Antitrust experts call on Congress to address failings in antitrust law to preserve competition and prevent monopolies in digital marketplaces

Posted on by Maria Monroe

Overview

A group of the nation’s top U.S. antitrust experts told Congress this week that outdated and bad economic theory has undermined antitrust enforcement, allowing dominant companies to gain an unfair advantage in the marketplace to the detriment of other businesses and consumers, innovation, and productivity growth. These prominent experts called on Congress to revise current law to align it with modern economic theory and to fix harmful judicial rules: “The signatories to this letter agree that antitrust enforcement has become too lax, in large part because of the courts, and that Congress must act to correct the state of antitrust enforcement.”

The statement, a “Joint Response to the House Judiciary Committee on the State of Antitrust Law and Implications for Protecting Competition in Digital Markets,” should serve as a wake-up call to Congress, the courts, enforcers, and antitrust practitioners. The signees of the statement calling for dramatic reform—see the list of individual names and their affiliations at the end of this column—include some of the most respected industrial organization (the field that studies competition and markets) economists and experienced antitrust practitioners, all of whom have spent a majority of their careers studying these issues either in academia or practicing antitrust law. Many have served as top enforcers at the Federal Trade Commission or the Antitrust Division of the U.S. Department of Justice, the two federal agencies primarily responsible for antitrust review and enforcement.

The statement responds to a request from the House Judiciary Committee for views on the state of federal antitrust law as part of the committee’s investigation into competition in digital markets. The conclusions are blunt, and the prognosis, absent change, is bleak. “Economic research establishes that market power is now a serious problem,” according to the statement, and “current antitrust doctrines are too limited to protect competition adequately—making it needlessly difficult to stop anticompetitive conduct in digital markets.”

Nor should their conclusion be controversial: “We believe that any conclusion to the contrary reflects either an incomplete or incorrect understanding of economics and the economic literature from the past several decades.” The statement closes with a set of recommendations:

  • Nullify existing precedent that limits antitrust actions
  • Clarify that the antitrust laws protect potential competition
  • Establish legal rules that, in appropriate cases, require defendants to prove their conduct does not harm competition
  • Increase penalties and enforcement resources

This column briefly details the statement and its recommendations. But their overarching conclusion is that current antitrust law is not protecting competition, and Congress, as it did in 1914 and 1950, must pass legislation to fix it.

The House Judiciary Committee investigation into competition in digital markets

The House Judiciary Committee began its investigation into competition in digital markets in June 2019. Digital markets cover a broad range of online services. They include social networking, online advertising, and online marketplaces for goods and services. Unsurprisingly, the investigation has focused on four companies: Amazon.com Inc., Apple, Inc., Facebook, Inc., and Alphabet Inc.’s Google unit. The committee’s goals are: “documenting problems in digital markets, examining whether dominant firms are engaging in anti-competitive conduct, and assessing whether existing antitrust laws, competition policies, and current enforcement levels are adequate to address these issues.”

Over the course of the past 10 months, the House Judiciary Committee held a number of hearings focusing on dynamics of these digital markets. The committee members listened to market participants who believe competition has been stifled, other market participants who believe these markets are functioning well, and a variety of experts. (Also testifying before the committee were Washington Center for Equitable Growth Steering Committee Member Jason Furman, professor of the practice of economic policy at the Harvard Kennedy School, and Fiona Scott Morton, professor of economics at Yale School of Management and an Equitable Growth grantee).

The statement addresses how successful antitrust laws would be in prohibiting harmful conduct in digital markets, if such conduct is occurring or does occur. The focus may seem odd. Antitrust laws are supposed to prevent anticompetitive conduct. So, how could it be that anticompetitive conduct is legal? Well, because U.S. antitrust laws themselves are broad and general, what is legal is left to the courts to define key terms and provisions. The statement to the committee examines whether the interpretation and application of antitrust laws by the courts and federal antitrust enforcers prevents or stops anticompetitive conduct, without unnecessarily condemning procompetitive actions.

Problems with current antitrust law

This group’s consensus view, based on the best economic theory and research, is that courts have been too willing to limit the scope of the antitrust laws and allow conduct that undermines competition. Monopoly power is growing in the United States, a conclusion supported by a broad range of evidence. Multiple studies find market power rising in industries such as hospitals, brewing, and airlines. Equitable Growth’s comprehensive literature review, authored by Yale’s Scott Morton, provides additional evidence, including how internet platforms can use (and some have used) restrictions on pricing (known as Most Favored Nation clauses) to suppress competition and harm competition.

Antitrust rules developed by courts have contributed to this problem. As the statement explains, “Antitrust has failed to respond to growing market power in substantial part because many key antitrust precedents—particularly those precedents governing exclusionary conduct—rely on unsound economic theories or unsupported empirical claims about the competitive effects of certain practices.”

Here’s just one case in point: In the 1980s, the federal government successfully challenged and broke-up AT&T’s phone monopoly, which helped spur the telecommunications revolution that led to competition for phone services, cell phones, and then smart phones. Under today’s legal standards, it is questionable whether the government could have won that case.

The implications of weakened antitrust law for digital markets

These judicial interpretations of federal antitrust laws over the past several decades make it unnecessarily difficult to successfully challenge anticompetitive conduct and acquisitions in digital markets. As the statement points out, “While these troubling judicial rules and decisions impede effective antitrust enforcement generally, they do so particularly with respect to protecting competition in the digital marketplace.”

The legal rules most weakened by courts apply to the types of anticompetitive conduct that has sparked the House Judiciary Committee’s concerns about digital markets, which Equitable Growth has discussed here, here, and here. Specifically, those concerns are:

  • A primary strategy for excluding competitors is imposing vertical restrictions, including denying a competitor access to a platform. Courts often, however, presume that vertical restraints enhance competition.
  • The U.S. Supreme Court has virtually eliminated antitrust liability for tactics such as refusals to deal (denying a competitor access to a critical online platform) and predatory pricing (pricing low to drive competitors out of business), both of which can be used by a dominant internet firm to exclude its competitors.
  • Many online services, such as search engines and apps, do not charge individuals for their use. Even if there is no increase in prices to the user, a dominant platform can anticompetitively exclude a competitor. That conduct can harm if the dominant firm then offers lower-quality apps or less advertising after eliminating a competitive threat. But courts have been skeptical of accepting evidence of qualitative harm, as opposed to evidence of higher prices.
  • The direct victims of anticompetitive acts (the target of exclusionary conduct or an acquisition) in digital platforms will often be small or potential competitors that could develop into disruptive forces, as Google did to the once-dominant search engine Alta Vista in the early 2000s. Challenging conduct that affects potential competitors can be difficult because courts focus on the likelihood of harm and not its size. Courts generally require that it be more likely than not that the new company would have been successful. But even if a competitor is somewhat less likely than not to succeed, its acquisition by a dominant platform (or being forced from the market) is still anticompetitive if the potential competitive benefit would be substantial.
  • Some digital markets are two-sided transaction markets, such as credit card companies that provide necessary services to both merchants and customers to make transactions possible. The Supreme Court has limited the ability of plaintiffs to prove harm directly, required evidence inconsistent with economic theory, and defined a “two-sided transaction market” so broadly that it might be misconstrued to apply to almost any digital platform.

Recommendations

Congress, not the courts, is the last word on the antitrust laws. The statement calls on Congress to “revise the antitrust laws so that they are no longer inconsistent with modern economic thinking.” The statement then offers broad areas of potential reform:

  • Nullify existing precedent that limits antitrust actions
  • Clarify that the antitrust laws protect potential competition
  • Establish legal rules that, in appropriate cases, require defendants to prove their conduct does not harm competition
  • Increase penalties and enforcement resources

Although the audience for this statement is Congress, the courts do not need to wait for legislation. Judges have become complacent in relying on economic principles that are outdated or incorrect. The statement also should embolden enforcers to be more aggressive in challenging bad legal decisions and advocating for courts to modernize their thinking.

The evidence is clear, and the harm from lax antitrust enforcement is real. Policymakers and the courts need to act now to ensure we have vibrant competition throughout the economy and in digital markets particularly.

List of signees to the statement

  • Jonathan B. Baker, research professor of law, American University Washington College of Law
  • Joseph Farrell, professor of economics, emeritus, University of California, Berkeley
  • Andrew I. Gavil, professor of law, Howard University School of Law
  • Martin S. Gaynor, E.J. Barone University Professor of economics and public policy, Carnegie Mellon University
  • Michael Kades, director of Markets and Competition Policy, Washington Center for Equitable Growth
  • Michael L. Katz, Sarin Chair Emeritus in strategy and leadership, Haas School of Business, professor emeritus, Department of Economics, University of California, Berkeley
  • Gene Kimmelman, senior advisor, Public Knowledge
  • A. Douglas Melamed, professor of the practice of law, Stanford Law School
  • Nancy L. Rose, Charles P. Kindleberger Professor of applied economics, Massachusetts Institute of Technology
  • Steven C. Salop, professor of economics and law, Georgetown University Law Center
  • Fiona M. Scott Morton, Theodore Nierenberg Professor of economics, Yale School of Management
  • Carl Shapiro, professor of the Graduate School, Transamerica Chair in business strategy emeritus, University of California, Berkeley
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Brad DeLong: Worthy reads on equitable growth, April 26–May 4, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. This is the best review of Thomas Piketty’s new book, Capital and Ideology, I have yet seen. I can tell that the book annoyed Heather Boushey. If his last book was written for a very small audience (which at times felt like me and a few of my friends) and yet managed to attract a very large one, this book appears written for an equally small audience. The thread to grasp, I think, as people dive into the book is the connection between the data we are shown, how that leads us to see the world, and how that then influences our attempts to change it. Read Heather Boushey, “Which Side Are We On?,” in which she writes: “Piketty … presents the economics profession with a clear challenge … part of the problem or part of the solution … This time, he very much wants to influence policymakers … He puts forth a slew of ideas to reconfigure our national economic data—proposing that nation-states cooperate to compile a public financial register that would give political leaders the tools to assess the distribution of wealth and its movement over time, correctly measure the depreciation of “natural capital” so that we have the data to evaluate progress on climate justice, and rewrite national constitutions to require the publication of accurate annual estimates of the amounts of tax actually paid by different classes of income and wealth. These are all good ideas to consider—and ones that governments can easily begin to do. I fear, however, that many of those in power will not heed his advice. The problem is that the audience … isn’t clear … I was shocked to not see the words “political science” until over halfway through the book. On the other hand, the book isn’t written for a general readership, or even politicians and policymakers … The problem is that Piketty thinks his readers have all the time in the world. It isn’t until chapter 11 that Piketty tells us that social democracy suffers from both intellectual and institutional shortcomings regarding social ownership, education, the nation-state, and how to tax wealth. Having made this point, he starts to explain his agenda … over the course of the remaining 500 or so pages.”
  2. A very, very good piece on how “austerity” in the past decade—especially in so-called “red states”—greatly weakened the ability of our unemployment insurance systems to do their jobs. Fixing them immediately would be good. 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: “The current disarray in state unemployment programs is not an accident. The Unemployment Insurance problems we face today were on full display during the Great Recession and result from decades of conscious choices by policymakers. Now, we should take a different path by: increasing the federal taxable wage base to the same level as the Social Security taxable wage base and indexing it to inflation to provide adequate resources for program administration; redesigning benefit extensions so that the program responds quickly and efficiently to macroeconomic changes; standardizing minimum benefit levels and durations that are generous enough to incentivize application.”

