ASSA Round-up: Day 1

Posted on by David Evans

Today was the first day of the three-day annual meeting of the Allied Social Science Associations, which is organized by the American Economic Association. The conference, held in San Diego this year, features hundreds of sessions covering a wide variety of economics and other social science research. Below are some of the papers and presentations that caught the attention of Equitable Growth staff during the first day. Included below are the abstracts from those papers as well as links to the sessions at which they were presented. Come back tomorrow evening for more highlights.

 

“Female Inventors and Inventions”

Rembrand Koning, Harvard Business School, Sampsa Samila, IESE Business School, and John-Paul Ferguson, McGill University

Abstract: Does increasing the number of female medical researchers produce greater medical advances for women? In this paper, we investigate if the gender of inventors shapes their types of inventions. Using data on the universe of US biomedical patents, we find that patents with women inventors are significantly more likely to focus on female diseases and conditions. Consistent with the idea of women researchers choosing to innovate for women, we find stronger effects when the lead inventor on the patent is a woman. Women-led research teams are 22 percent more likely to focus on female health outcomes. This link between the gender focus of the scientist and the type of invention, in combination with the rise of women inventors, appears to have shifted the direction of innovation towards female conditions and diseases over the last four decades. Our findings suggest that the demography of inventors matters not just for who invents but also for what is invented.

 

“From Here to Equality: A Framework for Restitution for Black Descendants of American Slavery”

William Darity Jr., Duke University, and Kirsten Mullen, Artefactual

Abstract: This paper chronicles the story of the “unmet black reparations” that got its start with the legitimate expectations of the formerly enslaved that they would receive tracts of land and farm implements (“40 acres and a mule”) in the immediate aftermath of the Civil War. The reasons for the cyclical swings in the attention given to reparations by black Americans and America as a whole are examined, with a particular emphasis on the most recent developments. The paper also details how an actual reparations plan might be designed and enacted, in light of the evolution of thought about restitution for black Americans over the past 150 years, details which include an assessment of the potential of H.R.40 and S.1083 to meet the expectations of blacks for reparations. Consequently, a critical analysis is undertaken on the form and role of the proposed “Commission to Study and Develop Reparation Proposals for African Americans” and how an actual reparations program could be advanced in the Commission’s report. The analysis includes: how the size of the “reparations bill” might be determined; how the program might be administered; how the goals and guideposts for the success of the program can be established; how the funds from the reparations program might be allocated; and how the reparations bill might be financed. An argument is made that the reparations of black Americans are entirely feasible, at least in principle.

 

“The Impact of Parental Wealth on College Enrollment & Degree Attainment: Evidence from the Housing Boom & Bust”

Rucker Johnson, University of California, Berkeley

Abstract: This study provides new evidence on the impact of parental wealth on educational attainment. In order to address the endogeneity of parental wealth, the empirical strategy analyzes parental housing wealth changes induced by local housing booms of the late 1990s and early 2000s, and the subsequent housing bust of the 2007-2009 period. Using geocoded data from the Panel Study of Income Dynamics (1968-2017) linked to MSA housing price data from the Federal Housing Finance Agency, I examine how changes in parental housing equity in the four years prior to their child being college-age affect the likelihood that the child attends college and where they attend (public vs private; in-state vs out-of-state). This provides a test of the role of credit constraints in influencing post-secondary decisions, including if, when, and where individuals attend and complete college. I find a stronger link between parental SES (as measured by wealth, income, education) and children’s subsequent educational attainment for more recent cohorts (i.e., more important in the 2000s than the early 1980s). Ignoring housing wealth will cause one to mismeasure the extent of family resources. Moreover, the combined effects of parental income and wealth are significantly greater than the effects of income alone.

 

“Intimate Partner Violence and Economic Well-Being in Later Life: Longitudinal Evidence from the United States”

Jacqueline Strenio, Southern Oregon University

Abstract: More than 37% of females and 30% of males in the United States report experiencing intimate partner violence (IPV) during their lifetimes, the majority of whom first experience it before the age of 24. However, little research has looked at the long-run economic consequences of IPV. Using the National Longitudinal Study of Adolescent to Adult Health, a nationally representative longitudinal dataset, this study extends the literature by incorporating a dual measure of intimate partner violence, accounting for both prevalence and intensity. Additionally, it analyzes outcomes separately for male and female victims using regression analysis and propensity score matching. Results imply significant economic penalties associated with IPV for both male and female victims along multiple dimensions including educational attainment, perceived socioeconomic status, and economic hardship in later life. Despite comparable consequences, victimization is more prevalent among females indicating that the adverse economic effects may be more widespread in this population.

 

“Labor in the Boardroom”

Simon Jäger, Massachusetts Institute of Technology, Benjamin Schoefer, University of California, Berkeley, and Joerg Heining, Institute for Employment Research-Nuremberg (IAB)

Abstract: We estimate the effects of a mandate allocating a third of corporate board seats to workers (shared governance). We study a reform in Germany that abruptly abolished this mandate for certain firms incorporated after August 1994 but locked it in for the older cohorts. In sharp contrast to the canonical hold-up hypothesis — that increasing labor’s power reduces owners’ capital investment — we find that granting formal control rights to workers raises capital formation. The capital stock, the capital-labor ratio, and the capital share all increase. Shared governance does not raise wage premia or rent sharing. It lowers outsourcing, while moderately shifting employment to skilled labor. Shared governance has no clear effect on profitability, leverage, or costs of debt. Overall, the evidence is consistent with richer models of industrial relations whereby shared governance raises capital by permitting workers to bargain over investment or by institutionalizing communication and repeated interactions between labor and capital.

