Structural racism and the coronavirus recession highlight why more and better U.S. data need to be widely disaggregated by race and ethnicity

Posted on by Maria Monroe

Overview

The enduring legacy of structural racism in the United States is not news to the multihued communities of color across our nation. And in these Black, Latinx, Native American, Asian American, Native Hawaiian, and Pacific Islander communities, it comes as little surprise that many of these communities are suffering and dying more from the novel coronavirus and COVID-19, the disease caused by the virus, or that many also are bearing the greater brunt of the job losses and income declines amid the coronavirus recession.  

The public health crisis today is especially acute among these communities of color. Black Americans, for example, are dying from COVID-19 at about 1.5 times their prevalence in the U.S. population. Latinx communities are suffering much higher rates of infection. Native Americans living on reservations are dealing with outsized outbreaks of the coronavirus and COVID-19.

In many communities of color, workers and their families, are more likely to be employed in lower-paying jobs with fewer benefits such as paid sick leave and often in jobs on the front lines of the current pandemic. And heightened levels of respiratory disease leave many of these individuals more likely to be infected by the coronavirus—respiratory ailments that are largely attributable to systemic racism that results, for example, from polluting industries and power plants sited in neighborhoods of color. Despite these facts, in the early days of the pandemic, most states were not reporting infections and fatalities by race. Thanks to the efforts of academics and policymakers who sounded the alarm early, racial breakdowns of coronavirus’s effects are now widely available.

Structural racism and the coronavirus recession highlight why more and better U.S. data need to be widely disaggregated by race and ethnicityDownload
Factsheet: Oversampling in surveys captures key data about U.S. racial and ethnic groupsDownload

Then, there are the already wide economic divides in homeownership, income, and wealth between Americans of color and White Americans, which may be growing wider due to the convergence of these crises in 2020. Add in the enduring police killings of unarmed Black victims—also no surprise to Black Americans—and the ensuing protests are now drawing the acute attention of our nation on the many ways that systemic racism persists in the modern-day United States.

Discrepancies in economic outcomes by race and ethnicity have long been known, but the coronavirus recession is putting a spotlight on the unique ways that the U.S. economy fails these groups amid economic downturns often further marked by racial repression. Alas, this spotlight is not matched by the collection of widely disaggregated data by race and ethnicity by federal government statistical agencies. And, as a result of attention garnered by the ongoing police killings of Black Americans, more data are likely to be demanded on issues of systemic racism in our society, just as the coronavirus recession is sparking new data-gathering demands. 

This issue brief details the steps Congress and executive branch agencies can take to improve our understanding of economic and social outcomes for all communities of color. There are many ways the economic statistical agencies could improve data collection, provide more analysis of racial economic divides, and alter the presentation and publication of statistics to better inform policymakers on the needs of marginalized communities. This issue brief focuses on three concrete policy actions that could be taken now with a focus on oversampling in existing federal surveys:

  • Provide funding for the U.S. Census Bureau and the U.S. Bureau of Labor Statistics to perform an oversample of Black, Latinx, Native American, and AANHPI populations, and to provide cash incentives to respondents if necessary, in the monthly Current Population Survey and the Annual Social Economic Supplement
  • Request that the Federal Reserve consider oversampling Black, Latinx, Native American, and AANHPI populations in its Survey of Consumer Finances
  • Direct the Government Accountability Office to study the feasibility, desirability, and cost of instituting oversamples for these groups in other surveys conducted by federal statistical agencies

Our current socioeconomic state of affairs is bleak, but it is no worse in aggregate than what so many communities of color have faced for generations. Current statistical surveys already show clear divides in unemployment rates and income levels by race and ethnicity across our nation, with the aggregate metrics indicating that many Black Americans live in a nearly permanent recession, and that overall, communities of color experience more frequent and prolonged periods of recession. By providing the means to more finely disaggregate data, policymakers can better understand the consequences of structural racism and the coronavirus recession today so that they can design policies that result in more equitable economic recovery attuned to the specific needs of all Americans.

Better data on communities of color are important to socioeconomic research and policymaking

The Current Population Survey and the Annual Social Economic Supplement, or ASEC, play a critical role in economic research. The monthly CPS is the foremost survey for understanding labor attachment (economic parlance for workers’ engagement in the jobs market) and is available at a higher frequency than most other surveys. The ASEC supplement to the Current Population Survey is the most commonly used source of income data for many researchers and includes much more detailed income reporting than the U.S. Census Bureau’s annual American Community Survey. And the Federal Reserve’s Survey of Consumer Finances is the most commonly cited survey for the measurement of wealth in the United States and the primary source of data on the Black-White wealth divide.

But the sample populations of these surveys do not support analyses of racial and ethnic segments of the population by age, gender, or geographical location without significant error. Oversampling is a survey technique where certain populations are sampled at a comparatively high rate, compared to their prevalence in the population, so they are overrepresented in the final survey sample. Oversampling communities of color can aid in uncovering the different economic and social experiences of Americans of different demographic groups by providing a granular view of key economic variables—and taking into account generational changes within these communities over time as well.

Oversampling for these data will also help target ongoing policy needs. The Coronavirus Aid, Relief, and Economic Security, or CARES, Act of 2020, for example, provided more than a trillion dollars in rebates alongside Pandemic Unemployment Assistance that proved pivotal to helping low-income households survive the first wave of the coronavirus recession while keeping the U.S. economy running. This aid was crucial, but the money could have boosted the economy even more strongly if we had the data to target it more efficiently.

Oversamples of particular racial and ethnic groups are a cost-effective way to make the analyses of small U.S. subpopulations viable in these surveys. Increasing the sample size of these surveys indiscriminately would inflate their costs and provide still more detail on populations that are already well-covered. Oversamples allow researchers and policymakers alike to zoom in on subpopulations whose economic experience is not well-represented by the aggregate data and learn more about the specific ways some groups are being left behind in our economy.

Disaggregated data shape how we view and manage the economy

The data that federal agencies choose to collect and the ways in which they release that data can have significant impacts on economic narratives and economic policymaking. As Rhonda Sharpe of the Women’s Institute for Science, Equity and Race writes, “If the data are collected and reported without taking a true diversity of experiences into consideration, it can’t be used to create a more inclusive society.”

Earlier this year, Equitable Growth published a working paper that finds the tone of economic news is uncorrelated to the fortunes of the bottom 90 percent of income earners, after controlling for income changes among the top 10 percent. The researchers blame this elitist tone on the outsize emphasis that reporters place on aggregate GDP growth, which does not represent the fortunes of most Americans and yet is released frequently and widely regarded as perhaps the most important economic indicator.

To the credit of the federal statistical agencies, many of their most notable economic releases provide racial breakouts. The Census Bureau’s Income and Poverty report, for example, provides extensive disaggregation by race. And the Bureau of Labor Statistics’ monthly Employment Situation Report provides White and Black unemployment figures alongside overall unemployment in the press release.

But there are limits to the existing data. Although these and other current surveys are sufficient for gleaning disaggregation by race and often for deciphering the intersection of race and gender, the data on smaller subgroups come with large amounts of uncertainty. Users may want to look at race at the intersection of occupations and industries, for example, or at subgroups within race groups that experience particularly poor labor market outcomes, such as young Black males. The appendix at the end of this brief gives some examples of the level of error that analysts face when working with some of these subgroups in the Current Population Survey and Survey of Consumer Finances.

The case for oversampling in surveys

Survey data are incredibly important sources of information for academics, the policy community, and journalists alike. In addition to their distribution by federal agencies, large surveys like the CPS and the SCF power public resources like the Prosperity Now Scorecard and  PolicyLink’s National Equity Atlas, which provide invaluable snapshots of economic progress across geography, race, gender, and other demographic groups.

But surveys suffer from a significant drawback for analysts who want to study subgroups of the population. Sample sizes in most surveys are insufficient for disaggregation of subgroups of the population. Oversampling in these surveys would make it possible for analysts to study a much wider array of outcomes for subgroups of workers and communities from the Black, Latinx, Asian American, Indigenous American, Native Hawaiian, and Pacific Islander populations.

There is precedent for oversampling. The Current Population Survey’s Annual Social Economic Supplement currently features two existing oversamples: an oversample of Hispanics and an oversample of households with children under age 18, which was instituted to make it possible to reliably analyze the effects of the State Children’s Health Insurance Program at the state level. This latter oversample was instituted by Congress in 1999 in that year’s consolidated appropriations act. 42 U.S.C. § 1397ii contains the relevant language for expanding the sample and could provide a guide for implementing future expansions.

These two surveys are especially good targets for an expansion of sampling. The Current Population Survey, first administered in 1940, is the workhorse survey of economic statistics in the United States. It is one of the few surveys that is administered monthly with a nationally representative sample. IPUMS, a project of the Minnesota Population Center at the University of Minnesota, puts an enormous amount of work into standardizing CPS data between years and making it available to anyone. There are now nearly 5,000 new users per year for its CPS portal. Its users create more than 30,000 data extracts annually, according to IPUMS.

Additionally, the full microdata for the CPS survey are released by the Census Bureau about a month after the survey’s reference week, making it easy for anyone to access the survey results and perform their own data analysis. Largely through the efforts of nongovernment analysts, CPS data are a critical window into the labor force attachment and income of non-Hispanic Black workers. Its yearly rotation group schedule also provides 1 year of panel data that is rare for economic surveys.

Because it is issued monthly, CPS is the most important tool we have for understanding the impacts of recessions as they are happening. The monthly CPS is being widely used by academics right now to understand the early phases of the coronavirus recession.

Michelle Holder of the City University of New York, who literally wrote the book on economic outcomes for Black males during the Great Recession, told us that although her work showed that Black males ages 16 to 24 appear to have had the highest unemployment rate of all major sex-race-gender combinations during the early stages of the Great Recession, CPS sample sizes are too small to reliably characterize levels and trends in this group. In the Appendix, we show that 95 percent confidence intervals (statistical parlance for the likely range of an estimate) for this group can have a range of around 10 percent, compared to just a percentage point or two for the same analysis for White respondents. Analyses of racial disparities in unemployment at the state level are similarly hindered by sample sizes in the CPS and generally require averaging 3 months or more of data together.

Non-Hispanic Black workers are, if anything, underrepresented in the CPS, as they now routinely represent a lower percentage of respondents to the survey than they are in the population. This underrepresentation can be even more severe for Black respondents of certain ages or education levels, making it more difficult to examine these relatively small groups. Some of these education-level and age subgroups are less likely to respond to surveys, and statistical agencies should also explore the possibility of paying respondents to fill in demographics that are not well-represented. (See Figure 1.)

Figure 1

Percent of Non-Hispanic Black and White respondents in the monthly CPS before and after weighting then Black population

Then, there’s the Federal Reserve’s Survey of Consumer Finances, which is conducted every 3 years. This survey is the data source for virtually all analyses of levels and trends in wealth in the United States. It is essential in helping economists and policymakers alike understand the size of the Black-White wealth divide. Just as with economic outcomes for income and unemployment in the Current Population Survey, the SCF demonstrates that when it comes to wealth, many communities of color face a very different economy than White Americans. And, in the case of wealth, the deprivation Black Americans face is based on a well-known and explicitly racist policy history.

But the Survey of Consumer Finances suffers from many of the same problems as the Current Population Survey. The SCF does have an existing oversample of high-wealth respondents, which is important because a significant amount of wealth is concentrated in a small number of households, and it is difficult to survey high-wealth households. But this is also effectively an oversample of White people, who are far more likely to have high levels of wealth.

Although measures of wealth are available in other surveys (including the Survey of Income and Program Participation, which has oversampled both Black people and Hispanics in its low-income oversample), the SCF is the gold-standard survey for understanding wealth in the United States and collects data on a much larger number of wealth categories than anything else available. Like analysis performed with the CPS, data from the SCF quickly becomes unreliable when subgroups of respondents in a single community of color are selected for analysis.

Administrative data cannot replace surveys

Economists are increasingly relying on administrative data instead of survey data for a number of reasons. Administrative data often consist of a much larger sample of people (sometimes virtually all participants in the U.S. economy) and are therefore ideal for disaggregation of small subgroups. They sometimes collect more detailed information than surveys do, may be less subject to misreporting, and, in some cases, can be observed on a very short lag at a high frequency.

But administrative data have many drawbacks. First of all, administrative data cannot replace surveys for many kinds of more immediate analysis. In the case of government administrative data, many datasets are not available until 2 years after the fact or longer. Secondly, gaining access to these datasets takes time and requires an application, which often means well-resourced researchers are advantaged by this application process. Finally, working with these datasets requires significant and uncommon data expertise. It is therefore not a viable option for many analysts.

A case in point is the IRS’s tax data, taken directly from tax returns. These data are, in many ways, the gold standard of analysis for most forms of income in the United States. But it is slow, arriving more than a year after the calendar year it documents. These data also lack racial demographics and must be merged with other sources to study race.

Private administrative data, such as credit card expenditures from banks or scheduling software data from Homebase or other human resources firms, are likewise often only accessible to a small group of researchers, either because access must be negotiated or purchased. Additionally, private administrative data often represent a particular subgroup of the population that may not be representative of all Americans.

Because both federal and private administrative data are often available only to a select group of academic economists, the researchers who can obtain access to these data resemble the demographics of the economics profession. Case in point: Just 3 percent of Ph.D.s are awarded to Black graduates, and little progress has been made toward diversity over the past two decades. If the researchers who have access to these gold-standard forms of data are largely White and male, then important perspectives on the data may be missed, especially when it comes to racial discrepancies.

Because of these pitfalls, administrative data are not a solution to the problem of racial disaggregation in surveys. Administrative data allow for the analysis of very small subgroups of the population because the reach of the data is so vast. But there is reason to believe that the researchers who have access to these data may not be as diverse as the profession at large. Expensive private datasets are not accessible to many researchers, and delays in the release of federal administrative data mean surveys are sometimes the superior tool, even when a researcher has access.

Properly resourcing statistical agencies

Instituting these oversamples will not be free, but the small investment they would require would be well worth it. The Census Bureau has requested just $67 million for the Fiscal Year 2021 collection of the Current Population Survey and the Survey of Income and Program Participation. These surveys are the backbone of our economic statistical infrastructure and are responsible for an enormous amount of academic research about the U.S. economy.

