Weekend reading: “work scheduling and mobility” 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’s Bridget Ansel and Heather Boushey co-authored a piece on “Modernizing U.S. work scheduling standards for 21st century families,” examining needs and mitigating solutions around fair scheduling laws.

Brad DeLong rounded up his top six exemplary pieces from Equitable Growth  .

Michael Kades released a piece on the Supreme Court’s decision in State of Ohio v. American Express. He argues that the decision undermines competition and will become a contributing factor in rising economic inequality.

Austin Clemens released a blog on an Equitable Growth-funded report by the Urban Institute. The blog argues the need for an investment in more data surrounding place-based economics to allow for further analysis of the effects on mobility and economic inequality.

Greg Leiserson and Heather Boushey’s piece on how the Tax Cuts and Jobs Act of 2017 worsens inequality was featured in The American Prospect. They argue that tax changes and cuts to support government programs to address the federal budget deficit will lead to further economic inequality for Americans and their families.

Links from around the web

 

Manufacturers are automating their assembly lines, but it still takes skilled workers to build these robots. Ben Casselman looks at how this could be the next job boom as more companies provide job training and apprenticeships as the economy reaches full employment.  (NYT)

Are U.S. government policies consistent with the values that Americans and our politicians claim to embrace to help working-class families? Emily Badger and Claire Cain Miller discuss how the politicization of families have churned out policies that end up hurting American families.  (NYT)

Minimum wage is on the rise in Massachusetts. Republican Governor Charlie Baker signed bill requiring the state to raise the minimum wage to $15 an hour by 2023. Morgan Gstalter additionally notes that the bill requires the state to require paid leave for workers and to institute an annual sales tax holiday. (The Hill)

Could a universal basic income streamline benefits systems, remove rules that discourage people from working, and help reduce crime and bad health? Brian Bergstein examines a basic-income test in Manitoba, Canada during the 1970s and how Canada’s government is putting it to the test again.  (technologyreview)

Bidding wars for workers are becoming a common theme in the Midwest and Northeast of the United States as the unemployment rate continues to shrink. Danielle Paquette discusses how states and localities are beginning to pay workers thousands of dollars to lure them into areas that are finding it hard to seek out employees (WashingtonPost)

Friday figure

 

Figure is from “Equitable Growth’s: Policymakers can’t tackle inequitable growth if it isn’t measured”

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How the Tax Act increases inequality and reduces well-being for most Americans

Posted on by Emilie Openchowski
President Donald Trump and congressional Republican gather for an event after the passage of the “Tax Cut and Jobs Act Bill” in December 2017.

How will the Tax Cuts and Jobs Act of 2017—the wide-ranging tax legislation enacted by Congress and signed into law by President Trump in December 2017—affect economic inequality in the United States? The American Prospect today published a new article by Equitable Growth Executive Director and Chief Economist Heather Boushey and Director of Tax Policy and Senior Economist Greg Leiserson that explores that question. It’s part of the journal’s Summer 2018 issue, which is devoted to essays about the Tax Cuts and Jobs Act of 2017.

In the article, entitled “Worsening Inequality,” Boushey and Leiserson observe that “the direct effect of the structure of the tax cuts is to sharply increase inequality in after-tax incomes,” and conclude that “whether or not the tax cuts spur meaningful growth … once all of the direct and indirect effects are accounted for—including the need to address the resulting revenue gap in the years to come—most Americans will be worse off, and inequality will be even greater.”

They add, “Policymakers do not need to choose between economic growth and increases in wellbeing for working and middle-class families. Tax reforms that restore adequate revenues and make the sources of those taxes fairer and more efficient would deliver on both those goals.”

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Supreme Court decision on credit cards undermines competition, celebrates price increases, and will contribute to economic inequality

Posted on by Emilie Openchowski
The Supreme Court decision in <em>State of Ohio v. American Express</em> harms consumers, is bad for antitrust law, and undermines competition, exacerbating economic inequality.

After a court approved AT&T Inc.’s acquisition of Time Warner Inc. earlier this month, a spirited discussion erupted about its implications for future vertical mergers, in which the acquisition involves companies at different stages of the supply chain as opposed to a horizontal merger, in which the parties are competitors. In light of the Supreme Court’s June 25 decision in State of Ohio v. American Express, that debate suddenly seems quaint. The decision reflects a hostility to competition in general and to price competition in particular. To reach the result, the majority misrepresented the evidence, applied inconsistent reasoning, and favored corporate profits over consumers.

