Jason Furman, Chairman of the Council of Economic Advisers, discusses the current state of the U.S. economy and answers audience Q & A. November, 2016.
Good afternoon and welcome.
I'm Susan Collins, the Joan and Sanford Weill Dean here
at the Gerald R. Ford School of Public Policy.
And it's always a little bittersweet
to have our last policy talks of 2016.
But I'm delighted to welcome all of you here for that.
And I'm also thrilled that we're ending on a very high note.
So it's my great honor to welcome today the Chair,
President Obama's Council of Economic Advisors, Jason Furman.
We're delighted to have you here.
[ Audience Applause ]
Actually before we begin I just wanted to thank you.
You spent the entire day with us.
You have gone to classes, you've met with Ph.D. students,
you've met with some of our faculty.
You've already had a really full day.
Thank you, we appreciate it.
For his policy talks, Jason will reflect on experiences
in the Obama White House and also public policy's role
in reducing poverty which is a really important topic to all
of us especially
as the university has just launched the poverty
You can read about Jason's background in the program today.
And so I'm just going to give a very brief introduction.
As most of you know the Council of Economic Advisors
or the CEA provides objective empirical research
for the White House and prepares the annual economic report
of the President.
Jason Furman has served as CEA Chair since 2013 and he served
as you can see in the program in a variety
of economic policy posts previous to that appointment.
He's also known as a really data savvy strategist and also
as someone who is very good at explaining economic concepts
to economists and non-economists alike.
And so I know that many of you
like me have been looking forward
to hearing from him today.
I'd also like to take this opportunity
to highlight his many connections
to us here at the Ford School.
So first of all we have two faculty
who have previously served on the Council
of Economic Advisors, Marina von Neumann Whitman
who I don't think is here with us today.
But our very own Professor Betsey Stevenson who served
on the Obama administration for two years
and also with Jason Furman.
Second, Jason was a student of our very own John Leahy,
the Sinai Professor of Macroeconomics and Policy.
And I'm especially pleased to recognize a Ford School Alum,
Andy Taverna who is the Chief of Staff
for Jason Furman and is with us today.
Andy, we're really pleased and we're proud of all
of the great work you're doing.
Following Jason's remarks we'll open
to questions from the audience.
And you should have received a card as you came into the room.
We'll have staff who are walking the aisles starting
in about half an hour or so.
And Professor Josh Houseman together
with two Ford School students, Sam Gellar [assumed spelling]
and Farrah Mandich [assumed spelling] will facilitate the
question and answer session.
If you're watching online, please tweet the questions
into us using the hashtag policy talks.
And so with no further ado I am delighted
to welcome Jason Furman to the podium.
>> Thank you.
[ Audience Applause ]
So thank you for that introduction.
Thank you for covering much of the Michigan connection.
But Linda Tesar is senior economist.
My mother's a graduate of the University of Michigan
and always wanted me to go here
and I finally succeeded in doing that.
And so I wanted to spend the whole day here.
And my special assistant is also a Ford School graduate,
Jeff Goldstein, so played a disproportionate role
in the Council of Economic Advisors
in the last several years.
And I don't think that's an accident because this is place
that really thinks about public policy, that's thinks
about an empirically and is grounded in the world
but does it in a manner that's really rigorous and serious.
And so I think you've helped me
and helped the country more broadly
and will continue to do so.
My talk today is going to be pretty broad range.
Actually I was originally going to focus more specifically just
on poverty and decided to broaden it out.
And make that an invitation also in the discussion we have
to discuss really whatever anyone here wants
to discuss including you can ask questions
that are little more political.
And I will choose whether or not to answer them.
So what I want to cover is the recent good in terms
of what's happened in the economy.
Then step back and put that in the context
of the longer term trends that we faced which go
under the analytically rigorous heading of bad.
And then talk about the sources, a decomposition of that in terms
of productivity, inequality and labor force participation.
I'm required to talk about our policies wherever we,
I go but I think it's actually quite important
because they're larger quantitatively I think
than many people appreciate and will be subject to debate
for many years to come.
So I think it's important to understand them.
And then finally I want to talk about issues with sustainability
and resilience going forward.
So this will put a lot of stuff on the table.
Then we can continue following
up on whatever parts you all want to follow up on.
So starting with the recent good.
The first thing I would start with, anytime we want to think
about the economy over the last eight years is where we started.
And we all know there was a financial crisis.
We all know there was a Great Recession.
What a lot of people don't appreciate given we know how it
turned out was just how bad and scary it was at the time.
