Policy options for building resilient U.S. medical supply networks [feedly]

This article from Equitable Growth raises an interesting question arising from "New Deal"-like public approaches to building production capacity as part of a national recovery program. "Buy America" can easily become a "rational" approach since the recovery must include prioritizing putting Americans back to work OVER the longer term efficiencies of "normal markets" using Just In Time supply chains from around the world; or, prioritizing subsidized production capacity investment that in normal times may not be needed or economic. 

The downside of "Buy America" or purely "National" concepts of recovery, is, it can lead to WW3, like it helped lead to WW2, if persisted too long, as competition following broken market globalization can  easily become  existential -- e.g. military.

Policy options for building resilient U.S. medical supply networks
https://equitablegrowth.org/policy-options-for-building-resilient-u-s-medical-supply-networks/

Overview

U.S. policymakers in Congress across the political spectrum, from Sen. Marco Rubio (R-FL) to Rep. Elissa Slotkin (D-MI) to Sen. Bernie Sanders (I-VT), all agree that the United States is woefully underinvested in the resilience of our supply networks, especially for medical products.²⁶ This underinvestment in the past left our nation in 2020 particularly vulnerable to the new coronavirus pandemic.

To cope with the still-rolling coronavirus public health crisis and accompanying economic recession, and then to prepare the eventual economic recovery, U.S. policymakers need to plan to rebuild the U.S. production of key medical products. They then need to act on these plans to be fully prepared for the next pandemic or other public health crises. Our recommendations are in three broad categories:

• Identify and assure stable long-term U.S. demand for key medical products, including equipment, pharmaceuticals, and the key ingredients in these products' supply chains
• Rebuild U.S. supply capabilities by investing in new equipment, the U.S. workers who need to be trained, and the supply networks that need to be built
• Promote productive investment and good jobs in medical supply chainsby empowering the agencies in charge of procuring medical supplies to protect our public health with maintaining not just stockpiles but also the resiliency of the U.S. supply chains themselves

We present a range of policy ideas in each of these broad categories that we think could work to make our medical supplies network more resilient, with emblematic examples when appropriate. We also include examples of other global manufacturing supply chains that exhibit similar strains in relation to the needs of U.S. manufacturing, as well as examples of where these fragile supply chains have become more resilient due to concerted government action.

Our first key point is that our supply chain policies work best with "high-road" investment and workforce policies that strengthen our domestic supply chains, encourage innovation in production capacity alongside the development of new technologies and drugs, train a well-paid production workforce, and ensure labor, environmental, and corporate reforms strengthen rather than weaken our domestic supply chains.

Our second key point is that a concerted national effort is required to overhaul our medical supply chains to better protect U.S. public health. To ensure the three broad steps listed above and detailed below are taken by the federal government, we propose that Congress empower the U.S. Department of Health and Human Services, the Federal Emergency Management Agency, and the U.S. Centers for Disease Control and Prevention to establish these proposed reforms to secure our medical supplies. And we suggest that the U.S. Department of Commerce take the lead in helping foster a business environment conducive to the reshoring of these key parts of these supply chains.

With these broad objectives in mind, and with this broad outline of where in the federal government these comprehensive objectives should be implemented, let's examine each of the three categories in turn.

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Policy options for building resilient U.S. medical supply networks

Identify and assure stable long-term demand

Without stable long-term demand, no company will invest in building up production capacity and workers, managers and investors will not invest in the necessary skills. To achieve long-term rebuilding of our production capabilities all economic actors need to know that an elevated level of demand for domestically produced products and components is here to stay. In the medical supplies arena, the federal government should be the core provider of stable long-term demand as a public health priority.

Without this stable demand, government funding to build up supply will not be effective in maintaining resilient U.S. supply chains. Indeed, many new technologies invented in the United States using federal funding are alas no longer manufactured here in any great quantities. These include storage drives, lithium-ion batteries, liquid crystal displays, and many medical goods.²⁷ That's why government purchasing at the federal, state, and local level should have a "Made in America" component as part of a core national supply chain strategy. Here are several proposals to do so.

Coronavirus relief funding to medical supply companies and the Strategic National Stockpile

Companies involved in providing medical supplies to the U.S. healthcare industry that are given federal aid as part of the response to the coronavirus recession should be required to move a significant percentage of their sourcing and production back to the United States. This should be done in both outright procurement programs at all levels—local, state, and federal—as well as in authorizing reimbursement programs, such as Medicaid.

The Strategic National Stockpile could be another source of demand. Implementing "Made in America" requirements does not necessarily mean abrogating our obligations under World Trade Organization rules and regulations. The WTO Government Procurement Agreement prohibits local content requirements for certain negotiated types of procurement, but these prohibitions are merely "annexes" to the main accord, meaning that according to some interpretations, breaking them wouldn't necessarily violate the main treaty itself.²⁸

These contracts with "Made in America" clauses should be for several years. Otherwise, firms would invest in fixed costs to build capability but would not have a chance to amortize these investments over time. That is, these expenses would hit their bottom line immediately, leading to a negative profit and loss without sparking long-term investments. Accordingly, without secured long-term contracts, it wouldn't make financial sense for any company to make the needed capital investment.

Rebuild supply capabilities

Just expanding demand by itself will not instantly create a domestic supply. Firms need to invest in new equipment, workers need to be trained, and supply networks need to be built. There are many market failures in this process, and government should assist in solving them. Here are some policy ideas to spur this process.

Disclose supply network sources

It is hard to prevent vulnerabilities without knowing where they are. There are several ways that policymakers could encourage or require companies to do this. For critical medical products, Congress could require companies to disclose their supply chains, as proposed in the Strengthening America's Supply Chain and National Security Act.²⁹ This proposed law is tightly focused on pharmaceutical products. Congress should consider expanding the requirement to other products critical for domestic security as revealed by the current coronavirus pandemic, from medical devices to information technology, material science, and natural resources.

