Today was the final 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, featured hundreds of sessions covering a wide variety of economics and other social science research. We’ve already posted the abstracts of some of the papers that caught the attention of Equitable Growth Staff during Day One and Day Two, as well as links to the sessions at which they were presented. Following are additional papers from the first two days as well as some from today’s final slate of sessions and an important report from AEA.
American Economic Association Committee on Equity, Diversity and Professional Conduct
Introduction: In April 2018, the Ad Hoc Committee on the Professional Climate in Economics recommended that the AEA conduct a professional climate survey to assess the status quo in the profession, and repeat this survey at regular intervals to monitor changes over time. The AEA charged a new standing committee, the Committee on Equity, Diversity and Professional Conduct, to carry out this work.
A survey was designed to gather critical information about the professional climate in economics, with particular focus on aspects that limit inclusiveness, demean and/or harass individuals, or otherwise engender incivility in work environments. The survey was sent to all current members of the AEA (as of December 2018) as well as all individuals who had been AEA members at any point in the prior 9 years.
This report summarizes the Committee’s work. The report is organized as follows. In Section 1, we describe the survey methodology, survey population and response rate, and data collection procedures; we also include a discussion of possible survey response bias. Section 2 summarizes the main findings of the survey in a set of tables. Among other things, we report on the perception of the overall climate in economics, experiences of discrimination in and outside of academia, behavioral changes to avoid discrimination and unfair treatment, and experiences of exclusion and harassment. Section 3 provides brief descriptions of the key findings along the following dimensions: gender, race and ethnicity, LGBT status, disability, ideology and religion; whenever possible, we use comments provided by survey respondents to provide concrete examples of the experiences of, and concerns raised by, members of the Association. Section 4 highlights some of the patterns of responses to an open-ended question on the climate within the profession and attempts to summarize some of the most commonly expressed views. These views include frequent references to the elitism of the field of economics, a dimension of the climate the survey instrument did not otherwise cover. Finally, Section 5 offers comparisons of some of the survey results to those obtained in similar climate surveys carried out by other professional associations.
Baris Kaymak, University of Montreal, and Immo Schott, University of Montreal
Abstract: We document a strong empirical connection between corporate taxation and the manufacturing labor share across OECD countries as well as across U.S. states. Our estimates associate 30% of the observed decline in the labor share with the global fall in corporate taxation. We present an equilibrium model of an industry where firms differ in their capital intensities. Lower corporate tax rates reduce the labor share by raising the market share of capital intensive firms. The tax elasticity of the aggregate labor share depends on the distribution of labor intensities at the micro level. Given the observed distribution of factor intensities in the U.S. manufacturing industry, the model predicts that corporate tax cuts explain about 40% of the decline in the manufacturing labor share since the 1950s.
Ellora Derenoncourt, Princeton University, David Weil, Brandeis University, and Clemens Noelke, Brandeis University
Abstract: Low unionization rates, a falling real federal minimum wage, and prevalent non-competes characterize the low-wage sector in the United States and contribute to growing inequality. In recent years, a number of private employers in the U.S. have opted to institute or raise company-wide minimum wages for their employees, sometimes in response to public pressure. To what extent do these policy changes at major employers spill over to other employers in a local labor market? This paper examines spillover effects of recent company minimum wage increases, including Amazon’s recent increase to $15 an hour in 2019 and Walmart to $9 an hour in 2015. We estimate the impact of these policies on other low-wage employers in the same county using data on minimum posted wages from online job ads. We find large spillover effects from both Amazon’s 2019 and Walmart’s 2015 increases. We discuss potential mechanisms and plans to extend the analysis to over 100 recent employer minimum wage increases across the U.S.
Stephen Trejo, University of Texas at Austin, and Brian Duncan, University of Colorado Denver
Abstract: Using microdata from the decennial U.S. Censuses of 1970-2000 and the American Community Survey from 2006 forward, we track changes in the educational attainment U.S.-born Mexican Americans over seven decades. We compare the schooling gains of Mexican Americans with the corresponding gains made by African Americans and by non-Hispanic whites. Our analyses produce several important findings. First, Mexican Americans have experienced enormous gains and have closed most of their large initial schooling deficit relative to non-Hispanic whites and all of their deficit relative to African Americans. Second, progress for Mexican Americans has been greatest in the lower tail of the schooling distribution. For many years, rates of high school completion were dramatically lower for Mexican Americans than for other Americans, but this gap is much smaller for recent birth cohorts. In contrast, although rates of college enrollment and college completion have been rising for Mexican Americans, these rates still fall far short of the corresponding rates for non-Hispanic whites. Finally, the initial schooling deficits and subsequent gains of Mexican Americans vary with their state of birth. These geographic differences suggest the potential importance of state-specific policies and institutions for shaping the educational progress of Mexican Americans.
