This is a post we publish each Friday 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 relevant and interesting articles 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
In April, the Supreme Court in AMG Capital Management LLC v. Federal Trade Commission unanimously struck down the Federal Trade Commission’s authority to require companies to give up profits they earn by violating U.S. antitrust laws and to require companies to compensate the victims of those violations. These two remedies—disgorgement and restitution, respectively—are the focus of two new Competitive Edge posts.
In one, Michael Kades takes a glass-half-empty view of the Court’s decision, arguing that it deprives the FTC of a critical deterrent of anticompetitive conduct. Kades explains how disgorgement has been used, albeit sparingly, in cases brought against pharmaceutical companies and successfully prevented certain anticompetitive conduct across the industry. It also tends to speed up the litigation process, which saves costs and resources for the Federal Trade Commission. As such, Kades writes, the Supreme Court’s ruling benefits big companies that cause the most harm and will have a troubling impact on antitrust enforcement, unless Congress takes action to reestablish the FTC authority.
Conversely, Andrew I. Gavil takes a glass-half-full approach, arguing that the Supreme Court’s ruling may end up opening the door to broader applications of the U.S. antitrust laws. Gavil highlights the textualist nature of the Court’s decision and how it could be applied to the antitrust laws, particularly the Clayton Antitrust Act of 1914. He gives a brief background on the Clayton Act and its relationship to the Sherman Antitrust Act of 1890, before turning to an analysis of the law and its reach through a textualist lens.
Each month, Equitable Growth highlights scholars working to understand how inequality affects economic growth in a series called Expert Focus. This month, Adrian Narayan and David Mitchell look at a group of academic researchers who joined the Biden administration to advance evidence-backed policy ideas to combat inequality and ensure strong, stable growth for all Americans. Narayan and Mitchell emphasize not only that Equitable Growth staff joined various agencies in the executive branch, but also how many academic network members, contributors, and speakers from previous Equitable Growth events decided to being their diverse experience and expertise to the administration.
The National Bureau of Economic Research is now more than halfway through its summer institute, an annual 3-week conference featuring discussions and paper presentations on specific subfields of economics, including wealth taxation and tax evasion, market structure and competition, and labor market inequalities. Equitable Growth compiled a list of paper abstracts that caught our attention throughout the second week, including research from our grantee network and members of our Steering Committee and Research Advisory Board. For highlights from the first week of the NBER Summer Institute 2021, click here. For coverage of the third and final week, be sure to check back on Monday, August 2.
New analysis reveals that states that cut expanded federal Unemployment Insurance benefits early are not actually experiencing a hiring boom. States that did not cut UI payments had the same pace of hiring as those that did cut them early, writeThe Washington Post’s Heather Long and Andrew Van Dam. Interestingly, though, states that did cut benefits are seeing changes in who is getting hired, with fewer teenagers securing employment and higher rates of hiring for those workers ages 25 and older. The analysis focuses on small restaurants and hospitality businesses, which, Long and Van Dam note, will probably face extended hiring challenges. This is largely because of the ongoing health threat posed by the coronavirus, continuing caregiving needs, and the prevalence of workers leaving their pre-pandemic industries in search of new opportunities. These three trends are likely more to blame for the hiring slump in hospitality than extended UI benefits, according to several experts that Long and Van Dam interview.
Coronavirus relief programs will cut the U.S. poverty rate almost in half this year, compared to pre-pandemic levels, with the number of poor Americans set to fall by nearly 20 million. The country has never cut poverty so rapidly before, writesThe New York Times’ Jason DeParle. This is all the more impressive considering the economy has more than 6 million fewer jobs now than it did before the pandemic and ensuing recession. But, DeParle continues, with many programs either already ended or set to expire soon, many of the families who have benefitted may find themselves back in poverty, or near the poverty line. DeParle tells the story of a few such families and their struggles amid the coronavirus pandemic.
President Joe Biden’s recent executive order designed to increase competition and reduce market concentration, along with several pieces of bipartisan antitrust legislation in Congress, suggest that U.S. antitrust regulators are focused on addressing the problem of “bigness.” But, Molly Wood asks in The Atlantic, why is Microsoft Corp. often left of the list of Big Tech companies—Amazon.com Inc., Apple inc., Facebook Inc., and Alphabet Inc.’s Google unit—that typically get the most scrutiny for their anticompetitive behavior? Microsoft, as big as the others, has largely escaped run-ins with the antitrust laws since its high-profile lawsuit in the 1990s. And technically, Wood points out, it’s not illegal under these laws to be big, or even to be a monopoly, unless the company uses its position to drown out competition or charge unfairly high prices. Wood examines the circumstances surrounding the lack of antitrust cases brought against Microsoft. She ultimately makes the case that it should be the test of the Biden administration and antitrust regulators’ will to increase competition, break up tech companies, and scrutinize acquisitions: “If bigness alone is the problem, Microsoft is the truest test of all.”
Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call “Competitive Edge.” This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. Michael Kadeshasauthored this contribution.
The octopus image, above, updates an iconic editorial cartoon first published in 1904 in the magazine Puck to portray the Standard Oil monopoly. Please note the harpoon. Our goal for Competitive Edge is to promote the development of sharp and effective tools to increase competition in the United States economy.
Michael Kades
Market power and its abuse are far too prevalent in the U.S. economy, increasing the prices consumers pay, suppressing wage growth, limiting entrepreneurship, and exacerbating inequality. Equitable Growth’s 2020 antitrust transition report identifies a lack of deterrence as a key problem: “Antitrust enforcement faces a serious deterrence problem, if not a crisis.”
As the report explains, “Rather than deter anticompetitive behavior, current legal standards do the opposite: They encourage it because such conduct is likely to escape condemnation, and the benefits of violating the law far exceed the potential penalties.” In the face of such warnings, it is a particularly bad time for the Supreme Court to unanimously reject 40 years of lower court rulings and conclude that the Federal Trade Commission can neither force companies to give up the profits they earned by violating the law nor compensate the victims of those violations. (The first remedy is called disgorgement, and the second remedy is called restitution.)
Whether the Supreme Court in April correctly interpreted the statute at issue in the case, AMG Capital Management LLC v. Federal Trade Commission, is less important than its implications. Professor Andy Gavil discusses a potential silver lining in the Supreme Court’s decision—the glass-half-full approach. He argues that if the Supreme Court faithfully applies its approach to statutory interpretation, then it could open the door to broader application of the antitrust laws.
I look at the direct impact of the decision—the glass-half-empty approach. I argue that the decision deprives the antitrust agency of a critical, albeit imperfect, weapon that has deterred anticompetitive conduct particularly in the pharmaceutical industry. Although it has used disgorgement in competition cases sparingly, those awards have deterred the entire industry from engaging in the challenged conduct.
Before the recent Supreme Court decision, the disgorgement awards in competition cases went far beyond the impact in a single case. The savings include benefits from the conduct that did not occur. If the commission cannot seek monetary remedies, then companies will keep the rewards of their illegal conduct. Perversely, the companies causing the greatest harm will benefit the most from April’s decision.
The impact reaches even further. Without the threat of a disgorgement award, companies are more likely to drag out litigation and tax the FTC’s limited resources. Because the commission will spend more resources on egregious cases to reach weaker results, it will have fewer resources to challenge anticompetitive conduct in other areas and, for example, could affect enforcement in merger cases or in the high-tech industry.
On the bright side, Congress can easily restore the FTC’s ability to seek monetary remedies, and the idea has some bipartisan support. The remainder of this piece discusses how disgorgement has been a successful tool in antitrust cases and what we can expect if Congress does not restore the FTC’s ability to seek broader and more equitable remedies, including monetary relief.
Disgorgement as deterrence
The story of the FTC’s monetary relief has come full circle. In 1998, the agency sued Mylan Laboratories Inc. to prevent it from continuing to corner the supply of a critical input (the active pharmaceutical ingredient) for a common tranquilizer, lorazepam. (I was one of the FTC attorneys on the case.) Mylan’s conduct forced its competitors to temporarily exit the market, and Mylan raised wholesale prices by 2,500 percent. (See Figure 1.)
Figure 1
Although Mylan’s competitors found new suppliers and reentered the generic market in a matter of months, Mylan had earned an additional $120 million in profit. The Federal Trade Commission and a group of state attorneys general sued, seeking to stop the conduct and to disgorge the profits Mylan earned. In settling the government actions, Mylan agreed to pay $100 million, which was distributed to consumers and state Medicaid plans that had paid the inflated prices.
