Competitive Edge: Underestimating the cost of underenforcing U.S. antitrust laws

Posted on by Maria Monroe

Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call “Competitive Edge.” This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. Michael Kades has authored this contribution.

The octopus image, above, updates an iconic editorial cartoon first published in 1904 in the magazine Puck to portray the Standard Oil monopoly. Please note the harpoon. Our goal for Competitive Edge is to promote the development of sharp and effective tools to increase competition in the United States economy.

Michael Kades

For much of the past three-and-a-half decades, courts across the United States increasingly accepted that strict antitrust rules present far greater dangers than lenient rules. According to this theory, overly strict antitrust rules limit business conduct in two ways. Conduct that is beneficial is wrongly condemned (what is known as a false positive), and the rule deters companies from undertaking procompetitive actions. Further, once an overly strict legal rule is enshrined in precedent, it is difficult to change and has a long-lasting harmful event. In contrast, overly lenient antitrust rules allow anticompetitive conduct to go unpunished (what is known as a false negative), but market forces will correct those problems more quickly than it takes to overturn precedent.

Courts have relied on concern about false positives to limit rules regarding refusals to deal, predatory pricing, and proof of conspiracy, as well increasing the procedural requirements for plaintiffs. This policy, however, has no basis in theory and little empirical support. The evidence that does exist suggests underenforcement is costly. A fuller discussion on this issue (called error-cost analysis) occurs in section 2 of the Washington Center for Equitable Growth’s comments on the Federal Trade Commission’s Hearings Competition and Consumer Protection in the 21st Century.

Recent experience with U.S. antitrust rules and pharmaceutical patent settlements provides further evidence that overly lenient rules are costly, and fears of overly stringent rules can be overstated. Between 2005 and 2013, federal courts adopted a lenient rule that allowed patent holders to pay alleged infringers to stay off the market until the patent expired, fearing the dangers of overenforcement and discounting the dangers of this type of settlement. In 2013, the Supreme Court rejected this approach and subjected settlements to antitrust scrutiny in its Federal Trade Commission v. Actavis Inc. decision. Post-Actavis, some scholars argue that the decision will lead to false negatives in some cases, but others conclude false negatives are very unlikely.

Based on the history of reverse-payment settlements, antitrust rules matter. After the courts adopted the lenient rule, the number of settlements with substantial payments increased dramatically, from zero in fiscal year 2004 to a high of 34 in FY2012. Those deals increased prescription drug costs by $63 billion. After 2013, the problematic deals virtually disappeared, and there is no evidence that this stricter rule prevented settlements, limited innovation, or suppressed patent challenges—the primary policy concerns of courts adopting the scope of the patent test relied upon.

Background on pharmaceutical patent settlements

Competition from low-cost generics is one of the few proven ways to control prescription drug prices. Often, that competition depends on the outcome of patent litigation between the firm that owns the branded drug and the one planning to sell a generic alternative over whether the branded firm’s patents are valid and whether the generic product infringes on those patents. Beginning in the 1990s, branded and generic companies found a new way to settle patent litigation. A branded company would allege that its potential generic competitor’s product infringed on the branded company’s patent, yet the branded company would pay the generic to stay off the market for a period of time, which is known as a pay-for-delay, or reverse-payment, patent settlement.

The anticompetitive threat is straightforward (a fuller discussion can be found here). The generic company is a potential competitor (whether the branded company’s patent blocks competition is uncertain) and receives payment to accept the branded company’s proposed entry date. The agreement eliminates potential competition and protects the branded company’s monopoly. In turn, the payment compensates the generic company for accepting a later entry date, which delays competition. Consumers are worse off because, in an expected sense, they wait longer for competition and pay higher costs for the product.

The combination of the payment and the restriction on the entry of a new generic drug into the market creates the competition concern. A procompetitive settlement reflects the strength of the patent and occurs when the generic company and the branded company settle a patent suit by splitting the remaining time on the patent. If the patent expires in 10 years, for example, then the generic company might receive a license to the patent in 6 years, guaranteeing 4 years of competition. Without a payment, the settlement simply reflects the parties’ estimates of the strength of the patent.

In contrast, a firm that owns the branded drug will pay the generic alternative to accept an entry date only if the settlement delays generic competition beyond what the patent strength warrants. The generic firm will accept a later entry date only if it is compensated. So, in the example above, a branded company would only pay the generic firm if the generic firm agreed to delay entry more than 6 years, and the generic firm would agree to delay entry more than 6 years only if it is paid.

The Federal Trade Commission, private plaintiffs, and state attorneys general brought a series of cases challenging reverse-payment settlements in the late 1990s. According to them, any payment that was more than de minimis raised significant antitrust concerns and was likely anticompetitive. In March 2005, however, the 11th Circuit Court of Appeals, in Schering Plough Corp. v. Federal Trade Commission, reached the opposite conclusion. It suggested that, with limited exceptions, reverse-payment settlements were legal unless the generic company agreed to stay off the market until after the patent expired, also known as the “scope-of-the-patent” rule. Two other circuits shortly thereafter adopted this position.

In adopting this lenient rule, courts expressed concerns about the costs of an overly strict rule. Specifically, the courts variously argued that:

  • An overly strict rule would “discourage settlement of patent litigation” (see Federal Trade Commission v. Actavis, 570 US 136, 170 (Roberts C.J., dissenting)) because litigation can be costly and inefficient, and limiting settlements could, the courts reasoned, just increase costs to everyone.
  • Limiting patent holders’ settlement options could “decrease product innovation by amplifying the period of uncertainty around the drug manufacturer’s ability to research, develop, and market the patented product” (see Schering Plough Corp. v. Federal Trade Commission, 402 F.3d 1056, 1075, 11th Cir. 2005) because if patent holders have fewer settlement options, then the uncertainty of litigation might deter them from investing in research and development.
  • An overly strict rule would “reduce the incentive to challenge patents by reducing the challenger’s settlement options” (see Asahi Glass co. v. Pentech Pharms, Inc., 289 F. Supp. 2d 986, 994, ND Ill 2003) because if generic companies could not resolve patent litigation by getting paid, then they might not undertake their challenges in the first place.