To summarize (or see a longer description here), American Express Co., similar to its competitors in the credit card industry, charges merchants a fee for processing a credit card transaction. The fees that American Express charges merchants are higher than those of its competitors, but American Express claims it provides better rewards to its cardholders. Critically, if a merchant accepts American Express cards, then the merchant agrees not to encourage customers—such as by offering a discount or free shipping—to use a different credit card that charges the merchant a lower fee, which is known as the “anti-steering provision.”

The original district court found that the anti-steering provisions essentially eliminated the effectiveness of price competition among credit card companies. If the merchant cannot pass along the savings to the customer, then lowering the merchant fee will not increase the use of the credit card. The clauses had prevented Discover Financial Services Inc. from implementing this strategy with its credit cards. The anti-steering provisions allowed American Express to increase its merchant fees. Merchants passed along those higher costs by increasing retail prices—not just for those using American Express, but for all customers. Without the anti-steering provisions, merchant fees and retail prices would fall. Supreme Court Justice Stephen Breyer, who would have affirmed the district court’s decision, explained that based on those findings, “there is little more that needs to be said.”

In rejecting the district court’s approach, the Supreme Court’s hostility to competition in general and price competition in particular is evident. The majority of the justices expressed no concern that a company, through its agreements with merchants, had eliminated an entire form of competition from the marketplace—internetwork price competition at the point of sale. Similarly, it did not bother the majority that customers paying by cash or using other credit cards were subsidizing American Express customers or that the anti-steering provision even precludes merchants from encouraging customers to use their Discover cards instead of ones offered by VISA Inc.

To the contrary, as Fiona Scott Morton, the Theodore Nierenberg Professor of Economics at the Yale University School of Management, notes, the majority is celebrating price increases when it writes that “Amex’s business model spurred Visa and MasterCard to offer new premium card categories with higher rewards.” Visa and MasterCard Inc. are raising prices because merchant restraints prevent price competition. The majority’s myopic concern is that consumers would stop using American Express cards if they knew the card has higher fees, which the majority calls a “negative externality.” The rest of us know that simply as “competition.”

Finally, the majority of the Supreme Court was entirely inconsistent in how it analyzed price and output effects. According to the majority, the evidence that merchant fees are increasing is irrelevant because credit cards are two-sided markets. This means that credit cards have two sets of customers: the consumers who use the cards and the merchants who accept them. The demand between the two groups is interdependent. The more people carry a credit card, the more likely a merchant is to accept the card, and the more merchants who accept a credit card, the more likely a consumer is to carry that card. According to the majority, if merchant fees go up but benefits to consumers increase more, then there is no price increase. Therefore, the plaintiff must prove a net pricing effect. That may sound like economics, but the issue is that the majority decided that a plaintiff has to make that showing before the defendant is required to provide a justification for its restriction that increases merchant fees.

Regardless, the district court did find that increased merchant fees were greater than increased card benefits. (As Justice Breyer noted in his dissent, this finding rendered irrelevant this complicated, academic discussion about two-sided markets.) Without the benefit of any evidence, the majority was adamant that proof of increasing prices does not prove that prices are above a competitive level because the price increase could reflect improved quality or increased demand. That could be true in theory—but in the facts presented in this case the district court had explicitly found that the elimination of competition increased prices.

Further, just sentences later, the majority forgot its own warning. The majority explains the restrictions could not have been anticompetitive because while they have been in force, total credit card volume has increased. Even if directly establishing that a restraint reduces output is the appropriate test (it is not), the question would be, as it is everywhere else in antitrust law, whether output is lower than it would have been if there had been no anti-steering provisions.

The decision means cash customers, who tend to be less wealthy, and non-American Express credit card customers, many of whom also tend to be less wealthy, will continue to unwittingly pay more for goods and services so that American Express customers can receive better benefits. Yet even American Express customers lose the ability to benefit from any competition between a card offering a lower merchant fee and their own American Express cards. Whether to use an American Express card and receive its benefits or use a different card and receive free shipping or a lower price should be the consumer’s decision, not American Express’. What’s more, merchant fees totaling more than $50 billion in 2013—the market data that was used at the time of the original trial—tend to be higher for smaller businesses.

So, at the same time the Supreme Court decision harms consumers, it also is making it harder for small businesses to survive. Not only is the decision bad for antitrust law, it is also an example of how undermining competition will exacerbate economic inequality.

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From the Urban Institute: “Place and Opportunity”

Posted on by Ed Paisley

A new report, “Place and Opportunity,” was published today by the Urban Institute: “Place and opportunity are inextricably linked, and new findings from an Urban Institute report highlight disparities in access to opportunity for racial and ethnic groups nationwide.” A blog post originally published about the report can be found on the Urban Institute’s blog, Urban Wire.