Colleen Cunningham, London Business School, Florian Ederer, Yale University, and Song Ma, Yale University
Abstract: This paper argues incumbent firms may acquire innovative targets solely to discontinue the target’s innovation projects and preempt future competition. We call such acquisitions “killer acquisitions.” We develop a parsimonious model illustrating this phenomenon. Using pharmaceutical industry data, we show that acquired drug projects are less likely to be developed when they overlap with the acquirer’s existing product portfolio, especially when the acquirer’s market power is large due to weak competition or distant patent expiration. Conservative estimates indicate about 6% of acquisitions in our sample are killer acquisitions. These acquisitions disproportionately occur just below thresholds for antitrust scrutiny.
Chloe N. East, University of Colorado-Denver, Annie Hines, University of California, Davis, Philip Luck, University of Colorado Denver, Hani Mansour, University of Colorado Denver, and Andrea Velasquez, University of Colorado Denver
Abstract: We examine the labor market effects of Secure Communities (SC)–an immigration enforcement policy which led to over 454,000 deportations between 2008-2015. Using a difference-in-differences model that takes advantage of the staggered rollout of SC, we find that SC significantly decreased the employment share of likely undocumented male immigrants. Importantly, the policy also led to a decrease in the employment rate of citizens. The employment effects are concentrated among male citizens working in higher-skilled occupations, particularly in sectors that traditionally rely on likely undocumented workers. This is consistent with complementarities in production between low-skilled immigrants and higher-skilled citizens.
Sydnee Caldwell, Massachusetts Institute of Technology, and Oren Danieli, Harvard University
Abstract: This paper develops a method to estimate the employment opportunities available to each worker, and to assess the impact of these outside options on the gender wage gap. We outline a matching model with two-sided heterogeneity, from which we derive a sufficient statistic, the “outside options index” (OOI), that captures the effect of outside options on wages, holding productivity constant. This OOI uses the cross-sectional concentration of similar workers across job types to quantify the availability of outside options as a function of workers’ commuting or moving costs, preferences, and skills. Higher concentration in a narrower range of job types implies lower OOI and higher dispersion across a wide variety of job types means higher OOI. We use administrative data to estimate the OOI for every worker in a representative sample of the German workforce. We estimate the elasticity between the OOI and wages using two sources of quasi-random variation in the OOI, that holds workers’ productivity constant: the introduction of high-speed commuter rail stations, and a shift-share (“Bartik”) instrument. Using this elasticity and the observed distribution of options, we find that differences in options explain 30% of the gender wage gap. The differences in (similarly skilled) men and women’s option sets are driven primarily by differences in the implicit costs of commuting and moving.
Martha Bailey, University of Michigan, Shuqiao Sun, University of Michigan, and Brenden Timpe, University of Michigan
This paper evaluates the long-run effects of Head Start using large-scale, restricted 2000-2013 Census-ACS data linked to date and place of birth in the SSA’s Numident file. Using the county-level rollout of Head Start between 1965 and 1980 and state age-eligibility cutoffs for school entry, we find that participation in Head Start is associated with increases in adult human capital and economic self-sufficiency, including a 0.29-year increase in schooling, a 2.1-percent increase in high-school completion, an 8.7-percent increase in college enrollment, and a 19-percent increase in college completion. These estimates imply sizable, long-term returns to investing in large-scale preschool programs.