Similarly, a recent report by the Bureau of Labor Statistics suggests that fielding a new cohort for the National Longitudinal Survey would cost just $50 million over 5 years (two previous cohorts of this survey oversampled both non-Hispanic Black people and Hispanics). As The Brookings Institution notes, federal data collection is a very modest investment with enormous returns.

Unfortunately, federal statistical agencies are often seen as less important than other federal priorities and thus are frequently subject to cuts or freezes in funding. These cuts mean these agencies must conduct surveys infrequently, accept less accurate or less frequently released statistics, and, in some cases, halt certain types of economic data collection altogether.

Small investments in the statistical agencies can have outsize impacts, giving us access to new insights about the U.S. economy. Those insights can change narratives and shape policy. Instituting new oversamples in existing surveys must be matched by budget commitments that will allow the statistical agencies to adequately carry out their jobs.

Oversampling would capture disparities in the U.S. economy

Amid the coronavirus recession, continuing high unemployment and depressed consumption could take years to overcome, especially for those workers and their families who are suffering the most devastating labor market disruptions in communities of color across the nation. Although the release of the employment situation report for May 2020 contained some positive news for unemployment in aggregate, many analysts noticed that despite a dramatic recovery in employment for workers overall, unemployment for Black workers was essentially unchanged, increasing by 0.1 percentage points, a statistically insignificant change. This remarkable discrepancy occurred against the backdrop of protests over the police killings of George Floyd, Breonna Taylor, and others—protests that are highlighting anew the structural racism in our society.

Indeed, economic outcomes for Black Americans are so consistently depressed when compared to outcomes for White Americans that virtually any economic observer can tell you right off the top of their heads what the ratio of Black unemployment to White unemployment is: about 2. This has been generally true in good times and bad since we first started measuring Black unemployment in 1972. (See Figure 2.)

Figure 2

Ratio of Black employment to White employment, 1972–2020

Because Black workers are disproportionately employed in essential, face-to-face jobs—think bus driver or grocery clerk—they have fared a bit better in this recession, relative to other groups, than they have in the past. But while their jobs have been spared a bit more than usual in recessions, their lives are more likely to be on the line. The unusual nature of this recession underscores the need for an oversample that will allow analysts to divide workers of a single race by occupation, gender, and age. All of these groups are experiencing the coronavirus recession in distinct ways.

The same persistent divides can be observed across many other economic variables, including income and wealth. As the country grapples with the legacy of slavery and ongoing systemic racism, economists and policymakers should consider why these divides persist despite the commonly held belief that today’s labor market is less discriminatory. Policing and criminal justice is far from the only domain where systemic racism causes significant harm to the Black community, although research shows that discrimination in the criminal justice system is closely tied to poor labor market outcomes for people of color.

Economists, in particular, must do some soul searching. Most economists are blind to the importance of racial discrimination in their research due to the economic models they employ that largely do not account for racial discrimination. As researchers in the field of stratification economics point out, existing theories of discrimination in the U.S. labor market cannot account for persistent, decades-long divides in economic outcomes between races. Classic models of racial discrimination predict that the free market will adjust and eliminate discrimination, but we haven’t seen this in practice.

Research shows, for example, that job applicants with “Black-sounding” names receive 50 percent fewer invitations to a job interview than those with “White-sounding” names. The researchers find that this is true across industries and employers. Black and Latinx workers who apply for jobs in person are significantly less likely to receive callbacks than White applicants. Similarly, research shows that Black men have to spend more time looking for work and are more likely to have unstable work histories.

The problem is especially acute now. Research shows that Black workers and their families are more affected by recessions. As a group, Black communities experience a deeper recession than others and are likely to be slower to fully recover from a recession than other groups. Amid the coronavirus recession, the losses of jobs among Black workers are, so far, less dramatic, but Black workers are more exposed to the coronavirus and COVID-19 because of their prevalence in front-line professions. This brief is not intended to summarize the many, many ways that Black people experienced the economy differently from White people, but this fact has been extensively documented.

Latinx, Native Americans, Asian American, Native Hawaiians, and Pacific Islanders likewise have their own distinct economic characteristics that are not well-represented by economic aggregates, and these groups also face unique challenges during the coronavirus recession. Latinxs suffer from much higher infection rates and are likely to be in front-line occupations. Native American reservations are dealing with severe outbreaks of the coronavirus. And Asian Americans are facing discrimination and harassment due to racist conspiracy theories about the origins of the virus. Knowing more about these populations of Americans is difficult because existing data sources for these highly heterogeneous groups are lacking, which is why they merit more granular analysis.

Oversampling needs to be accompanied by revamped survey instruments

Oversampling is only a first step in trying to create a federal statistical infrastructure that meets the needs of Black communities and other underserved communities of color. It will also be necessary, in some cases, to rethink survey instruments. The U.S. Census Bureau had planned to change its two-part race and ethnicity questions, which includes a question that asks the respondent if they consider themselves Hispanic and a separate question to indicate whether the respondent considers themselves Black, White, or another race. Census Bureau research found that a new one-question design would have a number of benefits.

Although this change was initially planned for the 2020 Census, the Census Bureau ultimately decided against it, in keeping with the White House Office of Management and Budget’s standards for race and ethnicity in federal data. This decision should be revisited, and OMB should revisit these standards. The one-question design that Census planned has a number of benefits.

Other subgroups cannot be found in the Current Population Survey data at all. There is no option, for example, for a respondent to indicate that they are of Middle Eastern descent. These respondents will generally just indicate that they are White. The result is that Americans of Middle Eastern descent simply can’t be analyzed: They are invisible in our most important economic survey.

Similarly, there are no questions about sexual orientation and gender identity in the CPS or the SCF, making it impossible to analyze these populations. These questions are present in the American Community Survey, and there is good reason for analysts to want to study these groups. Some may face economic discrimination or otherwise have unique experiences in the economy. Encouragingly, investigations into the possibility of identifying these communities by the Census Bureau are feasible.

Conclusion

The policies discussed in this brief are just a small first step toward better economic data coverage for marginalized groups. But ongoing protests against systemic racism and the unique ways that the coronavirus recession is harming Black, Latinx, Indigenous, Asian American, Native Hawaiian, and Pacific Islander communities makes it urgent that federal statistical agencies attempt to make changes that will give economists and policymakers better insight into their economic health now. Providing funding and direction to our statistical agencies will have a lasting impact on our ability to serve these communities. We are advocating three specific actions that could be taken now that would significantly enhance our ability to disaggregate economic data by race.

  1. Provide funding for the U.S. Census Bureau and the U.S. Bureau of Labor Statistics to perform an oversample of Black, Latinx, Native American, and AANHPI populations. The size of such oversamples should be selected to allow for reasonable disaggregation along the lines of race, age, and gender for Black and Latinx populations. For smaller populations, such as Asian Americans and Pacific Islanders, oversamples should allow analysis at the intersection of race and gender. Congress should also provide funding so the Census Bureau can give cash incentives to populations that are difficult to survey in the monthly Current Population Survey and the Annual Social Economic Supplement.
  1. Request that the Federal Reserve consider oversampling Black, Latinx, Native American, and AANHPI populations in its Survey of Consumer Finances. The size of the oversample should reflect the importance of understanding Black wealth by generational cohorts.
  1. Direct the Government Accountability Office to study the feasibility, desirability, and cost of instituting oversamples for these groups in other surveys conducted by the federal statistical agencies. This brief covers two very important economic surveys. But there are a number of other federal data collection efforts that would be well-served by oversampling underrepresented populations. The GAO can identify some of these needs to help guide future congressional action.

—Austin Clemens is a computational social scientist at the Washington Center for Equitable Growth. Michael Garvey is a macroeconomic policy analyst at the Washington Center for Equitable Growth.

Appendix: Standard errors in the Current Population Survey and Survey of Consumer Finances for some sample populations

This appendix demonstrates that in the two major surveys discussed in this brief, sampling errors for communities of color are large. We focus on Black Americans, but the same findings apply to Latinx, Native American, and AANHPI communities, the latter of which is where this problem is even more pronounced because they make up a small portion of the population. Even a significant oversample is unlikely tell us much about small subgroups within the AANHPI population, but it could make it possible for us to look at large subgroups, such as male and female.

The CPS surveys about 60,000 households each month. In March, the Annual Social and Economic Supplement surveys about 100,000 households. These sample sizes are sufficient for studying outcomes for all non-Hispanic Black Americans and gender divisions within the Black community. But at the level of a particular age group of Black Americans, or for Black workers in a specific set of occupations or industries, the error on monthly estimates becomes large. Analysts can mitigate this issue by aggregating multiple survey periods at the expense of timeliness.

To demonstrate the approximate amount of uncertainty in subgroups that might be interesting to researchers, we created standard errors for various point estimates in the monthly CPS and the ASES using bootstrap methods suggested by the Bureau of Labor Statistics. The BLS suggests applying a bootstrap and making a design-effect adjustment to account for the complex design of the survey. They recommend multiplying variances for unemployment totals by 1.6 and all other population estimates by 1.3. Because the CPS has a complex sampling frame, the resulting survey estimates are likely biased.

A basic statistic that is followed closely by economic observers is the employment-to-population ratio: the number of people who are employed divided by the total population of working-age adults. Ninety-five percent confidence intervals for this measure for the whole population have a range of less than 1 percentage point.

Young males are a subgroup where calculating the employment-to-population, or EPOP, ratio is important. Constructing estimates over time shows that the confidence intervals around our point estimates of EPOP for young White males consistently have a range of about 3 percentage points. For young Black males, the range is around 7 percentage points, occasionally reaching 8 percentage points. (See Figure 3.)

Figure  3

U.S. employment to population ration for 16–29 year olds, by race, with 95 percent confidence intervals, 2007 to 2021.

Even without confidence intervals, the lower reliability of estimates for Black males can be seen simply by looking at the trendline. The White employment-to-population trendline exhibits a stable pattern of seasonal differences with long-term trends responsive to the business cycle. The corresponding Black trendline is unstable, and any month-to-month difference is more likely noise than trend, making it difficult to know if the EPOP ratio for this group increased or declined in any given month.

Young males are an entirely plausible population on which analysts might want to focus and are not a particularly small subgroup. Analysts also might be interested, for example, in analyzing only the unemployed population. As the coronavirus pandemic recession drags on, we might want to know what proportion of the unemployed permanently lost their jobs instead of going on furlough or other options.

This population is much smaller and splitting the data by gender or age is not practical. Figure 4 shows the proportion of the unemployed that are permanent job losers, by race. Both lines are unstable, but confidence intervals for Black workers often exceed 10 percentage points. They are a more manageable 4 percentage points for White workers. (See Figure 4.)

Figure 4

Percent of U.S. unemployed workers who are permanent job losers by race, 2007 to 2020

A bit more than 6,000 families are surveyed for the Survey of Consumer Finances, which is conducted every 3 years. The survey’s microdata include five implicates (statistics speak for separate observations) for each respondent to allow analysts to account for imputation error, and a set of replicate weights is also provided to account for sampling error. To show the approximate levels of error that might occur in analysis of SCF data, we replicate calculations of homeownership by age cohort published by one of the authors of this issue brief and Equitable Growth Visiting Fellow John Sabelhaus.

Sabelhaus and Clemens show that successive generations have experienced lower rates of homeownership within several subgroups. An example of such an analysis by Sabelhaus and Clemens groups Black and Hispanic respondents to increase sample size and plots homeownership in each of the surveys between 1995 and 2016, with respondents broken out by year of birth. At the same age, younger cohorts tend to have lower rates of homeownership than older cohorts. (See Figure 5.)

Figure 5

U.S. homeownership rates by generational cohorts and age, for Black and Hispanic families, 1995–2016

Grouping Black and Hispanic respondents is necessary. Below, we show the same graph with 95 percent confidence intervals for each point estimate. Although some of the gaps between cohorts appear to be statistically significant, many do not reach a 95 percent level of confidence. (See Figure 6.)

Figure 6

U.S. homeownership rates by generational cohorts and age, for Black and Hispanic respondents, 1995–2016.

By contrast, the situation for Black respondents alone is intractable. Confidence intervals are large, with ranges exceeding 20 percentage points in several instances. Analysis of subgroups of this size is essentially impossible. (See Figure 7.)

Figure 7

U.S. homeownership rates by generational cohorts and age, for Black respondents, 1995–2016.

As with the CPS, Black and Hispanic families are, if anything, undersampled in the survey, because the SCF’s oversample of wealthy families tips the racial composition heavily toward White families. Below, we show that the exact same analysis for White respondents produces tight confidence intervals of just a few percentage points. Even though the gap between homeownership at age 40 for older and younger Gen Xers is only about 4.5 percentage points, this difference is statistically significant. (See Figure 8.)

Figure 8

U.S. homeownership rates by generational cohorts and age, for White respondents, 1995–2016.

Competitive Edge: Remedying monopoly violation by social networks—the role of interoperability and rulemaking

Posted on by Maria Monroe

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 Kades and Fiona Scott Morton have authored 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
  • Fiona Scott Morton

All eyes are laser-focused on competition in digital technology platforms such as Amazon.com Inc.’s Marketplace, Apple Inc.’s App store, Facebook Inc.’s eponymous social network, and the search engine operated by Alphabet Inc.’s Google unit. Congress, the Federal Trade Commission, the U.S. Department of Justice, and various state attorneys general are investigating their conduct, and, if press reports are to be believed, both Google and Facebook could soon find themselves as defendants in major monopolization cases. By way of comparison, the previous major monopolization case, United States v. Microsoft, was filed in 1998, when “You’ve got mail,” and that static noise of a dial-up connection were common.

It is, however, past time to think only about whether these technology giants are violating the antitrust laws and ask how to address such antitrust violations if they have occurred. Even in the most successful monopoly prosecutions, such as the antitrust cases against AT&T Inc. in the 1980s and against Microsoft Corp. in the 1990s, the courts struggled to develop and implement effective remedies with various degrees of success. Discussing remedy before there is a case may seem like putting the cart before the horse—but think of it as designing the cart before deciding what horses to use.