Absent the monetary recovery, Mylan’s strategy would have been wildly successful, and others, seeing that success, could have repeated it in any market where there were few suppliers of an active pharmaceutical ingredient. Until recently, however, no pharmaceutical company appears to have tried Mylan’s strategy. By depriving Mylan of its illegal profits, the Federal Trade Commission sent the message to the industry that cornering supply was a game not worth the candle.
Some antitrust experts argue that the agency has no need for monetary remedies because private parties can obtain treble damages. Unfortunately, treble damages sound more effective than they are. A study by emeritus professor John M. Connor of Purdue University and Robert H. Lande, Venable professor of law at the University of Baltimore, found that, on average, private plaintiffs in cartel case settlements obtain just 19 percent of the actual, not trebled, damages.
Indeed, several factors limit the effectiveness of the treble-damage remedy. One is forced arbitration clauses. Another is specific procedural hurdles that private plaintiffs face that government enforcers do not. And a third factor is the limitations on who is a proper plaintiff. The FTC’s authority to seek monetary remedies was not duplicative of private actions but rather made antitrust enforcement more effective.
Disgorgement and the efficient resolution of litigation
Private actions, even if they were sufficient to deter anticompetitive conduct, would not address the other problem the Federal Trade Commission will face without a monetary remedy. When the agency is challenging an ongoing activity, the longer the defendants can delay resolution, the longer they can earn their ill-gotten profits. When the conduct yields hundreds of millions of dollars in profits, legal fees of millions or even tens of millions of dollars look like a good investment.
Now, in the wake of the recent Supreme Court ruling, imagine the Federal Trade Commission trying to stop the conduct, and even if it wins, the company gets to keep everything it earned. Under that scenario, defendants have every reason to string out litigation. Further, the commission will be in a weaker position to negotiate settlements.
This scenario is not imaginary. In June 2013, the Supreme Court ruled in FTC v. Actavis Inc. that patent settlements in which a branded pharmaceutical company paid a potential generic not to compete, known as pay-for-delay or reverse-payment agreements, could violate the antitrust laws. At the time, the agency had two active pay-for-delay cases, the Actavis case itself and Federal Trade Commission v. Cephalon Inc. (I worked on both.) In the Actavis case, the commission had relinquished its disgorgement claim, but it had not in the Cephalon case. In less than 2 years, it settled the Cephalon case, obtaining $1.2 billion in disgorgement and the company’s agreement not to enter future pay-for-delay agreements.
In contrast, in the case against Actavis, there was no threat of disgorgement and so it dragged on for more than 5 years before a settlement was reached—and it ended up being a weakerorder with no monetary remedy. The result was worse: longer time to resolution, more resources expended, and a weaker remedy.
Without a disgorgement remedy in antitrust cases, particularly in pharmaceutical ones, the more profitable the conduct, the less incentive the defendants will have to settle—even when they are likely to lose on the merits. In turn, the Federal Trade Commission will have to use more resources on easy cases and have fewer resources for more complex matters.
If you are concerned about monopolization in digital platform markets, consolidation in hospital markets, or any other anticompetitive activity, the impact of the Supreme Court’s AMG decision should bother you. Without the ability to obtain disgorgement, anticompetitive conduct will be more likely, and the commission will face more demands on its already-insufficient budget.
Liability without consequences
If companies can keep the profits they earn by violating the law, then companies can engage in egregious behavior without fear of the consequences. Take the FTC’s recent case against AbbVie Inc. The commission proved that AbbVie had brought objectively baseless patent litigation, that the burden and length of the litigation (litigation process, not its outcome) delayed generic competition, and that that the company illegally increased its profits by $448 billion.
The U.S. Court of Appeals for the Third Circuit upheld the liability but concluded that the Federal Trade Commission could not deprive AbbVie of its illegal profits. The AbbViedecision was decided before the Supreme Court’s AMG decision and interpreted a different part of the Federal Trade Commission Act. Nonetheless, the AbbViecase exemplifies the limited impact of even successful FTC antitrust enforcement if the agency cannot seek monetary remedies.
Coming full circle?
Six years ago, Martin Shkreli, the so-called pharma bro, brought his hedge fund experience to prescription drugs. He acquired Daraprim, a drug used to treat a serious parasitic infection that can be deadly to babies and those with compromised immune systems. He then promptly raised the price from $13.50 per tablet to $750. The event triggered public outcry and unwanted attention on Shkreli, who is now in jail for securities fraud.
In addition to raising prices, Shkreli’s company made it more difficult, if not impossible, for new competitors to enter the market. It prevented generic companies from being able to obtain approval from the U.S. Food and Drug Administration through sample blocking, an anticompetitive tactic that Washington Center for Equitable Growth hasdiscussedoften and which Congress addressed through the CREATES Act in 2019. And, like Mylan, nearly 25 years earlier, Shkreli’s firm allegedly locked up the active pharmaceutical ingredient for Daraprim, creating a further hurdle to competition.
In 2020, the Federal Trade Commission sued, alleging both strategies were anticompetitive. Unlike in the Mylan case, after the AMG decision, the commission cannot seek monetary remedies such as restitution and disgorgement. Unless Congress acts, Shkreli and his co-defendants have no fear of losing the profits they earned through any anticompetitive and illegal activity. Regardless of the result in the Shkreli case, it is unlikely to deter anticompetitive conduct as strongly as the Mylan case did.
Status of a legislative solution
The fix is simple. The Supreme Court neither endorsed the fraudulent conduct at issue in the case nor suggested there was a constitutional objection to providing the Federal Trade Commission the authority to seek disgorgement or restitution. Congress can restore the authority the commission has been using for years by clarifying the scope of the FTC’s power.
On the surface, there appears to be strong bipartisan support for doing so. Within days of the Supreme Court’s AMG ruling, all four FTC commissioners called for legislative action. Both the then-acting chairwoman and the ranking member of the Senate Commerce Committee voiced support for a legislative fix. Recent hearings, however, in both the Senate Commerce Committee and in the House Commerce Committee suggest areas of disagreement over the scope of the legislation. The House did pass legislation with two Republicans voting in support last week.
After the AMG decision, much of the focus has been on how the decision limits the FTC’s ability to compensate victims of fraud and other consumer protection violations, which is understandable. The commission seeks monetary relief far more often in consumer protection cases (49 in 2019 alone) than in competition matters (14 total since 2000).
The decision’s impact on antitrust enforcement, particularly in the pharmaceutical industry, however, should be equally troubling. The antitrust enforcement scheme can address the market power problem and the harms it causes only if it deters anticompetitive conduct in the first place. With companies no longer facing the threat of the Federal Trade Commission seeking restitution or disgorgement, violating the antitrust laws will be far more profitable than the dangers of being prosecuted. Perversely, the biggest winners from these developments are the companies that cause the greatest harm.
By no means were the FTC’s monetary remedies sufficient to completely deter anticompetitive activity. There is a robust debate about other powers the commission may already have to hold companies accountable, and recently introducedbills would give the U.S. Department of Justice and the Federal Trade Commission the power to seek civil penalties for antitrust violations.
Civil penalties can be much larger than disgorgement, which is limited to the defendant’s illegal profits, or restitution, which is limited to harms consumers suffered. Policymakers should be discussing those issues and whether stronger remedies are needed rather than uncontroversial propositions such as whether companies that violate the antitrust laws should be allowed to retain the profits they earned through unlawful conduct and whether victims should be left uncompensated.
Before the AMG decision, a monetary remedy was the knife the Federal Trade Commission brought to a gunfight with pharmaceutical companies. Unless Congress acts, the commission will now arrive at the gunfight with only its bare knuckles.
Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call “Competitive Edge.” This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. Andrew I. Gavilhasauthored this contribution.
The octopus image, above, updates an iconic editorial cartoon first published in 1904 in the magazine Puck to portray the Standard Oil monopoly. Please note the harpoon. Our goal for Competitive Edge is to promote the development of sharp and effective tools to increase competition in the United States economy.
Andrew I. Gavil
At a 2015 lecture in honor of Supreme Court Justice Antonin Scalia at Harvard Law School, his colleague Justice Elena Kagan famously proclaimed: “We’re all textualists now.” Her proclamation appeared prescient this past Supreme Court term, when textualism came to antitrust law in AMG Capital Management LLC v. Federal Trade Commission.