Max Risch, University of Michigan
Abstract: This paper analyzes the role of the firm in mediating responses to changes in top marginal tax rates using a new linked owner-firm-employee dataset created from the universe of deidentified administrative tax records from the IRS. The majority of business income in the United States is held by pass-through businesses whose income is taxed at the personal income tax rates of firm owners, as opposed to being taxed at the corporate level. I study whether changes in the top marginal tax rate faced by business owners affect the compensation of the employees in their firms. I use panel difference-in-differences methods to estimate the sign and magnitude of these within-firm spillovers by comparing the earnings of employees in similar firms but whose owners were differentially exposed to a recent increase in the top marginal income tax rate. I find that employees in firms whose owners were more exposed to a tax increase reported lower relative earnings following the tax reform; approximately 18 cents per dollar of new tax liability was passed through to employee earnings. The observed response was a result of lower earnings paid to employees attached to their firms, and not due to compositional changes in employment. The earnings responses were larger in states with slack labor markets and larger among employees in the lower portion of their firms’ earnings distribution. These results provide some of the first direct evidence of pass-through from changes in the top marginal personal income tax rate to lower-bracket workers not directly subject to the top rate. I show that the presence of within-firm spillovers implies that the elasticity of taxable income of those facing a given rate change is not a sufficient statistic for welfare analysis.
Stefanie Stantcheva, Harvard University
Abstract: This paper studies the effect of corporate and personal taxes on innovation in the United States over the twentieth century. We use three new datasets: a panel of the universe of inventors who patent since 1920; a dataset of the employment, location and patents of firms active in R&D since 1921; and a historical state-level corporate tax database since 1900, which we link to an existing database on state-level personal income taxes. Our analysis focuses on the impact of taxes on individual inventors and firms (the micro level) and on states over time (the macro level). We propose several identification strategies, all of which yield consistent results: i) OLS with fixed effects, including inventor and state-times-year fixed effects, which make use of differences between tax brackets within a state-year cell and which absorb heterogeneity and contemporaneous changes in economic conditions; ii) an instrumental variable approach, which predicts changes in an individual or firm’s total tax rate with changes in the federal tax rate only; iii) event studies, synthetic cohort case studies, and a border county strategy, which exploits tax variation across neighboring counties in different states. We find that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity and quality of inventive activity and shift its location at the macro and micro levels. At the macro level, cross-state spillovers or business-stealing from one state to another are important, but do not account for all of the effect. Agglomeration effects from local innovation clusters tend to weaken responsiveness to taxation. Corporate inventors respond more strongly to taxes than their non-corporate counterparts.
Andres Drenik, Columbia University, Simon Jäger, Massachusetts Institute of Technology, and Benjamin Schoefer, University of California, Berkeley
Abstract: We paint a comprehensive picture of the prevalence and nature of temp agency work, its underlying drivers as well as the distributional consequences of this phenomenon. We draw on unique administrative data from Argentina that allow us to observe the universe of workers in temporary work arrangements both with their temp agency as well as the client firms that rely on their services. This unique feature – “dual registration” – combined with matched employer-employee data permits us to tackle three long-standing, interrelated questions empirically: First, we characterize the prevalence of temp agency work and outsourcing across the economy. Starting on the firm side, we describe and analyze which type of firms draw on temp agencies to outsource labor. Second, we estimate temporary work pay penalties. Here, our data permits us to hold fixed both the characteristics of the worker as well as the workplace, using data across all industries and occupations. In addition, we estimate how rent-sharing differs for workers within the same workplace that are only separated by the contractual arrangement at the same workplace and in the same occupation. Third, we investigate the economic and social mechanisms leading firms to contract out work to temp agencies, testing several core theoretical hypotheses in the literature.
Simon Dietz, London School of Economics, James Rising, London School of Economics, Thomas Stoerk, European Commission, and Gernot Wagner, New York University
Abstract: Tipping points in the climate system are a key determinant of future impacts from climate change. Current consensus estimates for the economic impact of greenhouse gas emissions, however, do not yet incorporate tipping points. The last decade has, at the same time, seen publication of over 50 individual research papers on how tipping points affect the economic impacts of climate change. These papers have typically incorporated an individual tipping point into an integrated climate-economy assessment model (IAM) such as Bill Nordhaus’s DICE model to study how the tipping point affects the social cost of carbon dioxide (SC-CO2). This literature, has, however, not yet been synthesized to study the joint effect of the large number of tipping points on the SC-CO2. SC-CO2 estimates currently used in climate policy are therefore too low, and they fail to reflect the latest research. Our paper brings together this large and active literature and proposes a way to jointly estimate the impact of tipping points. In doing so, we bridge an important gap between climate science and climate economics, and hope to bring climate policy onto more solid foundations.