 

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Realizing the promise of place-based economics requires more and better data from across the United States

Posted on by Emilie Openchowski
The recent pivot by researchers and policymakers to studying the economics of place is a welcome development, but more and better data must be made available.

A new report released today finds that access to opportunity in the United States varies by where people live and the color of their skin. The report, written by Ruth Gourevitch, Solomon Greene, and Rolf Pendall of the Urban Institute, uses data collected pursuant to the Department of Housing and Urban Development’s Affirmatively Furthering Fair Housing rule. HUD created the AFFH Data and Mapping tool, which combines data from a number of existing sources to describe access to opportunity at the neighborhood level, to allow communities to assess their current progress toward fair housing, and to set goals to achieve more equal opportunity for their residents.

The report reaffirms what scholars increasingly know to be true about economic outcomes in the United States: where a person lives shapes that person’s access to opportunity and his or her likely economic outcomes. The economist Raj Chetty at Stanford University has performed much of the foundational research in this new literature, showing that the neighborhood a child grows up in makes a lasting impact on that child’s future earnings. His recent work shows that innovation, measured by patent rates, is sharply different according to where inventors grow up, and that these patterns are not explained by innate ability.

Likewise, the Urban Institute report shows that access to opportunity varies sharply for Americans according to whether they live in an urban or rural location, their race and ethnicity, and whether or not their income is above the poverty line. The full report is loaded with interesting graphs showing these results such as one that shows that Americans in urban areas are more likely to benefit from access to transportation and robust job markets but are disadvantaged by exposure to harmful toxins at the neighborhood level. (See Figure 1.)

Figure 1

These findings probably aren’t surprising to most people who have a common-sense understanding of how different areas of the country are, well, different. But the ability to explore these trends in detail is a relatively recent phenomenon, enabled by new datasets and greater access by researchers to administrative data kept by federal and state agencies.

Additionally, economists have been reticent to recommend policy to confront disparities based on where people live and work. This reticence is based on the belief that market forces will encourage migration to more economically vibrant places, which will balance economic outcomes between, for example, rural and urban locations. But it is not clear that this balancing is actually happening in practice, which is why economists are coming around to the idea of targeting place-based disparities.

The recent pivot by researchers and policymakers to studying the economics of place is a welcome development. But this research is especially data intensive. If policymakers are serious about the promise of place-based policymaking, then they also need to be serious about collecting good data and making it accessible to researchers. The raw data behind the AFFH Data and Mapping program is a welcome tool and an example of the kind of data collection and data assembly that should be pursued more at the federal level. (HUD has suspended the community assessment portion of the AFFH rule, but the data is still available.)

Most of the most important U.S. economic indicators are still reported at an aggregate level, which can be misleading as a barometer of economic well-being. Unfortunately, federal statistical agencies often have inadequate access to the datasets they need to disaggregate these statistics and report at the smaller levels of geographic aggregation. As the nature of the U.S. economy changes and we start to understand and explore the role of where people live and work in shaping economic outcomes, these problems should be addressed. As Michael Strain at the American Enterprise Institute noted in a recent interview on this site, a small investment in better data collection could have a big payoff.

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Brad DeLong: Worthy reads on equitable growth, June 22-28, 2018

Posted on by Ed Paisley

Worthy reads on Equitable Growth:

  1. A very nice paper concluding, among other things, that geographic mobility in the United States is the friend and not the foe of increases in the minimum wage as an equitable growth policy—it is the individuals who are able to move across state lines to opportunity who appear to benefit the most. Read Kevin Rinz and John Voorheis: “The distributional effects of minimum wages: Evidence from linked survey and administrative data,” in which they find that “states and localities are increasingly experimenting with higher minimum wage…”
  2. Brad DeLong: “The lack of Federal Reserve maneuvering room is very worrisome.”
  3. “Karen Dynan joins Equitable Growth Steering Committee.”
  4. It is worth stressing that motherhood penalties—and work-gap penalties more generally—appear present throughout and beyond the Global North. Labor market institutions and expectations are still as if designed for a male-dominated paid workforce in which women exit the paid labor force upon marriage or pregnancy and do not return. Read Eunjung Jee, Joya Misra, and Marta Murray-Close: “Motherhood penalties in the U.S., 1986–2014,” in which they note that “mothers earn less than childless women…”
  5. I have long thought it unwise that feminist economics is not a much larger and more prominent subfield. The past century and a half, after all, has seen the typical woman go from eating for two for 20 years—spending those years either pregnant or breastfeeding—to eating for two for only four years. That is a huge change, with mammoth and fascinating implications and consequences within and far beyond economics—yet remarkably few (male) economists seem to care. Read Kate Bahn: “Reporting from the International Association for Feminist Economics Conference, in which she writes—“Great presentation on ‘Bridging Theory and Action: Digital Platforms as an Opportunity for Feminist Economics’ by @leezagavronsky and @Bilguis92…. We need to move beyond the online/offline binary, since it often leads activism out in the world. Economists don’t need to dumb things down, but present things in a more inclusive manner, with less jargon that obfuscates what we are actually trying to say…”