Today, we have posted a working paper that proposes a remedy for one type of digital platform: a social network such as Facebook. Our remedy proposal relies on five principles, summarized here and discussed in more detail below:

  • Social networks, like most digital platforms, have large “network effects.” We discuss this concept in detail below, but the basic idea is that like the telephone system and email, the more people on the same network, the more useful it is to its users. Those network effects create entry barriers, which make it easier for anticompetitive conduct to successfully create and protect monopoly power.
  • Unless a remedy addresses the entry barriers created by these network effects, it will likely fail to fully restore competition or prevent future violations.
  • Interoperability refers to the way phones from Verizon Communications Inc., AT&T, and other companies can connect with each other, or users of Gmail and Hotmail can write to each other. In the case of a social network, interoperability would enable social network users on different social networks to seamlessly connect with each other, meaning that interoperability is likely to be critical, although not sufficient, to address harms caused by an antitrust violation.
  • Implementing interoperability poses challenges for the litigation process. It requires the creation of a technical committee to address the technical details. The committee can’t be manipulated by the dominant players. Policing compliance with the remedy must be efficient. And substantial penalties are needed to deter incentives to violate the remedy order.
  • The Federal Trade Commission could use its rulemaking authority, outside of any particular litigation, to develop a default interoperability order that could increase the workability and effectiveness of any future interoperability requirement.

Digital platforms are under scrutiny

On Capitol Hill, the Senate Judiciary Committee just held a hearing on Google and online advertising. The House Judiciary Committee will release its report on digital platforms shortly. Jason Furman, a professor of the practice of economic policy at the Harvard Kennedy School and a member of Equitable Growth’s Steering Committee, outlined the role of networks on competition in digital markets in testimony before Congress (available as a Competitive Edge), and Equitable Growth has also summarized research more broadly.

A network effect means a digital platform’s value to users increases as the number of users increases. Take Facebook as an example. As the number of users on Facebook increases overall, any individual will need to be on Facebook to communicate with her friends or family; conversely, no one wants to be on a social network if none of their friends or family use it. Similarly, advertising on Facebook becomes more valuable the bigger Facebook’s user base grows, the longer users are on Facebook, and the more Facebook can help target the ads to those who will most likely respond to them, which is a function of the first two benefits of size.

In turn, this network effect can lead to a winner-take-all (or most) dynamic, also known as tipping. When one social network creates an edge in number of users, either legitimately or through exclusionary conduct, that advantage attracts even more users. The social network may become dominant and earn monopoly returns. Ultimately, the network effect creates an entry barrier. Few will join a new social network until their friends, families, and neighbors do.

Neither entry barriers nor tipping present insurmountable barriers for a new competitor, but they do make it easier to monopolize a market. In a market subject to tipping (even if it is not permanent), the value of excluding a competitor is greater because the prize is bigger. If entry barriers are high, any potential competitor’s chance of success is low. As a result, a social network may be able to inexpensively acquire nascent or potential competitors before they pose a threat to the network’s dominance.

A successful remedy will reduce entry barriers created by network effects

If this type of digital platform has violated antitrust laws, it has engaged in anticompetitive conduct that relies on and exploits the network effect and the entry barriers it creates. Absent intervention, the dominant platform will continue to benefit from its conduct; entry is unlikely and difficult. A divested network can compete with its existing installed base of users, and this will create choice for users—provided their friends move with them. So long as the network effect remains, however, the dominant firm continues to have the same incentives to adopt different and new exclusionary conduct to protect its monopoly. For a remedy to be fully effective, it needs to reduce the network effect and the entry barriers it creates.

Network effects manifest themselves across different types of digital platforms: social networks, online marketplaces, app stores, and online advertising. But they can operate differently in each setting. Network effects can be direct or indirect; platforms can have multiple sides. The effects may be asymmetric, and some may be strong and others weak. A remedy that addresses network effects present in a social network market may be meaningless in addressing network effects in an online marketplace. We use Facebook to explore addressing network effects as a remedy for a monopolization violation involving a social network.

Based on allegations currently being made, assume that Facebook has allegedly acquired a series of nascent or potential competitors to eliminate companies; that it cut off access to Facebook when a company could pose a competitive threat; and that those actions violate the antitrust laws as illegal monopolization. How would one remedy the violation? (Our working paper and this column do not comment on the merits of these allegations.) 

Certainly, a court could forbid Facebook from repeating the illegal act and similar acts. Facebook could face fines or have to give up its profits from violating the law. But we are doubtful that those remedies alone would recreate the lost competition and thereby give consumers the competition they were earlier denied. Conduct prohibitions are likely to create an expensive whack-a-mole game, with the government and the dominant firm arguing over both the impact of every new strategy and whether it counts as “similar” to what violated the law.

A more substantial remedy would break up a social network into separate parts and provide real benefits by setting the stage for robust competition. A remedy, for example, could require Facebook to divest its Instagram photo- and video-sharing unit and its messaging unit, WhatsApp. Divestiture would significantly benefit users post-break-up as the divested components would compete with each other to attract users. Each network would innovate and provide better service to win an advantage in the number of users. The competition would likely be fierce. But without additional remedies, the market would likely tip again to one of the competitors, creating another monopoly. Then, the winning social network has both the incentive and ability to engage in exclusionary acts to prevent future threats to its newly established or re-established market dominance.

Interoperability has the potential to lower entry barriers

Requiring interoperability can neutralize or significantly reduce the network effect that the incumbent employed to create and protect its monopoly. By interoperability, we mean that users on other or new social networks should be able to friend Facebook users and vice versa. Posts should flow from a Facebook user to her friend on a new network in much the same way email can be sent and received regardless of whether both parties use Gmail, or phone calls connect people regardless of their carriers. 

Interoperability reduces the barriers to entry created by network effects. Let’s say, for example, that one of the divested Facebook companies begins to lose users. It radically changes its business model from advertising-supported to a subscription-based business model and promotes the resulting high-quality user interface. It hopes to attract users because it has no advertising and strong privacy protections. Without interoperability, a user who prefers the subscription model and leaves Facebook to join it will lose contact with all her friends on Facebook and perhaps institutions there, such as her child’s school. Such costs might deter her from joining her preferred network. With interoperability, by contrast, she receives school forms and news of family vacations and college reunions that are sent to her through her new network. In short, with interoperability, each person can choose the network they prefer while staying in touch with their social circles. The network effect ceases to be an entry barrier.

In this world, entering social networks could compete on features outside the standard, such as their user interface, policies concerning news or offensive content, and privacy policies. Consumers could change social networks like they change wireless carriers, without losing the ability to stay in touch with their contacts. The need to compete for consumers on the basis of service quality, such as the amount of advertising and how it is targeted, rather than relying on network effects to keep users, would intensify competition among social networks to the benefit of consumers.

Interoperability could be ordered in addition to other relief, such as a divestiture, and could be complementary to it or stand on its own. It could be an appropriate remedy in any situation in which the dominant social networking firm has exploited network effects by violating antitrust laws. In today’s internet-based network markets, interoperability carries no incremental costs such as the dedicated wires and machines that were required for telecom interoperability in past decades. It requires the establishment of an open standard to exchange commonly used functionalities, such as text, calendars, and images between and among competing social networks.

The challenges of implementing interoperability as a remedy

Although interoperability as a concept is straightforward, effectively implementing it raises challenges. In our working paper, we look back at both the AT&T break-up order, where interoperability was effective, and the remedial order in United States v. Microsoft, where those provisions had little impact. From those cases, we suggest several operational principles.

Substantively, the remedy must establish the technical capability for users to communicate across platforms, balance the needs of multiple actors, promote entry, and enhance the user experience, including protecting privacy. Importantly, the remedy order must prevent the offending, dominant social network (or its divested parts) from manipulating the process. This requires that the remedy include provisions that will deter the defendant from violating the order, require standards that many entrants can meet, and not favor large incumbents.

The remedy also must establish a process for determining whether the defendant has violated the order. That process must be fast enough to provide relief to a harmed competitor before that firm fails, and the penalties must be significant enough that the dominant social network will be worse-off for having violated the remedy order.

From a process perspective, creating a technical committee overseen by an antitrust enforcer is the most promising option to solve these implementation challenges. Judge Harold Green used a similar procedure in the AT&T break-up, and Judge Colleen Kollar-Kotelly relied on a technical committee in Microsoft. Such a committee would include representatives of all relevant industry segments, but the antitrust enforcer engaged in policing the remedy would control the decision-making process to prevent capture by the dominant social network (or its divested parts).

FTC rulemaking can improve the remedy process

The final element of our proposal is that the Federal Trade Commission should use its rulemaking authority to develop a default order for interoperability. Rulemaking provides a number of advantages for developing the groundwork for a successful remedy. A default order derived through rulemaking can identify basic principles to apply in monopolization cases involving strong network effects or issue separate rules on remedies for different types of digital platforms.

In an administrative adjudication, where the Federal Trade Commissioners are the judges, the default order would be a mandatory starting point for a remedy. In cases brought in federal court by the Justice Department’s Antitrust Division, the states, or the Federal Trade Commission (the FTC can either bring cases internally, where it acts as a decisionmaker, or in federal court, where it is the plaintiff), courts would not be required to rely on the default order but would be free to do so.

In any individual case, the decision-maker could adjust the terms as necessary to fit the particular situation, but the default order would save time and effort. The default order would also help focus on the issues in dispute. Parties could appeal any of the decisions we describe to the courts. Given the existence of a carefully crafted, robust order, however, those appeals would likely be less frequent and burdensome than if a court had to resolve every issue from scratch.

Conclusion

The debate over whether any digital platform violates antitrust laws will continue in the press, in the halls of Congress, and, probably, in courtrooms across the country. Antitrust policymakers need not—and should not—wait for a liability determination before considering remedies they can apply today, using current law and existing institutions. Our working paper provides a contribution to the remedy discussion and on the need to address entry barriers as a necessary, but not necessarily a sufficient, goal of a successful remedy.

—Fiona M. Scott Morton is the Theodore Nierenberg Professor of Economics at the Yale University School of Management. She consults on antitrust issues for a range of corporations, including Apple Inc. and Amazon.com Inc. Michael Kades is the director for markets and competition policy at the Washington Center for Equitable Growth. He does no outside consulting.

The hidden costs of stock-market-first U.S. economic policies

Posted on by Maria Monroe
Stock-market-first advocates want you to believe that a booming stock market is always a good thing for you.

The idea that sound U.S. economic policy begins and ends with a strong stock market is becoming pervasive. Advocates of what I call the stock-market-first approach want you to focus on the stock market when you pass judgment at the ballot box this November. Stock market indexes are back to pre-coronavirus pandemic levels and, until recently, were testing new highs. If you have a 401(k) savings plan, it probably soared over the past 4 years.

The dramatic jump in the stock market since the 2016 election is the only information that a true believer in stock-market-first thinks you need to know. There is no need for you to understand why the stock market has gone up. There is no need for you to understand how the policies that increased stock prices came at the expense of other things you also might care about.

But if you are planning to vote with your 401(k) in mind this November, then you might want to take the time to understand the why and the how of the recent stock market boom.

Stock prices are determined by three factors. The first is the profits that companies are expected to earn. The second is the safe rate of return on government debt set by the Federal Reserve. And the third is the risk premium that stock investors earn on top of the interest they would get if they held government debt instead.

Once you understand how movements in profits, interest rates, and risk premia together affect the stock market, it is a short jump to understanding the role of government policy. Nothing new has been discovered in recent years about how government policies affect stock prices. We have just reached the point of pushing policies that inflate the stock market without regard for the consequences.

Once you understand that government can move the stock market, you are entitled to ask whether and how government should move the stock market. If government policy creates imbalances between economic fundamentals and stock prices, those imbalances are revealed in time, and often with disastrous consequences, especially for 401(k) investors who are largely invested on autopilot.

And even if government takes extraordinary additional steps to avert the collapse of an overvalued stock market, the policy actions needed to keep stock prices inflated impose other costs. When government moves income, wealth, and debt around to boost stock prices, that money must come from somewhere. Your 401(k) account may have gone up, but the things you lost along the way are likely larger than the gains.

Think about your slow salary growth and low interest rates on your savings accounts. Think about funding for the programs such as Medicare and Social Security that you also will depend on. Or, even more broadly, think about the importance of sustained economic growth to you and your family, compared to a boom-and-bust economy characterized by soaring stock prices followed by swift and sometimes-deep recessions.

If you are content not knowing how government policy helped fuel the recent stock market boom and what that means for your future, you should stop reading. But if you would like to know a little more about the hidden costs of stock-market-first economic policies, you might want to read on.

What moves the stock market?

Business schools teach you that a share of corporate stock just represents the value of the legal claim today on expected future company profits. The value of the stock is simply that stream of future profits converted to a present value.

If I promised to pay you $10 per year for the next 10 years, what is that worth to you today? If you place no value on time (and ignore inflation), the answer is just the $100 total you will receive over the 10 years. 

But if time does have value to you—meaning $10 today is worth more than $10 next year, and so on—the present value of the 10 $10 payments is less than $100. In fact, if you value time at (say) 2 percent per year, then business schools teach you that the stream of promised $10 payments for the next 10 years is worth just less than $90.

If you prefer to think in forward-looking terms, this present-value calculation is the same as saying, “If you put $90 in the bank today at 2 percent interest, at the end of the 10 years, you would have $100.”

Pretty basic math.

Stocks are more complicated because the future company profits are not a promise of certain payments; they are expectations about unknown payments. Analysts working on Wall Street make good money by predicting future profits, but there is uncertainty around even the best predictions.

Introducing uncertainty means the calculation of a stock’s value needs one more input. In addition to valuing time, you need to value the uncertainty about the profits. If the government will pay you 2 percent interest with certainty, why would you buy a stock that paid an expected 2 percent return, knowing you could lose money if the company’s profits are below expectations?

So, assume that instead of a 2 percent interest rate, the rate of return on the stock is expected to be 5 percent. That is, by switching from the guaranteed government interest rate of 2 percent to the stock, you will receive, on average, a 3 percent “risk premium” on the investment. Sticking with the $10 payment per year over 10 years, but using a discount rate of 5 percent, the stream of payments has a present value today of about $77.

Again, in forward-looking terms, that means investing $77 in the stock market today is expected to leave you with $100 in 10 years. But the only thing you really know is that the actual amount in 10 years will be centered around an expected $100, and it could be a lower or higher. That is what uncertainty means.

And remember, if you want to be sure you will have $100 in 10 years, you should invest $90 in the 2 percent government bond. That is, you can just pay $13 more now to avoid the uncertainty about having exactly $100 10 years from now.

