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

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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.”

 

 

Equitable Growth launches quarterly Working Paper Digest

Posted on by David Evans

The Washington Center for Equitable Growth today launched a new quarterly newsletter, the Equitable Growth Working Paper Digest, dedicated to informing readers about several of the working papers we’ve released on our website over the previous three months.

Equitable Growth’s Working Paper Series has been going strong for more than three years. We’ve released nearly 100 of these works-in-progress. They comprise a diverse, comprehensive, and ever-growing collection of original research by our grantees and other scholars highlighting the connections between inequality and economic growth. By posting this work, Equitable Growth seeks to promote broader discussion of these issues and generate feedback for the researchers from the academic community as they prepare their research for final publication. We also hope to provide a resource for policymakers who seek to develop and implement evidence-based policies on issues related to economic inequality.

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. The inaugural issue covers the following papers:

The Equitable Growth Working Paper Digest is the best way to stay informed about the working papers that Equitable Growth has published. If you wish to subscribe, please click here.

U.S. women’s national soccer team wins its fourth World Cup. Is pay equity really close behind?

Posted on by David Evans
Megan Rapinoe holds the Women’s World Cup trophy as the U.S. women’s soccer team is celebrated with a parade along the Canyon of Heroes, Wednesday, July 10, 2019, in New York.

Tens of millions of people around the world turned to their TVs earlier this month to watch the U.S. women’s national soccer team win its fourth World Cup and second consecutive championship since the 2015 tournament. After the momentous victory, spectators in the stadium began chanting “Equal Pay!”

The victory and the spontaneous chant cascading across Parc Olympique Lyonnais sparked many conversations about gender pay equity in national sports. While the women’s soccer team has won four of the eight World Cup championships, the players still earn less than 40 percent of what their male counterparts make. Not surprisingly, all 28 members of the women’s team filed a lawsuit in March against the U.S. Soccer Federation—the body that oversees both men’s and women’s soccer in the United States and manages the national teams—stating that the federation fails to adhere to its mission of gender equality. In 2016, five members of the U.S. women’s national team, three of whom are currently on the national team, filed a similar lawsuit addressing the gender pay inequality present in the federation.

In the current lawsuit, here’s how the players explained the breakdown of pay per friendly (nontournament exhibition game) victory:

A comparison of the WNT [Women’s National Team] and MNT [Men’s National Team] pay shows that if each team played 20 friendlies in a year and each team won all 20 friendlies, female WNT players would earn a maximum of $99,000 or $4,950 per game, while similarly situated male MNT players would earn an average of $263,320 or $13,166 per game against the various levels of competition they would face. A 20-game winning top tier WNT player would earn only 38% of the compensation of a similarly situated MNT player.

This data belies the views of many critics who believe the women’s team does not deserve equal pay, and who often cite metric differences such as wins, viewership, and revenue as justification for the women’s current salaries. Yet a simple glance at these metrics over the past few seasons reveals that the women have surpassed the thresholds established by the men on multiple occasions. Since the inaugural women’s World Cup competition in 1991, the U.S. women’s team has won half of all the championships, and earned third place three times and second place once. In comparison, the highest the U.S. men’s team has ranked was during the inaugural FIFA World Cup in 1930, where it placed third in the competition.

Earlier this month, the women’s final game was viewed by 17.8 million people around the world on Fox Sports across multiple platforms, a solid 18 percent increase in viewership from the men’s World Cup final in 2018. The 2015 women’s World Cup final game still holds the record for most-watched soccer match in history. Between 2016 and 2018, the women’s national team brought in $50.8 million in revenue from games and events alone, while the men’s team generated $49.9 million. Outside of viewership data, athletics gear companies such as Nike, Inc. announced that the U.S. women’s team jersey is the highest-selling soccer jersey in history, including jerseys on the men’s team.

The revenue gap between the men’s and women’s team continues to narrow, yet the pay gap persists. Pay equity in sports reflects the larger reality that women generate significant economic activity but are often not paid equal to the value they create. Women today earn an average of 80.5 percent of what men earn for full-time, year-round workers. Across the U.S. labor market, factors such as experience, race, and choice of occupation and education all contribute to explanations about pay disparities. Within the same profession, such as professional athletes, regardless of race and education, women continue to earn less than men. Critics of equal pay in sports often say that women don’t perform at the same caliber of men, yet the case of soccer makes it clear that even when it’s undeniable that women outperform men, staggering differences in their pay remain.