 

“Low Wage Workers and the Enforceability of Covenants Not to Compete”

Evan Starr, University of Maryland, and Michael Lipsitz, Miami University

Abstract: We exploit the 2008 Oregon ban on non-compete agreements (NCAs) for hourly-paid workers to provide the first evidence on the impact of NCAs on low-wage workers. We find that banning NCAs for hourly workers increased hourly wages by 2-3% on average. Since only a subset of workers sign NCAs, scaling this estimate by the prevalence of NCA use in the hourly-paid population suggests that the effect on employees actually bound by NCAs may be as great as 14-21%, though the true effect is likely lower due to labor market spillovers onto those not bound by NCAs. While the positive wage effects are found across the age, education and wage distributions, they are stronger for female workers and in occupations where NCAs are more common. The Oregon low-wage NCA ban also improved average occupational status in Oregon, raised job-to-job mobility, and increased the proportion of salaried workers without affecting hours worked.

 

“Market Size and Market Power: Evidence from the Texas Electricity Market”

Matt Woerman, University of Massachusetts Amherst

Abstract: Economic theory tells us that market structure is the primary determinant of a firm’s ability to exercise market power. However, it is challenging to empirically estimate the causal effect of market structure on market power because a firm rarely experiences exogenous variation in its market’s structure. In this paper, I exploit a novel source of exogenous variation in market size within the Texas electricity market—congestion of electricity transmission lines due to ambient temperature shocks—to estimate the causal effect of market size on the exercise of market power. When transmission lines congest, this statewide market splits into smaller localized markets. I find that a 10% reduction in market size causes firms to more than double markups. The direction of this effect is consistent with a model of oligopoly competition in which firms set markups in response to residual demand, which is less elastic in a smaller market. My results imply that the markups induced by transmission congestion at high temperatures generate $7.1–21.5 million of deadweight loss annually. These markups also create large transfers—$2.1 billion per year—from consumers to producers, which raise important equity concerns.

 

“Measuring the Macroeconomic Impact of Carbon Taxes”

Gilbert Metcalf, Tufts University and NBER, and James Stock, Harvard University

Abstract: This paper carries out an empirical analysis of carbon taxes in Europe to estimate their impact on GDP growth rates and employment. The results here show some evidence of transitional dynamics. We find that typically the carbon tax has positive effects on GDP growth and, initially, on employment. The positive effects are in some cases statistically significant but generally are not, so that the estimated growth effects are consistent with no effect of the tax on the growth rates of GDP or employment. We find no robust evidence of a negative effect of the tax on employment or GDP growth. For the European experience, at least, we find no support for the view that carbon taxes have adverse growth or employment impacts.

 

“Measuring Technology Adoption in Enterprise-Level Surveys: The Annual Business Survey”

David Beede, U.S. Census Bureau, Erik Brynjolfsson, Massachusetts Institute of Technology, Cathy Buffington, U.S. Census Bureau, Emin Dinlersoz, U.S. Census Bureau, Lucia Foster, U.S. Census Bureau, Nathan Goldschlag, U.S. Census Bureau, Kristina McElheran, University of Toronto, and Nikolas Zolas, U.S. Census Bureau

Abstract: The Annual Business Survey (ABS) started in 2017 and, in its first collection year, will provide an economy-wide view of technology from its sample of almost 850,000 firms across almost all sectors of the economy. The ABS is conducted by the Census Bureau in partnership with National Center for Science Engineering Statistics (NCSES) and replaces the Survey of Business Owners (SBO), Annual Survey of Entrepreneurs (ASE) and the Business R&D and Innovation Survey for Microbusinesses (BRDI-M). In addition to regularly occurring questions, the 2017 ABS includes a module of questions on the adoption and use of new technologies. The technology module was developed by the Census Bureau and a group of external researchers who specialize in technology adoption by firms and its effects. This paper describes the development of this module and some of the challenges faced by Census, including which technologies to collect data on, how to define certain technologies, what types of measures (extensive versus intensive) and what time frame to use for the adoption and use of the technologies. We describe how the cognitive testing of the survey was performed and how companies interpreted questions posed by Census and the external collaborators. We also discuss how the module fits in with current Census data collection efforts to better measure technology in the Annual Survey of Manufactures (ASM), as well as Annual Capital Expenditures Survey (ACES). Future versions of the paper will provide results from this survey.

 

“Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry”

Alice Bonaime, University of Arizona, and Ye Wang, University of Arizona

Abstract: Using novel data from the pharmaceutical industry, we study the impact of mergers on product prices and innovation. Product prices increase approximately 5% more within acquiring versus matched non-acquiring firms. These price increases are more pronounced for horizontal mergers and for acquisitions of large and publicly traded targets, i.e., deals resulting in greater market power consolidation. Consistent with causal identification of enhanced market power around mergers, price increases are significantly greater within drug classes with acquirer/target overlap and absent for drugs already shielded from competition through patents and exclusivity rights. We find no evidence of mergers facilitating or incentivizing innovation—a potential tradeoff to higher product prices.