At the same time, these courts were confident that even if settlements with payments were anticompetitive, the market would quickly remedy the situation. Once the branded company paid off one generic competitor, that payment would entice other generic companies to challenge the patent. As one court explained, “Although a patent holder may be able to escape the jaws of competition by sharing monopoly profits with the first one or two generic challengers, those profits will be eaten away as more and more generic companies enter the waters by filing their own paragraph IV certifications attacking the patent.”(See Federal Trade Commission v. Watson Pharms, Inc, 677 F.3d 1298, 11th Cir. 2012) In other words, if the branded company paid off one generic firm to avoid competition, then it would face a host of challengers, each demanding a payment to drop their challenges.

In 2013, however, the U.S. Supreme Court put an end to the scope-of-the-patent era and subjected these types of agreements to traditional antitrust analysis. According to the Supreme Court, an agreement in which the branded and generic companies eliminate potential competition and share the resulting monopoly profits likely violates the antitrust laws, absent some justification. (See FTC v. Actavis 570 US 136, 158) The result: The adoption of a very lenient rule, the scope-of-the-patent test, and the change to the stricter rule-of-reason approach provides insight into the costs and consequences of the two regimes.

The cost of the lenient scope-of-the-patent rule

Information from the Federal Trade Commission allows an estimate of the cost to consumers of the scope-of-the-patent rule. The FTC reports the number of settlements with any compensation and the subset of those with compensation greater than $7 million. Adoption of the lenient scope led to a dramatic increase in settlements with substantial compensation (more than $7 million), which peaked in FY2012 at 33. The Supreme Court’s rejection of that rule virtually eliminated settlements with substantial payments. In fiscal year 2016, only a single agreement occurred. The cost of a lenient rule is not simply that anticompetitive conduct goes unpunished; lenient rules also will encourage more anticompetitive conduct. (See Figure 1.)

Figure 1

One can estimate the cost to consumers of allowing pay-for-delay settlements by multiplying the length of the delay, the lost consumer savings due to delayed generic entry, and the volume of commerce affected. In 2010, the FTC issued a report analyzing pharmaceutical patent settlements. It found that settlements with payments and restrictions on entry delayed generic competition by an average of 17 months relative to settlements without payments. On a yearly basis, consumer lost savings equals 77 percent of the branded drug’s total revenue.

Finally, in information recently provided to Sen. Amy Klobuchar (D-MN), the FTC provided statistics on the total revenue of branded drugs subject to patent settlements with restrictions on generic entry and compensation of more than $7 million. The total cost to consumers equals 1.42 years of delay, multiplied by 77 percent of brand product’s revenue, multiplied by the yearly revenue of the branded drugs covered by settlements with compensation above $7 million. As it turns out, the consumer loss is equal to roughly a year of brand sales, or $63.3 billion. (See Table 1.)

Table 1

This estimate may be conservative. The 2010 FTC report counted even de minimis payments as a form of compensation in measuring the average delay. Such deals likely had little or no delay. So, the average length of delay for deals with payments above $7 million is likely longer than 17 months. Of course, more detailed data would allow for a more precise estimate, but it is clear that reverse-payment settlements during the scope-of-the-patent era increased prescription drug costs substantially (in the order of tens of billions of dollars).

It appears the courts adopting the scope-of-the-patent rule underestimate its cost. As a practical matter, during the scope-of-the-patent period, the market response did not deter the practice. Reverse-payment settlements were profitable and successful either because the payments did not entice additional generic companies to challenge the patent or the branded company could pay off all potential competitors. The Supreme Court, in its Actavis decision, explained that for reasons based on the competitive dynamics in the industry, paying off the first generic challenger removed the most motivated challenger. (See FTC v. Actavis at 155.) And, as one article explained, the incentives for subsequent challenges to litigate were so small that they would settle for little or nothing.

The costs of the stricter rule

Many cases are ongoing, and determining whether a given case is a false positive or a false negative requires a case-specific analysis. But what about concerns that a stricter antitrust rule would prevent settlements, deter generic companies from challenging patents, and lower incentives to innovate? Academics have questioned the relevance of those arguments. Whether those concerns are relevant in a legal sense, there is no empirical evidence that they are occurring.

First, stricter antitrust enforcement did not end pharmaceutical patent settlements. Record numbers of settlements occurred in each of the first 3 years after Actavis (FY2014 to FY2016). Although the Actavis decision deterred the use of payments to resolve patent litigation, parties found other ways to settle their disputes that did not harm competition. (See Figure 2.)

Figure 2

Second, there is no evidence that stricter antitrust enforcement deterred innovation. Although it is difficult to determine the impact on research and development, the pharmaceutical industry has not claimed that it is spending less on research and development because of the Actavis decision. To the contrary, PhRMA, the trade association for branded pharmaceuticals, highlights its increased research and development spending.

Third, the Supreme Court’s adoption of a stricter antitrust rule does not appear to have deterred generic companies from challenging patents, based on the 2016, 2017, and 2018 Lex Machina Anda Patent Litigation Reports. In the 4 years preceding the Actavis decision, under the scope-of-the-patent rule, new patent challenges averaged 271 a year, with a low of 236 cases and a high of 293 cases. In the 4 years after the Actavis decision, the average increased to a 413 new pharmaceutical patent challenges yearly, with a low of 326 cases and a high of 476 cases.

Proving a negative—that the Actavis rule did not deter procompetitive settlements—is challenging. The statistics, although they do not establish causation, suggests that the Actavis rule had little, if any, negative impact. Although one can hypothesize that there would be even more settlements, patent challenges, and innovation in the absence of Actavis, the theories are far less plausible, given the descriptive data offered here and lack of qualitative evidence to support them.

Conclusion

Adoption of the scope-of-the-patent test cost consumers more than an estimated $60 billion dollars, with little to no evidence of corresponding benefits. Going forward, courts should be more concerned about rules in this area that are overly lenient than rules that are overly strict. The drug-making industry responded both to the lenient scope-of-the-patent rule and then again to the stricter Actavis rule. Both of these points suggest that an even stronger rule—one that presumes such payments are anticompetitive—may be more effective. It would eliminate the risk of a bad court decision that would substantially increase prescription drug costs, and it would reduce the cost of enforcement.

