New Great Recession data suggest Congress should go big to spur a broad-based, sustained U.S. economic recovery

Posted on by Emilie Openchowski
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Overview

As federal policymakers debate President Joe Biden’s proposed $1.9 trillion American Rescue Plan, critics now argue that it will “overshoot,” meaning it would boost economic activity beyond the desired level. The economic track record of the past 10 years shows these concerns are misplaced. Undershooting the policy response would be a far more dangerous prospect and could lead to a repeat of the slow and inequitable economic growth that followed the previous U.S. recession.

New Great Recession data suggest Congress should go big to spur a broad-based, sustained U.S. economic recoveryDownload

After the Great Recession of 2007–2009, then-President Barack Obama and the U.S. Congress passed an insufficient stimulus, then pivoted too quickly to debt reduction. This was a crushing mistake that left many U.S. workers and their families stuck in the doldrums for years, facing stagnant, or even declining, incomes. The slow and uneven recovery was the direct result of these policies. This time, federal policymakers would be wise to err on the side of doing too much rather than too little.

A new data series from the U.S. Department of Commerce’s Bureau of Economic Analysis—its Distribution of Personal Income series—shows just how devastating this pattern was for most U.S. workers and their families. The agency’s new data series charts the distribution of aggregate growth in Personal Income and Disposable Personal Income, and reports how much growth accrues to the bottom, middle, and top of the income distribution. A new release in December 2020 updates the dataset through 2018, capturing most of the recovery from the Great Recession.

The lesson from the data is clear. The policy response to the Great Recession left millions of low- and middle-income families struggling while wealthy families saw significant additions to their incomes. Consider the cumulative growth in disposable personal income of high- and low- or moderate-income Americans. High-income households in the top 10 percent initially suffered a steep drop in income at the onset of the Great Recession due primarily to the collapse of income from assets such as stocks and bonds, which cratered early in the economic downturn, alongside business income losses. Low- to middle-income households in the bottom half of the income distribution did not initially suffer as dramatic a fall. (See Figure 1.)

Figure 1

One reason for the less dramatic shock to income seen in Figure 1 among households in the bottom 50 percent was because disposable personal income incorporates transfers from the federal government to households, so losses in this group were partially compensated for by rising Unemployment Insurance payments, Supplemental Nutrition Assistance Program benefits, and other government benefits. But this group then became mired in years of stagnant, or even declining, income as these benefits ended amid a still-tepid economic recovery, and did not experience substantial income gains until 2015.

By comparison, households in the top 10 percent of income recovered almost immediately after the end of the Great Recession and ended 2018 up 22 percent, compared to 2007. Importantly, the jump in top incomes in 2012 and steep decline in 2013 seen in Figure 1 does not represent a real decline, but rather is the result of households retiming their income to occur in 2012 so they could avoid rising top-income tax rates in 2013 as a result of the expiration of high-income tax cuts first enacted during the George W. Bush administration.

This issue brief breaks down the new BEA data series to discern why the U.S. economic recovery from the Great Recession was so weak and uneven, and what lessons can be learned from the policies of economic austerity enacted by Congress too swiftly after the end of the previous recession. Those lessons, briefly, are that policymakers should enact strong fiscal stimulus today and should invest in the development of distributional data so they can understand in real time how broadly shared the coming economic recovery is.

What happened to families’ income during the Great Recession?

The Bureau of Economic Analysis’ new data series provides a holistic look at how incomes changed for households in the bottom 50 percent of income during the Great Recession and the subsequent recovery. Personal Income consists of wages, transfers from the government, rent income, interest and dividends, and income from individually owned businesses and businesses organized as partnerships. Americans at the bottom and middle of the income distribution derive a significant amount of their income from the first two of these, wages and government transfers.

Government transfers initially blunted the impact of the 2007–2009 recession for low- and middle-income Americans. But once the initial stimulus wore off, transfers declined, and wages languished, providing positive but small contributions to income. (See Figure 2.)

Figure 2

Real growth in household income from 2008 to 2018, divided by type of income

Households were bolstered in 2014 by the implementation of the Affordable Care Act. But wages continued to stagnate until around 2016. It wasn’t until the tail end of the recovery from the Great Recession that the labor market started to really work for people in this group.

By contrast, households in the top 10 percent by income recovered quickly and were helped along by a mix of income sources, such as dividends from stocks, interest from bonds, rising business income, and much stronger wage growth, than what other Americans experienced. (See Figure 3.)

Figure 3

Real growth in household income from 2008 to 2018, divided by type of income

The result is that the top 10 percent of households routinely flirted with 6 percent income growth in the years after the Great Recession because they did not rely on any single source of income, but rather combined good wage growth with resurging business income and returns on their financial assets throughout the recovery period.

What’s more, this data series may understate the resurgence of top incomes after the Great Recession. The dataset-based definition of Personal Income notably excludes capital gains—the profits made by selling financial assets such as stocks. Income from capital gains is notably concentrated at the top of the income distribution.

The lesson: More economic stimulus is needed today to spur a more sustained economic recovery

What happened after the Great Recession that led to 5 years of mediocre economic progress for most Americans? Many factors may have contributed, but 2010 was famously the year that the United States—and most of the rest of the world—pivoted to austerity politics, slashing budgets in response to the supposed largesse of economic stimulus enacted in 2009. And that stimulus was comparatively small; lawmakers in 2020 spent more money over a much shorter span of time to prop up the economy.

Beginning in 2010, federal budgets declined significantly for the first time in decades. State and local budgets likewise declined significantly, and the public-sector workforce shrunk all the way through early 2014. (See Figure 4.)

Figure 4

Percent change in real per capita federal government outlays, 2006–2020

The lesson for the Biden administration is clear: Don’t let the foot off the gas. The slow recovery from the previous recession was a disaster for tens of millions of U.S. workers and their families. Although incomes eventually started to grow, the net result over a record-long expansion was that most families just barely recovered levels of wealth they had before the Great Recession. And young workers who graduated into the Great Recession economy may be dealing with the scarring effects for years to come.

Fast forward to today. The ongoing coronavirus recession is punishing for most families. Unemployment remains high, and it is concentrated among low- and middle-income earners. Yet, according to Opportunity Insights, high-wage employment is actually rising. And just like during the Great Recession, financial assets initially suffered but are now going up. The stocks that comprise the S&P 500 index are now up about 14 percent over their pre-pandemic high in February 2020, providing a significant boost to high-wealth households. More than half of all stocks are owned by the wealthiest 1 percent of U.S. households, and the top 10 percent own more than 80 percent of all stocks.

In recent months, aggregate job growth slowed considerably and has been especially weak for women and workers of color, strongly suggesting the initial signs of recovery amid the coronavirus recession may not last, absent more government intervention. And federal policymakers don’t yet know how low- and middle-income households will fare when eviction and foreclosure moratoriums are lifted—two economic cliffs that could impose sudden hardships on a large number of Americans. Nor is there a full picture of how this pandemic is impacting incomes yet.

The $1.9 trillion stimulus package that is currently working its way through Congress would provide significant support to incomes for low- and middle-income families. President Biden’s package includes enhanced Unemployment Insurance that will help sustain these families through the recovery, stimulus checks that will help them pay their bills now and will boost aggregate demand, and aid to states that will help them retain essential workers and open schools. These programs, and others included in the bill, will boost the incomes of workers outside the top 10 percent and help the economy avoid the pitfalls of the Great Recession recovery.

The BEA data on the previous economic recovery show the dangers of an inadequate policy response. Indeed, there are two specific lessons policymakers should take from the new BEA data.