Muyang Ge, Nanjing Audit University, Eric Edwards, North Carolina State University, Reza Oladi, Utah State University, and Sherzod Akhundjanov, Utah State University
Abstract: In arid regions, rural-to-urban water markets can reduce shortfalls among high-value urban consumers by allowing irrigators to voluntarily reduce production and sell conserved water. Such sales have been criticized for reducing economic activity and the availability of water for ecosystem services in the originating region. However, there are few studies examining the theoretical rationale for such an argument against water markets, or testing it empirically. In this study, we examine the impact of a 2003 agreement in California to transfer water primarily from the Imperial Irrigation District to San Diego County, a sale billed as the largest agriculture-to-urban water transfer in US history. We develop a basic general equilibrium representation of a hydrologic-ecological-economic system to explore the theoretical effect of this trade on the economy of the water exporting region. The model predicts increases in the value of water and a decrease in employment, in both high- and low-skill sectors. We test these predictions using data on agricultural labor and production in Imperial County before and after the agreement using a synthetic counterfactual constructed using California counties. Post-2003, the divergence in crop acreage and agricultural production between Imperial County and the control closely resembles the acreage reduction requirements of the water transfers. The effect also appears in the agricultural labor market, where we show a decline in the number of both high- and low-skill employment. Increased crop yields relative to the control also indicate higher water value in Imperial County in the post-trade period. The increase in value intensified water use, and we document how greater efficiency by irrigators has decreased flows into the nearby Salton Sea, leading to corresponding declines in ecosystem services, especially habitat for migratory birds. We conclude with a discussion of the magnitude of these costs relative to the gains from water trade.
Benjamin Lockwood, University of Pennsylvania
Abstract: Publicly-sponsored lotteries in the U.S. collect more than $60 billion annually in revenues, and are alternatively viewed as either a regressive tax on consumers who misunderstand their low expected value, or as sensible way to raise revenue for valuable public goods while generating consumer surplus. This paper studies the question of whether lotteries are welfare-enhancing, and if so, what is the optimal implicit tax rate on them? We present a model of lottery demand sufficiently flexible to allow for demand that is driven either by bias or by normatively valid consumer preferences, and we characterize the optimal implicit lottery tax (which may be infinite, corresponding to a ban) in terms of empirically estimable sufficient statistics. We then estimate these statistics using observational data on sales and lottery prizes over time, and using a new experimental survey of lottery consumption preferences.
Today was the second 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 second day. Included below are the abstracts from those papers as well as links to the sessions at which they were presented. Check out the highlights from yesterday as well, and come back after tomorrow’s program for more highlights.
Bo Cowgill, Columbia University, and Fabrizio Dell’Aqua, Columbia University
Abstract: Why does “algorithmic bias” occur? The two most frequently cited reasons are “biased programmers” and “biased training data.” We quantify the effects of these using a field experiment on a diverse group of AI practitioners. In our experiment, machine learning programmers are asked to predict math literacy scores for a representative sample of OECD residents. One group is given perfectly representative training data, and the other is given a “dataset of convenience” — a biased training sample containing who confirm to common expectations about who is good at math. Using this field experiment, we quantify the benefits of employing programmers who are diversity-aware vs obtaining more representative training data. We also measure the effectiveness of training interventions to reduce algorithmic bias, including both reminders and technical guidance.
John Michael Van Reenen, Massachusetts Institute of Technology
Abstract: Firms have become increasingly different in terms of size (concentration), wages and productivity. Alongside these trends there appears to be an increase in aggregate price-cost markups. Using firm-level panel data from the US and EU, we investigate four hypotheses to explain these trends: (i) an increase in platform competition; (ii) a rise in fixed costs; (iii) a decline in antitrust enforcement and (iv) an increase in competition.
Alberto Alesina, Harvard University, and Stefanie Stantcheva, Harvard University
Abstract: This paper provides a simple conceptual framework that captures how different perceptions, attitudes, and biases about immigrants or minorities can shape preferences for redistribution and reviews the empirical evidence on the effects of increasing racial diversity and immigration on support for redistribution.
