This month, inflation is back on peoples’ minds.
After economists like Lawrence Summers raised alarms about the prospect of rising prices due to ‘overly excessive monetary and fiscal stimulus—other theories suggest import tariffs have driven up prices artificially—recent data seems to offer evidence of inflationary pressure. For starters, according to the New York Federal Reserve, businesses are facing rising costs and passing them on to consumers—we see evidence of this in surveys of manufacturing prices paid and received, which point to record highs.
These inflationary pressures, which have remained acute throughout the past month, may also be catalyzing greater inequity. Since low and middle-income households tend to dedicate more of their disposable income to daily living costs, they may be more likely to be hurt by price increases if inflation-adjusted wages fall or stagnate. Of course, the Federal Reserve should have a number of monetary levers it can employ in order to ward against inflation, and Fed Chair Jerome Powell has indicated his willingness to use those levers in recent public addresses.
Here’s a helpful primer on inflation.
The US Economy: Up, up, and (probably) away
All this chat about inflation may seem like a bizarre use of attention, however, when we consider that the past year’s painful pandemic and recession is on track to be followed by a roaring recovery.
Due to a glut of savings, Americans have a perhaps unprecedented mass of cash to spend on a newly-reopened economy. This is partly why there is now an emerging consensus that GDP will increase by about six percent in the 2021 fiscal year, producing a total output at about the level it would have been had the pandemic not occurred. Such growth would follow after an estimated GDP loss of 3.5% last year, which is the greatest contraction since the Great Depression. So far, in the first three months of 2021, the US economy grew at a 6.5 percent seasonally adjusted annual rate.
Moreover, in direct contrast to the 2008 Financial Crisis, economists estimate that monthly job gains over the next 10 months will average between 700,000 and one million. Some economists have noted, however, that generous unemployment insurance may be deterring some workers from re-entering employment, in part because their unemployment benefits are more generous than their pre-pandemic —this may say far more about low wages in the US than it does about the fairness of COVID-19 unemployment benefits. Look out for the Fed’s job report on Friday, which will offer a window into how the labor market is growing.
Beyond this, school reopenings offer auspicious news about women’s participation in the labor force. As this newsletter has previously noted, women have been disproportionately hurt by the COVID-19 pandemic, in large part because 1.) women were more likely to work in industries that were shuttered by social distancing measures and 2.) the closure of in-person schooling forced many women to leave their jobs to care for their children. This ultimately resulted in a widening of the labor force participation gender gap by about 2 percent, which has already been narrowing as more women without children return to work. See this Boston Federal Reserve paper for more on this.
An ambitious approach to increasing corporate taxes
Joe Biden’s ambitious infrastructure bill is being paid for by a corporate tax increase, which is intended to generate $2.5 trillion of tax revenue over 15 years. The proposal, like almost any attempt at meaningful policymaking these days, is highly contentious in Congress. The Democrats' razor-thin margins may not only make significant compromise essential; it also may have the effect of skewing the political spectrum of what is considered ‘progressive’.
The current US corporate tax rate is at 21 percent, which is at its lowest level since World War II and lower than most other big countries. In 1968, the US corporate tax rate reached a high of 52.8 percent, and it fell to 35 percent in 1993. In 2012, President Obama proposed to lower corporate taxes to 28 percent, which is where Biden is now trying to bring them after Trump lowered them all the way to 21 percent. The reduction in the corporate tax rate, to some economists, offers an effective example of how economic liberalization becomes embedded and previously moderate policies get rebranded as bold new ones.
We can see similar subtexts of this in the increase of the Biden top marginal tax rate to 39.6 percent, which is much more similar to Bill Clinton’s top marginal tax rate than the rate under Franklin Delano Roosevelt, who Biden has perhaps quite unfairly been compared to. Though Biden’s economic efforts are welcome and could very well amount to a substantive revival and restructuring of the American economy, it is worth asking how many of them will be long-lasting. The Biden Administration has, for instance, made proposals to modernize American unemployment insurance without any appropriated funds to do so, extend the child care allowance to 2025, rather than making it permanent, and omitted a public option for health insurance.