First, Congress needs to pass a strong relief package and should continue to spend if economic indicators suggest that the U.S. labor market is not recovering quickly enough. After all, the overarching goal of federal policy is to get back to a tight labor market as quickly as possible and to avoid economic scarring that will permanently impact the economic prospects of the young and the economically vulnerable.

Second, these new distributional data provide actionable insights on how families fare during recessions and recoveries. To manage an effective recovery, Congress and the Biden administration need to understand how the economy is functioning in real time.

Right now, we are largely reliant on imperfect indicators that only hint at how families are faring. Policymakers know unemployment is up and aggregate Gross Domestic Product is down. But if the administration and Congress had access today to the kind of disaggregated statistics from the BEA running through 2018, then they could act with full knowledge of who was hurt most by the recession and who is being left out by the recovery.

Just imagine if federal policymakers could know in detail now just how incomplete the recovery from the current recession is today. If they did, then they could consider further economic stimulus with a clear target for how much stimulus is needed and how it should be targeted. Alas, policymakers are always seeing the economy imperfectly because data are often not available until long after the fact.

Piloting the U.S. economy through recessions and recoveries will be easier if policymakers know how the economy is faring for different kinds of families across levels of income, geography, race and ethnicity, and gender. Work by the BEA, the U.S. Department of Labor’s Bureau of Labor Statistics, and the U.S. Census Bureau to provide more granular economic data series should be considered an essential part of our economic crisis toolkit and funded accordingly.

Appendix

A note on data-analysis methods

The BEA data series provides total shares of Personal Income for each income decile of U.S. households. It reports, for example, that the bottom decile held 2.17 percent of all Personal Income in 2018. From this, it is easy to calculate growth rates for the various deciles, but there is no population adjustment. Because the dataset uses households as the unit of analysis (BEA starts with the Current Population Survey, which surveys households), I adjusted for the number of households in the economy to create Figure 1.

This “population” adjustment does not necessarily lead to a data series that closely tracks the per capita Personal Income series. Households sometimes grow faster or slower than the overall U.S. population does. Over the years analyzed in this issue brief, households generally grew faster than the population, leading to lower rates of growth across the board. Per capita Personal Income shows much stronger income growth in the aftermath of the Great Recession than my per household measure does, for example. In other years, the effect is reversed: The Great Recession was deeper in per capita Personal Income than in per household Personal Income.

To create Figures 3 and 4, I used Household Income rather than Disposable Personal Income, because it is easier to reconcile this measure with the distributional tables that the Bureau of Economic Analysis provides. At the recommendation of the agency, I did not adjust for household growth in these figures.

Notably, the BEA dataset is cross-sectional rather than panel. That is, when it refers to the top 10 percent, it does not mean the same group of people in each year but rather the 10 percent of people in the U.S. economy who happen to have the highest incomes in that particular year. In a given year, a large number of people may move up or down the distribution and find themselves in new groups.

Executive action to-do list for achieving strong, stable, and broad-based U.S. economic growth

Posted on by Emilie Openchowski
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When the Biden administration was handed the keys to the White House in January, it also was handed a number of broad executive powers that could, at the stroke of a pen, begin the process of substantially altering the way the U.S. economy works. Making the most fundamental, structural reforms to the economy, such as expanding workers’ bargaining rights, achieving universal paid leave, or better taxing large accumulations of capital, will require legislation, but the executive branch can take important steps on its own.

Like presidents before him, President Joe Biden is quickly making use of these authorities, which include executive orders, agency regulations, and various forms of subregulatory guidance. To underscore the exciting opportunities for further executive actions, the Washington Center for Equitable Growth is publishing our Executive Action Agenda, a series of factsheets on economic policy proposals that can help combat inequality and ensure strong, stable, and broad-based economic growth.

This is not the first time Equitable Growth has written about these policy recommendations, but these new publications outline the steps that specific agencies or other executive offices can take to actualize long-sought reforms. They also provide lists of experts with whom policymakers can consult. Here’s a rundown of the series so far.

  • Executive action to coordinate federal countercyclical regulatory policy. Regulatory actions that encourage banks to lend, firms to invest, and consumers to spend can increase demand and reduce unemployment during the current, and future, downturns. But identifying and implementing these effective countercyclical regulatory policies governmentwide requires coordination and expertise. This factsheet proposes that the new administration establish an office within the White House National Economic Council that would instruct regulators across the government to identify and implement countercyclical regulations—for example, promulgating rules that reduce energy prices, mortgage insurance premiums, or student loan debt during economic downturns. Yale Law professor Yair Listokin first proposed this idea in his 2019 book, Law and Macroeconomics: Legal Remedies to Recessions, and it was a cornerstone of his Vision 2020 essay published last year.
  • Executive action to combat wage theft against U.S. workers. Some employers frequently violate labor standards by paying workers less than the minimum wage. When these violations occur, they cut the victimized workers’ pay by 20 percent, on average. Cracking down on lawbreaking companies that don’t pay workers what they are owed is a straightforward way for the Biden administration to raise the incomes and living standards of U.S. workers and their families. The U.S. Department of Labor can take several steps to reduce labor law violations, including asking for a large increase for the department’s Wage and Hour Division in the president’s fiscal year 2022 budget request; prioritizing strategic enforcement to use resources as effectively as possible; pursuing co-enforcement with community-based organizations; and protecting workers from misclassification as independent contractors. This factsheet builds on foundational work from Janice Fine, Jenn Round, and Hana Shepherd of Rutgers University and Daniel Galvin of Northwestern University.
  • Executive action to reform the cost-benefit analysis of U.S. tax regulations. Since April 2018, the federal government has required a cost-benefit analysis for many more tax regulations than in the past. More than 2 years later, it is clear this experiment has failed because the analyses provide little information relevant to assessing the merits of those regulations, especially with respect to unmerited windfalls to favored groups. The Biden administration should eliminate the expanded requirement, and the U.S. Department of the Treasury should instead provide a qualitative and, when feasible, quantitative evaluation of tax regulations. This recommendation is based on a September 2020 report from Equitable Growth Director of Tax Policy and chief economist Greg Leiserson.
  • Executive action to coordinate antitrust and competition policies across the federal government. Growing market power disrupts the operation of free and fair markets, and harms consumers, businesses, and workers. It exacerbates inequality and compounds the harms of structural racism. Originally part of a comprehensive report Equitable Growth published in November 2020, this proposal recommends the new administration establish a White House Office of Competition Policy within the White House National Economic Council to coordinate the work of antitrust enforcement and regulatory agencies and promote rulemaking that catalyzes competition and reverse those that entrench incumbents or suppress competition.
  • Executive action to improve U.S. economic measurements. With the rise of economic inequality over the past four decades, most income growth has accrued to those at the top of the income distribution. As a result, aggregate Gross Domestic Product growth increasingly reflects the fortunes of the wealthy and masks the lack of progress for most Americans. To better reflect economic reality, GDP growth should be broken out for Americans in different income brackets. Equitable Growth calls this measure GDP 2.0. The U.S. Department of Commerce’s Bureau of Economic Analysis has begun producing a promising prototype of GDP 2.0, but BEA plans to produce statistics just once per year on a lag of at least 2 years. To support quicker and more frequent reporting, this factsheet recommends that the Biden administration direct BEA to estimate the cost of producing these statistics quarterly and then include that amount in the president’s annual budget request. The administration should also ask Congress to permit the use of IRS tax return data to improve statistical reporting. To advance racial equity, the administration should equip researchers, agencies, and Congress with data tools that better describe the experiences of workers of color and their families.