Congress then should tighten enforcement of "Buy American" executive orders and similar requirements, given the numerous waivers, exceptions, and loopholes that allow the federal, state, and local governments to purchase foreign goods without penalty. Currently, five big exceptions mean that the order is more declarative than actual.³⁰ Better information can by itself be effective, as well as serve as a powerful peer-pressure mechanism—who wants to be known as the last CEO to reshore critical U.S. medical supplies? Companies are currently required to disclose any material threats to their businesses, but most have not interpreted pandemics as such a threat. That must change. Congress should mandate that the U.S. Securities and Exchange Commission require companies to publicly disclose their exposure to risks caused by public health events that the World Health Organization classifies as pandemics.

Build real options that allow production to surge

Experts and policymakers can be sure that there will be future crises, unfortunately, but they can't know the exact future dimensions of any crisis. That's why the federal government should stockpile some likely items in advance, such as personal protective equipment and ventilators. Concurrently, the federal government needs to mandate the building and maintenance of production capabilities flexible enough to provide what turns out to be needed. There are several ways to do this.

Increase surge capacity
Companies need incentives to maintain slack for use in an emergency since this capacity may seem to be inefficient during normal times. This slack includes buying more general equipment than companies otherwise might, planning for flexible instead of fixed production lines, maintaining the in-house capability to reprogram these production lines, and training workers more extensively so they can help design and carry out the new tasks that turn out to be necessary.³¹

To ensure this added production capacity is ready in a crisis, the federal government could reimburse companies for the extra expenses involved in buying and maintaining this equipment. And the appropriate federal agencies could conduct periodic drills to test compliance. An unintended benefit of the U.S. and Canadian rescue of their auto industries from the Great Recession of 2007–2009 was to maintain organizational capability. Even though personal protective equipment and ventilator production is quite different from automotive manufacturing, when General Motors Corp. and Ford Motor Company began producing PPE and ventilators to help combat the new coronavirus pandemic, they were able to use their engineering and supply chain capabilities to set up production lines and quickly identify suppliers of parts and equipment; their broadly trained production workers were quickly able to learn the new jobs.

Match demand and supply
Sometimes firms use foreign sources because they are not aware of domestic sources. Apple Inc., for example, abandoned its attempt to assemble the Mac Pro in Texas in part because it couldn't find a reliable local manufacturer of a tiny screwneeded for the Mac.³² If the company had looked beyond Texas—say, to the Midwest—it might have been able to find a domestic source for this component.

Government at the federal, state, and local levels can mitigate these deficiencies by helping firms locate domestic suppliers. Several small programs run by federal government agencies have helped firms locate domestic suppliers. The U.S. Departments of Energy and Transportation have teamed up with the Manufacturing Extension Partnership to find domestic suppliers for firms who had requested waivers from "Buy America" policies.³³ Or take a page from the states of Mississippi and Pennsylvania: Each looked at detailed data on components imported from abroad into their states and then introduced the firms importing the components to domestic suppliers of similar products.³⁴ These programs should be expanded.

Aggregate and stabilize demand
Another issue is aggregating and stablizing demand. A key issue in the Apple case mentioned above was that before Apple decided to reshore, U.S. suppliers responded to the dramatic decline in demand for their products by selling their high-volume manufacturing equipment to China. Governments at all levels in the United States also can help match supply and demand for specialized assets and skills by convening supply chain players to develop a roadmap for products ripe for reshoring. The federal government could help by supporting and funding supply chain mapping across the medical supplies network.

China, especially Guangdong province and its leading municipalities, are world leaders in those policy efforts, and we should do well to learn from them how to continuously map product supply networks, identify critical local gaps, and devise and implement actions to close them. In the uninterupted power supply, or UPS, industry in Guangdong's Dongguan prefecture, for example, local township officials have worked hand in hand with the local industry to ensure that there are local suppliers for up to 90 percent of the components needed for a high-end UPS system. A leading official in one of Dongguan's townships concisely described this development strategy:

The leading company is located here because of the complete production and supplier networks we have here. It is not that we have only the final UPS companies. We have all the specialized suppliers they need. For example, there is a coordinating supplier in Tangxia that supplies all three leading UPS manufacturers. So long as we have a complete industry set there is no reason more UPS manufacturers won't come, and no reason for these that are here to move away.³⁵

Eliminate hidden subsidies for offshoring

There are currently multiple hidden incentives for companies to offshore. Chief among them are companies engaging in regulatory arbitrage. One case in point in the pharmaceuticals industry is the current practice by the U.S. Food and Drug Administration to preannounce foreign plant inspections, giving them a regulatory advantage over domestic plants, where inspections are unannounced. The FDA should have at least as rigorous an inspection program at foreign plants as it does at domestic plants.³⁶

Another way to rebuild supply capabilities is to improve methods of purchasing medical supplies in the United States. Too often, firms and governments simply buy products that have the lowest unit costs, ignoring the possibility that the resulting supply chains might have hidden costs, such as lack of robustness or inability to innovate.³⁷ The federal government should set up a Manufacturing USA Institute, perhaps hosted at the U.S. Department of Commerce, to research and improve methods of supply network sourcing and collaboration. These new methods could help ensure the diffusion of technologies developed at the other institutes, since these technologies are likely to be perceived as more expensive initially—unless prospective customers have methods to value the improved contribution these products will make.

