Policy options for building resilient U.S. medical supply networks

Posted on by Maria Monroe

Overview

U.S. policymakers in Congress across the political spectrum, from Sen. Marco Rubio (R-FL) to Rep. Elissa Slotkin (D-MI) to Sen. Bernie Sanders (I-VT), all agree that the United States is woefully underinvested in the resilience of our supply networks, especially for medical products.1 This underinvestment in the past left our nation in 2020 particularly vulnerable to the new coronavirus pandemic.

To cope with the still-rolling coronavirus public health crisis and accompanying economic recession, and then to prepare the eventual economic recovery, U.S. policymakers need to plan to rebuild the U.S. production of key medical products. They then need to act on these plans to be fully prepared for the next pandemic or other public health crises. Our recommendations are in three broad categories:

  • Identify and assure stable long-term U.S. demand for key medical products, including equipment, pharmaceuticals, and the key ingredients in these products’ supply chains
  • Rebuild U.S. supply capabilities by investing in new equipment, the U.S. workers who need to be trained, and the supply networks that need to be built
  • Promote productive investment and good jobs in medical supply chains by empowering the agencies in charge of procuring medical supplies to protect our public health with maintaining not just stockpiles but also the resiliency of the U.S. supply chains themselves

We present a range of policy ideas in each of these broad categories that we think could work to make our medical supplies network more resilient, with emblematic examples when appropriate. We also include examples of other global manufacturing supply chains that exhibit similar strains in relation to the needs of U.S. manufacturing, as well as examples of where these fragile supply chains have become more resilient due to concerted government action.

Our first key point is that our supply chain policies work best with “high-road” investment and workforce policies that strengthen our domestic supply chains, encourage innovation in production capacity alongside the development of new technologies and drugs, train a well-paid production workforce, and ensure labor, environmental, and corporate reforms strengthen rather than weaken our domestic supply chains.

Our second key point is that a concerted national effort is required to overhaul our medical supply chains to better protect U.S. public health. To ensure the three broad steps listed above and detailed below are taken by the federal government, we propose that Congress empower the U.S. Department of Health and Human Services, the Federal Emergency Management Agency, and the U.S. Centers for Disease Control and Prevention to establish these proposed reforms to secure our medical supplies. And we suggest that the U.S. Department of Commerce take the lead in helping foster a business environment conducive to the reshoring of these key parts of these supply chains.

With these broad objectives in mind, and with this broad outline of where in the federal government these comprehensive objectives should be implemented, let’s examine each of the three categories in turn.

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Policy options for building resilient U.S. medical supply networks

Identify and assure stable long-term demand

Without stable long-term demand, no company will invest in building up production capacity and workers, managers and investors will not invest in the necessary skills. To achieve long-term rebuilding of our production capabilities all economic actors need to know that an elevated level of demand for domestically produced products and components is here to stay. In the medical supplies arena, the federal government should be the core provider of stable long-term demand as a public health priority.

Without this stable demand, government funding to build up supply will not be effective in maintaining resilient U.S. supply chains. Indeed, many new technologies invented in the United States using federal funding are alas no longer manufactured here in any great quantities. These include storage drives, lithium-ion batteries, liquid crystal displays, and many medical goods.2 That’s why government purchasing at the federal, state, and local level should have a “Made in America” component as part of a core national supply chain strategy. Here are several proposals to do so.

Coronavirus relief funding to medical supply companies and the Strategic National Stockpile

Companies involved in providing medical supplies to the U.S. healthcare industry that are given federal aid as part of the response to the coronavirus recession should be required to move a significant percentage of their sourcing and production back to the United States. This should be done in both outright procurement programs at all levels—local, state, and federal—as well as in authorizing reimbursement programs, such as Medicaid.

The Strategic National Stockpile could be another source of demand. Implementing “Made in America” requirements does not necessarily mean abrogating our obligations under World Trade Organization rules and regulations. The WTO Government Procurement Agreement prohibits local content requirements for certain negotiated types of procurement, but these prohibitions are merely “annexes” to the main accord, meaning that according to some interpretations, breaking them wouldn’t necessarily violate the main treaty itself.3

These contracts with “Made in America” clauses should be for several years. Otherwise, firms would invest in fixed costs to build capability but would not have a chance to amortize these investments over time. That is, these expenses would hit their bottom line immediately, leading to a negative profit and loss without sparking long-term investments. Accordingly, without secured long-term contracts, it wouldn’t make financial sense for any company to make the needed capital investment.

Rebuild supply capabilities

Just expanding demand by itself will not instantly create a domestic supply. Firms need to invest in new equipment, workers need to be trained, and supply networks need to be built. There are many market failures in this process, and government should assist in solving them. Here are some policy ideas to spur this process.

Disclose supply network sources

It is hard to prevent vulnerabilities without knowing where they are. There are several ways that policymakers could encourage or require companies to do this. For critical medical products, Congress could require companies to disclose their supply chains, as proposed in the Strengthening America’s Supply Chain and National Security Act.4 This proposed law is tightly focused on pharmaceutical products. Congress should consider expanding the requirement to other products critical for domestic security as revealed by the current coronavirus pandemic, from medical devices to information technology, material science, and natural resources.

Congress then should tighten enforcement of “Buy American” executive orders and similar requirements, given the numerous waivers, exceptions, and loopholes that allow the federal, state, and local governments to purchase foreign goods without penalty. Currently, five big exceptions mean that the order is more declarative than actual.5 Better information can by itself be effective, as well as serve as a powerful peer-pressure mechanism—who wants to be known as the last CEO to reshore critical U.S. medical supplies? Companies are currently required to disclose any material threats to their businesses, but most have not interpreted pandemics as such a threat. That must change. Congress should mandate that the U.S. Securities and Exchange Commission require companies to publicly disclose their exposure to risks caused by public health events that the World Health Organization classifies as pandemics.

Build real options that allow production to surge

Experts and policymakers can be sure that there will be future crises, unfortunately, but they can’t know the exact future dimensions of any crisis. That’s why the federal government should stockpile some likely items in advance, such as personal protective equipment and ventilators. Concurrently, the federal government needs to mandate the building and maintenance of production capabilities flexible enough to provide what turns out to be needed. There are several ways to do this.

Increase surge capacity
Companies need incentives to maintain slack for use in an emergency since this capacity may seem to be inefficient during normal times. This slack includes buying more general equipment than companies otherwise might, planning for flexible instead of fixed production lines, maintaining the in-house capability to reprogram these production lines, and training workers more extensively so they can help design and carry out the new tasks that turn out to be necessary.6

To ensure this added production capacity is ready in a crisis, the federal government could reimburse companies for the extra expenses involved in buying and maintaining this equipment. And the appropriate federal agencies could conduct periodic drills to test compliance. An unintended benefit of the U.S. and Canadian rescue of their auto industries from the Great Recession of 2007–2009 was to maintain organizational capability. Even though personal protective equipment and ventilator production is quite different from automotive manufacturing, when General Motors Corp. and Ford Motor Company began producing PPE and ventilators to help combat the new coronavirus pandemic, they were able to use their engineering and supply chain capabilities to set up production lines and quickly identify suppliers of parts and equipment; their broadly trained production workers were quickly able to learn the new jobs.

Match demand and supply
Sometimes firms use foreign sources because they are not aware of domestic sources. Apple Inc., for example, abandoned its attempt to assemble the Mac Pro in Texas in part because it couldn’t find a reliable local manufacturer of a tiny screw needed for the Mac.7 If the company had looked beyond Texas—say, to the Midwest—it might have been able to find a domestic source for this component.

Government at the federal, state, and local levels can mitigate these deficiencies by helping firms locate domestic suppliers. Several small programs run by federal government agencies have helped firms locate domestic suppliers. The U.S. Departments of Energy and Transportation have teamed up with the Manufacturing Extension Partnership to find domestic suppliers for firms who had requested waivers from “Buy America” policies.8 Or take a page from the states of Mississippi and Pennsylvania: Each looked at detailed data on components imported from abroad into their states and then introduced the firms importing the components to domestic suppliers of similar products.9 These programs should be expanded.

Aggregate and stabilize demand
Another issue is aggregating and stablizing demand. A key issue in the Apple case mentioned above was that before Apple decided to reshore, U.S. suppliers responded to the dramatic decline in demand for their products by selling their high-volume manufacturing equipment to China. Governments at all levels in the United States also can help match supply and demand for specialized assets and skills by convening supply chain players to develop a roadmap for products ripe for reshoring. The federal government could help by supporting and funding supply chain mapping across the medical supplies network.

