Brad DeLong: Worthy reads on equitable growth, July 26–August 1, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:
 
Here are links to four important pieces at the Washington Center for Equitable Growth providing context to the recent presidential primary debates:

  1. Carmen Ye, “Why we need better re-employment policies for formerly incarcerated African American men,” in which she writes: “African American men … 33 percent of the 1.56 million Americans held in state or federal prisons … When these men are released from prison, what will their employment prospects look like? … Black applicants with no criminal record receive a callback or job offer at the same rate as white applicants with a felony conviction. Yet black applicants without a criminal record were three times as likely to get a callback as those with a record.”
  2. Will McGrew, “Investments in early childhood education improve outcomes for program participants—and perhaps other children too,” in which he writes: “Governments that spend money on early childhood education get a lot of bang for their buck—an estimated 7 percent to 10 percent annual return for programs targeted at disadvantaged children … [plus] also long-term improvements in human capital and earnings. But do those test-score gains last? … Mariana Zerpa … finds that children in states with early childhood education programs are 30 percent less likely to repeat a grade between ages 6 and 8—and that this effect lasts at least until age 12.”
  3. Equitable Growth, “Gender wage inequality in the United States: Causes and solutions to improve family well-being and economic growth”: “Disparities between men’s and women’s wages in the United States hinders economic growth by constraining family incomes and spending power. When comparing average full-time year-round incomes of men to those of women, research indicates that women make only 80.5 percent of men’s wages, a gap that is even larger when accounting for race. In the long run, these disparities heighten the risks of financial stress and inadequate retirement savings at times of economic shocks.”
  4. Greg Leiserson, “Wealth taxation: An introduction to net worth taxes and how one might work in the United States,” in which he writes: “Probably the most significant challenge in implementing a net worth tax is that determining tax liabilities requires a valuation for all of the assets subject to the tax … Such a tax would impose burden primarily on the wealthiest families—reducing wealth inequality—and could raise substantial revenues. As noted above, the United States taxes wealth in several forms already. Thus, the policy debate is less about whether to tax wealth and more about the best ways to tax wealth and how much it should be taxed. A net worth tax could be a useful complement to—or substitute for—other means of taxing wealth, as well as a tool for increasing overall taxation of wealth.”

 

Worthy reads not from Equitable Growth:

  1. The Tax Cuts and Jobs Act of 2017 was supposed to produce faster growth even though it was inequitable. But that hope appears to have been vain. Read Dan Drezner, “How Donald Trump is sanctioning the U.S. economy,” in which he writes: “Second-quarter GDP growth was only 2.1 percent … far short of the 3 percent target that President Trump has repeatedly promised. Data revisions released Friday wiped away what had been a prized talking point for the White House: GDP grew 2.5 percent for all of 2018, down from the 3 percent previously reported … [and] a far cry from Larry Kudlow’s 2018 claim that GDP growth would top 4 percent for a few quarters … Trump has unwittingly sanctioned the U.S. economy … has made himself the uncertainty engine for those interested in investing in the United States. And the effects are starting to be felt. In the second quarter, business investment was -0.6 percent. As in, negative … Part of the problem is the drying up of foreign direct investment … How will Trump react to the growth news? It is possible that he will respond in a mature fashion.”
  2. These numbers on the human costs of the Supreme Court’s decision in National Federation of Independent Business v. Sibelius are only about one-quarter of what I had feared. Read Scott Lemieux, “Matters of Life and Death,” in which he writes: “15,000 people died in three years because Republican states refused to accept the Medicaid expansion … And let us not forget that this was all made possible by the intervention of the Supreme Court, based on arguments so weak that, as Joan Biskupic’s new bio finds, [Supreme Court Chief Justice] John Roberts himself initially rejected them … Regarding the expansion of Medicaid for poor people, all four liberal justices … voted to uphold the program … [and] punctured … arguments that Congress had exceeded its spending power and its ability to attach conditions … In the private March 30 conference, Roberts also voted to uphold the Medicaid expansion.”
  3. At a recent conference, my fellow University of California, Berkeley professor and former President’s Council of Economic Adviser’s Chair Laura D. Tyson gave a powerful endorsement and shout-out to this book by my fellow UC-Berkeley professor Barry Eichengreen as the best survey of the history and prospect of what he calls “populism” and I would call “neo-fascism.” Read Barry Eichengreen’s new book, The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era. Here are excerpts from a summary of the book: “Populists tend to thrive most in the wake of economic downturns, when it is easy to convince the masses of elite malfeasance. Yet while there is more than a grain of truth that bankers, financiers, and ‘bought’ politicians are responsible for the mess, populists’ own solutions tend to be simplistic and economically counterproductive. Moreover, by arguing that the ordinary people are at the mercy of extra-national forces beyond their control—international capital, immigrants, cosmopolitan globalists—populists often degenerate into demagoguery and xenophobia. There is no one solution … [but] there is an obvious place to start: shoring up and improving the welfare state … America’s patchwork welfare state was not well equipped to deal with the economic fallout that attended globalization and the decline of manufacturing in America … Lucidly explaining both the appeals and dangers of populism across history, this book is essential reading for anyone seeking to understand not just the populist phenomenon, but more generally the lasting political fallout that follows in the wake of major economic crises.”
  4. Adopting robots may cost jobs, but not adopting robots appears to cost many more jobs. Read Wolfgang Dauth, Sebastian Findeisen, Jens Südekum, and Nicole Woessner, “Robots and firms,” in which they write: “Our study is based on firm-level data from Spain, a country with one of the highest robot density levels per worker in Europe. The data come from the Encuesta Sobre Estrategias Empresariales, an annual survey of around 1,900 Spanish manufacturing firms … We reveal significant job losses in non-adopting firms. Our estimates imply that 10 percent of jobs in non-adopting firms are destroyed when the share of sales attributable to robot-using firms in their industries increases from zero to one half. The same logic applies to changes in output and survival probabilities … Aggregate productivity gains are partly driven by substantial intra-industry reallocation of market shares and resources following a more widespread diffusion of robot technology, and a polarization between high-productivity robot adopters and low-productivity non-adopters.”
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How U.S. companies harm workers by making them independent contractors

Posted on by Maria Monroe
Lyft’s and Uber’s pickup spot at the Indianapolis International Airport as seen circa July 2017. Lyft and Uber have replaced many taxi cabs for transportation.

Being classified as either an employee or an independent contractor can determine whether workers in the United States have access to reliable pay, benefits, and protection from discrimination. Intense fights are cropping up across the country as companies try to argue that their workers are just “independent contractors” and do not qualify for many protections under U.S. labor law, while workers and some courts say the opposite, that some workers are actually employees. Many “gig economy” companies, such as Uber Technologies Inc., base their business models around misclassifying their workers as self-employed. Billions of dollars in worker pay is at stake.

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How U.S. companies harm workers by making them independent contractors

Economists and policymakers alike rightfully praise individual entrepreneurs who strike out on their own, and they encourage companies to embrace innovation. However, the vast majority of self-employed independent contractors are nothing like the legendary small businessperson engaged in launching a newfangled product or service. Instead, large companies have found that they can use independent contracting or self-employment status in U.S. labor law to lower workers’ pay and benefits, while maintaining significant control over how those workers perform their jobs.

This issue brief delves into how independent contractors are defined by law and understood by economists, while demonstrating why it’s rarely a good thing for most workers to be forced to work as independent contractors due to lack of good pay, lack of basic benefits, and lack of work-time independence.

Who is an independent contractor?

Traditionally, independent contractors are paid a commission per task they complete for clients, maintain significant control over how and when they perform their tasks, and are not integral to the business of the companies or people for whom they work. They can also be referred to as freelance workers. Traditional examples of independent contractors include plumbers, wedding photographers, and some lawyers and consultants. They run their own professional operations, contract with many different families or businesses, negotiate mutually agreeable contract terms, are free to complete their work without control by their customers outside of those contracts, and are not integral to their customers’ business models.

Independent contractors are a subset of people who are “self-employed,” which includes independent contractors, small business owners, and part-time hobby or craft merchants. The terms have slightly different meanings for economists, tax professionals, and lawyers, which are not relevant here.