If you look at household net worth, households lost more
than 15% of the net worth.
If you compare it to the Great Depression it's multiples
And that's because the stock market decline was the same
as what we had in the Great Depression.
The loss of value of housing was larger
and more people owned their houses.
The collapse in global trade was larger than the collapse
that help precipitate the Great Depression.
The loss in employment was about the same.
And GDP was a little bit more moderate.
And I remember, and I see Michael here as there and scared
at the time, Michael Barr, as well.
I used to look at this chart every day
that tracked the stock market.
And it had the Great Depression at 100
at the beginning, us at 100.
We're basically following right exactly the same path
up through March of 2009.
So it was this enormous and terrifying event.
To look at where we've come since then it's useful to,
you know, if you're assessing whether a drug works
to cure a patient, the thing you'd want to do is look
at a few different patients who have the same problem.
Give one of them one drug
and give another one a placebo or a different drug.
In some sense that's we did.
This hop shock hit a lot of countries
and this shows the United States, Japan,
the United Kingdom and the Euro area.
All of these areas took different strategies.
The United States was the one
that cut interest rates the furthest, most sustained basis
and did the most sustained balance sheet expansion.
This was all done independently in terms of monetary policy.
The United States had the most vigorous fiscal response
in the initial years of the crisis, although pivoted
to fiscal consolidation too soon,
sooner than we would have liked to.
And also did the most
to immediately recognize the problems
in the banking system and recapitalize.
And you look, we reattained our per capita GDP
on a sustained basis before any
of the other major economic areas.
We're growing at about the same or faster rate
than any of them still today.
And this is all done on a per capita basis.
Steal this, sorry, more flexibility.
You, the strongest indicator of what's happened in the economy
and the thing that matters the most
to people is the unemployment rate.
And the dotted lines show you the forecasts
at different points in time.
So in 2010 you felt the unemployment rate was going to,
oops, come down slowly and eventually get to about 6%,
We obviously came in ahead of all of those forecasts
in the slightly more partisan and humorous way to put
that was the famous comment that Mitt Romney promised
if he was elected after four years the unemployment rate
would get to 6%.
You know, good thing we didn't have to wait that long.
Probably not entirely accurate economically but captures some
of what happened with the unemployment rate.
Of course, you know, what people have focused
on is not just unemployment but wages.
And there's a standard pattern you expect to see
in an economic recovery.
First you see GDP growth which started in 2009.
Then you see employers being confident enough
to start adding jobs which happened in 2010.
And then they start raising wages which happened in 2013.
And if you look at the pace of wage growth since the end
of 2010, it's 1.4% per year.
That compares to essentially flat wages
in the decades before 2007.
And it's more wage growth in that four year period
than we saw in the several decades cumulatively prior
Now part of that is the strengthening labor market.
Part of that is also that this is adjusted for inflation
and inflation has been low
because the price of gasoline is low.
Although in the initial period
of the increase it's the labor market and in the last part
of the increase it is as well.
If you look at this business cycle as a whole,
at real wage growth, this next chart tries to do something
which gives you comparable periods of time
because wages get moved around a lot by recessions and expansions
and depending on which period you look at,
you can distort that.
But it looks at the peak of the business cycle in November,
And then it compares all the business cycles.
And what you can see is again real wage growth over the course
of this business cycle has exceeded the real wage growth
for any previous business cycle since the early 1970s.
And I should by the way define what this is.
It's in the note in tiny print, decent size print.
This is wages for what are called private production
and non-supervisory workers.
So these aren't managers.
So that 80% of workers and it's roughly the bottom 80%
of workers, and the average for this group isn't that different
from the medium overall.
And in fact if you look at the distribution, I'm switching now
from wages to income, so income is what the whole household gets
and not just, not just from the labor market.
You see that last year you saw income gains at every part
of the income distribution.
The largest gain's at the bottom,
pretty strong gains at the middle.
And the only one of these gains
that isn't the largest ever recorded,
so that's 7.9 is larger than any number ever
and those data go back to the 1960s.
The only one of those bars that's not a record is the one
for the 90th percentile but at 2.9% adjusted
for inflation probably not a whole lot for that group
to complain about either.
So the last thing to give a sense
of the labor market recovery and where we are in it
and where there's still more work to be done
on what I would call a cyclical basis which relates
to aggregate demand in the economy is to look
at the unemployment rate, broadly defined.
And this is a measure called U6.
Sometimes call this I think inaccurately
but sometimes they call it the true unemployment rate.
So the blue bars are the official unemployment rate.
