David Beckworth: Our guest today is Heather Boushey. Heather is the Executive Director at the Washington Center for Equitable Growth, a think tank founded to accelerate cutting edge analysis and to whether and how structural changes in the US economy affect economic growth. Heather recently co-edited a book titled, Recession Ready: Fiscal Policies to Stabilize the American Economy.
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Beckworth: She joins us today to talk about it. Heather, welcome to the show.
Heather Boushey: Thank you. It's a real treat to be able to talk to you today.
Beckworth: I'm glad to have you on, I'm glad to be here at Equitable Growth, a think tank here in DC and lots of activity going on here. Why don't you share with our listeners what Equitable Growth is about, what it's doing and, its history?
Boushey: Happy to. Happy to have you here. We just moved a few months ago. So, these are our new offices.
Beckworth: Very nice.
Boushey: So, it's very exciting for us. We almost doubled in size. We launched in November of 2013. We were founded by myself and John Podesta and, as you said, our goal is to advance evidence-backed ideas and policies in promote of growth that is strong, stable, and broadly shared.
Boushey: And we have a very unique institutional model. Unlike a lot of other think tanks here in Washington, DC, we have an in-house team of researchers. But, what we do is we fund scholars and are building a network of people from universities all across the country who want to join us in investigating this question of how inequality affects economic outcomes.
Boushey: So, over the past five years, we've funded ... I think we've given away almost five million dollars, maybe a little bit more now. Funded somewhere around 180 scholars to investigate these questions. And we have an open and competitive grant cycle that goes out, a call for proposal that goes out every Fall. And then, we are just about to announce our grantees for 2019.
Boushey: So, we take all of this research and evidence and try to make sense of it for people in the policymaking community. So, what does the research tell us about what inequality does, where does inequality affect productivity, where does it affect output, where does it affect the things that determine whether or not we're all going to see an increase in our living standards? So, these are the questions that we look at.
Boushey: And the team here in Washington focuses on really making sure that those answers are accessible and compelling and, policymakers know how to make sense of it all.
Beckworth: Okay. So, if there were any scholars out there who might be interested in applying for the grants, when do they come available?
Boushey: That's a great question. So usually, we put out our requests for proposals around November 15th and then usually the grant proposals will be due sometime in January. We're very excited that over the years we've been able to add to our programs. So when we started we just gave out grants to scholars and both to more senior scholars, but also we've also reserved funding for some junior scholars, people who are either at the dissertation level or postdoc level.
Boushey: Over the past few years, we've actually been able to expand. This year and last year welcomed two in-house pre-docs who sat with us here at Equitable Growth for a year. We're saying goodbye to this year's two fantastic folks on Thursday and we're going to welcome some new pre-docs in the Fall.
Boushey: And so the applications for the pre-doc program for the Rising Scholars Program and for our full grants all happen at the same time in January.
Beckworth: Okay. And we'll provide a link to your website with the podcast so interested parties can follow that and get in touch.
Boushey: Yes, and I would really encourage your listeners to check out our scholars. Our website elevates all the people that we've funded, our growing network and people that have written for us because we have a working paper series, seminars and, some of those people we fund, some of those are just scholars that are interested in these questions. And you can see the diverse array of viewpoints, the research that we found and, how that really adds up to a new story about what's happening in the US economy.
Beckworth: And I see you've had some conferences too right? You've brought in scholars to discuss issues in addition to the papers you commission.
Boushey: We do. We do so many convenings. Just came off of one this week bringing together people to ... both from the policymaking world as well as from the academic world to talk about the role of, the way that gender intersects with questions about the future of work. So we're having this national conversation about how technology is changing production, what that means for how work is happening, what that means for distribution of the gains of growth.
Boushey: And we brought together a bunch of thought leaders to really dig into what do we know, what do we need to know about that plays out for different communities across America.
Beckworth: Very interesting. Well, I have to ask since I'm the monetary policy guy, do you look at the intersection of monetary policy and inequality issues as well?
Boushey: Certainly. Yes, I'm going to point you ... whenever anybody asks me that question now, I point to this. One scholar that we funded in a working paper that came out a while ago and, I think we just released a short piece about the paper. His name is Xavier Jaravel and I hope I'm pronouncing that correctly. At any rate, he did research looking at the way that inequality in consumption is affecting what firms are producing in ways that is having an effect on inflation. With, of course, significant implications for how we think about monetary policy.
Boushey: So, what he found was that because of the rise of inequality, producers are focused on going where the consumers are. So there's an increase in competition, in product differentiation for goods and services at the top of the ... aimed at folks at the top of the income spectrum. And at the same time, there's been less competition, less innovation, less product differentiation at the bottom.
Boushey: Okay, well that kind of makes sense in a world where inequality is rising as fast as it is here in the United States. You might really focus on, if you want to make a lot of money, you might focus on how you can make fancier phones for rich people than focused on folks at the bottom who don't have as much money and who aren't seeing their incomes grow.