Executive action is a key tool for the new administration to influence how, and for whom, the economy operates. Equitable Growth’s Executive Action Agenda, launched over the past few weeks with the five policy recommendations listed above, outlines how President Biden can act unilaterally to advance strong, stable, and broad-based growth.

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Executive actions to improve U.S. economic measurements

Posted on by Maria Monroe
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Overview

The rise of economic inequality over the past four decades has changed the U.S. economy in fundamental ways. Unfortunately, the data that our federal statistical agencies produce to measure the nation’s economic progress has not kept up with these structural changes. At the same time, historical racial economic disparities persist, and federal government data has failed to give policymakers the tools to close these gaps.

Our statistical infrastructure must adapt to fit the present shape of the U.S. economy and the current needs of policymakers.

Factsheet: Executive actions to improve U.S. economic measurementsDownload

Aggregate GDP growth, for example, is increasingly disconnected from the fortunes of lower and middle-class Americans as more and more growth accrues only to those at the top of the income distribution. But the media continues to focus on aggregate growth because that is what government agencies report. Consequently, economic news perversely reflects only the fortunes of the rich and policies are assessed similarly. The resulting press coverage may actually reward politicians for increasing economic inequality.

The answer: Growth should not be reported as a single aggregate number, but rather broken out for Americans in different income brackets. We call this measure GDP 2.0. In 2020, the U.S. Department of Commerce’s Bureau of Economic Analysis, began producing, at Congress’ behest, a prototype of what this would look like. (See Figure 1.)

Figure 1

Measuring U.S. economic growth by income groups

U.S. Gross Domestic Product disaggregated by income levels, 2007­–2018

Disaggregation by income is meant to reflect a changing economy. It is also important to disaggregate by race and ethnicity to reveal more clearly the manifestations of long-standing discrimination. The two issues are not unrelated. Racial discrimination in employment and other areas is both an issue of justice and a drag on the entire economy.

There are two ways the federal statistical agencies can contribute to advancing economic research into racial economic disparities, which ultimately can help ensure more equitable economic treatment.

First, federal surveys often have insufficiently large samples to allow data users to analyze subsections of populations by race. Sample sizes are generally sufficient to look at male Hispanics versus female Hispanics, for example. But if we wanted to look at Hispanic females who have obtained a college degree, the level of precision of the estimate or margins of error, may be inadequate for analyses.

Here’s just one case in point. Analyses frequently discuss issues of the “white working class,” but policymakers are limited in their understanding of working class Hispanics, for instance, because federal statistics do not provide the tools to do so.

Second, there are few data releases that focus the attention of policymakers and the media on racial differences in earnings inequality and subsequent economic outcomes. Consider the annual poverty report, which is published every September by the U.S. Census Bureau. Its release serves as a news hook that engages the national and local press, policymakers and researchers in a dialogue about policies around poverty in the United States. This is a model for how economic data on inequality and racial differences can help drive conversations about addressing these problems

Executive action

The Bureau of Economic Analysis should produce distributional growth statistics concurrently with regular GDP reports. The agency’s prototype is promising, but BEA currently plans to produce statistics just once per year, and on a considerable lag of at least two years, limiting their usefulness to Congress and the Executive Branch.

To produce these statistics more quickly and frequently, the Bureau of Economic Analysis will need the resources to devote more people to this effort. In addition, access to IRS tax return data would help BEA construct higher-quality baseline estimates. This access can only be given by Congress, but agencies should signal their support of this move.

Steps the Biden administration could take to support GDP 2.0 include:

  • Direct the Bureau of Economic Analysis to estimate the cost of producing these statistics on a quarterly basis and include that request in president Biden’s annual budget request for the U.S. Department of Commerce.
  • Formally communicate to Congress through both the Annual Budget request of the Department of Commerce and the U.S. Department of the Treasury’s “Green Book” that U.S. statistical reporting would benefit from additional access to IRS tax return data through Section 5103(j) of the Internal Revenue Code.

In order to better describe the experiences of workers of color and their families in the United States and equip researchers, agencies, and Congress with the data tools necessary to advance racial equity, agencies should take the following steps:

  • First, the Interagency Working Group on Equitable Data, itself created by a Biden executive order on January 20, 2021, should study the feasibility, desirability, and cost of instituting oversamples of Black, Latinx, Native American, Asian, Native Hawaiian, and Pacific Islander populations in surveys conducted by the Census Bureau, the Bureau of Labor Statistics and other federal statistical agencies.
  • Second, this study also should examine the desirability of providing cash incentives to respondents if necessary. The Working Group should also consider recommending a similar expansion for the Federal Reserve’s Survey of Consumer Finances.
  • Third, statistical agencies should focus racial equity issues by issuing an annual report on racial equity across economic outcomes. For instance, an annual report out of the Census Bureau could track the nation’s progress towards racial equity and would play an important role in creating space for a national dialogue about economic outcomes across race.

Brad DeLong: Worthy reads on equitable growth, February 23–March 1, 2021

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. Across a remarkably large chunk of the United States, employers seem to think that keeping their contract with their workers is an optional thing. It is very disturbing and distressing to me that the norm that contracts are to be observed appears to of fallen to the wayside to such a substantial degree. Read Equitable Growth’s “Executive action to combat wage theft against U.S. workers,” which documents: “Wage theft against U.S. workers exacerbates the long-run problem of low and stagnant wages. When companies commit wage theft, they impoverish families and deprive workers of the just compensation for their hard work, robbing workers of the value they contribute to economic growth and exacerbating economic inequality. The odds that a low-wage worker will be illegally paid less than the minimum wage ranges from 10 percent to 22 percent, depending on overall economic conditions, and each violation costs that worker an average of 20 percent of the pay they deserve. Women, people of color, and noncitizens are especially vulnerable to wage theft and especially likely to feel they are not in a position to report the crime and get justice. Cracking down on lawbreaking companies that don’t pay workers what they are owed is a straightforward way for the Biden administration to raise the incomes and living standards of U.S. workers and their families.”

2. Restoring the minimum wage to something that actually has bite in the U.S. economy is the policy with the highest benefit cost ratio that I know of. Read Kate Bahn and Will McGrew, “Minimum wage increases are good for U.S. Workers and the U.S. economy,” in which they write: “Minimum wage increases significantly lower the poverty rate, increase earnings for low-wage workers, and decrease public expenditures on welfare programs. The earnings boost for low-wage workers from higher minimum wages extends beyond the immediate effect of the legal change and instead grows in magnitude for several years thereafter. A 10 percent increase in the minimum wage increases wages by 1.3 percent to 2.5 percent for workers in the food and beverage industry, according to a study of six cities with especially high minimum wages. Minimum wage increases can have some of the largest benefits for disadvantaged ethnic groups.”

3. Big business in the United States appears to have gotten itself into the minds of the Obama administration in a way that I do not remember it getting into the minds of the Clinton administration. Yes, the U.S. Department of Justice’s antitrust unit did very well in the Obama administration. But much of the rest of the executive branch over 2009­–2016—not so much. Now I fear that this pattern of forgetting that big businesses are not worthy people is taking hold in the Biden administration as well. That would not be a good thing. Read Hiba Hafiz and Nathan Miller, “Competitive Edge: Big Ag’s monopsony problem: how market dominance harms U.S. workers and consumers,” in which they write: “Agricultural markets are among the most highly concentrated in the United States. The markets for beef, pork, and poultry, grain, seeds, and pesticides are dominated by four firms. Three firms dominate the biotechnology industry. One or at best two firms control large farm equipment manufacturing. And a small number of firms are increasingly dominating agricultural data and information markets. Yet former Iowa Gov. Tom Vilsack (D)—President Joe Biden’s nominee for secretary of the U.S. Department of Agriculture, the same position Gov. Vilsack held during the Obama administration—has come out against breaking up Big Ag firms. “There are a substantial number of people hired and employed by those businesses,” he said last year. “You’re essentially saying to those folks, ‘You might be out of a job.’ That to me is not a winning message.” Gov. Vilsack couldn’t be more wrong on the economics.”