The case questioned the FTC’s authority to seek disgorgement as a remedy for violations of Section 5 of the Federal Trade Commission Act under Section 13(b) of the act. In an opinion authored by Justice Stephen Breyer, a unanimous Supreme Court concluded that the act did not provide for that authority. Section 13(b)’s use of “injunction,” the Supreme Court reasoned, was not the equivalent of the broader “equitable” relief with which disgorgement is associated and which is used in other provisions of the act.
Importantly, a comparison of Section 13(b) with those other provisions confirmed for the Supreme Court that Congress well understood the difference between the limited “injunction” and the broader “equitable” relief. The choice of language was deliberate and warranted differing interpretations. Under a textualist approach, the words would have to be assigned their distinct meaning.
As the Washington Center for Equitable Growth’s Director of Markets and Competition Policy Michael Kades explains, the decision in the AMG case was a blow to the FTC’s remedial authority that prompted immediate criticism and calls for legislative reform. In limiting the commission to injunctive relief, the Supreme Court had significantly circumscribed the commission’s remedial powers and, with it, had unquestionably diminished the deterrent value of its law enforcement power.
But is there a silver lining for antitrust law in the Court’s commitment to textualism?
Before AMG, the Supreme Court had demonstrated little, if any, interest in textualism to interpret the principal antitrust statutes. To the contrary, it often alluded to the common law origins and inherent flexibility of the terms of the Sherman Antitrust Act of 1890, which, over time, spilled into its interpretation of the Clayton Antitrust Act of 1914. AMG’s textualism calls those decisions into question—and they are worth questioning.
As lively debates about the future of U.S. antitrust law rage on, one persistent question has been: Can the current tools available to the antitrust enforcement agencies be more fully and effectively utilized? Textualism may hold the promise of an affirmative answer to that question, especially when it comes to the Clayton Act.
A brief history of the Clayton Antitrust Act of 1914
The Clayton Act was, by design, intended to augment the Sherman Act and redress the courts’ constrained reading of the Sherman Act’s common-law-derived standards in its first quarter-century of enforcement. To achieve the desired result, Congress made two textual choices. First, in lieu of the general language of the Sherman Act, it opted for more highly specified prohibitions. Second, it used an “incipiency” standard of competitive harm that recurs in all the Clayton Act’s main prohibitions.
In place of the Sherman Act’s unreasonable “restraint of trade” and “monopolization” standards, the Clayton Act prohibits conduct when its effect “may be to substantially lessen competition, or to tend to create a monopoly.” This text is used in its prohibition of price discrimination (Section 2), exclusionary contracts (Section 3), and mergers and acquisitions (Section 7). The choice of “may be” and “tend” signaled a departure from the Sherman Act and reflects congressional intent that the burden of establishing competitive harm under the Clayton Act should be lower than that required under the Sherman Act. (In other ways, the Clayton Act is narrower than the Sherman Act. Sections 2 (price discrimination) and 3 (exclusive dealing and tying), for example, are limited to sales of goods and exclude services.)
The Supreme Court differentiated, however, between the “mere possibility” that an agreement falling within its terms would “substantially lessen competition or tend to create a monopoly” and the probability that it would do so, noting in 1922 that Section 3 could reach the latter, though not the former. Still, the Supreme Court would later observe, in 1961, that it had not drawn the line “where ‘remote’ ended and ‘substantial’ began.”
The Supreme Court’s decades-long wavering on the degree of probability necessary to establish an anticompetitive effect left enough discretion for courts to progressively downplay the significance of the Clayton Act’s text or simply to ignore it. “Probability,” of course, can range from low to high. But increasingly, courts, including the Supreme Court in 2021, have suggested that Sherman Act offenses require proof of “actual” competitive harm—ignoring even well-established Sherman Act precedent that has long used the formulation “actual or probable.”
Over time, therefore, two trends dissipated the potential potency of the Clayton Act: The courts demanded ever greater degrees of certainty of competitive harm in Sherman Act cases and progressively downplayed the distinction between the Sherman Act and the Clayton Act. Alleged offenses under both acts became homogenized. Burdens of proof for plaintiffs became elevated.
At best, the Supreme Court only paid lip service to the textual distinctiveness of the Clayton Act. In Brooke Group Ltd v. Brown & Williamson Tobacco Corp., for example, the Court acknowledged in 1992 that, whereas proof of a violation of Section 2 of the Sherman Act requires “probability” of competitive harm, a violation of the price discrimination provisions of Section 2(a) of the Clayton Act only requires a “possibility” of harm. It nevertheless concluded that a unitary standard should apply for claims of primary line predatory price discrimination under the Clayton Act and predatory pricing by a monopolist under Section 2 of the Sherman Act.
In short, the Supreme Court acknowledged the textual difference but failed to assign any significance to it. Worse, it imported the unduly restrictive “dangerous probability” of successful monopolization requirement from the Section 2 offense of attempt to monopolize, without regard for its distorting effect on the Clayton Act. The decision has been criticized on the merits and is irreconcilable with AMG.
Reevaluating the Clayton Act through a textualist lens
The distinctive text of the Clayton Act could support a more expansive view of its reach, aided in part by both its more highly specified prohibitions and a less demanding burden of proof. Such an approach would also be supported, as in AMG, by crediting its text, contrasting it with the text of the Sherman Act, and assigning significance to it instead of ignoring and diluting it. Although there is nothing “ambiguous” in the Clayton Act’s text—a prerequisite that some strict textualists will often cite for consideration of legislative history—for the less strict, that history is rich and strongly supports the view that the Clayton Act was intended to have significance that it has been denied.
Three specific areas illustrate how such an approach could reinvigorate antitrust enforcement, especially by the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice. First, as noted, conduct such as that in Brooke Group should have been easier to challenge.
Second, Section 3 of the Clayton Act has lost its distinctiveness, and hence its vitality, as a prohibition of various types of exclusionary contracting practices of goods, especially tying, exclusive dealing, and conditional pricing practices. Those practices have been subjected to demanding standards of proof by the courts, which have linked Section 3’s fate to the increasingly demanding standards of the Sherman Act’s rule of reason. Very few plaintiffs, public or private, have prevailed.
Third, the proof required in government antitrust challenges to horizontal mergers has become demanding. This is the case even when challenges are brought pre-consummation based on predictions of likely effects.
Restoring balance to the process might begin with the recently announced plans to revise the Horizontal and Vertical Merger Guidelines, which could be profitably—and justifiably—modified to reflect a stronger commitment to incipiency. The same statutory text of Section 7 of the Clayton Act has supported every set of these guidelines adopted since 1968, yet the guidelines have continually evolved in the direction of ever more permissible levels of concentration.
Consider first the Herfindahl-Hirschman Index, or HHI, which has been used as a measure of market concentration in the guidelines since 1982 and by many courts since then. The two federal antitrust agencies could easily back away from the current HHI threshold of 2,500 that defines “highly concentrated” markets, for example, returning to the 1,800 level that was used before 2010.
Revised merger guidelines also could provide an even stronger message about the limited value of market definition when other evidence supports a prediction of anticompetitive harm, include more robust definitions of nascent and potential competition, and clarify the government’s approach to serial acquisitions. Anticompetitive presumptions could also be fortified for horizontal mergers and recognized for vertical mergers.
These kinds of revisions and others could provide a foundation for more aggressive enforcement relying on the text of Section 7 of the Clayton Act. They would also provide added guidance to the courts and greater transparency to the business community.
Conclusion
Revitalizing the incipiency standard of the Clayton Act is not a new idea. What is potentially new is AMG’s commitment to textualism. It provides an opportunity, if not an invitation, to test the Supreme Court’s commitment to consistent textualism: If it can unanimously support retrenchment of the FTC’s remedial power, then it also could support a renewal of its enforcement authority.
—Andrew I. Gavil is a professor of law at Howard University School of Law.
Equitable Growth is committed to building a community of scholars working to understand how inequality affects broadly shared growth and stability. To that end, we have created the monthly series, “Expert Focus.” This series highlights scholars in the Equitable Growth network and beyond who are at the frontier of social science research. We encourage you to learn more about both the researchers featured below, those featured in prior installments, and our broader network of experts.