The Manufacturing Extension Partnership, an existing federal program, could be used to improve medical supply chain production capabilities. Most small manufacturers supply larger firms, yet many of them struggle to adopt innovative practices due both to lack of economies of scale and poor purchasing practices such as those mentioned above. The Manufacturing Extension Partnership could help by working with lead firms to upgrade their suppliers' capabilities.³⁸ The MEP program is effective but pitifully small. In fiscal year 2020 ending on September 30, Congress provided funding of only $146 million—and, at the urging of Secretary of Commerce Wilbur Ross, the president has requested it receive zero funding for FY2021.³⁹

Akin to this manufacturing program are the "defense manufacturing communities" organized by the U.S. Department of Defense to ensure domestic production of key defense products and technologies. These communities "make long-term investments in critical skills, facilities, research and development, and small business support in order to strengthen the national security innovation base by designing and supporting consortiums as defense manufacturing communities." This blueprint could be applied to other products, including medical products manufacturing organized by the U.S. Economic Development Agency within the U.S. Department of Commerce.⁴⁰ A new bipartisan bill, the Endless Frontiers Act, introduced by Sens. Chuck Schumer (D-NY) and Todd Young (R-IN), proposes to do just that.⁴¹

Protect U.S. infant industries and secure their supply chains in the country

The last, but by no means least, important recommendation is for policymakers to craft legislation to protect infant industries in the United States. The United States currently runs a large trade deficit in even its most advanced technologies because start-up companies invented within U.S. universities often move abroad almost as soon as they have viable prototypes of their new technologies.

This is especially critical in cases where both new production technologies and new products that are based on them are developed. Too many times, infant U.S. companies find that they are unable to perfect the new production technologies in the United States and instead "dumb down" their products, so they can be produced using the old technologies and, hence, offshored to China. An interesting, and sadly only too common, example is optoelectronics, where, between 2010 to 2013, due to the inability of financing fabrication facilities utilizing the new integrated production methods, the United States lost a 10-year lead to the Chinese.⁴²

Policy reforms that would allow for the building of shared production assets could allow new inventions that include U.S. production upgrades to jump over this valley of death. Knowing the availability of infant industry protection measures, by itself, will change the investment and development rationale of entrepreneurs and their financiers.⁴³ And once one company opens the first state-of-the-art production facility in the United States and develops a resilient supply chain with sufficient U.S. domestic sourcing, the costs for its followers will be significantly lower because of economies of scale, learning, and downward sloping cost curves.

Further, since the new facilities in the United States will be built to scale using the latest technology, their yield and productivity will be second to none. And with American ingenuity to follow, unit costs will continue to come down. One historical example of this strategy in action is the production of bombers in the United States during World War II, where one study finds that "every doubling of cumulative output gives rise to 27.9 percent decline in the unit direct labor hours."⁴⁴ A similar approach to the national security threats posed by the coronavirus pandemic could well yield similar results.

Promote productive investment and good jobs in medical supply chains

The proposals presented above would work best in partnership with firms organized around productive investment and skilled, well-paid workers. Uncertainty about future pandemics and other potential disasters makes even more valuable the ability to innovate and rapidly shift to new products in the United States. Firms that focus on long-term investments in their workers and in new equipment and ways of working offer a better return on taxpayers' investment than do firms that focus on short-term financial metrics and rewarding top executives.⁴⁵

Past U.S. policies unfortunately produced counterexamples, such as contracts to produce ventilators that did not yield ventilators available to U.S. hospitals, due to anticompetitive behavior by the largest corporations. Case in point: One small company, Newport Medical Instruments, which received a contract to manufacture ventilators, was bought by Covidien, and Covidien was bought, in turn, by Medtronic PLC, which made competing products and so stalled the U.S. government contract.⁴⁶

Similarly, U.S. firms have spent so much on stock buybacks that they had little cushion to weather a crisis.⁴⁷ By 2019, stock buybacks reached $1 trillion and have become so prevalent that there is no sector in which their size did not dwarf their productive investment. Thus, stock buybacks have now become a significant vulnerability and obstacle to reshoring U.S. production.⁴⁸

On the labor side of the equation, too, there is need for reform. U.S. workers are nearly always left out of such key decision-making at corporations about the location of the production of medical products—and now, about the priority given to providing them access to personal protective equipment—in contrast to their European counterparts. Thus, it is germane to give workers a say in not just coronavirus-related decision-making at their companies, but also supply chain decisions through mandated works councils and elected health and safety committees.⁴⁹

An effective way to deal with many of these issues is the one pioneered in Israel by the Israeli Innovation Authority (formerly the Office of the Chief Scientist). This agency stipulates that any intellectual property generated by the nation's IIA grants, which are given to R&D projects aiming to come up with new exportable products in all sectors of the economy, is not allowed to leave the country without paying a hefty fine (six times the amount of the grant). This measure, in effect, ensures that production commences in Israel, even if the grantee is a fully owned subsidiary of a foreign multinational corporation.⁵⁰

Corporate governance is another key area in need of reform to promote productive investments and jobs, not just in the medical supplies arena but across the broader U.S. economy too. Our ideas presented above would be much more effective if implemented along with some broader reforms. In the past, much taxpayer money has been siphoned off by shareholders and top management of firms rather than being used for productive investment or paying worker salaries. Thus, limits on the financialization of firms and measures to empower workers as productive stakeholders can ensure effective use of citizens' dollars.

We would thus suggest policies such as these for firms that receive government aid to help improve the resiliency of their supply chains:

• Limits on stock buybacks and executive compensation
• Establishment of works councils in large firms and elected health and safety committees
• Renewed antitrust enforcement
• Pledges of neutrality in union elections at government contractors
• Requiring government contractors to obey laws, including labor laws

Conclusion

The still-deepening coronavirus recession brutally exposes our national weaknesses. The task in front of policymakers is difficult and will take years to bear fruit. Yet policymakers can help power an economic recovery and ensure that the next crisis will not find our nation so vulnerable. The federal government can do so by enacting policies that spark new sources of demand for medical supplies, create new domestic sources of supply for those medical supplies, launch workforce training to ensure well-trained workers are available, and enforce equitable labor, environmental, and corporate reforms. A national effort is needed.