 

Worthy reads not from Equitable Growth:

  1. Jay Powell and his colleagues at the Federal Reserve have been a very welcome beacon of action in helping us deal with the coronavirus pandemic. Color me as profoundly and favorably impressed with how much thinking and acting they have done and are doing. Read Dion Rabouin, “The Fed’s expanded lending looks to help fill the holes PPP missed,” in which he writes: “While business owners have largely praised the federal government’s fast response and the good intent of the CARES Act, it has left much to be desired. The state of play: It is believed that one of the reasons for the Fed’s expanded lending under the Main Street facility is the struggles of the Paycheck Protection Program. What it means: With the Small Business Administration overwhelmed by demand and many small business owners unable to access funding, PPP has been plagued by bad news since even before it launched. Where it stands: ‘PPP was the right idea but it was intended to be a short-term measure and really needs structural changes that can, in addition to a major infusion of resources, give travel businesses and their workers a real chance to survive,’ Tori Barnes, executive VP of public affairs and policy at the U.S. Travel Association, said during a media briefing Thursday … By reducing the size of the loans it offers (which unlike PPP loans cannot be forgiven), the Fed’s Main Street program allows medium-sized businesses direct access to its seemingly bottomless supply of cheap capital through financial institutions that take on, at most, 15 percent of the risk while the central bank shoulders the rest.”
  2. It is now very clear that the Trump administration—and state governments that follow its lead—have no interest in a tight enough lockdown to get the caseload low enough so that testing, tracing, and isolating, as done in South Korea or New Zealand could be attainable. Read German Lopez, “The 4 plans to end social distancing, explained,” in which he writes: “The plans all say the United States needs more testing. But they differ on how much more … These plans are a bit scary. They show the United States is likely stuck with some level of social distancing for at least months and possibly a year or more … These plans carry some assumptions, because there’s still a lot about COVID-19 and the coronavirus we simply don’t know … These plans, then, are about trying to put forward the best ideas with the best information available … The plans generally all say that extreme social distancing, as most parts of the United States are practicing now, is needed to get Covid-19 cases low enough that it’s safe to resort to softer measures.”
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Weekend reading: The safety net and 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

As the U.S. economy heads into what may be the most severe economic downturn since the Great Depression, there is no better time to look at and learn from the more recent Great Recession of 2007–2009. Though what the nation is facing now is different in that it is being caused by a global pandemic instead of collapsing financial markets, there are some striking similarities in the U.S. safety net’s inability to protect those in need. These issues ought to be addressed now, before the same results wreak havoc again. Alix Gould-Werth walks through how the Unemployment Insurance system is ill-equipped to handle a coronavirus recession, thanks, in part, to changes made to state-level unemployment benefits programs after the Great Recession. She proposes three fixes that will better prepare states to handle the record-breaking number of claims that have been and will continue to be filed, and argues that now is the time for policymakers to make these changes so that our economy and our society are ready to weather this crisis, regardless of how long it lasts, and be ready for the any future crises.

Another vital aspect of the safety net that is worth revisiting amid the coronavirus recession is the paid medical leave system. Jack Smalligan and Chantel Boyens review the recent literature on paid medical leave—which, until the pandemic struck, was paid relatively little attention to since workers tend to have access to it more than other types of paid leave. As the coronavirus pandemic continues and as the resulting economic recession deepens, a better understanding of the research that has been done can help inform how policymakers should respond and what aspects of this safety net must be addressed to ensure the health and well-being of workers and their families across the United States. Smalligan and Boyens discuss three different types of paid medical leave and how they are administered in various states, as well as the clear benefits—medical, social, and economic—that research proves result from states enacting paid medical leave programs.

In research studying the effect of targeted quarantine and widespread testing on death rates and economic output, David Berger and Kyle Herkenhoff show how expansive testing allows governments to target specific populations for quarantine, reducing infections and putting people back to work sooner. Meanwhile, the high U.S. unemployment rate, significant income drops, and unsteady economy are evidence that safety net programs must continue to be funded. Therefore, the authors ask, should the federal government focus its marginal spending on boosting testing capacity for the coronavirus or on shoring up the safety net? It remains to be seen which has a better “bang for the buck”—and Berger and Herkenhoff argue that this question must be answered as U.S. policymakers debate future rounds of stimulus spending.

In addition to social safety net programs—and even before many were enacted—unions in the United States have supported workers to achieve better outcomes for themselves and their families. Conditions from a minimum wage to a 40-hour workweek to expanded access to healthcare are just a few of the benefits unions fought for that are now considered standard worker rights, regardless of union membership status. But union membership has been declining steadily since the 1970s, leaving workers more exposed to poor treatment and outcomes on the job—and causing a decades-long growth in income inequality in the United States. This May Day, Equitable Growth released a factsheet showing how union membership empowers both unionized and nonunionized workers, how there is a growing share of workers who want to join a union, and how strikes remain a powerful tool for workers to achieve better conditions and pay. This last point is made ever clearer in an issue brief by Kate Bahn, Alexander Hertel-Fernandez, and Carmen Sanchez Cumming, which details the recent walkouts, strikes, and labor action against large companies such as Amazon.com Inc. in the face of coronavirus pandemic, as front-line workers say their employers aren’t doing enough to protect them from the coronavirus and the COVID-19 disease it spreads.

April’s Expert Focus is on equity and well-being during the coronavirus recession, highlighting the research of several academics looking at disparities in race and ethnicity, income, and gender, and the effects these gaps will have on our recovery. Christian Edlagan and Maria Monroe review recent work by academics and scholars in Equitable Growth’s network and beyond studying the crisis’s impact on those working on the front lines of the U.S. economy, including how disability programs are affecting financial outcomes for workers, earnings inequalities in the care industry, and the particularly severe impact of the pandemic on black women workers.

Links from around the web

Michigan Gov. Gretchen Whitmer announced plans to offer tuition-free education to emergency workers in a stunning display of what the government can do to help those who are keeping us safe. Zack Budryk reports for The Hill that the GI Bill-esque program will provide higher education to those working in healthcare, childcare, grocery stores, and manufacturing personal protective equipment and supplies. Gov. Whitmer also announced that employers will be able to reduce employee hours so workers will be eligible to receive unemployment benefits, as well as the extra $600 per week that recent federal legislation ensures through the end of July.

Not all front-line workers are so lucky, though. In an op-ed for The New York Times, Dollar General Corp. employee Kenya Slaughter describes her experiences as an essential employee in Louisiana, risking her life every day to keep the store open. It’s an eye-opening look into the daily realities of millions of Americans across the country who are not in a position to telecommute and are keeping the rest of us safe and fed. The lack of safety net protections for many of these workers has forced them to choose to go work over protecting their own health and the health of their families. And unpredictable schedules and a lack of childcare is causing undue stress, as workers must juggle their work and family responsibilities. Slaughter explains why hazard pay and more predictable scheduling are urgently needed and calls on policymakers to enact these protections now so those who are taking care of us can also take care of themselves.

The coronavirus recession appears to now be pummeling industries previously considered safe: the public sector and white-collar professionals. Looking at data on changes in unemployment claims week-over-week between industries, Andrew Van Dam at The Washington Post shows how each week of the pandemic thus far has affected different sectors of the economy differently. These trends of how the coronavirus recession affects specific industries from one week to the next can help map out where the U.S. labor market will be hardest hit in the future—and how quickly the U.S. economy can recover.

Friday figure

Figure is from Equitable Growth’s “Fool Me Once: Investing in Unemployment Insurance systems to avoid the mistakes of the Great Recession during COVID-19” by Alix Gould-Werth.

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Why workers are engaging in collective action across the United States in response to the coronavirus crisis

Posted on by Maria Monroe
Nurses at Alameda Hospital protest inadequate Personal Protective Equipment, or PPE, among other concerns, on April 7.

Overview

Recent worker uprisings across the United States in reaction to unsafe working conditions in factories, warehouses, and stores amid the coronavirus pandemic are drawing new and timely attention to the inadequate labor standards endured by many in the U.S. labor force. This decline in standards—ongoing for decades due to an array of economic, social, and political pressures—steadily eroded job quality, fair pay, and workers’ say in their own workplaces. Many workers have experienced this squeeze, but the effects have been uneven, reflecting longstanding inequalities across race, ethnicity, and gender.

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Why workers are engaging in collective action across the United States in response to the coronavirus crisis

As a result, large segments of the U.S. workforce have been hit particularly hard by the coronavirus pandemic, the COVID-19 disease that the virus spreads, and the economic consequences of the swift descent of the U.S. economy into recession. Today, workers without basic protections against the health and economic risks they now face and without meaningful input into workplace decisions are bearing the brunt of the harm and the dangers in workplaces across the nation.

Some of these essential workers are now staging collective actions to demand hazard pay, greater say in workplace safety standards, and protective gear—building on the large-scale collective action by teachers and other workers over the past 2 years. These actions are becoming more and more frequent, and are expected to be amplified across the country today, on May Day, the traditional International Workers’ Day.

In this issue brief, we explain how these protests demonstrate the continued power of workplace action in the United States. We also explore how those protests reveal longstanding barriers to workers’ voices being heard and workers organizing to improve the safety of their workplaces and the pay they deserve. We conclude by arguing that policymakers should prioritize efforts that more effectively center the voice of workers and rebuild possibilities for workers to organize in response to the ongoing public health and economic crises.

Essential workers are doing the nation a great service. Policymakers should act now to limit the risks to their health and well-being by empowering them to demand what they need to work more safely and earn what they need to take care of themselves and their families.

Protesting workers are raising health and safety standards in this coronavirus crisis

Across the United States, essential workers are coming together and organizing collective actions to demand safe working conditions and fair pay. These essential workers are helping to keep us safe in quarantine—from nurses and health aides who care for the sick, to grocery clerks and delivery drivers who make it possible for the rest of us to social distance. Yet far too many of these workers are raising concerns that they do not have the protections they need to do those jobs safely.