Boushey: Thing is, is that that actually has an effect on inflation. And what he found is that prices are actually rising faster for the bottom end of the income spectrum, families down there, than it is for folks at the top because you've got all this competition and product differentiation. So that has implications for how we should be thinking about monetary policy moving forward in a highly unequal society.
Boushey: There isn't just one inflation rate and we know the BLS has often looked at different prices for energy or food but inequality is a really important layer and that's going to play out differently across communities because inequality, it doesn't play out the same in every community across America that has the same kind of inequality. But communities that have a lot of low-income families are going to be seeing these higher prices than places that have a lot of high-income families.
Beckworth: That's interesting and also a little bit surprising to me. I would think that a Walmart, it brings low prices to low-income people. You're saying there's not a lot of competition for product variety at the goods sold at Walmart.
Boushey: Exactly. What's interesting, you're making an argument about a retail strategy which has kept prices low. So this is both ... now we might be getting so far into the research that I want to make sure that it's like, "Oh, I might want to go back and read that paper before I say this next sentence". But, my understanding is that that's about the change. So, where prices are headed.
Beckworth: Okay. So, the change. Not the level but the price. Got you.
Boushey: Right. But the change in prices.
Beckworth: Something else that strikes me that I've thought about and I tinkered with and seen some work done on this, is how monetary policy is grappling with regional disparities. Not necessarily maybe income inequality but the fact that some regions aren't keeping up with the more productive parts of the country; San Francisco, Silicon Valley. Like I'm from Tennessee, not too far from where I am is Appalachia and I just think that it's more difficult for the Fed to apply a one size fits all policy to very different regions, very different industries and so forth.
Beckworth: And part of the argument for having a one size fits all is, this optimal currency area argument that if the Fed tightens and let's say Michigan's in a recession and Texas is booming, well then a couple of things. One, you can take transfers via taxes from Texas to pay to Michigan, kind of softens the blow. Secondly, labor mobility. People will move from Michigan to Texas and we see there's less and less of that.
Beckworth: So some of the shock absorbers we normally think are there that make it easier for the Fed to apply one size fits all, are kind of diminishing. I wouldn't say diminishing. Maybe that's too strong. They're definitely maybe incrementally getting less robust and more fragile. So, one of the things I've been thinking about at least, is that the US might be slowly inching away from being an optimal currency area and it might be harder for the Fed to do its job in a successful manner.
Boushey: It's a really interesting question and I think your point about the shock absorbers is really important. I mean, you noted both people are moving less and that's one of the stories that's come out of the research since the Great Recession, is that one would expect given these disparities in wages across place, that Americans would be moving more. But it's not what we've been seeing. And that's interesting.
Boushey: And then you connect the dots between that and the research on the rise of deaths of despair, the Case and Deaton work that shows there’s some communities where you're seeing the way that the opioid crisis is playing out across place. Not just the opioid crisis but more generally and, one has to wonder why aren't all of these people packing up and going to the places where there is more economic vitality? Do they feel trapped or do they not see the opportunity or, is there just this sort of malaise, the despair. I'm the economist, these are questions for sociologists and anthropologists, you know people thinking about communities in a rich way.
Boushey: Another aspect of that question on the shock absorbers ... So one shock absorber is people move and that's disruptive to people and families and one has to wonder if part of what we're seeing is that maybe we kind of reached the end of the line on that a little bit. That America's an older country now, maybe people feel more embedded in their communities. They don't want to leave their church or their school or their neighbor or their family members and go across the country. And that kind of makes sense but also, we got airplanes and maybe that doesn't make sense so much.
Boushey: So we think there might be less of a shock absorber on people moving. But the other shock absorber you just mentioned, fiscal policy. That if Michigan is struggling that what you have in a common currency is that places that are booming should be sending tax revenue to those places that are struggling and, we should have a federal government where the places where you have the most poor people or the worst economic outcome, should be receiving the kinds of supports to bolster those economies to act as the shock absorber. And ideally, those would also be boosting economic outcomes. And of course, what we're seeing at the federal level is many of those very programs that service those shock absorbers have been paired back in recent decades. Which is a nice segue to our book.
Beckworth: So your book's title is, *Recession Ready: Fiscal Policies to Stabilize the American Economy.* And I'm going to ask an obvious question but, why this book and why now? You've kind of answered it already but just again for our listeners, why does this book need to be done?
Boushey: Let me start off with a little personal story.
Boushey: In 2008 I was working as a staff economist in the US Congress for the Joint Economic Committee, which is a non-legislative committee that is tasked with doing things like watching the economy and helping Congress understand what's happening. And 2008 shall we say, was a very exciting year to have been on the Hill watching the economy. I could describe in great detail one of the days when the Stock Market plummeted by over 700 points and standing there in the office just being like, "Oh goodness". And tracking all of the extraordinary things that we did, that the Federal Reserve did in 2008 to shore up the financial sector. Just really tracking that month by month and, at some point day by day.