A recent study by the U.S. Bureau of Labor Statistics and academic research by Lawrence Katz of Harvard University and the late Alan Krueger of Princeton University, show that between 6.9 percent and 9.6 percent of all workers are independent contractors, or 10.5 million to 15 million workers.

It is largely impossible to tell how many of these workers are traditional independent contractors and how many are misclassified low-wage workers, though Katz and Kruger do find that from 2005 to 2015, low-wage workers experienced a larger rise in independent contracting than high-wage workers. Katz and Kruger believe that employment in independent contracting rose by about 30 percent from 2005 to 2015 and this increase occurred while the rate of true entrepreneurial activity remained mostly stagnant. U.S. Department of the Treasury economists Emilie Jackson, Adam Looney, and Shanthi Ramnath corroborate this finding using tax data. They find that self-employment has risen by about 30 percent since 2001 and nearly all of that increase is due to a growing number of independent contractors and misclassified workers. The Bureau of Labor Statistics believes the increase has been smaller.

Why is it bad to be an independent contractor?

First, sometimes it isn’t bad. Plumbers, independent lawyers and consultants, and even wedding photographers can earn a good living as independent contractors while retaining freedom over how they operate their business. But there are many reasons why being an independent contractor might not be advantageous for most workers, specifically when:

  • They are not earning as much money as traditional employees would
  • They are denied crucial workplace rights such as 40-hour work weeks, the right to organize, protection from discrimination, and employer-provided health benefits
  • They are not actually independent and are not really able to determine where, how, and for whom they work

Overall, too many workers fit that description. These kinds of workers suffer from lack of good pay, lack of decent benefits, and lack of meaningful work-time independence, compared to plumbers, real estate agents, and other professional independent contractors.

Lack of good pay

Recent data-driven research shows that low pay is a serious issue for most independent contractors. Treasury economists Jackson, Looney, and Ramnath found that the universe of self-employed people and independent contractors is divided between a very prosperous upper crust and a large body of workers who are not very well-off. At one extreme, the average person who is a partner at a firm earned $243,000, while a gig economy worker made only $37,000 at the other. (Tax data is generally the best source for research on income. But there are still issues with under-reporting of income, especially among the self-employed, which can affect results.)

And it is not just that low-skill workers select into low-paying jobs. My research on the tax returns of Washington, D.C. residents shows that self-employment exacerbates existing income inequality in the local labor market. Low- and middle-wage workers who become self-employed see lower take-home pay than they could have expected if they remained just as wage earners. People in the bottom 75 percent of income-earning Washington residents (making less than about $83,000 annually), earned $3,450 less in 2014 than their counterparts who remained just wage-earners. (See Figure 1.)

Figure 1

In contrast, the city’s high earners see a wide range of earnings outcomes when they become self-employed relative to what they could have otherwise expected. They generally see a large increase in income, but a small minority see very large initial declines as their businesses get off the ground. On average in 2014, those who were already high earners and became self-employed increased their incomes by $25,000 above what they would otherwise have expected after 2 years.

This divide occurs because high-income self-employed workers are much more likely to be consultants, professionals, or traditional entrepreneurs, and thus have the corresponding human capital, social networks, and existing wealth to successfully strike out on their own. Being already wealthy predisposes them to reap great benefits on average from going into business for themselves. Further illustrating this divergence, the overall average income of self-employed people in Washington, D.C. in 2014 was $109,000, versus a median income of just $49,000. These very successful people should not be thought of as representative of the entire population of independent contractors.

Uber drivers are a good example of this phenomena. Uber’s business model is built on using independent-contractor status to lower workers’ pay and shift the costs and risks of doing business onto drivers. While big-city taxi drivers earn between $12 and $17 per hour and taxi drivers industrywide earn $12.49 per hour, a recent study by Larry Mishel of the Economic Policy Institute finds that Uber driver take-home pay averages $10.87 an hour. But after factoring in that Uber drivers must provide for their own benefits, Mishel finds that their hourly wage equivalent is only $9.21 on average.

Mishel points out that those average wages are “below the mandated minimum wage in nine of 20 major markets, including the three largest (Chicago, Los Angeles, and New York),” all of which have minimum wages above $10 per hour. This means Uber would have to immediately raise driver pay if drivers were considered employees. And because these are averages, many drivers make even less.

As Uber and many of its defenders will respond, Uber drivers are usually employed outside of the company and only rely on driving for part of their income. But in no case does U.S. labor law allow part-time workers to be paid less than the minimum wage simply because they are part-time. No matter how many hours someone works, all workers are entitled to a baseline minimum wage per hour of work. That is, unless they are mischaracterized as independent contractors.

In short: like many companies who rely on low-wage independent contractors, Uber uses the independent contracting status to rob drivers of the pay they would be entitled to as employees, or indeed as traditional taxi drivers.

Lack of benefits

Independent contractors are treated under U.S. labor law as self-employed. This means they:

Workers are forced to give up nearly all the rights that U.S. law entitles them to when they work as independent contractors. Uber and the other prominent “ride-services” company, Lyft Inc., claim that restoring those rights by converting their independent contractors into employees would pose a serious risk to their operations. In trying to fend off a new proposed California state law that would require companies to hire independent contractors as full-time employees, the two firms argue instead for vague rules and regulations that would enable their drivers to somehow provide these employee-benefits to themselves. They tout the importance of their drivers’ flexible schedules, but there is no legal reason drivers can’t have both flexible schedules and the benefits of being an employee.

Lack of meaningful work independence

In return for giving up the entire suite of employee protections and benefits in U.S. labor law, all that most independent contractors receive from a company such as Uber and Lyft is mostly imaginary work independence. Companies must give workers some amount of freedom for them to qualify as independent contractors, but it is in companies’ interest to keep as much control as possible. For instance, companies routinely discipline their contractors, control how they perform their job, unilaterally change pay structures, and forbid negotiation over pay. It is hard to imagine plumbers or lawyers operating under similar restrictions.

While “worker freedom” remains the primary justification given by companies and their allies for the independent contractor classification, the actual amount of freedom workers have is a subject of ongoing legal disputes.

In a blow to employers that rely on classifying their workers as independent contractors to avoid labor costs and juice profits, California’s Supreme Court ruled in 2018 that workers must be truly independent in order to qualify as self-employed. The court said that “businesses must show that the worker is free from the control and direction of the employer; performs work that is outside the hirer’s core business; and customarily engages in an independently established trade, occupation or business.” This so-called ABC test would describe most traditionally self-employed people, but clearly not contractors for companies such as Uber. This ruling applies in California only, and so far Uber and similar companies are not complying with the ruling. California’s legislature is currently debating a bill that will codify all or parts of the ABC test into law, which will force the companies to comply without further lengthy litigation.

In contrast, the National Labor Relations Board recently ruled in a case similar to the California Supreme Court case and reversed the Board’s prior position on independent contractors. The NLRB held that drivers for SuperShuttle DFW Inc. are contractors despite being considered employees until 2005. Additionally, those drivers are “completely integrated into SuperShuttle’s transportation system and its infrastructure,” they can not negotiate the terms of their work, and “are prohibited from working for any SuperShuttle competitor.” In her dissent, member Lauren McFerran sums up how misguided the decision was by saying “SuperShuttle’s drivers are not independent in any meaningful way, and they have little meaningful ‘entrepreneurial opportunity.’”

Crucially, worker freedom is not something that companies can only give to independent contractors. Nothing stops SuperShuttle, Uber, or any other business from giving workers both the status and protections of being an employee and a flexible schedule.

Conclusion

High-income professionals enter self-employment under vastly different circumstances than low-wage workers, and this drives different outcomes in terms of earnings, benefits, and work-time flexibility. Professionals really can act as entrepreneurs and greatly improve their incomes while gaining greater work freedom. U.S. labor laws were designed to enable these types of professional workers to declare themselves self-employed. In contrast, low-wage workers are more likely to see wages and benefits stripped away when they become independent contractors, with little or no corresponding increase in autonomy.