More generally, contrary to accepted antitrust principles, underenforcement can cause substantial harm, and there should be no presumption that markets by themselves will limit the harm of anticompetitive activity. At the same time, claims that stricter antitrust enforcement will suppress beneficial conduct are overstated. The before and after lessons of pay-for-delay should be a cautionary tale for courts as they apply antitrust law.

Brad DeLong: Worthy reads on equitable growth, December 7–13, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. New Equitable Growth hire Claudia Sahm has her very own way to tell policymakers when the economy has entered a recession. See the “Sahm Rule Recession Indicator” published by the Federal Reserve Bank of St. Louis, alongside her explanation of the rule from earlier this year. Her rule is “[triggered by] a 0.5 percentage point increase or more in the three-month moving average of the unemployment rate relative to its low in the prior 12 months.” And when it triggers, the time is right to get stimulus out to households, business, and local governments.
  2. Michael Kades also has indicators for the state of U.S. federal antitrust enforcement. Boy, does he have indicators! Read “The State of U.S. Federal Antitrust Enforcement,” in which he writes: “Criminal antitrust filings have fallen to historic lows … Merger enforcement actions have not kept pace with increased merger filings … Civil nonmerger actions have fallen … U.S. antitrust enforcement resources have fallen … U.S. GDP growth has outpaced growth in antitrust appropriations.”
  3. Those of us who graduated from college in 1982 had some scarring from the 1982-trough recession, but not nearly as much as today’s young workers. Read Jesse Rothstein, “Great Recession’s ‘Lost Generation’ Shows Importance of Policies to Ease Next Downturn,” in which he writes: “Young college graduates in the Great Recession of 2007–2009… [experienced] damage … [that will last] throughout their careers … Workers from these cohorts saw their annual employment rates drop by 2 percentage points to 4 percentage points per year, relative to older workers in the same labor market. Those who were established in the workforce by the beginning of the recession—those who graduated college in 2005 and earlier—essentially returned to prerecession levels of employment by 2014. But those who entered after 2005 have not; their employment rates remain depressed even as the overall market has recovered.”

 

Worthy reads not from Equitable Growth:

  1. Kim Clausing’s Open: The Progressive Case for Free Trade, Immigration, and Global Capital is high on my list for very good policy books of the past year. Attempts to achieve social and egalitarian goals by closing off the international economy comes at an extremely heavy price. Clausing is very convincing that that price is rarely worth paying. And that leaves out all of the restrictions on openness that are not aimed at accomplishing egalitarian and social goals. The Institute for Research on Labor and Economics says of the book: “International trade brings countries together by raising living standards, benefiting consumers, and making countries richer. Global capital mobility helps both borrowers and lenders. International business improves efficiency and fosters innovation. And immigration remains one of America’s greatest strengths, as newcomers play an essential role in economic growth, innovation, and entrepreneurship. Closing the door to the benefits of the open economy would cause untold damage for Americans. Instead, Clausing outlines a progressive agenda to manage globalization more effectively, presenting strategies to equip workers for a modern economy, to modernize tax policy for a global economy, and to establish a better partnership between society and the business community.”
  2. If you have not read Barry Eichengreen’s The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era, then you should. Read this review, which remarks: “Looking primarily at the United States, the United Kingdom, and Germany, with some French and Italian interludes … the core of the book is deep research into the convulsions caused by populist agitators and the response from the political establishment. As a historian, but especially an economic one, Eichengreen certainly delivers … Eichengreen’s definition … [of] a multidimensional phenomenon, with multiple perspectives on each dimension … [of] a political movement with anti-elite, authoritarian, and nativist tendencies … has been around ever since the capitalist economy began functioning as it does.”
  3. And I am ashamed that I still have not read Steve Greenhouse’s new book Beaten Down, Worked Up: The Past, Present, and Future of American Labor. Joseph A. McCartin’s review, “The Future of American Labor,” is a worthy read. He writes: “No writer is better equipped than Steven Greenhouse to assess how both American workers and the American labor movement are doing in the early 21st century … Greenhouse has spent the past 5 years freelancing important labor stories and stepping back to write his new book … He opens with a string of disturbing vignettes that illustrate workers’ current struggles, including rampant wage and hour violations, deteriorating workplace-safety enforcement, unpredictable scheduling practices, stagnant wages, retirement insecurity, lack of paid sick or vacation days, and abusive management.”
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New Equitable Growth Request for Proposals for scholars planning cutting-edge research on paid family and medical leave

Posted on by Maria Monroe

How does the availability of paid personal medical leave affect employees’ economic security, health, and other outcomes? How does paid caregiving leave affect the physical and mental health of care recipients and of caregivers? How does paid leave of all kinds affect firm productivity and employee turnover, and how do these impacts vary across leave types, industries, occupations, and the business cycle?

The Washington Center for Equitable Growth has issued a Request for Proposals to academics on campuses around the United States to explore these and other issues relating to paid leave. The RFP, separate from Equitable Growth’s broader annual RFP, seeks “to advance the evidence on how paid leave affects engines of economic growth such as labor force participation, the development of human capital, consumption, and macroeconomic stability.”

Equitable Growth has been interested in the relationship between paid leave and inequality and economic growth since its early days. The organization has funded a number of researchers examining these issues.

Earlier this year the organization announced grants totaling more than $200,000 to two research teams focused on issues related to paid leave. One is exploring the impact of paid medical leave on the prevalence of opioid abuse. The second is studying the effects of state-level paid family and medical leave policies on labor market participation for older workers who care for a spouse.

The United States is the only member nation of the Organisation for Economic Co-operation and Development with no national paid leave system. The absence of such a system is the subject of legislation in Congress and is an important part of the 2020 presidential campaign debate. Several states and the District of Columbia have enacted or implemented paid leave programs or are about to, creating a series of natural experiments that are ripe for researchers who hope to identify the causal impact of paid leave using rich data.

The RFP is focused on three core areas: medical leave, caregiving leave, and employers’ interactions with paid leave.