These examples are intentionally simple, but they make it possible to introduce a key point about how stock prices move. When one of the pricing inputs changes, the effect on stock prices is magnified. So, if the profits of a company are expected to grow 1 percent per year for the 10 years instead of staying constant at $10, the stock price jumps 5 percent, to $81. In the real world, where companies earn profits for more than 10 years, this magnification effect is obviously much larger.

The same amplification principle holds for changes in the real interest rate on government debt and the risk premium. If the interest rate on government debt is decreased from 2 percent to 1 percent, then the present value of the 10-year stream of $10 payments is worth $81, a 5 percent increase in the stock price.

If the world becomes more uncertain, such that the risk premium jumps from 3 percent to 6 percent, then the stock price falls from $77 to $67. Small changes in stock-price determinants lead to big changes in stock prices.

Lest you think this is all that I think you need to know in order to make money in the stock market, remember that the relatively simple math just tells us what a share of stock should be worth. Expectations about future profits and the risk premium move with market participant beliefs. The stock you own is only worth exactly what the highest bidder is willing to pay for it.

In 2013, the Nobel Memorial Prize in Economic Sciences was split three ways. Each of the recipients had made significant contributions in the field of “asset pricing,” which basically means thinking about what a share of stock should be worth. The fact that the prize was split between three economists with different views about what people believe and how they act is suggestive that the puzzle of valuing the stock market is far from solved.

Nobel Prizes are not given out for casual observation, but luckily, the details about “price earnings ratios” and “method of moments” and “three factor models” are not key to the message here. What matters is that the three key stock-price determinants—expected profits, interest rates, and risk premia—move together and reinforce each other.

The ways in which the three stock-price determinants move together is well-established. If the Fed lowers the risk-free interest rate or something happens to make investors think profits will increase, then the price goes up. If investors become more confident about a given profit prediction, then stock prices will rise further. When stock prices go up, there is a reinforcing effect on investor confidence, and stocks move up even more.

The existence of these positive feedback loops means stock prices move in waves. Stock market booms are generally slow and long-lasting, as the reinforcing effects of higher expected profits and confidence build on each other gradually.

Stock market busts are generally shorter-lasting but more intense because the truth about profits and risks are often revealed very suddenly. Investors know that maintaining optimistic beliefs while everyone else becomes pessimistic means they will be left holding stocks that others value less.

At the end of the day, the stock market is necessarily tied to economic fundamentals. The value of a stock is the expected value of the company’s profits, discounted at some interest rate that includes a risk premium. Humans can make systematic mistakes about future profits and risk premia, but ultimately, those mistakes will be revealed.

How does government move the stock market?

The stock-price math taught in business schools tells us that the value of a stock boils down to the risk-free rate of interest you can earn on government debt, the company’s expected profits, and the current risk premium added to the risk-free interest rate.

So, how can government move the stock market? By choosing policies that move the three inputs. Start with the Federal Reserve. The Fed controls short-term, risk-free interest rates directly. In times of financial crisis, the Fed also intervenes in other ways that impact expected profits and certainty.

One of the most poignant recent lessons about short-term interest rates and the stock market comes from 2018. In late summer of that year, Fed Chairman Jerome Powell began to signal the Fed’s intention to “normalize” interest rates, meaning allow rates (adjusted for inflation) to increase back toward historical averages. Powell said clearly that interest rates were well-below neutral in early October.

The stock market plunged between October and December of 2018, erasing most of the gains registered over the preceding 2 years.

In late 2018, Fed officials began to speak publicly about how they may have overstated the need for future interest rate increases. By December, the Fed had walked back plans for further planned increases. Finally, in 2019, the Fed began cutting rates. The stock market applauded the action, regained its losses, and grew in 2019—achieving new highs at the onset of the coronavirus pandemic in early 2020.

The Fed proved that it could boost the stock market and provide economic stimulus by keeping interest rates low. But this was not a newly discovered magic bullet. Fed officials got their jobs because they got good grades in the business and economics classes where the basic stock market math is taught.

Cutting interest rates, however, while the U.S. economy was still expanding in 2019 was an unusual policy move. Historically, the fear was that keeping interest rates too low for too long will lead to an overheated economy and inflation.

One possibility is that the noninflationary (or “equilibrium”) short-term interest rate has decreased in recent years. Historically, the Fed’s short-term interest rate target was maybe 2 percent or 3 percent, adjusted for inflation. Historically, keeping rates below that target for a prolonged period did lead to higher inflation.

The fact that inflation did not surge after the 2019 interest rate cuts suggests that the equilibrium interest rate the Fed should target has changed. Indeed, in a recent speech, Powell focused on how the lack of inflation is a key indicator that interest rates are not too low.  

Economists believe that changes in the economy from a variety of factors—globalization, declining productivity, and the aging of the population—may have pushed the optimal short-term interest rate down. In this view, the Fed has just responded to the new economic environment and cut interest rates to keep the economy on track.

I will come back to this “new equilibrium interest rate” view of the stock market below, but first, we need to think about how other types of government policies also move the stock market.

In addition to what the Fed can do, the legislative and executive branches can affect stock prices directly through regulatory actions and tax policy, or indirectly through spending and deficit policies.

The easier plays—regulatory actions and tax policy that directly boost stock values—have been the clear choice of stock-market-first advocates. There are no great insights here, and one does not need an Ivy League business school degree to read the playbook on using such policies to increase stock prices:

  • If we allow businesses to rely on cheaper, more environmentally destructive production techniques, then profits will go up.
  • If we allow businesses to cut wages and benefits without regard for worker rights and well-being, then profits will go up.
  • If we allow competition-destroying merger activity, then profits will go up (for the firms that survive) and overall industry profits will be higher.
  • If we reduce taxes on corporate profits, then the profits available to pay out dividends to investors will go up.  

The question is not whether these policies can increase profits and stock prices, at least temporarily. They can. But adopting these policies does raise two other questions.

The first question is whether regulatory and tax policies lead to a permanent increase in profit levels or, even better, to a higher growth rate for profits. If the effects on profits are temporary, then these actions are fueling a stock market bubble because profit expectations will rise and then fall.

And even if the increases in profits are permanent, we need to ask whether the higher profits represent an efficient reallocation of the nation’s resources. If we are just transferring more of our national wealth to business owners, then are you better-off? Your 401(k) investments may be increasing in value, but at the expense of what else that is important to your economic health and well-being?

Are we in a stock market bubble?

The first question we should ask about stock-market-first government policy actions is whether we are creating a stronger economy or just generating wild swings in the stock market. If policy is fueling booms and busts, then we may be at or near the top of one of those cycles.  

Distinguishing short- and long-run movements in stock prices is easy in hindsight. Stock market bubbles are declared to have happened after the bubble bursts, not while the bubble is expanding. But what we can do, at a point in time, is to look at the relationship between stock prices and the underlying economy in which everyone operates.

The famed stock market value investor Warren Buffet has long advocated that we simply look at the ratio of overall stock market value to the size of the economy, and, by that measure, the stock market is grossly overvalued.

More technical valuation measures are based on the three principles above—government interest rates, expected profits, and the risk premium—but those more technical measures also indicate stock market values are at historical peaks.

In short, even if you believe that the policy-driven increase in profits will persist and you believe the Fed will keep rates low, then stocks still are at the top of their historical range. The imbalance between economic fundamentals and stock prices is already here.

It might be the case that there is a new stock market math at play, and it goes hand-in-hand with the new equilibrium interest rate view. Inflation is not rising, which suggests that the economy is not overheated, and stock prices simply reflect the new equilibrium interest rate.

The lack of inflation is a mystery to the Fed and economists generally, but that may be because we are looking for inflation as the product of a “demand-pull” effect. The idea of demand-pull in this context just means that higher stock market wealth increases demand for goods and services and that bids up prices in an otherwise fully employed economy.

We are indeed collectively spending more in recent years, and that has led to increased employment. But inflation is not budging. Why?

There is another way to look at inflation, known as the cost-push effect. The term cost-push was coined in the 1970s, when unions and oil prices seemed to “push” businesses to raise their output prices to remain profitable.

What may be happening in recent years is that cost-push inflation is working in reverse. Government undertakes regulatory and tax policies that lower costs for all businesses, and businesses do what they teach in business school—they compete on price.

If firms operating in the same competitive market all experience the same cost decrease, then they will eventually lower the prices of the goods and services they are selling to maintain their market shares. The only possible exception to the rule is industries where there is a lack of competition—industries where government has not enforced antitrust laws.

But in general, an economist looking at recent regulatory and tax policy changes might wonder why someone would have ever expected a long-run increase in profits. If every business in a specific market is forced to follow the same regulations and pay the same taxes, then the costs are mostly just passed forward to consumers. That process works in reverse as well. Cutting the same costs for all businesses means lower prices or, at least, less pressure on further price increases.

But the goods are not truly cheaper. We consumers just stopped paying for things such as environmental protection and decent wages and meaningful health benefits for the workers at those firms.

The lower interest rates needed to prop up the inflated stock market are also impacting retirees and those saving for retirement. If you have practiced good financial hygiene and kept some of your savings in fixed-interest bonds, then you are earning a lot less on that part of your portfolio.

There is no free lunch, but sometimes, the price is hidden.  

If cost-push forces are really what is keeping inflation low in recent years, as seems likely, then the path to resolution of an overvalued stock market is through profits and the risk premium. When businesses compete away the reduced costs handed to them through regulatory and tax policies, the temporary boost in profits disappears.

And when the temporary boost to profits disappears, we are left staring at an overvalued stock market, with interest rates already close to zero, wondering when the bubble will burst. The only solutions are even more regulatory action or tax cuts and even lower interest rates.

If that sounds familiar, it is because you have been hearing about the need for more deregulation and lower taxes from stock-market-first advocates for decades. But lest you worry, the true believers in stock-market-first will tell you the next regulatory or tax fix is going to take care of everything, once and for all.

And yes—the stock-market-first agenda sounds more like a drug problem than good economic policy.

So, how should government move the stock market?

Even if stock-market-first policies do lead to some real economic growth, the follow-up questions we should ask are whether those policies are worth the cost and whether there is an alternative.

There are two ways that government policy can spur economic growth. The first is to engineer increases in stock prices using deregulation and corporate tax cuts, and we know that is possible. It even feels good on the way up. If we make stock owners wealthier, then they spend more, and the additional spending leads to increased employment and income for everyone else.

Giving up things such as environmental protections, decent wages, or a fair rate of return on risk-free retirement savings might just be the price of continued economic growth. But that higher growth does not mean you are personally better-off. You may reap some of the benefits of stock-market-first economics through a higher 401(k) balance, but you also pay the costs.

There is an alternative, but it requires understanding that although we can achieve the same or even better economic growth and employment, the nature of that growth will be different. The alternative would be more equitable, because we would not be relying on ever-increasing wealth inequality to grow the economy.

In addition to having regulatory and tax levers, government can grow an economy by investing or supporting investment in people, places, and things. Those sorts of investments can change one of the major underlying drivers of the “new” equilibrium interest rate environment by boosting productivity growth.

A slowdown in economic growth is not inevitable, but we need to realize that the types of investments we need to grow our economy are simply not seen as immediately profitable to people who already have a lot of money. If companies were already making these investments, then we would not be wondering why we are failing to grow an economy with so much obvious potential. Specifically:

  • We need to invest in people so that more people are qualified to work at the jobs the rest of us truly value in a technologically evolving world.
  • We need to invest in places, which means both in direct public infrastructure and in programs to direct loans away from big business and toward small businesses and private ownership of homes.
  • We need to invest in things, especially technology. And we need to understand that much of the technology we see today began in universities and large public research organizations and, beyond that, often involves private and public partnerships.
  • We need to cooperate in new ways on healthcare, retirement programs, and income security. Government created these sorts of cooperative programs because private markets failed to give us what we needed, and we should focus on making those programs better, not defunding and destroying them.
  • We need to stop listening when some politicians say that taxes are a destructive force for innovation and growth. We need to hear instead that the income generated from a stronger and more productive economy is, in part, a return on our public investments, and failure to tax that income is the same as foregoing our collective rights to those investments.

Most importantly, we need to get past the fundamental principle espoused by stock-market-first advocates. They want you to believe that anything of value to the rest of us must involve people who already have a lot of money making even more money using that money. 

Sound economic policies will boost the stock market because higher productivity means higher wages and higher profits. More importantly, the boost will be permanent and consistent with economic fundamentals. Low interest rates are not needed to prevent a stock market collapse. 

Consider policies that did not exist when our oldest voters were born. Social Security, Medicare, Unemployment Insurance, the GI Bill, the national highway system, the Environmental Protection Agency, NASA, support for higher education, and research by the National Institutes of Health. Those policies made us better-off because we worked together, made investments, and reaped the rewards.

And acknowledge that every one of those policies was subject to the same screams about excessive government that stock-market-first advocates regularly employ. But voters chose not to listen. They knew better.

And policy today? The imagination of stock-market-first politicians has become limited to undoing the environmental and workplace safeguards we value and lowering taxes to boost profits and the stock market.

History and logic tell us that sort of game can indeed ratchet the stock market to new levels, but it does not change long-term growth rates. History and logic tell us there is a cost to supporting inflated stock prices. Just look most recently at the costs to our economy of the Great Recession of 2007–2009. Or the costs evident in our current pandemic economy.

The Fed is running out of levers to accommodate policy failures and prop up inflated stock values. Interest rates are already effectively zero, and the Fed is now relying on interventions that directly target the problems generated in the name of free market efficiency.

At the onset of the coronavirus pandemic and resulting recession, the Fed was forced to guarantee the excessive debt issued by corporations during the preceding stock market run-up. Much of that debt was issued by corporations to buy their own stock and further inflate stock prices during the boom.

Had the Fed not stepped in to guarantee corporate debt, the risk premium would have shot up because investors would rightly fear a surge in bankruptcies, stocks would have tanked, and the economy would have imploded.

Lowering interest rates and guaranteeing corporate debt was the right thing to do, given the situation the Fed was facing.

The point here is that the Fed should have never faced that situation. The situation was created by the disastrous regulatory and tax policies put in place before the pandemic. The situation stemmed from choices made by stock-market-first politicians. The situation was not inevitable.

And what about the future? Current stock prices are out of sync with economic fundamentals. But there is not a lot more the Fed can do, beyond buying corporate stock directly.