And that shows the percentage of people who are looking
for a job but can't find one.
That average 5.2% before the recession, it's 4.8% now.
The next bar, the orange bar, includes people
who are discouraged, they've given up looking for a job
or people who are marginally attached.
Those are people who basically say they'd take a job
if one came to them but they're not actively looking
for one right now.
That actually hasn't changed very much.
The place where we continue to see a certain amount
of elevation and that indicates
that the recovery isn't complete is the people
who are working part time for economic reasons that,
I don't know what color that is.
That people who would like a fulltime job
but can't find a fulltime job.
That went up really rapidly during the recession
and it's come down pretty steadily since then
but hasn't come back to where it was before the recession.
So that remains an issue that, you know,
additional strengthening of demand would help.
And as does have some issues around the participation rate
which I'll come back to later.
But the bigger issue I'm concerned about is less
where we are in the wake of the Great Recession
and financial crisis and how our economy's recovering from it.
And more about the longer run trends that we've been facing
as an economy and the challenge that it's been posing on,
for the middle class and for families working to get
into the middle class.
And that's this longer term bad.
And I want to present what it is,
present a little bit what I think some of the sources
of it are and then talk about that because it helps inform
but doesn't definitively answer where the remedies are.
So the fact itself is one
that is not particularly difficult to comprehend.
The left bar is the average annual growth rate
of median family income from 1948 to 1973.
The right is 1973 to 2015 and you see an enormous slowdown.
You can do a lot of debating
over these numbers the Sun issues for example,
in households are increasingly small, oops, sorry,
I keep doing this, in the second period.
And so that 0.4 maybe it should be 0.5 or 0.6
if you adjust for that.
This is income doesn't include the expansion
in some government programs and changes in taxes.
If you include that, it helps that second bar a certain amount
and raises it a little bit.
There's a whole debate which we can talk about if people want
to about whether inflation is being mismeasured.
My bottom line is we probably are mismeasuring inflation,
the quality of things people buy is going up in ways
that statisticians don't track.
But that was always true so that 3 should be a bit above 3,
the 0.4 should be a bit above 0.4.
But none of these things are going
to change the magnitude of this slowdown.
There's a lot of different things that go into the slowdown
but I like to think of three major factors that you can look
at in trying to understand it.
The first is that productivity growth has slowed.
Productivity is the amount you can produce
with an hour of work.
And in theory that's how much we could afford to pay you,
that if you make $15 of stuff each hour we could pay you $15
and, you know, everything would sort of add up in the end.
That or you could think of it as just the size of the pie.
So the size of the pie was growing
at about 2.8% per year from 1948 to 1973.
Since 1973 that slowed to 1.8 a year and it's fluctuated,
it was better than that from '95 to 2005 as the internet spread.
It's been worse than that since 2005 in part I think in the wake
of the recession and the impact that's had
on business investment.
At the same time that the pie was growing more slowly the
share of income going
to the bottom 90% has changed quite a lot.
So in that first period it went from,
it was basically unchanged, 2/3 of the income went
to the bottom 90% of households in 1948 and in 1973.
From 1973 to 2015 it's gone from 2/3
of the income to 1/2 the income.
So the pie's growing more slowly.
At the same time it's being divided increasingly unequally.
And then finally and this matter is more recently,
more like in the last 15 years,
is the labor force participation rate.
And I'll come back to this.
But for men, you see it declining
in both of those periods.
For women it's increasing in both of those periods.
But that masks it for women since 2010.
Since 2000, it's been falling
and on men it's always been falling.
So you can think of this as, you know, everyone's wages are going
up more slowly but you make up for it by having two people
in your household work rather than one person work.
That works less well when the labor force participation rate
isn't rising as much.
I did a thought experiment to put some magnitudes
on these different factors.
And I set out to do this without really knowing what it would
show but just out of curiosity.
And I think it's interesting, relevant,
but doesn't 100% answer what's relevant for policy.
And that's this.
The first row here is the question what
if total factor productivity, which is a key component
of the productivity, had grown at the same rate after 1973
that it grew before 1973?
So we didn't have the productivity slowdown
that we had.
The answer is that, but then you distributed it
at the same increase and inequalities.
So it didn't, inequality didn't get any worse because of this
but didn't get any better.
The answer is that incomes would have been 65% higher
in 2015 or an extra $37,000.
The second thought experiment was let productivity growth slow
as it did in reality but let's freeze the share of income going
to the bottom 90% at the roughly 2/3 that it was in 1973,
so you don't have any increase in inequality,
than incomes would have been 19% higher or $10,000.