 

“Older Workers Need Not Apply? Ageist Language in Job Ads and Age Discrimination in Hiring”

Ian Burn, Swedish Institute for Social Research, Patrick Button, Tulane University, Luis Felipe Munguia Corella, University of California, Irvine, and David Newmark, University of California, Irvine

Abstract: We study the relationships between ageist stereotypes – as reflected in the language used in job ads – and age discrimination in hiring, exploiting the text of job ads and differences in callbacks to older and younger job applicants from a previous resume (correspondence study) field experiment (Neumark, Burn, and Button, 2019). Our analysis uses methods from computational linguistics and machine learning to directly identify, in a field-experiment setting, ageist stereotypes that underlie age discrimination in hiring. We find evidence that language related to stereotypes of older workers sometimes predicts discrimination against older workers. For men, our evidence points most strongly to age stereotypes about physical ability, communication skills, and technology predicting age discrimination, and for women, age stereotypes about communication skills and technology. The method we develop provides a framework for applied researchers analyzing textual data, highlighting the usefulness of various computer science techniques for empirical economics research.

 

“Using Wage Boards to Raise Pay”

Arindrajit Dube, University of Massachusetts Amherst

Abstract: The weight of evidence suggests that we have moved from a labor market in the U.S. that was based on labor market negotiations via collective bargaining to one where employers increasingly have power to set wages subject to limited labor market discipline. This paper proposes, as an alternative to a single, high minimum wage, instituting a wage board that sets multiple minimum pay standards by sector and occupation. The standards would be potentially chosen using consultation with stakeholders, such as business and worker representatives and elected representatives. This would allow raising wages not just for those at the very bottom, but also for those at the middle. This is effectively done in countries where there are extensions of collective bargaining contracts, but can also be done by setting multiple minimum pay levels statutorily.

 

“What Explains Neighborhood Sorting by Income and Race?”

Dionissi Aliprantis, Federal Reserve Bank of Cleveland, Daniel Carroll, Federal Reserve Bank of Cleveland, and Eric Young, University of Virginia

Abstract: Why do high-income black households live in neighborhoods with characteristics similar to those of low-income white households? We find that neighborhood sorting by income and race cannot be explained by financial constraints: High-income, high-wealth black households live in similar-quality neighborhoods as low-income, low-wealth white households. Instead, we show that the racial composition of neighborhoods drives neighborhood sorting. Black households sorting into black neighborhoods explains the racial gap in neighborhood quality at all income levels. Absent high-quality black neighborhoods in their metro, black households sort into black neighborhoods rather than high-quality ones.

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Preview: Equitable Growth network at ASSA 2020 annual meeting

Posted on by Maria Monroe

The 2020 annual meeting of the American Economics Association’s Allied Social Science Associations will be held January 3–5 in San Diego. The three-day meeting brings together more than 13,000 of the best minds in economics to network and celebrate new achievements in economic research.

The Washington Center for Equitable Growth will be active and well-represented at the conference through its academic network, grantees, and in-house policy experts. The following sessions have been organized by Equitable Growth and demonstrate the organization’s breadth of coverage of economic topics across disciplines related to whether and how inequality affects economic growth.

Economic Opportunity and the Impact of Race and Place
Friday, January 3, 8:00 a.m. – 10:00 a.m. (PST)

Economic opportunity and mobility vary dramatically in the United States, differing among racial groups and geographic locations. What does the growing body of research show about the causes of these disparities, particularly the impact of historical changes and policies? What are the place-based inequalities and structural barriers based on race that play a role in shaping opportunities for the next generation? What does it suggest about policy interventions to reinvigorate the promise of the American Dream? This panel will feature a conversation between leading scholars in this space in order to elevate the work that has been done and identify promising new frontiers for research.

Chair:
Heather Boushey, Washington Center for Equitable Growth

Panelists:
Randall Akee, University of California, Los Angeles
Ellora Derenoncourt, Princeton University
Patrick Kline, University of California, Berkeley

Rising Mark-ups and Monopoly Power
Sunday, January 5, 10:15 a.m. – 12:15 p.m. (PST)

Recent research suggests that mark-ups at the firm level have been rising since the 1980s. What has driven this increase, and what are the macroeconomic implications of rising mark-ups? Are rising mark-ups a sign of increasing monopoly power, or do they reflect other trends in the aggregate economy?

Chair:
Michael Kades, Washington Center for Equitable Growth

Panelists:
Nancy L. Rose, Massachusetts Institute of Technology
John Michael Van Reenen, Massachusetts Institute of Technology
Jan De Loecker, KU Leuven
Fiona Scott Morton, Yale University

The Economics and Policy of Automatic Stabilizers (Co-organized with the Hamilton Project)
Sunday, January 5, 8:00 a.m. – 10:00 a.m. (PST)

The focus will be on the economic policy challenges related to fiscal stabilization policy and automatic stabilizers specifically.

Chair:
Jay Shambaugh, Brookings Institution and George Washington University

Presenters:
Diane Whitmore Schanzenbach, Northwestern University
Claudia Sahm, Washington Center for Equitable Growth
Gabriel Chodorow-Reich, Harvard University

Discussants:
Jay Shambaugh, Brookings Institution and George Washington University
Heather Boushey, Washington Center for Equitable Growth
Noah Smith, Bloomberg

Also of note, on Friday, January 3 at 12:30 p.m. (PST), Heather Boushey will present ideas from Unbound: How Inequality Constricts Our Economy and What We Can Do About It for the David Gordon Memorial Lecture. And Claudia Sahm will be part of the panel for Using Social Media and Blogging to Engage Economists on Sunday, January 5 at 10:15 a.m. (PST).

Finally, Equitable Growth is hosting a reception on Friday, January 3 at 8:00 p.m. The reception is a chance to connect with other scholars, Equitable Growth staff, and our academic advisors to learn more about our research, grantmaking, academic programming, and policy engagement. Equitable Growth is pleased to welcome Dani Rodrik, Ford Foundation Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, who will give brief remarks about the efforts of Economics for Inclusive Prosperity, or EfIP. Friends and colleagues welcome; to RSVP and learn more about the reception, click here.