China, especially Guangdong province and its leading municipalities, are world leaders in those policy efforts, and we should do well to learn from them how to continuously map product supply networks, identify critical local gaps, and devise and implement actions to close them. In the uninterupted power supply, or UPS, industry in Guangdong’s Dongguan prefecture, for example, local township officials have worked hand in hand with the local industry to ensure that there are local suppliers for up to 90 percent of the components needed for a high-end UPS system. A leading official in one of Dongguan’s townships concisely described this development strategy:

The leading company is located here because of the complete production and supplier networks we have here. It is not that we have only the final UPS companies. We have all the specialized suppliers they need. For example, there is a coordinating supplier in Tangxia that supplies all three leading UPS manufacturers. So long as we have a complete industry set there is no reason more UPS manufacturers won’t come, and no reason for these that are here to move away.10

Eliminate hidden subsidies for offshoring

There are currently multiple hidden incentives for companies to offshore. Chief among them are companies engaging in regulatory arbitrage. One case in point in the pharmaceuticals industry is the current practice by the U.S. Food and Drug Administration to preannounce foreign plant inspections, giving them a regulatory advantage over domestic plants, where inspections are unannounced. The FDA should have at least as rigorous an inspection program at foreign plants as it does at domestic plants.11

Another way to rebuild supply capabilities is to improve methods of purchasing medical supplies in the United States. Too often, firms and governments simply buy products that have the lowest unit costs, ignoring the possibility that the resulting supply chains might have hidden costs, such as lack of robustness or inability to innovate.12 The federal government should set up a Manufacturing USA Institute, perhaps hosted at the U.S. Department of Commerce, to research and improve methods of supply network sourcing and collaboration. These new methods could help ensure the diffusion of technologies developed at the other institutes, since these technologies are likely to be perceived as more expensive initially—unless prospective customers have methods to value the improved contribution these products will make.

The Manufacturing Extension Partnership, an existing federal program, could be used to improve medical supply chain production capabilities. Most small manufacturers supply larger firms, yet many of them struggle to adopt innovative practices due both to lack of economies of scale and poor purchasing practices such as those mentioned above. The Manufacturing Extension Partnership could help by working with lead firms to upgrade their suppliers’ capabilities.13 The MEP program is effective but pitifully small. In fiscal year 2020 ending on September 30, Congress provided funding of only $146 million—and, at the urging of Secretary of Commerce Wilbur Ross, the president has requested it receive zero funding for FY2021.14

Akin to this manufacturing program are the “defense manufacturing communities” organized by the U.S. Department of Defense to ensure domestic production of key defense products and technologies. These communities “make long-term investments in critical skills, facilities, research and development, and small business support in order to strengthen the national security innovation base by designing and supporting consortiums as defense manufacturing communities.” This blueprint could be applied to other products, including medical products manufacturing organized by the U.S. Economic Development Agency within the U.S. Department of Commerce.15 A new bipartisan bill, the Endless Frontiers Act, introduced by Sens. Chuck Schumer (D-NY) and Todd Young (R-IN), proposes to do just that.16

Protect U.S. infant industries and secure their supply chains in the country

The last, but by no means least, important recommendation is for policymakers to craft legislation to protect infant industries in the United States. The United States currently runs a large trade deficit in even its most advanced technologies because start-up companies invented within U.S. universities often move abroad almost as soon as they have viable prototypes of their new technologies.

This is especially critical in cases where both new production technologies and new products that are based on them are developed. Too many times, infant U.S. companies find that they are unable to perfect the new production technologies in the United States and instead “dumb down” their products, so they can be produced using the old technologies and, hence, offshored to China. An interesting, and sadly only too common, example is optoelectronics, where, between 2010 to 2013, due to the inability of financing fabrication facilities utilizing the new integrated production methods, the United States lost a 10-year lead to the Chinese.17

Policy reforms that would allow for the building of shared production assets could allow new inventions that include U.S. production upgrades to jump over this valley of death. Knowing the availability of infant industry protection measures, by itself, will change the investment and development rationale of entrepreneurs and their financiers.18 And once one company opens the first state-of-the-art production facility in the United States and develops a resilient supply chain with sufficient U.S. domestic sourcing, the costs for its followers will be significantly lower because of economies of scale, learning, and downward sloping cost curves.

Further, since the new facilities in the United States will be built to scale using the latest technology, their yield and productivity will be second to none. And with American ingenuity to follow, unit costs will continue to come down. One historical example of this strategy in action is the production of bombers in the United States during World War II, where one study finds that “every doubling of cumulative output gives rise to 27.9 percent decline in the unit direct labor hours.”19 A similar approach to the national security threats posed by the coronavirus pandemic could well yield similar results.

Promote productive investment and good jobs in medical supply chains

The proposals presented above would work best in partnership with firms organized around productive investment and skilled, well-paid workers. Uncertainty about future pandemics and other potential disasters makes even more valuable the ability to innovate and rapidly shift to new products in the United States. Firms that focus on long-term investments in their workers and in new equipment and ways of working offer a better return on taxpayers’ investment than do firms that focus on short-term financial metrics and rewarding top executives.20

Past U.S. policies unfortunately produced counterexamples, such as contracts to produce ventilators that did not yield ventilators available to U.S. hospitals, due to anticompetitive behavior by the largest corporations. Case in point: One small company, Newport Medical Instruments, which received a contract to manufacture ventilators, was bought by Covidien, and Covidien was bought, in turn, by Medtronic PLC, which made competing products and so stalled the U.S. government contract.21

Similarly, U.S. firms have spent so much on stock buybacks that they had little cushion to weather a crisis.22 By 2019, stock buybacks reached $1 trillion and have become so prevalent that there is no sector in which their size did not dwarf their productive investment. Thus, stock buybacks have now become a significant vulnerability and obstacle to reshoring U.S. production.23

On the labor side of the equation, too, there is need for reform. U.S. workers are nearly always left out of such key decision-making at corporations about the location of the production of medical products—and now, about the priority given to providing them access to personal protective equipment—in contrast to their European counterparts. Thus, it is germane to give workers a say in not just coronavirus-related decision-making at their companies, but also supply chain decisions through mandated works councils and elected health and safety committees.24

An effective way to deal with many of these issues is the one pioneered in Israel by the Israeli Innovation Authority (formerly the Office of the Chief Scientist). This agency stipulates that any intellectual property generated by the nation’s IIA grants, which are given to R&D projects aiming to come up with new exportable products in all sectors of the economy, is not allowed to leave the country without paying a hefty fine (six times the amount of the grant). This measure, in effect, ensures that production commences in Israel, even if the grantee is a fully owned subsidiary of a foreign multinational corporation.25

Corporate governance is another key area in need of reform to promote productive investments and jobs, not just in the medical supplies arena but across the broader U.S. economy too. Our ideas presented above would be much more effective if implemented along with some broader reforms. In the past, much taxpayer money has been siphoned off by shareholders and top management of firms rather than being used for productive investment or paying worker salaries. Thus, limits on the financialization of firms and measures to empower workers as productive stakeholders can ensure effective use of citizens’ dollars.

We would thus suggest policies such as these for firms that receive government aid to help improve the resiliency of their supply chains:

  • Limits on stock buybacks and executive compensation
  • Establishment of works councils in large firms and elected health and safety committees
  • Renewed antitrust enforcement
  • Pledges of neutrality in union elections at government contractors
  • Requiring government contractors to obey laws, including labor laws

Conclusion

The still-deepening coronavirus recession brutally exposes our national weaknesses. The task in front of policymakers is difficult and will take years to bear fruit. Yet policymakers can help power an economic recovery and ensure that the next crisis will not find our nation so vulnerable. The federal government can do so by enacting policies that spark new sources of demand for medical supplies, create new domestic sources of supply for those medical supplies, launch workforce training to ensure well-trained workers are available, and enforce equitable labor, environmental, and corporate reforms. A national effort is needed.

Collective national action can make the difference because a crisis of this magnitude requires government action. It is time for the federal government to invest in American ingenuity and give U.S. workers the chance to show the world what its people are capable of making, innovating, and producing.

—David Adler is co-editor of the anthology “The Productivity Puzzle” published by the CFA Institute Research Foundation and the author of related works. Dan Breznitz is the Munk Chair of innovation studies and the co-director of the Innovation Policy Lab at the Munk School of Global Affairs & Public Policy and Political Science at the University of Toronto. Susan Helper is is the Frank Tracy Carlton Professor of economics at the Weatherhead School of Management at Case Western Reserve University. Breznitz and Helper also are co-directors of Canada-based CIFAR’s Innovation Equity and the Future of Prosperity Program.