In late April, members of National Nurses United—the largest union of registered nurses in the country—held a protest outside the White House over lack of access to protective gear, also known as protective personal equipment, or PPE. The nurses called on the Occupational Health and Safety Administration, the federal agency inside the U.S. Department of Labor tasked with enforcing workplace health and safety rules, to issue a federal emergency safety standard to guarantee their access to PPE.

Similarly, since early March, many grocery store and fast food workers have organized work stoppages over health concerns, pushing for adequate sanitation measures, hazard pay, and access to paid sick leave. So, too, have warehouse workers, who have also gone on strike after learning that their co-workers tested positive for the coronavirus—yet their employers were doing little to shield workers against infection.

These collective actions are producing important gains for U.S. workers. Since walking off the job due to concerns over a lack of social distancing policies in processing plants, workers at Perdue Farms Inc. and Refresco B.V. are now receiving some form of protective equipment and hazard pay. After weeks of discouraging employees from wearing face masks, large retail chains operated by Target Corporation and Walmart Inc. announced they would start supplying basic protective gear to their workers. Amid a wave of nationwide strikes, Amazon.com temporarily raised pay by $2 per hour and doubled overtime compensation for delivery and warehouse workers. And after a brief strike, bus drivers in Detroit got the city government to boost sanitation measures for public transit workers.

The health benefits of these actions often go beyond the protesting workers themselves to protect the public as a whole. When essential workers have adequate equipment and safety protocols in place, they are less likely to transmit the coronavirus within their communities. And in other cases, workers are advocating for changes to public policy that would affect all customers. One case in point: The United Food and Commercial Workers Union is calling on the Centers for Disease Control and Prevention to issue mandatory sanitation standards for grocery stores and food processing plants. These measures would not only protect workers and their families but also the health of consumers while simultaneously maintaining resilient food supply chains.

So far, federal guidelines on how businesses should operate during the current pandemic, including safety protocols and enforcement mechanisms, are not mandatory. That leaves coronavirus-related health and safety standards largely up to the discretion of employers. In turn, that makes collective pressure by workers all the more important for public safety.

Collective action during the crisis may also be especially important for historically disadvantaged workers. That is because many of the positions classified as essential are disproportionately held by women and workers of color, who are less likely than their white and male counterparts to have the resources to weather a loss of income or have a safety net to fall back on if they get sick.

Some researchers’ estimates find that 52 percent of jobs classified as essential are held by women. More than half of nursing assistants—whose positions are among the lowest paid and most exposed to workplace injuries and illnesses in the healthcare industry—are women of color. As a result of their weak economic position when the coronavirus pandemic upended the U.S. economy, these workers may not be in a position to decline work, even if it is unsafe or risky. Collective action can ensure that these workers do not have to make that decision.

Worker organizations boost working conditions and broadly shared prosperity

Well before the current crisis, U.S. workers faced mounting obstacles to exercising their collective voice in the workplace. In the mid-1950s, some 35 percent of the U.S. workforce was part of a union. Today, however, only 10 percent of workers are union members, including just 6 percent of workers in private-sector jobs. The decline of organized labor brought about a host of negative consequences, including the decoupling of wage gains from growth in economic productivity.

The erosion of pay and nonwage benefits has been particularly stark for low-wage and younger workers. In an Equitable Growth working paper, economist David Howell of The New School finds that the decline of middle-wage jobs and rise in “lousy-wage jobs” is especially pronounced for younger workers. Howell further finds that this decline is attributable to shifts in institutions that support worker bargaining power—namely, unions—and increasing employer hostility toward worker power.

The decline of unions also led to a corresponding rise in income inequality across the U.S. economy. Research by Princeton University economists Henry Farber, Daniel Herbst, and Ilyana Kuziemko, and Columbia University economist Suresh Naidu demonstrates how union density has an inverse relationship with income inequality, meaning that the rise and fall of unions in the United States tracks the fall and then subsequent rise of income inequality.

But higher worker pay—also known as the union wage premium—is just one of the many benefits that unions provide to workers. Advocates and researchers often note that we have unions to thank for the 8-hour work day and the weekend off of work—changes in U.S. labor policy and workplace norms that would not have happened without large-scale labor mobilization. And union members are more likely to have better benefits, such as health insurance and retirement plans than are nonmembers, thanks to union-bargained agreements with employers.

Decades of declining union power also weakened workers’ ability to police basic workplace violations related to pay, health, and safety. Unions have long played a role in securing better workplace conditions—through stronger standards at individual workplaces, changes in public policies, and better enforcement of existing regulations. Research by economist David Weil of Brandeis University shows, for instance, that unionized workplaces are much more likely to receive health and safety inspections by the Occupational Health and Safety Administration, or OSHA, than are nonunion workplaces.

In another study, Weil examines the implementation of workplace councils that oversee workplace safety to determine whether union-led workplace safety efforts are a substitute or complement for OSHA enforcement. Weil finds more effective enforcement by that agency in unionized workplaces, suggesting that unions complement institutionalized labor standards. Unions also have long lobbied the federal government for tighter OSHA standards, stronger enforcement mechanisms, and better data collection on workplace illness and injury.

Public policy is increasingly an obstacle to workers organizing and taking collective action

Many factors have contributed to the decline in labor unions over the past half century. But it does not reflect a decline in worker’s demand for unions. If anything, a greater proportion of nonunion workers report wanting a union today than in previous decades. Survey research indicates that nearly half of nonunion workers in 2017 reported wanting a union at their job. Indeed, even larger proportions of workers would be willing to pay dues and join labor organizations that include or go beyond the structure of traditional unions.

Instead, an especially important driver of the decline of unions is our nation’s outdated and poorly enforced labor laws. U.S. labor rules make it increasingly difficult for workers to form unions and easy for employers to oppose union drives, which businesses do aggressively. Recent research by the Economic Policy Institute estimates that private-sector employers have been charged with violating labor law in more than 40 percent of union elections in recent years. Violations include the illegal firing of union organizers and threats, coercion, or retaliation against union supporters.

Indeed, U.S. employers are willing to break the law because penalties for doing so are low and slow to be enforced. Between 1998 and 2008, for example, it generally took the National Labor Relations Board—the federal body responsible for overseeing private-sector union drives—500 days to decide unfair labor practice contested cases, an almost 280 percent increase with respect to the 1960s and 1970s.

U.S. labor laws are also increasingly misaligned with the structure of our current workforce. Unlike other industrialized countries, our labor laws do not establish mechanisms that allow workers to organize or bargain at the industrywide level. That mismatch is relevant because an increasing number of companies engage in domestic outsourcing, whereby workers are employed by a subcontractor or franchisee of a lead firm. Because outsourced workers are legally employed by a franchise owner or subcontractor, workers cannot bargain with the lead business that has ultimate control over working conditions and reaps the largest profits. Outsourced employment additionally shields lead firms from legal liability when labor standards are violated.

Compared to other countries, U.S. labor law also sharply restricts the right of private-sector workers to go on strike. That is significant because strikes have been one of the most powerful tools that workers possess to raise their pay and improve working conditions. One especially important legal limitation, passed as part of the 1947 Taft-Hartley Act, prohibits secondary boycotts and picketing. Secondary protests involve worker actions against a business that is not a worker’s direct employer. This provision has proved especially restrictive in the increasingly “fissured” U.S. workplace because more workers are no longer legally employed by the companies that exert ultimate control over working conditions.

Aside from limits on secondary protests, research by economist Mark Stelzner of Connecticut College identifies several other drivers behind declining strike rates in the United States since the 1970s, especially a greater willingness of employers to permanently replace striking workers. This is a practice that was virtually unheard-of until the 1980s. In an Equitable Growth working paper, Mark Stelzner, along with economist Mark Paul of the New College of Florida, demonstrate how reduced governmental support for unions and strikes reduces the potential benefits of engaging in collective action and increases employers’ ability to exercise their monopsony power by exploiting workers.

Why is the United States experiencing the return of mass worker actions?

Against all of these obstacles, strikes have surged in the past 2 years. In both 2018 and 2019, almost half a million workers were involved in large-scale work stoppages—numbers not seen since the late 1980s. This includes the current coronavirus-related protests, but also earlier actions in the Red4Ed teacher strikes that swept the country in early 2019.

Why have we seen this return to mass strikes, even as workers face substantial legal and economic barriers to labor action? One important reason is the way tat workers are increasingly learning from one another about the potential gains from labor action. At a time when only 10 percent of workers are in a union, most Americans do not have much personal exposure to the labor movement. Surveys suggest that only about 30 percent to 40 percent of workers report having a close friend or a family member in a union. That means that unions—and labor collective action in general—are often an abstract concept for many.

It should come as no surprise, then, that only 1 out of every 10 workers not currently in a union say that they would know how to form a union. An important effect of large-scale strikes is to show other workers what labor action looks like—and what collective action might accomplish at their own jobs.

In the case of the 2018–19 teacher strikes, initial actions in West Virginia—the first state with large-scale school strikes—helped spark interest in other states. Teachers in Kentucky, Oklahoma, and Arizona, working under similarly difficult conditions of low pay, meager benefits, and inadequate education spending, saw what West Virginian teachers had accomplished and asked themselves if they could achieve the same. Both interest and strategy flowed quickly across state lines.

Interest in collective action also extended beyond educators. Research on the large-scale teachers strikes from 2018 found that parents with firsthand exposure to the strikes became more interested in collective action themselves at their own jobs. Notably, the effect of the strikes was largest for parents who were least likely to be supportive of unions—conservatives, Republicans, and those without friends or family members in the labor movement.

We are observing something similar with the strikes sparked by the coronavirus pandemic and ensuing economic recession today. Recent polling by one of us (Hertel-Fernandez), conducted with Luke Elliott-Negri at the City University of New York and Columbia University’s Suresh Naidu, Adam Reich, and Patrick Youngblood, suggests that delivery workers who had been following the initial protests and strikes were substantially more likely to say that they were interested in taking collective action themselves.

In a March 29 to April 11 survey of more than 600 platform-based delivery workers recruited from Facebook ads, more than two-thirds of respondents said that they had been following news about coronavirus-related protests. Those workers, in turn, were more than 30 percent more likely to say that they were interested in going on strike, compared to workers who hadn’t been following the strikes. What’s more, workers who had been following the strikes also were more than 50 percent more likely to say that they had already been on strike themselves.

These data cannot say whether media exposure caused greater interest among workers to go on strike. But the data are strongly suggestive of the same pattern from the teacher strikes—initial actions and their subsequent coverage in the media are leading other workers to become interested in collective action themselves. That can help to explain why U.S. workplaces are experiencing the spread of strikes even as U.S. labor laws make it very challenging for workers to exercise collective voice through strikes or unions.