When President Joe Biden held his first cabinet meeting, he boasted that the diverse group of federal leaders “looks like America.” The president’s cabinet also includes a number of former academics, bringing much-needed rigorous, evidence-backed thinking to government. Indeed, across the newly formed federal administration, academic researchers—many of them previously funded by or collaborators with Equitable Growth—have taken on critical policymaking roles.
In addition to Equitable Growth co-founder Heather Boushey, who is now a member of the White House Council of Economic Advisers, former Equitable Growth staffers Greg Leiserson and Amanda Fischer have also joined the executive branch, serving at the CEA and the U.S. Securities and Exchange Commission, respectively. But it’s not just former Equitable Growth in-house experts bringing evidence-backed economic research and policy expertise to bear on the policymaking process. This installment of “Expert Focus” highlights scholars who have joined the Biden administration to make informed federal policymaking decisions that will lead to economic growth that is strong, stable, and broadly shared.
Alex Hertel-Fernandez
U.S. Department of Labor; on leave as associate professor at Columbia University
Alex Hertel-Fernandez serves as the deputy assistant secretary for research and evaluation at the U.S. Department of Labor. In this role, Hertel-Fernandez evaluates the effectiveness of Labor Department programs and estimates the impact of various policies on U.S. workers. Prior to joining the Biden administration, he worked with Equitable Growth to distill his research findings on labor movements, labor law, and the relationship between unions and Unemployment Insurance. He received an Equitable Growth grant in 2017 to study worker preferences for labor organizing and representation across industries and occupations in the U.S. workforce, releasing his findings in a 2019 working paper.
His recent book, State Capture: How Conservative Activists, Big Businesses, and Wealthy Donors Reshaped the American States—and the Nation (Oxford University Press, 2019), outlines how networks of conservative businesses, donors, and activists developed organizations that recreate federal and state public policies and how similar efforts from progressives fell short.
Cecilia Rouse
White House Council of Economic Advisers; on leave as professor at Princeton University
Cecilia Rouse was confirmed by the Senate in March as the 30th chair of the Council of Economic Advisers, making her the first Black leader of the CEA in its 75-year history. In this role, she serves as President Biden’s chief economist and a member of the Cabinet.
Rouse was the keynote speaker at the relaunch of our popular Research on Tap event series, where she participated in a one-on-one conversation alongside reporter Tracy Jan of The Washington Post. During the event, Rouse discussed the need for increasing public investments to address the underlying structural inequalities laid bare by the coronavirus recession and advance a sustained economic recovery that puts the United States on a path toward strong, stable, and broadly shared growth.
Immediately prior to joining the Biden administration, Rouse served as the dean of the Princeton School of Public and International Affairs, where she is also a professor of economics. From 2009 to 2011, Rouse served as a member of President Barack Obama’s Council of Economic Advisers. She served on the National Economic Council in the Clinton administration as a special assistant to the president from 1998 to 1999.
Her academic research has focused on the economics of education, including the benefits of community colleges and impact of student loan debt, as well as discrimination and the forces that hold some Americans back in the economy.
Gbenga Ajilore
U.S. Department of Agriculture; previously senior economist at the Center for American Progress
Olugbenga “Gbenga” Ajilore is a senior advisor in the Office of the Under Secretary for Rural Development at the U.S. Department of Agriculture. Prior to his current role, he was a senior economist at the Center for American Progress and former associate professor of economics at the University of Toledo. He is a past president of the National Economic Association and is a frequent media commentator on the labor market.
His research has focused on race and local public finance, peer effects and adolescent behavior, and police militarization. Ajilore’s work has been published in numerous journals, such as The Review of Black Political Economy, Economics and Human Biology, the Review of Economics of the Household, and the Atlantic Economic Journal.
In addition, Ajilore spoke at our recent virtual event, “Beyond place-based: Reducing regional inequality with place-conscious policies,”discussing how national actions have driven regional inequalities in rural regions and what this means for policy solutions.
Kimberly Clausing
U.S. Department of the Treasury; previously professor at University of California, Los Angeles School of Law
Kimberly Clausing serves in the Treasury Department as the deputy assistant secretary leading the Office of Tax Analysis. Clausing is in charge of examining tax proposals to inform which policies the Biden administration will pursue and how those policies will impact the overall economy. She was involved in Equitable Growth’s early efforts to understand how the tax system could support a more equitable distribution of growth, receiving funding for her research on the corporate tax system. She has also written for Equitable Growth on international trade and the coronavirus pandemic.
Clausing is a U.S. Fulbright Program scholar and received two research awards to the Centre for European Policy Studies in Brussels, Belgium and to the Eastern Mediterranean University and the University of Cyprus in Cyprus. In addition to being an Equitable Growth grantee, her research has also been supported by external grants from the National Science Foundation, the Smith Richardson Foundation, the International Centre for Tax and Development, and the U.S. Bureau of Economic Analysis.
Clausing previously researched economic policy with the International Monetary Fund, The Brookings Institution, and the Tax Policy Center, and she has testified before both the House Ways and Means Committee and the Senate Committee on Finance. In addition, she previously worked as a staff economist at the White House Council of Economic Advisers. Prior to becoming a professor at UCLA School of Law, she taught economics at Reed College and Wellesley College.
Her research focuses on the taxation of multinational firms, analyzing how government decisions and corporate behavior intersect within a global economy. She has been published in numerous articles and is the author of Open: The Progressive Case for Free Trade, Immigration, and Global Capital(Harvard University Press, 2019).
Neil Mehrotra
U.S. Department of the Treasury; previously economist at the Federal Reserve Bank of New York
Neil Mehrotra serves in the Treasury Department as the deputy assistant secretary of macroeconomic analysis. Mehrotra has been funded by and written for Equitable Growth on topics from secular stagnation and inequality to fiscal policy stabilization. His background in macroeconomics and previous position as an economist for the Federal Reserve Bank of New York further highlight his preparedness to analyze macroeconomic policy for the administration and guide decision-making to reduce overall inequality and bolster economic growth for all Americans. Prior to working at the New York Fed, Mehrotra was an assistant professor of economics at Brown University.
His research has been published in the American Economic Review, Papers and Proceedings, and has been cited in various news outlets, including The Washington Post, The New York Times, and Business Insider.
Mehrotra was an Equitable Growth seminar speaker, discussing his paper on the consequences of increased public debt. This event was an installment of our monthly academic seminar series, which aims to elevate important new research on issues related to whether and how economic inequality impacts economic growth. If you would like to read the paper, you can find it here and watch the seminar here.
Tim Wu
White House National Economic Council; previously professor at Columbia University
Tim Wu serves as the special assistant to the president for technology and competition policy on the National Economic Council. His portfolio is similar to the one he and other scholars called for in the November 2020 antitrust transition report from Equitable Growth, in which they described the need for a White House Office of Competition Policy to keep tabs on all the different cross-cutting ways the federal government shapes markets. That report also covered many additional ways Congress and the Biden administration could revitalize antitrust enforcement and restore competition.
Earlier this month, President Biden signed a new executive order, which Wu took the lead in authoring. Many of the 72 initiatives in the federal directive to promote healthy competition in the U.S. economy were inspired by principles put forth in Equitable Growth’s antitrust transition report.
Wu was most recently a professor at Columbia University law school. Prior to being a professor, Wu was enforcement counsel in the New York Attorney General’s Office, worked on competition policy for the National Economic Council for the Obama White House, and in antitrust enforcement at the Federal Trade Commission.
Wu was a guest speaker during a virtual conference in November 2020 to discuss the release of Equitable Growth’s antitrust transition report. You can watch the event here.
On July 12, the National Bureau of Economic Research kicked off its summer institute, an annual 3-week conference featuring discussions and paper presentations on specific subfields of economics, including wealth taxation and tax evasion, market structure and competition, and labor market inequalities. This year’s NBER event is being held virtually due to the coronavirus pandemic and is being livestreamed on YouTube.
We’re excited to see Equitable Growth’s grantee network, Steering Committee, and Research Advisory Board and their research well-represented throughout the program. Below are abstracts (in no particular order) of some of the papers that caught the attention of Equitable Growth staff during the second week of the conference. Click here for a round-up from week 1, and come back on Monday, August 2 for highlights from the third and final week of sessions and presentations.