Research across the social sciences demonstrate that pay is determined by more than simple economics models of human capital and marginal revenue productivity, where it’s predicted that workers will earn exactly equal to the revenue they contribute to the production process. Discrimination in pay is rampant, particular for women of color. Social forces influence what is considered appropriate pay for women and men, with research showing that the gender associated with a profession influences average levels of pay regardless of skills required, so historically pay has declined as more women enter a profession. The reverse is true for men entering a profession. In sum, overt and structural sexism play a role, and reversing gender pay disparity will result in broadly shared growth across the economy.

It is in the U.S. Soccer Federation’s best interest to establish gender pay equity. Establishing equal pay in sports for the women’s and men’s teams can benefit both women and men. Research examining the global fight for gender equality played a determining role in establishing women’s teams’ successes. The implementation of Title IX in college athletics in the United States has been credited for the widespread improvement of women’s soccer teams around the world and especially in the United States. Additional research on gender equality in soccer shows that countries with more gender equity across society and the economy see improvements in both teams’ performances and successes.

If the U.S. Soccer Federation institutes equal pay between the two teams, the new victories on both teams can potentially attract larger audiences and ticket sales, thus boosting revenue for the profession. Will the lawsuit by the women’s team—which is now awaiting mediation after the women’s victory tour ends—help propel this decision forward? It’s obviously difficult to predict whether the women will win pay equity in the near future, yet their undeniably thrilling victory has sparked cries of equal pay for superior work beyond the soccer community.

With allies in Congress rallying for equal pay, the women’s team victory tour around the nation now in train, and the return of many of the team members to their professional clubs, the pressure on the U.S. Soccer Federation to settle the case early will only continue to mount. Certainly an early, amicable resolution of the lawsuit would inspire more young women to pursue athletics and win, both on and off the field.

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Congressional panel investigates the market power of the ‘Big Four’ online platforms

Posted on by David Evans

Representatives from the “Big Four” online platform companies—Amazon.com Inc., Apple Inc., Facebook.com Inc., and Alphabet Inc.’s Google unit—are scheduled to testify on July 16 before the House Judiciary Committee’s antitrust subcommittee about competition in online markets, amid heightened U.S. congressional and regulatory scrutiny of increased concentration in this key digital economic arena. A second panel, composed of experts including Equitable Growth grantee Fiona Scott Morton, will provide their views on online competition.

Google, Facebook, Amazon, and Apple have faced varying degrees of growing and wide-ranging criticism about their business practices. The upcoming hearing—the second in the antitrust subcommittee’s investigation into high-tech companies—will focus on innovation and entrepreneurship.

The role that large online companies play in fostering or blocking innovation and entrepreneurship merits serious examination. A growing body of literature finds related broader trends in the U.S. economy: Some studies document the decline in business start-ups and venture capital funding in high-tech industries. This hearing will provide an opportunity to explore the causes of these trends.

Scott Morton, who is the Theodore Nierenberg Professor of Economics at Yale University, recently collated much of the recent research in this area into an interactive database and analysis for Equitable Growth. Her database includes key papers on these trends, both overall and specifically in technology industries, that members of Congress and committee staff may find helpful. Among them are:

These and many other papers can be searched for and accessed at Equitable Growth’s interactive database.

The open question is the cause of those trends. The four companies testifying operate in different ways. Google and Facebook earn revenue through advertising; they compete for people’s attention by offering services they value in order to maximize the opportunity to sell ads. Apple has a very different model: It sells products (smartphones, tablets, etc.), as well as services such as Apple Music that operate on those products, ideally giving consumers sufficient confidence in their unique qualities to purchase them. In many ways, Amazon looks more like a hybrid. It sells its own products and services (like Kindles and video streaming), similar to a traditional retailer, and also operates a marketplace that connects third-party sellers with customers, where it also competes with some of those sellers.

An issue that cuts across all four companies is whether such platforms can stifle, or are stifling, innovation and entrepreneurship. If an internet platform, having reached the top of the economic success ladder, can pull the ladder up behind it, a serious threat to competition exists. In contrast, if an internet platform’s position is tenuous and can be maintained only by providing ever-increasing value, rivals are more likely to be able to succeed. Ease of entry means there is unlikely to be a competitive problem.