The pressure to reconcile even current stock values with future profits in our low-growth economy suggests that corporate owners will lobby to further increase their share of the pie, lest the imbalance between actual and expected profits be revealed.

The pressure from economic fundamentals means corporate owners will lobby for more ways to lower your wages and benefits. That means your Social Security and Medicare are less secure. That means your health insurance will cost you more. That means your safe retirement income will be even lower.

The costs to you of stock-market-first U.S. economic policies

Advocates of stock-market-first economic policies would have you focus on new stock market highs as proof they know what is best for the economy. Specifically:

  • They want you to overlook the fact that they are using government to get an increasingly larger share of the economic pie for themselves.
  • They want you to ignore that their policies are inhibiting overall growth in the very economic pie from which they are taking that bigger share.
  • They want you to ignore that government-organized economic cooperation is often the key to real economic growth shared equitably between workers and business owners.
  • They want you to ignore that the absence of worker bargaining power is gutting the middle class.
  • They want you to ignore that failure to enforce antitrust laws has led to a lack of competition in key industries.
  • They want you to ignore that the impending technological change associated with automation is likely to make cooperation between government, business, and labor even more important in the years ahead.

And they want you to ignore that improved working conditions, higher wages, better retirement and health security, and a cleaner environment were choices that you voted for all your life because they have real value.

Stock-market-first advocates want you to believe that a booming stock market is always a good thing for you. But you should know now that it depends on how we got there. You should know now that the stock market math will add up one way or another at the end of the day, and the people in charge of the reckoning will not be the ones making sacrifices.

Rising wealth inequality is more than just unfair and discriminatory. Rising wealth inequality is the result of disastrous economic policies that generate unfair and discriminatory outcomes. The beneficiaries of those disastrous economic policies want to sustain that rising wealth inequality for their benefit, not yours.

Even if you do own a 401(k).

Posted in Uncategorized

Brad DeLong: Worthy reads on equitable growth, September 14-21, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. The spring and summer of 2020 were exactly the wrong time to have an economy that places a very low weight on the quality of eldercare in the United States. Read, Krista Ruffini, “worker earnings, service quality, & firm profitability: evidence from nursing homes and minimum wage reform,” in which she writes: “A ten percent increase in the minimum wage raises low-skilled nursing home workers’ earnings one to two percent, reduces separations, and increases stable hires. These earnings gains and increases in firm-specific human capital translate into marked improvements in patient health and safety. A ten percent increase in the minimum wage would prevent at least 15,000 deaths, lower the number of inspection violations by one to two percent, and reduce the cost of preventable care.”

2. It was decades ago that my ex-roommate Andrei Shleifer asked me why are there Keynesians and monetarists and Hayekians and institutionalists in economics, but no Galbraithians? I did not have a good answer for him then. But I believe that now I do. It is: we are all Galbraithians now. Read Kate Bahn, Mark Stelzner, and Emilie Openchowski, “Wage discrimination and the exploitation of workers in the U.S. labor market,” in which they write: “Characteristics specific to race and gender, such as the lower levels of wealth … increased household responsibilities … make workers of color and women more susceptible to exploitation … Government support for workers to act collectively boosts worker power, reducing employers’ monopsony power—their ability to set and lower wages—and thus decreasing worker exploitation and wage differences that replicate discriminatory biases against these groups of workers.”

Worthy reads not from Equitable Growth:

1. The coronavirus pandemic and the resulting recession are still happening and people cannot be convinced by what they see on TV that it is not. Read Austan Goolsbee and Chad Syverson, “Fear, Lockdown, and Diversion: Comparing Drivers of Pandemic Economic Decline 2020,” in which they write: “Comparing consumer behavior within the same commuting zones but across boundaries with different policy regimes suggests that … while overall consumer traffic fell by 60 percentage points, legal restrictions explain only 7 of that. Individual choices were far more important and seem tied to fears of infection … States repealing their shutdown orders saw identically modest recoveries … Shutdown orders did, however, significantly reallocate consumer activity away from “nonessential” to “essential” businesses and from restaurants and bars toward groceries and other food sellers.”

2. I confess that I had greatly underestimated the damaging effects of Jim Crow on even the “talented 10th” of the African American population. Read Eric S. Yellin, “how the black middle class was attacked by Woodrow Wilson’s administration,” in which he writes: “Woodrow Wilson … brought … an administration loaded with white supremacists … The U.S. civil service had never been formally segregated prior to Wilson’s inauguration … That route to social mobility for educated and hard-working black Americans was closed off … Many biographers treat Wilson’s racial views as an unfortunate aberration from the otherwise noble aims of this progressive leader … Wilson’s personal racism tends to distract us from a bigger story about the changing place of race in American life and politics. Wilson’s administration saw not just the end of a few careers of black Republicans and its impact was not merely the result of one man’s prejudice.”

Posted in Uncategorized

Weekend reading: Racial and gender discrimination in the labor market 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 U.S. labor market is difficult to navigate and that is especially the case since the onset of the coronavirus pandemic and recession, with record-high unemployment and an economic contraction ravaging the economy since March. When the statistics are broken down by race and gender, an even bleaker picture appears, showing that Black and Latinx workers and women workers in particular are bearing the brunt of this economic downturn. These groups of workers also tend to receive lower wages than their White and male peers, according to a recent working paper that was the basis of a policy report, published this week, by Kate Bahn, Mark Stelzner, and myself. These wage discrepancies can’t be explained by differing skills or education levels among these groups of workers. In fact, the working paper finds that workers of color, particularly Black and Latinx workers, women, and those at the intersection—Black women and Latina workers—face wage discrimination due to lower levels of wealth and more household responsibilities. These factors make them more vulnerable to exploitation and less likely to leave a job—even when they are being paid too little for their labor. Bahn, Stelzner, and I recommend several areas where policymakers can act to close the racial and gender wage gaps, including restoring worker power, reducing racial wealth inequality, and reinforcing family economic security.

As millions of American workers are laid off and small businesses are struggling amid the coronavirus recession, U.S. financial markets are booming and wealthy people keep getting wealthier. The reason behind this seeming paradox lies in the policy choices made over the past 40 years, exacerbating inequality across the economy and society. Amanda Fischer looks at both coronavirus-era policies and various policies that preceded them to show where this break between the fates of Wall Street and Main Street began. From antitrust law and the dominance of Big Tech companies to monetary policy and the Federal Reserve’s interventions in the bond market, Fischer walks through why some firms and people are doing great right now and why that isn’t trickling down to the many others who are being left behind. Fischer concludes with several policy ideas that could reverse this trend and help ensure a strong recovery for all Americans and businesses—not only from the coronavirus recession but from future recessions as well.

Heather Boushey wrote an op-ed in The Washington Post recently that examines why U.S. stock markets rallied quickly after plunging at the start of the coronavirus recession while the real U.S. economy and so many U.S. workers and their families continue to suffer. She explains how income and wealth inequality enabled the Dow Jones Industrial Average and the S&P 500 indexes to recover largely on the back of the five Big Tech companies in those indexes, but that smaller firms in the Russell 2000 index fell in value. She points to more economic data to caution that U.S. stock markets cannot sustain their gains indefinitely without a recovery in the real economy.

Head over to Brad DeLong’s latest Worthy Reads for his takes on must-read content from Equitable Growth and around the web.

Links from around the web

While unemployment numbers, in aggregate, seem to be decreasing from their peak in April, dropping from 14.7 percent to 8.4 percent in August, a closer inspection of the data shows that much of this improvement has been for White workers. HuffPost’s Emily Peck reports that the unemployment rate for White workers is at 7.3 percent, while Black workers’ jobless rate is still in double-digits, at 13 percent—indicating that White workers are getting hired back almost twice as fast as Black workers. Black workers have long had unemployment rates that are higher than that of their White peers due to structural racism and discrimination, but at the start of the coronavirus recession, Black and White workers were laid off at similar and high rates. It appears, however, that the racial unemployment divide may soon widen once again as businesses reopen and rehire White workers more quickly. And as the child care crisis continues to burden working parents, Peck writes, Black women workers will bear the brunt of this, since household responsibilities fall disproportionately on them. Black workers are getting left behind, and policymakers are not acting to address this issue with the urgency it requires—or at all.

Contrary to what many economists argue is the cause of racial and gender wage divides—a so-called skills gap between White men workers and their otherwise-similar peers—Annelies Goger and Luther Jackson write for The Brookings Institution that policymakers instead should focus on an opportunity gap in the U.S. labor market. The skills gap narrative doesn’t take into account social dynamics that stunt many workers’ career advancement and job options, and therefore does not provide an accurate picture of the obstacles faced by large swaths of the labor force in the United States. This leads to misinformed policy choices that will not solve the real issue at hand. Instead, Goger and Jackson argue that policymakers should look at the opportunity gap—the disparity in access to a good education, economic security, high-quality jobs, and career mobility—in order to cultivate and invest in talent, innovation, and general well-being. Goger and Jackson conclude with several policy solutions to address these issues specifically and explain why they are necessary for lawmakers interested in reducing inequality in the United States.

The rampant inequality prevalent in the U.S. economy over the past several decades made the nation more vulnerable to the economic and public health crises brought on by the coronavirus pandemic. In a TIME magazine article, Nick Hanauer and David M. Rolf show how the upward redistribution of income has cost American workers dearly—how the top 1 percent took $50 trillion from the bottom 90 percent over the past 40-plus years—and how that wealth did not trickle down to all Americans, as some economists predicted it would. Hanauer and Rolf explain in depth how this inequality holds back U.S. economic growth and limits who prospers from that growth, and how it made us less resilient and primed our system to be ravaged by the coronavirus pandemic and COVID-19, the disease caused by the virus. They also demonstrate, using data from a recent RAND Corporation working paper, what American workers would be making across the income distribution had this inequality not taken hold—and, unsurprisingly, the vast majority of workers are earning only a fraction of what they could be earning. In fact, they find, inequality is costing the average full-time worker $42,000 per year.

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.

Main Street’s workers, families, and small businesses are now suffering as Wall Street prospers from policies to fight the coronavirus recession

Posted on by Maria Monroe
Wall Street and Main Street are feeling very different effects from the coronavirus pandemic.

Overview

In San Antonio, 10,000 cars lined up to get bags of groceries from a local food bank, waiting hours in the heat for help.1 In New Orleans, advocates chained themselves together outside of the city courthouse to prevent landlords from finalizing evictions.2 In New York City, more than one-third of small businesses may be closed forever.3 And across the United States, more than 190,000 lives have been lost to COVID-19, the disease caused by the novel coronavirus, as of early September.4

But while these economic and health crises unfold in cities and towns across the country, a slice of the U.S. economy continues to thrive, insulated from upheaval, or even benefitting from it. The S&P 500—an index of 500 major publicly traded companies in the United States and a benchmark for gauging the health of the U.S. corporate sector—is up more than 5 percent in 2020, as of September 9. The index has not only fully recovered to its pre-pandemic level but, in fact, has hovered around the all-time high.5

Main Street’s workers, families, and small businesses are now suffering as Wall Street prospers from policies to fight the coronavirus recessionDownload

Leading the way is Apple Inc., which saw its market capitalization double in just 2 years and was the first company in U.S. history to be valued at $2 trillion.6 Bond issuances by U.S. companies—the way most medium- to large-sized firms fund themselves, by issuing debt—have also soared to an all-time high in the second quarter of 2020.7 This occurred after the U.S. bond market hit a prior high of debt-raising in the previous quarter.8 Companies issuing both the most credit-worthy investment-grade bonds and those issuing less credit-worthy “high yield” or “junk” grade bonds have been able to raise money fairly cheaply to get through the cash crunch caused by declining revenue during the coronavirus pandemic and ensuing recession.9

How did the fates of working people—facing death, hunger, displacement, and joblessness—and small businesses facing permanent closure become so disconnected from the fates of large corporations? Why isn’t the abundance channeled via U.S. financial markets to those at the top of the wealth and income ladders in the United States translating to security for most individuals and families? The answer is evident most immediately in the policy choices made during the coronavirus recession but also in policies enacted in the decades before the U.S. economy hit this particular shock.

This issue brief details what’s happening today on Main Street among our nation’s workers, their families, and our small businesses. It then explains why much of Wall Street remains insulated from the economic suffering happening across the Main Streets of our nation, and how policy decisions made over the past 40 years have produced these outcomes by design. It concludes with some key lessons about why policymakers not acting aggressively and consistently during and after the Great Recession of 2007–2009 harmed Main Street in many prolonged ways—lessons that, in 2020, seemed to have been learned, based on policymakers’ initial actions at the onset of the coronavirus recession but which increasingly fade as the fates of Wall Street and Main Street diverge.

To avoid another prolonged recession and tepid economic recovery, policymakers need to realize that Main Street needs to come first. Those policy tools are available and tested. They need to be deployed.

Individuals, families, and small businesses are on the edge

Individuals, families, and small businesses are on the edge of a cratering economy. The unemployment rate was 8.4 percent, as of August 2020, higher than at many points during the Great Recession of 2007–2009.10 While overall unemployment numbers have improved from their peak earlier this year, there’s been a surge in the number of permanent job losses, as temporary layoffs transition to lasting cuts.11 Food insecurity is rising, especially in households with children.12 Thirty million to 40 million people may be at risk of looming evictions, marking the most severe housing crisis in modern U.S. history.13 Small businesses everywhere are shuttering, and many of them may be closed for good.14 Public health data indicate that growing numbers of people are experiencing mental health challenges such as depression, anxiety, substance abuse, and suicidal ideation.15 And all of these trends, like COVID-19 itself, disproportionately harm people of color, especially Black, Indigenous, and Latinx individuals and families.

The good news is that this suffering is not inevitable. Policymakers have the tools to support individuals and families and to prevent a wider macroeconomic downturn if they choose to do so. In fact, actions taken by lawmakers in the spring and early summer as the pandemic spread across the country reduced the harm faced by most workers and their families and at least some small business owners. But that protection began to wane beginning at the end of July as various coronavirus aid programs expired. The renewed harm now facing many workers, their families, and small businesses will become more and more permanent if policymakers don’t act again soon.