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Equitable Growth’s Michael Kades co-authors AARP amicus brief in Impax Laboratories, Inc. v. Federal Trade Commission court case

Posted on by Maria Monroe

The Washington Center for Equitable Growth’s Director of Markets and Competition Policy Michael Kades co-authored an amicus brief for AARP and the AARP Foundation filed with the U.S. Court of Appeals for the 5th Circuit in the case of Impax Laboratories, Inc. v. Federal Trade Commission. The brief urged the 5th Circuit to uphold a decision by the Federal Trade Commission that a reverse-payment settlement between Impax and Endo Pharmaceuticals was anticompetitive. A reverse-payment settlement occurs when the patent-holder (in this case, Endo) sues the alleged infringer (Impax) and then pays the alleged infringer not to sell its product.

The brief details why “ever-escalating prices [for prescription drugs] disproportionately harm older adults, as they typically take more prescription drugs than younger adults and live on fixed or lower incomes.” The brief notes that “[t]he high price of drugs forces some to sacrifice their health and welfare by not filling their prescriptions because they cannot afford the medication.”

The brief makes the point that “delaying the market entry of generic drugs harms consumers by limiting their choices and thereby increasing their costs,” adding that “[c]ompetition from generic drugs is an effective way to slow the spiraling price of drugs. The brief explains that ruling against the FTC would weaken antitrust rules and allow the return of anticompetitive reverse-payment settlements that increase prescription drug costs for consumers and the U.S. healthcare system. Read the full amicus brief here.

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Congress adopts historic prescription drug pricing reform

Posted on by Maria Monroe

Here’s a sentence that might seem impossible, given our current political circumstances, but it’s true: The U.S. Congress just passed, and President Donald Trump signed, significant bipartisan legislation to curb prescription drug prices.

The year-end omnibus spending bill enacted last week contains the Creating and Restoring Equal Access to Equivalent Samples, or CREATES Act, a measure that strengthens market competition in the pharmaceutical industry by barring or limiting tactics that some drug companies use to prevent far less expensive generic versions of their products from coming to market.

The original Senate sponsors of the CREATES Act were Sens. Patrick Leahy (D-VT), Chuck Grassley (R-IA), Amy Klobuchar (D-MN), and Mike Lee (R-UT). The original sponsors in the House were Reps. David N. Cicilline (D-RI), Jim Sensenbrenner (R-WI), Jerry Nadler (D-NY), Doug Collins (R-GA), Peter Welch (D-VT), and David McKinley (R-WV).

As an attorney for the U.S. Federal Trade Commission, I saw drug companies use tactics time and time again to delay and prevent generic competition. These tactics enabled the firms to reap unfair profits at the expense of consumers, potential competitors, and ultimately the nation’s healthcare system, which thrives on innovation but struggles under the weight of excessive costs, especially for prescription drugs. Sadly, excessive prices can also cost lives.

The Washington Center for Equitable Growth supports research to understand the causes and consequences of increasing market power and to develop policy proposals that will strengthen competition. Earlier this year, as Equitable Growth’s director of markets and competition policy, I was asked by the House Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law to testify at a hearing on competition in the prescription drug market. I noted the unique aspects of the industry but emphasized that competition can have a significant impact on drug prices and innovation, as it does in other industries, when those markets work properly.

As I said then, “Competition plays a unique and fragile role in determining prescription drug costs: Unique because competition from generic alternatives is the only competition that dramatically reduces costs, and fragile because this competitive dynamic can be circumvented in many ways … It has become far too easy for companies to manipulate the system to delay competition and increase prescription drug costs.”

In addition to my time at the FTC, I spent 2.5 years as Sen. Klobuchar’s antitrust counsel. I was there when Sens. Klobuchar, Leahy, Grassley, and Lee came together to address two common and pernicious practices: sample blockades and safety protocol filibusters. And I was privileged to work on their solution, the CREATES Act.

To gain approval for a generic drug from the U.S. Food and Drug Administration, the manufacturer of the drug must test its product against the branded version to prove that the two are the same. Branded companies, however, frequently delay or even deny these samples to a manufacturer of generics, which postpones or potentially prevents FDA approval of the generic. No samples means no testing of the generic product, no testing means no approval, and no approval means no competition and thus higher prices for consumers.

I saw such sample blockades at the FTC, as companies sought redress, too often unsuccessfully. According to the FDA, there are currently 55 products for which companies are unable to obtain the needed samples.

The CREATES Act ends these blockades by establishing a process for ensuring that needed samples are available to generics manufacturers. It is carefully designed to ensure that the generics company can get what it needs to complete the required testing and obtain approval, but no more. At the same time, the new law makes it difficult for branded companies to delay or deny those requests with excessive claims or slow responses. In other words, it creates an efficient process that is difficult for either party to abuse.

The second tactic addressed by the CREATES Act, the safety protocol filibuster, exploits the need for certain drugs approved by the FDA to have a safety protocol designed to ensure the product’s safe use by consumers, as part of a Risk Evaluation and Mitigation Strategy, or REMS. This is another problem that made it to our desks at the Federal Trade Commission.

The law required generic manufacturers to use the same protocol system, which gave branded manufacturers an opportunity to filibuster. They could nitpick, create impossible conditions, and simply delay. Because the manufacturer already had approved protocols for its drug, the branded company could continue to sell its product while filibustering negotiations over a shared system with the generic. When this happened, the generic company could move forward only if it received permission from the FDA to develop a different but equally safe system.