Policymakers need to empower workers amid the coronavirus recession to help ensure a speedy and equitable economic recovery

Renewed worker voice will be essential to help ensure the ongoing responses to the dual economic and public health crises are well-targeted, effective, and equitable. As Sharon Block and Benjamin Sachs of Harvard University School of Law, Suzanne Kahn of the Roosevelt Institute, and Brishen Rogers of Temple University School of Law argued recently in an issue brief released by the Roosevelt Institute, workers are well-positioned to help identify the public health threats they and their customers, clients, and co-workers face on a daily basis and to develop and implement potential solutions. An important first step, they argue, is constructing mechanisms for workers to have a formal role in discussing, developing, and enacting workplace rules in individual workplaces and at sectorwide levels. This means building toward the sort of sectorwide consultation and bargaining present in many other developed democracies.

Beyond such sectoral deliberations, there are a number of ways that existing labor organizations could support responses to today’s complex public health and economic crises. Working in conjunction with local or state governments, healthcare unions could use their members’ skills to massively scale up testing for the coronavirus and the deadly COVID-19 disease it spreads across targeted regions or sectors. Unions representing retail workers could deploy their members to screen customers at stores for high temperatures.

More broadly, as employers prepare for reopening, unions could work with business leaders to develop plans and standards for bringing back employees into the workplace. Because the Occupational Safety and Health Administration has largely declined to investigate or enforce coronavirus-relevant workplace regulations, worker organizations have an important role to play in documenting and reporting safety and health violations.

These are just a few examples of possibilities for labor partnerships that could expand the reach and scope of the nation’s response to the coronavirus recession and put us on a path to an economic recovery that is more equitable—and thus more stable and broad-based. These partnerships also have the advantage of building workers’ knowledge and voice directly into the administration of relief measures, bolstering the organizational resources of labor groups, and scaling up the role that unions can play to reach many more workers than they currently do.

The lesson is clear: As policymakers continue to formulate relief and response packages to today’s public health and economic crises, they ought to prioritize a role for workers to raise their voices in support of better workplace safety standards and fair pay. Doing so will help to confront the immediate public health challenges we face today. It will also address the long-run issues of rising inequality and declining job quality that workers faced well before the coronavirus pandemic exposed the baleful consequences of enduring economic inequality in the U.S. economy and society.

Factsheet: How strong unions can restore workers’ bargaining power

Posted on by Maria Monroe
Striking workers picketing a reality company in New York City, ca. 1936-42.

Overview

Unions in the United States have long been one of the most powerful institutions through which workers achieved higher pay and better working conditions. In the middle decades of the 20th century, a strong labor movement empowered workers and helped them secure many of the rights and protections that now are also part of many nonunionized workers’ nonwage benefits, including the expansion of healthcare, access to family leave, the minimum wage, and work-free weekends, just to name a few.

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How strong unions can restore workers’ bargaining power

But a decades-long decline of unions has weakened workers’ ability to fight for a fairer workplace. About 10 percent workers are union members today, compared to 35 percent of the U.S. workforce in the mid-1950s. Over the past 40 years, the power of organized labor has declined alongside a steep rise in income inequality, the erosion of labor standards, and employers’ ability to dictate and suppress wages.

Yet unions still play an important role in shaping U.S. labor market outcomes, helping both union and nonunion members share in the economic value they create. This factsheet details those outcomes, including:

  • Strong unions benefit both union and nonunion members.
  • A small share of workers are part of a union today, but many want to belong to one.
  • Strong unions can counteract employers’ wage-setting power.
  • Strikes remain a powerful way for workers to achieve fair wages and better working conditions.

Before examining each of these in turn, however, it’s important to look briefly at how the steady decline in the power of unions since the 1970s is one of the most important causes behind the rise of income inequality in the United States.

Rising U.S. income inequality amid declining union membership

At least since 1936, there has been a strong inverse relationship between union membership and income inequality. More than just a story of correlation, research shows that from 1940 to 1970—the decades when U.S. union density was at its highest—organized labor represented a greater share of workers of color and workers with lower levels of education, raising their wages and narrowing the gap between incomes at the top and the bottom of the income ladder. As membership rates declined and the composition of unions changed, however, the equalizing effect of organized labor became less powerful. (See Figure 1.)

Figure 1

This research on declining union membership challenges an influential explanation of why income inequality has risen sharply since the 1970s. The theory of skills-biased technological change proposes that workplace innovations raised employers’ demand for workers with higher levels of education, leaving behind those without a college degree. According to this theory, highly skilled workers’ improved labor market standing drives them to exit unions because they can obtain higher wages without collective bargaining.

Yet the opposite happened. Unions now represent workers with higher levels of education, and in the past two decades, income inequality has grown most between workers with the same level of education, with women and black workers with higher education degrees experiencing greater pay gaps.

Strong unions benefit all workers

The first set of facts about the importance of unions is that they benefit all workers. Union members have higher wages than their nonunionized peers—what researchers call the union wage premium—but organized labor helps create conditions that make all workers better off. By leveraging the possibility of unionizing, workers overall are in a better bargaining position to negotiate for higher pay and better working conditions.

More generally, strong unions are able to set job-quality standards that nonunion businesses have to meet in order to compete for workers. Known as the spillover effect, this mechanism helps explain why:

  • Low- and middle-waged workers experienced important pay and benefits gains during the height of the labor movement in the middle of the 20th century.
  • Residents of states with greater unionization rates are more likely to have access to health insurance.
  • Average nonunion wages are higher in highly unionized industries.

Strong unions also allow organized labor to institutionalize norms of equity and fair pay. Even though the majority of union members were white and male during the height of the labor movement, organized labor strongly supported redistributive public policies that contributed to narrowing racial and gender pay gaps. Research shows, for example, that collective bargaining’s positive effect on earnings is particularly strong for black and Hispanic workers, helping reduce wage inequality. Likewise, women who are part of a union experience smaller gender wage gaps than their nonunionized peers.

A small share of workers are part of a union today, but many want to belong to one

The second set of facts show that workers are eager to join unions. U.S. labor law and a business environment antagonistic to organized labor prevent many workers from joining a union, yet public attitudes toward the U.S. labor movement have become increasingly positive over the past 30 years. A 2018 study found, for example, that 48 percent of nonunion workers would vote to join a union if they had the opportunity to do so. This number represents an important increase with respect to similar surveys conducted in 1977 and 1995, when only a third of respondents answered they would.

This research also shows that the ability to bargain collectively is very important to workers. Respondents to surveys asking why they wanted to become part of a union answered that the legal right to negotiate wages, benefits, and working conditions would significantly raise the likelihood of them joining a union. Workers were also enthusiastic about the prospect of joining labor organizations that allowed them to access unemployment benefits, as well as portable health insurance and retirement savings coverage.

Strong unions can counteract employers’ wage-setting power

The third set of facts demonstrates why unions can offset employers’ wage-setting power. The decades-long decline in union density has limited workers’ ability to push back against what economists call monopsony power: firms’ ability to use their market power to dictate and suppress earnings. Challenging traditional economic thinking on the wage-setting process, new sources of data have enabled researchers to show that labor markets are often uncompetitive, with wide-ranging factors such as corporate concentration, the widespread use of noncompete agreements, and the declining value of the federal minimum wage making it more difficult to move easily between jobs and, in turn, increasing employers’ power vis-à-vis workers.

Through an exhaustive analysis of the existing literature, researchers find evidence that monopsonistic labor markets are widespread, leading to important markdowns in wages for many workers. Using data from the hiring website CareerBuilder.com, for example, empirical research shows that going from a more competitive local labor market to a more concentrated one was associated with a 17 percent decline in the wages that employers posted on the website.

Unions can counteract monopsony power by limiting firms’ ability to extract “rents” from workers, where rents are defined as employers’ capacity to pay workers less than the value of what they produce. To do so, however, unions need the support of legislation that protects the right to organize, enforcement of regulation that prevents workplace abuses, and policies that allow collective action such as strikes.

Strikes remain a powerful way for workers to achieve fair wages and better working conditions

The fourth set of facts shows why the right to strike remains important. By striking, workers are able to use their labor as leverage and demand higher pay, better working conditions, and protest unfair practices by employers. That strikes are now much less frequent, successful, and popular than during the height of the labor movement has therefore weakened unions’ ability to counterbalance the power of employers.

Yet strikes keep playing an important role in workers’ struggle for a fairer workplace. There has been a significant rise in work stoppages since 2018, and the evidence shows that strikes can continue to be successful tools for the U.S. labor movement, particularly when organizers are able to build up goodwill though political education.

When studying the large-scale walkouts by public schools in 2018, for example, economists found that parents who had firsthand exposure to these strikes were more likely to support and join organized labor. The researchers found that strikes improved attitudes toward unions because educators were able to both leverage school staffing shortages and effectively communicate the worthiness of their demands, convincing parents of the public goods that collective action generates for their children and communities.

How to restore workers’ bargaining power

Unions remain important to all workers, as our sets of facts above detail, but in order to foster broadly shared economic growth, both unions and existing labor law need to adapt to the changing nature of work. During the past 40 years, the erosion of U.S. labor standards and changes in the way firms structure their businesses has made it harder for workers to join unions and bargain collectively.

Rulings by the U.S. Supreme Court have limited the ability of public-sector unions to collect dues, as well as made it more difficult for workers overall to band together and sue their employers for workplace misconduct. Likewise, businesses’ shift away from directly employing workers and toward contracting—a phenomenon researchers call the fissuring of the workplace—hurt workers’ career-advancement opportunities and earnings, as well as unions’ ability to counteract the power of employers.

Because of these new challenges, unions need to advocate for an updated vision for U.S. labor policy. Through their “Clean Slate Agenda,” Sharon Block and Benjamin Sachs of Harvard Law School developed such a framework, creating a series of proposals for structural legal changes that would protect workers and give them the ability to countervail employers’ power. Their recommendations include:

  • Sectoral collective bargaining that enables unions to negotiate with industries rather than individual firms, increasing organized labor’s power to lift wages, set industrywide standards, and reach agreements that benefit a greater number of workers
  • Laws that expand and protect workers’ right to engage in collective action, including the creation of funds that allow workers to engage in strikes or walkouts without jeopardizing their financial security
  • An inclusive labor law reform that places the need to address gender, racial, and ethnic inequities at its center by extending protections to domestic, incarcerated, and undocumented workers, as well as expanding rights and protections for independent contractors

Other proposals include:

  • The creation of labor market institutions such as wage boards, which set minimum pay standards by industry and occupation, and lead to wage gains for those at the bottom and middle of the income distribution
  • Passing legislation such as the PRO Act, which would make it easier for workers to organize into unions, and would also curtail employers’ ability to misclassify workers as independent contractors, who do not have the right to unionize under federal U.S. law

These measures would expand workers’ rights and allow unions to balance power in the labor market, ensuring that the economic gains they create are broadly shared.