Collective national action can make the difference because a crisis of this magnitude requires government action. It is time for the federal government to invest in American ingenuity and give U.S. workers the chance to show the world what its people are capable of making, innovating, and producing.

—David Adler is co-editor of the anthology "The Productivity Puzzle" published by the CFA Institute Research Foundation and the author of related works. Dan Breznitz is the Munk Chair of innovation studies and the co-director of the Innovation Policy Lab at the Munk School of Global Affairs & Public Policy and Political Science at the University of Toronto. Susan Helper is is the Frank Tracy Carlton Professor of economics at the Weatherhead School of Management at Case Western Reserve University. Breznitz and Helper also are co-directors of Canada-based CIFAR's Innovation Equity and the Future of Prosperity Program.

The post Policy options for building resilient U.S. medical supply networksappeared first on Equitable Growth.

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Weekend reading: How to return to work safely edition [feedly]

News and surveys on conditions of essential workers from Equitable Growth

Weekend reading: How to return to work safely edition
https://equitablegrowth.org/weekend-reading-how-to-return-to-work-safely-edition/

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

It's more important than ever to make sure those who do get back to work are protected against the backdrop of weekly Unemployment Insurance claims data showing that 1 in 4 American workers filed for UI benefits since the coronavirus pandemic began in mid-March. The most effective way to do so will be to contain the coronavirus through vigorous testing and contact tracing, Heather Boushey writes, noting that failing to do so will risk another spike in cases of and deaths from COVID-19, the disease spread by the new coronavirus, as well as prolong an already painful recession. Protecting those on the front lines of the battle against coronavirus will protect the rest of us—not offering these workers the safety they deserve risks our health and our economy. Boushey provides proposals to make sure workers feel safe returning to their jobs, including mandated paid sick days and personal protective equipment to essential workers, among others.

One group of essential workers that is gaining prominence in the discussions around protecting front-line workers is warehouse workers, who often are forced to accept unfair scheduling practices and are being exposed to COVID-19 at high rates due, in part, to unsafe work conditions and a lack of employer-provided protections. Back in February, Equitable Growth hosted a convening on scheduling practices in the U.S. warehouse sector, bringing together advocates, researchers, and warehouse workers to find solutions to job-quality issues facing the industry. Sam Abbott and Alix Gould-Werth explain how scheduling practices and poor work conditions affect job quality in the warehouse sector and discuss how researchers interested in studying this sector can engage in these areas of study.

Income inequality is higher and rising faster than policymakers probably realize, write John Sabelhaus and Somin Park. Using data from the Survey of Consumer Finances and comparing them to the widely used Congressional Budget Office measures of household income, Sabelhaus and Park show that CBO estimates don't consider two main drivers of income inequality: uncaptured noncorporate business income and the gap between realized and unrealized capital gains income. Incorporating the Survey of Consumer Finances addresses these shortcomings, the co-authors explain, highlighting how these two areas can shed light on income inequality's growth over the past few decades and the dynamics of inequality in the United States.

Equitable Growth has launched a new lecture series, which will be virtual for the time being, discussing evidence-based research on policy ideas to ensure sustainable and broad-based economic growth. The first lecture in the series featured a conversation between Boushey and Claudia Sahm, director of macroeconomic policy, on specific ways to deal with the health and economic crises caused by the coronavirus outbreak. Sahm urged bold actions by policymakers to prevent economic freefall and save lives. She also discussed the role of the Federal Reserve, automatic stabilizers for the economy, and targeting relief to the most vulnerable households and communities.

Equitable Growth announced its two new Dissertation Scholars this week. This program provides financial and professional support to doctoral candidates as they write their dissertations, bringing the scholars to Washington to gain familiarity with the policy process and current policy discussions. Congratulations to Angela Lee of Harvard University and Matthew Staiger of the University of Maryland, College Park, who will be joining Equitable Growth for the 2020–21 academic year!

Links from around the web

Essential workers are putting their lives and the lives of their loved ones at risk to keep the rest of us safe, healthy, and fed. They deserve more than basic protections and the minimum wage, argues Suresh Naidu in The Washington Post. But many are not being provided with adequate pay or what they need to feel safe at work—and have almost no leverage to get it. With unemployment at its highest rate since the Great Depression, these workers can't quit or move to other jobs. Even with expanded Unemployment Insurance from the Coronavirus Aid, Relief, and Economic Security Act, those who leave their jobs voluntarily are not eligible to receive benefits. Employers currently wield a lot of power in the labor market, writes Naidu, and they have been using it to keep hazard pay low and worker safety protections minimal at best. We owe it to these front-line fighters to push for better working conditions and higher pay, and Naidu offers several ideas of how to do so.

The latest stimulus bill proposed by House Democrats offers much-needed relief to struggling Americans in many ways. But, writes Ezra Klein on Vox, it's missing an important policy proposal that would be the most effective, surefire way to ensure continued support during the coronavirus recession and recovery: automatic stabilizers. The main idea behind automatic stabilizers is to provide support to those who need it based on the economic conditions of the day, not political whims or arbitrary expiration dates, explains Klein. The policy is popular with people across the political spectrum, and has broad support from researchers and economists (including Equitable Growth, whose book, Recession Ready, published last year with The Hamilton Project, focuses on various automatic stabilizer proposals). Klein investigates the reason automatic stabilizers were removed from the stimulus package and why they're actually cheaper than the alternative.