 

Worthy reads not on Equitable Growth:

 

  1. Maxine Berg (1980): “The Machinery Question and the Making of Political Economy 1815–1848.”
  2. Austin Frakt: “Reagan, Deregulation and America’s Exceptional Rise in Health Care Costs,” in which he writes—“why did American health care costs start skyrocketing compared with those of other advanced nations starting in the early 1980s?…”
  3. Will Wilkinson: “Liberaltarianism: Back the Future,” in which he examines “Misean economics,… filtered through Ayn Rand and Murray Rothbard’s peculiar views of rights and coercion…”
  4. Peter Jensen, Markus Lampe, Paul Sharp, and Christian Skovsgaard, in “The role of elites for development in Denmark,” ask and answer this—”How did Denmark get to Denmark?… Hundreds of butter factories could spring up in a few years in the 1880s… dominance in agricultural exports could be so rapidly consolidated… why this happened in Denmark and not elsewhere…”
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Looking back over the past six years of Equitable Growth

Posted on by Emilie Openchowski
A tip jar sits on the counter at Zak the Baker in Miami.

When John Podesta began talking about establishing the Washington Center for Equitable Growth, the hope was to create a place where high-quality facts and analysis could speak. The hope was to set out goals that were broadly endorsed: Who, after all, would think higher productivity—growth—was bad? Who, after all, would think being fair—being equitable—was bad? And, without entrenched ideological or partisan dog whistles about what we were aiming for, pragmatism might have a chance: This would make us richer. That would make things fairer.

It was intended to be another contribution to creating a nation not of blue states and red states, but of purple states. It was intended to raise the level of the debate. It was intended to focus the debate on what was really important. That effort has faced some truly astonishing political headwinds over the past several years. And so that effort has been unsuccessful.

But that is no reason not to keep trying.

What is it that we are trying to do? As I grow older, I become more and more an organizational realist: The purpose of an organization is what it does, rather than what its mission statement says it is going to do. What the worker bees do determines what the organization does. What the planners and vision architects say does not determine what the organization does. Thus the task is to tune things so that the organization does what it does in an effective, productive, and useful manner.

So, here are a half-dozen examples of things that Equitable Growth does and has done very well—six exemplars.

John Schmitt’s interview with Sandy Darity

This interview with Duke University economics and public policy professor (and Equitable Growth Research Advisory Board member) William “Sandy” Darity Jr. focused on his work on “stratification economics.” Up until the Great Depression, the United States was a country of extraordinary social mobility, especially upward social mobility—but only for white guys. Since World War II, the United States has ceased to have even above-average social mobility. Why luck, plus the market’s desire to channel money not to the established but to the potentially productive, both have not done more to generate social mobility is something about which Darity has spent his career thinking—with much less of an audience than his ideas and efforts deserve. John Schmitt—who, alas, has since moved on to the Economic Policy Institute—does an excellent job of teasing out Darity’s thoughts on stratification and on American economics today as social practice.

Read John Schmitt’s Equitable Growth in Conversation: Darity: “I definitely don’t want to forsake the economics profession. I still have hope that there will be other, younger economists who will try to bring very fresh perspectives to the way in which we conduct economic research. I would encourage folks to go into the field, but I’d want them to have their eyes open. I think that they need to be very selective about which institutions they choose to attend to try to do their work. If graduate students have ideas that are not conventional or are unorthodox, then they need to have their eyes set on trying to identify departments that have the flexibility and open-mindedness to allow them to pursue the kind of approaches that they want to undertake.”

Austin Clemens, Robert Lynch, and Kavya Vaghul’s snapshot on universal pre-K

This snapshot was on the state-by-state benefits and costs of high-quality universal pre-Kindergarten. It used to be an oft-repeated line that the cure to bad speech is more speech. These days we are more likely to believe that the cure to good speech is more bad speech. Good, informative speech has to be well-crafted, arresting, and properly framed and pitched if it is to break through and become a durable part of the people’s knowledge base. Knowledge of what policies are likely to do on the ground for communities is scarce. And in a federal system, knowledge of likely state-level impacts is extremely important in shaping the environments in which policy is made. Here the Equitable Growth team does an excellent job of laying out high-quality and useful numbers about one of the policy interventions that may truly be low-hanging fruit: high-quality universal pre-K.