Abstract: Over the past four decades, income inequality grew significantly between workers with bachelor’s degrees and those with high school diplomas (often called “unskilled”). Rather than being unskilled, we argue that these workers are STARs because they are skilled through alternative routes—namely, their work experience. Using the skill requirements of a worker’s current job as a proxy of their skill, we find that though both groups of workers make transitions to occupations requiring similar skills to their previous occupations, workers with bachelor’s degrees have dramatically better access to higher-wage occupations where the skill requirements exceed the workers’ observed skill. This measured opportunity gap offers a fresh explanation of income inequality by degree status and reestablishes the important role of on-the-job-training in human capital formation.
Abstract: How did the largest expansion of unemployment benefits in U.S. history affect household behavior? Using anonymized bank account data covering millions of households, we provide new empirical evidence on the spending and job search responses to benefit changes during the pandemic and compare those responses to the predictions of benchmark structural models. We find that spending responds more than predicted, while job search responds an order of magnitude less than predicted. In sharp contrast to normal times, when spending falls after job loss, we show that when expanded benefits are available, spending of the unemployed actually rises after job loss. Using quasi-experimental research designs, we estimate a large marginal propensity to consume out of benefits. Notably, spending responses are large even for households who have built up substantial liquidity through prior receipt of expanded benefits. These large responses contrast with a theoretical prediction that spending responses should shrink with liquidity. Simple job search models predict a sharp decline in search in the wake of a substantial benefit expansion, followed by a sustained rebound when benefits expire. We instead find that the job finding rate is quite stable. Moreover, we document that recall plays an important role in driving job-finding dynamics throughout the pandemic. A model extended to fit these key features of the data implies small job search distortions from expanded unemployment benefits. Jointly, these spending and job finding facts suggest that benefit expansions during the pandemic were a more effective policy than predicted by standard structural models. Abstracting from general equilibrium effects, we find that overall spending was 2 percent to 2.6 percent higher and employment only 0.2 percent to 0.4 percent lower as a result of the benefit expansions.
Abstract: We build a consistent measure of female employment for the United States over the past 150 years—encompassing intensive and extensive margins—combining data from the U.S. population census and several early state-level surveys on various personal and economic circumstances of individuals. The resulting measure of employment—which includes paid work, as well as unpaid work in family business and corrects for other sources of underreporting—displays a U shape over time. We empirically and theoretically relate the U-shaped labor supply to the process of structural transformation and, namely, the reallocation of labor from female-intensive agriculture into male-intensive manufacturing at early stages of development and from manufacturing into female-intensive services at later stages. We propose a multisector model of the economy, where the interplay between uneven productivity growth and consumption complementarities across sectors predicts the modernization of agriculture and decline of family farms, the rise in manufacturing and services, and the marketization of home production. The downward portion of the U-shaped pattern is associated with the decline in agricultural employment and the disappearance of the family farm, while the upward portion is driven by the expansion of the service economy, to the detriment of manufacturing, and the marketization of home production.
Note: This abstract is from an earlier version of this paper. For updated details, please click here.
Abstract: We present a mechanism based on managerial incentives through which common ownership affects product market outcomes. Firm-level variation in common ownership causes variation in managerial incentives and productivity across firms, which leads to intra-industry and intra-firm cross-market variation in prices, output, mark-ups, and market shares that is consistent with empirical evidence. The organizational structure of multiproduct firms and the passivity of common owners determine whether higher prices under common ownership result from higher costs or from higher mark-ups. Using panel regressions and a difference-in-differences design, we document that managerial incentives are less performance-sensitive in firms with more common ownership.
Abstract: This paper studies tax evasion at the top of the U.S. income distribution using IRS microdata from random audits, targeted enforcement activities, and operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7 percent in the bottom 50 percent to more than 20 percent in the top 1 percent, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1 percent fiscal income share significantly.
Note: This paper was funded in part by Equitable Growth.
Abstract: This paper adds to the empirical evidence that criminal records are a barrier to employment. Using data from 2,655 online applications sent on behalf of fictitious male applicants, we show that employers are 60 percent more likely to call applicants that do not have a felony conviction. We further investigate whether this effect varies based on applicant race (Black versus White), crime type (drug versus property crime), industry (restaurants versus retail), jurisdiction (New Jersey versus New York City), local crime rate, and local racial composition. Although magnitudes vary somewhat, in every subsample, the conviction effect is large, significant, and negative.
Note: This abstract is from an earlier version of this paper, which featured fewer authors alongside Agan.
Abstract: How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the U.S. data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5 percent in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax, or OWT, in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax, or OCIT, is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality.
Note: This abstract is from an earlier version of this paper. For updated details, please click here.
“Unbundling Labor” Chris Edmond, University of Melbourne Simon Mongey, University of Chicago, NBER, Equitable Growth grantee
Abstract: In this paper, we provide a theory for the role of technological change in the relative substitutability of workers in the economy. We show the theory to be useful for understanding new trends that we identify in the wages paid to workers. We extend Rosen (1983) to study when the bundled talents of workers that define their comparative advantage leads them to earn rents, and when these talents may be unbundled such that workers are more substitutable and rents are competed away. Allowing firms to choose their technology, as in Caselli and Coleman (2006), endogenizes this substitutability. When technologies are adapted to labor supply, an unbundled economy is more likely, rents to workers shrink, and workers get paid more similarly. We provide empirical evidence consistent with the theory. In the United States, workers in low-skill occupations are paid more similarly now than in the 1980s. Over-time premia, part-time penalties, and experience premia have disappeared.
Note: This abstract is from an earlier version of this paper. For updated details, please click here.
1. I would put this analysis more strongly. The price level now is 10 percent below where consensus forecasts that it would be a decade ago. In that context, a quarter—or a year, or two years—of 5 percent-a-year inflation is simply not an issue. Read Francesco D’Acunto and Michael Weber, “A temporary increase in inflation is not a long-run threat to U.S. economic growth and prosperity,” in which they write: “Recent 5 percent inflation rate appears much less concerning once we account for what economists call the base rate effect—the price level 12 months ago, in the midst of a pandemic recession in which demand was artificially low due to lockdown measures. … As this base rate effect vanishes over the next few months—due to the sharp drop in the price level early in the recession partially reversing in the second half of 2020—then, all else being equal, policymakers should expect more moderate Consumer Price Index inflation readings going forward. … Accumulation of higher savings, paired with new spending opportunities and the reopening of the U.S. economy, made the scope for demand pressure very concrete. Indeed, new car and home sales are at their highest levels since before the Great Recession of 2007–2009.”
2. As John Maynard Keynes wrote, long ago, the boom not the slump is the time for austerity. And “slump” includes the first, second, and third stages of the recovery as well. Read Davide Furceri, Prakash Loungani, Jonathan Ostry, and Pietro Pizzuto, “Fiscal austerity intensifies the increase in inequality after pandemics,” in which they write: “This column predicts the likely distributional effects of Covid–19 by analysing evidence from five previous outbreaks (SARS, H1N1, MERS, Ebola, and Zika). It finds that severe austerity measures were associated with inequality increases three times greater than expansive fiscal policy following a pandemic. Premature austerity is self-defeating from both a macro and an equity standpoint.”
3. I think this congressional testimony was extremely well put together. Read Kate Bahn, “Testimony before the Joint Economic Committee on monopsony, workers, and corporate power,” in which she writes: “When employers have outsized power in employment relationships, they are able to set wages for their workers, rather than wages being determined by competitive market forces. Given this monopsony power, employers undercut workers. This means paying them less than the value they contribute to production. One recent survey of all the economic research on monopsony finds that, on average across studies, employers have the power to keep wages over one-third less than they would be in a perfectly competitive market. Put another way, in a theoretical competitive market, if an employer cut wages then all workers would quit. But in reality, these estimates are the equivalent of a firm cutting wages by 5 percent yet only losing 10 percent to 20 percent of their workers, thus growing their profits without significantly impacting their business.”
Worthy reads not from Equitable Growth:
1. The people claiming that it was very likely there would be a big employment boost from cutting off pandemic unemployment insurance always seemed to me to be not competent or not thinking coherently. And, as of right now, it is looking as though they were, as expected completely wrong. But will there be any rethinking on their part as the empirical evidence comes in? Read Arindrajit Dube, “Early impacts of the expiration of pandemic unemployment insurance programs,” in which he writes: So far, 25 states have ended their participation in all or most of the pandemic unemployment insurance (UI) programs. … So what has been the impact so far on the labor market? … I group states by their dates of expiration: 4 states ended the programs on June 12, then 8 more states ended them on June 19, and finally 10 additional states ended participation on June 26. … In the 12 states where pandemic UI expired on June 12 (grey) or 19 (green), the share of population receiving UI fell sharply between early June and early July … a roughly 60 percent reduction in the UI rolls in these states. … Between early June and early July, the EPOP rates in the states seeing large drops in UI receipt (i.e., 12th and 19th June cohorts in grey and green) saw no uptick in employment. … Certainly there was no immediate boost to employment during the 2–3 weeks following the expiration of the pandemic UI benefits. … Of course, this evidence is still early, and more data is needed to paint a fuller picture.”