Equitable Growth names two new Dissertation Scholars

Posted on by Maria Monroe

A critical part of our mission at the Washington Center for Equitable Growth is to build a pipeline of young scholars doing cutting-edge research on inequality and economic growth. Equitable Growth has invested about $5 million overall in competitive, peer-reviewed research. A significant share of our grants has gone to some of the nation’s top young faculty members at universities and colleges across the country. In addition, we set aside a portion of our competitive research funds for graduate students working on their Ph.D. dissertations.

The output from these investments has been extraordinary. But in some ways, our most gratifying research funding is our Dissertation Scholars program, which extends financial and professional support to one or two doctoral candidates each academic year to help them pursue their research while gaining familiarity with current policy discussions and policy processes. Dissertation scholars are given office space at Equitable Growth’s offices in Washington, where they write, interact with our policy and academic experts, participate in our academic grants process, attend our academic and policy events, learn about policy and media engagement, and take advantage of the many intellectual and other pursuits available in the nation’s capital.

We are excited to announce that our Dissertation Scholars for the 2020–21 academic year will be Angela Lee of Harvard University and Matthew Staiger of the University of Maryland, College Park.

We at Equitable Growth know Lee well because this will be her second year as a Dissertation Scholar. To gain a second year, she needed to compete again with a new round of early career scholars. Lee’s dissertation focuses on gender wealth inequality. The gender wage gap has been the subject of research and analysis for many decades, and it continues to be a focus for Equitable Growth. But there has been only limited research on the gender wealth gap and on how wealth accumulation differs for men and women.

One reason for this lack of research is the difficulty of separating data within households. To address this research issue, Lee has constructed person-level measures of wealth, attributing to each person the assets and debts held in their own names, using nationally representative data from the U.S. Census Bureau’s Survey of Income and Program Participation. Her preliminary findings, based on data from 1996 to 2016, point to a significant and growing wealth gap, despite progress on the gender wage gap. Eventually, she will incorporate data from 1984 to 1995.

As Lee explains it, “I find that even though women have made progress in narrowing the gender wage gap, the gender wealth gap has grown wider over time, meaning that women are increasingly falling behind men in wealth accumulation. Equitable Growth has long advocated that how we measure inequality matters, and my research shows that we need to measure gender inequality in wealth, as well as wages, to gain a more complete picture of women’s economic well-being.”

Lee, who hails from New Jersey, is exploring possible reasons for this growth in the wealth differential and believes it has potential implications for policies in a number of areas. “As a Dissertation Scholar with Equitable Growth,” she said, “I am excited for opportunities to share this research with policymakers and to engage in broader efforts to understand and address inequality in the United States.”

Staiger, a Madison, Wisconsin native, is also familiar to us at Equitable Growth, having earned a doctoral grant in 2018. His work focuses on intergenerational mobility, an area of study that is very important to our work on economic inequality. Staiger will continue work on the three chapters of his dissertation, which investigates how parents shape the career paths of young workers. His research relies on data from two U.S. Census Bureau sources: the 2000 Decennial Census and the Longitudinal Employer-Household Dynamics program. The three chapters explore how children’s careers are affected when they work for the same employer as their parents, the relationship between family background and early career earnings growth, and how family assets affect the ability of a child to become an entrepreneur.

As Staiger puts it, “My dissertation contributes to our understanding of why economic outcomes are highly persistent from one generation to the next. More specifically, I investigate the ways in which parents continue to influence the outcomes of their children even after they have grown up and entered the labor market. For example, I look at how parents leverage professional connections to help their children find jobs. This research is closely aligned with Equitable Growth’s mission, since the distribution and determinants of economic opportunity are central to defining the costs of inequality and developing an effective policy response.”

He adds, “The coronavirus crisis has exposed and exacerbated many inequities and shortcomings in our economic system, and I hope my research and my work with Equitable Growth can help address some of these pressing issues.”

Equitable Growth’s Dissertation Scholars receive an annualized $50,000 stipend. We look forward to seeing our 2020–21 scholars when our Washington office reopens.

Posted in Uncategorized

U.S. income inequality is worse and rising faster than policymakers probably realize

Posted on by Maria Monroe

Overview

The use of U.S. administrative income tax data for research purposes over the past two decades has led to an ongoing debate about levels and trends in U.S. income inequality. The debate around income measurement is important because how economists and policymakers alike measure income shapes how income inequality is perceived by the broader American public and thus could drive public policy decisions in more equitable directions.26

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U.S. income inequality is worse and rising faster than policymakers probably realize

This debate about U.S. income inequality has swung back and forth. Some early academic uses of administrative income tax data showed dramatically higher and rising income concentration than previously thought.27 Yet some more recent efforts show less income inequality with no upward trend.28 The debate today centers on what types of income are being counted in the inequality measures and what sorts of data are used to measure each type of income.

There is a well-established middle ground in the income inequality debate, based on a regular series of reports from the Congressional Budget Office.29 The nonpartisan CBO measures household incomes in what most observers believe to be a conceptually comprehensive way. It also combines the best available data for every type of household income, merging surveys and administrative tax records. The result is believed by many to be the most accurate picture of U.S. income inequality available.

Even the CBO measures, however, are missing two important drivers of income inequality. The first is the CBO estimates the measurement of noncorporate business income. The second is the CBO counts only the portion of capital gains that is realized and taxable in the current year by any tax filer, instead of a more comprehensive measure of all capital gains associated with income-producing assets earned in the current year.

These two missing drivers of income inequality—uncaptured noncorporate business income and the gap between realized and unrealized capital gains income—means that income inequality is worse and rising faster than policymakers probably realize.

In our research, we use another household dataset, the Survey of Consumer Finances, or SCF, that makes it possible to address those two shortcomings and create a more comprehensive view of income inequality.30 This survey is conducted by the Federal Reserve Board every 3 years and was most recently completed in 2016, measuring incomes of respondents in 2015. The SCF has better measures of noncorporate business income, and SCF wealth measures make it possible to allocate all capital gains across households using values for SCF income-producing assets such as stocks, bonds, mutual funds, and closely held businesses.

This issue brief examines these two missing drivers of U.S. income inequality and concludes by showing that proper accounting for noncorporate business income and unrealized capital gains helps us understand the connection between high and rising U.S. income inequality and the dynamics of income and wealth inequality in the United States.

Noncorporate business income reporting

The first issue we address is noncorporate business income reporting. Most analysis of income inequality—including by the Congressional Budget Office—starts from the measure of noncorporate business income reported on income tax returns. The measure of noncorporate business income on tax returns is only about half of the noncorporate business income estimated in the National Income and Product Accounts, or NIPA, which is the benchmark for all components of U.S. national income.31

The gap between taxable business income and NIPA business income is, to some extent, a mystery. One source of difference is simple noncompliance by noncorporate business taxpayers, meaning deliberate misreporting to the IRS. But there are other possible sources of divergence between taxable and NIPA business incomes as well. NIPA statisticians estimate noncorporate business income as one component of overall national income, and any conceptual differences between NIPA economic concepts and the methods used to compute business sales and costs for tax purposes will lead to differences in estimated incomes. The decision about whether and how to account for the missing noncorporate business income is one of the key factors underlying differences in estimated U.S. income inequality.32

The Survey of Consumer Finances measures business income by simply asking respondents what their businesses earned. The total of SCF noncorporate business income is well above the tax-based income aggregate captured by the Congressional Budget Office and correspondingly, the SCF is much closer to NIPA for noncorporate business incomes. (See Figure 1.)

Figure 1

Although the data sources and methods differ, Figure 1 shows that all other SCF income components are relatively close to CBO values, after imputing unmeasured income components such as employee benefits and Medicare onto the SCF using CBO’s methods. The net effect is that total household income in the Survey of Consumer Finances is slightly higher than total household income as reported by the Congressional Budget Office, and that gap is mostly attributable to noncorporate business income.

Why does the Survey of Consumer Finances find more business income than tax returns do? Some academic research views the higher levels of business income in the SCF as indicating there must be a problem with the survey.33 There is certainly scope for respondent confusion about different types of capital income, and indeed, SCF-reported nonbusiness capital income such as interest, dividends, and realized capital gains is slightly below the CBO values. On net, the extra noncorporate business income dominates, however, and overall income is noticeably higher in the SCF than reported by CBO in all years. (See Figure 2.)

Figure 2

The most likely explanation for higher business incomes in the Survey of Consumer Finances is that respondents are reporting something closer to what they truly earned in business income, and that survey-reported concept is above the values they (or their accountants) reported on their tax returns. In any case, it is difficult to imagine why SCF respondents would overreport their business incomes, especially given the accuracy of reporting for other income components. So, correcting income inequality estimates for underreported noncorporate business incomes is the first important adjustment made possible by switching from tax data to the SCF.