Randall Akee, University of California-Los Angeles, Maggie R. Jones, U.S. Census Bureau, Sonya R. Porter, U.S. Census Bureau, and Emilia Simeonova, The Johns Hopkins University
Abstract: Our analysis uses a novel data set that combines data from the confidential-use US Census American Community Survey linked to administrative records from the IRS. In this new panel, we follow the earnings (as indicated by individual level W-2 and 1099 forms) at the individual-level over time for the Asian and Hispanic population in the U.S. for 11 years (2005-2015). Importantly, we disaggregate these two race and ethnic categories into smaller subgroups to examine how aggregation obscures different average outcomes across these groups. Our analysis focuses on several measures of inequality and immobility. This paper is a follow-up to our prior analysis which examined income inequality across the following race and ethnic groups: Non-Hispanic white, Black, American Indian/Alaska Native, Asian American, Native Hawaiian/Pacific Islander, Hispanic and Other Races (Akee et al, 2017). In this analysis, we disaggregate Asian into the following groups: Asian Indian, Chinese, Filipino, Japanese, Korean and Vietnamese. For Hispanics, we disaggregate into the following groups: Mexican, Puerto Rican, Cuban, Central American, Latin American. We use the self-identified race and ethnic categories as provided in the American Community Survey for each individual. We are also able to identify new immigrants (post 2005 arrival) and show how including this group affects measures of earnings inequality and immobility.
Samuel Bowles, Santa Fe Institute, and Wendy Carlin, University College London
Abstract: A common one-dimensional paradigm models the conflict over where to position policies along a continuum between the poles of government and market. Drawing on ideas from mechanism design as well as political philosophy, we explore the normative, modeling and policy challenges arising if we locate policies and institutions in a two-dimensional space by adding a third pole: community, based in important respects on social norms rather than state imposed laws or contractual exchanges.
Beatrice Cherrier, University of Cergy-Pontoise and CNRS, Cleo Chassonnery-Zaigouche, University of Cambridge, and John Singleton, University of Rochester
Abstract: Our paper is a history of this first gender reckoning in US economics, one beginning in the early 1970s. Based on hitherto closed AEA archives, comprehensive oral interviews with major protagonists, and quantitative data from the first decade of the CSWEP’s Roster, we reconstruct the historical context that led to the establishment of the CSWEP in order to unpack its successes and failures, the enthusiasm it generated, and the resistance it encountered. We show that then (as now), the birth of CSWEP was tied to larger social movements: the feminist and civil rights movements, growing public awareness of issues surrounding discrimination, and the shifting legal context that drew many scientific societies toward such a reckoning. But we also emphasize how economists’ peculiar approach to social phenomena shaped their views of their own gender issues. For economists both study and experience discrimination, which led them to approach gender issues within the profession as an economic phenomenon. The status of women in economics was thus tied to ongoing debates within labor economics. The theories, models, and empirical evidence that labor economists – from Becker and Arrow, Bell and Bergmann, Ashenfelter and Blinder, Ferber and Blau, among many others – developed and produced to understand the role of women in the economy also shaped economists’ understanding of gender issues within their profession. CSWEP pursued actions common to most scientific societies, such as mentorship programs and the development of a roster, but also very specific changes to the profession, such as the establishment of Job Openings for Economists (rationalized in economic terms), and the sponsorship of conferences on women’s labor supply, discrimination, and occupational segregation.
Erik Brynjolfsson, Massachusetts Institute of Technology, Avinash Collis, Massachusetts Institute of Technology, W. Erwin Diewert, University of British Columbia, Felix Eggers, University of Groningen, and Kevin Fox, University of New South Wales
Abstract: The welfare contributions of the digital economy, characterized by the proliferation of new and free goods, are not well-measured in our current national accounts. We derive explicit terms for the welfare contributions of these goods and introduce a new metric, GDP-B which quantifies their benefits, rather than costs. We apply this framework to several empirical examples including Facebook and smartphone cameras and estimate their valuations through incentive compatible choice experiments. For example, including the welfare gains from Facebook would have added between 0.05 and 0.11 percentage points to GDP-B growth per year in the U.S.
Elissa Braunstein, Colorado State University, and Stephanie Seguino, University of Vermont
Abstract: This paper looks at the role of gender job segregation and inequality through the effect of gender job segregation on labor’s share of national income. An earlier paper found this relationship was true in both advanced and emerging market nations. Further, among advanced economies, it was found that weakening protections for dismissal increased women’s job segregation, which then lowered labor’s share of income. This paper focuses on advanced economies and digs deeper on regulations that protect dismissal to include the role of unions in protecting workers. So, this includes an analysis of type of collective bargaining – centralized, decentralized, sectoral – and union density to also examine those effects.
Thomas Philippon, New York University
Abstract: We study the evolution of super star firms in the Global economy over the past 30 years. We estimate their contribution to global productivity growth using Hulten’s formula and using a measure of global reallocation of economic activity.