Equitable Growth supports research that uses many kinds of evidence and is interested in a variety of methodological approaches, as well as research that cuts across academic disciplines. We also support data collection and measure development: Ensuring that researchers have the data sources and measures they need is the first step in getting the answers to key questions related to paid leave.

Questions of particular interest to Equitable Growth relate to how people in need of medical or caregiving leave experience, interact with, and are affected by the paid leave system. Also critical to the policy debates around paid leave are questions related to employers: not only questions about how paid leave affects firm productivity and employee turnover, but also about employer compliance with state laws and whether, how, and why they might be facilitating or impeding employees’ access to paid leave. These investigations into how employers and individuals interact with the paid leave system are foundational to connecting the dots between paid leave, inequality, and broadly shared economic growth.

Equitable Growth’s grant 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, in addition to the specific grants related to paid leave, 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.

Paid leave is one of the most significant domestic and economic issues for our country going forward. The research supported by Equitable Growth is already informing and propelling the policy debate around paid leave. This next set of investments will also play a critical role in the paid leave policy conversation.

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Equitable Growth joins 10 other organizations in endorsing the Measuring Real Income Growth Act

Posted on by Maria Monroe

For decades, the approach to economic policymaking in the United States has been conducted under the presumption that “a rising tide lifts all boats,” and that we can therefore rely on measures such as Gross Domestic Product growth to understand how the U.S. economy is performing for American families. This presumption is mistaken.

During this time of high economic inequality, policymakers need new tools to track the progress of the economy and govern accordingly. The “Measuring Real Income Growth Act of 2019,” sponsored by Representative Carolyn Maloney (D-NY) in the House and Minority Leader Chuck Schumer (D-NY) and Senator Martin Heinrich (D-NM) in the Senate, would require breakouts of growth by income decile, making it possible for the first time to see who prospers when the U.S. economy grows.

“Until we change the way we conceptualize, and therefore measure, economic prosperity, we are unlikely to have very much of it,” said Heather Boushey, President and CEO of the Washington Center for Equitable Growth. “In short, better, fairer growth measures beget better, fairer growth,”

Boushey is joined by ten organizations in endorsing the bill.

Sister Simone Campbell, SSS, Executive Director of NETWORK Lobby for Catholic Social Justice:

“NETWORK Lobby for Catholic Social Justice advocates for federal policies to mend the income and wealth gap in our nation because such policies promote the common good. Current GDP measurement only accounts for the benefit realized by corporations and their stockholders. The common good requires that these measures account for the broader economy by including the impact on working people.”

“New indicators would be an important step forward in assessing how people are benefiting—or not—from economic growth,” she said. “My faith teaches that our major concern should be for those who are left out of our economic flourishing. With this supplemental data we will be able to faithfully respond to the needs of our people. This legislation is an effective measure in support of the common good.”

Barry Lynn, Executive Director, Open Markets Institute:

“There are a huge number of problems with the American economy. But you can’t fix the problems if you don’t see them clearly. And unfortunately, the way the government measures growth makes it hard if not impossible to understand the reasons why America’s working families are falling ever further behind. The Open Markets Institute strongly supports efforts to produce distributional GDP statistics, so we can see who really benefits from America’s growth, and who doesn’t. And hence, to begin to address the real sources of the problem.”

Debra Ness, President, National Partnership for Women and Families:

“The vast and growing inequality in our economy has devastated families and communities. Women and people of color in particular have experienced stagnating—and in some cases worsening—income and wealth gaps. These gaps continue even as GDP has grown, a clear sign that we need to update how we think about and assess the health of our economy.”

“A real measure of economic well-being would tell us more than the total number of goods, services and income the economy produces. We also need to know how it’s distributed among people.”

Mary Kay Henry, International President, SEIU:

“Income inequality is the highest it has been in five decades, with working people of all races bearing the brunt. The Measuring Real Income Growth Act helps government, policymakers, and working families understand how rigged our economy has become. Policies to address income inequality must be grounded in an understanding of who our economy is leaving behind. We need to measure not just how much our economy is growing, but who it is growing for. This bill is a good first step in developing economic indicators that measure how well working families are doing.”

Sabeel Rahman, President, Demos:

“You get what you measure. One of the big reasons our economic policy debates consistently fail to center questions of distribution and inequality is that we have a far too one-dimensional approach to measuring economic progress. Conventional measures of GDP growth tell us nothing about inequality and the increasingly skewed distribution of the gains from growth. Without more explicit metrics and data around distribution, it is very difficult to develop policies, narratives, and political support for measures that combat inequality. The development of distributional GDP statistics is a crucial step toward an economic policy agenda and a public conversation about the economy that takes inequality seriously.”

Janelle Jones, Managing Director for Policy and Research, Groundwork Collaborative:

“Every quarter, when the government releases GDP data, economists, reporters and policymakers focus on one question: ‘Is the economy growing fast enough?’ The real question should be, ‘who is the economy growing for?’ For decades, we have publicly defined a strong economy only by how much we are producing—GDP—and not at all by who is benefitting. True prosperity means not only that there is enough to go around in theory, but that people’s lives are getting better in reality. The Measuring Real Income Growth Act is a long-overdue step to align real-time government data with what policymakers need to know about GDP growth, and whether the economy is working for most Americans.”

Melissa Boteach, Vice President for Income Security and Child Care/Early Learning, National Women’s Law Center:

“For too long, lawmakers have focused on economic growth without stopping to consider who is benefiting from it. But we’ve seen periods in our nation’s history where GDP is rising yet poverty is also rising, where the stock market is soaring, but workers are struggling paycheck to paycheck. Let’s be clear: If the economy isn’t working for working-class families, which are disproportionately headed by women and people of color, then it is not working. Distributional GDP is an important tool to evaluate our progress and hold lawmakers accountable to creating a strong economy—one where the gains of growth are equitably shared.”

Jacob Liebenluft, Executive Vice President for Policy, Center for American Progress:

“Getting economic policy right requires understanding what is actually happening in the economy. If we are to make policy that can build a more equitable and prosperous society, we need data that tells us not only whether the economy is growing, but who is benefitting from that growth.”