Read Austin Clemens, Robert Lynch, and Kavya Vaghul’s “A snapshot of the long-term impacts of universal prekindergarten”: “A high-quality universal prekindergarten program … fully phased in by the end of 2017 … would require a total of $78 million in Delaware taxpayer dollars. Over time, the cost would eventually grow to include the cost of additional high school and college attendance. But in just 7 years after full phase-in, by the end of 2023, the benefits of the program would outstrip the costs. And by 2050, there would be more than $1,000 million in total benefits compared to merely $106 million in total costs, yielding net benefits of $893 million. By 2050, for every dollar invested in a universal program, there would be $9.39 in returns.”

Jesse Rothstein’s Challenge to Raj Chetty et al.

Do we, in fact, have reason to think that removing educational blockages could supercharge social mobility? Stanford University economist (and Equitable Growth Steering Committee member) Raj Chetty and his co-authors say “yes.” University of California, Berkeley economist (and Equitable Growth Research Advisory Board member) Jesse Rothstein says “no.” Chetty et al. believe that we could raise social mobility in the “frozen” regions of the country via effective strategic improvements in education systems—if we could find and implement such effective strategic improvements. Rothstein looks at “job networks … the local labor and marriage markets … as likely factors influencing intergenerational economic mobility.”

I do not have a dog in this fight. I have enormous respect for Chetty, for the rest of his team, and also for Rothstein, who sits two buildings north of my office at the University of California, Berkeley. Looking at Chetty et al.’s maps, you cannot help but be struck by the geographic concentration of low mobility in the large American Indian reservations, in the Civil War confederacy, and in the Ohio-Indiana-Michigan corridor. If the problem’s root was just the poor functioning of one regionally differentiated societal system—schools—would we expect to see such a pattern? The pattern predisposes me to Rothstein: This looks to me like sociology in action, rather than poor policy implementation in the public provision of educational services.

Nudging this kind of debate along is exactly what we should be doing and exactly the kind of thing that we could do well and of which we could do more.

Read Jesse Rothstein’s “Inequality of educational opportunity? Schools as mediators of the intergenerational transmission of income”: “[Do] children’s educational outcomes (educational attainment, test scores, and non-cognitive skills) mediate the relationship between parental and child income[?] Commuting zones (CZs) with stronger intergenerational income transmission tend to have stronger transmission of parental income to children’s educational attainment, as well as higher returns to education. By contrast, the CZ-level association between parental income and children’s test scores is only weakly related to CZ income transmission, and is stable across grades. There is thus little evidence that differences in the quality of K-12 schooling are a key mechanism driving variation in intergenerational mobility. Access to college plays a somewhat larger role, but most of the variation in CZ income mobility reflects (a) differences in marriage patterns … (b) differences in labor market returns to education; and (c) differences in children’s earnings residuals, after controlling for observed skills and the CZ-level return to skill. This points to job networks or the structure of the local labor and marriage markets, rather than the education system, as likely factors influencing intergenerational economic mobility.”

Nick Bunker on JOLTS

Not a single piece, but rather a series of monthly blog posts, is compiled by Equitable Growth staff under the lead of (now former) Senior Policy Analyst Nick Bunker on JOLTS—the Job Opportunity and Labor Turnover dataset released monthly by the U.S. Department of Labor. The U.S. press produces a huge amount of coverage and analysis—most of it of very low quality, but we are not going there right now—about the changing monthly, nay daily, state of finance and profits. But there is very little that is regular and timely about changes in the state of the labor market. Nick Bunker’s series on JOLTS has been doing a superb job, and I look forward to this important work continuing under Equitable Growth Economist Kate Bahn.

Greg Leiserson on the December 2017 tax bill

One of the greatest headwinds facing the equitable growth project is low-quality analyses by high-profile people who definitely know better. Consider the public-sphere discussion of President Donald Trump’s and the congressional Republicans’ tax cut bill in the fall of 2017. This led, for example, to an anguished rant by the very sharp reporter Binyamin Applebaum of The New York Times on Twitter about the state of the economics discipline.

Read Binyamin Applebaum: “I am not sure there is a defensible case for the discipline … if they can’t at least agree on the ground rules for evaluating tax policy. How does Harvard, for example, justify granting tenure to people who purport to work in the same discipline and publicly condemn each other as charlatans? What does it mean to produce the signatures of 100 economists in favor of a given proposition when another 100 will sign their names to the opposite statement? … How are ordinary people, let alone members of Congress, supposed to figure out which tenured professors are the serious economists?”

