As the weather warms, lockdown restrictions fade, and most vulnerable individuals gain access to vaccination, the US seems like a country on a rebound.
The economy is clearly in the midst of a relatively swift recovery; as I write, the economy has already gained three-quarters of its drop in output from the start of the pandemic. Manufacturing alone remains down about just five percent from February 2020. Consumer confidence has also increased to its highest level since the pandemic started, due in part to “pent up demand” accumulated throughout the lockdown. And although there are still 9.5 million fewer jobs in the US today than there were a year ago, labor markets exceeded expectations last month, producing an unemployment rate of 6.2 percent. In short, there is considerable evidence that things are, at last, looking up.
Yet lost within a broad macroeconomic analysis of the economy is a sense of the inequality in suffering the pandemic and recession has inflicted throughout the country. Women (and especially Hispanic women) have been particularly hurt by the COVID-19 recession; to date, 2.3 million women have left the workforce, which amounts to a fall of 57 percent.
The other side of this story is something that readers of this newsletter will know well about. As low to medium wage households with few assets were more likely to see their occupations shuttered by social-distancing measures, an asset-holding class of high-wage individuals able to work remotely often fared very well. And so, as millions of Americans sought protection through a badly-needed circus net of aid, debt relief, and direct cash transfers, billionaires saw their wealth increase by over $1 trillion, and the top 25 managers in the US earned a collective $32 billion.
What is particularly misleading about the sanguine view of the recent unemployment figures is that they don’t give us a full picture of the overall atrophy of the labor force. This is because a large number of Americans have simply chosen to leave it altogether (i.e. they don’t have jobs but are not classified as unemployed). Some of this is clearly due to COVID-19’s effect on hastening retirements; a large and growing number of older workers have simply elected to retire early. Yet labor force participation rate plummeted for workers aged 25-54 since the start of the pandemic. And while that participation has increased in recent months, it still falls below its pre-pandemic total.
Labor force participation for young Americans was already an issue prior to the pandemic. And it is possible that COVID-19 may result in a longer-term reduction in the share of “prime-aged” individuals working. This is concerning, in part because research shows long-run unemployment can negatively impact a person’s prospects for eventually reentering work.
A big stimulus… and inflation?
Of course, things would have been far worse had it not been for the US’ unprecedented attempts to curtail a deep recession through fiscal stimulus.
As of this newsletter, America is spending over $5 trillion on rescue programs—President Trump signed the $2.2 trillion CARES Act into law a year ago; a follow-up bill worth $900 billion came into force in December; Congress recently approved a $1.9 trillion package. This fiscal stimulus has coupled with monetary aid—in the form of lowered interest rates and a greater money supply, among other things— to help steer the US economy out of a deep recession.
The most recent stimulus package, which falls between the $3.4 trillion plan the House put forward and the previous $900 billion plan, provides payments of $1,400 for people who made less than $75,000 in 2019 0r 2020. There is also an additional $1,400 per child, and there is a $400 increase to weekly unemployment benefits as well as an increase in the child tax credit to $3,600 per child, up from $2,000. Absent from the bill, however, is a minimum wage increase—the Senate’s parliamentarian ruled that the proposal to increase the federal minimum wage to $15 an hour could not be included in the bill.
What do economists and policy analysts think about the most recent stimulus package? Overall, the considerable steps the US took to protect individuals hurt by the pandemic has been well received. Had it not been for the unprecedented aid, the debt-saddled demand of American consumers might have caused the US economy to spiral.
And yet, in the aftermath of the most recent stimulus bill, there are some economists who worry about the prospect of inflation. The argument, in short, goes as follows: if the US government overstimulates the economy by overestimating the “lost demand” of the COVID-19 recession, there will be an excessive increase in spending and demand. As a result, prices in the economy may rise to meet that excess demand. And the higher prices in the economy would cause workers to demand higher wages to meet those higher prices. This effect may be exacerbated further by any supply shock (such as the meme-worthy obstruction of the Suez Canal).
The US Fed Chair Jerome Powell, for his part, is not worried. Optimists hold there is no precise way to measure an output gap, and there’s no evidence that the estimates used to justify the most recent stimulus package are wrong. Moreover, the stimulus is not a long-term change in US economic structure and government spending; on the contrary, it is much more similar to a disaster relief package.