Researchers at the Center on Poverty and Social Policy at Columbia University find that the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, kept 12 million people out of poverty.16 Other research from former Equitable Growth Steering Committee member and Harvard University researcher Raj Chetty, leading the Opportunity Insights team, produced research showing that the “recovery rebates” (also known as direct payments) provided to individuals and families alongside enhanced Unemployment Insurance helped households in the poorest ZIP codes maintain necessary spending.17

The same is true for housing stability. ProPublica, the investigative news organization, reviewed filings in local court records in more than a dozen states over the course of months, finding that evictions dropped substantially in properties covered by the CARES Act’s federal eviction moratorium.18 All of these findings, however, are either largely expired or greatly diminished. Most of the one-time, direct relief $1,200 checks were spent many months ago, enhanced unemployment benefits ran out at the end of July 2020, and significant uncertainty surrounds the continuation of a federal eviction moratorium.19

Then, there are small businesses, which sustain half of private-sector jobs in the country. The Washington Center for Equitable Growth previously documented both the successes and challenges of earlier federal policy interventions, namely the $670 billion Paycheck Protection Program.20 While that program proved to be an effective lifeline for some firms in need of a boost to get through the worst of the mandatory, pandemic-induded lockdowns, it was less successful in helping the hardest-hit firms in the areas with the most cases of the coronavirus and the most concentrated caseloads of COVID-19.21

Challenges with the Paycheck Protection Program largely centered around issues with its program design, namely the rules around eligible uses of funds, conditions for loan forgiveness, and the intermediation of funding to these businesses through financial institutions.22 Equitable Growth documented how policymakers might fix those flaws, but the future of the Paycheck Protection Program is uncertain. As of August 8, 2020, the ability of the program to accept new applications expired, with more than $130 billion unspent and not available to eligible businesses.23

In summary, data show that we can prevent suffering when we give individuals, families, and small businesses the direct support they need to survive the coronavirus recession. Policymakers provided substantial relief in the CARES Act, but that help ran out. Yet what persists in its absence is the rescue money available for financial markets, as well as pre-existing advantages in our economy for certain large firms. Because our financial infrastructure is designed to quickly stabilize the corporate sector—even without further action from Congress—what’s happening on Wall Street looks a lot different from what’s happening for many workers.

Much of Wall Street is winning

When we say Wall Street is thriving, it’s important to identify precisely which slice of U.S. businesses is doing well in this moment. A good way to judge medium- to large-sized corporations’ health is through two measures. The first is to look at how their stocks are trading. The second is to see whether corporations have been able to borrow money and at what rate of interest. Corporations also raise money by taking out loans from banks or nonbank financial firms, with small businesses relying more on that type of funding. This issue brief will delve into those credit markets, but only minimally.24

Broadly, the two major U.S. stock markets, the New York Stock Exchange and NASDAQ, are performing extraordinarily well because a handful of powerful technology companies are profiting handsomely due to the nature of the coronavirus recession, which plays to their strengths, and because of historically lax antitrust enforcement that enables them to further boost their profits at the expense of other firms, workers, and consumers. Meanwhile, the U.S. bond market is performing well more broadly for all firms. This is due, in large part, to rescue programs designed by the Federal Reserve under authority provided in the CARES Act.

So, let’s turn to each of these Wall Street financial markets in turn.

The U.S. stock market

Stocks represent equity, or an ownership interest, in a company. Fundamentally, stock prices are determined by investors’ confidence in the future earnings of a firm (calculated by combining  the risk-free rate earned on holding government debt, plus the risk premium associated with owning the stock). Stocks are also a relatively risky form of investment, as stockholders are the first to bear losses and the last in line to get paid if a company fails. In good times, stockholders are compensated by dividends issued by the company or through appreciation of the stock price, which is realized if the investor sells shares of stock.

So, how have the stock markets been performing during the coronavirus recession? While the S&P 500 index, which measures the 500 largest companies on both U.S. stock markets, is up more than 5 percent in 2020 as of September 9, those gains have been driven by only a handful of companies that control a significant share of all stocks traded on the markets.25

Those top companies are concentrated in the technology sector. Consider the roughly $27 trillion in total market capitalization of all companies in the S&P 500.26 Of the value of all outstanding shares:

  • Apple Inc. boasts a $2 trillion market value.27
  • Amazon.com Inc. and Microsoft Corp. each represent around $1.7 trillion in value.28
  • Alphabet Inc., the parent company of Google, represents just more than $1 trillion in value.29
  • Facebook Inc. represents more than $800 billion in value.30

In total, the market capitalization of these five giants is more than one-fifth the value of the total market capitalization of the 500 largest firms trading on U.S. equity markets. (See Figure 1.)

Figure 1

The percentage of the shares of Apple, Amazon, Microsoft, Facebook, and Alphabet (owner of Google) in the equity index of the 500 largest U.S. companies

More broadly, total market capitalization for all publicly traded firms is concentrated in the S&P 500, with those 500 companies representing more than 75 percent of the value of all equities traded on U.S. stock exchanges.31 This level of concentration in market capitalization among a small number of companies is at historically above-average levels and is at the highest level it has been in about 40 years.32 The previous time it even approached this level was during the dot-com boom more than two decades ago, though even then, the top five stocks only represented around 16 percent of the S&P 500’s total value.33

These technology companies’ stock-price gains in 2020—particularly since the coronavirus and its recession hit—are outsized, too. The stocks of these five firms are registering astronomical returns while the median stock in the S&P 500 index declined by 4 percent as of August 28.34 Technology companies dominate the stock market among large companies. And, in turn, the stock market indexes of large companies are outpacing indexes backed by the stocks of smaller firms. The Russell 2000, an index that tracks small-cap U.S. firms, is down around 8.4 percent since the start of 2020, as of September 9.35

A visualization of the returns of Amazon, Alphabet, Apple, Microsoft, and Facebook stocks, versus the returns of the overall S&P 500 and Russell 2000 indexes, is instructive. (See Figure 2.)

Figure 2

Value of large tech stocks, compared to the average gains of the S&P 500 and Russell 2000 indexes

If stock prices reflect investors’ belief in the future health of a company, then technology firms are right to inspire significant confidence during the coronavirus recession. With many people trapped at home, reluctant to go outside, and increasingly working from their houses if they are able to do so, the business models of technology companies are uniquely suited for this moment.

Take the changing nature of shopping. A survey by consulting firm McKinsey taken between July 30, 2020 and August 2, 2020 finds that consumers’ use of online channels for purchases surged during the pandemic, with 59 percent growth in online grocery purchases, 45 percent growth in online over-the-counter medicine purchases, and 18 percent growth in online consumer electronics purchases, to name just three examples.36 McKinsey finds that across purchase categories, there has been a 15 percent to 45 percent growth in online sales, with similar levels of growth in the percentage of consumers who plan to make all purchases online.37 Across channels, new modes of product delivery, such as curbside pickup and home delivery, rose sharply.38

This trend benefitted Amazon the most. The company registered 40 percent growth in earnings in the second quarter of 2020, compared to a year earlier.39 In fact, the company’s second quarter earnings this year “managed to blow away elevated [investor] expectations,” according to the stock market website The Motley Fool.40 And Amazon continues to expand in ways that draw sharp contrast with the decline in brick-and-mortar retail sales and the companies engaged in traditional retail sales. News articles recently reported that Amazon is looking to convert vacant mall department stores into distribution centers, with Amazon’s growing reach coming alongside the recent bankruptcies of retailers, including J.C. Penney Company, Inc., Sears Holdings, Marcus Corp (the parent company of Neiman Marcus), J.Crew Group, Inc., and Ann Taylor’s parent company, Ascena Retail Group.41

The surge in working from home, rather than the office, has also benefited technology companies, which provide services such as cloud computing needed for telework. A survey of more than 300 chief financial officers and finance leaders by research firm Gartner Inc. finds that nearly three-quarters of companies plan to shift at least 5 percent of their previously on-site workforce to remote work permanently.42 Another study by consulting company Global Workplace Analytic estimates that when the pandemic is over, 30 percent of the entire workforce will work from home at least a couple times a week.43 In contrast, before the pandemic, U.S. Census Bureau data released in 2018 found that 5.3 percent of workers typically worked at home.44

But it’s not just COVID-19 causing technology companies’ dominance. A second factor to consider is how U.S. competition policy favors Big Tech. As the Washington Center for Equitable Growth’s Director of Competition Policy Michael Kades noted in a recent post, weak antitrust laws and conservative courts using unsound economic theories continually expose U.S. markets to corporate abuses of market power, which boost large corporations’ profits and dominance at the expense of competitors, workers, and consumers.45

In a recent hearing of the U.S. House Committee on the Judiciary featuring the chief executive officers of Amazon, Apple, Google, and Facebook, Kades notes how policymakers focused on the ways in which these technology companies have suppressed competition through harmful exclusionary conduct.46 Those practices, according to Kades, “allow dominant companies to stifle actual and potential rivals, preventing competition on the merits and allowing incumbents to obtain or exploit market power.”47

Kades notes that in the hearing, policymakers cited several examples of these practices, including:

  • Facebook cutting off online entertainment community Vine’s access to Facebook because it was a potential competitor
  • Amazon pricing its proprietary products and services below cost to drive out competitors
  • Apple discriminating against apps that compete with Apple products
  • Google preferencing its own content over that of its competitors48

Kades notes that new legislation is needed to give enforcement agencies and the courts the ability to shift the balance in U.S. antitrust law.49

The U.S. bond market

In addition to funding themselves with shares, firms also fund themselves with bonds, or securities issued by a firm paying a pre-established rate of return, either fixed or variable, for a set period of time. Bondholders’ investments are usually backed by collateral owned by the firm, and bondholders receive priority compared to stockholders if a company fails and its assets are liquidated.

Like stocks, bonds are widely traded among investors and can be grouped into indexes composed of a variety of bonds that can also be traded. Unlike stocks, bond returns do not change based on swings in the value of the firm. Note that companies can also fund themselves with other types of debt such as loans from banks or nonbank financial firms, including private equity companies, which this issue brief will touch on briefly later.

The bond market, unlike the stock markets, is performing solidly for all types of companies, even during the coronavirus recession.50 All told, companies, as of mid-August, have issued $1.9 trillion in bonds in 2020—a record amount, with healthy issuance for both investment-grade and speculative-grade companies.51 Companies have needed to raise additional money to help cover revenue shortfalls caused by a dip in demand during the pandemic. Other companies are issuing new debt because of the historically low cost of financing, driven by Federal Reserve interventions in the market, described later in this issue brief.

Among investment-grade companies, bond issuance totaled $1.3 trillion, hitting a yearly record just 8 months into the year 2020.52 Big companies such as Alphabet and Apple borrowed billions of dollars in recent weeks to lock in the low cost of debt financing.53 Indeed, mid-August 2020 was a record week for investment-grade bond issuances. (See Figure 3.)

Figure 3

Issuance of investment-grade U.S. corporate bonds, 2016–2019 and first 8 months of 2020, in trillions of dollars

Riskier firms have been able to issue bonds as well. Issuance by high-yield companies set a record in the second quarter of 202054 and topped a new record for the “typically slow August,” breaking records not seen since 2012.55 Firms adversely affected by the pandemic—among them aerospace manufacturer Boeing Inc. and Carnival Corp., the cruise line—were able to issue debt to fund themselves when previously, both firms had sought higher-cost loans from nonbank financial firms such as hedge funds.56 In total, yields on high-yield companies’ bonds are at record lows after briefly spiking in March 2020, meaning investors are requiring historically small levels of returns in exchange for purchasing company debt.57 (See Figure 4.)

Figure 4

Yields, which move in the opposite direction of the price of bonds, show that investors in junk bonds willing to accept small returns on the their investments

How did the bond market become so robust for the full spectrum of firms issuing debt? This story is about interventions by the Federal Reserve.

The U.S. bond market seized up in March, when the coronavirus recession began and as a growing consensus developed in U.S. financial markets that the United States would experience a prolonged recession due to the ongoing and failed public health response to the coronavirus pandemic.58 But the Federal Reserve’s mere announcement at the end of that month—saying the central bank would undertake a number of accommodative measures to boost the economy, including buying bonds and exchange traded funds, or ETFs, backed by bonds using funds appropriated under the CARES Act—caused markets to rebound and gain confidence.59 Indeed, Federal Reserve Chair Jerome Powell noted at the end of March that the central bank is “not going to run out of ammunition,” and financial markets responded with confidence.60

Specifically, the central bank set up two facilities, announced in March but operationalized starting in May, for the purpose of supporting corporate credit markets. The first facility, the Primary Market Corporate Credit Facility, which is operational but has not yet made any purchases, is designed to purchase debt directly from the issuing companies.61 The second facility allows the Fed to purchase both individual bonds and ETFs backed by corporate bonds on the secondary market via the Secondary Market Corporate Credit Facility.62 In total, both programs have the authority to purchase up to $750 billion in assets.63 The Fed, using its lender-of-last-resort authority to leverage money appropriated by Congress, which stands in a first-loss position relative to the central bank, has $75 billion in congressional appropriations to withstand any losses on its balance sheets.64

As of August 10, 2020, the Secondary Market Corporate Credit Facility has just more than $12 billion worth of holdings, around $8.7 billion of which is in the form of ETFs and $3.5 billion of which is in the form of individual bonds purchased on the secondary market.65 The purchases by the Fed include bonds, or ETFs backed by bonds, issued by firms that were rated as investment grade on March 22, 2020, whether they have kept that rating or have been subject to certain downgrades since that date (companies in the latter category are known as “fallen angels”).66

Among individual bond purchases, the Fed’s activity has been concentrated among blue chip companies, or large, well-established firms with household names.67 Individual bond purchases have comprised all of the Fed’s activity since the end of July.68 Generally, the Fed’s purchase activity has slowed in recent months compared to early on in the pandemic response, but it still remains active.69

The Fed helped companies that are riskier bets too, through the purchase of ETFs, which began in May 2020 but has generally slowed in the months since.70 Early purchases of ETFs by the Fed coincided with private buyers flooding the market, with the Fed’s purchases making investors feel more comfortable with the risks associated with companies with riskier profiles and higher debt.71 Though the Fed owned only 3 percent of total assets in the ETFs in which it purchased shares at the end of June, the Fed accounted for more than half of new cash inflows into some ETFs, giving it an outsized ownership share of some funds and putting pressure upward on prices and driving down yields.72

Notably, the Fed and other banking regulators sounded the alarm on high-yield corporate debt just before the pandemic.73 But today, 54 percent of the Fed’s corporate debt portfolio is composed of bonds on the cusp of junk bond territory,74 easing investors’ comfort and causing them to expand purchases notwithstanding increasing default rates and ratings downgrades.75

The size of the Fed’s total bond market interventions, at $12 billion,76 is relatively small (by way of comparison, Alphabet alone issued $10 billion in debt earlier this month).77 Still, the effects of the Fed’s actions on financial markets are profound. Fed reassurances to the bond market demonstrate that it will do whatever is necessary to stabilize corporate credit markets, and the $750 billion pledge of available funding for the Primary Market Corporate Credit Facility, alongside continuing purchases by its SMCCF window, gives confidence that the Fed has deep pockets to execute on its promises.