Well, we professional economists briefed up on the issue know that, say, Doug Holtz-Eakin, Charles Calomiris, Jim Miller, Jagdish Bhagwati, and a hundred-odd other economists’ claims that the tax cut would come close to paying for itself via the extra tax revenues from faster economic growth were worthless. As Columbia University economist Bhagwati then stated, “I agree with the main thrust of the letter but do not think it likely that tax cuts will produce revenues that offset the initial loss of revenue.” (No, I do not understand how Bhagwati can disagree with the principal claim of a letter, yet agree with its “main thrust.” No, I do not understand why anybody would sign a letter and then state that they disagreed with its principal claim.) We professional economists briefed up on the issue know that Harvard University economist Robert Barro simply should not have claimed that the tax cut would ultimately boost real GDP above its projected baseline path by 7 percent.

But what should Binyamin Applebaum and others do? They should follow, and trust, Greg Leiserson on the Tax Cuts and Jobs Act of 2017. He has been on fire in both performing the most sophisticated and accurate analyses and explaining his point of view clearly. I am extremely proud that his work on this has appeared at Equitable Growth on its tax pages.

Our engagement with Thomas Piketty’s Capitalism in the Twenty-First Century

After Piketty: The Agenda for Economics and Inequality has not, in my estimation at least, received the attention it deserves. But it is of very high quality indeed. For example:

  1. Brad DeLong, Heather Boushey, and Marshall Steinbaum: ““Capital in the Twenty-First Century,” Three Years Later”
  2. My 2014 “Mr. Piketty and the “Neoclassicists”: A Suggested Interpretation.” It still provides the best guide to understanding Piketty’s “compare r to g.” That was a shortcut that, I think, caused considerable confusion. If you want to sort those issues out, I am your guide.
  3. Equitable Growth, in conjunction with the City University of New York, ran the best panel on what the takeaways from and research agenda after Piketty are: “A Few Notes on the CUNY “After Piketty” Panel.”
  4. Worth reading is my extension of Laura Tyson and Mike Spence’s contribution to our After Piketty book in the light of Ryan Avent’s very interesting The Wealth of Humans: “Fifteen Theses on “The Wealth of Humans” and “After Piketty”

Getting the analysis of Piketty right is, I think, important if the global public sphere is to have a productive conversation about equitable growth issues over the next decade. And it is important because, at least as I see it, an awful lot of Piketty criticism was in bad faith. Let Ryan Avent’s comments on one critic stand in for the evaluation of an entire portfolio: “Why, for instance, doesn’t Mr. Piketty say that r must be significantly above g to generate the expected divergence, Mr. Crook complains. This, after literally hundreds of pages in which Mr. Piketty has walked through when and how the capital-income ratio has been pushed away from its long-run trend rate. You don’t even have to read hundreds of pages to get the qualification Mr. Crook wants; you can start with the page on which r > g is first mentioned: “If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.” … I suppose if you only read the book’s conclusion you could miss these details, but who would do that?”

We can do better as a society. We need to do better. And I think Equitable Growth is doing better. I think we are, in fact, accomplishing our mission—not just in our writing of mission statements, but also where the rubber meets the road.

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Karen Dynan joins Equitable Growth Steering Committee

Posted on by Ed Paisley

Washington, D.C.—Karen Dynan, a former assistant secretary of the Treasury for economic policy and current Harvard University economics professor, has joined the Washington Center for Equitable Growth’s Steering Committee, the organization announced today.

Dynan is professor of the practice of economics at Harvard. During her tenure at the Treasury Department, from 2014 to 2017, she was responsible for leading the analysis of economic conditions and economic policy development. She was also the department’s chief economist. Dynan also served as vice president and co-director of the economic studies program at The Brookings Institution and as a senior economist at the White House Council of Economic Advisers. For 17 years, she was on the staff of the Federal Reserve Board of Governors. At Harvard, Dynan teaches in the economics department, as well as the John F. Kennedy School of Government.

The Washington Center for Equitable Growth is a nonprofit research and grantmaking organization dedicated to advancing evidence-backed ideas and policies that promote strong, stable, and broad-based economic growth. Equitable Growth works to build a bridge between academics and policymakers to ensure that research on equitable growth and inequality is relevant, accessible, and informative to the policymaking process. Its Steering Committee, which comprises leading economists and senior policymakers, provides guidance and approves the overall direction for the organization.

“One of the most important questions facing researchers and policymakers is how macroeconomic policy influences both economic growth and economic inequality and well-being,” said Equitable Growth Executive Director and Chief Economist Heather Boushey. “That’s why I am so honored to welcome Karen Dynan to our Steering Committee. Her leadership, commitment to evidence-based policymaking, and breadth of expertise will be a tremendous asset to Equitable Growth as we seek to identify and answer the most pressing macroeconomic research and policy questions in order to achieve broad-based economic growth in the United States.”