All the recent concern about high inflation after the coronavirus recession is probably misplaced, says Neil Irwin in The New York Times' The Upshot blog, and may actually risk us ignoring or not adequately addressing the crisis at hand. Though he says it's worth looking into the concerns about inflation, especially considering how widespread these concerns are, he adds that it's also difficult to predict what will happen with inflation rates—and it shouldn't be the worst-case scenario for policymakers. "In many ways," continues Irwin, "an inflation surge in the early 2020s would be a signal that all the efforts being taken now (to flood the financial system with cash, to prop up smaller businesses and aid unemployed people) had worked—preventing a deflationary spiral akin to what happened in the Great Depression."

We've said it before, and we'll probably say it again: Millennials are economically the unluckiest generation in U.S. history. They entered the workforce during and after the Great Recession of 2007–2009, never really had a chance to recover from that downturn, and are now being hit by a recession again, right when they should be entering the peak years of their careers, earnings-wise. Andrew Van Dam put togetherseveral charts for The Washington Post highlighting how the average millennial's economic and labor force experience will have lasting negative effects on their earnings, wealth, and other economic milestones such as homeownership.

Friday figure

Figure is from Equitable Growth's Twitter feed after this week's release of Unemployment Insurance claims data.

The post Weekend reading: How to return to work safely editionappeared first on Equitable Growth

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Paul Krugman Is Pretty Upbeat About the Economy [feedly]

I tend to think the risk of depression is greater than PK. But this article is a good discussion challenge for those not convinced. PK has at times been off in his predictions, but not often. And most who argue with him on economic grounds, as with Summers, lose the analytical contest.

Paul Krugman Is Pretty Upbeat About the Economy
https://www.bloomberg.com/opinion/articles/2020-05-27/paul-krugman-is-pretty-upbeat-about-coronavirus-economic-recovery

Paul Krugman is one of the world's most influential and provocative economists. Although Krugman made his professional mark in academia, where his work on trade and economic geography earned him a Nobel prize in 2008, it is his commentary that has brought wider public recognition. Last week, Bloomberg Opinion writer Noah Smith interviewed Krugman online about the state of the U.S economy in the midst of the coronavirus crisis. This is a lightly edited transcript of their conversation.

Noah Smith: This pandemic, and the resulting economic slowdown, don't look much like the Great Recession -- or any recession since high-quality economic data has become available. How should we think about this unprecedented event? Can we model it as a demand shock, like the last downturn? Are there any simple models here to guide us?

Paul Krugman: Is this a demand shock or a supply shock? Yes. And no. The aggregate-demand-aggregate-supply framework doesn't work well for this crisis, because it assumes that the economy can reasonably be represented as producing a single good -- a fine approach most of the time, but not now.

What's happening now is that we've shut down both supply and demand for part of the economy because we think high-contact activities spread the coronavirus. This means we can't just use standard macro models off the shelf.

But it's not all that hard to produce two-sector models that use many of the same strategic simplifications we've used in the past. I've seen really nice work on the question of whether the lockdown in some sectors spills over into recession in other sectors (Veronica Guerrieri et al.), and whether and how it produces financial market spillovers (Ricardo Caballero and Alp Simsek). I'm finding these approaches really helpful as a lens for viewing the data and the policy response.

That is, I don't feel analytically at sea here. Even though this crisis is really different from anything we've seen before, my sense is that we've got a pretty good handle on the economics. In particular, we know enough to understand why conventional responses like stimulus or tax cuts are inappropriate, and why we should be focusing on safety-net issues.

NS: So typical stimulus isn't the goal here, and instead we're merely alleviating human suffering while we wait for the shock to end. But that raises an important question: What are the constraints on government action here? In a normal, demand-based recession, there's little risk of inflation from monetary or fiscal policy because the demand shortage is acting to push prices down. But in this situation, it's not clear which way the shock is going to push prices -- the model of Guerrieri et al., for example, is ambiguous on this point. So should we worry that enormous deficits and Federal Reserve asset purchases might stoke a runaway inflation spiral?

PK: In principle it could indeed go either way. People with intact incomes could be switching to unconstrained goods and services rather than postponing spending, so that aid to the unemployed could be inflationary. But that's not what we seem to be seeing. It looks as if the private sector surplus has risen by enough to accommodate public deficits, with room to spare -- that is, it's deflationary.

One big reason, I suspect, is that Guerrieri et al. -- whose model was almost exactly the way I would have done it, so this isn't a criticism -- don't include a role for investment. The fall in demand isn't just households postponing consumption until they can go to restaurants again; it's also a crash in construction of houses, commercial real estate and so on. Who wants to build an office park in a plague?

NS: That's a good point. But this does raise another question. During the Great Recession, you were -- rightfully, in my view -- a harsh critic of people who used bad macroeconomic models to try to explain that crisis as the result of natural shifts in technology or workers deciding not to work. This time around, how do we know which economists have good models? Leaving out investment can make a model give wrong results, but it's a fixable problem. What sort of theories and ideas should we absolutely shun?

PK: In both the Great Recession and now there are two classes of ideas we can immediately classify as worthless.

First, anyone who is peddling known zombie ideas like the magical efficacy of tax cuts should be dismissed out of hand.

Second, anyone who is just rolling out their usual ideas without making allowance for the special nature of the situation shouldn't be taken seriously. Back in 2008-10 you had people talking about monetary and fiscal policy as if there weren't an issue with the zero lower bound. Now you have people -- as always, a lot on the right but some on the left -- talking as if this were a garden-variety recession, not a shutdown enforced by social distancing.

In other words, it's only worth listening to people making a real effort to grapple with the novelty of this crisis.

Given that, I actually don't think it's too hard to think through a lot of what's happening. Most of the economy still works the same way as usual, which is to say more or less Keynesian in the short run. We can understand a lot of the unusual stuff just by applying usual behavior rules to an unusual situation: people may be unemployed with businesses losing sales to exotic causes, but their spending decisions will probably be like those of job losers in normal times. A lot of what's going on in financial markets reflects the same kinds of balance-sheet spillovers we saw in 2008-9.