In the case of corporate taxes, Biden’s proposal would still leave them 20 percent lower than they were under President Obama. Moreover, higher corporate taxes alone will do little to combat many of the mechanisms by which many massive companies have avoided paying taxes. To take the well-documented case of Amazon—a $1 trillion company—, the Institute of Taxation and Economic Policy showed that Amazon paid zero federal income tax in recent years and very little in other years. All told, the company has had an effective federal tax rate of just 4.7 percent over the past 10 years. For reference, the average individual tax rate for all US taxpayers was 13.3 percent in 2018.
How do companies get away with this? The dynamics of tax evasion are effectively explained by Matt Yglesias (Vox), who detailed how companies like Amazon have dedicated considerable resources to research mechanisms for tax avoidance—everything from deductions on investing in equipment to deducting stock-based payment to executives from its taxable earnings.
These dynamics are also why the most interesting tax-overhaul policy being floated by the Biden Administration is Janet Yellen’s proposal for a global minimum corporate tax rate of 15 percent. The idea is simple: set a global floor for corporate taxes in order to largely eliminate the incentive to try and evade taxes by shopping for generous tax jurisdictions around the world. Of course, this would take considerable international collaboration and agreement; however, it is a potentially auspicious approach to dealing with the problem of corporate tax havens. And if this approach is successful, it could help generate hundreds of billions of lost revenue annually.
Between capital and credit
Beneath the surface of political squabbles over taxes and spending, there are considerable structural economic shifts that are shaping the future of the US economy. The first of these is technological adoption. After a decade of stagnating productivity growth, investment in technological capital has increased considerably throughout the pandemic as companies substituted workers for machines. This may invigorate growth through productivity gains; however, it may also induce low-wage stagnation that partially helps avert inflationary pressure but could also widen inequality.
Throughout the early stages of this recovery, there are already signs pointing to greater automation, as companies opted not to rehire many of their low-wage workers, whose occupations have partially or entirely been replaced with mechanized processes. In America’s warehouses, for instance, a growing number of self-driving vehicles are responsible for shifting clothing and sports equipment, filing and withdrawing items from bins, and handing off items to workers.
A second trend worth noting here is how COVID-19 has hastened the gap of wealth inequality by widening the fissure between individuals who are in debt and individuals who are able to save. Despite a historically low aggregate household debt-service burden, recent months have seen a growing percentage of people with already-low credit scores falling behind on their car payments, which may be a sign of broader financial stress. So far, a spike in delinquencies has been averted through stimulus measures; however, it is possible that the simultaneous waning of social security benefits alongside an uneven recovery could change this.
This widening of wealth inequality also has a bearing on race inequality. Since more Black and, especially, Hispanic Americans have been disproportionately hurt by the pandemic and its economic effects, Black and Hispanic homeowners have been more likely to fall behind on mortgage payments. This is why when we consider widespread chat about a roaring recovery, the decline of indebtedness, and the end of the pandemic, it is important to contextualize those welcomed aggregate developments in the context of individual people, places, and widening inequality.
Other stories from the past month
Work ‘burnout’ seems to have been exacerbated by the COVID-19 pandemic. As Jill Lepore wrote for The New Yorker, “if you don’t think you’re burned out, you’re burned out.” This culture, some commentators have argued, is a consequence of ‘sociocultural residue of the industrial age, which emphasized a certain “visible busyness””.
We can expect the release of a congressional report on UFOs soon. In the words of President Obama, "what is true... is that there are – there's footage and records of objects in the skies, that we don't know exactly what they are”.
Political power in the US is shifting to the South and Midwest due to changing population growth rates. California lost two House seats, while Texas gained a new one.
Israel faced an agonizing wait today to see if a new government to end Benjamin Netanyahu’s 12 years as prime minister will be approved.
Yemen is in the midst of one of the worst famines in modern history; two out of three people in the country are food insecure, and half the population is one degree removed from the highest possible threshold of food insecurity, as described by UNICEF.
Thank you for reading. See you in July.
—Julian, writing from London
Elite schools do not equal elite outcomes, especially for lower status students
(Valerie Michelman, Joseph Price, and Seth D. Zimmerman, NBER)
There is growing evidence that peer interactions at elite institutions affect both performance in and access to top jobs. The authors in this study look at upward mobility and how exclusive social groups at these elite institutions dramatically impact students’ economic and social futures. This study explains that economic elites tend to have access to peer interactions that allow them to gain entrance into top jobs. This report not only seeks to find quantitative evidence for this; it also attempts to discern whether interactions between low- and high-privilege students offer greater upwards mobility for low-privilege students.