U.S. labor history has been defined by conflicts among workers, employers, and the government over workers’ rights to pay and benefits for over a century. As new technologies and business models are developed in the future of work, these fights will shift and policy needs to keep up. The federal government and other states should follow the lead of California’s Supreme Court and recognize the fundamental power imbalance between contractors and firms. Strict rules on who can qualify as an independent contractor would restore pay and benefits to misclassified workers or else give them true freedom to pursue entrepreneurial activity.

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Prescription drug pricing reforms in Congress are one step closer

Posted on by Maria Monroe

The U.S. Senate is moving the country one step closer to helping rein in rising prescription drug prices by restoring market competition—in a rare example of bipartisanship on Capitol Hill. Building on progress in the House of Representatives, two Senate committees late last month passed legislation that the Washington Center for Equitable Growth advised the U.S. Congress would help achieve this goal.

On June 26, the Senate Committee on Health, Education, Labor, and Pensions passed S. 1826, a package of measures focused largely on healthcare costs. Included in the bill is the Creating and Restoring Equal Access to Equivalent Samples, or CREATES, Act of 2019, which would deter pharmaceutical companies from employing certain tactics to prevent manufacturers of generic versions of their drugs from bringing their products to market. The measure was introduced originally by Sens. Patrick Leahy (D-VT), Chuck Grassley (R-IA), Amy Klobuchar (D-MN), and Mike Lee (R-UT). The House of Representatives has already approved the CREATES Act.

Separately, the Senate Judiciary Committee, on June 27, approved S. 1224, a bill introduced by Sens. Klobuchar and Grassley aimed at preventing abuses of the Food and Drug Administration’s petition process that slow down regulatory approval of generics and biosimilars. The Stop Significant and Time-wasting Abuse Limiting Legitimate Innovation of New Generics, or Stop STALLING, Act would make it easier for the Federal Trade Commission to sanction pharmaceutical companies that file citizen petitions with the Food and Drug Administration without real cause other than a desire to slow the approval process.

Soaring U.S. pharmaceutical drug prices infuriate consumers, distort the healthcare system, provide sometimes unconscionable profits to drug companies, and, in too many cases, endanger lives. While the problem is complex, there is no doubt that efforts to stifle competition are an important factor. Low-cost alternatives such as generic drugs have had a significant impact on drug prices generally, and hopefully biosimilars will have a similar effect. But many companies, especially those that manufacture name-brand pharmaceuticals, have developed tricks to thwart the legal and regulatory framework that policymakers have built to make it possible for these drugs to enter the marketplace.

The CREATES Act addresses two specific drug company tactics. The first is what’s known in the industry as a sample blockade. Before the FDA okays the sale of a generic drug, its manufacturer must prove that it is the same as the branded medication. To gain this certification, the generic drugmaker needs samples of the branded version. Sometimes branded companies will make it difficult or impossible to obtain those samples, thus delaying or even preventing FDA approval of the generic. The CREATES Act establishes a process for ensuring that those samples are available to generic manufacturers.

The second tactic addressed by the CREATES Act that is used by drug companies to block generic competition is a so-called safety protocol filibuster. The law currently requires that generic manufacturers negotiate with the branded drugmaker to develop a single safety protocol. Branded manufacturers sometimes filibuster these negotiations. Without an agreement on protocols, the generic company cannot receive approval, unless it obtains an exception from the FDA to develop a different but equally safe system. Because the manufacturer already has approved protocols for its drug (known as Risk Evaluation and Mitigation Strategies, or REMS), the branded company can continue to sell its product while filibustering negotiations over a shared system with the generic. The CREATES Act responds to the exploitation by branded drug companies of current law by ending the assumption that a generic company and a branded company must agree to use the same safety protocols, thus eliminating the branded company’s ability to delay FDA approval by stalling over such negotiations.

Part of the approval process for new drugs, including generics, is the citizen petition, which individuals or organizations may file to express their concerns about a drug going through the approval process. Current law does not allow the Federal Trade Commission to impose sufficient sanctions to deter drug companies from filing endless petitions against generic manufacturers to slow down or block the approval of competing generics. And there are plenty of cases in which drug companies have done just that. The Stop STALLING Act would allow the FTC to toughen enforcement against drug companies abusing the process in this manner.

It would be premature to assume that these reforms and others are a foregone conclusion, as obstacles still exist, including lobbying by the pharmaceutical industry. Neither Senate committee, for example, included legislation that would prevent anticompetitive patent settlements in which the branded firm pays its generic competitor not to sell its product. This is an important element of the legislation already approved by the House. Yet the trajectory of the legislation is very promising, and the White House has expressed general support for elements of the House-passed legislation.

As I have written before, legislation to curb rising drug prices by allowing greater competition in the marketplace continues to defy the partisanship and legislative inertia that characterize the U.S. Capitol right now. Bipartisan House passage of the CREATES Act and other related bills, and now these bipartisan actions in the Senate, have given this issue considerable momentum. But industry efforts will continue to pose challenges to these needed reforms.

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Weekend reading: “Diversity and innovation” edition

Posted on by Maria Monroe

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

David Mitchell explains the findings in a new working paper by economists Christina Romer and David Romer of the University of California, Berkeley that looks at how policymakers’ perceptions of debt and budgetary constraints limit their stimulus spending in economic downturns.

In a new issue brief for Equitable Growth, University of Michigan economists Lisa Cook and Janet Gerson explore why—despite earning an increasing share of postsecondary degrees in STEM fields—there is not a corresponding increase in patenting activity among women and people of color. Discrimination remains at the heart of the problem, and the authors estimate that closing the gender and racial gap in the U.S. innovation process could increase U.S. Gross Domestic Product per capita by 2.7 percent. In an accompanying Value Added blog post, Will McGrew summarizes the authors’ findings about the causes of the problem and their recommended policy solutions, including better mentorship, as well as actions to prevent the role of discrimination in patent review.

Catch up on Brad DeLong’s latest worthy reads from Equitable Growth and around the web.

Links from around the web

Four years ago, Seattle adopted a $15 minimum wage, the highest in the nation. New research from Jennifer Romich of the University of Washington into the effects of the changes found that jobs in restaurants and bars were not lost as a result of the change, and that low-wage workers experienced more rapid hourly wage growth, among other findings. [vox]

This week, the Department of Justice announced it was opening an antitrust review of whether online platforms such as Facebook, Inc., Google, Amazon.com Inc., and Apple Inc. are stifling competition. This is in addition to the taskforce created earlier this year by the Federal Trade Commission, which also has jurisdiction over antitrust, to look into the tech giants. [wsj]

While DoorDash announced a change in its policy for the allocation of tips in response to public outcry that they were not passing them directly along to workers, the issue illustrates the problems caused for delivery workers by their characterization as “independent contractors” rather than employees, allowing employers to avoid labor laws such as a minimum wage. [nyt]

A new working paper by Harvard economists Nathaniel Hendren and Benjamin Sprung-Keyser analyzed U.S. social safety net programs and found that programs that invested in children’s health and education had a net return on taxpayer dollars because they increased their future earnings and therefore how much they paid in taxes. [wsj]

Friday figure

Figure is from Equitable Growth’s “The intersectional wage gaps faced by Latina women in the United States” by Kate Bahn and Will McGrew.