The hard part is quantifying cross-cutting stuff. How important are supply-chain disruptions relative to excess capacity in driving inflation? What are we missing about things driving spending? (Investment-free consumer-only models can be a very useful strategic simplification — hey, I did that to think about the liquidity trap — but they may miss a key factor right now).

But the truth is that among economists who are making good-faith efforts to respond to unusual times, as opposed to saying what they always say, I'm actually seeing a lot of common ground. I don't see battling orthodoxies this time around.

NS: That's good to hear. One final question: How long can we expect the economic fallout from this shock to last? The Spanish Flu, which also led to a lot of social distancing, didn't seem to leave a lasting economic scar on the nation. But the modern economy is very different -- more dependent on delicate supply chains, more reliant on webs of debt and credit, more weighted toward services rather than manufacturing and agriculture. How likely is this to turn into a lost decade? And what policy mistakes might we make that prolong the pain?

PK: I've been trying to get a handle on this by looking at recessions over the past 40 years. Until now we've had two kinds: 1979-82-type slumps basically caused by tight money and the 2007-09 type caused by private-sector overreach. The first kind was followed by V-shaped "morning in America" recoveries; the second by sluggish recoveries that took a long time to restore full employment.

My take is that the Covid slump is more like 1979-82 than 2007-09: it wasn't caused by imbalances that will take years to correct. So that would suggest fast recovery once the virus is contained. But some big caveats.

One is that we don't know how long the pandemic will last. Right now, we're probably opening too soon, which will actually extend the period of economic weakness.

Another is that even if we didn't have big imbalances before, the slump may be creating them now. Think of business closures, which will require time to reverse.

And I also wonder how much long-term change we'll experience as a result of the virus. If we have a permanent shift to more telecommuting and less in-person retail, then we'll have to shift workers to new sectors, which will take time. That was an argument lots of people made, wrongly, in 2009, but it could be true now.

All that said, right now I don't see the case for a multiyear depression. People expecting this slump to look like the last one seem to me to be fighting the last war.

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A Service Industry Where Every Worker Thrives [feedly]

A Service Industry Where Every Worker Thrives
https://www.yesmagazine.org/opinion/2020/05/27/coronavirus-service-industry

COVID-19 has revealed the deep structural inequities of the service sector, and has thus created a tremendous opportunity to organize both workers and employers for the change we've always needed. We can't go back—we can only go forward together and reimagine an industry in which all thrive.

Before the pandemic, there were more than 13 million restaurant workers and nearly 6 million tipped workers across the United States, including restaurant, car wash, nail salon, tech platform delivery, and other workers. The National Restaurant Association had argued since emancipation that, given customer tips, they should be able to pay their tipped employees a subminimum wage, today just $2.13 an hour federally. A legacy of slavery, the subminimum wage for tipped workers today is a gender equity issue; 70% of tipped workers are women, disproportionately women of color, who work in nail and hair salons and casual restaurants such as IHOP and Denny's, live in poverty at three times the rate of the rest of the U.S. workforce, and suffer from the worst sexual harassment of any industry because they are forced to tolerate inappropriate customer behavior to feed their families in tips.

Seven states—California, Oregon, Washington, Alaska, Minnesota, Nevada, and Montana—have rejected this legacy of slavery and pay One Fair Wage, a full minimum wage with tips on top. These states have comparable or higher restaurant sales per capita, job growth among tipped workers and the restaurant industry, and tipping averages than the 43 states with lower wages for tipped workers, and half the rate of sexual harassment in the restaurant industry. One Fair Wage, the organization I lead, has been fighting to ensure that the nation follows the leadership of these seven states.

Workers are being penalized because their employers paid them too little.

The subminimum wage for tipped workers resulted in a horrific experience for millions of tipped workers as a result of the COVID-19 economic shutdown. We estimate that between 4.5 million and 9 million restaurant and other tipped workers have already lost their jobs. Most are ineligible for unemployment insurance; hundreds of tipped workers have reported to us that they are being denied unemployment insurance because their subminimum wage plus tips is so low it does not meet the minimum threshold to obtain unemployment insurance. In other words, these workers are being penalized because their employers paid them too little. Even among those who are eligible, unemployment insurance is being calculated based on the subminimum wage plus, generally, an under-evaluation of their tips. Millions of workers find themselves now unable to pay for rent, food for their children, or other bills.

We launched the One Fair Wage Emergency Fund on Monday, March 16, to provide cash relief to thousands of low-wage service workers; the fund has exceeded 150,000 worker applicants in the past month. We have built an army of almost 1,000 volunteers who are calling each worker to screen them for need, organize them into One Fair Wage, and register them to vote. Our organizers then follow up with potential leaders to organize them into our relational voter program and ultimately, win One Fair Wage.

Our relief fund is drawing in low-wage workers, people of color, single mothers, immigrants, and young people. These workers are anxious to speak with us, not only because they are desperate for funds, but also because they are distraught and frustrated with the fact that they have worked for years in the service industry, only to find themselves completely destitute the day after their restaurants close. Almost all workers are signing up to join One Fair Wage, speak to press, and register to vote.

We aren't stopping with just organizing workers—the extraordinary moment calls for more.

We have raised nearly $23 million to date to hand out relief to thousands of workers; we are also providing individual counseling to workers with regard to their unemployment benefits and finances. More importantly, we are organizing these thousands of workers into large national and state tele-town halls and virtual rallies with Congress members, governors, and other state legislators to allow them to raise their voices and make demands. It is a new and unique moment in organizing. Thousands of workers are attending these virtual events and demanding change with a fervor we've rarely seen. In this new and challenging moment for organizers, the OFW Emergency Relief Fund provides a clear pathway for a different kind of organizing and voter mobilization that will allow us to not only engage hard-to-reach populations civically but also develop their leadership to change the issues that most affect them.