Boushey: But one of the things that I really wished I'd had that year was an off-the-shelf manual for what to do in a Great Recession. You can see the recession unfolding and I'm trained as a labor economist, I know that unemployment is a lagging indicator. Meaning that unemployment's going to rise after growth starts falling. So, once you see growth start falling and the stock market, you're sort of seeing the financial markets unwinding, and you just knew, okay any minute now, we're going to see the way this is playing out for families all across America. It's like watching a slow-moving train wreck.
Boushey: And trying to put together the proposals and in the case of the role that I had, putting together hearings, bringing together people to come up with what the solution should be to give Congress the answers that it needed. We had a lot of learning that had been done. But there were so many places where, as Congress started putting together the Recovery Act, which happened of course very, very quickly, it would have been really great had we been able to rely on a body of work that had some time to marinate. Had some time for people to kick the tires, really think about the ideas and, to be able to make policy in a crisis that didn't just address the immediate crisis at hand, but was also laying a foundation for a stronger economic tomorrow.
Boushey: And I think looking back at what the Recovery Act did which was a legislation that was signed into law in 2009 after Obama took office that pumped money into the economy, a lot of great things were done there. But, there were places where we could have shored up our recession ready system that we hadn't really thought through. And even if somebody had a good idea, there hadn't been enough of, what I like to think of as the kicking of the tires. Enough conversation, enough debate to really know that was the right path. And so, one of the reasons that I really wanted to do this book was to be ready for the next time and to give that next person that has my job, a little bit of a toolbox.
Boushey: Another entry point into this is that I was at a conference a couple of years ago, a macroeconomic conference, and there were a bunch of macroeconomists and they were all talking about what the next recession would bring. And everybody is having these conversations about how, well, because interest rates remained at historically low levels, there's not enough bandwidth to lower interest rates relative to what normally happens in a recession.
Boushey: Recession, interest rates are usually a decrease much more significantly than we have room to go. And so, here are these macroeconomists who are used to thinking about big aggregate things, they're kind of thinking in aggregates and, one of them made an offhanded ... What I felt was a bit of an offhanded remark. "Well, we're just going to have to rely more on automatic stabilizers", and then they just kind of moved on.
Boushey: And those of us that think about those… the programs that make up automatic stabilizers, I was like, well as a labor economist I thought a lot about unemployment insurance, I thought a lot about safety net programs. And those programs are complicated. There's a lot of rules, some of them are administered at the state level. So unemployment insurance, you got 50 different programs. Some rules that are the same but you've got a lot of layers of bureaucracy to work through. It's not as easy as the Federal Reserve just changing a number.
Boushey: Changing fiscal policy is a lot more complicated. And changing a system that takes in money in good times and spends more money in bad times, which is what automatic stabilizers do, is a lot more complicated. So, at that conference, Jay and I, Jay Shambaugh and I started talking about how, "Hey, let's follow up on that automatic stabilizers point. Let's really think deeply about where we are, what we need and put together something that would give people a starting place of a set of ideas of what we could do.
Boushey: Recession's going to happen again and we're about the right point of the business cycle where we should be so lucky that we finish the book before we enter the next recession". So we're really excited that we made that.
Beckworth: You made the cut.
Boushey: We made the cut and, get people thinking and talking about it so that when a crisis happens, more people have had those conversations and people feel more comfortable with what would be the right path forward.
Beckworth: So the point of the book is to focus on automatic stabilizers. And I think a reason for this and correct me if I'm wrong is, you learned a valuable lesson from 2008, 2009 it's very difficult to do discretionary fiscal policy. Regardless of what one thinks about that, if you're going to do it, it's better to have built-in triggers, make it automatic. So, tell us why is it such a big deal? Why do we want automatic stabilizers for fiscal policy?
Boushey: Yes. And so there's a number of answers embedded in that question. So, let me sort of break it down.
Boushey: So first, doing fiscal policy can be hard. There's a lot of decisions you have to make. So again, it's not like making monetary policy where you're changing one number or the interest rate or, even a small number of things. You're making a decision about how to put together a policy, whether or not you have the administrative capacity to successfully deliver on that policy, and that may require coordination across layers of government. So, you need to know whether or not your state and local government is ready to do whatever it is that you might want to do.
Boushey: And you have to figure out how you're going to pay for it. And, you have to do all of that and convince a House and a Senate and a President that this is a good idea so that you get enough people to vote for it and the President signs it and, then you can start actually implementing it. So, it just requires a lot more, quite frankly, a lot more management and a lot more details on how you're going to do something.
Boushey: And the thing is, is that you're in the middle of a crisis and of course the Great Recession is hopefully an anomaly. Hopefully, none of us will see something like that again in our lives. But that January as people were writing the Recovery Act, we were losing 20,000 jobs a day. It was this very big crisis that we're in and that kind of makes it a little bit hard to concentrate and you also don't know how big it's going to be.