Observers differ on their perception of the wisdom of the Fed’s actions, with some calling it “decisive action” to “[avert] a worst-case scenario”78 and others saying the Fed is “addicted to propping up markets even without a need.”79 But all agree that the bond market was buoyed by Federal Reserve interventions.

Why isn’t the boom on Wall Street trickling down?

The stock market and the bond market are humming along amid the unprecedented coronavirus recession. But one central question that flows from these trends is to what extent the boom in stocks and bonds is helping people on Main Street by:

  • Preventing layoffs
  • Boosting individuals’ investment incomes
  • Producing knock-on effects for small businesses
  • Helping state and local governments cope with declining revenues

The short answer is that it is too soon to tell, but let’s examine each of these questions individually. The details may well indicate the emergence of trends in the coming weeks and months akin to what happened during and after the Great Recession of 2007–2009, which produced prolonged suffering for Main Street.

U.S. financial market gains are not preventing many layoffs

The stock market boom doesn’t mean much for most workers’ jobs. First, only around 17 percent of workers are employed at an S&P 500 firm.80 In contrast, nearly half the U.S. workforce is employed by small businesses.81 The vast majority of small businesses don’t issue stock.

For those who are employed at companies that issue shares, stock prices could be correlated with job growth—investors may feel confident in a company when they see it innovating or investing in workers to grow the business. But sometimes, investors actually penalize companies for investing in workers. American Airlines Group, for example, was downgraded by analysts when it gave raises to pilots and flight attendants.82 And Chipotle Mexican Grill, Inc. experienced a 3 percent decline in its stock price when analysts determined it couldn’t trim its workforce costs.83

Importantly, the companies whose stocks are surging the most during the coronavirus recession don’t employ that many people. Big technology companies, while large employers in an absolute sense, don’t have that many workers compared to their share of the stock markets’ total value. While they represent around a fourth of the total market capitalization of S&P 500 firms, they represent only 5 percent of the index’s total workforce. As a recent Bloomberg news report notes, 20 years ago, companies with the same market share employed 10 percent of the S&P 500’s total workforce.84 These companies are also more likely to use gig workers or independent contractors, who don’t have the security of permanent employees.85 Good examples are Amazon using independent contractors to do “last mile” deliveries with their own cars,86 or Google and Facebook using independent contractors to screen their platform for inappropriate content that violates the company’s guidelines.87

In fact, research suggests that companies with a higher level of “intangible assets” (such as intellectual property and brand recognition) per employee are far outpacing stock gains compared to companies with fewer intangible assets per employee.88 Part of this is driven by the unique nature of the coronavirus recession and the surge in the value of technology intermediation. But again, it’s also an outgrowth of antitrust policies that allowed prolific mergers and acquisitions in the technology sector.

The Fed’s support for bond markets could hypothetically support workers at companies that need to issue debt. After all, if a company can’t raise money, they can’t meet payroll. It is hard to causally determine whether any Fed actions are responsible for any positive indicators in labor markets, but, as economist William Spriggs of the AFL-CIO notes, one counterfactual (the Fed not acting at all) is unlikely to have produced better results for workers. Spriggs notes, “so you want [the Fed] to let all the companies go bankrupt? And then which jobs do you think will be left?”

In short, boosting teetering companies, while imperfect, may be better than the alternative.89

However, it is important to note that the Fed didn’t face a binary choice to do everything for corporate credit markets without precondition or do nothing at all. In fact, the CARES Act did include discretionary authority for the Fed to require corporations receiving rescue aid to retain jobs, maintain collective bargaining agreements, prohibit dividends and stock buybacks, and limit executive compensation,90 yet the Fed used several legal maneuvers to sidestep those conditions on aid.91 Two examples of how the Fed’s financial market activities are decoupled from worker protections can be instructive. For example, the Fed purchased corporate debt issued by ExxonMobil Corp.92 Meanwhile, the company is separately preparing for job cuts and ending their employer match for their remaining employees’ 401(k) retirement plans.93 The Fed also bought the corporate debt of Tyson Foods, Inc.,94 while the company has allowed a massive outbreak of COVID-19 in its meatpacking facilities.95

Finally, some contend that the Fed’s bond market actions are just delaying the devil coming due for many teetering firms and therefore won’t have a long-term positive effect on jobs. Indeed, the Federal Reserve Bank of New York recently noted a growth in firms whose expense payments exceed their cash flow.96 These firms are colloquially known as zombie companies.97 The New York Fed’s research finds that around 25 percent of all public firms (except agriculture) had expense payments that exceeded cash flow, along with more than a third of companies in the entertainment/hospitality/food, mining/oil, and retail industries.98 The Fed’s bond purchases could serve to prop up companies that otherwise would have stumbled or failed, including those that were precarious long before the pandemic, such as many oil and gas firms.99

Investment income doesn’t matter much for most Americans

The Fed’s actions also are unlikely to boost returns for most low- to moderate-income people in the United States. While about half of Americans own some amount of stock (either directly or through investment vehicles such as 401(k) plans), the value of all stock ownership is concentrated, with the top 1 percent of households by wealth owning more than half the value of all outstanding shares.100

As for corporate bonds, individual ownership, especially among moderate-income households, is extremely limited in the United States. Low- and moderate-income people do have exposure to the bond market through insurance companies, mutual funds, or pension funds that own such bonds.101

Small businesses continue to struggle

The Fed’s actions also are unlikely to do much for small businesses, aside from potential salutary macroeconomic effects of its actions for the U.S. economy generally. Small businesses typically don’t issue stocks or bonds, so they’re not helped by the Fed’s interventions in those markets. Low interest rates, under typical economic conditions, should enable some small firms to borrow more cheaply from commercial bank lenders. But, as described more below, bank lending is retrenching as financial institutions become more risk-averse during the pandemic.

The Fed did create a separate program to facilitate direct lending to mid-sized businesses, known as the Main Street Lending Facility.102 The program was designed to encourage financial institutions to lend to mid-sized companies with up to 15,000 employees and $5 billion in revenue by having the Federal Reserve purchase 85 percent to 95 percent of those underlying loans.103 Despite a $600 billion available pot of funding, the Fed has only committed or settled $252 million across 32 loans, with another 55 loans worth $604 million under review.104

This Fed program is floundering due to the complex rules of the Fed’s Main Street Lending Facility, alongside the already substantial debt load among mid-sized businesses and the reliance of the Fed program on the participation of private-sector lenders.105 Indeed, the sluggish start of the Main Street Lending Facility mirrors a general downturn in available credit for small- and mid-sized companies that rely on bank and nonbank loans for funding, despite low interest rates.

As noted in a recent Bloomberg article, “banks are tightening conditions on loans to smaller firms at a pace not seen since the financial crisis, while many direct lenders that have traditionally focused on the middle market are pulling back or turning to bigger deals instead.”106 This is despite claims from some that recent relaxation of post-Great Recession banking regulations would increase the provision of credit for nonfinancial businesses.107 Nonbank lenders are likewise tightening lending as they address increasing defaults and are targeting bigger deals.108

In short, the coronavirus recession and the policy response has produced a lopsided trend in corporate credit markets—with small firms that rely on lending increasingly finding it difficult to get credit while high-yield firms with access to bond markets enjoying falling yields.109 (See Figure 5.)

Figure 5

Commercial and industrial loans by banks, compared to the yield of BBB-rated corporate bonds, 1990–2020

State and local government financing is dire

How are the Federal Reserve’s bond market interventions affecting the health of state and local government finances and, therefore, the workers of these public-sector employers? The Fed, in April, established a Municipal Lending Facility to buy up to $500 billion in bonds issued by certain qualifying counties and cities so that they could use the proceeds to pay for necessary expenses related to, or declines in revenue because of, COVID-19.110 But only two bonds have been purchased by the Fed so far. One was issued by the state of Illinois, for $1.2 billion.111 The other was issued by the state of New York Metropolitan Transit Authority, for $451 million.112

The discrepancy between the Fed’s municipal and corporate bond buying program rules is instructive. The Fed imposes more stringent requirements on municipal borrowers than on corporate ones. A municipality rated A3 by a credit rating agency (a medium-grade rating that signifies the weakest borrowers within the cohort of strong borrowers) could borrow for a maximum of 3 years at around a 2.2 percent interest rate, while a similarly situated bond issued by an A3-rated corporation would pay just 1 percent.113

What’s more, municipalities can borrow for a maximum of 3 years, but corporations will be able to borrow for 4 years to 5 years—giving them more time to repay debts.114 Companies that issue bonds directly to the Fed via the Primary Market Corporate Credit Facility can have repayment timelines of up to 4 years, while the Fed’s program to buy bonds in the secondary market through its Secondary Market Corporate Credit Facility is allowing maturities of up to 5 years.115

Similar to the situation with corporate bonds, municipal bonds were stressed at the onset of COVID-19, and then, the market stabilized upon the Fed announcing its interventions, which included both the creation of the state and local bond purchase facility and other actions.116 But the Fed’s terms for municipal bond purchases are generally more punitive than those for corporations, meaning that the program may only be attractive for lower-rated municipalities that would otherwise have trouble borrowing at low cost in the market. Tellingly, only two municipal bond issuers have found the Fed’s terms attractive, with issuances totaling $1.65 billion, compared to more than $12 billion in Fed-supported corporate bond issuances, which support a range of investment-grade and high-yield firms.

Given the large declines in state and local revenues, combined with a lack of emergency federal support for state and local government bearing the increased costs of fighting the pandemic, public-sector job losses and services cuts are all but certain to continue because most states cannot run budget deficits. States and localities have already cut about 6 percent of their workforces as of mid-August 2020, and most estimates anticipate further job cuts absent a stabilization of the pandemic, added support from Congress, or a loosening of borrowing terms by the Federal Reserve.117

Conclusion

The coronavirus economic crisis need not produce deep and sustained harm for individuals and families in the United States if policymakers learn the lessons of the past. During the Great Recession, Congress failed to provide support commensurate with the scale of the crisis, and we saw the consequences.118 Wall Street was quickly stabilized and returned to profitability, with the fourth quarter of 2009 being the last quarter in which the banking sector posted losses.119

But individuals, families, and small businesses did not fare as well. It took until 2017 for median household income to get back to pre-crisis levels.120 The Great Recession saw more than a third of workers unemployed for 27 weeks or more.121 These sustained periods of joblessness led to poorer health, shorter life expectancies, and worse academic performance for children.122 The eviction crisis during and after the Great Recession produced heightened levels of stress, health crises, addiction, child abuse, and myriad other negative family outcomes.123

The apex of the previous global financial crisis, 2009, marked the year when business deaths most strongly outpaced business births, and for 3 months that year, new business creation reached its lowest point since the U.S. Bureau of Labor Statistics began collecting the information.124 And, perhaps most troublingly, one study from the U.S. Centers for Disease Control and Prevention found that suicides doubled in the years just before and after the Great Recession, spurred by severe housing stress, including evictions and foreclosures.125

Today, Wall Street is recovering even faster than during and after the Great Recession. Meanwhile, the coronavirus recession may be on track to deliver even worse economic conditions for workers, their families, and small businesses. Absent further action from policymakers, our nation may replicate the alarming consequences of the Great Recession. And this is not even taking into account the human tragedies brought on by the coronavirus pandemic and COVID-19 deaths and lingering sicknesses.

Policymakers have the evidence and tools to ensure a strong recovery. Direct financial aid to individuals and families works. Programs such as extended Unemployment Insurance, increased food benefits through the Supplemental Nutirition Assistance Program, and aid to states for Medicaid should be scaled up commensurate with economic indicators—and not scaled down until indicators show it’s safe to do so. Congress also needs to provide more financial aid to state and local governments.

Then, there are the reforms needed to ensure continuing financial aid to Wall Street is accompanied by concomitant obligations to help workers and their families, and support credit to small businesses. Policymakers should design more resilient “plumbing” to make rescues of families and small businesses as frictionless as Federal Reserve financial market interventions.126

Beyond the immediate response to the pandemic, the Washington Center for Equitable Growth provides a roadmap for the structural solutions needed to rebalance the economy over the long term, including restoring antitrust enforcement, boosting wages, and empowering workers.127 The United States walked into the coronavirus pandemic with severe underlying fragilities. To ensure a sustainable recovery will require bold action now, as well as addressing these weaknesses with structural policy changes.

—Amanda Fischer is the Policy Director at the Washington Center for Equitable Growth.

Brad DeLong: Worthy reads on equitable growth, September 9-14, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. The cuts in state and local government purchases that could easily drive the U.S. economy back into deeper depression this fall and winter are already in motion. State and local governments are about to sit down. Consumers are not standing up. Hence the odds that this depression will be a W-shape are high and growing. Read Jacob Robbins, “Sleepwalking into depression: The economic response to COVID-19 in the United States,” in which he writes: “State government employment declined by 247,000 between March and June, local government employment fell by a staggering 1.2 million, and federal government employment has been flat. As the coronavirus pandemic knocks a massive hole in their budgets, governments are laying off workers by the thousands …Without additional aid, the shedding of government workers across the country will continue … What is needed is monthly aid to state and local governments … The federal government needs to act and spend aggressively to support families, workers, and states and localities, and restore consumer demand. Acting swiftly and certainly can mean the difference between a lengthy, weak recovery with unnecessary suffering by those who already suffer from economic and racial inequality, and a strong recovery that leads to stable, broad-based growth and a more equitable economy.”