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Brad DeLong: Worthy reads on equitable growth, July 19–25, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

 

  1. New and well worth reading from Lisa Cook and Jan Gerson, “The Implications of U.S. Gender and Racial Disparities in Income and Wealth Inequality at Each Stage Of The Innovation Process,” in which they write: “Women and underrepresented minorities in the United States have obtained an increasing share of bachelor’s degrees and other advanced degrees in … STEM … Yet there has been no similar increase in patenting … Closing this gender and racial gap in the U.S. innovation process could increase U.S. Gross Domestic Product per capita by 2.7 percent.”
  2. Heather Boushey via Twitter directs us to Sarah Miller, Sean Altekruse, Norman Johnson, and Laura R. Wherry, “Medicaid and Mortality: New Evidence from Linked Survey and Administrative Data,” in which they write: “Changes in mortality for near-elderly adults in states with and without Affordable Care Act Medicaid expansions. We identify adults most likely to benefit using survey information on socioeconomic and citizenship status, and public program participation. We find a 0.13 percentage point decline in annual mortality, a 9.3 percent reduction over the sample mean, associated with Medicaid expansion for this population. The effect is driven by a reduction in disease-related deaths and grows over time. We find no evidence of differential pre-treatment trends in outcomes and no effects among placebo groups.”
  3. Almost always, there is very little news in the daily or even monthly macroeconomic data flow. Pay attention to broader trends, not to the financial news cycle. Read my “July 19, 2019: Weekly Forecasting Update,” in which I write: “We are where we were a year ago: Stable growth at 2 percent per year with no signs of rising inflation or a rising labor share. The only significant difference is that the Fed has recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain, and has now recognized that its confidence over the past six years that we were close to full employment was simply wrong … Specifically, it is still the case that: (1) the Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America; (2) but it has been a success in making the rich richer and thus America more unequal; (3) it delivered a short-term demand-side Keynesian fiscal stimulus to growth that has now ebbed; and (4) U.S. potential economic growth continues to be around 2 percent per year.”

Worthy reads not from Equitable Growth:

 

  1. I never understood why so many people were desperate to interpret financial crises as things that destroyed firms’ abilities to produce rather than things that made people want to hoard their cash. Yes, a numbers of firms are short of cash and need trade credit. But most healthy firms do not. Read Felipe Benguria and Alan M. Taylor, “After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade,” in which they write: “Are financial crises a negative shock to demand or a negative shock to supply? … Arguments for monetary and fiscal stimulus usually interpret such events as demand-side shortfalls. Conversely, arguments for tax cuts and structural reform often proceed from supply-side frictions … Household deleveraging shocks are mainly demand shocks, contract imports, leave exports largely unchanged, and depreciate the real exchange rate. Firm deleveraging shocks are mainly supply shocks, contract exports, leave imports largely unchanged, and appreciate the real exchange rate … After a financial crisis event we find the dominant pattern to be that imports contract, exports hold steady or even rise, and the real exchange rate depreciates … Financial crises are very clearly a negative shock to demand.”
  2. There are 260,000 people in Buncombe County, NC, encompassing Asheville, NC. That is 60,000 households, of which perhaps 40 are in the nationwide top 0.1 percent with an income of $1.6 million a year or more. That is, I am told, the range in which one should perhaps start thinking about whether one wants an 8,000 square-foot house as one of one’s items of conspicuous consumption. And such things sell slowly. So, the thing that amazes me is not that the inventory of houses priced at more than $2 million in Asheville is twice the annual turnover, but that 16 houses sold in that price range in greater Asheville last year. It’s an index of plutocracy. Read Candace Taylor, “A Growing Problem in Real Estate: Too Many Too Big Houses,” in which she writes: “Elaborate, five or six-bedroom houses in warm climates, fueled in part by the easy credit of the real estate boom. Many baby boomers poured millions into these spacious homes, planning to live out their golden years … Now … [they are] discovering that these … no longer fit their needs as they grow older, but younger people aren’t buying them … The problem is especially acute in areas with large clusters of retirees. In North Carolina’s Buncombe County, which draws retirees with its mild climate and Blue Ridge Mountain scenery, there are 34 homes priced over $2 million on the market, but only 16 sold in that price range in the past year.”
  3. In the modern world, it is not tariff reduction but regulatory harmonization that is required for grasping increased benefits from the world division of labor. We need to work to level up rather than level down or level stupid, but we need to work to level the regulatory landscape. The Brexit hope is for a free-trade zone with the United States but also with “national sovereignty” over regulatory matters. That is just not how it works. Read N. Piers Ludlow, “Did We Ever Really Understand How the EU Works?,” in which he writes: “The EU is always prone to support an insider in a tussle with an outsider … the idea that the strength of Britain’s bargaining position in the negotiations springs from the commercial interest of many continental exporters in keeping access to the lucrative UK market … overlooks the extent to which all of the EU27 regard a flourishing EU as even more valuable than the British market, whether economically or politically.”

 

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How and why innovation in the United States must diversify

Posted on by Maria Monroe

Women and disadvantaged minorities in the United States have long been underrepresented in the field of innovation. Economist Lisa Cook at Michigan State University (who is also a Washington Center for Equitable Growth Research Advisory Board member) and her Michigan University co-author Jane Gerson recently examined the causes and effects of this underrepresentation on the U.S. economy. Their research is especially important in explaining why the educational gains by women and people of color in STEM fields, or science, technology, engineering, and math, since the 1960s have failed to translate into a larger share of patents for female and minority inventors.

Specifically, women and ethnic and racial minorities face obstacles at each stage of the innovation pipeline:

  • In education and training, a lack of role models at an early age, the prevalence of discriminatory stereotypes and cultural norms, and an absence of peer support for female and minority students together explain the abysmal diversity numbers in STEM fields such as physics, computer science, and engineering.
  • In the practice of invention, women, black, and Hispanic inventors face discrimination in the form of noticeably lower employment rates and earnings vis-à-vis similarly qualified white men.
  • Finally, in the commercialization of invention, women and people of color are heavily underrepresented in venture capital, and female and minority inventors receive a miniscule fraction of the capital afforded to their white male peers.

In addition to explaining how these barriers hold back the careers of women and people of color, Cook and Gerson point to at least three empirical economics studies that document the benefits of increased racial and gender diversity to innovation and growth in the economy as a whole:

  1. Cook and Thammasat University economist Chaleampong Kongcharoen find that co-ed patent teams are more productive in commercialization than single-gender teams.
  2. Economists Chang-Tai Hsieh and Erik Hurst at the University of Chicago and Charles Jones and Peter Klenow at Stanford University estimate that the increasing representation of women and minorities in STEM and other professions explains approximately one-quarter of the total increase in aggregate economic output per worker since 1960.
  3. Similarly, Rutgers University economist Jennifer Hunt, along with her co-authors Jean-Philippe Garant at the University of Toronto, Hannah Herman at the Federal Reserve Bank of New York, and David Munroe at Columbia University, calculate that closing the gender gap in product design, development, and engineering jobs that exists today could boost U.S. Gross Domestic Product by 2.7 percent.

There are a series of evidence-backed methods that Cook and Gerson argue would increase the representation of women and people of color throughout the field of invention. These efforts include:

  • Mentorship programs that provide role models and support networks for underrepresented students, such as the American Economic Association’s summer program
  • Efforts to encourage innovation at a young age, such as the creation of innovation-oriented kids’ spaces such as the Spark Lab at the Smithsonian Institution, and the recruitment of underrepresented minorities and girls for participation in these activities
  • Blind patent reviews that reduce the influence of implicit biases and stereotypes
  • Expansion of the authority of the Equal Employment Opportunity Commission and other government agencies in fighting pay disparities, hostile workplace cultures, and occupational segregation

As I noted in a previous blog post for Equitable Growth, empirical work by Harvard University economics Ph.D. candidate and Equitable Growth grantee Alex Bell and his co-authors indicates that efforts such as these that seek to bring “missing Marie Curies” and “missing Katherine Johnsons” into the field of invention are some of the most effective steps policymakers can take to boost aggregate levels of innovation in the economy.

Posted in Uncategorized

The implications of U.S. gender and racial disparities in income and wealth inequality at each stage of the innovation process

Posted on by David Evans

Overview

Since the 1960s, both women and underrepresented minorities in the United States have obtained an increasing share of bachelor’s degrees and other advanced degrees in fields most associated with invention—the so-called STEM fields of science, technology, engineering, and math. Yet there has been no similar increase in patenting activity among these groups.1

Download File
The implications of U.S. gender and racial disparities in income and wealth inequality at each stage of the innovation process

The reasons are multiple and varied, but the core problem is the continued discrimination experienced by disadvantaged minorities and women at every stage of the innovation process, from childhood and youth exposure and mentoring in the STEM fields to postsecondary educational barriers to advancement, and from discriminatory denials of patent applications to the lack of opportunity to participate in the development of patentable ideas in the technology workplace. Closing this gender and racial gap in the U.S. innovation process could increase U.S. Gross Domestic Product per capita by 2.7 percent.