2. I confess this really surprises me, too. “Obeying the law is for little people” is not something that seems to be to be a likely vote-winner for any set of politicians. And as the Democratic Party shifts to the left with its increasing concern with equitable growth, where might the Republican donors go should Republican candidates cross them on things like pay-your-taxes? Read Paul Krugman, “Should Only the Little People Pay Taxes?,” in which he writes: “Even I was caught by surprise when Republicans negotiating over a possible infrastructure bill ruled out paying for it in part by giving the Internal Revenue Service more resources to go after tax evasion. … I’m not surprised to learn that a significant number of senators are sympathetic to the interests of wealthy tax cheats, that they are objectively pro-tax evasion. I am, however, surprised that they are willing to be so open about their sympathies. There is, after all, a big difference between arguing for low taxes on the rich and arguing, in effect, that rich people who don’t pay what they legally owe should be allowed to get away with it.”
3. A very nice history lesson from the extremely sharp Annette Gordon-Reed. No successful Haitian Revolution, no Louisiana Purchase sale to President Thomas Jefferson, and then in all likelihood both France and Great Britain willing to spend resources to contest control of the Mississippi Valley with the United States—especially as one’s presence in the area will induce the other to see it as a key cold- or hot-war battlefield. Read her “We Owe Haiti a Debt We Can’t Repay,” in which she writes: “In 1791 the enslaved people of Haiti … engineered the first and only successful slave revolt in modern history. … France’s richest colony … [supplied] worldwide demand for sugar and the slavery-based economy that fulfilled it. Led by Toussaint L’Ouverture, Africans on the island violently threw off their enslavers. … Americans watched these proceedings closely. As refugees from Saint-Domingue arrived in the United States, bringing news of the successful revolt, white Southerners were alarmed. … Napoleon brought a new challenge to Saint-Domingue when he decided in 1802 to reassert control over French colonies in the Americas. He sent a fleet to the island to accomplish the task. The residents fought back and, with the help of “Aedes Aegypti,” the mosquito that carries yellow fever, repelled the invaders. … Napoleon … [used] the territory of Louisiana as a supply station. … Once the Haitians had shattered his dream, Napoleon saw no reason to hold on to the territory. He was eager to sell it, and President Jefferson was equally eager to buy. … If not for the French defeat at the hands of the Haitians, the sale may not have come off, leaving the United States possibly forever divided by a huge swath of French-controlled land or forced into armed conflict with the French over it. Of course, what the United States really bought from France was the right to contend with the various Indigenous people who had their own claims to the land. … The Haitians, who suffered enormously for their victory in the early years of the 19th century and who were treated so poorly by Americans and Europeans for decades after that, gave the people and the government of the United States a generally unrecognized benefit. Writing in ‘History of the United States During the Administrations of Thomas Jefferson,’ Henry Adams said it plainly: the ‘prejudice of race alone blinded the American people to the debt they owed to the desperate courage of five hundred thousand Haytian Negroes who would not be enslaved.’”
This is a post we publish each Friday 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 relevant and interesting articles 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
On July 12, the National Bureau of Economic Research kicked off its summer institute, an annual 3-week conference featuring discussions and paper presentations on specific subfields of economics, including inequality and the macroeconomy, intergenerational mobility, automation and the future of work, and occupational segregation. Equitable Growth compiled a list of paper abstracts that caught our attention throughout the first week, including research from our grantee network and members of our Steering Committee and Research Advisory Board. For highlights from week two, be sure to check back on Monday, July 26.
Last month’s intense record-breaking heat in the Pacific Northwest led many workers in Oregon to fear for their lives, reports HuffPost’s Dave Jamieson. The state’s Occupational Safety and Health Administration received more than 100 heat-related complaints in the final week of June alone, reporting unsafe conditions in various industries and workplaces. Jamieson explains the challenges that many workers will face as heat waves become more common, particularly in typically cooler climates that are ill-equipped to handle such high temperatures. He then goes into detail about the complaints, which frequently centered on a lack of air conditioning, water, or sufficient breaks for workers.
In a guest essay for The New York Times, Susan Joy Hassol, Kristie Ebi, and Yaryna Serkez detail the impact of extreme heat around the world. They focus on the increase in deaths and other health incidents as a result of heat waves, both in the United States and abroad. They put together a series of maps that show how annual heat-related deaths could increase by almost 100,000 in the United States by the end of the century if no action is taken to reduce emissions and combat human-caused climate change. They then urge policymakers to not only act to reduce emissions but also implement heat action plans, worker protections, and infrastructure updates to bolster the power grid in the face of rising heat-related disruptions.
Millions of U.S. adults who are looking for jobs do not have a bachelor’s degree, while many employers complaining about labor shortages also unnecessarily require a college education for their open positions. This bias is preventing companies from gathering a talented and diverse workforce and is reinforcing economic inequalities, writes Byron Auguste in The Washington Post. While higher-education degrees are certainly necessary in some fields such as medicine, law, and engineering, he continues, they make little sense as a requirement for others, such as sales or marketing, where skills can be learned on the job or through alternative pathways. This college-degree discrimination affects Black, Latino, and rural workers the most, reinforcing racial and socioeconomic disparities and causing serious harm to the U.S. economy and workforce.
On July 12, the National Bureau of Economic Research kicked off its summer institute, an annual 3-week conference featuring discussions and paper presentations on specific subfields of economics, including inequality and the macroeconomy, intergenerational mobility, automation and the future of work, and occupational segregation. This year’s NBER event is being held virtually due to the coronavirus pandemic and is being livestreamed on YouTube.
We’re excited to see Equitable Growth’s grantee network, Steering Committee, and Research Advisory Board and their research well-represented throughout the program. Below are abstracts (in no particular order) of some of the papers that caught the attention of Equitable Growth staff during the first week of the conference. Come back on Monday, July 26 for highlights from the second week of sessions and presentations.
“The racial wealth gap, 1860-2020” Ellora Derenoncourt, Princeton University, Equitable Growth grantee Chi Hyun Kim, University of Bonn Moritz Kuhn, University of Bonn Moritz Schularick, University of Bonn
Abstract: The racial wealth gap is the largest of the economic disparities between Black and White Americans, with a White-to-Black per capita wealth ratio of 6-to-1. It is also among the most persistent. In this paper, we provide a new long-run series on White-to-Black per capita wealth ratios from 1860 to 2020, using data from the U.S. Census, historical state tax records, and a newly harmonized version of the Survey of Consumer Finances (1949–2019), among other sources. We combine these data with a simple framework of wealth accumulation by each racial group to show that even under ideal conditions, racial wealth convergence is a distant scenario given vastly different starting conditions under slavery. Further, the observed path of convergence indicates that the wealth gap is on track to persist indefinitely or even diverge due to differences in wealth accumulating conditions for Black and White Americans since Emancipation. Our findings shed light on the importance of policies such as reparations, which address the historical origins of today’s persistent gap, as well as policies that reduce wealth inequality and thereby improve the relative wealth position of Black Americans.
“Monetary Policy and Racial Inequality” Alina K. Bartscher, University of Bonn Moritz Kuhn, University of Bonn Moritz Schularick, Federal Reserve Bank of New York, University of Bonn Paul Wachtel, New York University
Abstract: This paper aims at an improved understanding of the relationship between monetary policy and racial inequality. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between Black and White households. Specifically, we show that, although a more accommodative monetary policy increases employment of Black households more than White households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between Black and White households, because Black households own fewer financial assets that appreciate in value. Over a 5-year horizon, the employment effects remain substantially smaller than the countervailing portfolio effects.