Capital gains income reporting

The second important adjustment made possible by using the Survey of Consumer Finances is switching from realized to total capital gains. Realized capital gains are the incomes reported for tax purposes when tax filers are required to report profitable asset sales on their tax returns. Total capital gains capture all increases in asset values, regardless of whether tax reporting is triggered. The concept of Haig-Simons income—which includes all capital gains, realized or not—is well established as the key benchmark in analysis of economic welfare. If the value of an income-producing asset goes up—meaning the owner could sell it at a higher price—then the owner has truly earned something by owning the asset, whether they sell the asset or not.

A few recent studies show the importance of capital gains in overall savings and wealth accumulation. One study shows that capital gains account for 8 percent of national income, on average, since 1980.34 Another recent paper shows that capital gains account for about 75 percent of wealth accumulation since 1995.35 Since most gains are not realized for tax purposes when they occur, we are missing a substantial part of true economic income in the tax data.

Take a look again at Figure 2. The third (purple) line shows our estimate of Haig-Simons income, which is, on average, about 6 percent higher than the SCF income measure. How do we construct Haig-Simons income? Aggregate capital gains for each type of income-generating asset in each 3-year period between SCF surveys are computed using the Financial Accounts of the United States.36 We then compute a gains ratio—aggregate gains divided by the aggregate holdings of the respective assets in the SCF—and apply that gains ratio to household assets. Each SCF household then receives the average capital gains of the 3 years prior to the survey, and that replaces their reported realized capital gains.

The consequences of missing noncorporate business income and unrealized capital gains

So, how does accounting for missing noncorporate business income and unrealized capital gains affect estimated U.S. income inequality? The answer is unambiguous because both the missing business income and unrealized capital gains are concentrated at the top of the income distribution. Income inequality is worse than policymakers probably realize. Also, because business income and capital gains are both increasing relative to other income components, income inequality is rising at a faster pace than previously understood.

There are different ways to show how accounting for the missing noncorporate business income and unrealized capital gains affects income distribution in the United States, but the simplest way is to just compare income of households in the middle of the income distribution with incomes of households near the top. (See Figure 3.)

Figure 3

When we compare incomes for the median household, the CBO and SCF measurements look similar. The ratio of median SCF to median CBO income and the ratio of median Haig-Simons to median CBO income consistently hover around 1. Why? The median family is just as well-off using any of the three measures, because the additional business income in the SCF and unrealized capital gains do not accrue in any substantial way to the median household.

In contrast, the story is different at the top of the income distribution. Just switching from CBO to SCF source data, which takes account of the higher business incomes, raises the 99th percentile of the income distribution by about 10 percent in 1988, and the gap (although volatile) is more than 30 percent by 2015. Replacing realized capital gains with unrealized capital gains to move to Haig-Simons income pushes the 99th percentile to 40 percent above the CBO value in 1988, and (although even more volatile) that gap increases to 70 percent by 2015.

The upshot of the more comprehensive measures is that whatever your prior beliefs about the ratio of 99th percentile to median income—the P99-to-P50 ratio—you were probably too low. In the CBO reports, the P99-to-P50 ratio is 6.2 in 1988, rising to 8.3 by 2015. Figure 3 suggests the more appropriate P99-to-P50 ratio, using the Haig-Simons measure, is 9.3 in 1988, rising to 14.9 in 2015.

The capital gains adjustment we apply to the Survey of Consumer Finances comes with a caveat, but it is likely biasing our top income values down, not up. The estimates here assume that the ratio of capital gains to asset value are the same for every owner of a given asset, because we compute and apply one ratio per asset type and time period. In practice, if wealthier owners earn higher gains relative to asset values, then the ratios should increase with wealth, making income even more unequal.

Conclusion

We are not the first to focus on the role of missing noncorporate business incomes in overall U.S. income inequality.37 But we are the first to use the Survey of Consumer Finances in a head-to-head comparison against tax data to pinpoint where in the income distribution that missing income can be found—rather than assume, for example, that it is simply underreported income of otherwise low-income families or proportional to reported taxable income. Also, others have estimated Haig-Simons income distributions, but come to very different conclusions about the impact of levels and trends on inequality.38

Our answer differs because we use the actual joint distribution of income and wealth, then recompute the income distribution with the more comprehensive income measure. Our results push the pendulum in the ongoing U.S. income inequality debate back toward the “high and rising” conclusion.

More importantly, proper accounting for noncorporate business income and unrealized capital gains helps us understand the connection between income and wealth dynamics. It is difficult to explain high and rising U.S. wealth concentration with available income measures because the very wealthy would have to be saving at an unbelievably high rate to accumulate that much wealth. Acknowledging that there is a lot more unmeasured income at the top of the distribution makes that puzzle less challenging.

—John Sabelhaus is a visiting scholar at the Washington Center for Equitable Growth, where he has been since 2019. Prior to that, he was assistant director in the Division of Research and Statistics at the Board of Governors of the Federal Reserve System. Somin Park is the research assistant to the president and CEO at the Washington Center Equitable Growth and will be a student at Harvard Law School starting in the fall of 2020.

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Coronavirus recession: How to get the U.S. economy back on track

Posted on by Maria Monroe

Equitable Growth launches new lecture series with inaugural event featuring Claudia Sahm on the economic crisis

Amid our nation’s health and economic crises, government officials must do more. They must use research and evidence-based polices to support people today and strengthen our economic future. The Washington Center for Equitable Growth is dedicated to promoting research that elevates effective and inclusive policies. Our new lecture series will highlight the latest economic research in order to provide policymakers with evidence-backed solutions to advance sustainable, broad-based growth.

Our first lecture in the series on May 19 was online. Claudia Sahm, who joined Equitable Growth 6 months ago as the director of macroeconomic policy, inaugurated this lecture series. Heather Boushey, Equitable Growth’s president & CEO, highlighted Sahm’s experience as a macroeconomic forecaster and researcher at the Federal Reserve and an economic advisor for the Obama administration during the Great Recession of 2007–2009 and the slow recovery that followed.

Sahm, a leading expert on macroeconomic policy who has consulted members of Congress on the response to the coronavirus recession, argued for additional economic relief to households during these unprecedented public health and economic crises. She began her talk with a sobering comparison of today with the Great Depression of the 1930s. Sahm also compared today’s recession to “a Category 5 hurricane that hit the entire United States for more than 2 months.” From her research during her tenure at the Fed, she knows the damage natural disasters cause for families, businesses, and communities. Today’s epidemic is no different.

Sahm urged policymakers to “listen to experts on health and safety.” It is the only way to save lives and stop the economic freefall. She argued that it would take years to recover from this downturn absent bold intervention from policymakers. The policy actions Congress and the administration take today could save us from the worst long-term costs.

In addition, her presentation highlighted the disproportionate harm that will be borne by our most vulnerable families, businesses, and municipalities, and its severe impact on groups that were already falling behind even before the coronavirus recession. Sahm stressed, on the policy outlook, that “We don’t fight recessions forever. There are structural inequalities in the economy that we should fight forever,” adding that relief efforts must be sustained as long as there’s high unemployment.

Her presentation referenced the wealth of research evidence in Recession Ready, which was published 1 year ago to promote automatic fiscal spending triggered by proven signs of an oncoming recession. The smart solutions championed in research sponsored by the Washington Center for Equitable Growth and the Hamilton Project focus on stabilizing the economy through financial support to families, small businesses, and communities. These approaches have made an impact, with policymakers increasingly consulting Recession Ready authors on the best structure of future fiscal support. The book features Sahm’s own proposal to boost consumer spending during recessions by creating a system of direct stimulus payments to individuals that would be automatically distributed when the unemployment rate increases rapidly. She also previewed forthcoming work with Joel Shapiro and Matthew Slemrod at the University of Michigan analyzing new data on the 2020 rebates.

Questions on the role of the Fed and deficit spending

The presentation was followed by a conversation with Boushey and a Q&A session with the audience, which largely centered on the proper role of fiscal policy and monetary policy in protecting workers and their families. Sahm expressed optimism that the Federal Reserve learned from the Great Recession that recovery efforts need to continue for a sustained period until the economy sufficiently rebounds, but seemed skeptical whether Congress internalized the same lesson. With that said, she cautioned on leveraging the Federal Reserve’s powers to intervene more directly to start “backstopping Main Street” and lending to discreet municipalities and businesses, at the risk of exceeding its lender-of-last-resort role as authorized by Congress.

In response to concerns about the deficit, Sahm also pushed back against calls for fiscal restraint, which she warned would only serve to prolong the recession. “Recessions are times when you spend,” Sahm declared, noting how runaway inflation and crowding out of private investment did not materialize, neither as a result of the government’s fiscal response to the Great Recession, nor from extraordinarily low interest rates that continue today.