And finally what if the female labor force participation rate
had continued increasing after 1995 rather than peaking
and starting to decrease?
The answer is 6% or $4,000.
I can tell you the lesson I draw from this.
One is, you know, it's not
like this $61,000 was available to us.
That some of the things that happened
in the post-war period were the one time effect of innovations
that we made to fight World War II that we ended
up commercializing like the jet engine, nuclear power.
But some of it I think probably should be a wakeup call
That we also invest in more infrastructure and research.
We did a whole range of things then on productivity
and there's no reason we couldn't continue to do now.
So I don't think, you know, we could have had $61,000
if we made different choices but I think it's well above zero.
The second lesson I draw is all three of those is large numbers.
I mean, 37,000 is larger than 10,000
but 10,000 a decent amount of money too.
So I think it motivates all of these.
If you were overly, if you were obsessed exclusively
with inequality, you should maybe look at this
and think ah-ha, productivity growth actually matters
when the pie isn't growing that quickly.
It's hard to have sustained wage and income gains.
But if you were, you know, just cared about growth
and had never thought about inequality, you know,
you should think 10,000 is a decent amount.
The last thing of course is it's not just what they're cause
in decomposition of the slowdown is, for policy we need to know
which of these we can solve.
So maybe the whole fault is productivity
but we don't have any policy that can raise it.
Inequality may not have been very responsible
but we may have huge policies that can deal
with that or visa versa.
And I'll try to talk a little bit about that
and I don't fully know the answer.
But to some degree the biggest takeaway I take
from this is we have quite a big problem in terms of incomes.
It probably has a lot of causes
and it probably has a lot of solutions.
And I wouldn't obsess over trying
to find the one magic bullet, I'd obsess over trying
to leave no stone unturned in doing something about it.
So I want to dig a little bit deeper into some of the causes
of these different things.
Productivity, the most important thing to know especially
about the recent productivity slowdown is just how global
And this just shows you the G7.
Every G7 country has seen its productivity slow over the last,
productivity growth slow over the last decade.
And it's also true of the rest
of the events the economies with one exception.
The United States has had the best productivity growth,
which I show you because a bunch of the other things we're going
to be the worst at, so I wanted to have at least one thing
that I was positive about in contrast to everyone else.
And yeah, now part of the slowdown as I briefly alluded
to before, I think it's a consequence of the recession,
the impact the recession had on business investment
and business investment is an important part
of productivity growth.
And you can quantify that just in the mechanical way
across these seven countries
and we could certainly talk about that.
But there's some other things going on as well.
I think one may be demography.
That to be a little self-promotional there's a
certain amount of research
that I personally find extremely compelling.
That society is more productive to the degree it has a lot of 41
to 49 year olds in it, might be 40 year olds
but 49 year olds in it.
And our demography has gotten somewhat older population
and that may be playing a role
and that may be something that's happening in Japan.
And then there's something
that I think has gotten too little attention
and is a little bit puzzling
and potentially a little bit troubling which is the decline
that we've seen in the dynamism of firms.
A lot of productivity growth isn't a firm figuring out how
to do something better, it's a new firm coming along
that does it better and displacing the old firm.
Or maybe a new firm coming along and challenging the old firm
so the old firm needs to get better at it.
But we've seen firms entering at a slower rate.
They've exited at about the same rate, slightly lower.
And as a result the average firm age is older,
the average firm size is larger and this is consistent
with other evidence
that competition has declined in the economy.
You also see something similar going on in the labor market
and there's a lot of different ways to show this.
This shows from the employer's perspective when you create jobs
and when you destroy jobs has also been trending down as long
as we've collected the data.
But it's also true that people move less from job to job.
Move less from place to place.
Move less from, you know, industry to industry,
etc. And this plays a role, I think not just in productivity
but also potentially, and the next thing I'm going
to talk about, which is inequality.
So inequality, this is another one
where the United States is number one.
And not just higher than everyone else in terms
of the share of the top 1% but also has seen a faster increase
in inequality for the top 1% than other countries.
There are two general classes of explanations for this.
The one that has gotten the most attention
and that I think captures a lot of what's going
on is a competitive explanation.
And that goes under the heading of two things happening.
One, the demand for skilled workers has gone
up because you have things like computers that compliment people
with skills and substitute for people with less skills.
So you want more skilled people.
At the same time we had a lot of increase in education
in the '30s, '40s, '50, '60s, as we expanding high school,
created and expanded subsidies for college.
But that that came to an end
and that now educational attainment is increasing
but it's increasing at a slower rate than it did before.