Boushey: So you have, one, a problem of just administration and management of how you're going to do this. Two is, there's questions about how big does your stimulus need to be? So you're in the middle of a crisis and you're like, "Well, does it need to be really big, does it need to be small, what's the right level?" And one of the things that we learned during the Great Recession is that you actually don't get that many bites at the apple. Congress might be willing to do something at one point but, then going back to them isn't actually quite as easy as one might think. So you have to get it right the first time.
Boushey: But that's a lot of pressure. To get things perfect when you don't know what the economy's going to look like in a year. So, discretionary policy while important and also shows that policymakers are taking action and, that also could be very important in a crisis to know my representative is doing something. But it requires a lot of thought and intellectual firepower to really put together the right pieces.
Boushey: So automatic stabilizers have the advantage of ... And let me just break down when we say automatic stabilizers, that sounds so wonky. What we mean are programs that have been set up that have some sort of mechanism whereby in bad economic times, when the unemployment rate rises, more money is flowing into the economy. So it's balancing out that downward pull of what's happening in the economy with some infusion of cash into communities in some way. And then in good economic times, the idea with an automatic stabilizer is that it pulls money out of the economy.
Boushey: So a classic example is actually the tax code. So in good economic times, low unemployment, lots of people have jobs, wages are rising, the amount of tax revenue going to the federal government increases. People are moving up tax brackets as they get raises, you get a job and obviously, you're paying taxes when last week when you didn't have a job, you weren't paying taxes. So that's a way of money in good times, more money going to the federal government or to state and local governments. And then in bad times, you get unemployed or your income falls or you fall down tax brackets, you pay less in taxes, so it automatically is sort of adjusting to the business cycle.
Boushey: That's one example. But there are a lot of other programs and ways that you can trigger spending to go up in bad times and come down in good times. So, if you can do that in advance, you can kind of fix the roof when the sun is shining rather than waiting until it's raining. You can hopefully craft better policy and you can have policy that has a pay-for embedded in it because it's going to expand and contract along with the economy.
Boushey: I'll end here but one of the challenges with discretionary funding is again, how big is it and when does it end? Well, if I'm going to add, make some investment in infrastructure, how do I know ... You heard a lot in 2008, ‘09, ‘10, well, we might want to spend that money on more roads and bridges or infrastructure projects but by the time the money gets out there the recession will be over. And some of us were like, "It's probably not going to happen". But we should be so lucky that it was over but it wasn't. In ‘09 that was definitely not a problem that we should be worried about.
Boushey: But there's nothing that automatically pares that back. So an automatic stabilizer can build into the very fabric of the policy. Okay, well if unemployment comes down then we can say it triggers off and so, that's the genius of the idea.
Beckworth: Well I like it, coming from a perspective where I like predictability, rules-based approach, that this would be a very predictable programmed-into-the-works type of procedure. This thing kicks in, it kicks off and I think that makes it a selling point too. You got to sell to both sides of the aisle. And I think something like this is easier to sell than massive discretionary fiscal policy in the middle of a crisis.
Boushey: I couldn't agree more. And it makes a lot of sense both I think politically and economically. Let me go through a couple of the ideas. Can we talk about that?
Beckworth: Yes, let's do that. Please do.
Boushey: Yes so, one of the things that we did in the book is that it's essentially divided into long-standing automatic stabilizers. So programs that we already have in place that are already serving that function and the ways that we need to shore those programs up, the way that they need to be improved, the ways that they could be improved so they can be better automatic stabilizers.
Boushey: And then there's a series of programs that have been discretionary in the past so we know that they've been tested, they've actually been out there but, the authors in our book actually came up with ideas for how those could become automatic stabilizers. So I want to just emphasize that, and I love doing books like this where everything in the book has already been tested. There's no new ideas so, in that sense, it's very practical. There's nothing that somebody actually hasn't done before.
Boushey: But there are these sort of two ways of tweaking the system. So, I'll start with what I think are a little bit the more ... They're not the easy places but the places we're already working. We have chapters where we talk about the unemployment insurance system, the Supplemental Nutritional Assistance Program, which used be called food stamps but the program that gives food aid to families and, the welfare system. The Temporary Assistance for Needy Families program also known as TANF.
Boushey: So we have three authors that go through where those programs are and where we could expand them. And in each case, there's both a call to understanding there have been policy actions over the past decades that have weakened the capacity of these programs to be automatic stabilizers so, we need to both think about how we're thinking about these programs in good times and in bad, as well as ways that we could improve them to trigger on better in recessions.
Boushey: So, let me give you an example. In the area of food stamps, one of the debates that is been happening over the past few years is whether or not to allow states to implement work requirements as a part of the food stamp program. So the Trump Administration has allowed states to experiment with the introduction of work requirements on a state by state basis and that, is a policy change that whatever you think of it as a policy change in good times, that's not a good idea if you want the Supplemental Nutrition Assistance Program, SNAP, to actually be an automatic stabilizer because it literally works in the wrong direction.
Beckworth: It's pro-cyclical.