This issue brief examines these problems faced by disadvantaged minorities and women across the arc of the innovation curve in U.S. society and the economy. The research in this area is only just beginning to bear substantial fruit, but the findings to date are encouraging ones for providing the evidence needed to support policy proposals to rectify the problems. The brief then closes with several proposed policy recommendations, among them better mentoring of students at all levels of education, better opportunities for advancement in academia and in patent recognition, and decisive action against gender and racial discrimination in the workplace.

The problem

The costs of misallocating talent in the U.S. economy are increasingly evident in the economics literature. In their 2013 paper “Why Don’t Women Patent,” economists Jennifer Hunt at Rutgers University, Jean-Phillippe Garant and Hannah Herman at McGill University, and David Munroe at Columbia University calculate the cost to GDP of not including more women and African Americans in STEM education. They show the gender gap among science and engineering degree-holders is due primarily to women’s underrepresentation in patent-intensive fields and patent-intensive job tasks. They also show that women with a degree in science and engineering accrue patents little more than women with other degrees, meaning that an increase in the share of women with science and engineering degrees will not substantially close this gender gap. They find that women’s underrepresentation in engineering and in jobs involving development and design explain much of the patent gap. Closing this gap could increase U.S. GDP per capita by 2.7 percent.2 One of the authors of this issue brief, Lisa D. Cook, and Yanyan Yang of the University of Massachusetts Boston came to similar conclusions concerning women and African Americans in their 2018 paper “Missing Women and African Americans, Innovation, and Economic Growth.”3

In their 2018 research paper “The Allocation of Talent and U.S. Economic Growth,” economists Chang-Tai Hsieh and Erik Hurst at the University of Chicago’s Booth School of Business and Charles I. Jones and Peter Klenow at Stanford University analyze the gender and racial distribution for highly skilled occupations over the past 50 years.4 They show the change in the occupational distribution since 1960 suggests that a substantial pool of innately talented women and African Americans in 1960 were not pursuing their comparative advantage, and this misallocation of talent affects aggregate productivity in the economy. They find one-quarter of growth in aggregate output from 1960 to 2010 can be explained by an improved allocation of talent.

Whatever the source of disparity, these gender and racial disparities exist at each stage of the innovation process, from education to training, and from the practice of invention to the commercialization of invention, and can be costly to the U.S. economy. These disparities can also lead to increased income and wealth inequalities at each stage for those who would otherwise participate in the innovation economy. Let’s look at each stage to assess this problem in further detail.

Education and training

In the early stages of postsecondary education and training in STEM fields, women and underrepresented minorities lag in participation in nearly each STEM field. This is first evident in the awarding of bachelor’s degrees. Even though a higher proportion of total degrees were awarded to women in 2014, women were awarded only 35 percent of the degrees in STEM fields. For advanced degrees, women outnumber men in some STEM fields. In 2016, women received 53 percent of the doctoral degrees in biological science and 71 percent of doctoral degrees in psychology. In other STEM fields, they are barely present. In 2016, women received 23 percent of doctoral degrees in engineering, 17 percent to 18 percent of those in computer science and physics.5

The recent literature on the gender and racial gaps related to participation in STEM fields attempts to identify the factors affecting these differences. In “The Math Gender Gap: The Role of Culture,” Natalia Nollenberger at the Instituto de Empress SL, Nuria Rodríguez-Planas at the City University of New York, and Almundena Sevilla at Univeristy College London analyze the math test scores of the children of immigrants to the United States.6 They find that immigrant girls whose parents come from more gender-equal countries perform better than those whose parents come from less gender-equal countries, showing the transmission of cultural beliefs on the role of women in society contributes to the math gender gap.

Economists Alexander Bell and Raj Chetty at Harvard University, Xavier Jaravel at the London School of Economics, Neviana Petkova at the U.S. Department of the Treasury, and John Van Reenen at the Massachusetts Institute of Technology present evidence in their 2019 paper “Who Becomes an Inventor in America? The Importance of Exposure to Innovation” that suggests that gender and race gaps in children’s chances of becoming an inventor in the United States may be primarily driven by differences in environment. They show that exposure to innovation as a child has a significant causal effect on whether the child becomes an inventor.7 The five co-authors suggest there are many “lost Einsteins” resulting from this lack of exposure to innovation in childhood.

Other recent papers attempt to identify other salient factors and outcomes associated with gender and racial differences in STEM participation, among them the impact of social norms and gender stereotypes, as well as professors’ gender, on test scores and college majors. In their 2018 paper “Nevertheless She Persisted? Peer Effects in Doctoral STEM Programs,” economists Valerie Bostwick and Bruce Weinberg at The Ohio State University focus on gender peer effects and attrition among women in STEM doctoral programs.8 They show that gender peer effects are the largest in programs that are typically male-dominated, finding that women entering cohorts with no female peers are less likely to graduate within 6 years and also more likely to leave after the first year of a Ph.D. program.

Other recent social science literature focuses on factors affecting participation in STEM education beyond the STEM doctoral pipeline in the form of supply constraints. For instance, Indiana University’s Elizabeth Canning, Katherine Muenks, Dorainne Green, and Mary Murphy show in their new paper that STEM faculty who believe ability is fixed are associated with higher racial achievement gaps among their students.9

The practice of invention

STEM occupations have higher wages and stronger job growth than non-STEM occupations in the United States. The national average wage for all STEM occupations was $87,570, compared to the national average wage for non-STEM occupations of $45,700. Employment in STEM occupations grew by 10.5 percent between May 2009 and May 2015, compared to 5.2 percent in non-STEM occupations.10

In the process of practicing invention and creating new knowledge or products, women and African Americans not only engage at generally lower rates than their counterparts but also earn less and are employed less than their counterparts. In 2015, the median salary for African Americans was only 79 percent of that for whites. While the median salary for men in the innovation economy in 2015 was $87,000, it was $62,000 for women, which was 71 percent of the median male salary.11 Among scientists and engineers, African American unemployment in 2017 was 4.3 percent, compared to 2.1 percent for whites.12

While U.S. employment rates are increasing among women and underrepresented minority scientists and engineers, unemployment rates vary significantly by gender and racial and ethnic group. The unemployment rate for African American women is higher than the unemployment rate for all scientists and engineers, is nearly double that of all scientists and engineers, and is more than double that of white women scientists and engineers. Unemployment for underrepresented minority men, at just above 4 percent, is higher than for white and Asian men and higher than the average for all scientists and engineers.13

The literature on gender and racial differences in the inventive process has evolved similar to the literature on STEM participation. The older literature focused on identifying the gaps, while the newer literature focuses on sources or correlates and outcomes. A few papers in the past decade have focused on the misallocation of talent among inventors and other high-skilled workers. One of the authors of this issue brief, Lisa Cook, and her co-author at Michigan State University, Chaleampong Kongcharoen, found that co-ed patent teams are more productive (at commercialization) than single-sex male or single-sex female patent teams.14

Similarly, in “Why Don’t Women Patent,” Rutgers’ Hunt and her co-authors investigate the gender gap for commercialized patents. Using the 2003 National Survey of College Graduates, they show the gender gap among science and engineering degree holders is due primarily to women’s underrepresentation in patent-intensive fields and patent-intensive job tasks.15 They also show that women with a degree in science and engineering file patents little more than women with other degrees, meaning that an increase in the share of women with science and engineering degrees will not substantially close this gender gap. They conclude that women’s underrepresentation in engineering and in jobs involving development and design explain much of the patent gap.