Felicia Wong, President & CEO, Roosevelt Institute:

“It is beyond time for policymakers to think about who truly benefits from economic prosperity. The Measuring Real Income Growth Act will contribute enormously to our elected officials’ understanding of how American families, especially people of color and women, are faring in an age of inequality. I’m confident that these metrics will help lawmakers to craft policy that ensures that everyone shares in the prosperity our economy can generate.”

Thea Lee, President, Economic Policy Institute:

“Gross Domestic Product measures how much income the market economy generates each year, but it tells us almost nothing about who receives that income. Requiring government statistical agencies to work to produce regular, official estimates of how GDP is distributed across the entire population would represent an enormous step forward in diagnosing and combating high and rising economic inequality.”

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Great Recession’s ‘lost generation’ shows importance of policies to ease next downturn

Posted on by Maria Monroe

There is considerable research showing that recessions hit young college graduates harder than older graduates. Based on the evidence from research I’ve done for a new working paper, the damage (or “scarring”) is even worse and lasts far longer than anticipated. Indeed, the long-term consequences are comparable in magnitude to the short-run effects, roughly doubling the initial cost. The results suggest that policymakers need to do more to prepare for recessions and ameliorate their severity.

Economists have known for some time that in a recession, young workers, including new college graduates, are more likely to become or remain unemployed, lose access to training and work experience at a time in their careers when they need them most, and suffer from lost income both during unemployment and in the early years following a period of joblessness.

My research for a new working paper, which focuses on young college graduates in the Great Recession of 2007–2009 and its aftermath, suggests that the damage suffered by young workers in recessions lasts throughout their careers. Those who enter the labor market during recessions have permanently lower employment and earnings, even after the economy has recovered.

This long-term scarring argues not only for quicker and stronger action to counter recessions when they occur but also for putting in place policies that can be automatically triggered at the first signs of a recession to limit its depth and duration.

The Great Recession was the worst downturn since the Great Depression and wreaked havoc on U.S. workers and businesses. Unemployment rose by 6.5 percentage points and took nearly 10 years to get back to its prerecession level. Job losses amounted to 8.7 million. Perhaps more importantly, the prime-age employment rate, which measures the percentage of people aged 25–54 who are employed, fell by more than 5 percentage points to its lowest level in 25 years and, despite continuing tightening in the labor market, has not quite fully recovered after 10 years.

And yet, the long-term damage, while less visible, will cause more financial and career losses to cohorts of workers who entered the labor market during this period.

To obtain my results, I used the U.S. Census Bureau’s monthly Current Population Survey. I used the data to determine the degree to which poor employment rates of young graduates following recessions can be attributed to transitory shocks (the reduced demand for workers in the immediate wake of the recession) versus permanent differences that last long after the recession is over. In other words, once the overall labor market recovered, would there continue to be significant differences in employment outcomes (after adjusting for normal age differences) between those who entered during the recession and those who entered prior? (See Figure 1.)

Figure 1

Figure 1 shows the drop in employment rates around recessions (white areas) for different cohorts of college graduates ages 22 to 40, with the years on the x-axis indicating the year a cohort entered the workforce. These estimates net out effects that are common to workers of all ages during the recession and disappear after the recession is past; they show only differences in outcomes for new graduates relative to older workers. The sharp downward slope for younger cohorts (those entering the workforce more recently) shows how much harder hit they were by the Great Recession than other workers. Workers from these cohorts saw their annual employment rates drop by 2 percentage points to 4 percentage points per year, relative to older workers in the same labor market. Those who were established in the workforce by the beginning of the recession—those who graduated college in 2005 and earlier—essentially returned to prerecession levels of employment by 2014. But those who entered after 2005 have not; their employment rates remain depressed even as the overall market has recovered.

These findings raise an important question. Is the damage permanent, or will the affected cohorts recover as they age, thus making the damage only temporary? Evidence from past recessions is informative here. In each of the recessions of the past several decades, graduates who entered the market during the period of economic weakness were scarred, just as seen in Figure 1. They recovered part of the damage in the years following the recession, but only part—half of the damage to recession cohorts has been permanent, manifesting as lower employment rates throughout their careers than for cohorts that graduated in better times.

For the Great Recession graduates, I estimate based on past recessions that this permanent scarring will reduce the average individual’s post-recession employment throughout his or her career by a total of approximately one week. Moreover, my research also shows that those scarred by recessions will earn lower wages when they are employed—about 2 percent less through the early years of their careers.

On an individual level, these losses might seem relatively small. Taken together, as an entire cohort of workers, they represent a very substantial loss of potential earnings.

How policymakers can ameliorate the consequences of the next economic downturn

Recessions are inevitable, even if economists can’t predict their timing or severity. One of the many mysteries of economic policymaking is why Congress and successive administrations have not done more to prepare in advance for upcoming recessions.

To be sure, there are already federal programs, known as automatic stabilizers, that act as counter-cyclical measures. Unemployment Insurance is a good example. When the economy slows and joblessness rises, more people receive these benefits, propping up their ability to spend and thus pumping additional money into the economy. The tax system acts in a similar way—removing less money from the economy as workers earn less.

Yet these existing automatic stabilizers are rarely sufficient. By the time policymakers act in the middle of a downturn, the system has already failed millions of workers (along with their families) who may have lost their jobs unnecessarily and/or suffered avoidably long periods of unemployment. There is no need to wait for emergency legislation. To reduce the damage to workers and families, we need to have plans in place before recessions arrive to speed recoveries and cushion those affected until the recovery comes. Such measures are especially effective when targeted to those with the greatest marginal propensity to consume—those who live from pay/benefit check to pay/benefit check.

Equitable Growth and The Brookings Institution’s Hamilton Project released a book recently, titled Recession Ready: Fiscal Policies to Stabilize the American Economy, that makes the case for six policies that either strengthen existing stabilizers or add new measures to be triggered when unemployment begins rising with a consistency that has always proven to signal a coming recession. We ought to consider these and other ideas now, before the next recession hits.