The audience also inquired about how to balance concerns about targeting relief to the most vulnerable households and businesses versus providing universal economic relief. Sahm emphasized the size of relief to be commiserate to the gravity of the crisis. She also stressed the importance of thinking long term and honoring the dignity of work to make the case for public investment in critical infrastructure, particularly in areas of the country subject to historic disinvestment.

Research provides the roadmap to recovery

The driving ethos of our first lecture in this series was the essential role of strong research evidence in crafting sound economic policy. Equitable Growth continues to fund and elevate scholarship that seeks to understand the role of macroeconomic policies in the long-term stability of the economy and its growth potential.

This first lecture underscored how research is providing a roadmap for robust federal actions to address the underlying issues of economic inequality, which has made our economy more fragile in the face of the coronavirus shock. Sahm’s presentation made clear that the unprecedented scale and speed of this challenge necessitates rapid, sustained, and bold measures to fully address the health crisis for people and families, and move swiftly into economic stabilization, recovery, and long-term resiliency that creates the conditions for broad-based growth.

Brad DeLong: Worthy reads on equitable growth, May 19-26, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Equitable Growth last week launched a new lecture series. The first installment is with Claudia Sahm, who is saying something very worthy of your attention. Watch her Fighting the coronavirus and the way forward video, in which she discusses promising research ideas that support a robust response to fight the coronavirus recession, as well as longer-term efforts to ensure a more resilient U.S. economy in the years to come.
  2. Claudia Sahm sees the freight train bearing down on us, in the form of a very deep and long depression. She watches ideologues and partisans try to tie us to the railroad tracks. Why? Some because they do not understand the importance of ensuring a rapid and complete bounce back from the coronavirus depression. Some because they cynically dismiss the importance of ensuring a rapid and complete bounce back from the coronavirus depression. We have seen this story before, as tragedy. A decade ago ideologues, partisans, and centrists declared victory in late 2009 over the then Great Recession. They shifted their attention away from boosting recovery to austerity. Sahm is terrified that they are doing it again. And she is right to be scared. Read her “The coronavirus recession is severe, and the damage to the U.S. economy will last years,” in which she writes: “The U.S. economy is in a severe recession, at least twice as severe as 2007–2009…Today’s national unemployment rate is rivaled only by the heights of the Great Depression, when 30 percent of workers were unemployed. Lost income leads to less spending, which leads to business closures and more layoffs …People and businesses are living with overwhelming anxiety. Policymakers need to do more than contain the coronavirus and allow stores to reopen. They need to get money in the pockets of people and calm their fears. If Americans have money to spend, they will spend. Many have no choice. Their low wages make it impossible to support their families in good times, let alone now … Even with relief from Washington, immense damage is happening across country right now. This is not a drill. The Great Recession showed how long it can take to get us back on our feet.”
  3. The U.S. Bureau of Labor Statistics reports that still more workers, 2.4 million of them, lost their jobs and applied for unemployment benefits in the past week. Relaxing lockdowns looks to have increased the virus caseload. Relaxing lockdowns has not all has not yet boosted production. See Equitable Growth’s graphic about the applications for Unemployment Benefits in the week of May 10–16.

 

Worthy reads not from Equitable Growth:

  1. The extremely thoughtful David Glasner explains why those who analogize the coronavirus supply shock to the monopoly oil price shocks of the 1970s are profoundly mistaken. This is not an inflationary supply shock. This looks overwhelmingly likely be a profoundly deflationary supply shock. Read his “The Idleness of Each Is the Result of the Idleness of All,” in which he writes: “Some, perhaps many, seem to think that if the shock is a supply, rather than a demand, shock, then there is no role for a countercyclical policy response designed to increase demand … The problem with that reasoning is that reductions in supply are themselves effectively reductions in demand. The follow-on reductions in demand constitute a secondary contractionary shock on top of the primary supply shock, thereby setting in motion a cumulative process of further reductions in supply and demand … The interconnectedness of the entire economy, and the inability of any individual to avoid the consequences of a social or economic breakdown … was recognized by… Frederick Lavington, in his short book The Trade Cycle published in 1922 in the wake of the horrendous 1921-22 depression … To call unemployment “voluntary” under such circumstances is like calling the reduced speed of drivers in a traffic jam “voluntary.” To suppose that the intersection of a supply-demand diagram provides a relevant analysis of the problem of unemployment under circumstances in which there are massive layoffs of workers from their jobs is absurd. Nevertheless, modern macroeconomics for the most part proceeds as if the possibility of an inefficient Nash equilibrium is irrelevant to the problems with which it is concerned … In the face of an adverse supply shock, a spell of inflation lasting as long as the downturn is therefore to be welcomed as benign and salutary, not resisted as evil and destructive. The time for a decline in, or reversal of, inflation ought to be postpone till the recovery is under way.”
  2. Great Depression-level unemployment rates are reached not after three years but after two months. Read William M. Rodgers III and Andrew Stettner, “New Data Show That the True March Jobless Rate Could Near 20 Percent,” in which they write; “The Century Foundation has revised upwards our projections for the true March unemployment rate nationally to 18.3 percent … Unemployment insurance … data tell only part of the problem, as issues with overwhelmed state UI systems and eligibility restrictions that exclude many gig workers and independent contractors from receiving benefits … The current jobs crisis is unlike anything we’ve seen before. Past recessions and economic downturns have brought a snowstorm of job losses—a steady fall, spread over many months, if not years, whose impacts we could address in real-time, with existing tools, to mitigate the damage and keep the accumulation manageable. Today, however, we’re facing an avalanche.”
  3. The political intellectual policy tide from 1975 to 2005 was the neoliberal one: stepping back from even indicative planning and from any form of commitment to equality of result or even of opportunity—the conventional wisdom becoming that there was very little indeed that government was capable of doing efficiently, that sharper and harder incentives were almost always to the social benefit, and that to the extent social democratic ends could be obtained at all they could best be obtained through market means. As of 2005 this neoliberal movement was in intellectual bankruptcy. But in politics and policy it has continued its zombie-like shamble forward to this day. Now my colleagues here at the University of California, Berkeley have decided to see if they can do you some of the intellectual spadework needed to prepare the ground in which to grow a better way of thinking about the political economy. Check out their Network for a New Political Economy: “An interdisciplinary group of faculty and students at the University of California, Berkeley, has launched a Network for a New Political Economy supported by the Hewlett Foundation to rethink political economy and develop a new intellectual paradigm as an alternative to neoliberalism. The roots of the new paradigm reside in ongoing research in social science departments such as Economics, Political Science, Sociology, and History, plus professional schools such as Business, Law, and Public Policy. The Network fosters an intellectual conversation among faculty and students across these units, and encourages them to frame their insights and to package them for public engagement and policy relevance. It facilitates collective deliberation on how political economy should be studied and taught, and how new perspectives on political economy can be applied to broad public debates and pressing policy problems.”
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Weekend reading: The what to incorporate in future federal coronavirus stimulus bills 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

As policymakers consider what to include in future legislation to address the coronavirus public health and economic crises, they should consider including a green stimulus package to accelerate the clean energy transition. Climate change is a looming crisis that we must address—and it is linked to the coronavirus, as air pollution from dirty energy infrastructure enhances the fatality rate of COVID-19, the disease spread by the new coronavirus. Leah Stokes and Matto Mildenberger examine how the $2.2 trillion Coronavirus Aid, Relief, and Economic Security, or CARES, Act could have included provisions to protect our health by reducing our reliance on fossil fuels—and how instead, it is bailing out the failing dirty energy sector. They review how the CARES Act has been misapplied to the fossil fuel industry, and then turn to how future legislation could avoid this mistake and target clean energy in order to both fight the coronavirus recession and address climate change.

Late last week, the U.S. Bureau of Labor Statistics released data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS, for the month of March 2020. Kate Bahn and Carmen Sanchez Cumming put together several graphics using the data, which showed, among other things, that the quits rate dropped sharply as workers’ confidence about job prospects declined.

No better time than Memorial Day Weekend to catch up on some of Brad DeLong’s latest worthy reads from Equitable Growth and around the internet.

Links from around the web

Before policymakers enact the next federal stimulus package to fight the effects of the coronavirus recession, they must ensure relief is allocated in a way that alleviates, rather than exacerbates, inequality in the United States. Policymakers can do so by studying how funding would impact various demographic groups. Previous coronavirus legislation, such as the CARES Act, would have benefitted from such an analysis, write Pamela Shifman and Salamishah Tillet for The New York Times. And examples abound around the world—and even in states and localities within the United States—of budgets and initiatives that are prepared using racial- and gender-equity assessments. The coronavirus public health and economic crises are impacting different communities disproportionately, and as such, Shifman and Tillet argue, the next relief package should take these factors and disparities into consideration.