Therefore, a key focus of this hearing should be what economists call “barriers to entry” and whether a platform’s growing dominance allows it to raise those barriers. Barriers to entry are costs that a new entrant faces to enter a market and compete successfully. These can be inherent in the business (such as the need to build an expensive factory) or created by the incumbent exactly to keep out the entrant (such as an exclusive contract). For an internet firm, inherent entry barriers can include the need to acquire significant data, to have access to a platform, to overcome consumers’ tendencies to focus on only the first few results of an online search or to simply accept a site’s default settings.

Recently, multiple reports have concluded not only that such barriers exist but also that a dominant platform can intentionally raise them. An expert panel, led by Equitable Growth Steering Committee member Jason Furman of the Harvard Kennedy School, produced “Unlocking digital competition” for the United Kingdom. The European Commission released “Competition Policy in the Digital Era,” and a group of scholars led by Scott Morton produced a report on digital platforms for the Stigler Center.

The common theme among these reports is that internet markets tend to be winner-take-all (also referred to as a market subject to tipping), which means that, after a period of fierce competition, one company becomes the dominant player. Competition mainly occurs in the initial phase. Of course, that “initial” competition is re-ignited when new paradigms arise and new markets open. For example, multiple companies today are working on innovation in home pods and artificial intelligence. Because competition occurs only periodically, it is critical to protect new competitors and potential competition.

As the Stigler Center report explains, once a platform wins a market, it has an incentive to make it as difficult as possible for a new challenger to arise. It can acquire potential new entrants. Or it can use its data from other services to make its product better than the entrant’s and crush the innovator before it is sustainable. Or it can condition access to its platform in ways that prevent a new company from developing into a threat. In short, the very strategy of a dominant platform would be to stifle entrepreneurship and innovation.

Skeptics of these concerns see a different competitive dynamic and argue that these concerns are transitory. At this moment, a given platform may seem unassailable and entry barriers may seem high, but the technology landscape is always in flux. IBM, Microsoft, AOL, and Yahoo all once seemed invincible, possessing monopolies with seemingly strong entry barriers, but each fell from its perch—and relatively quickly. In the skeptics’ view, today’s dominant firms can maintain their position only by continuing to offer better products and services.

The House hearing sets the stage for a debate over the necessity of increased antitrust enforcement and regulation in the technology field. By focusing on whether a dominant firm can raise entry barriers to future competition, Congress can help answer the question of how successful internet companies affect innovation and entrepreneurship.

Weekend Reading: “Equal Pay for Better Work” edition

Posted on by David Evans

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

Hourly wages among U.S. workers vary enormously by gender, race, and education level. In order to address and identify these variances, we updated our wage comparison tool, which was originally published by former Equitable Growth Research Director John Schmitt and former Analyst Kavya Vaghul, along with our Computational Social Scientist Austin Clemens. This interactive tool provides a way to see just how much wages vary within and across demographic groups. The data behind this interactive are derived from the Center for Economic and Policy Research extracts of the Current Population Survey Outgoing Rotation Group.

The Congressional Budget Office score forecasting significant job losses from a minimum wage increase relies too heavily on old research and not sufficiently on new studies. Recent research makes clear that badly needed increases in the minimum wage can produce substantial wage hikes for workers without significant job loss. This op-ed by Director of Labor Market Policy and economist Kate Bahn puts into context the anticipated CBO scoring of the minimum wage legislation currently being considered in the U.S. House of Representatives. Bahn and Research Assistant Will McGrew also compiled this factsheet, which contextualizes the CBO report in light of the cutting-edge econometric research on minimum wage increases from economists and other scholars in Equitable Growth’s network.

In light of the recent introduction of the “Raise the Wage Act,” Creative Director Dave Evans , along with former Equitable Growth economist Ben Zipperer and Research Assistant Will McGrew updated their analysis on the minimum-to-median wage ratios across states. They provide an interactive graphic that demonstrates that most states had much stronger minimum wages more than 30 years ago than they do today. They conclude that a federal $15 minimum wage would benefit a majority of the states.

Last Friday, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of June. Kate Bahn and I compiled five graphs highlighting important trends in the data.

The U.S. Bureau of Labor Statistics earlier this week released the newest data from the Job Openings and Labor Turnover Survey covering the month of May. Kate Bahn and I put together four graphs utilizing JOLTS data.

In the latest installment of Equitable Growth’s In Conversation series, Equitable Growth President and CEO Heather Boushey speaks with economist Leemore Dafny, the Bruce V. Rauner Professor of Business Administration at the Harvard Business School and the Kennedy School of Government. They discussed health insurance exchanges established under the Affordable Care Act and how antitrust enforcement in the health insurance industry can regulate mergers, preventing rising costs and limiting potential harm to consumers.