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Expert Focus: Equity and Well-Being During the Coronavirus Recession

Posted on by Maria Monroe

The underlying problem of economic inequality in the United States will only prolong and deepen the coronavirus recession. Disparities by income, race, ethnicity, and gender render any response to a deep recession and eventual recovery all the more difficult. As the twin public health and economic crises continue to unfold, it’s critical to examine our policy responses with an eye toward equity in order to protect the most vulnerable workers and communities.

Our monthly series “Expert Focus” highlights scholars in the Equitable Growth network and beyond who are leading important conversations in social science research. In this installment, we explore the work of scholars contributing to our understanding of how this crisis is affecting individuals and families working on the front lines of the coronavirus pandemic across the U.S. economy. In addition, see our coronavirus recession page for updated analysis and resources from experts in our network.

Elizabeth Oltmans Ananat and Anna Gassman-Pines

Columbia University; Duke University

The coronavirus pandemic and resulting economic downturn highlight the absence of critical social supports—from paid leave to predictable schedules to health and safety protections on the job—that should be available to all workers. Anna Gassman-Pines, the WLF Bass Connections Associate Professor of Public Policy at Duke’s Sanford School of Public Policy, and Elizabeth Ananat, the Mallya Chair in Women and Economics at Barnard College, Columbia University, both of whom are also Equitable Growth grantees, have produced research that helps to understand the various ways economic shocks affect family well-being and intergenerational poverty and inequality.

In their recent survey of hourly service workers, they asked about the impact school and business closures were having on working families. They found that the coronavirus recession led to drastic reductions in work hours and to job losses as well as mental health deterioration. Meanwhile, policy support in the form of Unemployment Insurance relief has yet to reach many eligible households. Their work, which was featured in The Economist, underscores the pressing need for public policy to both alleviate current suffering and ensure that rescue efforts equitably meet the needs of working families in the long run.

Manasi Deshpande

University of Chicago

The coronavirus pandemic laid bare the underlying structural fragilities of the U.S. economy and the limits of the existing public health infrastructure to protect workers. Manasi Deshpande, an assistant professor of economics at the University of Chicago and an Equitable Growth grantee, has been researching the interactions between social safety net programs and the financial well-being and families.

In this working paper, Deshpande and her co-authors look at the effects of disability programs on financial outcomes in the United States. Her research is contributing important evidence to understand how programs such as Social Security Disability Insurance and Supplemental Security Income substantially help to alleviate financial distress of recipients as well provide spillover benefits to nonrecipients. Fully appreciating the varied needs of vulnerable workers and their families can help ensure access to vital programs when needed most.

Nancy Folbre

University of Massachusetts, Amherst

Paid and unpaid care work undoubtedly play an immensely valuable role helping both families and the U.S. economy overall weather the coronavirus pandemic and the sharp economic downturn it triggered. Nancy Folbre, Professor Emerita of Economics at the University of Massachusetts Amherst, is a leading scholar on rethinking economic measurement to value care provision and public expenditure to support working families.

Folbre co-authored a working paper with Equitable Growth grantee Kristin Smith to examine the source of earnings inequality in care industries (health, education, and social services) that are disproportionately comprised of women, in particular women of color. Her blog, Care Talk, presents important questions on measuring the economic contributions of the care sector, and highlights ideas needed to build more efficient systems of care and better protect the most vulnerable and undervalued workers.

Michelle Holder

John Jay College of Criminal Justice, City University of New York

Previous evidence shows that workers of color are one of the most harmed groups of workers during economic downturns. Michelle Holder, an assistant professor of economics at John Jay College of Criminal Justice, City University of New York, has written extensively on the disproportionate impact of the current crisis on black women—impacts that are rooted in long-running and persistent disparities. Already, black women are crowded into low-wage occupations and firms with the highest rates of layoffs during recessions.

In her recent report, she shows how the long-term lack of economic security and pay discrimination for black women exacerbates hardships brought upon by the coronavirus recession, such as reductions in work hours, job losses, and exposure to the coronavirus while on the job. Putting workers first means recognizing the historic and persistent role of workplace and government discrimination that reinforce gender and race disparities among workers and their families.

Kyle K. Moore

U.S. Congress Joint Economic Committee

The coronavirus pandemic brings into focus longstanding racial disparities in health and economic security made worse during this emergency. Kyle Moore, currently a senior policy analyst at the U.S. Congress Joint Economic Committee, has explored the links between racial disparities in health and economic inequality in the United States.

A former Dissertation Scholar at Equitable Growth, his interdisciplinary, historically contextualized research is timely for informing policy decisions that not only address the immediate resource needs of vulnerable communities but also redress the broader forces undermining access to the economic and social resources that ensure well-being for families across all races.


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

Fool Me Once: Investing in Unemployment Insurance systems to avoid the mistakes of the Great Recession during COVID-19

Posted on by Maria Monroe
<em>Stańczyk</em> (1862) by Jan Matejko

Overview

Thousands of laid-off workers in Massachusetts unable to access the state’s Unemployment Insurance website. Kentucky, North Carolina, and Ohio experiencing full system outages. Nevada Unemployment Insurance applicants stuck at busy signals and hold messages. A civil engineer in Florida stumped by the arcane benefit application system. And 9 in 10 Californians with unprocessed claims and missing benefits in the dark about their cases.

The outbreak of the coronavirus pandemic and the COVID-19 disease it spreads has moved many sectors of the U.S. economy to a near-standstill, and state Unemployment Insurance systems are overwhelmed by the number of claims, as an unprecedented more than 1 in 7 workers apply for benefits. The examples in the previous paragraph, however, predate the current crisis by years. 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: Over the past decade, many states limited Unemployment Insurance benefits, made accessing the program more difficult, and refused to fully fund it.

With policy as it stands, we will also repeat problems with benefit extensions at the crisis’s middle and the depletion of trust funds and erosion of benefit levels at the crisis’s end. And, as was the case in the Great Recession, in the first months of the coronavirus crisis, policymakers today refuse to remedy the issues at the heart of these administrative failures. But it’s not too late.

To be able to respond nimbly to the next twists and turns in the coronavirus recession, policymakers should address three key structural flaws in the nation’s Unemployment Insurance program as soon as possible:

  • Increase the federal taxable wage base to the same level as the Social Security taxable wage base and index it to inflation so that states have adequate resources for program administration
  • Redesign benefit extensions so that the program responds quickly and efficiently to macroeconomic changes
  • Implement a standardized minimum benefit level and minimum benefit duration that are generous enough to incentivize workers to apply for benefits

Before turning to these policy recommendations, however, this issue brief sets the stage by examining the current state of the Unemployment Insurance program.

What’s now in place: The Unemployment Insurance response to the coronavirus recession

Policymakers have chosen Unemployment Insurance as the primary program to use to disburse resources to people in the crosshairs of the current economic crisis. This choice makes sense: For 85 years, Unemployment Insurance has served as the main government program designed to assist workers who lose a job through no fault of their own and stabilize the U.S. economy in times of macroeconomic contraction. The basic premise of how Unemployment Insurance should facilitate economic stabilization is simple:

  • In good economic times, employers pay small amounts into Unemployment Insurance trust funds.
  • When unemployment rises, workers receive benefits from the trust funds.
  • They spend the money they receive, countercyclically sustaining demand when the economy needs it most.
  • When unemployment abates, workers draw fewer benefits and employers’ profits increase, allowing the government to replenish trust fund coffers.

Unemployment Insurance is run through a state-federal partnership, with the federal government setting program requirements and providing funding for program administration, and states setting the day-to-day rules governing benefit levels and program administration. In normal times, people who lose jobs through no fault of their own are eligible for 12 weeks to 30 weeks of state-funded Unemployment Insurance benefits—benefit length is set by the states, with most providing 26 weeks.

The current economic crisis is unlike any in recent memory because of the speed at which businesses closed their doors, the magnitude of the shock, and the fact that many workers cannot and should not search for work as usual. Figure 1 shows the magnitude and speed at which the surge in Unemployment Insurance applications occurred (See Figure 1.)

Figure 1

To respond to the atypical nature of this crisis, federal policymakers made key changes to the Unemployment Insurance system. They gave states the latitude to waive work-search requirements for Unemployment Insurance claimants whose ability to search for work is impeded by the pandemic. They extended the length of benefits by 13 weeks for those affected by the pandemic, and they also increased the benefit amount by $600 per week until the end of July.

This extra $600 a week per claimant means that the average worker will have her full wages replaced during this period. What’s more, federal policymakers created a special program called Pandemic Unemployment Assistance for people who are not eligible for regular unemployment benefits whether because they have earned too little, are self-employed, or have exhausted their benefits. People who receive Pandemic Unemployment Assistance will receive the same higher benefit amount and longer benefit duration as those who access regular state Unemployment Insurance.

Each of these changes has the potential to improve the life chances of workers affected by the coronavirus recession and contribute to the stabilization of the macroeconomy. But the benefits are only as good as workers’ ability to receive them—and state Unemployment Insurance agencies face the herculean task of processing an unprecedented number of applications at the same time that they modify and update their systems to disburse enhanced pandemic benefits, all with insufficient resources and technology.

As a result, workers are struggling to access the unemployment benefits to which they are entitled under the law. They are stymied by faulty websites, jammed phonelines, and antiquated computer systems, none of which are ready to disburse enhanced pandemic unemployment benefits. And all of these enhancements are already on a clock that is winding down. All programs expire at the end of the calendar year (with the higher weekly benefit amount ending in July) even if the economic crisis stretches on, as it is expected to.

Though the magnitude of this crisis is unique, the problems facing our Unemployment Insurance system aren’t new. A little more than a decade ago, huge numbers of workers across the country faced administrative barriers to the program during the Great Recession and its aftermath, and those who did gain access to unemployment benefits were perpetually on the fence, wondering if the program would sunset or if it would be extended. If workers experienced these problems before, and policymakers were aware of them, then why did nothing change? This stasis is the result of inadequacies in three main areas: program funding, automaticity, and benefit levels.

Let’s examine each in turn.

What’s needed: Adequate funding for adequate program administration

How does a government program that is supposed to be the major lifeline for unemployed workers in times of macroeconomic catastrophe find itself operating on decades-old computer systems, understaffed, and ill-prepared to serve its basic function? This state of affairs is neither a coincidence nor a surprise. It is the result of a conscious choice by state and federal policymakers not to provide adequate levels of resources for the program’s operation.