State and local governments are facing a funding catastrophe, as their spending on much-needed services skyrockets and their sources of revenue wither amid the coronavirus recession. These nonfederal government entities provide and pay for the bulk of government services that citizens receive, writes Ted C. Fishman in The Atlantic, so this funding shortage could have devastating consequences. Not only could the loss of these vital services—including healthcare, education, and public safety—harm communities’ health and well-being during the pandemic and reduce quality of life in the months after. It could also lead to lower levels of trust in government and democracy, and higher levels of political extremism. State and local governments, many of which have balanced-budget requirements, are on the brink of a disaster, and federal aid to states to weather this storm is more essential now than ever before—but as the coronavirus recession endures, Fishman explains, even that may not be enough to keep state and local governments above water.

As all 50 states begin to reopen to varying degrees, a look at the employment situation in Georgia nearly one month after easing lockdown restrictions shows that jobs haven’t come flooding back as a result. Politico’s Megan Cassella looks at the state’s Unemployment Insurance claims, which have remained elevated despite relaxed social distancing regulations. The data illustrate that reopening doesn’t automatically mean a booming economy if consumers are still wary of leaving their homes, and highlight the importance of federally mandated expanded and enhanced Unemployment Insurance. The reality check for decisionmakers is that until the public feels safe going outside, it’s unlikely that the U.S. economy and labor market will go back to normal—even if state and local governments allow businesses to reopen and employers start to bring staff back on payroll.

Friday figure

Figure is from Equitable Growth’s Twitter feed after this week’s release of Unemployment Insurance claims data.

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Brad DeLong: Worthy reads on equitable growth, May 12-18, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Everyone knows that I have been a great fan of Trevon Logan since he showed up at Berkeley to go to graduate school. He has blossomed into a superb researcher, an impressive administrator, a gifted teacher, and a powerful intellectual voice here in America today. Go to Listen to him: in conversation with Liz Hipple, “Equitable Growth in Conversation with Trevon Logan,” in which they discuss: The reasons for the disparate health impacts of the coronavirus among black Americans. The historical legacies of structural inequalities in the United States. The economic inequalities faced by African Americans in the coronavirus recession. Policy recommendations to deal with the immediacy of the coronavirus recession. Policy recommendations to deal with historical structural inequalities to power a more equitable economic recovery. The historical legacy of intergenerational mobility, race, and segregation”
  2. Started by Equitable Growth alumnus Nick Bunker, the monthly JOLTS Day coverage—coverage of the release of the Bureau of Labor Statistics’ latest survey results on job openings and labor turnover—should be at the very top of the must-reads in your monthly must-read lists. These survey numbers are, of course, now two months stale, but they hint at the different world than we now live in. Read Kate Bahn and Carmen Sanchez Cumming, “JOLTS Day Graphs: March 2020 Report Edition,” in which they write: “The quits rate decreased sharply from 2.3 percent in February to 1.8 percent in March, as workers’ confidence about job prospects declined amid the public health crisis and requisite state shutdowns.”
  3. Successfully running a modern economy requires, on the political economy level, a well-functioning social insurance system. In lots of states we do not have a well-functioning social insurance system. Is centralizing functions at the federal level the solution? Before the age of Trump I would have said “yes.” Now I think, more and more, that administrative reform has to come state-by-state—the slow boring of hard boards. Read Alix Gould-Werth, “Fool Me Once: Investing in Unemployment Insurance systems to avoid the mistakes of the Great Recession during COVID-19,” in which she writes: “During the Great Recession of 2007–2009 and its aftermath, unemployed workers across the country struggled to access the unemployment benefits to which they were entitled, and our government—at both the state and federal levels—failed to remedy the systemic problems that prevent workers from accessing benefits and thus lead to personal financial hardship and a muted economic stimulus. In the early days of the coronavirus recession, we have seen the problems of the Great Recession echoed in the administrative failures of state Unemployment Insurance agencies. The current disarray in state unemployment benefits programs is neither a surprise nor an accident. It is the result of decades of conscious choices made by policymakers at the state and federal level.”

 

Worthy reads not from Equitable Growth:

  1. I would not say that Jay Powell’s actions as chair of the Federal Reserve during this crisis have been a surprise. He is a highly competent administrator with good social democratic American values, plus a keen sense of the public interest, of trade-offs, and of the necessity of marking your beliefs and actions to market. But I am very heartened by his actions. I think that when the dust settles, historians may classify him as the most effective, keen-sighted, and reality-based Federal Reserve chair to date. Yet all who are not experts deep in the weeds do not understand what he and his central bank have done and are doing. In order to find out, you need to be following the thoughtful and patient Nathan Tankus. Read his “The Federal Reserve’s Coronavirus Crisis Actions, Explained (Part 6),” in which he writes: “The most important announcement covered in this post is far and away the expansion of the Municipal Liquidity Facility … The Fed expanded the MLF … by lowering the population cutoffs. Now cities with a minimum of 250,000 residents and counties with a minimum of 500,000 residents can access the Municipal Liquidity Facility…The Federal Reserve announced that it was considering expanding the MLF to allow a limited number of governmental entities that issue bonds backed by their own revenue to participate directly in the MLF as eligible issuers. This opens the door to providing direct support to public universities … As if Monday’s announcement wasn’t enough, the Federal Reserve announced an expansion of the Main Street Lending Program … to include businesses with $5 billion in revenue and up to 15,000 employees (up from $2.5 billion and 10,000 maximum employees).”
  2. Right now COVID-19 is administering a disastrous health shock to the world. Following that is the less deadly but still important negative supply shock to our economies. Behind that is a manageable but as yet unmanaged knock-on domestic demand shock. And behind that is the rapidly-approaching international financial crisis with its global negative demand shock that, as of yet, nobody is seriously trying to manage. Read Barry Eichengreen, “Managing the Coming Global Debt Crisis,” in which he writes: “These countries’ private companies borrow in dollars … When it comes to the stabilizing use of monetary and fiscal policies, emerging markets are hamstrung. Which is why we are back to Baker Plan 2.0 … suspend[ing] interest payments … private creditors … roll[ing] over an additional $8 billion worth of commercial debt. That, at least, is something. But, to borrow the baseball apostle Yogi Berra’s line, it is also “déjà vu all over again.” The Baker Plan likewise proceeded on the premise that the shock was transient and that a temporary debt standstill would be enough … By 1989, seven unproductive years after the onset of the crisis, the Baker Plan finally was superseded by the Brady Plan … Debts were written down. Bank loans were converted into bonds—often a menu of securities from which investors selected their preferred terms and maturities. Advanced-economy governments facilitated the transaction by providing “sweeteners” … Today’s crisis is also being treated as temporary, with a moratorium on interest payments and a promise of commercial credits remaining valid only through the end of the year. The reality is different. Weak global growth and depressed primary commodity prices will persist. Supply chains will be reorganized and shortened, auguring further disruptions of trade. Receipts from tourism and remittances will not pick up anytime soon. And unless the debt overhang is addressed, capital flows will not resume.”
  3. There seems to be one big piece of good news in the fight against COVID-19: The battle to keep the caseload low enough that hospitals do not collapse and the death rate rise from 1 percent to 4 percent appears to have been won, worldwide. Now there is a second battle: to push the bulk of the potential caseloads out beyond the date at which an effective vaccine arrives and so reduce the global death toll from its likely non-vaccine value of 50 million to a small fraction of that. That battle can be lost. That battle can be won expensively, through prolonged and expensive social distancing and other measures. That battle can be won quickly and cheaply, by sharp, short-term massive virus repression, followed by controlling re-emergences via large scale and frequent trace-&-test-&-isolate. Sane, intelligent, and competent national governments are engaged in that last option, and it looks like many of them will succeed. The Trump administration is not among them. Read Matthew Yglesias, “Flattening the curve is not good enough,” in which he writes: “With the disease seemingly beaten back domestically, Hong Kong is now in a position to start switching emphasis to a strategy focused on border controls … The city has a clearly articulated strategy that it calls “suppress and lift” [to] ease restrictions now when cases are at zero, but then clamp back down as necessary to push cases back down if they pop up. Taiwan has also had no new cases for several days … New Zealand has not done quite this well, but the government believes it has successfully identified and isolated all of the country’s coronavirus cases and is lifting restrictions, on the claim that the virus has been “eliminated” in the country. South Korea’s outbreak is now down to single-digit numbers of new cases per week … The United States, meanwhile, is moving to open up on the basis of a vaguely articulated assumption that settling for mitigation is good enough … The United States has not really tried the strategies that have made suppression successful. To accomplish that, America would need to invest in expanding the volume of tests, invest in more contact tracers, and create centralized quarantine facilities … But doing so would save potentially tens or hundreds of thousands of lives and almost certainly lead to a better economic outcome by allowing activity to truly restart.”
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Green stimulus, not dirty bailouts, is the smart investment strategy during the coronavirus recession

Posted on by Maria Monroe

Overview

In March, the federal government passed the Coronavirus Aid, Relief, and Economic Security bill, more commonly known as the CARES Act. The law aims to provide relief for businesses and Americans struggling due to the coronavirus pandemic and the resulting economic recession. It also had the potential to accelerate the fight against another crisis—climate change—by funding a green stimulus to accelerate the clean energy transition.