So the combination of less supply of skilled people,
more demand for them has meant that the price of skills,
or here the college earnings premium has trended up.
We have also looked CEA at another class of explanations
which go under a noncompetitive explanation.
And this relates to first of all changes in bargaining power,
so the idea that in every employment contract there's
And that way it gets divided depends
on the respected bargaining power
of the two sides in that contract.
And the graph you see here on the right, on the left,
shows you there was a big increase
in unionization starting in the '30s that coincided
with a big increase in the share
of income going to the bottom 90%.
And then you've seen that in reverse since the 1970s.
Now the causation probably runs both directions
as you have manufacturing that lends itself both to good wages
and to unionization as manufacturing goes away,
that makes both of those go away.
But there's a decent amount of literature
on a union wage premium as well.
And the other thing is the real value of the minimum wage peaked
in the late 1960s and broadly speaking has declined
The reason you see such a jagged picture is we've never adjusted
it for inflation, never indexed it
to inflation on a regular basis.
Every now and then we raise it, then we let it decline
for a while, then, through inflation,
then we raise it again.
I've also with Peter Orszag
and then some others have been speculating
about another hypothesis for inequality that may not jump
out at you immediately from this picture.
But the story is not that, the way you divide the pie
between labor and business, which is what the minimum wage
and unions are about, but also how some businesses have become
Some have become less successful.
The successful ones share their success
with the employees and visa versa.
So the way to think about this is reduction in competition
in the economy, which I mentioned before.
I mean some firms can be super successful.
So I think of Google, Pfizer and Goldman Sachs.
The issue in those firms isn't
that their managers get paid a lot more
than their line workers, everyone who works
for those firms no matter what they do gets paid better
than the same occupation working at a firm
at say the 25th percentile.
And you see this massive dispersion in returns
and an increased persistence of those returns,
so they don't seem to be accounted for by risk
that could also be playing a role in inequality.
The third factor is one that we've spent a lot of time
on at the Council of Economic Advisors,
Betsy Stevenson helped us do a lot of the work
for the first two years of our thinking on it
and we've continued to puzzle over it since then.
And I think people will continue to after it.
And this is because labor force participation
in part I think has gotten less attention than it should.
In part because it's played this role in the slowdown of incomes
but also because it goes beyond just incomes
because there's something to work
that really affects your dignity, your participation
in society and a lot of evidence that when people are
out of the labor force for sustained periods of times,
at least a much higher level of pain, of pain medication
and other opioids, of impacts on their children
and a range of other outcomes.
So in terms of labor force participation the big picture
fact is that it was increasing for decades.
It peaked around 2000 and it's been decreasing pretty much
steadily ever since.
This aggregate though masks, it's been stable since 2013 Q4,
and I just note that because that's when I,
roughly when I started in my job.
But this masks what's going on for a lot
of different subgroups.
And there's issues with what's going young people,
with old people, but I'm going to focus again on the group
that I'm a proud part of which is in this case is 25
to 54 year olds or what,
I didn't invent the term, is called prime age.
So for prime age men their labor force participation rate peaked
in the early 1950s and has declined pretty much steadily
ever since going from 2% of men out of the workforce to 12%
of the men out of the workforce.
But the labor force participation rate is the
percentage of people who either are in a job
or actively looking for a job.
So if you're not in the labor force participation rate it says
you've given up.
And if you look most of the people
who aren't participating haven't worked at all the previous year.
So these are people who are pretty much
out of the labor market, out of the economy.
So it's been declining since the 1950s.
For women you saw this big increase
and that's what caused the overall increase.
But that stopped around 2000 and has declined since then
and there's a huge gap between the trend we were on
and what has happened since then.
It's instructive to look at, you know, who this is.
And just for men in the 1960s your participation
in the workforce wasn't particularly dependent
on the amount of education that you had.
For the most part around 95, 96% of people worked regardless
of the amount of education they've had.
Labor force participation has dropped for every group
but it's dropped most precipitously for people
with a high school degree or less.
If you look at women the patterns a little
But since the decline began
in 2000 it looks roughly like this as well.
I think it's also instructive to look
at the United States compared to other countries.
And you may not be able to read the names
of all the other countries but the main thing
that you should be seeing here is that the United States
which is the red one is way to the right.
Which means our labor force participation rate
for prime age men is roughly tied with Italy's,
ahead of Israel's and behind every other country.
And for women the countries that we're ahead of are countries
that are culturally different
in their norms towards women working.
Countries like Italy, Korea, Mexico and Turkey
and we're behind all of the other countries.