“As policymakers continue to confront the challenges of stagnant wages and rising economic inequality, Equitable Growth’s support of new research and evidence-based policy solutions is essential,” Dynan said. “Economic policymaking will ultimately be more effective when we take into account the question of how and to what degree inequality may be altering our understanding of the economic landscape facing households and the broader economy. Equitable Growth’s growing network and body of supported research is critical for policymakers looking to better understand how to attain growth that benefits all, not only the few.”

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The lack of Federal Reserve maneuvering room is very worrisome

Posted on by Emilie Openchowski
Federal Reserve Board Chairman Jerome Powell in a meeting in Washington in June 2018.

This column for Bloomberg by the very sharp Tim Duy strikes me as simply wrong. Contrary to what the professor of practice and the senior director of the Oregon Economic Forum at the University of Oregon says, the Federal Reserve does have room to combat the next crisis, only if the next crisis is not really a crisis but rather a small liquidity hiccup in the financial markets. Anything bigger, and the Federal Reserve will be helpless and hapless.

Look at the track of the interest rate the Federal Reserve controls—the short safe nominal interest rate. In the past one-third of a century, by my count, the Federal Reserve has decided six times that it needed to reduce interest rates in order to raise asset prices and try to lift contractionary pressure off of the economy—that is, once every five-and-a-half years. Those six times happened in 1985, 1987, 1991, 1998, 2000, and 2007. Specifically:

  • Starting in 1985, then-Fed Chair Paul Volcker and his Federal Open Market Committee decided that the configuration of interest rates was too high to be consistent with stable growth at full employment, so the FOMC lowered the federal funds rate and the market rate on three-month Treasury bills by fully 3 percentage points. The Federal Reserve could not do that today.
  • Starting in 1987, then-Fed Chair Alan Greenspan and his FOMC reacted to the one-day 25 percent collapse in the value of the stock market by opening the discount window so that banks could freely borrow from the Fed and reduced the short-term rates by 1.5 percentage points. The Fed could do that today.
  • Starting in 1991, then-Fed Chair Alan Greenspan and his FOMC reacted to the wave of pessimism transmitted through financial markets by the savings and loan crisis by lowering the short-term rates by 5 percentage points, in steps. But the Fed acted late, and the early 1990s recession and subsequent “jobless recovery” were the result. Regardless of timing, the Fed could not do that today.
  • Starting in 1998, then-Fed Chair Alan Greenspan and his FOMC reacted to the triple whammy of the Asian crisis, the Russian bankruptcy, and the collapse of Long-Term Capital Management—then the world’s largest hedge fund—by telling LTCM’s creditors to manage the situation (and they did very well out of it indeed) and by lowering the short-term rates by 0.75 percentage points. The Fed could do that today.
  • Starting in 2000, then-Fed Chair Alan Greenspan and his FOMC reacted to the collapse of the dot-com bubble by lowering the short-term rates by 4 percentage points. It was, again, behind the curve. The recession of 2001 and the subsequent jobless recovery were the result. The Fed could not do that today.
  • Starting in 2007, then-Fed Chair Ben Bernanke and his FOMC reacted to the collapse of the U.S. subprime mortgage market and the subsequent investment bank bankruptcies by lowering the short-term rates by more than 4 percentage points. It was, again, behind the curve. The disaster of 2008 and what followed—the Great Recession of 2007–2009—was the result. The Fed could not do that today.

I would draw a distinction between liquidity hiccups as things that do not involve permanent re-valuations of asset values, and the larger shocks that hit the economy as things that do. In 2008, there was a permanent and substantial fall in the risk tolerance of the market. In 2001, there was a permanent downweighting of the value of tech—not that the technologies were disappointing, but rather that using them to reap profits for investors turned out to be much harder than expected.

In 1991, there was the end of the Sunbelt’s “Morning in America” decade, as it became clear that much of the investment since the 1986 fall in oil prices had been fueled by S&Ls gambling for resurrections and that the U.S. economy needed permanently lower and temporarily very much lower interest rates to rebalance at full employment. In 1998, by contrast, there were events outside the United States that had little consequence for fundamental values inside the country. And in 1987, there was a market-mechanisms dysfunction blip.

All of those things can be handled well by the Fed simply providing extra liquidity while the crisis is at its peak. The larger shocks require more: They require that the Federal Reserve have the power, capability, and will to substantially shake the entire intertemporal price system. Yet that is what the current low level of safe nominal short interest rates keeps the Federal Reserve from having right now. And unless and until the neutral real rate of interest rises, the easiest way out of this low-rate-even-in-boom-time trap is a higher inflation target.