Closing this gap could increase U.S. GDP per capita by 2.7 percent.16 Research by Cook and Yang executes a similar exercise using more recent data, finding that GDP per capita would be 0.6 percent to 4.4 percent higher if more women and African Americans received STEM training and worked in related jobs.17

Commercialization of invention

In the final stage of commercializing invention, outcomes are starkly different. This is the stage where incomes can be high, and wealth generated can be substantial. This is immediately apparent when considering the prominence of tech firms in the most valuable public firms and the relative size of these firms. The trillion-dollar valuations of some tech firms—among them Amazon.com Inc., Apple, Inc., and Alphabet Inc.’s Google unit—put them roughly on par with the Gross National Product of the Netherlands, Mexico, or Australia.18 Five of the top 10 wealthiest people in the world derive their wealth primarily from the innovation economy, according to Forbes’ global wealth rankings.19 And nine technology firms with initial public offerings in the United States last year were valued at roughly $37.5 billion, with the most valuable one, Snap Inc., valued at more than $20 billion.20

The number of tech billionaires also is growing. Daniel Ek, the 35-year-old co-founder and CEO of music streaming company Spotify Technology S.A. taught himself to write code in his early teens and started his first business when he was 14. In April 2018, when Spotify went public, the Swede became the tech industry’s newest billionaire. On the close of the first day of trading, the company was valued at more than $26 billion, with Ek’s share worth nearly $2.5 billion.21 Tech entrepreneurs continue to dominate the list of the world’s billionaires. In the first half of 2018, 11 new tech entrepreneurs became billionaires when companies they founded went public, were acquired, or had new funding.22

This is also the stage of the innovation process where the outcomes are most unequal by gender and race. Women are only 8 percent of new hires at venture capital firms.23 Female CEOs receive only 2.7 percent of all venture funding, while women of color get virtually none: 0.2 percent.24 Women and African Americans are often found in legal and marketing departments but are largely missing in technical positions and among executives and boards.

In 2014, Fortune ranked several large tech firms based on recently released demographic data. With respect to women executives, one firm was ranked highest, with women constituting 43 percent of leadership roles, and two firms were ranked lowest, with women filling 19 percent of these roles. Women constituted just 18.7 percent of boards of companies in the Standard & Poors 500 in 2014, which was up from 16.3 percent in 2011. In 2015, 11 percent of venture capitalists were women, and 2 percent were African American.25

This is the stage where gender and racial gaps have been covered the least in the academic literature. Cook and Kongchareon’s 2010 research and Cook and Yang’s 2018 paper include systematic analyses of commercialization of invention by race and gender, but, case studies in the business literature notwithstanding, this is typically not the focus of academic inquiry.

Policy efforts underway

The potential losses to individuals and to the U.S. economy as a whole due to these gender and racial gaps in the innovative process will not close any time soon. The patent gap, for example, is estimated to close only by 2092.26 Not surprisingly, then, economists and policymakers are increasingly expressing concern about improving the participation of women and underrepresented minorities in the innovation economy.

In the current session of Congress, the SUCCESS Act was introduced in the House of Representatives (H.R.6758) by Rep. Steve Chabot (R-OH) and the Senate by unanimous consent and became law after President Donald Trump signed it into law on October 31, 2018.27 The objective of the bill is to obtain information from the U.S. Patent and Trademark Office about the ability of the agency to measure the dimensions of this patenting problem and figure out how best to identify women and underrepresented minorities in the data. In February 2019, the Patent Office released a report on the history and status of women receiving patents. Over the past few decades, the share of patent inventors who are women has increased, yet key differences between female and male inventors persist.28

In 2019, a new companion bill, the Inventor Equality and Diversity Act of 2019, is being proposed by the House Subcommittee on Courts, Intellectual Property, and the Internet of the House Committee on the Judiciary. This bill would provide mechanisms to collect demographic data during the patent application process. These data would be collected separately from other data related to the patent application and would be voluntarily submitted to the U.S. Patent and Trademark Office.

If this bill passes, then its provisions would go a long way to improve how inventors are identified in the data. Currently, algorithms identify demographic characteristics based on probabilities, while the current bill would obtain more reliable and consistent data. Having better data could aid researchers in doing such analysis and aid economic policymakers in improving the living standards of all Americans.

Apart from comprehensive data collection by an independent federal agency, further efforts are needed to make the innovation economy inclusive. Such issues include mentoring, exposure to invention, blind patent review, and workplace climate. We briefly look at each of these features in turn below.

Mentoring

Mentoring has been broadly suggested as one tool to address the gender and race gap in STEM careers. As aforementioned, Harvard’s Chetty and his co-authors show that the income, race, and gender gap in invention is primarily due to environmental barriers in acquiring human capital, including a lack of mentoring and exposure to careers in science and innovation in childhood, and not due to differences in ability.29

The American Economic Association launched a summer boot camp program in the 1970s to increase racial and ethnic diversity in the economics profession. Mentoring is a key component of this program. A 2014 research paper estimated the effectiveness of the AEA’s summer program, finding that program participants were more than 40 percentage points more likely to apply to and attend a Ph.D. program in economics, 26 percentage points more likely to complete a Ph.D., and about 15 percentage points more likely to work in an economics-related academic job.30 According to these estimates, the summer program may directly account for 17 percent to 21 percent of the Ph.D.s awarded to minorities in economics over the past 20 years.

The effectiveness of mentoring is recognized beyond academic papers and university programs, with programs designed to make a difference. US2020, an organization focused on programming that supports underserved and underrepresented primary and secondary school-age students, has a mission of changing the trajectory of STEM education in the United States by dramatically scaling the number of STEM professionals engaged in high-quality STEM mentoring with youth. US2020 is building a community of companies, organizations, schools, government agencies, and cities to participate in mentoring, encouraging our society to imagine 1 million science, technology, engineering, and math professionals mentoring students in Kindergarten through graduate school.31

Encouraging invention at an early age

Exposing children to invention and innovation is becoming more recognized method of increasing participation. Just one case in point is Spark Lab at the Lemelson Center for Invention and Innovation at the Smithsonian Institution, which provides an activity space that allows children to create an invention and to help them think about making the invention useful.32 Targeting low-income, underrepresented minorities, and female children for such activities is recommended by authors Chetty and his co-authors, among others.

Blind patent review

A recent paper in Nature finds that, all else being equal, patent applications with women as lead inventors are rejected more often than those with men as lead inventors.33 An easy fix would be for the U.S. Patent and Trademark Office to engage in the blind review of patent applications by patent examiners. Research by Princeton University economist Cecilia Rouse and Harvard University economist Claudia Goldin has demonstrated the success of blind reviews in increasing the representation of women in the context of symphony orchestras.34

Workplace climate

Workplace issues for women and minorities go beyond the opportunity to participate in invention and innovation. Other issues have been brought into stark relief by recent events related to workplace climate, such as recent protests and discussions at Google and at Microsoft Corp. over an array of discrimination complaints. Among the issues identified in the case of these two firms—ones that have been reported about in similar workplaces elsewhere in U.S. technology industries—is the lack of transparency when dealing with these complaints (including forced arbitration for sexual harassment claims), discriminatory workplace cultures, and pay and promotion inequality.35

Most patented invention occurs at firms. Therefore, at public companies, shareholders and the boards of directors need to hold CEOs more accountable for the workplace climate at their firms. The shareholders and boards of private companies should do the same. Congress could also play a role in bolstering the ability of the federal Equal Employment Opportunity Commission to investigate such complaints and help to minimize the frequency and intensity of hostile workplaces for women and underrepresented minorities.

About the authors

Lisa D. Cook is an associate professor in the Department of Economics and in International Relations at James Madison College at Michigan State University. She is a member of the Washington Center for Equitable Growth’s Research Advisory Board.

Janet Gerson is a lecturer emerita of economics at the College of Literature, Science and the Arts at the University of Michigan.

Posted in Uncategorized

Perceived fiscal space and the case for automatic stabilizers

Posted on by Ed Paisley

Why do policymakers around the world often place limits—often ill-advised ones—on their fiscal responses to financial crises? Do they act because of economic concerns about deficits and debt, or are they reacting to politics and ideology? A new working paper (and an accompanying digest here) from husband-and-wife academic duo Christina and David Romer at the University of California, Berkeley suggests that it is mainly policymakers’ perceptions of debt and budgetary constraints and their ideas about the proper role of government that limit policymakers’ stimulus spending in such downturns.