Program administration is funded through federal taxes based on employee payroll—referred to as FUTA taxes after the Federal Unemployment Tax Act. Taxes are collected at a rate of 0.6 percent (the FUTA tax rate is 6 percent, but a 5.4 percent credit is applied for state taxes paid) and are levied on the first $7,000 of earnings for each worker on an employer’s payroll. For a full-time, year-round employee, the FUTA tax is $42 per worker per year.

These taxes are technically charged to employers, but research finds that employers pass the cost on to workers by paying them less. Because most workers earn more than $7,000 in a calendar year, FUTA taxes are regressive. A laid-off hedge fund manager, for example, will receive more money in unemployment benefits than a laid-off car wash attendant, yet both pay the same effective tax.

The revenue generated from FUTA taxes is not enough to maintain the program. This revenue is tasked with not only maintaining more than 50 administrative systems but also funding half the cost of the extended benefits that workers receive in times of economic contraction. In 1939, the taxable wage base was $3,000, equivalent to $55,000 in 2020 dollars. Because this amount can only be raised by law (and has only increased three times over the past 80 years), its value has eroded by nearly 800 percent. In contrast, the taxable wage base for Social Security benefits was indexed to inflation in 1977. The chart below shows their divergent histories. (See Figure 2.)

Figure 2

This trend has been labeled fiscal constriction by scholar Alexander Hertel-Fernandez, and it means that by starving the Unemployment Insurance program of resources, policymakers effectively bind their own hands and purposefully prevent themselves from establishing a modern and efficient system for disbursing benefits. During the Great Recession, we saw the consequences of fiscal constriction clearly. Yet federal policymakers left the taxable wage base at the same level it has been stuck at since 1983, unmoved by the hardship of millions of members of the labor force and unwilling to risk even a small amount of political capital by modestly nudging tax levels upward.

As the old aphorism goes, “fool me once, shame on you; fool me twice, shame on me.” Now is the time to bring the Unemployment Insurance taxable wage base back to the same level as the Social Security taxable wage base and index it to inflation so that states have the resources they need to deliver benefits efficiently and effectively.

Looking to 2017 as an example and conducting a simple back-of-the-envelope calculation that keeps the FUTA tax rate at 6 percent and applies a 5.4 percent state credit reduction to the $7 trillion of taxable earnings under the Social Security wage base indicates that using this tax base would generate $41 billion. This is a $33 billion dollar increase over the $8 billion in FUTA taxes that were actually collected in 2017.

This additional revenue would provide sufficient funds for Unemployment Insurance system modernization efforts (past grants to states have ranged from $50 million to $200 million), ongoing maintenance, and appropriate staffing. These funds could also be used to provide grants to states to partner with community-based organizations serving vulnerable workers to raise awareness of UI benefits and provide assistance in the application process.

Additional revenue would cover the increased use of the Extended Benefits program and could be used to provide grants to states as they standardize benefit amount and length, as detailed below. Any change to the taxable wage base could be scheduled—for example, occurring when unemployment rates return to prepandemic levels with revenue advanced prior to that time.

What’s needed: The right economic indicators to determine when extra Unemployment Insurance benefits are delivered

When economic times are tough and jobs are hard to come by, finding new work often takes longer than the 26 weeks that Unemployment Insurance benefits typically last. In these circumstances, there are two ways that people can receive additional weeks of benefits. The first is through the Extended Benefits program: When states meet specific economic indicators, residents of the state become eligible for additional weeks of benefits, half of which are paid by the state and the other half of which the federal government pays. The second is when Congress passes new legislation granting benefit extensions and foots the full bill, known as Emergency Unemployment Compensation.

During the Great Recession, most benefits provided to Unemployment Insurance claimants who ran out of normal state-provided benefits before finding new work were delivered through acts of legislation (Emergency Unemployment Compensation) rather than in response to economic triggers (Extended Benefits). (See Figure 3.)

Figure 3

The reliance on emergency benefit programs is a reflection of deficiencies in the formulae that states use to determine when Extended Benefits are activated. To activate Extended Benefits, for example, the insured unemployment rate in a given state must be at least 20 percent higher than it was both four and eight quarters prior, and no additional weeks of benefits are provided when the insured unemployment rates climb to levels past 8 percent. This means the Extended Benefits program is not responsive to the most severe recessions—both those that are severe because of their length and those that are severe because of high levels of unemployment. Compounding the problem, as benefits have become more difficult to access, insured unemployment rates have dropped, making it less likely that Extended Benefits will be triggered, even when underlying economic conditions warrant the use of Extended Benefits.

Indeed, looking back over the past three recessions, as detailed in Figure 3, the majority of additional weeks of benefits were provided through Emergency Unemployment Compensation programs rather than Extended Benefits. The coronavirus recession is shaping up to be similar: Congress authorized Pandemic Emergency Unemployment Compensation in the early days of the crisis. Establishing an Emergency Unemployment Compensation program early was the right thing to do. But it came about through an unusual political coalition and is limited to 13 weeks.

As the coronavirus recession stretches on, it will be important that economic indicators—rather than political horse trades—determine the number of weeks of available benefits. Otherwise, we will end up in a situation similar to where we found ourselves during the Great Recession: Unemployed workers waiting on a political compromise to pay the rent and an economy deprived of the stabilization that unemployment benefits provide because of the political calculus of elected officials.

Particularly in the context of the current pandemic, when in-person voting in Washington by members of Congress comes with significant health risks, it would behoove Congress to automatize these processes in lieu of relying on in-person votes. The extension of pandemic-specific benefits should be automatic, and the Extended Benefits program should be improved so that it functions as the automatic stabilizer it was intended to be.

What’s needed: Adequate benefits for effective economic stabilization

Unemployment Insurance’s function as a macroeconomic stabilizer is not a secret. Its ability to quell economic hardship at the individual level is well understood, too. So, during the Great Recession, federal policymakers made efforts to update the program’s eligibility criteria so that more workers would qualify for benefits. But in the aftermath of the Great Recession, during a slow and uneven recovery, unemployment dollars were not finding their way to the people who needed them. By 2012, rates of Unemployment Insurance claims were at historic lows. (See Figure 4.)

Figure 4

The importance of the changes that policymakers incentivized during the Great Recession should not be understated, but they were not the essential structural reforms needed to increase benefit receipt, reduce the duration of economic contractions, and attenuate their severity. The key areas for structural change that were overlooked during the Great Recession were benefit levels and the share of the unemployed who are able to access benefits.

Benefit levels affect macroeconomic stabilization in two ways. First, and most obviously, the higher benefit levels are, the more money claimants have to circulate in the economy. Second, benefit levels must be high enough that workers will claim benefits—the higher the level of benefit receipt, the more macroeconomic stabilization will occur. As the coronavirus crisis unfolds, one of the most important tasks for policymakers will be to stabilize the economy.

Yet the rise in administrative barriers to benefit applications has been accompanied by a simultaneous drop in benefit levels in many states. Many of these states entered the Great Recession with inadequate resources and were unable to finance benefits without borrowing money from the federal government. Rather than sufficiently increasing their revenues following the Great Recession to pay back the federal government and build up adequate reserves for the next crisis, many states instead cut the number of weeks they would provide benefits for and the amount of money workers receive. (See Figures 5 and 6.)

Figure 5

Figure 6

When Unemployment Insurance benefits are paltry, workers may opt not to claim them at all, given the difficulty involved in applying. Benefit amounts are pegged to earnings levels, which means that the lowest-earning workers receive the lowest benefits. The minimum weekly benefit can be as low as $5, application procedures are difficult due to the disinvestment in administrative systems discussed above, and increasing penalties for overpayments add an additional layer of risk to approved claims.

In addition to searching for work, disadvantaged workers who are unemployed also may need to care for children, arrange for healthcare, address issues with other public benefits, and deal with high levels of stress and anxiety. Given this constellation of factors, it may not be a rational choice to spend time and mental energy on an application process when the payoff is so low.

This is particularly disconcerting given the importance of targeting aid to disadvantaged workers. To have the strongest macroeconomic effect, dollars should go to the people who will spend them most quickly: Disadvantaged workers often receive low compensation for their work, and are more likely to lose their jobs when layoffs begin. These groups of workers, who in some cases have faced generations of labor market discrimination, are usually enmeshed in networks that don’t have the resources to lend a hand in hard times, are less likely to be able to fall back on their own personal savings, and do not typically purchase many unnecessary goods that they can cut back on during an unemployment spell.

When they receive unemployment checks, disadvantaged workers spend them quickly in order to keep medical prescriptions filled, food on the table, and a roof overhead. The money they spend contributes to economic stabilization right away, but if it is not rational for them to go through the process of claiming benefits, then these dollars will never make it to their hands.

When the coronavirus pandemic and resulting economic downturn hit, policymakers recognized the problems with low benefit levels and provided Pandemic Unemployment Compensation, an extra $600 of benefits per week. These extra dollars are a welcome Band-Aid that will help to stabilize the U.S. economy and reduce hardship. But they are time-limited and likely to expire before the economic need for them dissipates, leaving claimants to rely on the low benefit levels of the standard program.

During the Great Recession, policymakers attempted to increase access to insurance benefits by making changes to eligibility criteria. But rather than increase revenue, states responded to financial distress by preventing people from accessing benefits. Today, it is unclear when the coronavirus recession will end. But it will end, and when it does, state coffers will be depleted, and states will once again be tempted to cut corners by cutting benefits.

To avoid putting ourselves in the same situation that we faced at the end of the Great Recession and to ensure that benefit levels are adequate throughout this crisis, policymakers should implement a standardized minimum benefit level and minimum benefit duration that is high enough to incentivize workers to apply for benefits—especially disadvantaged workers. Advocates suggest a minimum benefit level of 60 percent of weekly wages and minimum duration of 26 weeks of benefits.

Conclusion: Policymakers can make these necessary changes now

During the Great Recession, the unemployment compensation system was hamstrung by three key problems: starvation of funding for program administration, use of political calculus rather than economic indicators to determine whether additional weeks of benefits would be available, and a combination of state finances and absence of federal regulation that led states to cut benefit levels. All three problems undercut Unemployment Insurance’s ability to serve as a macroeconomic stabilizer. During and following the Great Recession, policymakers did not address these underlying structural problems, and we have entered the coronavirus recession with an underprepared, fragile unemployment compensation system that we are left to shore up with last-minute fixes in the midst of remote work for many government offices.

As the old aphorism goes, “fool me once, shame on you; fool me twice, shame on me.” During the Great Recession, policymakers thought that a crisis was not the time to make structural changes in one of the most foundational programs to our economy’s resilience and stability. They were wrong. Now is the time to remedy these flaws, so we are ready for the upcoming twists and turns in the coronavirus crisis and prepared for the next crisis that will come.