Abstract: Do collective bargaining rights for law enforcement result in more civilian deaths at the hands of the police? Using an event-study design, we find that the introduction of duty to bargain requirements with police unions has led to a significant increase in non-White civilian deaths at the hands of police during the late 20th century. We find no impact on various crime rate measures and suggestive evidence of a decline in police employment, consistent with increasing compensation. Our results indicate that the adoption of collective bargaining rights for law enforcement can explain approximately 10 percent of the total non-White civilian deaths at the hands of law enforcement between 1959 and 1988. This effect is robust to a contiguous county approach, accounting for heterogeneity in treatment timing, and numerous other specifications. While the relationship between police unions and violence against civilians is not clear ex-ante, our results show that the popular notion that police unions exacerbate police violence is empirically grounded.
Abstract: We show that lenders face more uncertainty when assessing default risk of historically underserved groups in U.S. credit markets and that this information disparity is a quantitatively important driver of inefficient and unequal credit market outcomes. We first document that widely used credit scores are statistically noisier indicators of default risk for historically underserved groups. This noise emerges primarily through the explanatory power of the underlying credit report data (e.g., thin credit files), not through issues with model fit (e.g., the inability to include protected class in the scoring model). Estimating a structural model of lending with heterogeneity in information, we quantify the gains from addressing these information disparities for the U.S. mortgage market. We find that equalizing the precision of credit scores can reduce disparities in approval rates and in credit misallocation for disadvantaged groups by approximately half.
Note: This paper builds off Equitable Growth-funded research.
Abstract: We present what is, to the best of our knowledge, the first long-run estimates of intergenerational relative mobility for samples that are representative of the full U.S.-born population. We develop a simple mobility measure that allows easy inclusion of non-Whites and women for the 1910s to 1970s birth cohorts. We show a robust decline in both the intergenerational elasticity and rank-rank persistence measures between the 1910s and 1940s birth cohorts. Both measures tend to drift up afterward, so we find that persistence measures mirror the U-shaped trends in inequality over this period. Decomposing the IGE into within- and between-group components, we show that absolute convergence of incomes by race explains a large share of the decline in intergenerational mobility.
Abstract: Telephone operation, one of the most common jobs for young American women in the early 1900s, provided hundreds of thousands of female workers a pathway into the labor force. Between 1920 and 1940, AT&T adopted mechanical switching technology in more than half of the U.S. telephone network, replacing manual operation. Although automation eliminated most of these jobs, it did not affect future cohorts’ overall employment: The decline in demand for operators was counteracted by growth in both middle-skill jobs like secretarial work and lower-skill service jobs, which absorbed future generations. Using a new genealogy-based census linking method, we show that incumbent telephone operators were most impacted by automation, and a decade later were more likely to be in lower-paying occupations or have left the labor force entirely.
Abstract: Introducing heterogeneous households to a New Keynesian small open economy model amplifies the real income channel of exchange rates: The rise in import prices from a depreciation lowers households’ real incomes and leads them to cut back on spending. When the sum of import and export elasticities is one, this channel is offset by a larger Keynesian multiplier, heterogeneity is irrelevant, and expenditure switching drives the output response. With plausibly lower short-term elasticities, however, the real income channel dominates, and depreciation can be contractionary for output. This weakens monetary transmission and creates a dilemma for policymakers facing capital outflows. Delayed import price pass-through weakens the real income channel, while heterogeneous consumption baskets can strengthen it.
Note: This paper builds off Equitable Growth-funded research.
Abstract: In the 1960s, two landmark pieces of legislation targeted the longstanding practice of labor-market discrimination against U.S. women. The Equal Pay Act of 1963 mandated equal pay for equal work, and Title VII of the Civil Rights Act of 1964 included a broader ban on employment discrimination by sex. We evaluate the combined effects of this legislation using two complementary research designs, which exploit variation in the incidence of the legislation due to preexisting state equal pay laws and preexisting pay gaps. Our findings show that equal pay and fair employment legislation reduced discrimination against women and increased their wages. Although we find little evidence that the legislation reduced women’s employment or hours, women’s employment shifted away from jobs more affected by the legislation to jobs with smaller gender gaps.
“Bottlenecks: Sectoral Imbalances and the US Productivity Slowdown” Daron Acemoglu, Massachusetts Institute of Technology, NBER David Autor, Massachusetts Institute of Technology, NBER, Equitable Growth grantee, Equitable Growth Research Advisory Board member Christina Patterson, University of Chicago, NBER, Equitable Growth grantee, former Equitable Growth Dissertation Scholar
Abstract: Despite the rapid pace of innovation in information and communications technologies, or ICT, and electronics, aggregate U.S. productivity growth has been disappointing since the 1970s. We propose and empirically explore the hypothesis that this is because of the unbalanced sectoral distribution of innovation over the past several decades. Because an industry’s success in innovation depends on complementary innovations among its input suppliers, rapid productivity growth in just a subset of sectors may create bottlenecks and fail to translate into commensurate aggregate productivity gains. Using data on input-output linkages, citation linkages, industry productivity growth, and patenting, we find evidence in support of this hypothesis: The variance of supplier TFP growth or innovation adversely affects an industry’s own TFP growth and innovation. Our estimates suggest that a substantial share of the productivity slowdown in the United States and several other industrialized economies can be accounted for by the sizable increase in cross-industry variance of TFP growth and innovation.
“A Goldilocks Theory of Fiscal Policy” Atif Mian, Princeton University, NBER, Equitable Growth grantee, Equitable Growth Steering Committee member Ludwig Straub, Harvard University, NBER Amir Sufi, University of Chicago, NBER, Equitable Growth grantee, Equitable Growth Research Advisory Board member
Abstract: Fiscal policy in advanced economies faces a “Goldilocks dilemma”: Fiscal consolidation risks prolonged episodes at the zero lower bound (ZLB), while fiscal expansion raises sustainability concerns. This paper proposes a dynamic fiscal policy framework to study fiscal space subject to this trade-off. At the core of our analysis is a deficit-debt diagram, which we use to measure how much fiscal expansion is necessary to avoid the ZLB, when fiscal policy can run deficits indefinitely, and at what debt level the interest rate rises above the growth rate. Rising inequality and weak aggregate demand expand fiscal space, allowing greater indefinite deficits, while slowing growth tightens the ZLB constraint, requiring greater and greater debt levels. We characterize the effects of various tax policies on fiscal space and provide a cross-country comparison.
1. I think this is a great decision and is going to lead to great and wonderful things. Read “A note from incoming Equitable Growth President & CEO Michelle Holder,” in which she writes: “I’ve admired the Washington Center for Equitable Growth since its inception in 2013, so I am thrilled to become its next leader. Equitable Growth’s mission—to accelerate research on how inequality affects economic growth and stability—hits home for me. … Examining how inequality inhibits growth, and promoting effective and actionable policies, is absolutely critical if we want to improve our economy and society more broadly. As a second-generation immigrant, first-generation college graduate, and working mom, my lived experience lies at the nexus of characteristics associated with marginalization and cuts right to the heart of many topics Equitable Growth studies. …The present moment is charged with opportunities. … I could not be more excited to lead the Washington Center for Equitable Growth through this next chapter.”
2. It is Child Tax Credit week. We have very solid projections of all the good it will do from studies of partially similar programs in the past, but it would be nice to confirm or disconfirm our expectations as rapidly as possible. Read former Equitable Growth senior policy advisor Liz Hipple, “The child allowance will pay dividends for the entire U.S. economy far into the future,” in which she wrote: “Research into positive, long-term benefits of the Earned Income Tax Credit and the Supplemental Nutrition Assistance Program is directly translatable to the benefits we can expect to see from the new child allowance. Economic research clearly demonstrates that an investment in families today is an investment in their future economic mobility, as well as in broad-based, stable economic growth. Making the newly enacted child allowance permanent will pay dividends for all Americans far into the future.”
Worthy reads not from Equitable Growth:
1. If you had told me a generation ago that we would let local control of zoning get this dysfunctional, I would not have believed you. Read Joseph Gyourko and Jacob Krimmel, “The Impact of Local Residential Land Use Restrictions on Land Values Across and Within Single Family Housing Markets,” in which they write: “The amount by which land prices are bid up due to supply side regulations … [is] especially burdensome in large coastal markets. … Price impacts in the big West Coast markets now are the largest in the nation. In the San Francisco, Los Angeles, and Seattle metropolitan areas, the price of land everywhere within those three markets having been bid up by amounts that at least equal typical household income. … In the San Francisco metropolitan area (which includes San Francisco, Alameda, Contra Costa, Marin and San Mateo counties), the median “zoning tax” for a quarter-acre of land was $409,000—more than four times the region’s median household income.”