While it will be some time before conclusive data are available, my research clearly suggests that as a group, the young people who graduated just before, during, or immediately following the Great Recession will find it harder to be employed and will receive measurably lower wages and annual earnings throughout their careers. This has also been true of past recessions. This adds up to massive damage to the affected individuals, their families, and our economy, and argues strongly for measures to ameliorate the impact and length of future downturns.

—Jesse Rothstein is an associate professor of public policy and economics at the University of California, Berkeley and a member of the Washington Center for Equitable Growth’s Research Advisory Board.

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McGuinness brings experience building organizations and supporting data-driven policy to Equitable Growth board

Posted on by Maria Monroe
Tara Dawson McGuinness joins Equitable Growth’s Board of Directors

Tara Dawson McGuinness, a senior fellow at the public policy think tank New America and a senior adviser to its National Network and Public Interest Technology programs, has joined the Washington Center for Equitable Growth Board of Directors.

McGuinness, who also teaches public policy at Georgetown University, has a long history of leadership in building both governmental and nongovernmental organizations that serve the public and local communities. She is a champion of evidence-backed policy and program implementation that creates a feedback loop for citizens in the policy process. She recently completed, for example, an effort focused on landscaping public policies and programs that would decrease inequality and increase mobility for Americans.

Prior to joining New America in 2017, McGuinness served as a senior advisor in the Obama White House in several capacities. She ran the organizing and communications effort to sign up Americans for Obamacare after President Barack Obama signed the Affordable Care Act into law, helping 15 million people gain access to health insurance. She later oversaw the federal government’s initiatives to support cities and towns at the White House Office of Management and Budget.

McGuinness also directed the White House Task Force on Community Solutions, which facilitated interagency efforts to use data in new ways to tackle entrenched poverty at the community level. She oversaw federal teams working with local leaders in Detroit, Baltimore, Flint, Michigan, and elsewhere.

McGuinness writes frequently about the potential impact of data in helping cities and communities address problems. “A hallmark of successful public problem solvers today,” she wrote in the Stanford Social Innovation Review with co-author Anne-Marie Slaughter, “is their ability to use data (big and small) to measure problems, to learn what works and what doesn’t, and to make improvements as soon as they are necessary.” McGuiness and Slaughter added:

The opportunity for data use in public problem solving … can take the form of analytics … or performance management dashboards … or low-cost evaluation methods. Those making the most transformational change across the United States have a culture of measurement and reassessment, with data as the central ingredient. It is not the data, per se, that add value, but their ability to tighten the feedback loop between people receiving services and those … steering them.

McGuiness is currently writing a book on the intersection of data, human-centered design, and the importance of delivery in public policy to be published in 2021.

Prior to her work in the Obama Administration, McGuinness was the executive director of the Center for American Progress Action Fund. She has also worked at the National Democratic Institute and on Capitol Hill. McGuinness is a graduate of the University of Pennsylvania in urban studies.

Equitable Growth is excited about the leadership and expertise McGuiness brings to our organization. Her expertise examining and implementing data-driven, evidence-backed ideas and policies are central to our mission to promote strong, stable, and broad-based economic growth.

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Eight graphs that tell the story of U.S. economic inequality

Posted on by Maria Monroe

Rising economic inequality over the past 40 years has redrawn the U.S. wealth and income landscape, shifting many of the gains of prosperity into the hands of a smaller and smaller group of people and marginalizing members of vulnerable communities. This transformation is in turn reducing income mobility and opening gulfs in educational achievement and health outcomes between different levels of income. The eight graphs in the three sections below visually illustrate these findings.

post

Six charts that explain how inequality in the United States changed over the past 20 years

By Austin Clemens,

February 1, 2022

Inequality is rising

The first graphic tracks the share of all earned income accrued by the top 1 percent of earners, along with the next 9 percent, the upper 40 percent (from the 50th percentile to the 90th) and the bottom 50 percent. The share of income controlled by the top 10 percent bottomed out in the 1970s but has reached new highs—the top 10 percent of all income earners now control around 38 percent of national income. (See Figure 1.)

Figure 1

Wealth concentration has risen even faster. The wealthiest 10 percent of households have long controlled more than 50 percent of all wealth, but that proportion has grown steadily over the past two decades, according to new research from economists at the Federal Reserve. Just 1 in 100 Americans now own 31 percent of all wealth in the country, and the top 10 percent owns 70 percent of all wealth. Meanwhile, one half of Americans with the lowest wealth have paltry assets: just 1.2 percent of the total. (See Figure 2.)

Figure 2

To some extent, these patterns are evident in other countries, suggesting that there may be global effects that explain some portion of the rise in inequality. But the rise in the United States has been much steeper than in Europe. (See Figure 3.)

Figure 3

Underlying these broad income inequities in the United States is long-standing and ongoing racial inequity that results in people of color, and especially women of color, having lower salaries than white and male workers at similar levels of education. Not all of this gap is due to discrimination, but significant portions of it remain unexplained and are generally attributed to discrimination. (See Figure 4.)

Figure 4

Mobility is decreasing

Patterns of economic growth that increase income inequality also make it more difficult for people to pull themselves up the rungs of the income ladder. Research by Raj Chetty at Harvard University and his co-authors shows that rates of absolute intergenerational inequality have crashed in the United States. At age 30, people born in 1940 had an approximately 90 percent chance of out earning their parents. But for people born in 1980, the chances were just 50 percent. Chetty’s research shows that most of this decline is attributable to inequity in income gains, rather than lower rates of growth over the latter period. (See Figure 5.)

Figure 5

In fact, economic inequality and low economic mobility appear to occur together frequently. The next graph was first produced by City University of New York economist Miles Corak and has since been dubbed “The Great Gatsby Curve.” It demonstrates that there is a correlation between inequality and weak mobility across countries. (See Figure 6.)

Figure 6

Gulfs in outcomes between the rich and poor

As economic inequality increases, the lives of the rich and poor are diverging. This is true across many metrics, but two examples are telling. First, the rich in the United States are significantly more likely to complete college, and this gap has risen with inequality. The child of a top quartile family is now 45 percentage points more likely to complete college than the child of a bottom quartile family, reinforcing the income mobility problems discussed above. (See Figure 7.)