Worthy reads not from Equitable Growth:

1. It’s not just ethnic minorities that economics has a very hard time attracting. It’s the majority as well—the female majority. The pipeline leaks, massively, everywhere—and economics has been stalled for a generation in a way that no other academic discipline has. Read Shelly Lundberg and Jenna Stearns, “Women in Economics: Stalled Progress,” in which they write: “By the mid–2000s, just under 35 percent of Ph.D. students and 30 percent of assistant professors were female, and these numbers have remained roughly constant ever since. Over the past two decades, women’s progress in academic economics has slowed, with virtually no improvement in the female share of junior faculty or graduate students in decades … While differences in preferences and constraints may directly affect the relative productivity of men and women, productivity gaps do not fully explain the gender disparity in promotion rates in economics. Furthermore, the progress of women has stalled relative to that in other disciplines in the past two decades. We propose that differential assessment of men and women is one important factor in explaining this stalled progress, reflected in gendered institutional policies and apparent implicit bias in promotion and tenure processes.”

2. This is very, very good news indeed about the forthcoming robotization of the service sector. Human core capabilities appear to be straightforward to supplement, but nearly impossible to supplant, in at least one slice of services. Read Karen Eggleston, Yong Suk Lee, and Toshiaki Iizuka, “Robots and labour in the service sector,” in which they write: “Firm-level studies are important for understanding how robots augment some types of labour while substituting for others, yet evidence outside manufacturing is scarce. This column reports on one of the first studies of service sector robots, which suggests that robot adoption has increased some employment opportunities, provided greater flexibility, and helped to mitigate turnover problems among long-term care workers. The wave of technologies that inspires fear in many countries may be a remedy for the social and economic challenges posed by population ageing in others.”

3. The Texas blackout is worth studying closely. Apparently—obviously—there were insufficient market incentives in current and projected prices to incentivize and fund investments to secure reliable supply in the case of a weather event that was bound to come along sooner or later with probability one. Yet there was sufficient uncertainty and risk imposed upon consumers by the price process to make it a utility disaster for those who were not extremely nimble on their feet. It looks to me like a WOBW—a Worst of Both Worlds—situation. Was it? Where, exactly, did the market fail and why? I need to study this much much more. Read John Quiggin, “What Texas’s Blackouts Tell Us about Australia’s energy market,” in which he writes: “Texas lost power when neighbouring states, also experiencing the freeze, did not. The answer involves regulatory failures … Most of Texas is not connected to the rest of the US power grid. This is deliberate: the Texas Interconnection has been kept separate to ensure that it remains under Texas rather than federal control … Texas kept itself separate so it could replace its traditional integrated electricity supply with a structure that combined a pool market for the generation stage of electricity supply with a competitive market in retailing, and lightly regulated transmission and distribution. The system is run by ERCOT, the ironically titled Electric Reliability Council of Texas … The electricity market run by ERCOT… is an electricity pool market in which generators bid to supply power to the grid each day … When lots of power plants went offline, the market price of power soared to US$9000/MWh, producing ruinous bills for customers who had chosen supply deals based on the wholesale price rather than a fixed rate. Second, the system made it unprofitable for generators to invest in “winterising”… The maximum price is high enough to create both risk and opportunities for market manipulation, but not high enough to provide incentives to invest in reliable supply. In response to this mess, some electricity regulators have reintroduced an element of central planning by making “capacity payments” to generators willing to guarantee supply.”


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Research on race and consumption shows why racial disparities in Unemployment Insurance receipt are detrimental to economic recovery in the United States

Posted on by Maria Monroe
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It’s well-established that Black and Latinx workers who lose their jobs are less likely to access Unemployment Insurance benefits than their White peers. And it’s clear this disparity means hardship at the individual level for Black and Latinx families. But what does it mean in the broader context of the COVID-induced economic crisis?

Research released last year by a joint team of researchers from the University of Chicago (Peter Ganong, Damon Jones, and Pascal Noel) and the JP Morgan Chase Institute (Diana Farrell, Fiona Greig, and Chris Wheat) implies that this disparity will slow the eventual recovery of the U.S. economy. To understand why, it’s first important to take a look back at the way unemployment benefits stabilize our economy.

The idea is simple, when you think about it. When people lose their income from work with nothing to replace it, they stop spending their money. When they don’t spend money, businesses suffer and lay off employees. Unemployment spreads contagiously through the economy, like a disease. But income from unemployment benefits can stop the contagious spread. When people receive income from unemployment benefits, they are able to pay for clothing for their children and food for their families. And the stores where they spend money are able to keep their employees on payroll.

For unemployment benefits to have this effect, people have to spend them, and the new research from the University of Chicago and JP Morgan Chase Institute team shows that the spending of some demographic groups is more sensitive to fluctuations in income that the spending of others. Drawing on administrative data capturing 1.8 million households with Chase Bank checking accounts between October 2012 and April 2018, linked with data sources that can identify the race of bank account holders, the research team identifies moments when employers decrease or increase compensation to their entire workforce to see how individual households respond. They find that on aggregate, a $1 change in income leads to a 22-cent change in spending. (See Figure 1.)

Figure 1

Sensitivity of consumption to changes in pay, October 2012–April 2018

The co-authors also uncover variation by racial group. While for White bank account holders, a $1 change in income means a 7-cent change in spending, for Latinx bank account holders, it means a 15-cent change, and for African American bank account holders, it means a 22-cent change. (See Figure 2.)

Figure 2

Sensitivity of spending to changes in pay, October 2012–April 2018

There are many ways that a household could see a change in earnings from work. The hours of workers in a household could be cut or extended. They could receive bonuses. Their employers could change the amount they earn from commissions. Or their employment situations could vary with the seasons.

A particularly dramatic change occurs when workers in a household lose their jobs altogether, and this blow can be softened through the receipt of income through the Unemployment Insurance program—another income dramatic change. The research team again finds that spending by Black and Latinx households are more sensitive to fluctuations in income. (See Figure 3.)

Figure 3

Sensitivity of spending to changes in income from unemployment, October 2012–April 2018

This means that when Black and Latinx workers lose income from unemployment, their spending is more affected, and unemployment spreads more contagiously. Conversely, it means that when Black and Latinx workers receive income from unemployment benefits, they spend more of it—and the Unemployment Insurance dollars are more effective at propelling our economy toward recovery.

Why is spending by Black and Latinx workers and their families so much more sensitive to fluctuations in income than their White counterparts? While the existing literature suggests a variety of reasons, ranging from their ability to lean on their social networks to their ability to borrow, the research team finds one culprit that explains all the variation: the amount of savings available for a rainy day.

When people have funds stored away for a rainy day, they are less sensitive to dips in income. If they miss a paycheck, they can draw on their savings. But some people don’t have savings to turn to. So, when they miss a paycheck, they have no option but to cut back on spending, even if it means foregoing necessities such as paying the electricity bill or buying food. And when they experience an increase in income—including when an unemployment check comes through—they spend it to meet their needs. (See Figure 4.)

