, there were 18 million Americans with a felony conviction compared to a little more than 7 million who have been incarcerated.64

While it is generally accepted that changes in public policy are responsible for the expansion of the modern U.S. penal system over the past five decades, what is less clear is how ostensibly colorblind policies led to the concentrated incarceration we see today within minority communities and especially African American communities. Harvard University historian and African American studies professor Elizabeth Hinton persuasively argues that the infrastructure necessary for the growth in incarceration began during an era of liberal reform amid the Civil Rights period with the passage of the 1965 Law Enforcement Assistance Act, which marshalled in an era of law enforcement and a focus on fighting racial and economic inequality through the vehicle of law enforcement instead of social programming.65

Largely in response to the civil unrest that stemmed from urban protests against police brutality, targeted crime-control policies led to increased supervision of black urban communities, especially black youth, which ultimately led to mass incarceration. Racialized perceptions of crime and poverty led the federal government to use a punitive approach to poverty alleviation and racial economic justice.66 Indeed, an often overlooked topic within the mass incarceration discussion is the national crime-control policies that provided the funding and incentives that guided state governments to adopt more punitive laws. As Hinton asserts:

The federal government’s long mobilization of the War on Crime promoted a particular type of social control, one that signals that the targeted arrest of racially marginalized Americans and the subsequent creation of new industries to support this regime of control are among the central characteristics of domestic policy in the late twentieth century.67

This last point should not be lost, as many localities in the nation unsuccessfully used prison construction as economic growth engines.68

The purpose of this essay is twofold. The first is to argue for a shift in focus away from dealing with economic inequality through the lens of the criminal justice system—which is ill-equipped to address the root causes of poverty and racial inequality, and may actually increase social costs in the long run. The second is to argue for a widespread audit of current federal crime-control policies and funding, not only to understand whether their social benefits outweigh their social costs, but also to determine and eradicate the policies that are leading to greater racial disparities within the criminal justice system.

The essay begins with a brief discussion of race and crime, then moves on to discuss the relationship between federal crime-control policies and racial disparities in the criminal justice system. I then conclude with some policy recommendations, among them concerted federal efforts to understand and document the historic and still-prevalent role of racial bias in our criminal justice system, and the education of the American public on the persistence and consequences of these biases.

Understanding our past: Race and the criminal justice system in the United States

Toward the end of his life, Dr. Martin Luther King, Jr. began fighting for economic justice because he understood that up to that point, American society had paid very little to enact civil rights legislation, and there could be no true social justice and inclusion of African Americans without economic justice.69 King also seemed to realize that an important component in the fight for equity, justice, and social inclusion was for white people to “reeducate themselves out of their racial ignorance.”70

Specifically, he noted that black people were putting in a mass effort to overcome the oppression that had hindered their progress over the years. Yet white people, King pointed out, were not as determined to overcome their racial obliviousness, arguing that considerable investments were required to close the racial gap, to accommodate black neighbors, and to enforce bona fide school integration—all of which were still terrifying for many white Americans.

More than 50 years later, there has been no meaningful racial education and only limited inclusion of black people within the social and economic fabric of the United States. Schools are just as racially segregated, if not more, than they were 25–30 years ago.71 Neighborhoods and communities across the country are still broadly divided along racial lines.72 Moreover, the racial wealth gap has persisted over time and is about the same level it was in 1962.73

Along the way, the United States has achieved the highest incarceration rate in the world, with its prisons disproportionately filled with black descendants of their enslaved ancestors: African American men born in 2001 have roughly a 1 in 3 chance of being imprisoned (roughly 5.5 times their white counterparts), while an African American woman born in 2001 has a 1 in 18 chance of being imprisoned (roughly 6 times their white counterparts).74 (See Figure 1.)

Figure 1

Consider the disproportionality in state and federal prison admissions rates from 1926 to 1993 by race. It should be noted that even in 1926, African American state and federal prison admission rates were more than twice the admission rates of white people, and this continued to increase over time. Yet admission rates began to increase at a much steeper rate for black Americans than for white Americans beginning in the mid-1970s through 1993, such that black admission rates were 7.6 times the white rate by 1993. Imprisonment rates by race from 1988 to 2010 show a similarly large disparity between black people and white people. (See Figure 2.)

Figure 2

Political science research suggests a duality in the way that society chooses to punish based on who is punished. Professors Jon Hurwitz at the University of Pittsburgh and Mark Peffley at the University of Kentucky find that when white people are asked about how to address violent crime in general, and violent “inner city” crime in particular, respondents are more likely to prefer to build prisons to combat violent “inner city” crime—and this is true particularly among white people who hold negative stereotypes about black people and who view the criminal justice system as racially fair.75 In this context, “inner city” is used as a codeword for black.

Mainstream society’s view of black people as a degenerate race of inferior intellect, prone to criminal behavior, and incapable of governing themselves is a long-held belief that predates mass incarceration or even the unrest during the civil rights era.76 These highly racialized views and perspectives played an important role in the intellectual history of the United States in the 19th and early 20th centuries. American Polygeny, or the belief that human races stem from different species, was one of the primary theories to gain recognition on the international science arena at that time.77 This scientific movement developed right before the American Civil War, during a time of uncertainty when the country was fervent about establishing racial inequalities.78

Indeed, the legacy of these racist beliefs spurred the intellectual and political foundation that time and time again led to social investment in policies that reinforced racial inequality and social control, such as black codes and convict leasing. It also laid the groundwork for the Jim Crow laws that took root at the end of Reconstruction in 1877 to limit the full participation of African Americans in the U.S. labor market, voting, residential preferences, and education. These regulations, along with the civil unrest protesting police brutality and other marginalizing institutions in black communities, paved the way in the 20th century for the integration of crime control and equal opportunity programs.79

Specifically, it was during President Lyndon Johnson’s “Great Society” in the 1960s that anti-poverty programs became intertwined with anti-crime programs, thereby setting the foundation for the mass incarceration policies of the past several decades. In fact, President Johnson’s Law Enforcement Assistance Act ended 200 years of domestic law-enforcement policy by instituting federal authority over local policing procedures.80

Federal crime-control policies and racial disparities in the criminal justice system

This section of the essay reviews some of the unintended consequences of these major crime-control policies—such as the Edward Byrne Memorial State and Local Law Enforcement Assistance Program, or Byrne Program, which provided federal funding for state and local drug law enforcement efforts—to show how colorblind policies could lead to racially biased results. Conceivably, financial incentives from intergovernmental grant programs and civil asset forfeiture laws, together with U.S. Supreme Court decisions awarding police extraordinary power to stop and search residents with minimal to no probable cause, contributed to the disproportionate policing and imprisonment of African Americans.81

A 1993 report by the congressional General Accounting Office (now the Government Accountability Office) found that federal grants provided under the Byrne Program were “the primary source of federal financial assistance for state and local drug law enforcement efforts.”82 These types of grants could lead to changes in policing and prosecution—if, for example, they enhanced collaboration between police and prosecutors—for drug and violent crimes.83

In fact, one of the key policing innovations stemming from the Byrne Program was multijurisdictional drug task forces. But some of these multijurisdictional task forces—such as the South Central Narcotics Task Force in Texas, which, at one point, arrested 15 percent of the young black men in the city of Hearne in one drug raid—have become infamous for their selective enforcement of African Americans.84

The case of Hearne, Texas is especially egregious: The South Central Narcotics Task Force conducted raids in the black community each year for 15 years under the direction of District Attorney John Paschall with the intent to “round up the n*****s.”85 Even though white and Hispanic people in the community were participating in drug activity at the same rates, there was a deliberate focus on the black community, according to an American Civil Liberties Union legal complaint.86 In fact, the same ACLU legal complaint specifically states that Paschall was open about his desire to rid Hearne of its black population using incarceration.

I and my co-author, Jamein Cunningham at the University of Memphis’ Department of Economics, investigate the effect of the Byrne Program on crime and black and white arrests.87 We find this program significantly increased the number of drug sales arrests for white and black people, although the marginal effect on drug sales arrests for African Americans is much larger, suggesting that this program may have exacerbated already-present racial disparities in arrests. Although the Byrne Program also targeted violent crime, there is little evidence of significant changes for violent crime arrests.

While our analysis cannot specifically pinpoint the mechanism through which police increased arrests for drug sales by black people, such as by selective enforcement due to racial animus or implicit bias, sociologists Katherine Beckett, Kris Nyrop, and Lori Pfingst at the University of Washington find evidence of selective enforcement of African Americans in Seattle. Their research finds that selective enforcement was due to organizational practices established by policies driven by implicit racial bias and not the more common reasons provided for differences in arrests, such as differences in the structure of drug markets between drugs used and sold by black and white people or greater community complaints by black people.88 University of Chicago economist Derek Neal and Cornell University management professor Armin Rick also find that due to historical differences in arrest rates, mass incarceration policies disproportionately affect African American communities.89

Similarly, Emily Weisburst at UCLA’s Luskin School of Public Affairs, using data from Texas, finds that federal grant funds for school police from the Community Oriented Policing Services’ Cops in Schools program raises middle school discipline rates by 6 percent per year, and this increase is mostly driven by low-level infractions.90 Moreover, black students experience the greatest increase in their discipline rates. She estimates that a student who attends a school district that received one 3-year grant is 2.5 percent less likely to graduate high school and has a 4 percent reduced chance of enrolling in college.

While these crime-control policies were seemingly colorblind, they were certainly not race neutral in their effect.

Effective criminal justice policy

The United States’ history of racial bias and animus is so engrained in the soul of the country that failure to acknowledge and atone for its presence in the intellectual, political, and cultural fabric of our society allows for its continued reproduction.91 What’s more, the failure to recognize the intricate connection of racial bias to systems of social control, such as the criminal justice system, leads to challenges to the implementation of race-neutral public policy and causes additional social costs to society. Specifically, ignoring racism as an important policy variable leaves federal, state, and local policies vulnerable to be misused as a tool to oppress and disenfranchise historically oppressed groups.