The CREATES Act ends the assumption under previous law that a generic company and a branded company must agree to use the same safety protocol system as long as the generic’s protocols are safe. This effectively takes away companies’ filibuster power while continuing to ensure consumer safety.

Enactment of the CREATES Act is an important bipartisan accomplishment. Using the Congressional Budget Office’s projection of how much the CREATES Act will reduce federal spending on prescription drugs and estimating, based on Centers for Medicare and Medicaid Services data, that the federal government pays about 45 percent of total prescription drug costs in the United States, the CREATES Act will reduce prescription drug costs nationally by more than $7 billion dollars over the next 10 years.

But more can be done to control prescription drug prices through greater competition. There has been progress made on additional bills that address other behaviors by drug companies that make it difficult to introduce new generics. The House and Senate Judiciary Committees have approved the Stop STALLING Act, a bill introduced by Sens. Klobuchar and Grassley and by Reps. Sensenbrenner and Hakeem Jeffries (D-NY) aimed at preventing abuses of the Food and Drug Administration’s petition process that slow down regulatory approval of generics and biosimilars.

The House Judiciary Committee also has approved a bill introduced by Reps. Nadler and Doug Collins (R-GA) calling for a study of possible anticompetitive practices by pharmacy benefit managers. And that committee and the House Energy and Commerce Committee have approved different bills, introduced by Reps. Nadler and Collins, and by Rep. Bobby Rush (D-IL), that would address pay-for-delay agreements under which manufacturers of brandname drugs pay a competitor not to produce a generic or biosimilar version of the drug.

Competition prevents companies from charging excessive prices for needed goods. The market for pharmaceuticals has been distorted for a very long time, and it is a struggle for Congress to overcome lobbying by the major drug companies to bring prices under control. But there is bipartisan support for using competition to help make drugs affordable to the consumers who need them. This Congress has another year during which it can follow up on the CREATES Act and the progress it has already made on other legislation to spur further competition in the drug industry.

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Weekend reading: New measures of GDP 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

A new measure of county-level Gross Domestic Product called Local Area Gross Domestic Product helps make GDP a more useful metric in tracking economic growth, writes Raksha Kopparam. LAGDP numbers were released late last week by the U.S. Department of Commerce’s Bureau of Economic Analysis and estimate local GDP between 2001–2018, allowing policymakers and economists to study economic conditions and responses to shocks and recoveries on a county level. The data reveal a number of interesting takeaways about how parts of the country have been faring differently since the Great Recession, which Kopparam summarizes in four graphics, highlighting just how valuable it would be to further break down GDP numbers by income decile—something we have long proposed as part of our GDP 2.0 project.

Speaking of, Equitable Growth organized 58 leading economists and social scientists in endorsing the Measuring Real Income Growth Act of 2019, which would add a distributional component to the National Income and Product Accounts, breaking out income growth into deciles and allowing policymakers and the public to see who really prospers when the economy grows. The bill was reintroduced this week in the Senate by Sens. Chuck Schumer (D-NY) and Martin Heinrich (D-NM), after previously being introduced in the House of Representatives by Rep. Carolyn Maloney (D-NY).

How can Green New Deal proponents learn from the original New Deal of the 1930s to grow public support for their policy proposals combatting climate change? Harvard University’s Lizabeth Cohen looks at how Americans came to support the New Deal, lessons learned from that era, and how to apply these lessons to the Green New Deal climate policies today, arguing that the original New Deal’s support from a radial flank of idealists inspiring action, combined with their willingness to accept a more gradual path to change, was key to their success.

Equitable Growth’s 2020 Requests for Proposals will allow scholars to look more deeply at how U.S. economic inequality and intergenerational mobility are connected, writes Liz Hipple, continuing that “we hope to invest in research that pushes beyond individual-level factors such as education and skills and explores the structural barriers that people face in realizing their full human potential, particularly racism and public policies that create and perpetuate those structural barriers.” Be sure to check out more details about our 2020 RFP, as well as the 2020 RFP on paid family and medical leave.

Over the past two weeks, Equitable Growth’s Director of Tax Policy and chief economist Greg Leiserson held two “Economics of Taxation” courses, covering both tax basics and understanding and evaluating the trade-offs of U.S. tax policy. Corey Husak summarizes what Leiserson covered in the courses, including using revenue estimates and distribution analyses to see how much revenue a new tax law will collect or lose and who is affected by tax cuts or increases, respectively, and how economic growth plays a role in tax policy.

Links from around the web

While many policies have been floated lately to address the growing racial wealth gap in the United States, it would likely make more of a difference if we addressed the broader systemic issues driving this gap, argues Anne Kim in Washington Monthly. The problem is not just that black Americans are having a harder time finding a job, she writes, but also that the jobs they do get don’t pay well and tend to be low-level service jobs, making it near impossible for them to catch up to their white counterparts’ wealth accumulation. “All in all, the confluence of systemic disadvantages black workers face—from lower earnings and lesser-quality jobs—has led to fewer opportunities to save and accumulate wealth. That, in turn, has translated to lower rates of homeownership, higher levels of debt, and insecure retirement,” she says, concluding that “black workers need policy solutions that not only boost their earning power but protect their upward mobility in a changing economy.”

New evidence shows that workers are increasingly taking on side jobs in addition to their traditional employment, reflecting how a rise in U.S. economic inequality has caused a surge in the gig economy. About one-third of those workers with multiple jobs say they do them out of financial necessity, explains Jonathan Rothwell for The New York Times’ The Upshot—and at least two comparable countries, Canada and France, are not experiencing the same trends. This is probably due to those nations’ stronger social safety nets and lower rates of inequality.