Figure 4

Change in spending per $1 change in income by savings amount quintile, October 2012–April 2018

And because of racism in our labor markets, our banking system, our housing markets, and our educational institutions, not all racial groups have the same amount of savings at their fingertips. The research team finds that Black and Latinx households have lower levels of savings to draw on when the proverbial rainy day occurs. What’s more, they find that this disparity in liquid savings completely explains the different sensitivities to income changes by racial group. (See Figure 5.)

Figure 5

Difference in spending's sensitivity to unemployment-related income change between White workers and Black/Latinx workers, October 2012–April 2018

This is an elegant explanation, but it is also bad news, particularly in the COVID pandemic. The same systemic racism that leads to low bank account balances for Black and Latinx workers also means that they were disproportionately clustered in jobs that were eliminated due to the COVID crisis and resulting recession. Getting unemployment dollars into the hands of Black and Latinx workers is therefore even more crucial to getting the United States to economic recovery.

So, what to do? In the short term, it’s important to extend the clock on UI benefits, as well as their amount. As of the publication of this column, enhancements to unemployment benefits are set to end in the middle of March, and even the currently proposed extensions to UI benefits that were introduced in the U.S. House of Representative’s 2021 budget reconciliation bill will stop abruptly at the end of August.

The research described in this column shows that the sudden cut in income will lead large numbers of Black and Latinx unemployed workers to curtail their spending. This means that unemployment will spread more contagiously, even as the waning of the pandemic is on the horizon. Extending benefits until the public health situation is under control and businesses are fully functioning again would stabilize the U.S. economy.

But even this policy fix will have muted effects because of racial disparities in rates of UI take-up. This research implies that if Black and Latinx workers who lost their jobs through no fault of their own during this pandemic had accessed benefits at the same rate as their White counterparts, the economic fallout would not have been so severe. In the longer term, we need to think about policy fixes that increase rates of unemployment benefit access among Black and Latinx workers. By eliminating racial disparities in UI benefit receipt, policymakers can be prepared for the next economic crisis, whenever it may strike.

Posted in Uncategorized

Weekend reading: Systemic racism’s impact on Black Americans’ economic outcomes edition

Posted on by Maria Monroe

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

The history of violence and suppression of Black Americans is long and atrocious, and the institutionalized racism and systemic oppression that began centuries ago continue to impact the economic outcomes of Black Americans. As Black History Month comes to a close, Liz Hipple and Shanteal Lake highlight how the lingering impacts of this historical discrimination and subjugation prevent many Black families from achieving the so-called American Dream. Hipple and Lake review a few of the papers that were presented at this year’s Allied Social Sciences Associations conference that elevate research on this topic and explain the impact that this research has on broader understandings of the Black experience in the United States. This research, they write, shows how decades of “violence, predatory financial practices, and labor market discrimination have stolen opportunities—and billions of dollars—from African Americans,” exacerbating racial disparities in areas from economic well-being to educational achievement to health. These policies were designed to promote racial inequality and violence, and therefore, they note, can be re-designed to promote equality and restore humanity.

Each month, Equitable Growth highlights scholars from our network and beyond who are working to better understand the effects of inequality of broad-based economic growth. This Black History Month, Christian Edlagan and Maria Monroe showcase Black scholars leading the way to diversify the economics profession. The lack of diversity in economics, both at university and professional levels, stymies research on economics, social sciences, and policy. These scholars and experts, Edlagan and Monroe write, are doing the critical work of increasing and sustaining diversity in the field and addressing pipeline and pathway challenges for people of color in economics.

Wage theft, which occurs when an employer doesn’t justly compensate an employee for their labor, exacerbates inequality and puts families at risk. The workers who are most at-risk are women, workers of color, and noncitizens—often already-vulnerable workers who occupy low-wage positions in industries where workers have little power to protect themselves and demand fair compensation and working conditions. An Equitable Growth factsheet looks at the dangers posed by wage theft for workers and the economy more broadly, and then provides several executive actions that President Joe Biden’s administration can take to crack down on wage theft, protect workers, and raise their wages and living standards.

As the Biden administration explores ways to improve efficiency and outcomes in government, it should consider eliminating the cost-benefit analysis requirement for tax regulations. An Equitable Growth factsheet explains why this requirement, which was implemented in 2018, fails to provide accurate assessments of the merits and downsides of tax regulations. The factsheet then lays out possible executive actions President Biden can take to properly evaluate tax regulations, particularly by examining the impacts of these rules on revenues, the level and distribution of the tax burden, and any compliance costs.

Links from around the web

The prevalent zero-sum thinking on race and wealth in the United States takes a huge toll on society and the U.S. economy, writes Heather McGhee in an op-ed for The New York Times. For too long, policies and politicians have pitted people against each other in a way that ends up leaving us all worse off than we could be, McGhee continues. Starting around the Civil Rights era, the percentage of White Americans who support government provision of public goods cratered and has remained low since then. Describing her 3-year quest to “understand what stops us from uniting for our mutual benefit,” McGhee looks at the impact of racial resentment on per-capita government spending and provision of services (or lack thereof) in the United States. She then urges policymakers, stakeholders, and the public to dispel the idea that there is a fixed quantity of prosperity to go around, and instead focus on uniting across racial lines to ensure the provision of basic needs for all, from a livable wage to clean air.

Tying economic relief for the coronavirus recession to economic indicators and trends is a vital way to ensure both that the aid is adequate and the economic recovery is strong. Because the COVID crisis is unlike any other modern economic downturn, it is hard to know for sure when things will be back to normal. As such, setting a random date—March 14, or the end of August, for instance—for badly needed government aid to expire sets up a cliff that the U.S. economy could easily tumble over. Instead, Vox’s Emily Stewart explains, the relief programs ought to be phased out as the economy improves. Stewart describes the benefits of these so-called automatic stabilizers and why they would be better than arbitrary expiration dates for certain government supports and emergency benefits. This is the best idea left on the table for the next coronavirus stimulus package: It removes the guesswork involved in trying to predict an unpredictable “end” of the pandemic, and it eliminates the ability for political brinksmanship to cut-off important aid to U.S. households and families that are struggling the most.

Though there was much discussion surrounding the recent Congressional Budget Office projection that a $15 minimum wage would result in 1.4 million jobs lost, this estimate does not line up with the empirical evidence on the topic. In an op-ed for The Washington Post, Arindrajit Dube runs through recent research on U.S. state and local minimum wage hikes (as well as those from countries abroad), which show an overall minimal impact on employment rates—and large economic and societal gains in terms of reducing poverty and improving standards of living. Indeed, Dube estimates, using modern literature and recent findings, raising the federal minimum wage to $15 would result in fewer than 500,000 jobs lost. While he concedes that a major national policy change such as this may result in more losses than were found in studies of cities and states that raised the minimum wage, he maintains that the CBO’s projections are off. He concludes by urging policymakers to consider the risks of keeping the minimum wage too low: increased poverty, heightened inequality, and exacerbated racial injustice.

Friday figure

Median household wealth by race/ethnicity in 2016 dollars, 1963–2016

Figure is from Equitable Growth’s “Reconsidering progress this Juneteenth: Eight graphics that underscore the economic racial inequality Black Americans face in the United States” by Liz Hipple, Shanteal Lake, and Maria Monroe.

Honoring Black History Month: How the history of violence and systemic racism continue to impact economic outcomes for African Americans

Posted on by Emilie Openchowski
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Dominance and violence rooted in institutionalized racism, systemic oppression, and colonization are often to blame for the inequality that many African Americans endure today. This year’s celebration of Black History Month follows a year wrought with violence and blatant acts of racism. While it may be easier to label the more-apparent atrocities, it is equally, if not more, important to highlight the lingering impact that the historical underpinnings associated with racism and oppression have on the quality of life many African Americans struggle to obtain.