The failure to recognize the role of race and racial bias as a key policy variable through which the United States arrived at the state of mass incarceration, as well as the role that race plays in criminal justice system outcomes in general, will only reproduce historically racially biased social structures, racial disparities in the criminal justice system, and social exclusion, regardless of any reforms we choose to implement.92 The impact of these racial disparities on earnings is telling.93 But the collateral consequences of mass incarceration policies are far reaching and have been devastating to the black community. These consequences include greater health disparities, the destruction of the black family, greater obstacles to employment and human capital investment, and the forfeiture of citizenship status and political exclusion through felon disenfranchisement laws.94

Recent research on the consequences of racial bias in U.S. incarceration rates makes manifest many of these connections. University of California, Berkeley public policy professors Rucker Johnson and Steven Raphael observe that male incarceration explains the bulk of the difference in HIV/AIDS rates between black and white women.95 And I and my co-author Sally Wallace, an economist at Georgia State University’s Andrew Young School of Policy Studies, find that the financial shock of an incarceration raises the likelihood that households with children will become food insecure.96 In fact, it is estimated that families with an incarcerated loved one incur almost $14,000 in debt, paying for court-related costs and fines, and that 1 in 3 families go into debt to maintain contact with an incarcerated family member.97

Action at the federal level is now required to undo the harm caused by racially biased mass incarceration policies. To begin addressing these concerns, the federal government should first seek to re-educate the public about the history of race in the United States in order to break flawed perceptions in the association between race and crime. The first step in this strategy would be reconciliation and atonement, which may include reparations for past and current oppressive policies enacted against historically marginalized groups in general and African Americans in particular.

As part of this strategy, the government should allocate funding to state and local governments for initiatives that will educate the public on the history of race in the United States and how this history affects social outcomes and our beliefs about others. This should be incorporated throughout Kindergarten through grade 12 public school curriculums in all subjects.

Moreover, the federal government should encourage and promote policies that work against the dehumanizing effect of racial biases by providing incentives for the development of programs that produce empathy toward others.98 As part of this strategy, these policies should address racial biases in the criminal justice system and their root causes, such as racial biases that persist in news media reports of criminals and victims. Research finds that the news media portray false accounts about the racial distribution of criminals, victims, and arbitrators of justice, and that these characterizations perpetuate false racial stereotypes about crime.99 To the extent that these racial stereotypes impede the execution of unbiased criminal justice policy, racial biases in the media should be addressed.100

The federal government also should conduct an audit of federal crime-control programs and policies (such as plea bargaining) to understand their impact on historically marginalized groups, encourage state and local governments to do the same, and then defund programs that inadvertently lead to greater net social harm, that increase racial disparities, or that have a disproportionate burden on historically marginalized communities. Such a benefit-cost analysis should be undertaken to determine how these policies not only influence crime but also their external costs (or benefits) to society. Policymakers can no longer condone partial equilibrium analyses that only consider the direct crime-fighting benefits of a program without also considering all of its direct and indirect costs to society, which includes determining the extent to which a policy is race neutral and its effect on marginalized groups.

These sets of recommendations would require unbiased data collection by the states and local governments of quality criminal justice data in order to understand why there are persistent racial disparities in the criminal justice system, including documentation not only for policing but also for prosecution, since prosecutors also are important gatekeepers to the criminal justice system.101 This effort also would require better data collection on arrests, convictions, and incarcerations in national datasets, such as the U.S. Census, in order to improve population estimates of the impact of incarceration on individuals, families, and communities.

Theoretically, crime-control policies include programs that promote economic justice and the elimination of racial disparities. Yet investments in economic opportunities should be done on the front end through social services organizations, not on the back end through the criminal justice sector, which may only serve to increase the contact of young minorities with the criminal justice system. In other words, federal and state governments should stop using the criminal justice system to address economic inequities. This would require decreasing the correctional population, both juvenile and adult, which could be done, for example, by placing a moratorium on incarceration for non-violent offenses and redirecting the cost savings to social programs. The federal government could provide monetary incentives to states that reduce their correctional population. These social programs should not be administered by law enforcement agencies. Examples of these programs are early childhood education, subsidized childcare programs, summer programs for youth, improving K–12 school quality, and more equitable healthcare—all targeted toward the most marginalized groups in society.

Finally, the federal government should tie federal funding for criminal justice programs to states’ eradication of felon disenfranchisement laws. Although African Americans’ right to vote became protected by law with the Voting Rights Act of 1965, the racial disparities in felony convictions suggest that they disproportionately bear the burden of felon disenfranchisement laws, and through these laws, many have effectively lost their right to vote.102 Most states prohibit individuals in prison or on probation or parole from voting, and although numerous states have developed protocols for restoring voting privileges to ex-offenders, these procedures are so burdensome that many of them do not seek to restore their rights.103

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Overcoming social exclusion: Addressing race and criminal justice policy in the United States

Conclusion

Failure to address racial biases in our society risks democracy for all Americans. Failure to address the systematic racial biases in state, local, and federal policies in general, and the criminal justice system in particular, will only lead to the perpetuation of racial inequality and the overrepresentation of marginalized groups within sectors of social exclusion, especially the criminal justice system. While there is undoubtedly a behavioral aspect to crime, too much focus on the individual will not address the root causes of crime in our society or the structural barriers that have led to the social exclusion of historically marginalized individuals and communities.

—Robynn Cox is an assistant professor at the University of Southern California Suzanne Dworak-Peck School of Social Work.

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Prisoner re-entry in Native American communities offers lessons of resilience and nationwide policy solutions

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Half of all tribal reservations in the United States have unemployment rates higher than 50 percent, and nearly all have poverty rates of more than 40 percent, with their incarceration patterns 44 percent higher than national averages.104 Scores of men and women have been removed from their communities by the criminal justice system, and the adverse effects of prisoner re-entry have been immediate in tribal communities.

Despite dealing with these consequences of significant and overlapping economic and social inequalities for generations, tribal reservations and the individuals who call these areas home are examples of living resilience. Their resilience manifests in the ability to overcome great adversity to teach their children the traditions passed down to them from their elders, honor their obligations to their families and communities, and steward their local environments.

As a Yurok sociologist, I offer the experience of my own tribal reservation, the Yurok Indian Reservation in northwestern California, and the experience of Indian Country at large as an opportunity to devise and extrapolate effective strategies for prisoner re-entry in communities across the country. Tribal Americans are the first inhabitants of our country, and their ability to persist despite centuries of economic and social inequality is evidence of their tenacity and resilience. Better understanding the process of resilience in these communities affected by mass incarceration, substance use, and poverty could unlock similar strategies for use in areas with comparable obstacles, such as other rural parts of the country, low-income neighborhoods, and other communities.

Learning how tribal members thrive on remote reservations despite their scant resources and high substance abuse rates can shed light on how to intervene in the opioid crisis that is devastating so many rural, underresourced communities around the country. Going further, understanding prisoner re-entry from a rural perspective will help adapt existing community reintegration policies to better meet the needs of those living far from public transportation, formal employment, public housing, and other key supports for helping offenders get back on their feet post-incarceration.105 Finally, finding a way to revitalize stagnant reservation economies could shed light on how to do so in other communities affected by industrial decline.

In these ways, Indian Country has much to teach the rest of the United States when it comes to successfully intervening in cycles of adversity. Yet sizable public investments and increased legislative support must first be secured to maximize these lessons. Toward those ends, I introduce three noteworthy solutions for policymakers to support: the importance of investing in rural data infrastructure; reshaping the criminal justice system to re-emphasize rehabilitation over punishment in the form of therapeutic jurisprudence; and expanding the mental health and dual diagnoses services that are available in rural areas.

Data infrastructure

Data infrastructure matters because there can be no policy intervention without first establishing the baseline and scope of a problem. One such example includes the epidemic of missing and murdered indigenous women and girls across the country. Documentaries such as this river and Finding Dawn and popular films such as Wind River speak to the grave miscarriages of justice that take place far too often on tribal lands, where indigenous women are up to 10 times more likely to be victims of a violent assault than their nonindigenous counterparts.

Scholar-activists such as Annita Lucchesi, director of the Sovereign Bodies Institute and creator of the database on missing and murdered indigenous women and girls, and the Urban Indian Health Institute have each made great inroads to document the scope and breadth of this tragic phenomenon.106 In spite of their contributions, such data-collecting efforts are far too often stymied by national and local law enforcement agencies that refuse to work in good faith with tribal bodies to share data on their citizens. The Freedom of Information Act exists for a reason, but Freedom of Information Act requests add unnecessary and even damaging time to the search for missing and murdered indigenous women and girls, and risk further victimizing those who are missing and murdered, as well as their families, by preventing tribes from accessing essential records on their behalf.

Without proper data on their missing and murdered citizens, tribal nations are greatly limited in their capacity to intervene in the violence and adversity that claims the lives of their mothers, daughters, aunties, and sisters well before their time. It is the responsibility of both policymakers and the criminal justice system to honor the sovereignty of tribal nations as partners in seeking justice in Indian Country through full and transparent cooperation, from the reporting of a crime through its investigation and prosecution.

Even more so, resources and funding must be allocated to tribes and their neighboring county jurisdictions to design, implement, and expand their data-collection infrastructure. Piloting these strategies in tribal communities could shape efforts to build similar mechanisms in rural areas across the country, areas that are notoriously underresourced with regards to data collection.107

Criminal justice

Just as we build the tools necessary to track the victims of violent crime in tribal communities, we must also design our policy interventions to meet the needs of tribal offenders. These individuals have indeed committed crimes, but more often than not, they also have been victims of violence and trauma themselves. For Native men in particular, one must take into account that they suffer trauma at far disproportionate levels compared to other groups, but we have yet to recognize this in theory or policy.108

American Indian and Alaskan Native, or AI/AN, men experience more disparities than any other group, including increased risk of chronic health conditions, accidental death, and homicide. Their suicide rate outpaces that of any other group from adolescence to middle age.109 Only 50 percent of American Indians graduate high school, with less than one in three American Indian men graduating in areas with large native populations, such as the Dakotas.110 American Indian men are overrepresented in the criminal justice system, and Yurok men in particular are 11 times more likely to go to jail than the average American.111

Despite such a long list of adversities, “AI/AN men persist,” says education psychologist Leah Rouse, associate professor and Eleta Quinney Scholar at the University of Wisconsin, Milwaukee’s School of Education, and their resilience cannot be understated.112 Tribal men overcome their traumas to honor their obligations to their families and communities. My work with tribal fathers with criminal records speaks to the deep involvement and intense meaning that they derive from their roles as providers and teachers. In spite of their pro-work orientations, they are limited in their capacity to find work by their criminal histories and struggles with substance abuse, and these constraints are further exacerbated by the slack labor market in which they find themselves.113

For former offenders, finding work is first a process of getting sober. Even if they abstained from substances for the duration of their sentence, up to 90 percent of repeat offenders struggle with chronic substance use.114 Those courts that best support their efforts to get “clean and sober” employ a therapeutic jurisprudence model through holistic case management that centers on framing those under supervision as assets rather than liabilities.115

California is leading the way with such efforts in the form of joint jurisdiction courts. The Yurok Tribe is partnering with the surrounding counties of Humboldt and Del Norte to create courtrooms where tribal judges work with county judges to support offenders through re-entry by offering Wellness Courts to support recovery, accept in-kind child support in the form of traditional food gathering and subsistence hunting, and offer culturally adapted batterer’s intervention programming. Those jurisdictions that have partnered with tribal bodies to shepherd their members through the criminal justice system are thriving.116

Even still, we need more county jurisdictions that are willing to pioneer these efforts alongside increased funding to help them do so. Long term, federal policymakers could directly expand tribal court oversight through executive orders and bills that emulate the Indian Child Welfare Act and the Violence Against Women Act by placing jurisdiction over injustices committed against tribal peoples directly into the hands of these sovereign nations. Such vital legislation has previously protected thousands of Americans and greatly enhanced the ability of tribal courts to safeguard and support their citizens.