The shape this crisis will take over the coming months and years is unclear, but if past is prologue, the political will for Band-Aid fixes will dissipate over time. So, when the next policy window opens, rather than slapping another bandage onto our unemployment system, policymakers should make three key changes:

  • Increase the federal taxable wage base to the same level as the Social Security taxable wage base and index it to inflation so that states have adequate resources for program administration
  • Redesign benefit extensions so that the program responds quickly and efficiently to macroeconomic changes
  • Implement a standardized minimum benefit level and minimum benefit duration that are generous enough to incentivize workers to apply for benefits

Policymakers can learn from the mistakes of the Great Recession and strengthen our nation’s unemployment infrastructure by making these changes. Not doing so would be foolish.

The coronavirus recession is severe, and the damage to the U.S. economy will last years

Posted on by Maria Monroe
The effects of the coronavirus recession on people and the U.S. economy are unprecedented.

I shared my views on the coronavirus recession on March 24, at a virtual conference that economists Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley organized. My remarks drew on my experience as a forecaster at the Federal Reserve Board during the Great Recession and its slow recovery. The conference took place 3 days before the president signed the $2.2 trillion relief package. A month later, sadly, my pessimistic outlook then remains correct today. In fact, we learned this morning that real Gross Domestic Product dropped 5 percent at an annual rate in the first quarter. (See Figure 1.)

Figure 1

The drop in consumer spending on services can more than account for the decline, and stay-to-home orders in March weighed on spending. In addition, real personal income was flat in the first quarter, after rising 1.5 percent in the fourth quarter of last year. Keep in mind, that March has relatively little weight on first-quarter GDP. The worst is yet to come. Second-quarter GDP will be shockingly bad. The largest quarterly decline in GDP since 1948 is 10 percent. We are on track to blow past that record soon.

I began my presentation—back in March, well before these shocking data came rolling in—with a stern warning that the U.S. economy is in a severe recession, at least twice as severe as 2007–09. The official recession dating committee will eventually tell us that February 2020 was the peak in economic activity, and thus the start of the coronavirus recession. It is as obvious now as it was a month ago.

My first macroeconomic forecast at the Fed was January 2008, a month after the Great Recession began. I studied that recession. I studied its recovery. My job was to follow the U.S. economy in the moment. In addition, I did research then—and still do now—on policymakers’ efforts to support families. I know today is bad, really bad for everyone.

We are living a heartbreaking reversal from the best of times to the worst of times. In February 2020, we had an unemployment rate of 3.5 percent, continuing more than a decade of more jobs year after year. Millions of people who, frankly, had been written off were finally finding work. That world is now gone.

Nearly 30 million workers have filed for jobless benefits since the beginning of March. As I said before, layoffs will continue. They have. With jobless claims alone, I estimate the unemployment rate is now at more than 20 percent. (See Figure 2.)

Figure 2

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. This recession is the first to be caused by a pandemic, but the downward spiral looks like all the rest, albeit much more severe.

U.S. policymakers had advance warning. The coronavirus began overseas. It spread first across Asia, and some countries such as South Korea fought back with some success. Then, on March 8, my heart sank when the Italian government closed its northern region—that’s when it became clear the United States did not have the virus tests or tracking capability needed to get ahead of the curve of the pandemic. We could not be South Korea. We were going to be Italy, with the coronavirus and the COVID-19 disease it spreads shutting down our economy. The temporary closure of public commerce would certainly have dire economic consequences. It did, and it will.

So, let’s talk now about what’s at risk in terms of dollars. U.S. consumers are the engine of our economy, spending about $15 trillion dollars per year. That accounts for 70 percent of Gross Domestic Product. These are big dollars, and we are not spending now. We have “the mother of all demand shocks” upon us.

Stores are closed, and people are staying home. Many physical barriers now exist to spending, but people still have to pay the bills to keep a roof over their head and the lights on. Many will have to cut back when they lose paychecks and as they fear they will lose their jobs in the future. 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.

Congress and the Federal Reserve began to step up support for families and businesses in March, for both public health and financial relief. They have done much more in the past month. On March 27, the Coronavirus Aid, Relief, and Economic Stability, or CARES Act, became law and set aside $2.2 trillion in relief. It included nearly $300 billion in rebates to families, more generous jobless benefits, and a new Payroll Protection Program to get money to small businesses. The relief programs are not perfect, and they will not be enough. But they are a start and are getting money out—money that will make a very severe recession a little less very severe.

The Federal Reserve has rolled out many programs over the past two months to support the U.S. economy and keep financial markets working. They cut the federal funds rate to zero in March and have launched many lending facilities. The Fed is fulfilling its role as the lender of last resort, and it has had to work hard to keep markets from breaking down.

In April, the Federal Reserve took a big step and began providing relief directly to Main Street. Congress gave the Fed the authority and the funds to lend to medium-sized businesses and municipalities. Loans, in particular, to state and local governments will help some communities with their budget shortfalls. But, most of all, families, businesses, and municipalities need money. Loans come with a risk. The outlook is uncertain, and many fear they will not be able to pay down the road. Congress needs to send money, with no obligation to repay.

I want to be clear, 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. This time, it will be worse.

What does the economy look like on the other side of this recession? Anyone who says they know what the recovery will look like is just blowing smoke. No one knows. The containment of the public health crisis will determine the economic bottom, and efforts to keep it under control will shape the U.S. economy in the coming year.

We have so many unanswered questions about the damage from this recession. Questions on how many workers lose their jobs, on how much income disappears, and on whether our nation’s social safety net even holds up. Our joint state and federal employment insurance system was neglected for decades. We have the thinnest of safety nets, and now, we have millions of workers applying for benefits every week. I’m very concerned that the safety net could break down regardless of how much money Congress approves. The big dollars only matter if it gets to people.

But back to the recovery. I think it’s useful to think of the coronavirus recession as a huge natural disaster. It’s something akin to a Category 5 hurricane, with entire country in the eye of the storm for 2 months. Let me put some data behind this scenario. With colleagues at the Federal Reserve, I studied the economic effects of Hurricanes Harvey and Irma in 2017. Daily spending at retailers and restaurants in the path of the hurricane declined sharply during the storms. The hit was big, and lost spending was not made up quickly. (See Figure 3.)

Figure 3

Today, the coronavirus pandemic continues to ravage the United States and countries around the world. Unlike hurricanes, however, the effects of the coronavirus are not isolated and not short-lived. Even when our nation eventually beats the virus, the cleanup from our current disaster will be hard. To underscore—this recession will create lasting damage to the economic well-being of families, businesses, and communities. It will take many years to get back what we lost.

Policymakers cannot throw in the towel. They must commit to stay the course and provide relief until we are all back on track. Congress walked away too soon after the Great Recession, and that made the recovery painfully slow. Congress must not repeat that mistake. They should use a trigger based on economic conditions to determine when the relief can be phased out. Passing programs for 6 months or a year will waste time in debates on the Hill and risks aid stopping too soon.

Above all, the unemployment rate tells us when we are in a recession, and it tell us when we have recovered. The coronavirus recession is so unprecedented that any predictions about this fall and winter—let alone next month—are impossible. We do not need to guess. Congress can enact legislation and the Federal Reserve can commit to a plan that lets workers tell us when they are back on track.

Policymakers must learn that lesson from the Great Recession. They cannot leave too soon. We need their help.

Good U.S. fiscal policy could have made us stronger before the coronavirus recession and can make us stronger afterward

Posted on by Maria Monroe

When U.S. policymakers seek to restore the U.S. economy in the wake of the coronavirus recession, what will constitute success? Returning the economy to its prepandemic state is not sufficient. It’s not even desirable. Yes, unemployment was low, and job growth was strong. But that economy was also characterized by pervasive economic inequality, low productivity, and inflated asset prices. That economy was being kept afloat mainly by the Federal Reserve’s policy of maintaining a historically low rate of interest.

The Fed was forced into keeping interest rates low by years of misguided fiscal policy. When it was convenient, the need to control budget deficits was made the highest priority and used as an argument against the kind of investments that build a strong economy. Yet the deficit became irrelevant when tax cuts, especially tax cuts for the wealthy, were on the table. As policymakers seek ways to recover from the coronavirus recession, we will need to do more than just provide healthcare and replace lost incomes until the economy is “back.” The focus of fiscal policy during this recovery should be to invest—and invest a lot—in human capital, infrastructure, and scientific research.

When the coronavirus hit the U.S. economy hard in March, conventional wisdom had it that the economy was as strong as it had been in generations, with low unemployment and a thriving stock market, and that it took a global pandemic to bring it down. Some leaders, and too often the media, use the stock market as a proxy for the strength of the economy. But that is a symptom of what was wrong with our economy and economic policymaking before the new coronavirus hit our shores, spreading the COVID-19 disease in its wake—and what we need to avoid in policymaking going forward.

The new U.S. economy that policymakers should aim for also should feature low unemployment, achieved through higher productivity created by public and private investments powering broad-based growth. The new economy should create well-paying jobs with strong benefits for the many, not the few. The gap in benefits such as paid sick days and family leave is clearly evident amid this continuing public health crisis. The new economy should be stronger and more resilient than anything we saw in the decades leading up to this crisis, providing policymakers understand their past mistakes and do things differently going forward.

What, specifically, do policymakers need to do to achieve this new economy? First, some context.

The Federal Reserve lowered interest rates at the onset of the Great Recession and has kept rates near zero for most of the time since. In fact, the Fed discount rate has not been this low for a sustained period in about 70 years. This is partly due to market trends and partly a result of explicit monetary policy. Keeping in mind that interest rates are essentially the price of borrowing money, downward pressure on rates was a result of slow productivity growth, which reduces the demand among businesses for credit so they can invest, and an aging population, which increases the supply of saving. These two factors have a number of important implications, including:

  • The Fed’s traditional weapon for combatting recessions—lowering interest rates by several points—is depleted. Practically speaking, you can’t lower interest rates much below zero.
  • The return to risk-free saving was reduced. This affected individual savers seeking to secure their retirement savings, as well as institutional investor funds that support guaranteed pension benefits and other forms of annuities. These investors were forced to take greater risks to get positive financial returns or save even more, both of which pose challenges to the economy.
  • Lower interest rates reduced borrowing costs for corporations, and they took on excessive debt, including to enrich their shareholders by buying back corporate stock. Stock prices (and other asset values) were overvalued using conventional measures such as the Buffet Ratio, and thus were highly vulnerable to shocks.