And even if prices did rise, there are a number of monetary and fiscal levers the US could employ to curtail inflation if it emerged. Given the pain the pandemic and recession have inflicted on so many households, an emphasis on price stability over welfare seems, at least in this moment, out of touch.
Yet the stimulus package was probably too large. Though another generous round of aid was badly needed, the costs of the pandemic have not been evenly distributed. Lower wage individuals without asset ownership tended to experience significant economic losses. By contrast, wealthier individuals, who were more likely to work from home and own assets, tended to do well in the pandemic economy as portions of the stock market soared.
Research by Raj Chetty speaks to exactly this point. A recent report he co-authored shows that households earning more than $78,000 spent only 7.5 percent of their $1,400 checks. This is why Chetty ultimately endorses a phasing out of stimulus aid for households earning more than $50,000 per person ($100,000 per household). Doing so would lead to a smaller bill on taxpayers and a lighter future debt burden—federal debt is projected to double to 202% of GDP by 2051. It would also produce a more targeted and ultimately fairer pandemic response.
The New Deal, it ain’t
High though the price tag of the recent stimulus might be, it’s worth saying that it is not the New Deal. It has become almost a cliche for the media to compare Democrat policy to Franklin Delano Roosevelt’s New Deal. In regards to the COVID-19 relief measures, however, these comparisons are hyperbole.
The innovations in governance and overhauling of the economy that took place during The New Deal marked a massive structural realignment of US domestic economic power and the empowerment of workers. The Wagner Act of 1935, for instance, helped massively expand worker unionization. Moreover, the Social Security Act helped create the basis of modern welfare by offering up benefits for retirees, the unemployed, dependent mothers, and children, among other groups. And finally, massive public job schemes put millions of people into work.
The COVID-19 Stimulus packages— though a monumental achievement—do not attempt to enact this sort of structural change.
It is true that commentators—from Bernie Sanders to The New York Times—have called Biden’s Rescue Plan the best bill for working families in a generation. And it would be foolish to ignore the considerable moment this stimulus represents in the history of recession-relief policy. Yet it remains an open question whether any of Biden’s measures will last beyond 2021. Will the single-year child credit extend beyond COVID-19? Will a disequalizing recession and pandemic, which took the lives of half a million Americans, spur a movement toward universal health care? Will Democrats accept defeat over the minimum wage? And will the US consider more radical proposals, such as a wealth tax?
Between the culture wars and class
A key element of the stimulus debate that has so far been underlooked is the relative unity Americans have shown in their support for aid. Even as Senate Republicans opposed the recent stimulus bill, 70 percent of Republican voters supported the direct payments of $1,400, and 60 percent supported the broader $1.9 trillion stimulus. That is a far cry from the distinctly anti-government streak of Tea Party Republicanism. And polls show that white voters without college degrees—in other words, a key Trump constituency--valued the recent $1,400 checks even more than college-educated white voters.
It is a great shame, then, that amidst historically high economic inequality, middle and low-income Americans remain divided. As voters with shared economic interests remain fractured in the culture wars, there may be too little incentive for American politicians from either party to focus on the generally popular set of policy packages that might rebuild America’s middle class.
Yet this is work the Biden Administration says it’s keen to take on. Let’s see if they’re up to it.
Thank you for reading. See you in April.
—Julian, writing from London
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Thank you to Maanasi Natarajan for research assistance with these summaries.
Race Inequality and Why Student Debt Cancellation Should Consider Wealth, not Income
(Andre M. Perry and Carl Romers, The Brookings Institution)
It is no secret that student debt has soared in the past few decades to potentially unsustainable levels. Prior to the COVID-19 pandemic, Brookings research found that 40 percent of borrowers were on track to default on their student loan debt by 2023. And as writers like Rana Foroohar have pointed out, the overall debt burden has been outpacing wages and inflation. This has meant, among other things, that too many students are going into far too much debt for far too little a return. All of this is why the debate about student debt forgiveness is, to many analysts, a badly-needed and overdue development.