Now that paid parental leave for federal workers has passed through Congress, Courtenay Brown writes for Axios that corporate America is facing pressure to boost paid leave benefits as well. After the law passed, the Business Roundtable—a group of CEOs whose companies employ more than 15 million workers—urged Congress and President Donald Trump to expand paid leave to as many American workers as possible, saying that its member companies’ sole purpose was no longer just profits but also investing in employees. Since the United States is the only industrialized nation in the world that does not mandate paid leave for new parents, the trend toward expanding these benefits for more and more workers is encouraging.

Earlier this year, it seemed as though a U.S. recession was imminent. Though it appears we’ve dodged that bullet (for now), Ben Casselman of The New York Times has put together a handy list of five indicators that could help warn us when a recession is about to hit or even is already underway. He explains each indicator in turn, and shows why it’s important to keep an eye on each of them to see what they’re saying about the economy.

Friday Figure

Figure is from Equitable Growth’s “New measure of county-level GDP gives insight into local-level U.S. economic growth” by Raksha Kopparam.

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Brad DeLong: Worthy reads on equitable growth, December 14–20, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Come to our reception at the ASSA Annual Meeting in San Diego on January 3!
  2. Read my “Was the Great Recession More Damaging Than the Great Depression?,” in which I write: “Your parents’—more likely your grandparents’—Great Depression opened with the then-biggest-ever stock market crash, continued with the largest-ever sustained decline in GDP, and ended with a near-decade of subnormal production and employment. Yet 11 years after the 1929 crash, national income per worker was 10 percent above its 1929 level. The next year, 12 years after, it was 28 percent above its 1929 level. The economy had fully recovered. And then came the boom of World War II, followed by the “thirty glorious years” of post-World War II prosperity. The Great Depression was a nightmare. But the economy then woke up—and it was not haunted thereafter. Our “Great Recession” opened in 2007 with what appeared to be a containable financial crisis. The economy subsequently danced on a knife-edge of instability for a year. Then came the crash — in stock market values, employment and GDP. The experience of the Great Depression, however, gave policymakers the knowledge and running room to keep our depression-in-the-making an order of magnitude less severe than the Great Depression. That’s all true. But it’s not the whole story. The Great Recession has cast a very large shadow on America’s future prosperity. We are still haunted by it.”

 

Worthy reads not from Equitable Growth:

  1. Michael Boskin wrote this two years ago. To my knowledge, not once in the past two years has he acknowledged that his “professional judgment” about the effects of the Trump-McConnell-Ryan tax bill were wrong. There has been no jump in the equipment investment share of national income. And those of us whose judgment is better than Michael Boskin’s were damned certain back in late 20127 that there would not be. Read Michael Boskin, “Another Look at Tax Reform and Economic Growth,” I which he wrote: “With the Republican tax package now finalized and coming to a vote in both houses of Congress, a debate has been raging over the bill’s possible growth effects. In that debate, those who oppose the package seem to be underestimating the outsize impact of equipment investments … I agree that the current tax bill could, in principle, have been better … Barro and I have clearly come to a different conclusion than Summers and Furman have about the bill, based on our own judgments about the links between corporate-tax reform and economic growth. While I certainly respect Summers and Furman’s right to their views, I am not about to cede my professional judgment to others, in or out of government.”
  2. This is a very, very nice example of the genre of microfoundations tuned to give a desired macroeconomic result. Lots of people find this kind of thing very useful, or at least comforting. So I am probably wrong in my lack of enthusiasm here. Read Daniel Murphy, “Excess Capacity in a Fixed Cost Economy,” in which he writes: “[When] firms … face only fixed costs over a range of output … equilibrium output and income depend on consumer demand rather than available supply, even when prices are flexible and there are no other frictions. The theory matches the procyclicality of capacity utilization, firm entry, and markups. A heterogeneous household version of the model demonstrates how an economy can enter a capacity trap in response to a temporary negative demand shock: When demand by some consumers falls temporarily, other consumers’ permanent income (and hence their desired consumption) falls. Since output is demand-determined, the permanent fall in desired consumption causes a permanent state of excess capacity.”
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Understanding the economic effects of federal tax changes

Posted on by Maria Monroe

Overview

The primary purpose of taxation is to fund public spending in a fair manner. When analyzing proposed tax changes, tax economists must make complex assumptions about how people would respond to those changes and what that means for the incidence of the tax changes, meaning who would ultimately receive a tax cut or pay for a tax increase. Luckily, the economic effects of a federal tax change are summarized succinctly and intuitively by rigorous, nonpartisan groups such as the Joint Committee on Taxation and the Tax Policy Center in the form of a revenue analysis and a distribution table.

As Greg Leiserson, Equitable Growth’s director of Tax Policy and chief economist, notes, “If U.S. tax reform delivers equitable growth, a distribution table will show it.” Numerous complex calculations and assumptions underlie the production of revenue and distribution tables, but when done well, they provide the key information that policymakers need to know about how tax changes will impact the populations they care about. This may seem like a simple point, but all too often, arguments about tax policy ignore these fundamental sources of information, instead focusing on narrow, misleading claims about economic growth and job creation.

On December 6 and December 13, Equitable Growth hosted our “Economics of Taxation” courses in the U.S. Capitol building to help congressional staffers understand these tools of tax analysis and the trade-offs in designing tax policy. Our first day, “Tax Basics,” was an introduction to the federal tax system. The second day, “Taxes and Consequences,” covered most of the topics presented below in this column and how to understand and evaluate taxes in an intellectually rigorous and coherent manner.