The study utilizes Harvard data from the 1920s and 1930s along with other census and biographical data, and it finds that even while high-status students perform worse in the classroom than lower-status peers, they join exclusive campus clubs at a higher rate because of their ability to access the old boys’ clubs, which provide networking opportunities for highly competitive careers. The authors explain that data from the 1920s and 1930s is heavily documented and abundantly recorded and that the 1920s and 30s reflected a culture of highly selective final clubs that still exist today, even as universities simultaneously contained a substantial amount of economic diversity, though little diversity in race or gender. The study focuses on room randomization and social capital gained from potential interactions between low-and high-status roommates to measure the effect on entrance into old boys’ clubs for low-income students.
The main conclusion of the report, then, is that early interactions between those in old boys’ clubs shape individuals’ career trajectories and spur greater socio-economic success in the long run. This process is self-reinforcing because students already from high-status backgrounds are the ones who tend to have access to these opportunities. The authors also find that membership in exclusive campus clubs provides much more of a labor market premium than academic success: interactions among high-status students reinforce inequality, while less privileged students are unaffected by these interactions. Even students who had residential interactions with high-status students did not benefit from the social proximity. While expanding access to higher education is important, the authors ultimately conclude it is not sufficient to level the opportunity gap between higher privilege and lower privilege students. Read
Your Research Briefing
Reimagining housing assistance programs to support homeowners during economic downturns.
(Robert Collinson, Ingrid Gould Ellen, and Benjamin Keys, The Brookings Institution)
This report proposes a reimagining of housing assistance programs in order to stabilize households and housing markets to better support homeowners and renters during economic downturns. The authors explain that housing costs in the United States account for larger portions of household budgets than they did between 1960 and 2000, and unanticipated shocks to income and expenses strain households’ budgets and consequently their ability to pay for housing costs, emphasizing that housing assistance programs often fall short during economic downturns, a time when they are most needed. The authors’ proposals to bolster the housing safety net include 1) creating Emergency Rental Assistance Accounts that can be used to buffer negative shocks that lead to housing instability; 2) implementing an Automatic Homeownership Stabilization Program for low- and moderate-income homeowners with who qualify; and 3) establishing a Permanent Automatic Tax Credit Exchange Program to reform the Low-Income Housing Tax Credit Exchange program to sustain the creation of affordable housing during recessions. Read
The Biden Administration must reconfigure its immigration policy in order to address the border crisis.
(Elaine Denny, David Dow, Jose Ordoñez, Wayne Pitts, Diego Romero, Juan Tellez, Mateo Villamizar Chaparro, Erik Wibbels, and Pamela Zabala, The Brookings Institution)
This report surveys Central American deportees about the forces driving migration in South America, seeking to use this data to inform the steps the Biden Administration should take when reformulating immigration policy. The authors reach four main findings: 1) the lack of economic opportunity in Guatemala is a significant motivation for migration to the US; 2) most immigrants are law-abiding but feel threatened by aggressive law enforcement; 3) poor governing in Guatemala can be at least partially repaired by US programs; and 4) despite deportation, many deportees intend to cross the border again. In order to create substantive immigration reform, the authors recommend implementing policy changes on both sides of the border, including normalizing the legal status of undocumented immigrants currently in the US, allying with the civil society in the Northern Triangle in its fight against corruption, and promoting economic growth in Central America through infrastructure changes in rural areas and entrepreneurship in urban areas. Read
~Social Security & Taxation~
Passing a minimum wage increase is hard. Elevating the earnings of low-wage workers doesn’t have to be.
(Emmanuel Saez and Gabriel Zucman, University of California at Berkeley)
In real terms, the United States federal minimum wage is at an all-time low. In this paper, Emmanuel Saez and Gabriel Zucman point out that a bill to increase the minimum wage cannot pass at the federal level because of the legislative filibuster. To increase the take-home pay of lower-wage workers in a way that circumvents this obstruction, Saez and Zucman suggest a new policy: a refundable tax credit funded by new employer-level payroll taxes. This policy would be easy to administer, bears similarity to a minimum wage increase, and has policy components that are well-tested. For other recent Saez and Zucman pieces, see their work on the billionaire capital gains tax and the corporate wealth tax. Read
The decline of the U.S. labor share of income is largely a consequence of new technologies.