And, yes, there is some reason to worry today. With the rise of passive and automatic investment strategies, there are many players in the market for whom diversification is the new due diligence. Bond covenant quality thus seems unusually low, and many things that people presume are either well-collateralized or hedged-via-diversification may well not be.

Yes, the Federal Reserve could handle a liquidity hiccup in financial markets. No, the Federal Reserve could not handle anything larger. The record of the past one-third of a century tells us that “larger things” come along every eight years or so. It has been 10 years since the previous “larger thing” hit the economy. Read Tim Duy, “The Fed Has Enough Room to Combat the Next Crisis,” with these thoughts in mind.

Duy writes: “The Fed has more than enough room to replicate the responses to the 1987 stock market crash or the 1997 Asian financial crisis. They even met the challenge of the 2015 oil price crash simply by scaling back expected rate hikes in 2016. Given the expectation among market participants that the Fed will continue raising rates over the next year, just pausing on rate hikes would be a powerful stimulus. The likely willingness of central bankers to shift to a dovish stance may help account for the overall benign response on Wall Street so far to emerging threats from a more turbulent external environment. These include not only trade wars but also potential for financial crisis among emerging markets or the euro area. The risk these events pose for the overall economy would be bigger and more worrisome if the Fed felt its hands were tied such that they could not respond to a downturn. This is not the case. Market participants should know that the Fed is in a position to cushion the impact should these risks become a reality.”

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Policymakers can’t tackle inequitable growth if it isn’t measured

Posted on by Emilie Openchowski
Policymakers must measure the increasingly inequitable growth and income gaps among Americans in order to tackle our deepening economic inequality.

With the launch of our new website, we are reintroducing visitors to our policy issue areas. Informed by the academic research we fund, these issue areas are critical to our mission of advancing evidence-based ideas that promote strong, stable, and broad-based economic growth. Through the rest of June and early July, our expert staff are publishing posts on our Value Added blog about each of these issue areas, describing the work we do and the issues we seek to address. The following post is about Disaggregating Growth. For previous posts on other issue areas, please go to our Value Added home.

Quarterly reports of Gross Domestic Product growth are among the most publicized products of our federal statistical agencies. For journalists, policymakers, and pundits alike, these reports are read as barometers of national economic health. Increasingly, however, these reports do not necessarily reflect the economic fortunes of the average American because inequitable growth patterns mean that most Americans see less income growth than the average. If policymakers want to change these patterns, they first need to change how people think about economic growth. The first step is to measure growth for all Americans.

President John F. Kennedy liked to remark that “a rising tide lifts all boats,” echoing the conventional wisdom that a prosperous economy benefits Americans across the economic spectrum. The conventional wisdom in his era wasn’t wrong: Between 1963 and 1979, average national growth was relatively close to the growth experienced by the vast majority of Americans. For Americans between about the 30th percentile of income and the 95th percentile, average income growth at this time was close to their own income growth, about 1.7 percent per year after accounting for inflation. (See Figure 1.)

Figure 1

But this relationship dissolved in the 1980s as Americans at the top of the income spectrum started to pull away from the rest. Now, average growth is a poor indicator of economic performance for the average American. Today, only about 15 percent of Americans enjoy income growth at or above the average of 1.4 percent per year, while for the vast majority of Americans—everyone below the 70th percentile—average growth is a poor indicator of their economic fortunes. (See Figure 2.)

Figure 2

Gene Sperling, who served as director of the National Economic Council under President Bill Clinton and President Barack Obama, modified President Kennedy’s conventional wisdom to fit these new economic facts: “The rising tide will lift some boats, but others will run aground.” GDP growth is no longer a sufficient statistic for understanding the economic fortunes of most Americans.

What we need is to disaggregate growth and report on the progress of all Americans. Instead of the one-number-fits-all approach of GDP growth, this new system would report growth for Americans along the income curve, much as the graphs above do. It might indicate, for example, that the bottom 50 percent of Americans experienced growth of 1.3 percent while Americans in the top 1 percent of earners experienced 4.5 percent income growth.

Unfortunately, such a system is not currently possible. The graphs above were created using academic datasets for which no federally produced analog exists. GDP growth is reported by the U.S. Commerce Department’s Bureau of Economic Analysis, but the BEA is currently incapable of creating a system of distributional national accounts because it lacks the necessary data to do so. This problem is outlined in our recent report on the issue. Correcting it will require action from Congress and the executive branch. Without it, policymakers and pundits will continue to trumpet a measure of economic progress that does not tell the real story of the economy.

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