The National Economic Association organized sessions at this year’s Allied Social Sciences Associations conference to elevate research that does just that. Through papers presented at sessions such as “Economics of Racism” and “Racial Discrimination and Disparities: Effects of Institutional and Historical Factors,” academics sought to highlight research into how the economic consequences of past racist acts and policies continue to reverberate today through institutions and policies.

As an example of how deeply rooted racism is today in American culture, society, and policy, RAND economist Jhacova Williams’ paper, “Confederate Streets and Black-White Labor Market Differentials” examines what the persistent symbols of our racist past can tell us about labor market conditions today. In this paper, Williams studies the association between streets named after Confederate generals and differences in labor market outcomes between White and Black workers in those areas today. 

Hypothesizing that the continued presence of streets named in honor of people who fought to preserve slavery serves as a proxy for the persistence of racist attitudes, Williams finds that “Blacks who reside in areas with a relatively higher number of Confederate streets are less likely to be employed, more likely to have low-status occupations, and have lower wages compared to their White counterparts.” In addition, differences in labor market outcomes in these areas are observed not just between White and Black workers, but also between White workers and other workers of color.

These findings are descriptive, not causal, but they nonetheless suggest that there’s something about the places that celebrate the symbols of the Confederacy that influences mechanisms shaping labor market outcomes, such as investment in public education, outright discrimination in the labor market, or state minimum wage laws.

Another mechanism that shapes U.S. labor market outcomes is whether and how labor laws are actually enforced. One example of this comes from the work of University of Memphis economists Jamein Cunningham and Jose Joaquín Lopez. In a presentation of preliminary findings from their work funded by Equitable Growth, “Civil Rights Enforcement and the Racial Wage Gap,” Cunningham and Lopez explore how private enforcement of anti-discrimination legislation—the right to which was established by the Civil Rights Acts of 1964 and 1968—could influence local racial wage divides. Though still very preliminary, this research project is an example of how we can model the role of institutions such as the legal system to understand their impact on economic outcomes.

Cunningham and Lopez’s preliminary results show that a relationship exists between court rulings and labor market outcomes, though they caveat that many instances of labor market discrimination will not even be litigated because the onus is on the affected party to take on initial costs of bringing a case, and even of the cases that are brought, many will be settled out of court. “Enforcement, as measured by plaintiff win rates in nondismissal judgments, reduces the wage gap for Black males by 3.4 percentage points (19 percent reduction in wage gap) and by 7.7 percentage points for Hispanic men,” the co-authors find. “The impact of plaintiff win rates is much larger for women; reducing the wage gap by 71 percent for Black women and by 50 percent for Hispanic women.” 

While these results are also just descriptive, they demonstrate that court enforcement plays a role in shaping local labor market decisions and that further research into the mechanisms explaining this relationship could help improve our understanding of the role of institutions in shaping how policy is implemented and therefore actually influences people’s economic experiences.

It is not just via seemingly race-neutral labor market policies that nonetheless have a disparate impact on the economic outcomes of Black Americans that the economic mobility of African Americans is obstructed—it is also through overt acts of physical violence. Lisa Cook, professor of economics and international affairs at Michigan State University, a member of the Washington Center for Equitable Growth’s Steering Committee, and chair of the “Economics of Racism” session at the ASSAs, has done groundbreaking work to quantify the impact of racist violence on economic growth and innovation.

In her paper, “Violence and Economic Activity: Evidence from African American Patents, 1870 to 1940,” Cook studies how the rise in mass violence directed at Black Americans following the end of slavery resulted in less inventive activity and found that “extrajudicial killings and loss of personal security depressed patent activity among Blacks by more than 15 percent annually between 1882 and 1940.”

Cook looked at patent filings as an indicator of inventive activity and how the rise in extrajudicial violence against Black Americans over the course of the late 19th and early 20th centuries affected the creative economic activity of Black and White inventors. Looking at how patent activity among Black inventors varied, compared to that of White inventors, after race riots and across states as they adopted Jim Crow segregationist laws, Cook found that “the sense among African American inventors and other economic agents that hate-related violence would likely not be adjudicated and that the rule of law, typically through federal government intervention, would likely not prevail” depressed U.S. inventive activity by 1 percent per year.

Cook’s research is an example of economics research that attempts to quantify the economic impact of the violence that was directed toward African Americans and is a parallel to the work of other scholars such as Mehrsa Baradaran, a professor of law at the University of California, Irvine and a member of Equitable Growth’s board. In Baradaran’s book, The Color of Money: Black Banks and the Racial Wealth Gap, she recounts the events of the 1921 Tulsa Race Riots and the destruction of what was known to many as Black Wall Street. Once the wealthy, predominantly African American community in Tulsa was perceived as a threat to White supremacy, it was destroyed at the hands of White rioters and its economic prosperity was never restored.

Generations of violence, predatory financial practices, and labor market discrimination have stolen opportunities—and billions of dollars—from African Americans. Research presented at the ASSA conference highlighted both the historical and ongoing significance of racial violence, alongside structurally racist institutions and norms used as tools used to isolate Black Americans while reserving and creating opportunities for White Americans. As a result, profound racial divides exist across all indicators of success, including access to quality education, high-paying jobs, and, as illuminated by the coronavirus pandemic, quality healthcare.

Let us remember as Black History Month draws to a close that the same policies, laws, and practices that were designed to promote racial violence and inequity can be redesigned to restore humanity.

Posted in Uncategorized

Executive actions to combat wage theft against U.S. workers

Posted on by Maria Monroe
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Overview

Wage theft against U.S. workers exacerbates the long-run problem of low and stagnant wages. When companies commit wage theft, they impoverish families and deprive workers of the just compensation for their hard work, robbing workers of the value they contribute to economic growth and exacerbating economic inequality.

Factsheet: Executive actions to combat wage theft against U.S. workersDownload

The odds that a low-wage worker will be illegally paid less than the minimum wage ranges from 10 percent to 22 percent, depending on overall economic conditions, and each violation costs that worker an average of 20 percent of the pay they deserve. Women, people of color, and noncitizens are especially vulnerable to wage theft and especially likely to feel they are not in a position to report the crime and get justice.

Cracking down on lawbreaking companies that don’t pay workers what they are owed is a straightforward way for the Biden administration to raise the incomes and living standards of U.S. workers and their families.

Executive action

The Wage and Hour Division of the U.S. Department of Labor is the principal agency tasked with detecting, deterring, and punishing wage theft under the Fair Labor Standards Act. The Biden administration can take several steps to enhance the power and effectiveness of this important agency:

  • Ask for a large increase for the budget of the Wage and Hour Division in the president’s fiscal year 2022 budget request
  • Prioritize strategic enforcement to use resources as effectively as possible
  • Pursue co-enforcement with community-based organizations

We will discuss each in order below.

Increase the budget and institutional capacity of the Wage and Hour Division

One of the central problems facing U.S. workers is that the Wage and Hour Division of the U.S. Department of Labor does not have the resources necessary to fulfill its responsibilities. As of May 1, 2020, the division employed 779 investigators to protect more than 143 million workers, which is fewer than the 1,000 investigators it employed back in 1948 when it was only responsible for safeguarding the rights of 22.6 million workers.

President Joe Biden’s first budget should request that Congress more appropriately fund the Wage and Hour Division. For instance, the International Labor Organization recommends a benchmark of one investigator per 10,000 workers, which would require roughly 13,500 more investigators to be hired. Currently, this may be out of reach. But, at the very least, the Biden administration’s first budget request for the division should, in real terms, exceed the FY2016 request for $332,543,000 to fund 2,044 full-time staff. 