This report by Andre Perry—who I interviewed recently— and Carl Romers is significant because it analyzes the ways in which the ongoing student debt crisis has been most acute for Black households. This reality, they argue, is a consequence of a persistent lack of generational wealth among Black Americans, which makes their student loan debt a greater financial burden in the long-run. The essay argues that if the US is genuinely interested in reducing the scale of race inequality, student loan debt cancellation would be a good start. Moreover, amidst the growing literature on student debt cancellation that shows it may benefit wealthier students more than lower income ones, the report considers a number of proposals for student loan debt cancellation. It ultimately argues that the primacy of income as the barometer for who is or is not worthy of receiving aid can be misleading, especially when dealing with an issue like race inequality. This is because, the authors argue, income does not capture the impact of intergenerational wealth accumulation. Read
Your Research Briefing
Federal and state governments should prioritize funding of public research universities in America’s heartland to spark economic growth.
(John C. Austin, The Brookings Institution)
Prior to the pandemic, there was an increasing concentration of economic activity in cities with major coastal tech hubs. This was partly responsible for congestion and skyrocketing costs of living. This report explains that the pandemic has caused many to flee those hubs in favor of burgeoning cities in the midwest. This has as much to do with lower costs as it does with the perceived more-comfortable quality of life. These cities are also often home to leading research universities that are integral to the rebirth of economies in the midwest; however, cuts to state and federal R&D budgets threaten to force tuition hikes. And public universities face demographic challenges due to an aging population, Trump-era budget cuts, and the effects of the pandemic. In order to combat this, the authors argue, federal innovation funding and COVID-19 aid for state budgets should prioritize keeping these universities afloat to continue to grow America’s heartland. Read.
Giving nursing homes a rethink.
(Stuart M. Butler, JAMA Network)
As a consequence of Medicaid payment rules, hundreds of thousands of older or disabled people live in nursing homes despite not wanting or needing any type of specialized care. Nursing homes serve people who require short-term post-acute care and those who need only basic daily living care but would prefer to live in their own communities. Moreover, advancements in smart technology and innovations like the “senior village movement”—a movement to use networks of volunteers to help with visits to physicians and shopping trips— have made it possible for older adults needing help to stay in their communities. This piece argues that nursing homes should be more focused on those that need institutional care by reducing back the number of people sent to nursing homes and further investing in nursing homes to improve their performance in caring for people who cannot plausibly live in an alternative setting. The authors also argue that increasing the salaries of caregivers could also make the care workforce more efficient. Home-based aging would also be a better outcome for many older adults. And the improved effectiveness of the elder-care industry might also help reduce costs, improving access to better health care for less wealthy families. Read
The Biden administration is facing an inflation trilemma.
(Lance Taylor and Nelson Henrique Barbosa Filho, Institute for New Economic Thinking)
Inflation is at the forefront of public policy discussions for the first time in decades after the federal government authorized trillions in spending in response to the COVID-19 pandemic. This report examines the Biden policy inflation trilemma. The study explains that the path to a more equal distribution of income would come through a rising labor share; this would spur higher inflation and ultimately lead to asset price deflation. It makes sense, then, that the recent stimulus is receiving resistance from affluent Americans. The report concludes by noting that, while the economic priorities of the Biden administration seem clear, achieving them will be difficult. Read
“Law and Economics” cannot offer a scientific method for making legal decisions.
(Mark Glick and Gabriel Lozada, Institute for New Economic Thinking)
The “Law and Economics movement,” known as L&E, has a primary aim of making economic efficiency the sole basis of jurisprudence. And yet, this report shows the definitions of efficiency used by scholars in the L&E field are unsuitable for legal analysis. This study explicates the shortcomings of the L&E project by discussing the history of the movement. It also attempts to offer a better definition of economic efficiency. The authors acknowledge that economics could be helpful in law in certain instances— econometrics, for instance, could support data analysis about legal decisions. Yet the authors argue economics cannot offer a coherent scientific method for making legal decisions. Read
~People and Places~
How to improve employment opportunities for Black men and reduce race inequality.