The other thing here that this graph shows is the dots are
where countries were in 1990.
So the gap between them is the change since 1990.
For men our decline is the second largest of any
of these countries since 1990.
For women if you look almost all the dots are
down below the bars.
So, most countries have seen the percentage
of women participating in the workforce increase since 1990.
Japan is particularly striking.
It's the country right next to us and that's where in 1990,
that's where they are now.
Then you look at the United States, that's where we were
in 1990 and I can't hold my hand still
but if I could that's where we are now.
It hasn't moved at all.
We've tried to look at a lot of explanations for this.
Demand, a supply of labor doesn't seem to explain a lot.
It's not that people are married to someone else working
so they don't need to work.
Disability insurance has played a role but a very small role
because it hasn't increased that much.
Demand has played a role the same thing
and it has reduced the demand for less skilled workers,
for adults in lower relative wages for them
and lower amounts of work.
But I think part of the answers also to be found
in our institutions because all
of these economies had the same shock in terms of reduction,
demand for less skilled workers.
It hit the United States harder.
And what's interesting about that is you look
at different measures of our policies for labor markets,
a hundred is, you know, this is percentiles.
You compare us to other OECD countries
and we have the least labor market regulation.
We have the least employment protection.
We have among the lowest minimum wages
and among the lowest degree of unionization.
So the classic orthodox recipe for what you do
to have a well-functioning labor market we have.
And in a sense that was always the bargain we thought we had.
We're willing to tolerate more inequality
but we'll have really flexible labor markets that won't get
in the way of everyone getting a job.
What we've done quite badly is nationwide paid leave
where we're at the zeroed percentile
because we don't have it and everyone else does.
Expenditures on active labor market policy, so this is things
like job search assistance or training, that we spend 2%
of GDP, that's lower than everyone but Chile and Mexico.
Our childcare subsidies are low and we have a high tax
on people returning to work.
I think looking at that set of institutions
and challenging some of the previous notions we had
about labor market flexibility and understanding the need
for supportiveness is part of the answer here.
Wanted to just quickly put down on the table some
of our policies because it's not
like we've just been sitting here describing the set
of problems for the last eight years and not trying
to do anything about it.
Now of course our policies are less than we wanted to do.
And in almost every one of these the answer was to do more.
But want to put them down on the table relatively quickly.
The first is the fiscal expansion I mentioned earlier.
The recovery act is shared GDP is the blue part of that bar,
that's what we passed at the beginning of 2009.
What is often underappreciated is that after
that we passed 12 subsequent fiscal expansions for things
like payroll taxes, tax credits for infrastructure, housing,
etc. Those increases the recovery act shrank
so we averaged about 2% the GDP for those four years.
And then there were automatic stabilizers.
You add this all up and it was on par with the fiscal response
to the Great Depression and larger than what you saw
over this period of time for any
of the other major economies in the world.
The Affordable Care Act, people, economists spent lots
of time worrying about whether something was causal
or not causal and diffs and diffs and regression
and discontinuities, etc. Unreasonably comfortable
with the decline we see after the dotted line there
which represents 20 million people being a causal result
of the Affordable Care Act.
At the same time we've seen an enormous slowdown
in per enrollee spending.
We've seen it both in private insurance
and we've seen it even more starkly in Medicare.
And that has translated for people.
If you look at overall premium growth
in the decade before the Affordable Care Act it was 5.6%.
In the years after it's been 3.1%.
If you look just at what workers contribute
to their premium plus their out of pocket costs,
their deductibles, etc. the slowdown has been even larger.
Now this has a lot of different causes.
It's not just the Affordable Care Act but there's a number
of ways in which the Affordable Care Act contributed both
by changing reimbursements in Medicare
and through delivery system reforms,
many of which have been mimicked and adopted
by the private sector.
At the same time minimum wage, we have not raised minimum wage
at the federal level in this administration.
We've certainly tried very hard.
But when we launched the strategy
for a higher federal minimum wage we were very conscious
that congress might now go along.
And so we made a real effort to make states to act,
to get localities to act and to get employers to act.
And if you look at that blue bar [inaudible] think the minimum
wage could go a lot higher.
You still see that decline relative to where it used to be.
But we've at least at the state level, including states
like Michigan, prevented the erosion of the minimum wage.
There's a large academic literature that's looked
at what happens in neighboring counties or neighboring states
when one raises the minimum wage, one doesn't.
At CEA we've reproduced that analysis and found that states
that have raised the minimum wage
since 2013 have seen a large increases in earnings growth.