(Joachim Hubmer and Pascual Restrep0, NBER)
The US labor share, while stable for much of the past century, has been declining in the latter part of the 20th century and the beginning of the 21st century. This report notes the economic debate about the causes of this decline but focuses on the theory of increased substitution of capital for labor. This theory speaks to the idea that as new capital-intensive technologies become less expensive, some firms decide to substitute technology for workers, which results in the decline of labor’s share of income. The authors introduce a firm dynamics model where large up-front investments are used by firms to adopt capital-intensive technologies that automate tasks workers would normally do. This shift tends to happen within large firms when capital prices drop; however, medium-sized firms tend to continue using labor-intensive technology, perhaps because they cannot front the high fixed costs of new capital. The report ultimately finds that, while reallocation played a role in the decline of the labor share of retail and other sectors, it was the substitution of labor with capital that best explains the decline of the labor share in manufacturing. Read
AI manufacturing jobs will likely be concentrated in regional areas with highly skilled and college-educated immigrant workers.
(Gordon H. Hanson, NBER)
Though there are many studies on the labor-market consequences of automation and AI, there is less research available about the forces governing the creation of AI and the teams and workers that are involved in manufacturing this technology. The author explains that the market for AI goods and services is expected to grow tremendously in the coming years and that understanding the comparative advantage in AI occupations is important for evaluating how the emergence of this technology will change trade patterns. To study comparative advantage, the author looks at US commuting zones and the occupations that encompass AI activities in order to examine regional specialization in AI-related occupations. The study finds that the regions that are best able to attract individuals involved in the production of AI are likely to be the ones that have a comparative advantage but that globalization and advances in digital communications mean that this effect has little bearing on regional manufacturing consolidation. The study concludes that location choices of newly-arrived immigrants— whether low or high-skilled—tend to follow those of previous immigrants from their home countries. As a consequence, US commuting zones that had the greatest increase in college-educated immigrants saw the largest increase in the employment share of AI jobs. Read
Here’s What Else You Should Know
Though recent recessions in advanced economies usually had a disproportionate impact on men's employment, the COVID-19 pandemic recession catalyzed larger employment declines among women. (NBER)
Larry Summers: The scale of Biden’s fiscal policy may be far too massive and could lead to overheating and wasted resources. (Financial Times)
Unequal representation within juries tends to make sentences for Black defendants significantly harsher. (NBER)
How Amazon gerrymandered the union vote—and won (Economic Policy Institute)
Billionaires like Bill Gates have said they could support paying more in personal taxes, but have stayed quiet on President Biden’s proposals to raise them. (Recode)
The National Association of Realtors is advocating an end to a pandemic-era order meant to keep renters in their homes. (New York Times)
As Joe Biden and state lawmakers target new taxes on millionaires and billionaires, wealth advisers are trying to help their clients evade the new rules. (Bloomberg)
The American Families Plan: a primer on what it means for workers, families, and students. (New York Times)
The failure of automation and skill gaps to explain wage suppression or wage inequality. (Economic Policy Institute)
FDR discovered the need for a public option to match America’s workers with job demand on fair, nonexploitative terms. As the “Uberized” job market becomes the new normal for millions, we must address the same need. (Brookings)
Yanis Vaourfakis: Austerity’s hidden purpose is to preserve the power of the few to compel the many (Project Syndicate).
Banks are lobbying against the Biden administration’s $4 billion plan to provide debt relief to minority farmers, claiming it would hurt profits. (New York Times)
Promising job numbers are hiding a slow recovery for many metro areas. (Brookings)
Is free college a good idea? Increasingly the evidence says yes. (Brookings)
Assessing English learners during remote learning: Local education leaders offer insight on how to assess ELs’ needs when standardized testing goes awry. (New America)
How restrictive zoning shut the middle class out of Greenwich, Connecticut (Brookings)
Thanks for reading. See you in July.
That’s a wrap on this edition of “The Difference Principle”.
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