Revenue estimates

Revenue estimates show how much revenue a tax law will collect or lose. U.S. policymakers ultimately face choices between revenues and spending, and the revenue impacts of federal tax legislation determine how much public spending and investment a tax increase can finance or, in the case of tax cuts, how much spending will need to be cut. In general, there are two different types of revenue estimates produced by groups that “score” legislation:

  • Conventional revenue estimates score every provision of a bill (or sometimes, closely related groups of provisions) and include behavioral responses, but assume that total national income remains unchanged by the legislation. Conventional revenue estimates are more detailed than dynamic estimates and are the default form of analysis produced by the Joint Committee on Taxation.
  • Dynamic estimates produce a modified revenue estimate that considers how tax legislation may cause total national income to change. Dynamic estimates are typically produced only for large pieces of legislation and only for the legislation as a whole, not for individual provisions. Tax bills can cause national income to change, for example, by increasing productive investments in the economy, inducing people to work fewer or more hours, or causing people to move activity from the nonmarket sector (as with home childcare) to the market economy (as with center-based childcare).

Both types of scores fulfill different purposes and are only useful insofar as the assumptions underlying them. Dynamic scores also are vulnerable to timing gimmicks. For instance, bills can generally increase growth within the standard 10-year scoring window simply by borrowing money from the future.

Distribution analyses

Distribution analyses assign the taxes cut or raised to the people ultimately responsible for paying the taxes, a concept called “incidence.” For instance, cuts in corporate taxes may be partially assigned to shareholders and partially to workers in different percentages, if the economist believe that is where the incidence lies.

Generally, the most useful way to present tax changes is using the percent change in after-tax income, which normalizes a tax cut by the recipient’s own income. This normalization is important because $10 is worth more to a poorer person than to a richer person, so this metric allows us to compare quantities in a way that is meaningful to individuals and families. Using this metric, the tax cuts in the 2017 Tax Cuts and Jobs Act were about 10 times as large for people in the top 5 percent as for those in the bottom 20 percent in 2018, as a share of each family’s income. (See Table 1.)

Table 1

The share of the federal tax change and the average federal tax change also can be instructive. In Table 1, two of the columns detail that 20.5 percent of the value of the tax cut in 2018 went just to 1 percent of the population, and this is more than went to the entire bottom 60 percent of the population (17.4 percent). Table 1 also shows that the average tax cut in the top 1 percent was $51,000, which is 852 times the average tax cut in the bottom 20 percent of the income spectrum.

Although it is most common to see examples of distribution analyses by income group, it is also possible to do distribution analyses by geography, race, and gender, or other groupings of people. These kinds of distributional analyses are important to do because they can give U.S. policymakers a more nuanced understanding of where the incidences of tax changes fall.

What about economic growth?

Economic growth is not as simple a concept as it often seems to be in the popular parlance. While the term may conjure up an image of broadly rising living standards and personal well-being, that is generally not what tax analysts are measuring when they talk about growth from tax changes. As we alluded to with our discussion of “dynamic scores,” economic analyses of growth typically focus on changes in U.S. Gross Domestic Product, or the market value of goods and services produced in the United States in a year.

Thus, U.S. tax laws that cause people to work longer hours, pay more in childcare expenses, or even induce more corporate payouts to foreign investors, can be said to increase growth, even when U.S. families would not consider themselves materially better off as a result of those changes.

In addition, presenting one aggregate growth number can obscure disparate affects across the income distribution. Unfortunately, the gains from growth have gone to the richest Americans in recent decades. The bottom 50 percent of Americans have seen their incomes after taxes rise by only 21 percent since 1980, compared to a 194 percent increase for the top 1 percent. So, even in the abstract, tax changes that affect “economic growth” may not actually affect the living standards of average Americans.

Thankfully, policymakers seeking to understand how a tax change will affect their constituents’ economic well-being can simply look to a distribution table, which captures both the benefits and costs to actual households.

To learn more about these topics, see the presentation slides from both courses here and here. And be sure to keep your eyes peeled for more courses such as these coming from Equitable Growth in the future.

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Equitable Growth’s 2020 Request for Proposals is an opportunity to better understand the structural barriers to intergenerational mobility

Posted on by Maria Monroe

Two years ago, the Washington Center for Equitable Growth launched a new initiative to connect the dots between poverty, inequality, and mobility. Harvard economist—and founding Equitable Growth Steering Committee member—Raj Chetty had reinvigorated the conversation about intergenerational mobility with his dramatic findings that absolute mobility had declined from 90 percent for the generation born in 1940 to only 50 percent for those born in 1980. But what are the actual channels connecting inequality and mobility?

One product resulting from this initiative was a strategic framework report by Elisabeth Jacobs and myself, “Are today’s inequalities limiting tomorrow’s opportunities?,” which surveyed the academic literature on economic mobility to determine what we know and what we need to know about the drivers of intergenerational mobility. The report emphasized crucial factors related to the acquisition of human capital—such as improving education, particularly early childhood education—and found that they are insufficient when seeking to understand why mobility has declined over time and why mobility outcomes remain sharply divergent for Americans of different races and in different places.

Over the past year, we shared this framework in convenings and meetings with researchers; policymakers at the national, state, and local levels; and advocacy groups dedicated to advancing racial and economic justice. The feedback we received made clear that there is still more work to be done to deepen our understanding of the mechanisms connecting parental economic advantage and children’s adult economic outcomes.