The Wage and Hour Division can also work better with state and local agencies. A grant program should be created to support state and local enforcement agencies to facilitate sharing of innovative strategies and practices. Such a program would promote more effective enforcement at all levels while enhancing the potential for coordinating across agencies. In addition, the division should review and update its Memoranda of Understanding with state enforcement agencies that allow for reciprocal information-sharing and maximize coordinated interagency enforcement efforts.

Prioritize strategic enforcement

No matter what the funding situation is, the Wage and Hour Division can also more effectively use its resources to police illegal conduct by businesses. Strategic enforcement differs from reactive, complaint-based enforcement in that agencies proactively and visibly target high-violation industries and maximize the use of enforcement powers to increase the real and perceived costs of noncompliance with labor laws, without waiting for vulnerable workers to initiate complaints.

The division should reprioritize its personnel and other resources toward pursuing proactive investigations to better reach those industries with high violation rates but in which few complaints are filed. Under the Obama administration, roughly half of all investigations were initiated proactively. This is especially important today, amid the coronavirus recession. Research demonstrates that wage violations increase when the unemployment rate is high. (See Figure 1.)

Figure 1

Probability of minimum wage violations measured against state unemployment rates

Even though U.S. workers are more likely to experience wage violations during moments of economic contraction, that does not mean they are more likely to initiate complaints. The scarcity of jobs means that workers may not be able to find alternatives to their current employment situation, making them more afraid to complain about wage theft, lest they be fired or retaliated against. The power differential between workers and employers in economic downturns simultaneously emboldens employers who treat workers poorly and raises the stakes for workers who complain. This problem is most acute among low-wage workers who face the largest power differential vis-à-vis their employers.

Research on minimum wage enforcement suggests that workers in industries with the worst conditions are much less likely to complain about wage theft. Most wage theft goes unreported, and it is especially present in industries where women and people of color are overrepresented. (See Figure 2.)

Figure 2

San Francisco's industries ranked by the ratio of wage theft violations to wage theft complaints, 2005–2018

The Wage and Hour Division needs to prioritize strategic enforcement, so its limited budget has the maximum impact on the most-vulnerable workers and most wage-theft-prone sectors. It can do this in several ways, according to the authors of the essay “Strategic enforcement and co-enforcement of U.S. labor standards are needed to protect workers through the coronavirus recession” in Equitable Growth’s new book of essays, Boosting Wages for U.S. Workers in the New Economy:

  • “First, the use of proactive investigations in targeted industries means enforcement resources are more likely to identify and reach vulnerable workers who are unlikely to complain.”
  • “Likewise, industry research to identify industry structure, influential employers, and widespread noncompliant industry practices helps agencies target employers that are likely to get the attention of others in the industry.”
  • “Strategic enforcement includes … assessing high damages and penalties in addition to back wages owed.” These measures deter future violations by changing the cost-benefit calculation some employers make when they decide that violating the law is worth the risk of being caught.

By not only increasing the budgets of enforcers, but also by using those limited resources more strategically, the U.S. Department of Labor can ensure that its investments in enforcement have maximum impact.

Pursue co-enforcement with community-based organizations

One of the central problems with complaint-based investigations is that some classes of workers are less likely to report wage theft than others. Power dynamics at workplaces and in the community mean that women, noncitizens, and people of color risk more when they report abuses. Indeed, this is the pattern that the data show. (See Figure 3.)

Figure 3

The demographics of workers and the probabilities of minimum wage violations, all workers, 2008–2010

In a co-enforcement model, labor agencies enter formal partnerships with civil society organizations that have strong relationships with low-wage workers and deep knowledge of high-violation sectors to help uncover violations that would otherwise go unreported and provide support to vulnerable workers so that they face lower levels of risk when they speak up. As explained by the same labor market scholars cited above:

Problems will remain hidden unless workers speak up, yet vulnerable workers will not speak up in isolation …Without a connection to the workforce on which the agency can build an investigation, proactive investigations can be daunting and the agency may be unable to establish violations are occurring. Worker organizations have access to information on labor standards compliance that would be difficult, if not impossible, for state officials to gather on their own.

To that end, the Wage and Hour Division should engage in thoughtful outreach to worker organizations. To do so, the division should hire at least one community outreach and resource planning specialist for each of its 54 district offices. These CORPS workers are full-time Wage and Hour Division staff charged with working with worker centers, unions, and community organizations on campaigns related to the division’s targeted industries before and after investigations. These officers should also, when possible, facilitate partnerships on enforcement actions, which they have not prioritized in the past.

Executive actions to reform the cost-benefit analysis of U.S. tax regulations

Posted on by Emilie Openchowski
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Overview

Beginning in April 2018, the federal government required a cost-benefit analysis for many more tax regulations than it had in the past. More than 2 years later, it is clear this experiment in cost-benefit analysis of tax regulations failed. The cost-benefit analyses released alongside regulations implementing the Tax Cuts and Jobs Act of 2017 provide little information relevant to assessing the merits of those regulations. Moreover, while tax experts criticize many of the TCJA regulations for providing unmerited windfalls to favored groups, the cost-benefit analyses for those regulations often fail to identify these windfalls or provide critical analysis of them.

The weaknesses of these analyses are rooted in the framework that the White House Office of Information and Regulatory Affairs mandates for the cost-benefit analysis of federal regulations by executive branch agencies. This framework is fundamentally ill-suited to the evaluation of tax regulations.

Factsheet: Executive actions to reform the cost-benefit analysis of U.S. tax regulationsDownload

First and foremost, this framework treats revenue increases as neither a cost nor a benefit because a revenue gain for the government is accompanied by higher tax payments for some set of people. Yet because raising revenues is the primary purpose of taxation, this assumption means the resulting analysis cannot provide useful guidance in developing tax regulations. The framework assumes there is no reason for the tax system to exist.

The practical upshot of this approach to cost-benefit analysis is to bias the system in favor of tax cuts. A lax regulation that simply gives up on preventing some form of corporate tax avoidance, for example, could easily generate positive net benefits in this framework. This is because giving up on tax enforcement allows corporations to stop engaging in costly schemes to avoid paying taxes—they get a tax cut directly instead—and that is considered a benefit.

Yet the revenue loss itself would not be treated as a cost. In the same way, a more stringent regulatory interpretation that shuts down corporate tax avoidance could have positive costs—the firms might spend more money on lawyers and accountants to avoid paying tax—and no benefits. The higher revenues themselves would not be counted as a benefit.

In addition, the framework that the Office of Information and Regulatory Affairs mandates agencies use for cost-benefit analysis relegates changes in the distribution of the tax burden to second-tier status. Though it may seem neutral to instruct the U.S. Department of the Treasury and the IRS to ignore changes in the distribution of the tax burden, it is not. High-wealth taxpayers are generally better able to avoid tax than low-wealth taxpayers. This framework thus puts a thumb on the scale for shifting taxes from the wealthy to everybody else.

For example, suppose the Treasury Department and the IRS are considering two regulations. The first would raise $150 from rich taxpayers, who would also spend $20 on accountants and lawyers to work around the regulation. The second would raise $100 from poor taxpayers who would only spend $2 to try and avoid the tax. The cost-benefit framework would tell the Treasury Department and the IRS that the second regulation would be the better approach as it would result in only $2 spent on tax avoidance. The higher revenue and more progressive distribution of the first regulation that would require wealthier taxpayers to pay more tax would receive no weight.