2. Workers are now losing their jobs at a substantially elevated rate because firms are shutting down and declaring bankruptcy. These are no longer the temporary, emergency, hunker-down playoffs of last spring. Yes, the third quarter numbers will show a substantial bounce back from the second quarter. But the longer-term outlook for the economy and the recovery is slowly getting grimmer and grimmer. Read Kate Bahn and Raksha Kopparam, “JOLTS Day Graphics: July 2020 Edition.”

3. A normal depressed economy has many more hires per month than it has job openings, as those who want workers can quickly and easily find them. This depressed economy is stunningly different. The relationship between job openings and hires is it levels seen traditionally only in bloom times. Where and why is the matching process failing? My suspicion is that firms are unable to provide workers who come into contact daily with elderly relatives with what the workers regard as an acceptable degree of protection from the coronavirus. This is quite puzzling, because effective social-distancing, mask-wearing, and disinfecting is really not rocket science. Again, read Read Kate Bahn and Raksha Kopparam, “JOLTS Day Graphics: July 2020 Edition.”

Worthy reads not from Equitable Growth:

1. Barry Eichengreen is frightened about the U.S. economy turning down again, with good cause. Read “The Pandemic’s Most Treacherous Phase, in which he writes: “The more dangerous phase of the crisis in the United States may actually be now … Fatalities are still running at roughly a thousand per day … Implications for morbidity—and for human health and economic welfare—are truly dire … Americans[‘] … current leaders are willing to accept 40,000 new cases and 1,000 deaths a day … inured to the numbers … impatient with lockdowns. They have politicized masks … If the economy falters a second time … it will not receive the additional monetary and fiscal support that protected it in the spring … If steps are not taken to reassure the public of the independence and integrity of the scientific process, we will be left only with the alternative of “herd immunity,” which, given COVID-19’s many known and suspected comorbidities, is no alternative at all.”

2. Enough market to keep business is efficient and innovative. Enough central control to make Chinese corporations tools and arms of the state and state purposes. And enough dictatorship to keep party bosses from succumbing to corruption and factionalism. That appears to be Xi Jinping’s plan for 21st-century China. It will, in a decade or perhaps a little more, face the inevitable overwhelming succession problem non-hereditary monarchies inevitably face.  Moreover, Xi’s image of dictatorial state capitalism with egalitarian aspirations and Chinese characteristics has no successful models in the past. These make it appear a low-odds historical gamble at very large stakes. Still, James Madison could be confident that the future would be different from the past because advances in the science of government made it possible to avoid past disasters. Perhaps Xi Jinping thing and his cohorts have similar degrees of optimism. Read The Economist’s “Xi Jinping is trying to remake the Chinese economy,” in which the magazine writes: “Party control is mixed ever more intimately with market mechanisms: The time when private Chinese companies downplayed their links to the Communist Party is gone. By The Economist’s count, nearly 400 of the 3,900 companies listed on stock exchanges in mainland China paid homage to the Communist Party and its leader in their annual reports this year. References by both state-owned firms and their private-sector peers to Xi’s guidance have increased more than 20-fold since 2017 … The idea is for state-owned companies to get more market discipline and private enterprises to get more party discipline, the better to achieve China’s great collective mission. It is a project full of internal contradictions. But progress is already evident in some areas … China’s success in stalling its coronavirus epidemic and restarting its economy has reinforced its belief in what Xi calls China’s “institutional advantages”—the idea that, as a strong one-party state, China can pool its economic and social resources to meet critical objectives … The last major focus of Xi’s market-orderliness reforms has been the financial system … His reassertion of government control over banks, brokerages, and investment firms has been bracingly hands-on, featuring tactics such as the abduction of Xiao Jianhua, a once-mighty financier, from a luxury hotel in Hong Kong in 2017. Several other tycoons have also disappeared, only to re-emerge either chastened or on trial. The message to bankers has been chilling: fall into line with the new order, or else.”

Posted in Uncategorized

Weekend reading: The economic and racial inequalities of college sports edition

Posted on by David Evans

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 economics and economic inequalities of college sports, and college football in particular, have long been ignored, with both the physical and economic well-being of athletes often overlooked by universities and fans alike. But the coronavirus pandemic is raising questions about what the economic effects would be of deferring college sports by a year due to the out-of-control public health crisis. Kate Bahn looks at why two top college sports conferences have decided to suspend all activities until at least January 2021, while the other three top university-level leagues are forging ahead. The lost revenue from cancelling a season or a full year of college football will have a dramatic impact on the economies of college towns and the purses of universities across the United States. But, Bahn asserts, with the coronavirus and its corresponding disease, COVID-19, predominately affecting people of color—including students of color who are now the majority of college football athletes, even as coaches remain mostly White—the existing structural and economic inequalities facing Black and Latinx students and their families are being brought to the foreground, as is the longstanding call for student athletes to be recognized as a labor force, entitled to proper pay and workplace protections.

Every month, the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. The BLS recently released the latest data for July 2020. Raksha Kopparam and Kate Bahn put together four graphics highlighting key data from the release, including that workers are beginning to feel more confident about the labor market (reflected in an increasing rate of those who quit their jobs) and that job openings are continuing to yield fewer hires.

Catch up on Brad DeLong’s latest Worthy Reads, in which he provides his take on content from Equitable Growth and across the internet. This week’s articles include Equitable Growth’s August 2020 Jobs Day coverage, an in-depth look at one of our 2020 grant descriptions, and more.

Links from around the web

In August, a group of U.S. senators announced plans to introduce legislation that outlines a so-called college athletes bill of rights, which would provide NCAA players with proper pay, healthcare, lifetime educational scholarships, and additional benefits. The co-sponsors of the legislation hope this bill of rights will get rolled into existing bills making their way through both chambers of Congress on NCAA policies regarding the use of the name, image, and likeness, or NIL, of college athletes. Sports Illustrated’s Ross Dellenger dives into the proposed bill of rights, which intends to “advance justice and opportunity” for athletes, particularly with regard to monetary compensation and representation in decisions that affect them. It would also enhance transparency regarding school finances, revenues, and expenses, and importantly includes college athletic departments—which are notoriously secretive about their spending—in this requirement.

College sports is not the only industry in which those in leadership positions tend to be White. A New York Times review of the more than 900 most powerful people in the United States—from politics to entertainment to law enforcement—shows that even as the U.S. population becomes more diverse, the vast majority of those in power are White. Denise Lu, Jon Huang, Ashwin Seshagiri, Haeyoun Park, and Troy Griggs look at 922 officials and executives, and find that 20 percent identify as Black, Hispanic, Asian, Native American, multiracial, or otherwise a person of color, even as more than 40 percent of Americans identify with one of these groups. The co-authors then look at each specific field to show the diversity—or lack thereof—in its leadership ranks, noting that “even where there have been signs of progress, greater diversity has not always translated into more equal treatment.”

An in-depth look in The Washington Post at a dilapidated motel in Orlando, Florida, just down the road from Disney World and Universal Studios, reveals a devastating present and foreshadows a bleak future for many communities suffering similar fates. Greg Jaffe writes that the motels along this stretch of highway have long been a barometer for the economy, gathering budget-conscious tourists in good times and, during tougher times such as today, transforming into last-resort shelters for struggling workers and their families. After the Great Recession of 2007–2009 and the housing collapse in 2008, the number of families staying in these increasingly decrepit motels rose, thanks to a lack of both well-paying jobs and low-income housing in the city. Now, Jaffe finds, some motel owners are abandoning their properties for the residents to maintain, often leading to power outages, pest problems, rising addiction and mental health crises, and crumbling infrastructure. A few local charities are working to help these vulnerable and hard-hit families, but more assistance is needed—and doesn’t appear to be imminent. It’s a devastating look at what could only get worse if policymakers at the local, state, and federal level continue to ignore the problems facing many low-income communities amid the continuing coronavirus recession.

Friday figure

Percent of coaches and players who are Black or White in Division I Football and Basketball

Figure is from Equitable Growth’s “College football’s inequality dilemma amid the coronavirus recession” by Kate Bahn.

JOLTS Day Graphs: July 2020 Edition

Posted on by Raksha Kopparam

Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for July 2020. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.

The quits rate continued to increase in July as the economy began to recover from early shutdowns, rising to 2.1% after falling to a low of 1.4% in April.

Quits as a percent of total U.S. employment, 2001–2020

There was less than one hire per job opening in July as openings increased to 6.6 million and hires fell to 5.8 million, a decrease of over 1 million hires compared to the prior month.

U.S. total nonfarm hires per total nonfarm job openings, 2001–2020

The job openings rate increased to 4.5% in July, but there were still more than two unemployed workers per opening and the unemployment rate was 10.2%.

U.S. unemployed workers per total nonfarm job opening, 2001–2020.

The Beveridge Curve reflects the unique circumstances of the coronavirus recession, with an elevated openings rate alongside high unemployment.

The relationship between the U.S. unemployment rate and the job opening rate, 2001–2020

College football’s inequality dilemma amid the coronavirus recession

Posted on by David Evans

Before the coronavirus pandemic and the recession it caused, the economics of college sports, particularly college football, took a backseat to game-day coverage of tens of millions of fans spending freely on eating, drinking, and cheering in tightly packed stadiums and bars, tail-gate parties, and backyard barbeques across the United States. In particular, the economic well-being of the athletes themselves and the financial imperatives for the college and university towns and cities where these games are played was, by and large, overlooked by the majority of fans.

Now, however, even Americans with no interest in college sports are taking part in conversations about whether college football should be played this fall and, by extension, what the economic impact would be of deferring a year of sports. Two of the Power Five college football conferences, the Big 10 and Pac-12 conferences, decided earlier this month to suspend their fall seasons at least until January due to the still out-of-control coronavirus pandemic and COVID-19, the disease caused by the virus.

In contrast, the other three conferences—the Atlantic Coast Conference, the Big 12, and the Southeastern Conference—say, for now, that they will forge ahead with the slimmed-down game schedules even as most of the regions of the country in which they play are among the hardest hit by the coronavirus pandemic. While the National Collegiate Athletic Association has started to implement measures to lessen the spread of COVID-19, the NCAA has not canceled the football season.

Certainly, a predominant factor for the ACC, Big 12, and SEC in forging ahead with a football season is the revenue generated: According to Patrick Rishe, director of the sports business program at Washington University in St. Louis, the top 65 schools in the Power Five generated $4 billion in revenue from football in 2018. Yet the chances of a full season of college football for the ACC, Big 12, and SEC conferences are in the hands of a virus that infects people of color, including students of color, more than other students, which, in turn, infects these athletes’ classmates and their parents and grandparents. And lurking in the background of all of this is the longstanding call for student athletes to be recognized as a labor force entitled to a voice and workplace protections, among other job-quality standards.

Of all student athletes in Division I football at the Football Bowl Subdivision level in 2018, 54.3 percent were African Americans, 39.8 percent were White, 2.3 percent were Latinx, Asian Americans and Pacific Islanders represented 2.8 percent, and 0.9 percent were classified as Other.

This higher infection rate and death rate among people of color in the United States is the defining health inequality of the coronavirus pandemic. Yet the pandemic and resulting recession also lay bare several economic inequalities that athletes of color have faced for decades, among them the lack of worker power enjoyed by their counterparts in the professional National Football League via their union, the NFL Players Association, as well as the massive subsidy these student football players provide to college and university sports programs and these institutions of higher learning overall. This difference is made more stark when examined through the lens of the race and ethnicity of college football players, who supported financially all other college sports programs in 2018—54 percent are Black, 40 percent are White, and 5 percent are Latinx and Asian Americans and Pacific Islanders. (See Figure 1.)

Figure 1

Percent of athletes by race in Division I football at the Football Bowl Subdivision level

Compare this to the $1.2 billion in revenue just among the top five teams in the SEC, the ACC, and the Big 12 in 2018. That may seem like an apple-to-oranges comparison, except that the work of these majority players of color supports exceedingly well-paid head coaches in football and in the other college power sport, basketball, nearly all of them White, as well as all other sports programs. (See Figure 2.)

Figure 2

Percent of coaches and players who are Black or White in Division I Football and Basketball

Here is just one telling case in point from SEC powerhouse Louisiana State University, ranked fourth in revenues in 2018, according to the SBNation/Vox News website Banner Society:

In 2018, LSU’s athletic department reported $145 million in revenue to the NCAA. Of that, LSU reported $87 million came from football. But that doesn’t tell the whole story. LSU also reported $39 million from media rights, the result of the SEC’s negotiations with ESPN and CBS. The athletic department only credited $12 million of that to football, even though anyone in college sports would tell you the vast majority of CBS’s interest in the SEC was football-based.

Football’s real contribution was well over $100 million of LSU’s $145 million in total athletic money. But even going by LSU’s accounting, football made $55 million in profit. Men’s basketball and baseball, together, added a little less than $1 million. Everything else lost money, but thanks to football, the department still made about $8 million.

Then, there’s the economic engine of college football in college and university towns across the nation. Like the restaurant industry, most Americans didn’t realize how important hospitality and leisure activities were to the economic well-being of their fellow citizens. The largely uncontrolled spread of the coronavirus in the spring and early summer made clear the economic importance of college sports in some of the towns and cities and rural communities in the South and Southeast, Midwest, and Mountain West that are most passionate about college football. Now, with the 2020 college football season over or seriously curtailed, business owners are facing heavy losses.

All of these data point to the economic importance of college football—especially to the importance of the players who are not paid to support this incredible economic edifice—and to the economic inequalities that are the sport’s very foundation. Seen in this light, the efforts by the SEC, ACC, and Big 12 conferences to play college football amid a pandemic that threatens players of color especially with possible career-ending sickness or even death before they ever get a shot at being paid as professional athletes means these conferences are ignoring longstanding health inequality along the lines of race and economic class on top of already egregious economic inequality.

This is the moment to come to grips with the intricacies of college football in our society amid the coronavirus recession and the enduring structural racism in our economy and society that underpins college football and also harms Black Americans and other Americans of color. College athletes are exploited while creating tremendous value during regular seasons, and their safety is put at further risk if they are to play during an uncontrolled pandemic. One way to address this problem may be the recently introduced “college athletes bill of rights” in the U.S. Senate by Sen. Cory Booker (D-NJ) and number of his colleagues. More immediately, a wise move could be for all conferences to pause this college football season because of the coronavirus pandemic and take the time to figure out how college sports, and college football in particular, could be more equitable and sustainable when the nation emerges from the coronavirus recession in 2021 or beyond.