This year, we hope to invest in research that pushes beyond individual-level factors such as education and skills and explores the structural barriers that people face in realizing their full human potential, particularly racism and public policies that create and perpetuate those structural barriers. We welcome proposals asking questions about how changes to the labor market such as fissuring and the erosion of career ladders affect intergenerational mobility. What are the mechanisms via which race and place influence intergenerational mobility? How does family wealth—not just income—impact mobility? What are the mechanisms underlying the relationships between mobility and family structure, and what do they imply about policies that can support families and break the link between family background and economic outcomes?

These are just some examples of the questions that Equitable Growth is interested in exploring as part of our 2020 Request for Proposals to academics to explore these and other issues related to inequality and mobility. Equitable Growth’s grants program, now entering its seventh year, includes a portfolio of cutting-edge scholarly research investigating the various channels through which economic inequality may or may not impact economic growth and stability, both directly and indirectly. The organization has provided grants to more than 200 researchers and distributed more than $5.6 million in grants. Earlier this year, Equitable Growth announced 14 grants to 33 researchers and 13 grants to doctoral student researchers totaling $1.064 million. Equitable Growth bridges the gap between academia and policy by fostering research that is relevant to today’s policy debates, and by informing policymakers of cutting-edge research.

The American Dream remains a dominant narrative in U.S. economic policy conversations. And the “pull-yourself-up -by-the-bootstraps” metaphor remains the dominant one for how Americans think about achieving the American Dream. Yet research clearly demonstrates this is a facile response that ignores the role of legal barriers, policy choices, and discrimination in shaping and determining economic outcomes. By funding new, cutting-edge scholarly research that examines the role of structural barriers to economic mobility, Equitable Growth will be able to arm policymakers with solutions that make the American Dream live up to its promise.

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Nobel laureates, former Fed chair, two former CEA chairs–58 scholars endorse the Measuring Real Income Growth Act of 2019

Posted on by Maria Monroe

Fifty-eight economists and other social scientists, including Nobel laureates Robert Solow and Joseph Stiglitz, former chair of the Federal Reserve Janet Yellen, and former chairs of the Council of Economic Advisers Jason Furman and Laura Tyson, endorsed the Measuring Real Income Growth Act of 2019, which was reintroduced in the U.S. Senate today by Senator Chuck Schumer (D-NY) and Senator Martin Heinrich (D-NM). The bill was previously introduced in the House of Representatives by Representative Carolyn Maloney (D-NY).

The Measuring Real Income Growth Act would add a distributional component to the National Income and Product Accounts, breaking out income growth into deciles of income and allowing us policymakers and the American people see who prospers when the U.S. economy grows. The bill was previously endorsed by 11 economic nonprofit organizations, including Equitable Growth.

The text of the letter and a link to the letter with all signatories listed are below.

Signatures on Letter of support – Measuring Real Income Growth Act

We the undersigned economists and other social scientists are writing in support of the Measuring Real Income Growth Act of 2019. This act would direct the U.S. Bureau of Economic Analysis to report on growth in income for each decile of income earners.

Pundits and politicians frequently judge economic progress by reference to Gross Domestic Product (GDP) growth, a one-number measure of output that is both readily available and easily comparable across countries. These two features have fueled its adoption as an indicator of prosperity. But as income inequality has widened, GDP is increasingly ill-suited for this purpose.

In the mid-20th century, families all along the income distribution tended to share the fruits of growth equally, making GDP growth broadly representative. But over the past four decades the experiences of rich and poor Americans have been very different, with the latter falling far behind, and average growth, though widely reported and discussed, becoming much less useful as a guide to how the economy is performing for median families.

The inadequacy of aggregate measures of income was noted by Simon Kuznets, who pioneered the creation of National Accounts in the United States. In his report to Congress on the new measurement, he warned that “Economic welfare cannot be adequately measured unless the personal distribution of income is known.” Indeed, such aggregate measures could have a pernicious effect—increases in GDP could lull us into a complacency that all is going well with the economy, when in fact most citizens are seeing their incomes decline.

Nonetheless, the concept of national income accounting is a useful one, and with some improvements could provide valuable guidance for elected officials. A simple first step is to report growth for households at different levels of income so that we know how growth is distributed among the rich and poor, as the Measuring Real Income Growth Act will do.

This data will have a number of useful applications. Research has shown that unequal patterns of growth may be indicative of falling intergenerational income mobility. Combined with distributed consumption data, the national income data could tell us about the accumulation of debt in the economy. In the wake of a recession, this data will help us understand how relief should be targeted.

As important as their analytical value, these statistics will provide a more accurate reflection of the economy for millions of Americans who are poorly represented by aggregate statistics. Surveys show that 66 percent of Americans believe most government statistics are inaccurate. This may reflect in part the legitimate feeling that the economic statistics are not accurately describing their economic experiences and those of people like them. Statistics that show how income is distributed is a small but meaningful step toward rectifying this situation and improving the tools we have available to us to steward the economy.

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JOLTS Day Graphs: October 2019 Report Edition

Posted on by Austin Clemens

Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for October 2019. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.

1.

The quit rate continued to hold at 2.3% in October, where it has remained for over a year with the exception of a blip in last July.

2.

The ratio of hires to job openings remains below 1.0 as it trended downward in October to 0.79 from 0.85 in September.

3.

As job openings increased by 235,000 in October, to a total of 7.3 million, and unemployment remains low, there continues to be fewer than one unemployed worker per opening.

4.

The Beveridge Curve reveals the continuation of an expansionary labor market, with a low rate of unemployment and a high rate of job openings.

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