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Green stimulus, not dirty bailouts, is the smart investment strategy during the coronavirus recession

The coronavirus and climate change are, unfortunately, linked. Air pollution from dirty energy infrastructure makes people much more likely to die from COVID-19, the disease caused by the coronavirus. And those dying in the United States are more likely to be people of color, perhaps in part because of environmental injustices that expose communities of color to much higher pollution levels.

We do not have to use dirty energy that damages peoples’ lungs to power our societies. The CARES Act could have helped protect Americans’ health during this pandemic by moving us away from polluting fossil fuels. Yet rather than supporting clean energy, the law is being used to bail out the dirty fossil fuel sector.

If we continue along this terrible path, the accelerating climate crisis will disrupt employment, cause property damage, and destabilize the financial system. Why use the rescue programs from the current crisis to subsidize the industry most likely to cause the next one?

This issue brief examines how the CARES Act was deliberately misapplied to the fossil fuel industry, which was already on the ropes before the coronavirus recession. We also examine how future stimulus funds could be targeted toward clean energy, which would create more and better-paying jobs to power our economic recovery. This approach would not just help us tackle the coronavirus recession, but the climate crisis as well.

The fossil fuel industry was in crisis before the coronavirus hit

Many fossil fuel companies were already struggling before this economic crisis. Since President Donald Trump entered the White House, 11 coal companies have declared bankruptcy. To try to buck this trend, the Trump administration has found creative new ways to distort power markets to advantage coal.

Similarly, shale gas and oil companies have been struggling under high debt levels and underperforming investments. The massive global petroleum glut has only added to their woes. These hard times led carbon-intensive companies to seek refuge in bailouts when the coronavirus recession hit.

Unfortunately, the CARES Act is funding corporate welfare for polluters. The law allows the Federal Reserve to lend money to companies. In theory, these companies should be doing well enough that they are able to pay the government back. But for oil and gas companies, this may not be the case. Given very low oil prices, these companies do not have a clear pathway toward profit. Many are highly leveraged and were already struggling with credit-rating downgrades by the end of 2019. This debt burden would have initially made many oil and gas companies ineligible to receive Federal Reserve loans.

Yet after taking comments, including from the fossil fuel industry, the Federal Reserve watered down their requirements for lending. Oil and gas companies, even with their pre-existing debt, have become newly eligible. In addition, the maximum lending amount was raised from $150 million to $200 million.

Notably, U.S. Secretary of Energy Dan Brouillette said in mid-April that lending would need to be “closer to $200 or $250” million to help the fossil fuel sector, after he met with representatives from the industry. While the Trump administration has been meeting regularly with fossil fuel groups, it has not done the same for the renewable energy industry.

Some commentators have called for federal government ownership or equity stakes to be a conditional requirement for lending to the oil and gas industry, even though the CARES Act prohibits the federal government from exercising any voting power if a government financial investment takes the form of an equity stake. This clause needs to be amended to enable the federal government to influence these corporations, ideally helping to put them on a path toward reducing their fossil fuel extraction and carbon emissions. The Trump administration, however, has clarified that it has no intention of taking ownership stakes in fossil fuel companies.

Instead, fossil fuel companies have been using the coronavirus recession to try to secure immunity against lawsuits for their decades promoting climate denial. In response, 60 members of the U.S. House of Representatives recently wrote a letter opposing liability relief. These disturbing developments are not just happening federally. Across the country, fossil fuel companies and state and local governments are using this crisis as an opportunity to weaken environmental regulations.

What’s more, publicly traded coal companies have received more than $31 million as part of the law’s Paycheck Protection Program, which is designed to go to small businesses, not publicly traded companies capable of other ways of raising cash. The coal industry was initially left out of the package but successfully persuaded the Trump administration to list it as essential. Similarly, Marathon Petroleum Corporation has received more than $400 million from the CARES Act.

Environmentalists have criticized these loans as throwing good money after bad because the coal industry was already struggling financially in recent years. They’re right. These are bad economic investments. Bailing out fossil fuel industries will not yield as many jobs as investing in clean energy would.

A green stimulus can lead an economic recovery

Every dollar spent propping up a dying industry is a dollar that can’t be invested into new careers, training, opportunity, and equitable growth in the clean energy sector. Increasingly, even banks recognize this, as more and more are pulling out of fossil fuel investments that are yielding poor returns.

According to recent research from Heidi Garrett-Peltier, an assistant professor at the University of Massachusetts Amherst, for every $1 million invested in renewable energy or energy efficiency, almost three times as many jobs are created than if the same money were invested in fossil fuels. Investing more money in the fossil fuel industry will not address high and growing unemployment rates. Indeed, the Federal Reserve is not even requiring companies to keep workers as a condition for getting loans.

The seeds of an even more pernicious argument are already sprouting. Some conservative members of Congress are raising concerns about rising federal debt levels and threatening to stop further spending on relief amid the still-deepening recession. This would be the worst of both worlds. With $1.8 trillion in direct spending, the CARES Act is larger than Vice President Joe Biden’s 10-year climate plan. Clearly, the United States is able to spend more money addressing climate change if we treat it as the crisis it is.

We need green stimulus investments because it’s a smart way to spend money. Investments in the clean economy will provide significant returns. As Nobel prize-winning economist Joseph Stiglitz argues, alongside other colleagues, renewable energy and energy efficiency investments typically have high multipliers, delivering even greater returns over time. They also create more jobs, including ones that can’t be taken offshore, such as those in home energy retrofits.

At the end of 2019, Congress had an opportunity to put extensions for basic supports of the green energy sector into place, among them the Investment Tax Credit and the Production Tax Credit, in the year-end budget bill. But Congress decided against it. Congress then could have put these extensions in the CARES Act, but both President Trump and Senate Majority Leader Mitch McConnell (R-KY) opposed it.

This lack of support immediately before and during the coronavirus recession leaves the the renewable energy sector struggling. This quarter, for example, residential solar installations are likely to fall by half. In March alone, the clean energy industry lost more than 100,000 jobs. In wind energy alone, $43 billion in investments are at risk. Despite the terrible state the industry finds itself in, Congress is doing very little to support clean energy jobs.

Conclusion

Despite a complete economic shutdown, global carbon pollution has only declined 5.5 percent so far this year. It may fall as much as 8 percent by year end, marking the largest annual decline on record. But to limit global warming to 1.5 °C (2.7°F), emissions must fall by that amount every year for the next decade. This will not happen without concerted government policy.

Instead, U.S. policymakers could power an economic rebound and prepare to meaningfully address climate change by investing stimulus funds in the renewable energy sector. If the Great Recession of 2007–2009 is any indication, temporary emissions reductions from economic contractions quickly reverse themselves. We should learn a lesson from the previous recession and the current one—ignoring a crisis does not make it go away, be it the coronavirus pandemic or the growing climate threat.

Leah C. Stokes is an assistant professor at the University of California, Santa Barbara. Her recent book, Short Circuiting Policy, examines the clean energy transition.


Matto Mildenberger is an assistant professor at the University of California, Santa Barbara. His recent book, Carbon Captured, examines carbon pricing and climate policy.

Weekend reading: Data amid the coronavirus recession 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. economy is a long way away from recovering from the coronavirus recession, which will likely be long and bumpy when it does happen. But now is the time to ensure policymakers have the data they need to effectively help those who are hurting the most and will continue to hurt long after the crisis passes. Policymakers must ensure they are measuring how the economy is working for low-, middle-, and high-income Americans. Austin Clemens explains how a new dataset from the U.S. Bureau of Economic analysis divides up annual income growth along these lines and why this is an important step in targeting aid to those who need it the most. It’s especially important to consider, Clemens writes, because those at the bottom of the income ladder have continually experienced far less of the gains of past economic recoveries than their better-off peers—even after also being hit harder during the economic downturns that preceded the recoveries. Policymakers can use data to ensure a more fair recovery that benefits all Americans, not just the wealthiest of our society.