But we aren't stopping with just organizing workers—the extraordinary moment calls for more. The moment has shown that we can simultaneously support workers and ensure that responsible restaurant owners who care about their workers survive the crisis—and reshape the service sector going forward. In fact, several restaurant owners who previously opposed or were hesitant about One Fair Wage are now willing to work with us to commit to One Fair Wage and increased equity next year. For some, their eyes have been opened to the unsustainability of the system; for others, the moment has allowed them to break free from an old business model that they could not see how to change. Some are even working with us to design model restaurants of the future.

Based on these conversations, we have been working with various governors and mayors to launch High Road Kitchens—a program in which restaurants that commit to move to One Fair Wage and greater race and gender equity voluntarily next year receive public and private dollars to rehire their workers and repurpose themselves as community kitchens to provide free meals to those who need them. We are thus providing both relief to struggling independent restaurant owners, free meals to workers and others in need, and most importantly, reshaping the sector toward equity.

The pandemic is both the gravest crisis in the service sector's history in the United States and also the greatest moment for transformation—for building power among workers and change among employers toward a sustainable future of collective prosperity.

The post A Service Industry Where Every Worker Thrives appeared first on Yes! Magazine.

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U.S. income inequality is worse and rising faster than policymakers probably realize [feedly]

U.S. income inequality is worse and rising faster than policymakers probably realize
https://equitablegrowth.org/u-s-income-inequality-is-worse-and-rising-faster-than-policymakers-probably-realize/

Overview

The use of U.S. administrative income tax data for research purposes over the past two decades has led to an ongoing debate about levels and trends in U.S. income inequality. The debate around income measurement is important because how economists and policymakers alike measure income shapes how income inequality is perceived by the broader American public and thus could drive public policy decisions in more equitable directions.⁹⁰

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U.S. income inequality is worse and rising faster than policymakers probably realize

This debate about U.S. income inequality has swung back and forth. Some early academic uses of administrative income tax data showed dramatically higher and rising income concentration than previously thought.⁹¹ Yet some more recent efforts show less income inequality with no upward trend.⁹² The debate today centers on what types of income are being counted in the inequality measures and what sorts of data are used to measure each type of income.

There is a well-established middle ground in the income inequality debate, based on a regular series of reports from the Congressional Budget Office.⁹³ The nonpartisan CBO measures household incomes in what most observers believe to be a conceptually comprehensive way. It also combines the best available data for every type of household income, merging surveys and administrative tax records. The result is believed by many to be the most accurate picture of U.S. income inequality available.

Even the CBO measures, however, are missing two important drivers of income inequality. The first is the CBO estimates the measurement of noncorporate business income. The second is the CBO counts only the portion of capital gains that is realized and taxable in the current year by any tax filer, instead of a more comprehensive measure of all capital gains associated with income-producing assets earned in the current year.

These two missing drivers of income inequality—uncaptured noncorporate business income and the gap between realized and unrealized capital gains income—means that income inequality is worse and rising faster than policymakers probably realize.

In our research, we use another household dataset, the Survey of Consumer Finances, or SCF, that makes it possible to address those two shortcomings and create a more comprehensive view of income inequality.⁹⁴ This survey is conducted by the Federal Reserve Board every 3 years and was most recently completed in 2016, measuring incomes of respondents in 2015. The SCF has better measures of noncorporate business income, and SCF wealth measures make it possible to allocate all capital gains across households using values for SCF income-producing assets such as stocks, bonds, mutual funds, and closely held businesses.

This issue brief examines these two missing drivers of U.S. income inequality and concludes by showing that proper accounting for noncorporate business income and unrealized capital gains helps us understand the connection between high and rising U.S. income inequality and the dynamics of income and wealth inequality in the United States.

Noncorporate business income reporting

The first issue we address is noncorporate business income reporting. Most analysis of income inequality—including by the Congressional Budget Office—starts from the measure of noncorporate business income reported on income tax returns. The measure of noncorporate business income on tax returns is only about half of the noncorporate business income estimated in the National Income and Product Accounts, or NIPA, which is the benchmark for all components of U.S. national income.⁹⁵

The gap between taxable business income and NIPA business income is, to some extent, a mystery. One source of difference is simple noncompliance by noncorporate business taxpayers, meaning deliberate misreporting to the IRS. But there are other possible sources of divergence between taxable and NIPA business incomes as well. NIPA statisticians estimate noncorporate business income as one component of overall national income, and any conceptual differences between NIPA economic concepts and the methods used to compute business sales and costs for tax purposes will lead to differences in estimated incomes. The decision about whether and how to account for the missing noncorporate business income is one of the key factorsunderlying differences in estimated U.S. income inequality.⁹⁶

The Survey of Consumer Finances measures business income by simply asking respondents what their businesses earned. The total of SCF noncorporate business income is well above the tax-based income aggregate captured by the Congressional Budget Office and correspondingly, the SCF is much closer to NIPA for noncorporate business incomes. (See Figure 1.)

Figure 1

Although the data sources and methods differ, Figure 1 shows that all other SCF income components are relatively close to CBO values, after imputing unmeasured income components such as employee benefits and Medicare onto the SCF using CBO's methods. The net effect is that total household income in the Survey of Consumer Finances is slightly higher than total household income as reported by the Congressional Budget Office, and that gap is mostly attributable to noncorporate business income.

Why does the Survey of Consumer Finances find more business income than tax returns do? Some academic research views the higher levels of business income in the SCF as indicating there must be a problem with the survey.⁹⁷ There is certainly scope for respondent confusion about different types of capital income, and indeed, SCF-reported nonbusiness capital income such as interest, dividends, and realized capital gains is slightly below the CBO values. On net, the extra noncorporate business income dominates, however, and overall income is noticeably higher in the SCF than reported by CBO in all years. (See Figure 2.)