Boushey: It's highly pro-cyclical. And so the reason that it's pro-cyclical to have work requirements is that if you are saying to someone in order to get food aid ... to qualify to get this food assistance, you have to be someone who is poor. So you're someone who's earning either very low wages or maybe you were working but you lost your job or, maybe you're working a couple of part-time jobs and you lost one of those part-time jobs and you can't make ends meet. So, in a recession, all those things become more likely. And what becomes even more likely is that you're fully out of work. You completely lose your job-
Beckworth: No job.
Boushey: No job. But even no job, but losing one of your part-time jobs or having a part-time job where all of a sudden your hours are cut down to a nothing-burger so, you're not actually making any money. Saying to that person, "Okay. Well, I understand that you're in a crisis that's caused by macroeconomic conditions because unemployment's high so that's affected you personally. What we really need you to do is find a way to meet a work requirement so that we'll give you some support so that you and your family can eat". Really just works in the absolutely the wrong direction because more people are going to be ineligible for that assistance.
Boushey: There's ways that states could say, "Okay, we're going to have work requirements but we're going to do a job guarantee so that we give you some sort of work program". Actually, the chapter on TANF talks about how we could implement a jobs program that would ramp up during recessions which actually happened during the Great Recession.
Boushey: There was a program called the TANF Emergency Fund that public-private partnerships in a lot of states ... States had an option for how they wanted to implement this program which was very effective at getting subsidized jobs so that firms didn't have to pay so much to hire this person but this person got some assistance and met that work requirement. So you could pair it with that but that's not the way states are experimenting right now with the food benefits.
Beckworth: I think it's important just to flesh this out a little bit more. It's understandable, at least for me, why some states may want to push this. They're thinking an individual needs to have good incentives, they need to work and we don't want slackers free riding on the system – and I get that, I'm sympathetic to that. But a recession is different. A recession, there's these external forces that's affecting everybody.
Beckworth: You may be the best worker at the firm, you may have gone to school, you do extra studying, you put in extra hours and this force beyond anyone's control knocks you out of work. So it's not that you're a slacker, you're just someone who had bad fortune at being around during a Great Recession or a recession. And I think if that distinction could be made, some of these policies that become pro-cyclical wouldn't be pro-cyclical. People would realize, "It's not a good idea". You want to have a policy that both incentivizes work but also recognizes a business cycle.
Boushey: Exactly. And there's two really important reasons here right? One is, of course the human side. One of the things that Diane Whitmore Schanzenbach who's one of the authors with Hilary Hoynes of this chapter, they've done other work showing that the investments that we make in the SNAP Program actually carry with the child over that child's life as they become an adult. So similar children who are in poverty, those that got food stamps as a child were able to be more likely to avoid growing up into an adult that is actually income-eligible for food stamps.
Boushey: So this has an effect on children, on their families. So there's a human piece of this program that's really important. But there's also the macroeconomic side of this program. And I think this is actually where it's really interesting from a policy perspective that in saying okay, we want to encourage work, we're thinking about the incentives of this individual family. Okay, well that's important and in some sense you're thinking about the well-being of the family, that is, what is really good for them is to make sure they're fully integrated into the labor force.
Boushey: So we want to make sure that we as a government are encouraging not discouraging that while acknowledging that food assistance can have a lifetime effect on a child's future and on a family's well-being. So, you've got this human side. But then on the other side, that money flowing into that community is especially in a time of high employment, going to be helping to sustain consumption. That might make the difference between being able to make the rent or not. So that has an effect on landlords, it's got an effect on the whole community.
Boushey: And too often I think we've missed that connection which is why we were so excited in this book to talk about the macroeconomic effect of these programs as automatic stabilizers. And that thinking about it only as something about an individual family rather than a program that serves a macroeconomic function leads you to different policy choices that we really want people to think about as you just articulated.
Beckworth: Yes, it's very interesting. I want to look at another proposal in the book and this is the one by Claudia Sahm and macroeconomics. You'll have to talk about rules, there is the Taylor Rule. Apparently now there's a Sahm Rule. So Claudia-
Boushey: We're so excited about this.
Beckworth: Claudia if you're listening you know, kudos to you. You and John Taylor are now in the same camp. You each have your rule named after you. But tell us about her proposal.
Boushey: So, Claudia, a fantastic discovery that Claudia had so if you want to hear her version of it, there's a webcast of the event we did in May. I believe it was May 16th. And so she talks about how she came to thinking about that. So, I'll let her tell that story. But let me tell you what the rule is.
Boushey: So basically, one of the challenges for policy makers is to know: when are we in a recession? When are things going to get bad, how bad are they going to get, this is the big question. And when you're doing “recession watch”, a lot of people are like, "Oh, it's like two quarters of falling GDP," or people have these sorts of rules of thumb. And what Claudia did is she came up with a rule of thumb that is important and unique in that she found that going back to every recession since the 1960s ... I believe it's since the early 60s recession.