By spearheading the expansion of tribal jurisdictions, policymakers can support these courts to pioneer effective criminal justice reform ripe for replication. In this way, those communities that also are plagued by mass incarceration will benefit from the strategies formulated by tribal courts as they facilitate the process of successful prisoner re-entry.

Mental health and dual diagnoses services

A key component of supporting “returners” as they navigate life post-incarceration is addressing their needs in a holistic manner that affirms them as a whole person. Many offenders must meet their mental health needs before they can find work and support their families, and that often means seeking drug rehabilitation treatment. My research shows that legacies of adversity cluster on reservations, such that those who live there are much more likely to be exposed to adverse experiences across the course of their lives. Such trauma can have lifelong implications and, when combined with substance use, can dramatically reduce the ability of an individual to function in mainstream society, let alone gain and maintain formal employment.117

If policymakers and civic leaders are to intervene in cycles of trauma and addiction that span generations, then they must greatly augment the existing mental healthcare system in this country. Rural areas have few mental health resources and would particularly benefit from an increased investment in dual diagnoses treatment centers that have the capacity to support individuals with co-occurring disorders such as post-traumatic stress disorder, depression, and drug and/or alcohol dependence.118

Beyond the significant human toll, these conditions deprive the nation’s workforce of billions of dollars in lost productivity each year.119 Integrated mental and substance abuse care facilities that have the capacity to treat co-occurring mental health conditions and addiction comprise only a fraction of available treatment options in this country, and policymakers must budget accordingly for the expansion of such services in rural and urban areas alike.120 Mental heath is a right, not a privilege. It is high time policymakers enshrined this ethos through effective legislation and investment.

Native American communities as sources of resilience

Indigenous peoples are the original inhabitants of every landscape in the United States and the vitality of their communities are a direct reflection of the health of the nation at large. Described as the “miner’s canary,” tribal reservations and their off-reservation networks are a pulse point from which to observe the historical and present-day legacies of oppression and violence in the United States.121

There are harsh conditions that shape life on many reservations. These are a direct reflection of the historical trauma that accompanies life on tribal lands. Eduardo Duran and his co-authors of “Healing the American Indian Soul Wound,” coin the term soul wound to refer to the traumas that cannot heal in one generation and persist through to the next.122 Such trauma is cumulative and concentrated in communities marked by cumulative adversity.123

The soul wound also is known more recently as intergenerational trauma, historical trauma, and post-traumatic stress disorder—all academic names for a phenomenon that has been acknowledged for centuries in Native communities.124 Even for those who did not perish from physical contact with Europeans and their diseases beginning in the 15th century or the genocide and slavery that followed, the trauma of these events and others, such as the forced removal of Indian children to residential boarding schools and the termination of tribal sovereignty in the 1950s, all accumulate over time, leaving the survivors with guilt and unresolved mourning.125

Losses of such magnitude are expressed at the epigenetic level, whereby extreme stress can change the structure of human DNA such that the trauma experienced by past generations is transmitted down to their descendants.126 Such DNA testing confirms what tribal communities have long known to be true—the higher rates of alcoholism, suicide, and other chronic health conditions such as diabetes and heart disease that plague Native American families represent the residue of past traumas manifesting in present-day symptoms.127 Thankfully, because “the explanations of the soul wound are centuries old,” so too are its solutions.128

Without trauma, there can be no resilience. Resilience is not a trait, but rather a dynamic process that speaks to the ability to adapt to adversity and “bounce back” from stress and trauma.129 In Native communities, the need for resilience has surfaced time and time again, as “perfectly normal people respond to an abnormal history,” writes Martin Brokenleg, a Rosebud Sioux and a professor of Native American Studies and chair of the Department of Sociology and Social Work at Augustana College.130 In this way, indigenous peoples have much to teach us about the process of resilience. By investing in the strategies of resilience derived from tribal communities, policymakers can emulate these mechanisms for successful intervention in similarly disadvantaged communities.

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Prisoner re-entry in Native American communities offers lessons of resilience and nationwide policy solutions

Conclusion

Ultimately, while we as indigenous peoples live in communities that deal with high crime, epidemic substance use, and a host of other negative outcomes on a daily basis, we are still here, and our very existence is a reflection of our resilience over time. We are the epitome of survival, and we draw on our deep knowledge base as this country’s original caretakers to thrive despite many obstacles otherwise.

Even with our resilience, however, we are in desperate need of enhanced infrastructure and increased investment to expand our efforts to heal the wounds left by generations of trauma and oppression. The rural areas that many of us call home are the least prepared to meet our needs despite a sincere desire to do so, yet this could easily be ameliorated through legislative and monetary investments. We have the answers and the ways of knowing that we need to heal ourselves, but we need the funding and the infrastructure necessary to do so.

Specifically, by increasing the resources available for rural data collection and dual diagnosis mental health facilities, as well as expanding the jurisdictions of tribal courts to better allow them to directly meet the needs of their citizens, policymakers stand to greatly augment their own resources for intervening in comparable adversities in communities around the country. Investing in our vitality as indigenous peoples is the first step to identifying those strategies of resilience needed to restore the health of communities shaped by inequality. ‘Wokhlew’ (“thank you” in Yurok) for your consideration.

—Blythe George is a member of the Yurok Tribe of California and a post-doctoral sociologist at the University of California, Berkeley.

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The logistics of a reparations program in the United States

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

The idea of reparations for African Americans is receiving renewed attention, driven in part by the willingness of an unprecedented number of prominent policymakers and presidential candidates to entertain the idea of opening a serious discussion on the topic. Past and current research demonstrates the deep, abiding suffering and harm inflicted on African Americans due to the practice and legacy of slavery and post-Civil War laws and regulations that prevented so many of the enslaved and most of their descendants from reaping all but meager benefits from the sustained growth of the U.S. economy since colonial times.

My essay presents a brief history of the various reparations movements in the United States following the end of the Civil War and the Reconstruction era in the South through to today, a discussion of the logistics of carrying out a reparations program, and research-based recommendations for policymakers. Investigating the size of reparations and how they would be disbursed will first require a commission to be set up to decide appropriate levels of reparations, and policymakers will then need to implement the best financial vehicles for disbursement of the funds. I also recommend ways for policymakers to ensure that ongoing racial discrimination can be accounted for and resolved.

A brief history

Near the close of the Civil War, on January 16, 1865, General William T. Sherman signed Special Field Orders No. 15, which temporarily allotted each formerly enslaved family living along the Atlantic coasts of South Carolina, Georgia, and Florida no more than 40 acres of land on which to settle and make a living. President Andrew Johnson later reversed these orders and returned the land to white southerners.131 Many descendants of formerly enslaved persons point to these “40 acres and a mule” as an unfulfilled promise by the U.S. government and a basis for the earliest calls for reparations for slavery.

Since that time, there have been multiple judicial, legislative, and grassroots efforts advocating for reparations for African Americans for their enslavement and the discriminatory consequences reaped by their descendants. In the judicial arena, there have been multiple lawsuits filed in the United States and the United Kingdom against financiers, insurers, and shipping companies that profited from slavery. In 2002, lawyer and human rights activist Deadria Farmer-Peallmann coordinated lawsuits against the U.S. insurer Aetna Inc., then-independent (and now Bank of America Corp.-owned) FleetBoston Financial, and other corporations for their role in the slave trade of the 17th and 18th centuries. The cases were ultimately dismissed for lack of standing, exceeding the statute of limitations, and for being deemed a political matter outside the scope of the judiciary.132

Legislatively, Rep. John Conyers (D-MI) introduced H.R. 40—a bill to establish a Commission to Study Reparation Proposals for African Americans—in every Congress from 1989 until his resignation in 2017. The bill never made it out of committee. In 2019, Rep. Sheila Jackson Lee (D-TX) reintroduced the bill, and prominent 2020 Democratic presidential candidates have endorsed it.133 Increased support for the current bill may be due, in part, to an increase in recent support for reparations on online social media platforms such as Facebook and Twitter.

Importantly, these grassroots efforts promoting reparations for African Americans build upon earlier waves of activism. At the turn of the 20th century, Callie House, a poor washerwoman who was born into slavery, lobbied Congress to provide old age pensions for the formerly enslaved who were no longer physically able to work to support themselves.134 Her efforts were stymied by the full force of the U.S. government. More recently, organizations such as the Universal Association of Ethiopian Women founded by Queen Mother Moore in the 1950s135 and the National Coalition of Blacks for Reparations in America, founded in the late 1980s,136 have advocated for reparations for decades. These organizations kept alive the idea of the efficacy of reparations.