While financial markets exerted downward pressure on interest rates, the Fed was forced, before the coronavirus recession, to accommodate that downward pressure to keep the economic recovery on course. And the reason was wrongheaded U.S. fiscal policy. Better fiscal policy, emphasizing federal investment over tax cuts, would have led to higher productivity and a stronger economy. This would have made it possible for the Fed to conduct better monetary policy, meaning the Fed could achieve full employment and stable inflation—the U.S. central bank’s “dual mandate”—without the inherent financial market valuation issues and instability associated with artificially low interest rates.

Since the 1980s, the narrative that has governed U. S. fiscal policy has been that budget deficits are bad for the economy, and they are caused by excessive spending. Tax cuts are always good for the economy. And what about the deficits they create? Deficits caused by tax cuts are okay, and anyway, tax cuts pay for themselves—or so goes the supply-side argument. As we know, the latter argument has been disproven time and time again.

Indeed, examining the composition of federal spending and the composition of federal revenues relative to Gross Domestic Product over the past few decades provides a high-level, evidence-based perspective on this mistaken supply-side narrative. The data clearly reject that narrative that increased government spending is the primary reason for rising government deficits in recent years. Total spending, at about 20 percent of GDP in 2019, is close to its 50-year average. (See Figure 1.)

Figure 1

In contrast, total federal revenue relative to GDP, at 16.5 percent in 2019, is historically low. The previous time the economy was comparable to what we experienced in 2019, at the end of the 1990s, revenues were 20 percent of GDP. (See Figure 2.)

Figure 2

A closer look at the composition of spending in Figure 1 cuts further against the mistaken narrative about rising government spending. The component of spending associated with direct government intervention in the real economy—nondefense discretionary spending—has fallen as a share of GDP in recent decades. The fastest growing categories of outlays are for programs such as Social Security, Medicare, and Medicaid, all of which are generally financed by payroll taxes on the same low- and moderate-wage earners who are the primary beneficiaries.

The increase in payroll taxes used to fund these programs is evident in Figure 2. Thus, another crucial takeaway from this high-level perspective is that the overall decline in total revenues relative to GDP is because corporate, estate, gift, and income taxes have fallen even more than payroll taxes have increased. Deficits are primarily the result of the wealthy and corporations paying less in taxes, not due to workers receiving social insurance benefits for which they are not paying.

Most analysis of fiscal policy focuses on the economic effect of deficits, without regard for why the deficits were created. The trends in the composition of U.S. spending and revenue shown above suggest that all deficits are not created equal. A deficit created by increased nondefense discretionary spending focused on investments in human capital, scientific research, and infrastructure has positive effects on aggregate demand and boosts productivity. Such policies have the potential to reverse the downward pressure on interest rates.

A deficit generated by reducing taxes on capital incomes, in contrast, has only short-run effects on aggregate demand, mostly through increased asset prices. Indeed, the effect of such fiscal policies is to reinforce a low-interest-rate equilibrium because the after-tax return from owning stock is higher. Yet experience with those sorts of policies over the past two decades shows they do not lead to the sorts of investments that will make the U.S. economy grow and help alleviate the downward pressure on interest rates.

Most of the policy discussion about taxes in the United States involves the negative consequences of taxing some positive outcomes, but policymakers need to remember that those positive outcomes are sometimes, in large part, the payoff on public investments. Our federal tax system is increasingly allowing those who have benefitted the most from public investments in science and technology to pay less in taxes. Simply restoring the tax system to where it was a little more than two decades ago, as proposed by Owen Zidar of Princeton University and Eric Zwick of the University of Chicago, would allow us to make the sorts of investments we need to make without deficits.

The recent history of U.S. fiscal and monetary policies suggests that bad fiscal policy and constrained monetary policy increasingly reinforced each other in recent decades. This mutual reinforcement contributed to a slowdown in overall U.S. economic growth before the coronavirus recession alongside rising income and wealth inequality and financial instability. Fiscal policymakers have abdicated their responsibility to make the investments in people, technology, and infrastructure that private investors cannot and will not make.

So, what now? When we restore the economy from the ravages caused by the coronavirus recession, we should be guided by the lessons we’ve learned in recent decades and build an economy characterized by strong, stable, and broad-based growth. If U.S. policymakers had been investing properly, for example, then right now there would be federally funded infrastructure projects in place for workers to get back to once the threat of COVID-19 diminishes. Instead, many of the infrastructure investments we might commit to now will take months or years to get underway. They’re still worth doing, but earlier investments could have supported a more speedy economic recovery now.

Today, policymakers need to focus on spending to support healthcare, maintain incomes, and keep businesses alive—and, as businesses start operating again, restore aggregate demand. But to get to the kind of strong, stable, and broad-based economic growth our nation needs, the federal government needs to invest. We need to invest in human capital—in quality childcare and early childhood education, in Kindergarten through 12th grade education, in vocational and higher education, and in programs to alleviate hunger and poverty.

We need to invest in infrastructure—in maintaining, repairing, and building our roads and bridges and mass transit systems, in enhancing the quality and security of our water systems, in preparing for and alleviating the baleful consequences of climate change, and, at long last, building rural broadband—the lack of which is freezing millions of rural Americans out of the modern economy.

And policymakers need to invest in fundamental scientific research, the lifeblood of our innovation economy and health advances. We need to invest in the National Institutes of Health, the National Science Foundation, and the other agencies supporting the basic research that has made possible everything from our smartphones to MRIs, from global positioning systems to the vaccine research we rely on today to fight the new coronavirus and COVID-19.

Tax cuts are decidedly not the answer. They double down on inequality. Most of the time, they favor the wealthy over everybody else. And the payroll tax cut now under discussion within the Trump administration and among conservative policymakers and pundits would likely just undermine Social Security finances without providing the direct infusion of funds workers and businesses need to survive the sharp economic downturn and then recover.

Although better U.S. fiscal policy is the key to better monetary policy, there are some monetary policy principles the Fed can and should embrace as it battles the coronavirus recession. Economic shocks generally involve both financial effects and real effects in the economy, with the wealthy experiencing declines in their net worth but the less wealthy experiencing job losses. In the past, the Fed has focused on propping up the financial system—for example, bailing out mortgage lenders but not mortgage borrowers during the Great Recession.

The Fed needs to expand its policy purview if the fiscal authorities won’t act in the interests of all the people. The U.S. central bank needs to make sure the next round of quantitative easing—Fed speak for the central bank’s purchase of financial securities in the marketplace to boost liquidity in the economy—or other extraordinary monetary policy action do not simply rescue the corporations whose past decisions created financial vulnerabilities.

U.S. policymakers need to enact and implement the fiscal and monetary policies tools needed to fight the coronavirus recession and prepare for a more equitable and thus more sustained economic recovery. They can and must build an economy that, unlike the one we just left behind, is built on strong, stable, and broad-based economic growth.

Where should the marginal dollar go in U.S. fiscal policy—to testing or to the safety net—amid a pandemic-induced economic downturn?

Posted on by Maria Monroe

In our recent working paper, “An SEIR Infectious Disease Model with Testing and Conditional Quarantine,” the two of us and Simon Mongey, an assistant professor of economics at the University of Chicago, explored the role of widespread coronavirus testing programs and argued that testing greatly alters the trade-off between economic output and deaths faced by a country dealing with a pandemic. We are not epidemiologists, so our calibrations were more illustrative than quantitative. But the main point is quite robust: Targeted quarantine and widespread testing can be combined to both lower deaths and increase economic output.

Testing enables a government to tailor quarantine policies, reduce subsequent infections, and put those who test negative back to work sooner. We came to this conclusion by simulating an infectious disease epidemiology model known as SEIR, which stands for Susceptible-Exposed-Infectious-Recovered, with both testing of asymptomatic individuals, as well as conditional quarantine. Conditional or targeted quarantine policies simply allow the government to prescribe quarantine based on the results of the tests.

In particular, in our model, we allow those who test negative to be released from quarantine and return to work. We also assume that our testing program is very effective (no false negatives), and that the government continues to follow individuals’ health after their initial tests. This assumption is a stand-in for the bundles of tests being conducted on individuals and/or the health and contact tracing applications used in China, Singapore, and other countries.

As a consequence, our model demonstrates that our suggested strategy—and many other strategies being discussed in the current policy debate—would require millions of tests per day. While such demands for large-scale testing seemed infeasible in the middle of March 2020, when we completed our working paper, there now appears to be a consensus among epidemiologists that testing capacity must increase at least threefold in the United States before public health officials can begin to relax measures to “flatten the curve” of infections and deaths from COVID-19, the disease spread by the new coronavirus.

The United States currently does not have the capacity to process millions of individual tests per day, and testing capacity has leveled off in recent days at roughly 150,000 samples per day. Reaching significantly higher levels of testing will likely require creative solutions such as pooling multiple tests and, perhaps more importantly, direct government investment in testing. As we write this column, current federal test funding is being negotiated in Congress, although future funding burdens are likely to fall to the states.

Two clear economic questions arise from epidemiologists’ consensus view that many more tests are needed. How does the marginal government dollar spent on testing compare to the marginal government dollar spent on safety net programs in the midst of a sharp economic downturn? And where does society receive the biggest bang-for-the-buck?

We do not have the answer to these questions. And, to our knowledge, there are no existing studies that examine the optimal mix of standard fiscal tools in combination with direct spending on testing. Yet answers to these questions are critical as policymakers near a third round of fiscal stimulus in April and contemplate a fourth round later this spring or early summer amid the continuing debate over direct federal funding of state testing.

Given the cross-state nature of this pandemic, as well as potential state budget shortfalls due to the swift and deep economic downturn, federal spending on testing may be necessary to control cross-state COVID-19 transmissions and relax cross-state travel restrictions. There is clearly a trade-off between directly investing in testing and potentially shortening the duration of the coronavirus pandemic vis-a-vis spending more on safety net policies to help households weather reduced economic activity.

Our research suggests that investing in large-scale testing programs may reduce deaths and increase economic output by allowing for more tailored quarantine policies. But given the sharp decline in incomes following the widespread loss of jobs and the subsequent knock-on effects working through defaults in credit markets, significant funds must remain devoted to safety net policies.

Answers to the two questions posed in this column will require a combination of so-called frontier epidemiological models, which allow for both testing and conditional quarantine nested in economic frameworks that allow for the governments to optimize over standard fiscal tools, such as business taxes and subsidies, labor taxes, unemployment insurance, and other safety net programs. While this is an arduous task, we believe the payoff to society of developing frameworks capable of answering this question now, and in the future, is beyond measure.

—David Berger is an associate professor of economics at Duke University. Kyle Herkenhoff is a senior economist at the Federal Reserve Bank of New York, and his views expressed in this column are his own and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.