Thomas Wollmann, University of Chicago
Abstract: Most U.S. mergers are not reported to the federal government on the basis of their size. This can effectively exempt them from antitrust scrutiny, resulting in mergers to monopoly and duopoly, even in industries where enforcement is otherwise robust. This paper studies the impact of premerger notification exemptions in the context of US dialysis providers. First, I find large effects on enforcement. For instance, many proposed dialysis facility acquisitions that would otherwise be blocked over 95% of the time are blocked less than 5% of the time when exempt from premerger notification requirements. Second, I find equally important effects on market structure. Exempt facility acquisitions account for most of the rise in industry-wide within-market concentration over the last two decades. In fact, applying the enforcement rates faced by reportable mergers to exempt mergers stalls the dramatic consolidation of the dialysis industry. Finally, facility acquisitions associated with exempt mergers compromise the quality of care received by patients.
Amanda Bayer, Swarthmore College, Gary Hoover, University of Oklahoma, and Ebonya Washington, Yale University
Abstract: The goal of the article is twofold: 1) To give readers a sense of the minority experience in the economics profession and 2) To give readers action steps that they can take to improve racial/ethnic diversity in the economics profession. The black percentage of Economics PhD recipients has hovered around 4 percent since the 1980s, while the fraction of blacks receiving PhDs and, particularly, PhDs in math or science has grown over this time period. Blacks make up about 12 percent of the US population. Similarly, Hispanics have seen increases in Economics PhDs as other STEM PhDs and PhDs in general. However, the Hispanic fraction of degrees remains below the Hispanic fraction of the population. We will describe the experience of being a minority in economics with the goal of identifying difficulties for which we will provide approaches to remedy. We finally offer advice to profession-shareholders including: Help to correct misconceptions about economics starting even before minority students arrive on campus. When hiring (beyond the rookie market) start with a census of those in field. Mentor a minority student.
Ayelet Gneezy, University of California, San Diego, Alex Imas, Carnegie Mellon University, and Ania Jaroszewicz, Harvard University
Abstract: Scholars have long argued for the central role of agency in the human experience. In this paper, we demonstrate the importance of agency in shaping people’s patience and risk tolerance. We focus on the context of resource scarcity, which has been associated with both impatience and a lack of agency. Using data from a representative sample of over 86,000 individuals worldwide and two experiments, we replicate the decrease in patience among those exposed to scarcity. However, we show that endowing individuals with agency over scarcity fully moderates this effect, increasing patience substantially. We further show that agency’s impact on patience is partly driven by greater risk tolerance. These results hold even though individuals with greater agency do not exercise it; simply knowing one could alleviate one’s scarcity is sufficient to change behavior. Finally, we demonstrate that these effects of agency generalize beyond scarcity, highlighting the potential for agency-based policy and institutional design.
Francesco Agostinelli, University of Pennsylvania, and Giuseppe Sorrenti, University of Zurich
Abstract: We study the effect of family income and maternal hours worked on child development. Our instrumental variable analysis suggests different results for cognitive and behavioral development. An additional $1,000 in family income improves cognitive development by 4.4 percent of a standard deviation but has no effect on behavioral development. A yearly increase of 100 work hours negatively affects both outcomes by approximately 6 percent of a standard deviation. The quality of parental investment matters and the substitution effect (less parental time) dominates the income effect (higher earnings) when the after-tax hourly wage is below $13.50. Results call for consideration of child care and minimum wage policies that foster both maternal employment and child development.
Mindy Xiaolan, University of Texas at Austin
Abstract: Public firms in the United States that provide better insurance against productivity shocks to their workers experience higher cash flow volatility. The difference in intra-firm risk sharing between workers and capital owners accounts for more than 50% of the variation in firm-level cash flow volatility. I develop a theory in which wages can serve either as a hedge or as leverage, depending on the history of the productivity shocks the firm has faced. Heterogeneous roles of workers in the firm are derived by analyzing the dynamic equilibrium wage contracts between risk-neutral owners and risk-averse workers who can leave the firm with a fraction of accumulated human capital. Owners of the firm will optimally bear more risk when the current value of the firm’s human capital is lower than the peak value it has reached. The model explains the joint dynamics of cash flow volatility and the wage-output sensitivity. Also, the model produces predictions for the dynamics of cash flow volatility that are consistent with the time series properties of the firm-level data.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Worthy reads from Equitable Growth:
Worthy reads not from Equitable Growth:
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 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:
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 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.
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.