Much more recently, author and columnist Ta-Nehisi Coates’ influential article “The Case for Reparations,” published in The Atlantic in 2014, revived popular interest in reparations. His widely read analysis helped broaden the discussion of the basis for reparations to include the Jim Crow era of state-sanctioned discrimination in the wake of the Civil War up until the Civil Rights era of the 1960s, the discriminatory federal, state, and local laws, policies, and ordinances prevalent during the New Deal and post-World War II eras, and ongoing institutional racism in employment, education, and the criminal justice system.137

The logistics of carrying out a reparations program

By definition, reparations involve the making of amends to those who have been wronged, whether through money or by other means. Key logistical questions that arise when conceptualizing reparations for African Americans include:

  • Who should be eligible to receive reparations?
  • How much money should be allocated to fund a reparations program, and how should it be financed?
  • What form should reparations take? Should there be a cash payment, investment in social programs, trust funds for education, homeownership or business investing, or some combination of these ideas?

I answer each of these questions in turn.

Who should be eligible?

As previously mentioned, prior attempts to sue for reparations were rejected in part due to a lack of standing—a legal term indicating whether the people suing for damages can demonstrate that they are the people who have actually suffered damages. Although a reparations plan developed in the legislative branch would not initially be subject to the judicial concept of standing, the plan could be challenged in the courts on the grounds of constitutionality, and standing may be one dimension that could be legally scrutinized. In order to withstand that scrutiny, a reparations plan should accrue to those who have been wronged and/or their descendants. Eligibility then would depend on the reason for redress.

Reparations for slavery should accrue to the descendants of those who were formerly enslaved in the United States. Descendants of enslaved persons from other nations, such as Jamaica, Haiti, and Brazil who are currently living in the United States should not be eligible and should instead seek reparations against the nations primarily responsible for enslavement in those nations and regions. U.S. policymakers will have to determine whether current U.S. citizenship is a requirement for receiving reparations.138

Reparations for state-sanctioned discrimination during the Jim Crow, New Deal, and post-WWII eras should accrue to any African Americans who were living in the United States during those time periods or their descendants, regardless of whether their ancestors were enslaved in the United States. Black immigrants from the West Indies and Africa also faced state-sanctioned discrimination in this country during this period even if they were voluntary immigrants to the United States.139

How much?

Research teams are currently working on refining reparations estimates, but estimates that have been calculated in the past (mostly in the 1990s and early 2000s) range from $500 billion to $6 trillion.140 Dividing this amount evenly among the roughly 40 million people identified as black or African American in the 2010 Census yield estimates of $12,500 to $150,000 per person. The wide range arises from differences both in calculation methods and in the underlying rationale for reparations (slavery, Jim Crow, or ongoing discrimination).

Prominent reparations researcher and Equitable Growth Research Advisory Board member William A. Darity, Jr. at Duke University took the value of 40 acres of land in 1865 (the aforementioned unfulfilled promise made to formerly enslaved families at the end of the Civil War), multiplied that value by 4 million formerly enslaved persons, and calculated the present value compounded yearly at 6 percent interest to arrive at $1.3 trillion in 2008 dollars.141 University of Illinois Urbana-Champaign economist Larry Neal calculated the difference between the wage that an enslaved person would have received if paid for work and the amount spent by enslavers on food and shelter for the enslaved from 1620 to 1840 and compounded that value yearly at 5 percent to arrive at $4 trillion.142

Estimates that include discrimination during the Jim Crow, New Deal, and post-WWII eras are necessarily larger. Using U.S. Census of Agriculture data on black ownership of agricultural land from 1910 to 1997, a group of researchers estimated losses to the countless black farmers who fell victim to violent dispossession of their land prior to the Civil Rights reforms of the 1960s, as well as those who lost land due to discriminatory federal farm credit policies and the discriminatory implementation of federal, state, and local agricultural policies, before, during, and after the Civil Rights era. By their most conservative estimate, the dispossession of black agricultural land resulted in the loss of hundreds of billions of dollars of black wealth.143

To adjudicate the amount of reparations based on a timeline of amends that need to be redressed, a commission impaneled by Congress to study the question of reparations should be tasked with evaluating the strengths and weaknesses of all available estimates and calculation methods to arrive at separate values for reparations for slavery, reparations for the era of state sanctioned discrimination, and reparations for ongoing institutional discrimination.

What form?

A reparations program can take many forms, including:

  • Cash payments
  • Investment in social programs
  • Trust funds
  • An official apology
  • Institutional reform
  • Public education about slavery and racial discrimination

Rep. James Clyburn (D-SC), a Civil Rights-era veteran, argues against reparations taking the form of cash payments on the grounds that it would be logistically difficult to carry out. Instead, he and many other policymakers support investing in impoverished communities as a form of reparations.144 Critics of reparations programs that focus on broad-based social programs, however, argue that they cannot be considered reparations if they do not specifically and solely target African Americans.

Some people in our society may be opposed to cash reparations payments under the misguided assumption that African Americans cannot be trusted to spend cash payments in ways that will benefit them economically.145 While this assumption is unsubstantiated and potentially rooted in racial bias and paternalism, researchers have demonstrated that policymakers should be cautious about cash payments for another reason—it is possible that cash reparations payments could further impoverish black Americans relative to nonblack Americans if there are no available vehicles for African Americans to invest that money back into black communities.146

Given that black Americans own less than 10 percent of all small businesses in the United States147 and hold less than 15 percent of their wealth in business investments,148 cash reparations payments in the current environment could possibly find their way back into the pockets of nonblack Americans, both through consumption spending and through investments held in mainstream financial institutions, potentially further widening the racial wealth divide.

This possible drawback, however, does not have to be an argument against cash reparations payments, but rather an acknowledgement that any cash reparations payments should be coupled with the development of an investment infrastructure that could provide opportunities for recipients to invest in black communities and black-owned businesses and to create black-owned financial institutions.

Ultimately, the form a reparations program should take depends on the underlying goals. If the goal is to address the wealth gap created by discriminatory government actions such as redlining—the practice of overt housing discrimination in the post-WWII era—and Jim Crow discriminatory laws and regulations, then cash payments or trust funds for investments in housing, education, or businesses may be the most appropriate form. If the goal is to repair or make whole those who were disadvantaged by the legacy of slavery and discrimination, then an official apology, a program of public education about slavery and discrimination, and investment in social programs targeted at reducing racial disparities may be the most effective forms. If the goal is to address ongoing discrimination against African Americans, institutional reform may be in order.

Policymakers tasked with determining the appropriate form for a reparations program should consider the underlying goals of the program to assess the most appropriate form.

Addressing ongoing discrimination

Even if policymakers do not incorporate the damages from ongoing discrimination into the calculation of reparations for African Americans, no reparations program will be complete without somehow addressing the existence of that ongoing discrimination in the U.S. economy today. As long as institutional discrimination persists, there will be continued grounds for future reparations claims.

As an example, reporters for the New Food Economy recently identified ongoing discrimination at the U.S. Department of Agriculture against black farmers that has contributed to unjust foreclosures. Among other findings, they report that under the administration of President George W. Bush, the department sat on civil rights complaints that alleged lending discrimination until the statute of limitations on those complaints ran out. Then, officials in the Obama administration did not seek extensions from Congress on the statute of limitations, instead actively foreclosing on black farmers who had pending lending discrimination complaints.149

Even if the descendants of black farmers were made whole for the loss of black agricultural land during the Jim Crow era, future generations would have claims for reparations based on the documented ongoing discrimination by the USDA. To guard against this particular instance of discrimination, Congress should enact legislation that prevents any arm of government that is accused of discrimination from failing to act on the discrimination complaints until the statute of limitations runs out.

There are certainly other instances of government agencies using loopholes to get around civil rights protections meant to guard against ongoing discrimination. Any reparations program should also establish a commission to examine structural discrimination within federal, state, and local government and propose institutional reforms that reinforce civil rights protections to guard against the need for future redress.

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The logistics of a reparations program in the United States

Conclusion

In conceptualizing a reparations program for African Americans, the roadmap for policymakers to follow is fairly straightforward. They should:

  1. Establish the basis for which reparations are owed—slavery, the period of state-sanctioned discrimination, and/or ongoing institutional discrimination
  2. Determine the goal of a reparations program—to make whole those who were wronged, to close racial wealth gaps, and/or to address ongoing discrimination
  3. Create a commission to estimate the value to be set aside for a reparations program
  4. Decide the appropriate form a reparations payment should take
  5. Incorporate a plan to address ongoing discrimination

In this way, centuries spent by African Americans not sharing in the full fruits of phenomenal U.S. economic growth over the course of the past 400 years can be addressed, so that they can more fully contribute to and accrue the full benefits of living in the world’s wealthiest nation in history.

—Dania V. Francis is an assistant professor of economics at the University of Massachusetts Boston.

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Promote economic and racial justice: Eliminate student loan debt and establish a right to higher education across the United States

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

The amount of student loan debt in the United States has ballooned over the past decade—more than tripling from less than $500 billion to more than $1.5 trillion since 2006. What’s more, the repayment burden is substantial—approximately $400 per month on average.150 Yet students have little choice but to pursue a college education. Where college was once seen as a ladder to upward social mobility, students increasingly need a college education simply to remain where they are socioeconomically.

Higher education is, for many, a necessary step to earning a living wage, but black students face a particularly cumbersome burden to finance a degree. This essay explicates the disproportionately high burden of student debt carried by blacks in the United States, though all racially marginalized groups in the United States face particular financial burdens when pursuing higher education and repaying the necessary debts. (See “Snapshot” below.) Due in part to their families’ financial position, black students generally take on more debt than white students and, even at higher levels of socioeconomic status, are less protected by parental wealth.151 Then, after entering the labor market, young black adults face a harder time paying off their student loans in a labor market characterized by racial discrimination, as demonstrated by the experiences of prior cohorts of graduates.152 (See Figure 1.)

Figure 1

Upon exiting college, young adults are shaped by their indebtedness, including the need to secure paid employment with urgency in an endeavor not necessarily aligned with their career aspirations. New graduates with debt burdens enter the labor market more quickly and are more likely to work in unrelated fields after graduation.153 These borrowers have lower job satisfaction and overall life satisfaction, and lower psychological well-being well into adulthood.154 Student loan borrowers are less likely to get married, purchase a home, or start a business.155

While these negative economic and psychological consequences of student debt are distorting employment choices and depressing opportunities to pursue creativity across all borrowers, black students are hit the hardest. Evidence suggests that student debt impedes family formation specifically among the most vulnerable borrowers: black borrowers and those who have not completed their degree.156 Student loan debt is associated with poorer mental health and is even significantly associated with poorer sleep patterns among black borrowers, in particular compared to white borrowers.157

In this essay, we briefly present a range of proposals for relieving the burden of student loan debt and use our analysis to urge the full cancellation of all undergraduate and graduate, federal and private, student loan balances. We come to this policy recommendation after examining how less ambitious proposals fail to fully fix the unsustainable status quo of increasing indebtedness as a strategy for financing rising costs of higher education in the United States. Only the full cancellation of all student debt fully protects black students, their families, and those of other racially marginalized and vulnerable groups from the burden of student loans while establishing higher education as a universal right and offering restitution to all those who have had to rely on debt finance to pursue upward mobility through the education system.