Figure 7

Wealth also buys a longer lifespan. Research by Raj Chetty and others shows that the gap in life expectancy between the very poorest and richest Americans is 15 years for males and 10 years for females. Notably, the gap has grown slightly for both males and females over just a 13-year period. (See Figure 8.)

Figure 8

Questions about whether and how this rise in inequality affects economic growth and stability are fundamental to Equitable Growth’s work. This is why we explore how economic inequality impacts individuals and families across a wide range of issues, and what policies might address these challenges.

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Weekend reading: “Jobs Day” 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

In the lead-up to the 2020 presidential election, Equitable Growth is engaging in a number of activities to help focus the national debate on how to achieve strong, stable, and broad-based economic growth. Last month, we hosted a day-long policy conference in Washington, D.C., entitled “Vision 2020” that featured leading thinkers and activists addressing a broad range of important issues. We posted a column describing the themes that weaved through the various conversations and containing links to video excerpts. Equitable Growth also announced the forthcoming publication of a book containing 21 essays by an impressive list of authors, including some of the conference participants, exploring recent transformative shifts in economic thinking that demonstrate how inequality obstructs, subverts, and distorts broadly shared economic growth, as well as what can be done to fix it.

Raksha Kopparam reminds policymakers that there is a direct relationship between economic inequality and a significant decline in the intergenerational economic mobility that was once a hallmark of U.S. society. Restoring mobility should be a priority for policymakers, and measuring economic inequality can tell us where policies need to be focused. For too long, government has focused on Gross Domestic Product growth as the primary measure of economic success, without examining whether that growth is broadly shared. Kopparam points to Equitable Growth’s GDP 2.0 initiative, which has helped convince the federal government not to track the growth of GDP only, but to track who benefits from that growth.

The U.S. Bureau of Labor Statistics today issued its monthly report on the U.S. labor market for November. The employment rate for prime-age workers held steady and the unemployment and underemployment rates continued their downward trend, but year-over-year wage growth, while slowly rising, remains tepid, given near-historic low levels of unemployment and a significant number of jobs added in November. Raksha Kopparam and Kate Bahn compiled five graphs on the report that show both rosy and not-so-rosy developments in the U.S. economy.

Equitable Growth posted a working paper by Will Dobbie of Harvard University and Jae Song of the Social Security Administration describing a field experiment designed to deepen understanding of how debt contributes to financial distress. Their findings about the impact of long-term debt “run counter to the widespread view that financial distress is largely the result of short-run constraints.”

And be sure to check out Brad DeLong’s worthy reads, which provide Brad’s takes on content from Equitable Growth and elsewhere.

Links from around the web

Tim Wu in The New York Times writes about the struggles of local hardware stores competing with Amazon.com Inc., and asks the question: “Why is a less efficient, less personalized and more wasteful way of buying screws and plungers—ordering online—displacing the local hardware store?” Telling the story of the hardware store in his own New York City neighborhood, Wu says that both the illusion of greater convenience in online shopping and a significant rent increase “reflect the transformative consolidation and centralization of the American economy since the 1990s, which have made the economy less open to individual entrepreneurship.”

This USA Today headline asks a question that Equitable Growth and many others have been asking for a long time: “America’s parents want paid family leave and affordable child care. Why can’t they get it?” Authors Alia E. Dastagir, Charisse Jones, Courtney Crowder, and Swapna Venugopal Ramaswamy talk to families across the country about the challenges they face and explore the political and ideological barriers standing in the way of national policy changes.

While we’re on the subject of paid leave, The New York Times’s Claire Cain Miller asks why men say they want paid leave but then don’t use all of it. She cites reports by New America and the Boston College Center for Work and Family. The reasons seem to be a combination of financial considerations and the persistence of societal gender role expectations.

Matthew Boesler of Bloomberg reports that Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, who believes the Fed can do more to combat inequality, has recruited an ally to help advance his agenda of reducing inequality in the U.S. economy. He has hired Abigail Wozniak, former senior economist to the White House Council of Economic Advisers and also an Equitable Growth grantee, to serve as first head of the Minneapolis Fed’s Opportunity and Inclusive Growth Institute.

Finally, policymakers and workers alike are well aware of how technological changes have been a key factor in diminishing job opportunities for factory workers, but there’s another significant group of workers deeply affected by technological progress: administrative assistants. Heather Long of The Washington Post writes, “The United States has shed over 2.1 million administrative and office support jobs since 2000, Labor Department data show, eroding what for decades had been a reliable path to the middle class for women without college degrees.”

Friday Figure

Figure is from Equitable Growth’s “To fight falling U.S. intergenerational mobility, tackle economic inequality,” by Raksha Kopparam.

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Brad DeLong: Worthy reads on equitable growth, November 23–December 6, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. If you haven’t read Heather Boushey’s new book, Unbound: How Inequality Constricts Our Economy and What We Can Do About It, then you should. She writes: “Do Americans really have to choose between equality and prosperity? … [Would] reducing economic inequality … require such heavy-handed interference with market forces that it would stifle economic growth[?] … Nothing could be further from the truth … Cutting-edge economics … shows how today’s inequality has become a drag on growth and an impediment to free market efficiency … [There are] deep problems in the U.S. economy, but … policymakers can preserve the best of our economic and political traditions, and improve on them.”
  2. Solvency crises, not liquidity crises, underpin the substantial bulk of Americans’ financial distress experiences. Read Will Dobbie and Jae Song, “Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers,” in which they write: “We study the drivers of financial distress using a large-scale field experiment that offered randomly selected borrowers a combination of (i) immediate payment reductions to target short-run liquidity constraints and (ii) delayed interest write-downs to target long-run debt constraints. We identify the separate effects of the payment reductions and interest write-downs using both the experiment and cross-sectional variation in treatment intensity. We find that the interest write-downs significantly improved both financial and labor market outcomes, despite not taking effect for three to five years. In sharp contrast, there were no positive effects of the more immediate payment reductions. These results run counter to the widespread view that financial distress is largely the result of short-run constraints.”
  3. Here at Equitable Growth we now have a macroeconomics director! Listen to Claudia Sahm on Bloomberg Radio at 3 p.m. today.