Even prior to conducting this research, Christina Romer had an insider’s knowledge of this problem. She started advising President-elect Barack Obama during the 2008 transition, when the new administration’s response to the Great Recession of 2007–2009 was being crafted, and became chair of the Council of Economic Advisors in 2009. She famously argued inside the White House for a larger stimulus than what the administration ultimately proposed. Then-National Economic Council Director Lawrence Summers dismissed Romer’s proposals for $1.8 trillion, and then $1.2 trillion, in stimulus as too politically untenable even to present to the president.

Most economists now agree that the roughly $800 billion stimulus bill passed by Congress in 2009 was too small to fully counter the magnitude of the worst recession since the Great Depression.

The Romers’ new paper is not based on Christina Romer’s anecdotal experience, but rather looks at financial crises (defined as recessions that are caused by paralysis in the financial system) in 30 developed economies over the past four decades. They use statistical and narrative evidence to chart the relationship between “fiscal space” (as measured by the country’s precrisis debt-to-Gross Domestic Product ratio), the fiscal response (as determined by the tax and spending changes policymakers enacted in response), and how bad the recession turned out to be (how much economic output was lost). It is an extension of previous work by the couple that contained similar analysis, but this new paper adds several more recent examples, bringing the number of severe financial crises studied to 22.

This question is important to federal policymakers in Washington because an economic recession is inevitable, even though few economists are predicting a repeat of the 2008 financial crisis anytime soon. The Romers’ paper also is timely because when the next U.S. recession does hit, the Federal Reserve’s policy options will be limited by today’s historically low interest rates, which have held throughout the expansion. (See Figure 1.)

Figure 1

U.S. interest rates fall lower and lower after each recent recession

Actual and projected federal funds rate, 1987–2023

Source: Federal Open Market Committee (FOMC) projections 2019, Board of Governors of the Federal Reserve System 1987-2019, authors’ calculations.
Note: The arrows and corresponding values represent the differences in peak to trough for the federal funds rate. Shaded bars denote a recession. The dotted line represents the FOMC’s March 2019 projections for the federal funds rate.

If a recession were to occur in the United States today, the Federal Reserve would not be able to substantially lower interest rates—the traditional way central banks infuse cheap credit into the economy. This will leave a larger onus on the U.S. Congress to stimulate demand with spending increases and tax cuts.

The Romers find, consistent with their and others’ previous work, that countries carrying more sovereign debt as a fraction of total output—their debt-to-GDP ratio—tend to implement less expansionary fiscal policies during a crisis and thus have a tougher time getting out of their economic hole. (See Figure 2.)

Figure 2

The Romers’ new paper goes beyond those previous studies to look at why this is so. The most obvious potential answer they provide is that higher debt could be reducing access to credit. Countries finance deficit spending by selling bonds, and if bond buyers grow concerned about a country’s ability to repay its debts, then they’ll demand higher risk premiums (in the form of higher interest payments) or will simply refuse to take the risk at all. This is clearly a serious constraint for some countries—think Greece in 2009.

But this is not what the Romers find overall. Even when controlling for interest rates on their debt and other indicators of bond market access, they find that countries with high debt-to-GDP ratios undertake less fiscal expansion after a crisis. So, the cost of credit or access to credit are not the cause.

The better explanation, according to the two authors, is what they call “policymaker choice.” It is policymakers’ views about the desirability of fiscal expansion or austerity that are directly related to debt-to-GDP ratios. Policymakers here include European Union and International Monetary Fund officials, who often exert influence on in-country policymakers through EU rules and IMF bailout conditions. So, for countries with low debt-to-GDP ratios, policymakers are more likely to view a rescue of the financial sector or countercyclical stimulus favorably, and for countries with high debt loads, policymakers are more likely to favor austerity, often because of either a perception that market access problems are imminent or more ideological motivations related to the appropriate size and role of government.

What lessons are there for the United States in these findings?

Given the pristine standing of U.S. government debt in global credit markets (assuming Congress raises the debt ceiling later this month), it’s unlikely that the United States will suffer from a lack of fiscal space during the next downturn. The country’s experience in 2008–2010 is instructive in this regard—even at the height of the Great Recession, when the federal government was running trillion-dollar annual deficits and the debt-to-GDP ratio jumped to 61 percent from 39 percent, demand for U.S. Treasury bonds remained strong (and thus financing that debt remained cheap).

But, as the Romers’ paper demonstrates, real fiscal space is different from perceived fiscal space, in the United States as well as other countries. After the 2010 U.S. elections, for example, Congress enacted a fiscal austerity agenda, prematurely replacing stimulus with spending cuts. This decision—probably the result of pure political calculation (newly empowered Republicans were not eager to improve President Obama’s standing with voters growing weary of the slow recovery), ideology (worry that stimulus spending would never be unwound and lead to a permanently larger government), and faulty economic thinking (an unfounded fear of debt-fueled inflation and a Greece-like fiscal crisis)—almost surely prolonged economic suffering. (See Figure 3.)

Figure 3

Lack of sustained economic stimulus stifled a robust U.S. economic recovery after the Great Recession

Impact of automatic and discretionary stimulus spending in the United States, 1980–2018


Source: Authors’ calculations, see online appendix A for more details on FIM.
Notes: Data show the four-quarter moving average of each FIM component.

The authors offer two ways to combat the risk of policymakers making this error of limiting government stimulus spending amid a recession and early recovery. First, countries should maintain their debt ratios at manageable levels during periods of economic growth, so that they are not tempted to respond to future downturns with austerity measures. Second, policymakers—including those who write EU and IMF rules—should become more open to the idea of aggressive fiscal policy even in the face of high debt levels.

One promising approach that the authors do not consider is for federal policymakers to decide now what countercyclical fiscal policies should kick in when the U.S. economy stumbles. Dubbed “automatic stabilizers” by economists, these policies are attractive because they ensure a timely, temporary, and targeted response to the next recession, no matter who is in power or what direction the political winds are blowing.

The United States already has many automatic stabilizers—unemployment insurance is the canonical example—but there are lots of good ideas for improvements, many of which you can find in a book the Washington Center for Equitable Growth co-published with The Brookings Institution’s Hamilton Project in May. The book’s proposals are informed by recent academic evidence on:

  • Which fiscal policies have the largest multiplier effects on the U.S. economy
  • How best to package assistance to the 50 states and the District of Columbia
  • How to design the program triggers so that stimulus arrives exactly when it’s needed

Since those triggers also ensure stimulus is removed, or even reversed, when the economy is fully back on track, automatic stabilizers are also fiscally responsible—signaling to bond markets that any spike in federal deficits is temporary. And, on a practical level, it’s easier to carefully design policies now, when the economic sun is shining, than during an economic storm.

When the next U.S. recession hits, count on at least some policymakers claiming that the country’s budget is too out of balance and its debt-to-GDP ratio, which today stands at 78 percent, is too high to allow for fiscal stimulus. The ensuing political debate probably will be divorced from economic evidence and hamstrung by political finger-pointing. As Christina and David Romer demonstrate, federal policymakers will likely make suboptimal choices as a result. Is it possible that policymakers, foreseeing this prospect, might act now to head it off? Nobody should hold their breath, but when the next recession inevitably comes, policymakers—and the country as a whole—will be wishing they had.

 

 

Weekend reading: “Buy local” edition

Posted on by Ed Paisley

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Equitable Growth Director of Competition Michael Kades published a piece on the antitrust issues raised by the “Big Four” technology companies (Amazon.com Inc., Apple Inc., Facebook.com Inc., and Alphabet Inc.’s Google unit) whose representatives testified on Capitol Hill this week. After pointing out the negative effects of market dominance by these firms on business investment, Kades argues that policymakers should focus on reducing barriers to entry in these internet markets.

In an addition to our working paper series, Stanford University economists Petra Persson and Maya Rossin-Slater investigate the effects of increased parental leave for fathers on health outcomes for mothers. They find that increased temporal flexibility for fathers reduces the risk of postpartum and mental health difficulties for mothers. The authors conclude that mothers thus often bear the burden for a lack of workplace flexibility.