Boushey: A recession follows when the unemployment rate ... and it's a little bit complicated. So it's a three month moving average of the unemployment rate follows by at least a half a percentage point relative to where it had been over the past 12 months. Basically when the unemployment rises by a half a percent over the course of a year, then you know you're in a recession. It's been foolproof and it's actually able to indicate much faster than any of the other sorts of rules of thumb people have come up with. That, "Oh, yes. This is it. We're in a recession now".
Boushey: And so using that as a trigger for when you should turn on automatic and turn on these benefits through automatic stabilizers is a really good way to go. Because then policy makers know, "Oh well, if we wait for this Sahm Rule to go into effect, then we actually know, nope, we're in a recession". And you can have a high degree of confidence that if you put into place your policies and then you don't enter a recession, your policies worked.
Boushey: So that's like a nice feature, right, if it predicted all these other recessions and we were to put in all these places policies right now so that when her trigger went on in the future and we didn't have a recession, you would know that you were a very effective government.
Beckworth: So with the Sahm Rule, the insight is that you want to look at the change in the unemployment rate not the level. Because the level itself would be a lagging indicator. Oftentimes unemployment doesn't go through ... doesn't reach its peak until well into the business cycle and you could be past the worst, real damage. So we want to look at the change, the early warning signs, the red alert and, that's the trigger. And there's presumably an off trigger too at some point later in the process?
Boushey: Yes. So specifically in the chapter that Claudia wrote in the book, she works at the Federal Reserve and had done research thinking about consumption and how the direct payments to individuals that the government sent out in the 2001 recession and the Great Recession, the one that began in 2008, how those payments affected economic demand and helped to stem the tide of the recession. And so we know that those direct payments that went out worked.
Boushey: One of the great things about the way that the payments were sent is that they provided this really amazing research opportunity for scholars because the IRS sent out the payments randomly based on people's social security numbers over time-
Beckworth: Okay. This is the Bush tax that was sent out?
Boushey: The Bush tax that was sent out, yes. And so you knew that some people got their check in March or something and, other people got their check in June and, scholars have been able to look at the differences in spending patterns of those different households. And we're able to say, "Oh, lo and behold in a recession if the government sends you a check, people spend that money and that has this stimulative effect of the economy".
Boushey: So we've always done these payments on an ad hoc basis. Congress decides, the checks goes out. And what Claudia Sahm does in her chapter is lays out how you could actually make that into an automatic program using this trigger that she developed. Well when we know that the unemployment rate has increased by half a percent using this measure, then you send out checks to individuals and then so long as unemployment continues to rise or is at a high level, in her proposal we continue to send out checks, but then once the unemployment rate stops rising or comes back down, then the program ... then you don't do it anymore.
Boushey: So it has this built-in end point. It's not that we're going to send direct payments out to individuals through the end of time, but that this is designed purely to be when the economy is in a recession you're going to have this stimulative policy going out. And the advantage of doing this as an automatic stabilizer is that you don't have to ... You can set up the structure, you can figure out how to do those payments in an efficient way. It actually turns out to be a lot of work to figure out how the IRS can just send checks out in some way or another.
Boushey: So setting that up in advance can make it a lot more efficient and make sure that money gets out to people as quickly as possible because time is your enemy. The faster you can stave off that income decline for families, the higher probability you'll have of staving the worst of the recession.
Beckworth: So one of the proposals is for infrastructure investment as an automatic stabilizer. And that's intriguing because typically we think one of the key challenges of fiscal policy ... at least discretionary fiscal policy, is there is no shovel ready project. It's hard like you said to get these things going for all the reasons listed earlier. So how would this work?
Boushey: Well, I'm glad that we have time to cover this one. We have this proposal from Andrew Haughwout of the Federal Reserve Bank of New York where he directly says: Okay, so the problem is that we know that one of the best things that you can do in a recession is have the government make investments that matter using the power of the purse and the power of the federal government's ability to deficit spend, to go out and make investments that will directly put people to work. But you want to do something that's socially important, that's valuable and that you have a plan for.
Boushey: Well, one of the big problems with solving great recessions you don't have this laundry list of things that are ready to go. So he said why don't you make the list? So his proposal is that the federal government pay for the state's localities ... states would do this but a lot of the actual projects are done at the city or county level, to put together a list of projects that they want to do. So they have lists but what they don't do is actually pay for the planning and getting all the permits, the environmental permit and the construction, all of those things.
Boushey: So you pay for those in advance and that would be the federal subsidy to that (which is some money, but in the grand scheme of things, not a very large bill for that) so that, when you have a recession, you would take these slate of proposals that were supposed to be funded over the next four years and you front-load them and say, we're going to do all of these proposals this year. So that you don't go around the planning process, you don't do crazy things, you don't stop thinking thoughtfully about what it is that you want to invest in and what would make sense for a community to do.
Boushey: But you think about those in advance and you queue them up, which you're going to do anyway. So we're always queuing these projects up but you just do a few more of them in advance and you have them ready to go and able to pull them forward when the trigger goes on when you have a recession.