Figure 2

The most likely explanation for higher business incomes in the Survey of Consumer Finances is that respondents are reporting something closer to what they truly earned in business income, and that survey-reported concept is above the values they (or their accountants) reported on their tax returns. In any case, it is difficult to imagine why SCF respondents would overreport their business incomes, especially given the accuracy of reporting for other income components. So, correcting income inequality estimates for underreported noncorporate business incomes is the first important adjustment made possible by switching from tax data to the SCF.

Capital gains income reporting

The second important adjustment made possible by using the Survey of Consumer Finances is switching from realized to total capital gains. Realized capital gains are the incomes reported for tax purposes when tax filers are required to report profitable asset sales on their tax returns. Total capital gains capture all increases in asset values, regardless of whether tax reporting is triggered. The concept of Haig-Simons income—which includes all capital gains, realized or not—is well established as the key benchmark in analysis of economic welfare. If the value of an income-producing asset goes up—meaning the owner could sell it at a higher price—then the owner has truly earned something by owning the asset, whether they sell the asset or not.

A few recent studies show the importance of capital gains in overall savings and wealth accumulation. One study shows that capital gains account for 8 percent of national income, on average, since 1980.⁹⁸Another recent paper shows that capital gains account for about 75 percent of wealth accumulation since 1995.⁹⁹ Since most gains are not realized for tax purposes when they occur, we are missing a substantial part of true economic income in the tax data.

Take a look again at Figure 2. The third (purple) line shows our estimate of Haig-Simons income, which is, on average, about 6 percent higher than the SCF income measure. How do we construct Haig-Simons income? Aggregate capital gains for each type of income-generating asset in each 3-year period between SCF surveys are computed using the Financial Accounts of the United States.¹⁰⁰ We then compute a gains ratio—aggregate gains divided by the aggregate holdings of the respective assets in the SCF—and apply that gains ratio to household assets. Each SCF household then receives the average capital gains of the 3 years prior to the survey, and that replaces their reported realized capital gains.

The consequences of missing noncorporate business income and unrealized capital gains

So, how does accounting for missing noncorporate business income and unrealized capital gains affect estimated U.S. income inequality? The answer is unambiguous because both the missing business income and unrealized capital gains are concentrated at the top of the income distribution. Income inequality is worse than policymakers probably realize. Also, because business income and capital gains are both increasing relative to other income components, income inequality is rising at a faster pace than previously understood.

There are different ways to show how accounting for the missing noncorporate business income and unrealized capital gains affects income distribution in the United States, but the simplest way is to just compare income of households in the middle of the income distribution with incomes of households near the top. (See Figure 3.)

Figure 3

When we compare incomes for the median household, the CBO and SCF measurements look similar. The ratio of median SCF to median CBO income and the ratio of median Haig-Simons to median CBO income consistently hover around 1. Why? The median family is just as well-off using any of the three measures, because the additional business income in the SCF and unrealized capital gains do not accrue in any substantial way to the median household.

In contrast, the story is different at the top of the income distribution. Just switching from CBO to SCF source data, which takes account of the higher business incomes, raises the 99th percentile of the income distribution by about 10 percent in 1988, and the gap (although volatile) is more than 30 percent by 2015. Replacing realized capital gains with unrealized capital gains to move to Haig-Simons income pushes the 99th percentile to 40 percent above the CBO value in 1988, and (although even more volatile) that gap increases to 70 percent by 2015.

The upshot of the more comprehensive measures is that whatever your prior beliefs about the ratio of 99th percentile to median income—the P99-to-P50 ratio—you were probably too low. In the CBO reports, the P99-to-P50 ratio is 6.2 in 1988, rising to 8.3 by 2015. Figure 3 suggests the more appropriate P99-to-P50 ratio, using the Haig-Simons measure, is 9.3 in 1988, rising to 14.9 in 2015.

The capital gains adjustment we apply to the Survey of Consumer Finances comes with a caveat, but it is likely biasing our top income values down, not up. The estimates here assume that the ratio of capital gains to asset value are the same for every owner of a given asset, because we compute and apply one ratio per asset type and time period. In practice, if wealthier owners earn higher gains relative to asset values, then the ratios should increase with wealth, making income even more unequal.

Conclusion

We are not the first to focus on the role of missing noncorporate business incomes in overall U.S. income inequality.¹⁰¹ But we are the first to use the Survey of Consumer Finances in a head-to-head comparison against tax data to pinpoint where in the income distribution that missing income can be found—rather than assume, for example, that it is simply underreported income of otherwise low-income families or proportional to reported taxable income. Also, othershave estimated Haig-Simons income distributions, but come to very different conclusions about the impact of levels and trends on inequality.¹⁰²

Our answer differs because we use the actual joint distribution of income and wealth, then recompute the income distribution with the more comprehensive income measure. Our results push the pendulum in the ongoing U.S. income inequality debate back toward the "high and rising" conclusion.

More importantly, proper accounting for noncorporate business income and unrealized capital gains helps us understand the connection between income and wealth dynamics. It is difficult to explain high and rising U.S. wealth concentration with available income measures because the very wealthy would have to be saving at an unbelievably high rate to accumulate that much wealth. Acknowledging that there is a lot more unmeasured income at the top of the distribution makes that puzzle less challenging.

—John Sabelhaus is a visiting scholar at the Washington Center for Equitable Growth, where he has been since 2019. Prior to that, he was assistant director in the Division of Research and Statistics at the Board of Governors of the Federal Reserve System. Somin Park is the research assistant to the president and CEO at the Washington Center Equitable Growth and will be a student at Harvard Law School starting in the fall of 2020.

The post U.S. income inequality is worse and rising faster than policymakers probably realize appeared first on Equitable Growth.

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