I'm sorry, this is for retail, leisure and hospitality workers,
whereas job growth hasn't been different.
If you looked at the trend before the increase
of the minimum wage it's about the same and you look
at higher income workers, the trend is about the same.
So this does seem consistent with what we thought before
that reasonable increases in the minimum wage result
in higher earnings and don't result
in reduced job growth or hours.
We've seen, thanks to James Cavall [assumed spelling]
who I've done a lot of work with on this topic,
over the years a big increase in support for higher ed.
This is in the form of Pell expenditures
and this has an impact on that competitive explanation
of inequality in the long run.
If you look at after tax income inequality the,
this shows you the percentage change in after tax incomes
as a result of the affordable [inaudible] act
and the tax changes we've had, this is the largest shift
in income to the bottom 99% as a result of tax policies
of any administration since at least 1960.
And it's the largest dollar investment in inequality
since the Great Society in the late 1960s.
So that adds up to be quite large.
And the ACA's a really important part of that inequality story.
Now none of that needless to say is mission accomplished
but almost all of that is in the vein of things we need
to do more of like minimum wage, college
and a more progressive fiscal system.
Wanted to end by saying that all of this matters.
But, you know, there's nothing
that hurts incomes more than a big crisis.
And so sustainability is real important.
You don't want to prop up incomes today
at the expense of the future.
And wanted to say, you know, one thing that a lot
of economists are worried about now is that if you look
at past recessions we've responded to them
by cutting interest rates by five or six hundred points.
Interest rates now are really close to zero
which makes it pretty card to cut them by five
or six hundred points.
And with what Linda did at CEA is consistent with the idea
that this, while interert rates might rise they might continue
to be pretty low.
And so our scope
for conventional monetary policy may be more limited
in the future.
To me that says we need to make sure we're engaged
in robust fiscal policy in the future,
that we're ready to do that.
The fiscal situation has improved.
Two thousand eleven the debt was rising more
than it's rising now.
That's in part because of changes we've done to taxes
for high income households because, oh,
if you've [inaudible] the number before 2011 you'd see the
Affordable Care Act brought this down even more.
But debt is still rising as a share of the economy.
In my judgement this isn't some immediate urgent threat
to our economic growth next year, but it's something
that over time would chip away at our growth and chip it away
at our ability to engage in the fiscal policy that we need
and so it should be dealt with over the medium and long term.
Thanks too, so I can give credit to everyone in this room
that played a role in all of this, Michael Barr,
on the financial sector is more resilient.
And you look at tier 1 common equity [inaudible] sort
of how much of cushion you have if you lose money
to make sure you don't go bankrupt
and that's considerably more robust
than it was before the crisis.
But there's still risks in our financial system.
And then finally all of these are some things moving
in the right direction but more work remains to be done
and this is no exception.
It's a pretty amazing thing if you look at carbon emissions,
for a long time they were increasing.
They've been decreasing for some time now.
And the decrease got pretty steep.
Now part of that steep decrease was the recession,
just not the world's best way to solve climate change.
But it's continued on balance since then and we estimate
about half of it is due to policies.
The baselines have come down a lot.
We are, commitment is to get to that gray bar
which is what we've promised
under the Paris agreement to get to.
If you just continued policies based on the last estimate
from the EIA we wouldn't quite get there.
We need to some additional policies, although some
of the estimates since then suggest
that the baseline would come
down further absent policy changes,
which we can talk about in the Q&A.
So in summary I think we have made a lot of progress
in the last many years.
I don't think you want to throw out or deny that progress
because I think that progress contains in it the lessons
of what we need to do going forward
which in many cases is a lot more of what we've done
over the last eight years.
But I don't think you want to look at that progress and say
that we've solved the problem.
A couple of years of decent real wage growth doesn't make
up for decades of subpar wage growth.
And the fact that the participation rate has been
stable under my tenure as CEA Chair doesn't make
up for the 10 percentage point decline
in the decades before the country was fortunate enough
to have me as CEA Chair.
So I think there's a lot more to do going forward.
Obviously some of that is making sure
that one doesn't go backwards on some of the things I talked
about but a lot more room or need
to go forward on them as well.
So, thank you.
[ Audience Applause ]
[ Pause ]
>> Thank you again Mr. Chairman for joining us this afternoon.
My name is Sam Gellar, I'm a second year master student
at the Ford School here with an interest on housing,
transportation and public finance.
>> Hi and I'm Farrah Manich
and I'm a second year MPP student here.
And my interests lie primarily in economic policy
and sustainability policy.