Beckworth: So you would have shovel ready projects?
Boushey: Exactly. You get them ... And I will just note in his proposal he focuses on what are called Build Grants through the Department of Transportation. So they're really focused on roads and bridges. You know, that kind of stuff. And one of the questions that I kept asking him throughout the book is, if we could apply this model to other kinds of things like building schools or childcare centers or, whatever it is that we as a society need and, ideas that came up a lot during the Great Recession and, we didn't have the bandwidth to look at that in this book but I really hope that we can think about that before the next recession comes.
Beckworth: I want to circle back to monetary policy in the time that we have left. It's who I am and I think it does relate to this. The issue that I think about a lot and that is, let's say we go ahead and get all these proposals passed, the triggers are all ... they're waiting for the next recession, recession comes, they're triggered, unemployment insurance goes in, the Sahm Rule works, everything is going great and it starts to fuel a quicker recovery. So we've got this quicker recovery, everything is looking great but the quick recovery starts to cause inflation to go up and let's say we haven't completely eliminated all the slack in the economy so we still have an output gap.
Beckworth: And we saw this as an example, a historical example in the 1930s. I'm going to go back to the Great Depression. So it was 1936 I believe when the Fed began to get nervous about all the reserves the banks had built up and they were concerned because they thought it would lead to inflation. And there's still a massive amount of unemployment, a lot of slacks, so what does the Fed do? It tightens, this is classic double-dip recession, the ‘36-‘37 recession. There's some other things going on as well.
Beckworth: But one of the key contributors as I understand it is the Fed tightened because they were worried about a little bit of inflation picking up even though you have massive unemployment. So I look at your proposals, I like them, I like the predictabilities, they're rule-based but, what if we still have a Fed in-play who freaks out because these worked so well that they trigger inflation?
Beckworth: And that to me leads back to what kind of regime we have in place for the Fed. So what are your thoughts on that? How important is it to have the Federal Reserve queued up as well appropriately to support these plans you've laid out?
Boushey: It is imperative. I mean at the launch of our book we had Ben Bernanke and Christy Romer talking about their roles during the Great Recession. Ben Bernanke was the Federal Reserve Chair and Christy Romer was the Chair of the Council for Economic Advisors, the first one under Obama. And Bernanke said it during the recession, he said it since: it really requires the working together of what's happening on the monetary side and the fiscal side.
Boushey: And so you are 100% right that if you had a Federal Reserve that was a little too anxious about inflation or was just really right there ready to undo everything you do with your fiscal policy, that's going to be a problem. Now the question as you were asking your question I was like so, the big question is what do you do about this?
Boushey: The Federal Reserve Board is not beholden to the US Congress. It's only kind of beholden to the Executive Branch. It's independent. The terms are ... they don't neatly align with Presidential cycles. You've got this Board of Governors. So you have this institution that has some independence and capacity to be making decisions. But how are those decisions tied to the most important metrics of economic success and how is the Federal Reserve being held accountable to its role in managing the economy towards full employment?
Boushey: And alongside stable prices, how do we get that right? I mean I think ... I find the inflation question so fascinating given my life experience. Which is that over most of my lifetime inflation, certainly all of my adult lifetime, inflation has not been a thing here in the United States. So we hear a lot of talk. You hang out in econ circles and you hear a lot of concern about when inflation is going to rear its ugly head. And yet for decades now, the Fed has consistently under-performed on meeting ... The Fed does not overshoot on inflation, it consistently undershoots on inflation.
Boushey: And that has implications especially, most importantly for people who have a lot of debt. You think about one of the things that happened in the Great Recession. So many families take on so much debt. A little more inflation would have really helped families to be able to work their way out from under this enormous overhang and to some degree, socialize that cost so it was being borne by banks in a different way, not just on families.
Boushey: The lack of inflation is both bad for families because the price of goods and services go up but it does make the value of your debts go down as well. Anyway, I digress. But I think that this question about inflation is it's held up as this really important issue and yet, if you're not meeting the full employment target and you're undershooting on inflation, what can we as a society be doing to hold the Federal Reserve accountable for what matters?
Boushey: And I think that what matters is that in every community all across America, you have good jobs being created so that people can engage in the economy so they can be productive and so they can support their families.
Beckworth: Can I give you my suggested solution?
Beckworth: So I'm a big nominal GDP targeting fan.
Boushey: I love the mug by the way.
Beckworth: Heather got her mugs. Every morning she'll be slowly converted if not already. But I think this is a key argument for level targeting. Whether it's a price-level target or nominal GDP level target, I think nominal GDP level target's better. But it allows some flexibility in the inflation rate. It provides a long run anchor but as you mentioned, you know if you go into the Great Recession you take out a 30 year mortgage, all of a sudden there's a deflationary shock. Not only is there deflationary shock but, you're nominal income, your dollar income is collapsed. That real debt burden's gone up.