A history of student loan cancellation in the United States

The concept of loan cancellation is not new. The George W. Bush administration brought us the public service loan forgiveness program in 2007.162 This program was intended to erase student debt for teachers, other public servants, and anyone working in a not-for-profit organization after working in their chosen field for 10 years while paying down their debt. Additionally, these borrowers must consolidate their loans and enroll in a particular type of repayment plan.

These stipulations were complicated enough that the program failed to provide relief to the vast majority of these select borrowers, even those verifiably working for nonprofit organizations or the government. Over the program’s cumulative history, more than 132,000 borrowers submitted employer-verified applications but only 641 have gotten relief, or approximately 0.5 percent.163 The other 99.5 percent were rejected primarily on technical grounds.

President Barack Obama introduced a similar program, but expanded it beyond employees of public and nonprofit institutions. Under the Obama administration’s program, borrowers pay between 10 percent and 20 percent of discretionary income, as defined by the U.S. Department of Education, for 20–25 years, and then have the remaining balance canceled. Upon program completion, any canceled debts are taxed as income (though surely none of it has “come in,” from the perspective of struggling borrowers).

Because the program has not yet been in place long enough for borrowers to complete 20 years of payments, the rate of award is uncertain. Yet, as of 2018, approximately one-quarter of borrowers are enrolled, with many disenrolled by the annual re-certification requirements.164 And policymakers are paying attention: Following efforts to gut the program by the Trump administration beginning in 2017, 23 senators in October 2019 called upon the federal Consumer Finance Protection Bureau to investigate the loan service company employed by the federal government due to its exceedingly high rates of refusals to forgive loans.165 Clearly these types of programs can be administrative minefields for borrowers, and it is unclear if they will or can provide any real relief to borrowers.

Weighing the merits of full or partial student debt cancellation

The merits of full or partial student debt cancellation at first glance largely rest on the degree to which the cancellation helps borrowers in need of debt relief. Those plans that call for partial student debt cancellation focus to different degrees on whether some higher-income borrowers or those who have borrowed to attend graduate school would benefit inordinantly from having their debt cancelled, compared to those who borrowed in pursuit of an undergraduate or technical degree or those who are otherwise clearly burdened by their student loan repayments. Cost estimates based on the plans’ assessment of these borrowers’ needs run the gamut, from an estimated $1.5 trillion for a full cancellation to between approximately $2 billion and $200 billion for a partial cancellation, between $5,000 and $60,000 per borrower.166

In our estimation, however, the merits of full cancellation far outweigh those presented in plans for partial cancellation. Full cancellation not only would address the array of financial inequities in current student borrowing programs—inequities that are particularly egregious for black borrowers—but also eliminate the many and complex rules and regulations borrowers are now required to meet for debt cancellation. Full cancellation would require a larger budgetary allocation, but doing so would directly address the rise of economic inequality in the United States, particularly for black Americans, while laying the groundwork for more sustainable and broad-based economic growth.

Partial student loan cancellation

When considering partial debt cancellation proposals, it is noteworthy that, on average, black college graduates still owe $53,000 in student debt 4 years after graduation.167 (See Figure 1 above.) Plans that propose to cancel less than this amount would ensure that the average black family would owe a lot less, yet many would still be left holding substantial sums of student debt. According to our calculation using the 2016 Survey of Consumer Finances, a plan that cancelled $50,000 of student loans for every borrower would still leave 1 million black-headed households holding $18,000 or more in student debt.

In contrast, the average white graduate carries about $28,000 in debt 4 years after graduation. This suggests that a capped debt forgiveness plan would completely wipe out many more white graduates’ debts, as a proportion of the population, than black graduates.168

Moreover, cancellation plans that provide debt cancellation after a set number of years are insufficient. Most of these plans still require certification of one’s household income level, profession, or other characteristics, and thus leave in place the same institutional and administrative barriers currently preventing graduates from realizing the cancellation promised in the Public Service Loan Forgiveness Act. As we can see in that law’s failures to provide meaningful debt relief, even well-intentioned attempts to target forgiveness to the “most” needy populations can cause nearly insurmountable hurdles for those needy groups when a program is not administered generously and fairly.

Full student loan cancellation

Full cancellation of student debt would entirely eradicate all current student loan balances immediately. Everyone would be eligible and all debts would be relieved, with no rules for borrowers to decipher and then prove their eligibility under, thus removing the potential for similar bureaucratic barriers to those that so thoroughly hinder our current policy today.

Full cancellation would unquestionably include the debt balances carried by parents through the Parent Loans for Undergraduate Students program, which also exhibits a racially disparate distribution.169 The full cancellation would serve to even further advance the lives of millions of black debtors and graduates and, yes, would include a fraction of wealthy whites.

Full student loan cancellation is the best policy

Many student debt advocates express skepticism about full cancellation, arguing it would be racially regressive because it would not benefit people of color so much as help white borrowers. The argument rests on three misguided assumptions. The first assumption is that a higher level of debt probably indicates a graduate or professional degree. Secondly, white students are more privileged, the thinking goes, and are presumably more likely to go to graduate school after graduation, leading to their higher debt values. Finally, the argument concludes, it must mean that a full cancellation of debt would really just help white borrowers and their families, thus widening the racial wealth gap.

A similar critique could apply to partial student debt relief, under an assumption that black students are generally less burdened by student loans than their white counterparts seeking higher levels of education. Together, these critiques exaggerate the consequences of full debt cancellation. The first problem with the argument is that carrying large amounts of student debt does not necessarily indicate a graduate degree, especially considering that the average black student who graduates from college has $53,000 in debt 4 years after graduation. Many have simply attended universities with inadequate public funding, including those in the Historically Black College and University system, which awards a disproportionate share of black college degrees and is more tuition-dependent than its counterparts.170

Next, black students, in fact, enroll in graduate degree programs at high rates. While this might run counter to conventional expectations, black college graduates are overrepresented in graduate education relative to their share of the population overall, according to the National Center for Education Statistics.171 Furthermore, as of 2012, 47 percent of black college graduates were enrolled in a graduate school degree program within 4 years of completing their bachelor’s degrees, which is higher than that of white recent graduates (38 percent).172

Indeed, this and the common finding in the social science literature that blacks from similar socioeconomic backgrounds as whites actually acquire more years of schooling runs counter the bootstrap narrative that situates inadequate investment in education on the part of blacks as the primary explanation for racial disparity.173

Finally, there’s the concern that full cancellation might favor white debtors in a way that increases the racial wealth gap. The evidence here is, at best, mixed. But a compelling recent study finds the opposite—that a full cancellation of student debt would reduce racial wealth disparities between black students and their white counterparts.174 Black students tend to take on more debt at every level of higher education, and are more likely than white students to drop out of university because of financial concerns in large part because of comparatively lower household-finance levels for black families in the first place. So, at each level of higher education, undergraduate and graduate, removing student debt proportionately benefits historically disadvantaged black students more.

The real problem, however, with making the argument that full cancellation of student debt widens the racial wealth gap is that it confuses the urgent problem of rising and unjust student debt burdens with the urgent problem of racially unequal access to capital. Relieving student debt is not the policy tool for eliminating the racial wealth gap, which has a great deal more to do with a lack of assets among black families than an abundance of debt on their part. Black families headed by a college graduate have less wealth than white families headed by a high school dropout.175 This wealth gap is not driven by student debt. That inequity stems from the insufficient assets within communities of color, regardless of education.

Hence, independent of student debt, young students of color start out in a less favorable economic position than their white peers. White families have had generations to amass and pass down wealth in a way that families of color have not. Neither a full nor a limited cancellation changes those roots of the racial disparity in assets.

This is not to say there is no connection between student debt and the racial wealth gap. Families with outsized financial advantages can “buy” crucial additional advantages for their children, such as the ability to obtain a college degree without accruing costly educational debts. Lack of wealth (primarily inherited wealth) prevents many black families from ever exercising this advantage.

Nonetheless, the alarming rise of student indebtedness, which, in the context of stagnating real wages (after accounting for inflation) and growing income and wealth inequality, point to alarming economic vulnerabilities that need to be addressed. The bad news is that this immediate yet also intergenerational problem may be getting worse. A recent report illustrates that lost income gains among millennials in the aftermath of the Great Recession of 2007–2009, alongside record levels of student debt accumulations, has left the homeownership rate for young adult millennials lower than every other generation at a similar age dating back about 100 years—to the Greatest Generation, who entered young adulthood right after the Great Depression and World War II.176 What’s more, the racial disparity in homeownership for young millennials is as large as it has ever been.177

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Promote economic and racial justice: Eliminate student loan debt and establish a right to higher education across the United States

Conclusion

Black Americans are highly motivated to pursue higher education, but the reality is that as a group, they are financially stymied. Fewer black students begin college, even fewer graduate, and those who do graduate carry much more debt than their white counterparts. While student debt is conventionally thought of as “good debt,” the returns on investment that it generates are widely disparate by race within the prevailing socioeconomic framework that still subjects blacks and other subaltern groups to inferior housing and education, targets them disproportionally with predatory financial products, and continues discriminatory labor market practices.

These enduring levels of historical and ongoing discrimination patterns in the U.S. economy and society are why we enthusiastically applaud proposals that remove the economic burden of student loan debt for all students and their families. Additionally, providing tuition-free education at public colleges and universities to all Americans would eliminate the social and psychological stigma associated with the system of financial aid and eliminate the need for future generations to carry burdensome debts. We urge lawmakers to support proposals that implement restorative economic justice by cancelling the burden of all existing student debt. In essence, we can do the right thing and establish higher education as a universal economic right.