Likewise, Heather Boushey writes on Medium, the only way policymakers will be able to measure whether the relief packages they have passed are actually working is by collecting accurate data about how Americans along the income ladder are faring. The imperative to collect these data is included in the fourth coronavirus package proposed recently by Speaker of the U.S. House of Representatives Nancy Pelosi (D-CA), and is grounded in our GDP 2.0 project. It would be an important tool in tracking whether other relief actions—from expanded Unemployment Insurance to small business funding to relief payments sent to households across the United States—are effectively shaping an economy where gains and losses are shared equally among the population. Looking at the historical example of when Gross Domestic Product was first unveiled, Boushey shows why income inequality has rendered GDP ineffective as a barometer of overall economic growth, and why it must be broken down to include data across the income spectrum.

Effective data collection not only can guide policymakers as they take action to help those in need but also provide a level of transparency that is much-needed to shore up trust in public institutions among the American people. Amanda Fischer reviews the lessons policymakers can and should learn from the Great Recession of 2007–2009, when a lack of data all but ensured that relief was more delayed and ineffective than it would have been had policymakers properly collected data. As Congress passes trillions of dollars of coronavirus-related economic relief aimed at shoring up various sectors of the economy and protecting hard-working and hard-hit families, Fischer writes, policymakers must also release accurate data so that the public can hold government accountable about how it is spending and distributing this taxpayer money.

In the latest installment of “Equitable Growth in Conversation,” Liz Hipple talks with Trevon Logan, the Hazel C. Youngberg Trustees Distinguished Professor of economics at The Ohio State University and a research associate at the National Bureau of Economic Research, about disproportionate impact on black Americans of the coronavirus pandemic and ensuing recession, the structural inequalities that led to these disparities, and the historical legacy of intergenerational mobility, race, and segregation. They also discuss policy recommendations to address the coronavirus recession and to deal with structural inequalities in society.

The Supplemental Nutrition Assistance Program, previously known as food stamps, is a vital part of the country’s social safety net. It not only keeps people fed and healthy, but also can help stabilize the U.S. macroeconomy by boosting consumer spending even when household budgets are otherwise limited—which is why some legislators have recently proposed using SNAP as an automatic stabilizer during economic downturns. New research by Martha Bailey, Hilary Hoynes, Maya Rossin-Slater, and Reed Walker shows that even as SNAP’s economic and health benefits play an important role during hard times, they also have long-lasting effects far into the future, for recipients as well as the broader economy. The co-authors explain the methodology, findings, and implications of their new working paper and urge Congress to enact enhancements of this vital program now, as the coronavirus recession threatens households across the country.

Links from around the web

In another item for the “GDP needs an update” category, Justin Wolfers argues in The New York Times that the official measure of the U.S. economy should be incorporating our social distancing efforts. The sacrifice of millions who are staying home to “flatten the curve” is saving countless lives, so why isn’t this effort being counted? The answer is because “the official measure of [GDP] takes a much more limited view of what counts as ‘output,’ and it hides this progress,” Wolfers writes. The true value of what we have done in the past few months is probably higher than it has ever been, he continues, but failing to measure these public health precautions has led to a misdiagnosis of our economic situation—and thus a misleading conversation on when and whether to reopen the economy.

The data released last week by the U.S. Bureau of Labor Statistics show how the 14.7 percent unemployment rate is affecting different groups of workers differently. Tracy Jan put together a series of graphics for The Washington Post using the data to show how the coronavirus recession has been distributed across the U.S. population, making clear that age, gender, educational attainment, and race are obvious dividing lines in the joblessness rate. Jan’s analysis highlights that young workers, women, those without high-school degrees, and Hispanic and black workers are faring the worst in the worst economic situation since the Great Depression.

Many millennial workers were still recovering from effects of the Great Recession when the coronavirus pandemic began, and this group of younger workers is likely to suffer the worst from the coronavirus recession as well. Vox’s Sean Collins explains why the COVID-19 economy is particularly devastating for millennials, who entered the workforce during one of the worst downturns in recent history and are now facing a second battering right when they should be earning their career peak salaries. In a series of 14 charts, Collins shows why everything from layoffs to student debt to lower rates of homeownership have hit millennials harder than other generations in the workforce, and how these factors lead younger workers to worry more about their current and future standings in the economy.

Essential workers—from grocery store clerks, warehouse workers, and childcare providers to delivery people, home health aides, and farmworkers—are currently risking their lives to make sure the rest of us are healthy, fed, cared for, and living in a functioning society. So, The Atlantic’s Annie Lowrey asks, why are these modern-day heroes treated so poorly and paid so little? The answer is not because these jobs are worth less to our economy than others, but rather because of “the kinds of people who hold them and the kinds of labor laws we have chosen. They are bad jobs because we have not cared to make them good jobs.” Now, these workers are risking more than ever before to protect and support the rest of us, and so now is the time for change, Lowrey argues. Policies such as higher minimum wages and mandated paid sick leave, and encouraging unionization or expanding labor regulations could go a long way in showing these workers how vital they truly are.

Friday figure

Figure is from Equitable Growth’s “Data will provide accountability to ensure the U.S. economic recovery is shared broadly” by Austin Clemens.

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Data will provide accountability to ensure the U.S. economic recovery is shared broadly

Posted on by Maria Monroe

The U.S. economy is a long way from experiencing a recovery from the coronavirus recession. But the actions Congress takes now will determine just how deep the recession gets and how difficult it will be to pull back from the brink once the health threat has passed. So, it’s not too early to start thinking about what the recovery should look like. As policymakers start to think about recovery policy, they should target those who were most hurt by the recession. This may seem like an obvious point, but it is often overlooked because there is not usually a careful accounting of who has been harmed in economic downturns.

That is poised to change with the release of a new data series from the U.S. Bureau of Economic Analysis that divides up annual income growth to reflect the fortunes of low-, middle-, and high-income Americans. This new dataset lets policymakers see how previous economic expansions and contractions have treated these groups differently. It is an important step toward being able to craft policy responses to recessions that target weakened groups and help them recover to their pre-recession incomes. The proposed Measuring Real Income Growth Act of 2019 directs the agency to regularly produce these statistics and gives them the resources they need to do so.

House Democrats have wisely included this bill as part of their next coronavirus response legislation. Democrats are right to do so as part of their response to the economic crisis. Following the economic experiences of different groups of Americans provides important accountability to any legislation that is passed to lessen the impact of the recession or to help Americans recover more equitably in the wake of it.

In previous economic cycles, those at the bottom have experienced far less of the gains during economic recoveries. Using the income data series created by Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, we can see how people at different levels of income fared in the past two economic contractions and expansions. In the relatively mild contraction of the early 2000s, the bottom 50 percent of income earners bore about 18 percent of the decline in economic output. But in the ensuing expansion, from 2003 to 2006, they received only 11.3 percent of the expansion’s growth. Expansions and contractions are measured here by years of positive or negative growth according to per capita National Income, the measure favored by Saez and Zucman. (See Figure 1.)

Figure 1

At the same time, those at the top of the income distribution saw most of the declines during the recession but also more of the gains. Thus, when all is said and done, those at the top end up in a stronger position after a recession and recovery than they were in before. This was not only the case for the 2001 recession, but also for the Great Recession—and certainly is a concern now, especially as early indications are that those with the lowest wages have been laid off more frequently relative to higher-paid workers.

During the Great Recession, those in the bottom half of the U.S. economy had a similar, although slightly less dramatic, experience. About 18 percent of the decline in output was thanks to declines in income for the bottom 50 percent. In the following expansion, they captured about 14 percent of total income growth, through 2015, the last year of the data series. (See Figure 2.)

Figure 2

This pattern of economic recessions that fall more heavily on those with below-median earnings than the expansions that follow is a significant contributor to the four-decade rise in inequality that began around 1980. The inability of policymakers to identify and respond to this pattern is why many Americans have entered this recession in a delicate financial position, with nearly 40 percent saying they would struggle to handle a $400 emergency expense. (See Figure 3.)

Figure 3

Similarly, families in the bottom 50 percent of wealth holdings only narrowly recovered their pre-Great Recession levels of wealth when the coronavirus pandemic and ensuing recession struck. With many of these families now plunged suddenly into unemployment, consumption will plummet, and the financial fragility of these families will further harm the entire U.S. economy.

New statistics from the Bureau of Economic Analysis that provide policymakers with a picture of who is benefitting from growth and who is suffering during recessions will give them the evidence needed to target legislation and build an economic recovery that benefits all Americans.