Beckworth: And what a level target does is it corrects for that. It puts you back on the path you thought you would be on whether in terms of the price level or dollar incomes. And that also implies temporarily, you know, running things a little bit hot until you get back up there. But it's a systematic way I think of allowing these programs, all these programs we've talked about to pack a punch without getting freaked out or worked out about a little bit of inflation and a deep recession.
Boushey: So, yes. All great ideas. Let me just throw one little wrinkle into the nominal GDP targeting.
Beckworth: Please do.
Boushey: So one of the things that we have spent a lot of time and working with scholars here at Equitable Growth is this idea that we are now at a point in our economy that we need to think about how we want to disaggregate growth. So just bear with me for a second.
Boushey: When Simon Kuznets put together the NIPA Tables, the National Income and Product Accounts for the United States back in the 1930s ... So, we've talked a little bit about the Great Depression, you just talked about the double-dip of the 1930s. While the economy was going through that, economists behind the scenes were trying to put together the kinds of data that would allow us to have these conversations. It would measure the economy.
Boushey: And so the National Income and Products Accounts are what give us our measure of Gross Domestic Product. And that has become this go-to measure. Everybody knows what GDP is, it's reported on twelve times a year, you have quarterly GDP and then you have the revisions and, what we now know thanks to new research by Emmanuel Saez and Gabriel Zucman and, Thomas Piketty is that when you look at the period from over the 1960s and 70s up until the late 1970s early 80s, when GDP grew most Americans saw their income grow at about the same rate. The measure that I'm thinking about is national income which is fairly akin to GDP. Close enough for this conversation.
Boushey: So if GDP grew, income grew by 2% nationally then most families saw their income also grow by about 2%. And in fact families at the bottom income distribution tended to see their incomes grow even faster than the average. Families at the top tended to see their incomes grow slower than the average. So over those decades, GDP was an excellent indicator of what mattered. Because it was an indicator of what was happening to the vast majority of American families.
Boushey: Since 1980 GDP has become a very ineffective measure of what's happening all across America. So now, nine in 10 people in the United States experience income growth that is lower on average than the national income growth. And that's looking from 1980 to the most recent data in 2015 or 2016. So, that means that GDP and folks at the top, the top 10% see their incomes grow much faster than national income.
Boushey: So this question, the question I would throw back to you is, as we're thinking about how we want to measure policy, how we want to index it, the aggregate isn't telling us the story of what's happening in America. It's like that study we talked about earlier in this episode about how inflation looks different across the income distribution. We know that growth is looking very, very different and that our way of thinking about the macro economy is being undermined by inequality and we're not, if we just look at those indicators and if we're making policy based on those aggregates, we may not be doing what we need and we need to unpack that.
Boushey: So I don't know how that would relate to GDP targeting. But I'm very curious to hear your response.
Beckworth: Great question and I think, a couple answers. One, when I say nominal GDP targeting there's many versions of it. So nominal income targeting. Our friend Sam Bell on Employ America they have like a gross labor income target which is I think a version of nominal income targeting. So you could target some kind of index or wages. That would be the first thing, indicators you could look at.
Beckworth: Secondly, I think that issue is much more of a fiscal policy fix and a monetary policy fix. So when I think of like nominal GDP level targeting or price level targeting, I'm thinking ultimately about what the Fed can effectively do. And I agree, it's a problem that probably is not best suited for the Fed but for fiscal policy, for education policy, whatever the fixes may be.
Beckworth: So that would be my quick answer is that some indicators would get better at that but, in general, I don't think monetary policy is going to ever, no matter what you do ... I'm not sure monetary policy is ever going to be able to solve those problems. Does that seem reasonable or ...?
Boushey: It does seem reasonable. My only push back that I'll talk about on this show today is: that may be true but I think one of things that we really learned over the past, especially a few years, is it's become more apparent in our society that some parts of the United States aren't ... they're not keeping up. They're not growing. And so as we're thinking about macro policy, you brought up the example earlier about, "Oh well, you know if Michigan is in a recession and Texas is doing really great, then we should be having this equilibration across the United States".
Boushey: And, we're not seeing that. And so when you're thinking about Fed policy and thinking about those indicators, something that really makes sure that you're not undershooting ... I don't know if it's under or over. But you're not-
Beckworth: Doing no harm?
Boushey: Yes, you're doing no harm, or that you aren't assuming that just because national GDP has gone up that that actually means that in most parts of the United States, people's incomes are going up, that families are actually experiencing economic growth. And that may mean that we do ... I would push on you a little bit that that may mean that we need to think about what that metric is that monetary policy is working towards.
Boushey: Because it shouldn't just be that the macroeconomic indicators you're working towards are only indicative of what's happening at the very top of the income distribution. Because then there's a disconnect between how America is growing and whether or not our monetary authorities are really working on behalf of all of us.
Beckworth: Okay. Well, you get the last word.
Beckworth: Our time is up. Our guest today has been Heather Boushey. Heather thank you for coming on the show.
Boushey: Thank you David. This has just been delightful.
Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite Podcast App. And while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the Podcast. Thanks for listening.
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