—Darrick Hamilton is the executive director of the Kirwan Institute for the Study of Race and Ethnicity at The Ohio State University. He also holds a primary faculty appointment in the university’s John Glenn College of Public Affairs, with courtesy appointments in the Departments of Economics and Sociology in the College of Arts and Sciences. Naomi Zewde is an assistant professor in the Graduate School of Public Health and Health Policy at The City University of New York. Both Hamilton and Zewde are fellows with the Roosevelt Institute. Hamilton would like to thank the Omidyar Network and the Hewlett Foundation for providing the Kirwan Institute with financial support while he conducted this research.

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A plan for equitable climate policy in the United States

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

One year ago, the town of Paradise, California burned to the ground, killing 85 people. Before the fire, it was a poor community with a median annual income of less than $50,000, below the national average.178 In Paradise, climate change combined with economic disadvantage to create a deadly situation.

Unfortunately, this kind of scenario will be increasingly common as the climate crisis accelerates. Across the western United States, wildfires fueled by climate change are putting rural communities at risk. Scientists estimate that climate change has increased wildfire risk by 500 percent, compared to historic risk levels in the 20th century. In addition, twice as much land area in the western United States burned between 1984 and 2015 than would have without climate change.179

Climate change also is making heatwaves hotter, hurricanes stronger, and droughts longer.180 Humankind has already warmed the planet by 1 degree Celsius (1.8 degrees Fahrenheit), or about halfway to the 2 degrees Celsius level that world leaders agreed to limit warming under the Paris Agreement on climate change. Meanwhile, the crisis is claiming American lives—in California wildfires, New Orleans and Houston flooding, and in heatwaves and storm surges across the country—with many more in danger as climate change accelerates.

This crisis will increasingly and dramatically exacerbate economic inequality in the United States. Low- and middle-income Americans have minimal safety net protections from the impact of climate change. These communities are more vulnerable to health-related risks, don’t have the financial resources to recover from climate disasters, and are more vulnerable to climate-related hazards in the first instance. And U.S. workers and communities who may face economic costs from the energy transition to a more clean economy don’t have guaranteed access to healthcare, pensions, and the necessary assistance to maintain their dignity and quality of life.

Already, insurers are declining coverage for housing against growing climate risks such as flooding and wildfires. Without equitable climate policies in place, low-income Americans will have to face a double threat. They will be more likely to die in heatwaves, struggle to recover from hurricanes and wildfires, and, without health insurance, face greater burdens from diseases pushing into new ranges as the planet warms. At the same time, they will struggle the most to pay for the costs associated with preventing even worse climate change impacts.

In this essay, we make the case that equitable climate policy is both good economic policy and good politics. We then present specific policy proposals to support the decarbonization of the U.S. economy by 2050, in line with what climate scientists tell us is necessary to limit warming. We follow with a number of economic and social policies that need to be part of equitable climate policy, such as:

  • Community Benefits Agreements for clean energy projects that ensure communities and firms share the profits from wind and solar farms
  • Subsidies for clean transportation targeted at low-income Americans
  • Retirement with dignity or retraining for fossil fuel industry workers into good-paying clean energy jobs

These and other energy transition investments presented in this essay can be structured to support equitable growth in the United States.

Equitable climate policy is good economic policy and good politics

Unmitigated climate change will hit low- and middle-income Americans the hardest, but climate solutions also could exacerbate economic inequality. The reason is straightforward: Low- and middle-income Americans depend on cheap energy, transport, food, and consumer goods powered or produced using fossil fuels. Many of these goods are relatively inexpensive because their prices do not include the damages caused by carbon pollution. Putting a price on carbon will raise household energy costs, even while one out of every three Americans is already struggling to pay their electricity bills.181

Rural residents across the country in particular must deal with higher prices for fossil fuel-related goods and services—costs that would climb still higher when a price is put on carbon pollution. This is why climate policy that does not take economic inequality into consideration could further squeeze U.S. families that are already struggling with wage stagnation.

To overcome this challenge, we need an approach to climate policy that centers on economic inequality. This is the promise of policy proposals such as the Green New Deal—a wide variety of ideas that integrate social and economic reforms into climate policymaking. According to Green New Deal advocates, climate reforms must address economic inequalities in order to create a just and sustainable future. In this section of the essay, we focus on two key components in this approach: passing a federal clean electricity standard, and investments in clean energy research and development.

But first, let us explain why equitable climate policy also is good economic policy and good politics. No matter what climate reforms are proposed, opponents of those reforms in the fossil fuel industries will frame them as harmful to low- and middle-income Americans. Yet smart climate policy can be designed to offset adverse effects on low- and moderate-income U.S. households. In our research, we show that combining climate reforms with economic and social policy expands public support—even among Republicans.182 This suggests that linking climate and social policy is likely to generate greater public support.

In the past, putting a price on carbon has been the centerpiece of climate reforms. While policymakers may still want to pursue this policy, it is essential to understand that this action alone would be insufficient. Further, any carbon price must also be designed to raise living standards for low- and middle-income households.

One option is to redistribute revenues collected by the government after putting a price on carbon directly back to the public in a progressive way. While we recognize the potential political value of that approach, we also note that any form of taxation—progressive or not—can face political roadblocks. So, it is essential that equitable climate policy makes clear that any transfer payments to U.S. households made with carbon revenues are highly visible to the recipients and clearly associated with carbon taxation in the minds of recipients.

A federal clean electricity standard

Over the past three decades, many states have passed clean energy requirements, even as the federal government has lagged behind. A majority of states now have a Renewable Portfolio Standard in place that requires a certain amount of clean electricity by a given year. Yet other states are falling behind. The United States needs a federal clean electricity standard to meet the climate crisis head on.

A nationwide clean electricity standard can ensure that contributions to climate solutions are not only equitable overall but also offer equitable protection from the local air pollution and other harms that accompany carbon-intensive power plants. This federal standard also would allow the transportation and building sectors to decarbonize much more easily, as those sectors become electrified and begin running off of clean power.

Coal-fired power plants, for instance, are disproportionately sited in communities of color, particularly in urban areas, forcing these communities to bear the negative health externalities of local air pollution.183 More generally, research shows that communities of color bear a disproportionate “pollution burden,” with more than 50 percent greater exposure to pollution relative to their consumption.184 Only a federally coordinated clean energy standard can ensure that no community or region of the country gets left behind by the transition to cleaner energy.

Investments into clean energy research and development

Compared to historic levels, federal investment in energy research and development is extremely low.185 The costs of many energy technologies have fallen over the past decade. Yet it will not be enough to simply deploy existing technologies. There are several areas where the solutions required to fully decarbonize our economy by 2050 are not yet available. That’s why sustained federal investment in research and development is essential.

One key case in point: Investments are needed in energy storage technologies, including grid-scale batteries in order to store wind and solar energy during the times of the year when energy from these sources is scarce. Climate research and development also needs to target reducing carbon pollution from industrial processes, including steel production, cement, and chemicals processing.

As climate science models overwhelmingly show, negative-emissions technologies are also necessary to ensure a stable climate.186 These carbon dioxide removal methods, such as direct air capture technologies or bioenergy production using carbon capture and sequestration technologies, are required to remove historic carbon pollution from the atmosphere and bring carbon concentrations down to safe levels.

Particular attention should be paid to investments in direct air capture technologies, which are at the threshold of commercial viability. For those unfamiliar with these technologies, they involve capturing carbon from the air and either sequestering it underground or using it to create a synthetic fuel, for example to power airplanes. These technologies do not require burning any fossil fuels and are therefore distinct from carbon capture and sequestration technologies.

Funding climate technologies equitably

Many economists believe that putting a federal price on carbon is necessary to price out fossil fuels and provide the revenues necessary for the next transformation of the U.S. energy system. We have reservations about this policy instrument because the political economy of carbon pricing is challenging. Carbon taxes focus policymaking debates on the short-term costs of actions, while masking the substantial economic and ecological benefits of climate reforms. And because carbon pricing can perpetuate economic inequalities, it allows climate policy opponents to present themselves as representing the interests of low-income communities even though, in reality, these communities are being endangered by those same polluting interests.

We believe that equitable climate policymaking instead requires massive investments in communities across the country, and that these investments should be funded from existing revenue sources. Other national and economic security threats are routinely prioritized in U.S. budgetary negotiations and are not restricted to particular earmarked sources. So too should efforts to manage the existential threat of climate change.

The clean energy transition will involve an enormous amount of investment and result in equally massive profits. How can policymakers ensure that some of these benefits are captured by communities, including low- and middle-income communities and communities of color? In addition to carbon pricing, there are a number of policy tools available to ensure equity during the energy transition, among them:

  • Community Benefits Agreements
  • Subsidies for electric vehicles
  • Public transit funding
  • Funding for clean energy adoption in underserved communities
  • Policies to retire coal plants and increase equity
  • Payments and retraining for workers in fossil fuel-intensive industries
  • Repeal fossil fuel subsidies

Let’s briefly consider each of these recommendations in turn.

Community Benefits Agreements

Community Benefits Agreements are contracts between large energy developers and communities hosting an energy project. These agreements require that the community receive a share of the project’s benefits. In the few offshore wind developments in the United States, for example, these agreements are in place.187 Policymakers could provide extra incentives for projects that receive government subsidies or tax benefits to negotiate Community Benefits Agreements. These agreements also could require minimum wage standards, unionization or other equitable labor market arrangements.

These terms and conditions would likely increase acceptance of wind energy farms in nearby communities. As our research shows, about 1 in 10 wind energy plants currently faces local resistance, and that number is growing over time.188 Offshore wind energy has faced strong opposition, which is particularly problematic given how high quality this energy source would prove if developed. Deploying renewable energy very fast will require communities to see the benefits of hosting projects.

Subsidies for electric vehicles

To date, wealthier Americans have used most of the tax incentives available when purchasing an electric vehicle.189 While these early, wealthy adopters have brought down the cost of these technologies, it is now time for electric-vehicle policies to be more accessible to all Americans. Subsidies for electric vehicles should be at the point of sale, so that they do not require middle- and low-income buyers to carry large costs until they can claim tax credits at the end of the year. Vehicle rebates could be based on means testing or be restricted to cars whose base price falls below a preset cap. The latter approach could help target lower-end car models that lower-income Americans are more likely to afford.