 

Worthy reads not from Equitable Growth:

  1. In a world riddled by frequent and deep business-cycle recessions, work requirements for safety-net programs are a really bad idea. Read Hilary Hoynes and Diane Whitmore Schanzenbach, “Strengthening SNAP as an Automatic Stabilizer,” in which they write: “The Supplemental Nutrition Assistance Program (SNAP) is a universal program with eligibility criteria based on household income, allowing it to expand automatically when the economy contracts and vice versa. Unfortunately, this stabilization feature is often limited by work requirements for SNAP eligibility, which restrict benefits for some workers who lose their jobs or otherwise experience labor market volatility during recessions … Two reforms [would] strengthen SNAP as an automatic stabilizer. First … either limiting SNAP work requirements—by automatically removing work requirements during downturns—or eliminating work requirements altogether. Second … an automatic 15 percent increase in SNAP benefits during recessions.”
  2. It is a great pity that Steve Greenhouse’s generation of labor reporters at major media institutions was the last. When they retired, the slots were cut. Read Zephyr Teachout, “Review of Steven Greenhouse: The Upheaval in the American Workplaces,” in which she writes: “There’s an enormous upheaval in the American workplace right now … Beaten Down, Worked Up [is] the engrossing, character-driven, panoramic new book on the past and present of worker organizing by the former New York Times labor reporter Steven Greenhouse. At the beginning of this decade, less than 7 percent of private-sector workers belonged to a union, and support for organized labor unions was at an all-time low. Corporations were using illegal tactics to stop unionization, tactics unheard-of in other countries, and new hires at the biggest companies were often required to watch anti-labor propaganda depicting unions as greedy and self-interested … The “Fight for $15” was born, leading to huge rallies and predawn fast-food walkouts across the country. The workers lacked union protection, and big corporations shelled out cash telling lawmakers that raising the wage would cause small businesses to collapse and result in economic disaster. Nonetheless, the workers won. A wave of minimum wage raises passed. In New York, the rate hit the magic number of $15 an hour. Those 2012 meetings and the Fight for $15 almost didn’t happen; this was not the kind of organizing work that labor unions like S.E.I.U. had been doing for decades. This required unions to spend money on organizing people who would most likely never pay dues. You’ll have to read Greenhouse’s book to learn why the union did it, and how a $50 million failure by one of the country’s biggest unions led to one of its greatest recent successes.”
  3. I was surprised to find, in some circles, a strange lack of enthusiasm for the Banerjee-Duflo-Kremer Economics Nobel Prize. Here is some necessary and important pushback against this lack of enthusiasm. Read Oriana Bandiera, “Alleviating Poverty with Experimental Research: The 2019 Nobel Laureates,” in which she writes: “The 2019 Nobel Prize in Economic Sciences has been jointly awarded to Abhijit Banerjee, Esther Duflo, and Michael Kremer “for their experimental approach to alleviating global poverty.” This column discusses the new laureates’ vision and their common interest in both understanding and addressing the persistence of poverty and the huge differences in living standards across countries … Development economics had no Ph.D. courses, no group at the NBER or CEPR, and hardly any publications in top journals until the early 2000s. What this year’s Nobel laureates did was to build the infrastructure to make fieldwork widely accessible and the methods to make the analysis credible. What they did, and what they were awarded for, is to put development economics back on center stage. The prize to Abhijit Banerjee, Esther Duflo, and Michael Kremer is unusual in many ways. Passionate about statistical trivia, the economist on the street will quickly point out that the three are very young, that Esther Duflo is only the second woman to win it, and that she is the youngest ever economics laureate. This is indeed unusual—but it is largely irrelevant. What is unusual and relevant is that the nomination explicitly mentions that the winners lead a group effort.”
  4. What the researchers call, I think somewhat unfortunately, “non-cognitive routine” work is a puzzle for us as we try to look into the future. We used to know what this very large and very important category of jobs was: staple crop farming, or simple craftwork, and later factory work on an assembly line or moving items or boxes in a distribution channel. There still is a lot of this work in distribution channels and in construction, but we can foresee this category of employment shrinking rapidly in the next generation, and we are having a hard time imagining what other jobs in this category will rise. Read Beth Gutelius and Nik Theodore, “The Future of Warehouse Work: Technological Change in the U.S. Logistics Industry,” in which they write: “Are “dark” warehouses, humming along without humans, just around the corner? Predictions of dramatic job loss due to technology adoption and automation often highlight warehousing as an industry on the brink of transformation … We project that the industry likely won’t experience dramatic job loss over the next decade, though many workers may see the content and quality of their jobs shift as technologies are adopted for particular tasks. Employers may use technology in ways that decrease the skill requirements of jobs in order to reduce training times and turnover costs. This could create adverse effects on workers, such as wage stagnation and job insecurity. New technologies potentially can curtail monotonous or physically strenuous activities, but depending on how they are implemented, may present new challenges for worker health and safety, employee morale, and turnover. Additionally, electronically mediated forms of monitoring and micro-management threaten to constrain workers’ autonomy and introduce new rigidities into the workplace.”
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Equitable Growth’s Jobs Day Graphs: November 2019 Report Edition

Posted on by Raksha Kopparam

On December 6th, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of November. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

1.

The employment rate for prime-age workers stayed at 80.3%, holding at it’s pre-recession level for the second month.

2.

Both the unemployment rate and the underemployment rate trended downward in parallel, reaching 3.5% and 6.9% respectively in November.

3.

Year-over-year wage growth picked up to 3.1%, but it still remains tepid given near-historic low levels of unemployment and a significant number of jobs added in November.

4.

Unemployment remains significantly higher for workers with lower levels of education, but those with less than a high school diploma saw a decline from 5.6% in October to 5.3% in November, after a steep increase from 4.8% in September (amid noisy data in the previous year).

5.

Despite low unemployment and strong job growth, the share of unemployed workers who have been searching for work for more than 15 weeks has not budged, as these workers face significant barriers in finding a new job.

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