Heather Boushey dives into the role economist Arthur Laffer, who was recently awarded the Presidential Medal of Freedom, played in promoting supply-side economics. Laffer introduced the country to the idea that tax cuts would lead to such large-scale investments and economic growth that in the end, they basically would pay for themselves. However, this theory is not supported by credible research or evidence, as Boushey points out.

Austin Clemens reports that new estimates of U.S. economic growth released by the University of California, Berkeley’s Gabriel Zucman and Emmanuel Saez tell us, for the first time, how growth was distributed in the United States between wealthy and low-income households in 2015 and 2016. Low-income households in the lowest quintile of income-earners suffered an especially poor year in 2016 and saw their incomes decline by more than 3 percent as a group. While the share of total economic income held by the top 10 percent dropped slightly between 2014 and 2016, from 39.2 percent to 38.4 percent, it still maintains a disproportionately large share of economic growth.

Brad DeLong compiles his most recent worthy reads on equitable growth over the past two weeks, both from Equitable Growth staffers and outside press and academics.

Links from around the web

This month marks a record-breaking stretch of economic expansion, as the U.S. economy has experienced 121 months of continuous growth. Hispanic women between the ages of 25 and 54 saw employment rates increase by 2.2 percentage points since 2007, while African American women saw a growth of 1.6 percentage points within the same time frame. While this growth is encouraging, the aggregate growth has been concentrated among the wealthiest Americans, who happen to be white men. [nyt]

This week, the Trump administration ended its fight to add a citizenship question to the 2020 Census. Critics argued that adding such a question would result in massive underreporting among permanent residents and visa-holders, who may be fearful of ICE targeting them for their immigration status. The administration still wants to collect citizenship data and, as such, President Donald Trump issued an executive order mandating the U.S. Department of Commerce to obtain citizenship data through other means. [cnn]

This week, the Congressional Budget Office estimated that raising the federal minimum wage to $15 would lift the incomes of 27.3 million workers but eventually lead to 1.3 million lost jobs. Andrew Van Dam reports that while the CBO report headline credits a $15 minimum wage to the tremendous potential job loss, the estimates actually say that an increased minimum wage can result in a range of no major job loss up to 1.3 million jobs lost. Economic Policy Institute economist and former Equitable Growth economist Ben Zipperer said that the low-job-loss scenario indicates that raising the minimum wage may not be as dangerous as academics once thought. [wapo]

The Trump administration recently dropped their plan to limit industry rebates that pharmaceutical manufacturers give to pharmacy benefit managers, or PBMs, in Medicare. This plan would have restricted the deals made between pharma and the PBMs for Medicare and Medicaid plans, thus preventing the PBMs from taking a large profit at the expense of America’s most vulnerable patients. [wsj]

Earlier this week, a federal judge blocked a Trump administration proposal that would require pharmaceutical companies to reveal the sticker prices of their prescription drugs on TV ads if the price is above $35. Transparency of drug pricing would heavily benefit older patients, who often struggle to obtain accurate information of their medical costs. However, many drugmakers sued the Trump administration for violating their free speech rights, and in the end, the judge ruled in their favor. [npr]

Friday Figure

Source: “JOLTS Day Graphs: May 2019 Report Edition”

Brad DeLong: Worthy reads on equitable growth, July 4–11, 2019

Posted on by Ed Paisley

Worthy reads from Equitable Growth:

  1. Equitable Growth earlier this week convened an event, “Racial and Gender Wage Gaps: Overcoming Structural Barriers to Shared Growth,” that was very much worth attending. In case you missed it, you can find some highlights here. The event featured “a conversation on wage gaps for women and people of color, and what we can do about it. Wage stagnation and falling economic mobility are endemic economic problems in the United States. Their effects fall most severely on communities of color and women, who also face large wage gaps compared with white men. Key to solving wage stagnation and overall income inequality is a recognition that deeply ingrained structural forces keep many Americans from sharing in economic prosperity. This event will feature research and discussion from policy experts on the wage gaps in U.S. society.”
  2. Equitable Growth Executive Director Heather Boushey had a “fun chat” on Monday with David Beckworth about their work together on a new book, Recession Ready: Fiscal Policies to Stabilize the American Economy.
  3. Boushey also appeared in this piece by PBS Newshour, “Amid Long Economic Expansion, Why so Many Americans Are Still Struggling,” in which she explained: “We need to understand and do more to address the ways that inequality obstructs, subverts, and distorts the processes that lead to growth …. Reams of … evidence … that investments in early childhood are some of the most important … We’re not making the investments that our economic competitors are in early childhood … We’re not making those investments because we haven’t created the tax revenue to do that.”
  4. It was the philosopher Santayana who wrote that those who do not remember history are condemned to repeat it. Unfortunately, the rest of us are condemned to repeat it alongside them. Thus, it is very, very important that we stamp out those who do not remember history. How? By educating them. The piece of history we need to remember as we approach the next recession, whenever it starts, is that there never was any evidence that austerity is good or necessary during the bust. Read my “Risks of Debt: The Real Flaw in Reinhart-Rogoff,” in which I write: “Economists … don’t watch just quantities … but prices. And the prices of government debt are the rate of inflation, the nominal interest rate, and the level of the stock market as people trade bonds for commodities, bonds for cash, and bonds for stocks. And all three of these prices are flashing green: saying that markets would prefer and it would be better for the economy if government debt were growing at a faster pace than under current forecasts … The principal mistake Reinhart and Rogoff committed in their analysis and paper—indeed, the only significant mistake in the paper itself—was their use of the word ‘threshold.’”

Worthy reads not from Equitable Growth:

  1. Central banks may remain independent if they manage economies in a way that produces a modicum of stability and prosperity. If they fail to do so—if their management produces instability and poverty—I can guarantee you that they will not remain independent. Read Barry Eichengreen, “Unconventional Thinking about Unconventional Monetary Policies,” in which he writes: “Defenders of central-bank independence argue that quantitative easing should have been avoided last time and is best avoided in the future because it opens the door to political interference with the conduct of monetary policy. But political interference is even likelier if central banks shun QE in the next recession.”
  2. From the past, and worth highlighting. Why? Because when the next recession comes, the usual suspects will, once again, start claiming that they should not do anything to shorten or cushion it. And the usual suspects will, once again, be wrong. Read Paul Krugman’s 2008 piece, “Hangover Theorists,” in which he writes: “Somehow I missed this: via Steve Levitt, John Cochrane explaining that recessions are ‘good’ for you … The basic idea is that a recession, even a depression, is somehow a necessary thing, part of the process of ‘adapting the structure of production.’ We have to get those people who were pounding nails in Nevada into other places and occupations, which is why unemployment has to be high in the housing bubble states for a while. The trouble … is twofold: 1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking—why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business? 2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble … The current slump is affecting some non-housing-bubble states as or more severely as the epicenters of the bubble … Unemployment is up everywhere. And while the centers of the bubble, Florida and California, are high in the rankings, so are Georgia, Alabama, and the Carolinas. So the liquidationists are still with us. According to Brad DeLong, ‘Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught…’ But now, apparently, it is.”
  3. Why does our economic system work as well as it does, and why is it as intelligent as it is? This is a deep question in need of much more thought. Michael Jordan thinks it noteworthy that the human brain is not the only system that looks capable of “intelligent behavior.” I wonder if the things that have made our economy appear intelligent in the past may disappear in the future. Read Jordan’s “Dr. AI or: How I Learned to Stop Worrying and Love Economics,” in which he writes: “I view the scientific study of the brain as one of the grandest challenges that science has ever undertaken, and the accompanying engineering discipline of ‘human-imitative AI’ as equally grand and worthy … [But] what else is intelligent on Earth? Perhaps the Martians will notice that in any given city on Earth, most every restaurant has at hand every ingredient it needs for every dish that it offers, day in and day out. They may also realize that, as in the case of neurons and brains, the essential ingredients underlying this capability are local decisions being made by small entities that each possess only a small sliver of the information being processed by the overall system … This system is intelligent by any reasonable definition—it is adaptive (it works rain or shine), it is robust, it works at small scale and large scale, and it has been working for thousands of years … The Martians may be happy to conceive of this system as an ‘entity’—just as much as a collection of neurons is an ‘entity.’ Am I arguing that we should simply bring in microeconomics in place of computer science? And praise markets as the way forward for AI? No, I am instead arguing that we should bring microeconomics in as a first-class citizen into the blend of computer science and statistics that is currently being called ‘AI.’ This blend was hinted at in my discussion piece; let me now elaborate.”