Efforts to increase the cost of carbon pollution would also make the purchase of electric vehicles even more attractive, price-wise, as fossil fuel-powered vehicles become more costly to drive due to carbon taxes. Targeted investments also are necessary to build electric vehicle charging infrastructure across the country and especially in low-income and rural communities. It is critical that lower-income Americans not get left behind, paying the true costs of fossil fuels, while other Americans have the resources to transition their transportation options.

Public transit funding

Equitable climate policy needs to ensure that electrified public transportation systems are built in urban areas and that the development of affordable housing near clean transit lines is part of that development. This means policymakers need to rethink patterns of urban development to ensure that affordable housing is available in places that do not force low-income families to intensify their dependence on long, fossil-fuel-dependent commutes.

The federal government has a role to play in guaranteeing this supply of environmentally friendly affordable housing. The government should directly build and renovate affordable housing to ensure low-income Americans and renters are not left behind by the energy transition.

Funding for clean energy adoption in underserved communities

Research suggests that clean energy adoption has been unequal along racial lines, even after accounting for differences in wealth.190 Policymakers need to ensure that substantial clean energy investments are made in underserved communities. When funding for low-carbon technology projects is limited, for example, policy should prioritize projects in disadvantaged communities. Renewable energy tax credits should couple a basic credit, perhaps 20 percent, for most solar projects, with an additional tax credit of 10 percent for projects that benefit poor and low-income communities.

Overall, this kind of tax credit would deploy carbon tax revenues to leverage private-sector investment within low-income communities. Further, this policy could be designed to ensure benefits reach both homeowners and renters. If clean energy adoption projects are built in low-income housing, then the tax credit could require 50 percent of the benefits go to renters and 50 percent to the project developer and/or the building owner.

Policies to retire coal plants and increase equity

Existing federal laws and inexpensive natural gas, a fossil fuel, are causing the closure of costly and highly polluting coal-fired energy plants, yet almost one-third of the U.S. power grid is still fueled by this dirty energy source.191 For both health and climate reasons, policymakers must shut down all remaining coal plants as fast as possible.

Many of these coal plants are owned by or contracted through rural electric cooperatives, which are nonprofit utilities founded after the New Deal that operate in some states. As of 2017, 65 percent of rural electric cooperatives’ electricity mix came from fossil fuels, particularly coal. To speed up the retirement of these utilities’ dirty assets, debt relief for rural electric cooperatives may be necessary.192 The federal government could provide funding to write down these debts or restructure loans, for example through the existing Rural Utilities Service.

Another approach to retire coal plants more quickly is through the securitization of the debt held by coal-fired plants. In 2019, Colorado passed a new law that enables utilities to restructure loans on their coal plants. Using government bonds, the utility can lower its cost of capital. In return for these favorable terms, the utility retires its coal plants early.

In the Colorado case, part of the revenue the government collects through the bonds will flow into a fund to support workers and communities near these plants. Given the impact on health from coal plants, closing them has clear benefits for nearby communities, particularly communities of color.193 Of course, shutting down coal plants is also essential to addressing the climate crisis.

Payments and retraining for workers in fossil fuel-intensive industries

There needs to be compensation for workers in fossil fuel-intensive industries so that they can retire with dignity or receive training for new, good-paying jobs in their communities. One of the challenges to the clean energy transition is that communities and workers in parts of our country depend on historic, polluting industries for their livelihoods. Coal miners and other fossil fuel workers must be offered real alternative economic opportunities with a living wage.

Weak compensation programs that either force workers into retirement with minimal social safety nets or funnel them into entry-level service industries will compound economic inequities and undermine political support for the energy transition. Instead, we need robust retraining for good-paying clean energy sector jobs. If necessary, these should be subsidized by government-led clean energy deployment.

Further, many U.S. unions maintain strong ties to carbon-intensive industries, such as auto manufacturing or heavy industry. By contrast, many jobs in the clean energy sector—from clean energy deployment to electric vehicle manufacturing—remain nonunionized. In part, this reflects secular decline in union participation across new U.S. economic sectors. To ensure political support for the energy transition among labor communities coping with decarbonization, government funding for clean energy projects should prioritize unionized workers.

Repeal fossil fuel subsidies

For more than a century now, the federal government has provided valuable tax breaks to the oil and gas industry. Even conservative estimates value this funding at around $20 billion every year.194 U.S. taxpayers should not be paying companies to destabilize the climate. Congress should reform the tax code to eliminate fossil fuel subsidies, including the Intangible Drilling Costs Deduction and the Percentage Depletion Deduction.

Carbon tax revenues

Carbon pricing is a tool that still enjoys support among many policymakers, but we have reservations about its political viability. To the degree that a carbon price is included in a package, we emphasize the importance of using revenues to manage the inequities associated with decarbonization. A variety of revenue options are available. They can be invested in clean energy innovation and deployment or be returned back to Americans. If revenues are given back to the public, then they must be highly visible. They should not be implemented through the tax code, but through visible checks or electronic payments. Citizens need to understand that their dividend payments are specifically linked to new climate change reforms.

In addition, policymakers could allocate a portion of carbon-price revenues to municipal or county-level governments to spend on local projects to reduce greenhouse gas emissions, following the example of California’s cap-and-trade program. In one project funded by this Transformative Climate Communities program, carbon-pricing revenues have been awarded to the city of Fresno for transit-connected affordable housing, weatherization and renewable energy investments in low-income neighborhoods, and urban greening projects.195

The revenues from carbon taxation also could be used to deploy clean-energy and energy-efficiency technologies in low- and middle-income Americans’ communities, helping to distribute the benefits of the energy transition more equally. Policies could be enacted to retrofit low-income housing, for example, improving efficiency and indoor health simultaneously. These carbon-tax revenues also could be used to offset energy bills directly in low- and middle-income households. These diverse benefits should be included in any climate reform package so there is no reason why they must be tied to carbon pricing revenues specifically.

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A plan for equitable climate policy in the United States

Conclusion

Policymakers and the general public must recognize that government funding for low-carbon technologies can be a powerful social policy. Such subsidies are more than a way to reduce the risks of climate change. They also boast the potential to equalize access to new technologies and reduce economic inequality.

For that reason, the federal government must ensure that economically disadvantaged Americans gain the same access to new green technologies as all others and are not left behind in the emerging low-carbon economy. Our government must stop abdicating its responsibility to address the climate crisis.

Government intervention has been necessary in every U.S. energy transition since the 19th century. This time, equitable climate policy must fund significant government incentives to deploy low-carbon technologies, especially in disadvantaged communities, and must fund aggressive investments in clean energy research and development so that clean energy becomes cheap and ubiquitous for all U.S. households.

—Leah Stokes and Matto Mildenberger are both assistant professors in the Department of Political Science and affiliated with the Bren School of Environmental Science & Management and the Environmental Studies Department at the University of California, Santa Barbara.

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New measurement for a new economy

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Measurement is an important component of good economic governance. In the United States, we rely on the federal government’s Census Bureau, the Bureau of Labor Statistics, and the Bureau of Economic Analysis to provide the data that elected officials and economic policymakers use to steer the U.S. economy and that businesses use to make investment decisions.

Many of our most well-known economic indicators were designed and then first collected more than 70 years ago. The most prominent is the National Income and Product Accounts, from which the Bureau of Economic Analysis calculates Gross Domestic Product. But also important is the Current Population Survey, a national, monthly survey of all U.S. households by the Census Bureau, which gives us estimates of the share of the population employed and household income. Then there’s the data provided by employers on employment and earnings to the Bureau of Labor Statistics. Although the U.S. economy has changed significantly over the intervening decades, few new metrics have been added—and none have eclipsed the public salience of these old stalwarts.

Yet our economy has changed markedly in recent decades, which means our existing metrics are not properly accounting for the disruptive influence of economic inequality. New metrics that measure what really matters for American families would focus policymakers on the task of building an equitable economy—one that creates strong, stable, and broad-based growth. Metrics that better capture the well-being of American families would allow everyone to evaluate economic performance and hold elected officials accountable to their promises. As our ideas about what constitutes economic success change, so too must our metrics.

Federal statistics are an absolutely essential component of a policy agenda. To govern in an age of inequality, policymakers need to craft and make use of new metrics that show them and the public how the U.S. economy delivers for all Americans.

How does measurement shape policy?

The metrics that the federal government collects shape the policy options that stakeholders consider and execute. Terms of public debate over economic policy are likewise shaped by the available indicators, and getting the metrics right is imperative. Case-in-point: When the Bureau of Labor Statistics releases data on the prior month’s employment indicators, the data can cause gyrations in stocks and other financial markets.

Common and widely available metrics naturally become targets for decision makers—sometimes with suboptimal results when the metrics aren’t quite right. An oft-repeated example is U.S. News & World Report’s annual Best Colleges rankings. These ratings so dominated the public imagination that colleges became obsessed with improving their ratings. Since the ratings were based on a small set of measurable outcomes—such as graduation rate, class size, and admissions selectivity—colleges quickly found ways to improve their ratings by changing their practices. One college offered financial incentives to freshmen to retake the SAT, raising their incoming class average and their ranking,196 while others hired their own graduates to boost graduate employment metrics.197 Multiple colleges gave falsified data to U.S. News.198 The way we measure outcomes can indeed shape outcomes.

The measurements at the center of national policy debates affect both what policies are discussed and what policies are adopted. GDP growth has assumed a central role in many economic policy debates. Policy debates often center on the idea that growth in GDP is an unalloyed good, worth targeting without regard for other considerations, including how those gains are distributed across the American people. The Tax Cuts and Jobs Act of 2017 was sold on exactly these grounds by its biggest proponents.199

But in order to understand what greater economic growth means for our economy, we need to see it within its relevant context, which is that in our modern economy, growth now tends to almost exclusively benefit the highest income earners in our society. With that bit of context, it becomes difficult to understand why we should be targeting aggregate growth at all. Surely policymakers should instead look at distributional tables that tell us how people in particular income brackets will be affected by the tax, as Equitable Growth advocates.200 Trumpeting the 2017 tax law’s effects on overall growth only serves to obscure what the distributional tables show—these tax cuts will raise the incomes of the wealthiest Americans and will do little for those at the bottom. (See Figure 1.)