Moreover, if the agencies had previously issued the first, more progressive regulation, this framework would say that withdrawing that regulation and replacing it with the regulation raising less money from poorer people would yield $18 in net benefits and thus be a great project to pursue. (See Table 1.)

The framework for cost-benefit analysis that the Office of Information and Regulatory Affairs instructs agencies to use is often described as disregarding redistributive impacts. But, as the preceding example makes clear, it would be more accurate to say that it adopts a specific and regressive view on how to judge redistributive impacts.

Evaluating the merits of a tax regulation requires assessing the impacts of that regulation on tax revenues and the tax burden. These are the most important considerations in any tax change. Do the revenue losses prevented by a more stringent interpretation of the law justify the burden imposed, taking into account who would bear that burden? Or does the burden reduction resulting from a lax interpretation, taking into account who would benefit, justify the revenue loss? The cost-benefit analysis that the Office of Information and Regulatory Affairs currently instructs agencies to produce cannot answer these questions.

Executive action

The Biden administration should eliminate the requirement for cost-benefit analysis of tax regulations, as well as the authority of the Office of Information and Regulatory Affairs to review that analysis. Instead, the Treasury Department should provide a qualitative and, when feasible, quantitative evaluation of tax regulations. This evaluation should examine the impacts on:

  • Revenues
  • The level and distribution of the tax burden
  • Compliance costs

The traditional types of analysis developed for the legislative context are exactly the types of analysis required to evaluate tax regulations. These analyses are the analog of the cost-benefit framework, taking into account the distinct purpose of tax regulations. Though cost-benefit analysis can be a useful framework for judging the economic impacts of certain regulatory changes, it is inappropriate and unhelpful to try to apply it to tax regulations. 

Finally, the U.S. Department of the Treasury’s analysis of the impacts on revenues, burden, and compliance costs should focus on the decision points where the agencies have discretion to regulate differently, as this is the analysis that can inform regulatory decision-making. In addition, the analysis should be conducted only when different interpretations of the law would have substantially different effects. If the Treasury Department and the IRS lack discretion or all permissible interpretations have essentially the same effects, there is little value in requiring additional analysis.

Expert Focus: Diversifying the economics profession

Posted on by Maria Monroe
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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 and our broader network of experts.

This Black History Month, we are highlighting Black scholars who are leading critical work to cultivate more inclusive pathways in economics and diversifying the economics profession. The underrepresentation of Black students among economics Ph.D. recipients and Black economists in both faculty and federal policymaking are longstanding issues for the economics discipline and profession. Organizations that steadfastly work to cultivate racial and ethnic diversity in the economics profession include the National Economics Association, founded in 1969 as the Caucus of Black Economists and of which several of the scholars highlighted in this issue are former presidents, and the Sadie Collective, founded in 2018 as the first and only organization that uniquely addresses the pathway and pipeline problems for Black women in economics and public policy.

Other programs that are indispensable to increasing and sustaining diversity in academia include the Diversity Initiative for Tenure in Economics, founded in 2008, which provides research and professional development mentorship for early career faculty, and the American Economic Association Summer Training and Scholarship Program, which has accounted for nearly 20 percent of all economics Ph.D. degrees awarded to people from historically underrepresented and disadvantaged groups. Equitable Growth is committed to supporting these ongoing efforts and recognizes the critical importance of the perspectives of Black, Indigenous, and other people of color in understanding how inequality, in all its forms, affects economic growth and stability.

Lisa Cook

Michigan State University

Lisa Cook is a professor of economics and international relations at Michigan State University and former senior economist at the Council of Economic Advisers. Her research interests include economic growth and development, financial institutions and markets, innovation, and economic history. Cook is on the executive committee of the American Economic Association, as well as part of the new equity, diversity, and professional conduct committee for the AEA, which recently conducted a climate survey of the economics profession that reported dismal findings but also provided a baseline point for improvement. Cook is a member of Equitable Growth’s Steering Committee and received an Equitable Growth grant in 2018 to examine the role of gender and racial disparities on U.S. innovation, which links discrimination and systemic racism to creative losses and lower economic returns in the U.S. economy.

Quote from Lisa Cook on gender and racial disparities in STEM

Rhonda Vonshay Sharpe

Women’s Institute for Science, Equity, and Race

Rhonda Vonshay Sharpe is an economist and the founder and president of the Women’s Institute for Science, Equity, and Race. She is a leading advocate for the disaggregation of data by race, ethnicity, and gender, and the characteristics that influence outcomes to be the standard for all research. She has written extensively on the professional experiences of Black scholars, including on continued challenges of academic diversity efforts and their long-term consequences for the production of economics knowledge to inform public policies to address racial inequality. With William A. Darity, Jr. at Duke University, she co-founded the Diversity Initiative for Tenure in Economics in 2008, and is currently the associate director of the American Economic Association Summer Training and Scholarship Program. She is also the co-editor of the Review of Black Political Economy, a journal on policy prescriptions to address racial, ethnic, and gender economic inequality. Through a partnership between AEASP and WISER, Sharpe is launching the Inclusive Peer Onsite Distance , or IPOD, mentoring program in support of undergraduate, post-baccalaureate, and master’s-level students.

Quote from Rhonda V. Sharpe on seeing Black women disaggregated in data

Gary A. Hoover

Tulane University

Gary A. Hoover is professor of economics and the executive director of the Murphy Institute, a political economy research center at Tulane University. His research specialties are in policy analysis of income distribution and poverty, public finance, and the ethics of economics. Hoover is the founder and editor in chief of the Journal of Economics, Race, and Policy, launched in 2017 to address how local and global issues around race, ethnicity, and gender overlap and possible policy solutions to address economic disparities. Additionally, he is a co-chair of the American Economic Association Committee on the Status of Minority Groups in the Economics Profession, which monitors the racial and ethnic diversity of the economics profession.

Quote from Amanda Bayer, Gary Hoover, and Ebonya Washington on diversifying the economics profession

Omari Holmes Swinton

Howard University

Omari Swinton is associate professor of economics and chair of the Economics Department at Howard University. His research interests include labor economics, the economics of education, and industrial organization, with an extensive focus on the academic labor market for Black scholars. In a paper with Equitable Growth grantee Rodney Andrews, Swinton examines harmful misinformation and cultural myths concerning the academic performance of Black students and access to higher education, finding a lack of empirical evidence that Black students’ attitudes toward education are a major contributor to racial divides in educational performance, and provides evidence that race-neutral alternatives to affirmative action policies are both less effective and less efficient in producing racially diverse cohorts. He is both an alumnus and the current director of the American Economic Association Summer Training and Scholarship Program, which will be hosted, for the first time at a historically Black college and university, at Howard University in summer 2021.

Quote from Omari Swinton and co-authors on the nurturing effects of HBCUs

Ebonya L. Washington

Yale University

Ebonya L. Washington is Samuel C. Park Jr. professor of economics at Yale University. Her research focuses on public finance and political economy, including the interplay of race, gender and political representation, the consequences of political participation, and the processes through which low-income Americans meet their financial needs. She is also a co-chair on the Committee on the Status of Minority Groups in the Economics Profession, which recently launched an annual program to award seed grants for economics departments to start programs aimed at diversity and inclusion.

Quote from Amanda Bayer, Gary Hoover, and Ebonya Washington on incentives for increasing diversity

Equitable Growth is building a network of experts across disciplines and at various stages in their career who can exchange ideas and ensure that research on inequality and broadly shared growth is relevant, accessible, and informative to both the policymaking process and future research agendas. Explore the ways you can connect with our network or take advantage of the support we offer here.