Equitable Growth Research Assistant Raksha Kopparam wrote a piece this week to celebrate the U.S Women’s National Team’s victory in the World Cup and discuss their case for pay equity. Given that the women’s team has a better record and produces more revenue than the men’s team, Kopparam argues that their situation is similar to those of many other women whose work is devalued, and she offers some policy recommendations for closing these unjustified pay gaps.

Academic Programs Director Korin Davis announced the launch of our new working paper digest, a quarterly email summarizing key insight from papers in our working paper series. The four papers featured in the first edition cover topics ranging from the social safety net in rural areas to the effects of disability programs on financial distress.

In his weekly “Worthy Reads” column, University of California, Berkeley economist and Equitable Growth columnist Brad Delong highlighted recent research and writing in economics from Equitable Growth and other economists. This week, Brad redirects readers to economist Fiona Scott Morton’s literature review for Equitable Growth on cutting-edge research in the economics of antitrust and competition, and he provides his take on recent debates on President Trump’s nominations to the Federal Reserve Board.

Finally, in a working paper released yesterday, University of Chicago economists Thibaut Lamadon, Magne Mogstad, and Bradley Setzler empirically test the relationship between compensating differentials for workplace conditions and declining competition in U.S. labor markets. Using their data to propose a model of the labor market with two-sided heterogeneity, the authors offer some policy recommendations to achieve more efficient and equitable outcomes for workers.

Links from around the web

Nathaniel Meyersohn reports for CNN on recent local efforts to restrict the growth of Dollar General and Dollar Tree stores in communities across the country. In addition to boxing out locally owned small businesses, these stores are often clustered in low-income areas, thereby preventing the arrival of supermarkets that sell healthier and higher quality food products. [cnn]

Zach Shrivers interviews local retailers in West Virginia on Amazon.com Inc.’s Prime Day to see how they are dealing with competition from the massive online retailer. The small business owners emphasize that local communities suffer from Amazon’s market dominance because this multinational corporation doesn’t invest in communities to nearly the same extent as traditional small businesses. [wtap]

Claire Kelloway summarizes the findings of a recent report by the Institute for Local Self-Reliance on Walmart Inc.’s effects of the economics of food in the United States. In particular, Walmart leverages its dominant market position and its links with financial firms to force the closure of local retailers by selling stores in targeted communities at a loss. To make up for this, Walmart forces lower prices on farmers and other suppliers—often dependent on the retail giant for sales. [civil eats]

Todd Shields reports for Bloomberg on a recent win by small telephone service providers at the Federal Communications Commission. In May 2018, large telecom companies attempted to get the FCC to remove limits on what they can charge small carriers for accessing their networks. S0 far this year, however, the FCC has sided with the small carriers given the risk that large providers could hike prices to drive smaller competitors out of the market to the detriment of consumers. [bloomberg]

Friday figure

Figure is from Equitable Growth’s “Modern U.S. antitrust theory and evidence amid rising concerns of market power and its effects” by Dr. Fiona Scott Morton.

Brad DeLong: Worthy reads on equitable growth, July 12–18, 2019

Posted on by Ed Paisley

Worthy reads from Equitable Growth:

 

  1. The most important worthy read this week is Fiona Scott Morton’s “Modern U.S. Antitrust Theory and Evidence Amid Rising Concerns Of Market Power and Its Effects: An Overview Of Recent Academic Literature,” in which she writes: “The experiment of enforcing the antitrust laws a little bit less each year has run for 40 years, and scholars are now in a position to assess the evidence. The accompanying interactive database of research papers for the first time assembles in one place the most recent economic literature bearing on antitrust enforcement … Horizontal mergers … Vertical mergers … Exclusionary conduct … Loyalty rebates … Most Favored Nation clause … Predation … Common ownership … Monopsony power … Macroeconomics and market power.”
  2. Watch Darrick Hamilton, “Racial and Gender Wage Gaps,” from this event on Capitol Hill, “Racial and Gender Wage Gaps: Overcoming Structural Barriers to Shared Growth.”
  3. Read Korin Davis, “Equitable Growth Launches Quarterly Working Paper Digest,” in which she notes: “The Equitable Growth Working Paper Digest provides descriptions of several highlighted working papers along with analysis by our staff of why they are significant and how they fit into the framework of Equitable Growth’s efforts.”
  4. And then read Kyle Herkenhoff, “The Case for More Internships and Apprenticeships in the United States,” in which he writes: “We estimate that learning from co-workers accounts for 24 percent of the aggregate U.S. human capital stock. Roughly 40 percent of a typical worker’s human capital is accumulated on the job, and of that human capital accumulation, 60 percent comes from learning the skills of co-workers. These benefits of learning from co-workers could be increased markedly.”

Worthy reads not from Equitable Growth:

 

  1. A healthy macroeconomy continues to be the best of all labor-side policies. Two centuries of bitter experience have taught us that the macroeconomy can only stay healthy if it is planned—and properly planned. Not least among the necessary planning institutions for the macroeconomy is the central bank. And two centuries of bitter experience have taught us that the central bank has a very delicate task, one that can only be successfully accomplished if it is staffed by highly competent and good-hearted people. Here, we have the American Enterprise Institute raising the alarm with respect to the chaos-monkey nature of President Donald Trump’s Federal Reserve nominations. Read Desmond Lachlan, “Trump’s bizarre Federal Reserve nomination,” in which he writes: “Among President Trump’s more bizarre nominations for office has to be his nomination of Judy Shelton … Shelton manages to hold two contradictory views of monetary policy at the same time … Normally a person would be in favor of either an easy monetary policy to stimulate the economy or a hard monetary policy to exert discipline on the government … One would not expect her to hold both views at the same time. Yet Ms. Shelton does exactly that.”
  2. The past decade of bitter experience has taught us that monetary policy cannot do the entire job on its own: A healthy macroeconomy requires planning, and some of that planning must be on the fiscal policy side. And the evidence that expansionary fiscal policy is a very effective tool to cure a depressed economy, and cure it with minimal blowback costs of any kind, continues to mount. Read Jérémie Cohen-Setton, Egor Gornostay, and Colombe Ladreit de Lacharrière, “Aggregate Effects of Budget Stimulus: Evidence from the Large Fiscal Expansions Database,” in which they write: “This paper estimates the effects of fiscal stimulus on economic activity using a novel database on large fiscal expansions for 17 OECD countries for the period 1960–2006. The database is constructed by combining the statistical approach to identifying large shifts in fiscal policy with narrative evidence from contemporaneous policy documents. When correctly identified, large fiscal stimulus packages are found to have strong and persistent expansionary effects on economic activity, with a multiplier of 1 or above. The effects of stimulus are largest in slumps and smallest in booms.”
  3. Very wise. There is no reason for the U.S. Senate to do anything but neglect the Federal Reserve, and the Fed will be stronger at the start of 2021 if it is neglected. Read Josh Barro, “There’s No Need for the Senate to Confirm Anyone to the Fed,” in which he writes: “Trump … says he will nominate Judy Shelton and Christopher Waller to … fill out the board … Moore and Cain were bizarre … Waller seems like a fine enough choice … Shelton … like Cain and Moore before her has traded in a long track record of hawkish gold-buggery for a new, dovish outlook that calls for the low interest rates President Trump wants … Shelton’s flip-flop is, if anything, more egregious than Moore’s and Cain’s, because monetary policy is supposed to be an actual area of expertise for her … Conservatives in the Senate have reasons to take a long view … So long as Trump is the person making nominations, there’s no reason to aim for seven.”
  4. Market forces are voting, strongly, for green energy. Read Alwyn Scott, “General Electric to Scrap California Power Plant 20 Years Early,” in which he reports: “General Electric Co. said on Friday it plans to demolish a large power plant it owns in California this year after only one-third of its useful life because the plant is no longer economically viable in a state where wind and solar supply a growing share of inexpensive electricity. The 750-megawatt natural-gas-fired plant, known as the Inland Empire Energy Center, uses two of GE’s H-Class turbines, developed only in the last decade, before the company’s successor gas turbine, the flagship HA model, which uses different technology. The closure illustrates stiff competition in the deregulated energy market as cheap wind and solar supply more electricity, squeezing out fossil fuels.”