Figure 1

But popular evaluation of the Tax Cuts and Jobs Act tended to present it as a trade-off between equity and growth. Because GDP growth is a highly visible metric of economic progress, whereas distributional tables are one-off evaluations of potential policy by nonofficial sources, the public policy debate gives undue importance to it.

Federal metrics should reflect the complexity of the U.S. economy

Our economy has changed dramatically, and the metrics we had can no longer serve to help us fix the problems of economic inequality. Policymakers cannot continue to pretend that they can rely only on methods developed by economists from 70 years ago, when our economy today looks so different.

Below, I detail two areas where new metrics would help us chart a bold new course for our economy. The first is an issue that academic economists are still puzzling out—the extent to which inflation is now different for the rich and poor and how this fact affects policy choices. The second is a much more mature area of work: GDP 2.0 is a project to add distributional measures of income to our National Income and Product Accounts. It is the subject of current legislation in Congress and one of the most important steps we can take to combat inequality.

Inequality has upended the measurement of inflation

Xavier Jaravel is an assistant professor of economics at the London School of Economics. His research provides an apt example of how gaps in government measurement may already be having an effect on existing economic policy, largely without anyone noticing.

Jaravel uses price-scanner data from retail stores to show that low- and high-income consumers face different rates of inflation.201 On average, he finds that households with incomes of $100,000 or higher faced inflation rates 0.65 percentage points lower than households with incomes of $30,000 or less. (See Figure 2.)

Figure 2

This is a recent phenomenon, driven by the rise of inequality in the U.S. economy. Inequality, Jaravel finds, has driven up demand for goods at the high end of the product market. That, in turn, has led firms to innovate more in high-price goods, and this innovation has introduced competitive pressure into these market segments, keeping prices for these products low relative to prices of low-price goods.

An example is the craft beer market. Craft beers are generally more expensive than their mass-market counterparts. But the proliferation of small craft breweries and the resulting competition has kept inflation in the craft brew segment more than a full percentage point lower than inflation in the mass-market beer segment.

This discrepancy in high-cost and low-cost product inflation rates limits the effectiveness of policy decisions. One case in point is the Supplemental Nutrition Assistance Program, which provides food assistance to low-income households that increases over time with the rate of inflation. Jaravel’s research shows that the headline rate of inflation is understating price increases for the households that this program is meant to serve, which means that benefits are rising slower than the price increases faced by low-income families.

Between 2004 and 2015, Jaravel’s higher inflation rate for low-income households suggests that food prices rose 36 percent, which is almost a third higher than the 25 percent increase in supplemental nutrition assistance benefits based on the headline inflation rate. Families are experiencing a decline in the purchasing power of these benefits, counter to the intent of the policy. This is not the only consequence of unequal inflation rates. Jaravel’s findings may have implications for monetary policy, which typically targets the inflation rate. Economists are only just beginning to explore the consequences.

GDP 2.0: Measuring who prospers when the U.S. economy grows

GDP is the one-number economic indicator that news anchors and policymakers alike love to dissect. Reading quarterly Bureau of Economic Analysis reports on GDP growth is a form of divination that, in popular imagination, tells us whether the economic fortunes of the country are trending up or down. Strong GDP growth is considered evidence of good fortune for all Americans under the presumption that “a rising tide lifts all boats.”

This presumption is mistaken. GDP growth may once have indicated good fortune for the vast majority of Americans, but over the past several decades, many Americans have been left behind by economic expansion. This reality makes GDP a misleading statistic for the opinion leaders and politicians who rely on it. The consequence is that the diagnoses of the U.S. economy and prescriptions for what ails it are based on the wrong metric.

The good news is that we have the data and the statistical know-how to fix the problem. To reflect the true range of how people experience the economy, we can and should produce statistics that show income growth for Americans in different income brackets. These statistics will allow policymakers to evaluate how the U.S. economy is performing for the working class, the middle class, and the affluent.

GDP 2.0 is a policy proposal that will extend existing GDP reports, adding a distributional component so policymakers and the public know not just how much the economy grew overall, but also how much incomes grew for those at the bottom, middle, and top of the income distribution. Each Bureau of Economic Analysis report on GDP should come with measures of growth for income earners up and down the income ladder, including measures of income growth at the very top of the income distribution—the top 1 percent—where the largest gains of the past several decades have been seen.

Who does growth benefit?

This new way of measuring economic growth is needed because the National Income and Product Accounts, of which GDP is just one part, were devised in the 1930s, the result of a concerted effort by many economists to better quantify economic output at that time but wholly inadequate to the needs of today.

These data were first put together in the 1930s to help policymakers understand the Great Depression. The U.S. Department of Commerce commissioned Simon Kuznets, who, at the time, was an economist at the National Bureau of Economic Research and a professor at the University of Pennsylvania, to develop estimates of aggregate national income for the United States. In 1934, he and his team of researchers in New York and at the Commerce Department presented their findings to the U.S. Senate. The report itself is nearly 300 pages long, offering painstaking detail for every line of information published, drawn from an immense number of independent sources and statistical abstracts across every major industry and government agency responsible for their oversight.202

Based on this work, the first U.S. national income statistics were published in 1942. These accounts, specifically developed to help the United States effectively marshal its economic resources to fight in World War II, are what we have used to tabulate GDP ever since. Kuznets would go on to win the third Nobel Memorial Prize in Economic Sciences for this work and his research on economic growth.203

Gross Domestic Product was a tool well-adapted to the economic problems of mid-20th century America. It allowed economic policymakers to understand the vast depth of the Depression and highlighted the need for bold action. Similarly, it served as a guide in World War II, providing some indication of how many planes and boats and tanks we might plausibly manufacture if the full resources of the nation were focused on the task.

These are important questions, but now there are other ones that the nation needs answered. In an era where inequality has swelled to levels approaching those last seen nearly a century ago, elected officials need to know who is prospering from economic progress so they can manage the economy for broad-based growth that benefits all Americans. This need is acute now because headline GDP growth has become unmoored from the economic fortunes of many Americans.

Economic growth was equitably distributed in the United States between 1963 and 1979. Americans at all levels of income saw annual growth that was at or above the level of total GDP growth, unless they were among the very richest, who experienced slower growth than the rest, on average. Starting around 1980, this relationship began to change. In the decades since 1980, the vast majority of Americans have seen growth in their own incomes that is below GDP growth. Over this time period only the most affluent Americans have seen their incomes rise faster than the average. This is a sharp shift in the trends from the decades before. (See Figure 3.)

Figure 3

This divergence between the average and the actual fortunes of families is a problem Kuznets warned about in one of his very first publications on the subject of national accounts. In a section of his report to Congress titled “Uses and Abuses of National Income Measurements,” he noted that, “The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income.”204

This divergence makes GDP increasingly misleading as a guide to public policy: It does little good to target GDP as an outcome if the majority of GDP growth flows to a small group of families, leaving the rest with few gains. Despite this, politicians continue to focus too much on GDP growth, and pundits encourage them. The Trump administration made a campaign issue out of targeting 3 percent growth and sometimes promised to achieve much higher growth, without a simultaneous discussion of who would reap the gains of that growth.205

The pattern of growth shown in Figure 3 has serious downstream consequences. To take just one significant example, Harvard University economist Raj Chetty and his colleagues have demonstrated that absolute intergenerational income mobility has declined precipitously in the United States, and that most of this decline is due to rising income inequality.206

Chetty finds that children in the United States used to have a 90 percent chance of earning more than their parents did, comparing parents at age 30 to their children at age 30. But by 1980, the chances had dropped to just 50 percent. There are two possible explanations: Mobility could have fallen because of lower overall economic growth in later cohorts, or it could have fallen because of unequal patterns of growth. A counterfactual analysis shows that the latter accounts for two-thirds of the change in absolute mobility.

Adding GDP 2.0 to the statistical toolbox

Academic economists have already provided a working prototype of what GDP 2.0 might look like. Thomas Piketty of the Paris School of Economics, and Emmanuel Saez and Gabriel Zucman, both of the University of California, Berkeley, have published a public dataset they call Distributional National Accounts that uses U.S. tax data to distribute income for 55 years, from 1962 to 2016.207

But academic datasets are not a long-term solution for the problem. Government statistics are produced on reliable schedules, using standardized methodologies and the best available data. A distributional measure of growth presented alongside the headline GDP growth number would make the report more meaningful to American families who are not currently well-represented by overall GDP growth. (See Figure 4.)

Figure 4

GDP 2.0: Coming soon

These GDP 2.0 statistics would help facilitate the diagnosis of a real and concerning phenomenon in the economy: increases in inequality that could presage weakness in future consumer spending, indicate falling income mobility, or indicate that the economy is not working for every American.

Creating a distributional component in the National Accounts is well underway at the Bureau of Economic Analysis, thanks to interest from the broader economic community and pressure from Congress. In 2019, for the second Congress in a row, Sens. Charles Schumer (D-NY) and Martin Heinrich (D-NM) and Rep. Carolyn Maloney (D-NY) introduced the Measuring Real Income Growth Act in both chambers.208 The bill, which has garnered 23 cosponsors in the Senate and 22 in the House of Representatives, would direct BEA to produce income growth statistics for Americans in each decile of income to accompany aggregate GDP growth.

This congressional interest has led to a flurry of legislative action. The congressional Joint Economic Committee has held two hearings on the topic, most recently in October 2019.209 In March 2019, the conference report accompanying the Consolidated Appropriations Act for fiscal year 2019 included a clause instructing the Bureau of Economic Analysis to report income growth within deciles of income starting in 2020.210 And in December 2019, the conference report accompanying the Consolidated Appropriations Act for fiscal year 2020 provided the agency appropriations bill for the Department of Commerce for FY2020, House appropriators instructed the agency $1 million to pursue the project.211

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New measurement for a new economy

Conclusion: For better policy, measure the right things

The metrics we choose should reflect what we value. As the cases of inflation and GDP show, the headline metrics we use for economic evaluation are either missing important features of the 21st century economy or have become misleading because of changes in how the U.S. economy works. If realizing the promise of the American Dream is important, then GDP 2.0 and similar new measures will serve to align our economic policies with our values. Modernizing our economic statistical infrastructure is a way to set new economic goals and guideposts. Without these guideposts, we cannot achieve strong, stable, and broad-based economic growth.

—Heather Boushey is the president and CEO of the Washington Center for Equitable Growth.

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