2. As far as I know, there are very few people who were satisfied with the sluggish recovery from the Great Recession. Read Matthew Yglesias, “When experts go astray,” in which he writes: “On the specifics of full employment, what happened after the 1970s inflation experience is that economists promulgated a view that democracy naturally tends toward inflation. … Elected officials always want to err on the side of less unemployment, even if that means more inflation. They say you can worry about the inflation later. But there’s a ‘time consistency problem’ where once it’s later, you still want to defer addressing inflation. … The solution to this, according to economists, was to create central banks that are staffed by experts (i.e., economists), pay higher salaries than normal civil service agencies, and also receive unusual levels of insulation from the political process—to the point where the president criticizing their decisions is considered inappropriate. … But just as biology lab insiders are reluctant to conclude that biology labs are running reckless risks, economists are reluctant to conclude that this set of special arrangements might have some downsides. I don’t think it’s a coincidence that Jay Powell is not an economist—he’s not intellectually, emotionally, or professionally invested in the community of practice that looks at the sluggish recovery from the Great Recession and says ‘yeah, we did a great job.’”
This summer’s West Coast heat waves come as no surprise. But headlines about the various negative effects of excessive heat, including fatal wildfires, often overlook the plight of everyday workers. Extreme heat due to the effects of climate change threaten the health and safety of predominantly non-college-educated U.S. workers, especially young men in their early prime-age working years, according to new research published today in the Washington Center for Equitable Growth’s Working Paper series.
The new working paper by Jisung Park and Nora Pankratz at the University of California, Los Angeles and A. Patrick Behrer at Stanford University documents, for the first time, the growing safety risks of excessive heat for U.S. workers in occupations not just where the work is mostly outside but also indoors. It examines confidential data from California’s worker compensation system, the nation’s largest, finding that on days with highs of 90 degrees Fahrenheit, workplace injuries increase by 6 percent to 9 percent, compared to a day in the 50–60-degree F temperature range, while days of 100 F or higher increase injuries by 10 percent to 15 percent.
All told, the three co-authors estimate that hotter temperatures caused approximately 260,000 to 450,000 additional unreported heat related injuries in California over the period between 2001–2018, or roughly 15,000 to 25,000 per year. They estimate the socioeconomic costs of these injuries are on the order of $525 million to $875 million per year, given the costs of healthcare, lost wages and productivity, and other knock-on costs such as work disruptions and potential permanent disability. And that toll will be registered unequally as climate change hits men without a college degree hardest and as the reverberations of the coronavirus pandemic continue to harm front-line, mostly low-income workers, particularly workers of color.
Indeed, the health and economic toll from this summer’s record-breaking heat waves in the West could well elevate these numbers and costs in California and across the entire U.S. economy. And certainly, the rapidity of climate change makes it important to understand the consequence of heat exposure on working conditions, particularly the 70 percent of the 100 million U.S. workers without a bachelor’s degree who report routine exposure to harsh environmental conditions on the job. The coronavirus pandemic spotlights further the importance of nonwage compensation for U.S. workers in the form of enhanced workplace safety.
Climate change, worker safety, and U.S. income and health inequality
Research shows human physical and cognitive performance to be highly sensitive to heat. But little is known about how climate change will affect workers, particularly in the United States and other developed economies.
This latest research by Park, Pankratz, and Behrer presents important new evidence. Using administrative data from worker’s compensation claims in 1,700 ZIP codes across California, and then linking these records to high-frequency local weather data, they were able to isolate the causal impact of a hotter day on the number of injury claims in a given ZIP code, as well as location-specific seasonality.
In order to account for the possibility that increased injuries are driven by firms working employees for longer hours or recruiting more workers to make up for lost time, they separately estimate the effect of temperature on the number of workers and worker-hours on the job and find that the results are unlikely to be driven by these factors. They find that hotter temperatures increase workplace accidents in both indoor and outdoor settings and for many injury types not directly related to heat, such as falling from heights, being struck by a moving vehicle, or mishandling dangerous machinery.
As one might expect, hotter temperatures significantly increase injuries in predominantly outdoor industries, such as agriculture, utilities, and construction. But higher temperatures also increase injuries in some industries where work typically occurs indoors. In manufacturing, for instance, a day with highs above 95 degrees Fahrenheit increases injury risk by approximately 7 percent, relative to a day in the low-60s F. In wholesale, the effect is nearly 10 percent.
These patterns are consistent with recent research that finds hotter temperature to adversely affect cognitive performance and decision-making, as well as the possibility that firms must manage costs on hotter days by reducing safety investment, all of which provides evidence that leveraging investments in workplace safety is good for firms and the broader economy.
What’s more, the three co-authors find that heat exposure at work may exacerbate recent trends in workplace inequality. Because lower-wage workers are more likely to work in dangerous occupations, more likely to live and work in places with greater heat exposure, and experience larger marginal increases in risk on hotter days, the net effect on injuries is far greater for low-income groups. They find that for California workers in the bottom 20 percent ZIP-code-level residential income, the annual effect is approximately five times larger than for someone in the top 20 percent of the residential income distribution.
Park, Pankratz, and Behrer’s findings also present age and gender inequalities related to the threats to health from excessive heat. The effect of heat on injuries is significantly larger for men relative to women and for younger workers relative to older ones. Men appear to be at least three times more affected by heat-related workplace safety risks, compared to women, and workers in their 20s and 30s are approximately two times more affected than those in their 50s and 60s.
The implications of this research on policymaking
These findings suggest that many of the documented injuries may be preventable using existing technologies. The data suggest there is significant potential for adaptation to climate-related workplace risks. The effect of a day hotter than 90 degrees Fahrenheit on worker safety falls by roughly a third between 2001 and 2018, and the effect of days above 100 F is statistically indistinguishable from zero after 2005, which coincides with the introduction of what was, at the time, the nation’s first heat safety mandate, the California Heat Illness Prevention Standard, which applied only to outdoor workplaces.
More research is needed to understand whether such policies can improve safety without adversely affecting wages and employment, but the evidence is consistent with the notion that, even in some of the hottest parts of the world, measures can be taken to reduce heat-related worker risks. For instance, we document a significant decline in heat sensitivity of injuries even in the hottest third of California’s extreme heat distribution (by average number of days above 95 F), which corresponds to the 95th percentile of the U.S. extreme heat distribution.
Yetclimate change may already be adversely affecting U.S. workers in ways that official statistics may have significantly undercounted to date and which may exacerbate economic inequality in ways not fully captured by headline wage statistics. This year may well break the 2020 record that tied 2017 as the hottest year on record. Projections suggest that parts of the United States will experience more than 50 additional days above 90 F by 2040 to 2050 alone.
This means that, without further protections, many thousands of workers may face dangerously hot working conditions in coming years due to climate change. Research shows that the economic costs of rising health shocks could be substantial, leading to future earnings losses and even leading in some cases to more bankruptcies. For instance, a recent study finds that Americans who are hospitalized experience average earnings losses of 17 percent over the ensuing years, even those who have health insurance. Another recent study estimates that each workplace injury results in direct and indirect economic losses of approximately $35,000 per injury (in 2020 dollars).
Because many exposed workers have lower levels of formal education, these climate impacts may exacerbate trends in economic inequality. At the same time, because worker’s compensation and health insurance only cover a fraction of the total costs, the burden is not shared by all members of society. Estimates suggest that workers compensation covers less than 25 percent of the total economic burden associated with workplace accidents.
For those who do not have health insurance, such shocks to health have been shown to significantly increase the risk of bankruptcy. This may compound the challenges faced by noncollege workers amid the coronavirus pandemic, which has been shown to hit low-wage, low-education workers hardest.
What policymakers can do to protect U.S. workers from extreme heat
Federal regulations do not provide workplace protections against extreme heat. There are no binding regulations at the federal level, with the U.S. Occupational Safety and Health Administration providing only general guidelines pertaining to heat safety but no binding statutes. In October 2020, then-Sen. Kamala Harris (D-CA) and Sen. Sherrod Brown (D-OH) introduced a bill that would extend California’s protections nationwide. But those protections apply only to outside workers. Given the extent of these new findings on workplace safety needs due to excessive heat for indoor workers, state and federal policymakers should consider implementing binding safety standards related to heat for all U.S. workers.