(Harry J. Holzer, The Brookings Institution)
This report discusses the factors that affect low employment among Black men, including education, discrimination, health, crime, and incarceration. The authors find that Black men have the highest unemployment rates of any race or gender group. Yet the study acknowledges that that data on the employment rates of Black men is incomplete because of consistent undercounting and high rates of incarceration. In order to develop strong policy solutions, the authors argue, data needs to better reflect the actual unemployment of Black men. We know that the lower educational attainment of Black men tends to reduce their earnings levels and work experience. And the lack of active privileged social connections in Black communities can make finding jobs difficult. Moreover, poorer health and higher rates of incarceration (due predominantly to institutional racism) prevent Black men from finding and keeping jobs. To combat these forces, the authors propose a number of methods to increase employment among Black men. This includes desegregating schools and neighborhoods as much as possible, providing early work experience, raising the federal minimum wage, and subsidizing jobs for the long-term unemployed. Read
To reduce mortality rates in native communities, policymakers should prioritize accessible data and health equity
(Randall Akee and Sarah Reber, The Brookings Institution)
This report examines the phenomenon of Indigenous Americans dying of COVID-19 at much higher rates than any other group. The authors argue that this is largely due to high rates of poverty, racial discrimination, and a lack of support and healthcare resources from federal, state, and local governments. In addition to the disproportionately high COVID-19 mortality rates among Indigenous Americans, the average age of death is also considerably lower than other demographics. The authors hope their report will be used as further evidence of the need to prioritize Indigenous Americans in vaccine distribution. Read
AI and automation advancements threaten to advantage developed countries at the expense of developing and emerging economies
(Anton Korinek, Joseph E. Stiglitz, NBER)
Artificial intelligence and automating digital technology have been inspiring fears for decades about joblessness and rising inequality. This report shows, however, that the greatest costs of nascent digitalization may be placed upon developing countries. This is due largely to the declining returns to labor and natural resources. While there was a belief for much of the last half-century that technological advances would benefit all, this report argues that those who feared the impact of these advances on developing countries may be right. The authors argue that if AI is both labor and resource-saving, it may devalue the competitive advantage many developing countries have. The authors go on to propose a number of policy solutions that could counteract the disequalizing global force of AI and inequality. This includes redistribution and taxation to help the “losers'' of technological advancement. The report also proposes supra-national solutions, including a new global minimum tax rate on capital and reforms to the intellectual property regimes. Read
Expanding broadband access will require a reworking of the Trump Administration’s failed policies
(Tom Wheeler, The Brookings Institution)
This report explains the accessibility gap that the Biden Federal Communications Commission (FCC) will face due largely to the mismanagement of the Trump administration in expanding access to the internet. The authors find that they are currently 42 million Americans unserved by broadband, and they argue that bridging the accessibility gap will require updating the definition of broadband to reflect the proliferation of in-home internet devices and the lack of data about address-to-address coverage. They also make the case that the Rural Digital Opportunity Fund (RDOF)—a program that used allocated broadband subsidies through reverse auction—was a good idea that was undermined by a poor administration. Read
Here’s What Else You Should Know
The perceived fairness of inequalities is strongly related to one’s current social position, and people tend to underestimate the scale of inequality. (NBER)
Actions the Biden administration and Congress can take to better protect farmworkers (Economic Policy Institute)
Schoolwide free-meal programs fuel better classroom outcomes for students (The Brookings Institution)
American Indians and Alaska Natives are dying of COVID-19 at shocking rates (The Brookings Institution)
Hedge funds chalk up decade’s best returns in 2020 (Pensions & Investments)
Gabriel Zucman: high-income Americans may underreport their income at levels far beyond previous estimates (NBER)
The Fed traditionally denied its role in spurring inequality. Not anymore. (New York Times)
Elite private schools breed entitlement, entrench inequality—and then pretend to be engines of social change. (The Atlantic)
Today's market mania will end in economic pain, and like the 2008 recession, that pain will fall hardest on ordinary Americans. (Project Syndicate)
The mass inequality of America’s first Gilded Age thrived on identity-based partisanship, helping extinguish the fires of class rage. In 2021, we’re headed down the same path. (Jacobin)
What ten economists think about the prospect of stimulus-induced inflation (The New York Times)
Thanks for reading. See you in April.
That’s a wrap on this edition of “The Difference Principle”.
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