>> Great, we have a ton of questions here to get through.
We'll see how many we can tackle.
>> There may not be room for more questions but I should say,
have us do the topic I just talked about
but if people have broader issues or, you know,
personal advice that I don't, advice for,
have to do that too, but.
So the first question from the audience is what state
and federal education policies do you see
as potential mechanisms for addressing some
of the systemic issues with productivity,
labor and inequality that you identified?
>> So I think education is really important
and is disproportionally important relative to the number
of unique insights I have into it.
So there's others in the room, I mean, it's probably true
of every question that's going to be asked here.
But probably more true here in both directions.
If you look at us, at the United States and you look
at the number of years people were in school
which is obviously an imperfect measure of education,
it was rising at I think about .4 years every 5 years.
Now it's rising at about .15 years every 5 years.
So it's rising at 1/3rd the rate.
There are two margins that you could improve that on.
One is start people in school earlier.
And if you look at the share of three and four years,
so I'm trying to look
at who asked the question, but that wasn't you.
If you look at the share of three and four year olds
in school now I'd say we're 22nd in the OECD.
And, you know, countries like Chile and Mexico
that aren't nearly as rich
as the United States have a higher fraction
of their students in school.
So there's room to expand on that margin.
I don't think there's any overly cheap way to do that.
I don't think, you know, you could talk about reform
for preschool or whatever else, I think a lot
of it is we just spend a lot of money on it
and certainly don't spend a lot of money to help families
who have a hard time affording it go to school.
So we just need to expand the subsidies.
And by the way that has a side benefit
of the labor force participation issue I was talking
about of enabling, making it easier for parents,
disproportionately mothers to work.
We could also expand the number of years at the other end
in terms of college and the number of people both going
to college but also a big emphasis that we've had
in the administration on college completion.
And that when people get there making sure they are staying
in and completing.
That also is to some degree a function of money
and the subsidies you have a college.
And there's a whole set of ideas around that.
But I think it's also things that we did an expansion
of income based repayment
that James literally was the mastermind of
or the main conspirator in getting it done.
That says if your income isn't as high as it was,
your debts get deferred and then ultimately forgiven.
That's still more complicated than it should be.
There's places like Australia, which I've learned from Betsy,
is where all interesting polices happen.
At first I thought Betsy by the way was really insightful,
smart person because she always had examples
from other countries of how policies work.
And then I realized they were all Australia.
The, but more automatic the way it happens there.
And then in between K thru 12 I suspect, you know, there's a lot
that could be done in terms of reforms.
But I'm not as knowledgeable about them
so I'll leave time for more questions.
>> So the next question we have is do you think universal basic
income will be a necessary response
to jobs lost to technology.
And if so, how far away are we from meeting this policy?
>>> So my answer to the question is no.
And let me explain why.
First of all a universal basic income, it's a little bit hard
to define because everyone who likes it wants to be in favor
of something that sounds big and exciting.
They never quite tell you what it is
but I assume it means universal which means everyone gets it.
I assume it means basic which is just sort of a certain amount
of money that's almost flat and that it's income
which means that it's cash.
It has two flaws as an idea.
The first flaw is the basic premise itself.
I don't think our problem is that we have
so much productivity growth that it's going
to replace everyone's ability to work
and there won't be jobs for people.
First of all we don't have enough productivity growth
But second of all even if we do,
remember that picture I showed you
of labor force participation rates in different countries.
Switzerland has almost everyone participating in the workforce.
Italy has a low labor force participation rate.
That's not because in Italy they have really great robots
that are doing jobs so people don't have jobs.
And in Switzerland they're stuck doing manual labor
and like making the cuckoo clocks themselves.
The problem is that they have different labor market
institutions and they have different policies.
And I think that matters an enormous amount,
by 10 percentage points or more in terms of the fraction
of the people that are working.
So I don't think technology tells you what fraction
of your population can work, I think your policies do.
And universal basic income to me is giving up on the idea
that people can work which I think is both analytically
wrong, is inconsistent with hundreds of years
of technological progress.
And is a problem in the world where a lot of the, you know,
esteem people get derives from their job,
not just from the dollars that they have.
The second problem
with universal basic income is I think we have a limited ability
to sustain revenue in the United States.
To either sustain our current revenue levels
or sustain additional revenue levels.
And I think we need more infrastructure.
We need more investment of basic research.
We need to more fully fund some low income programs
like housing vouchers that we know work well.
We need a more, we need also to deal
with our existing obligations even before we talk
about those new ones like social security and Medicare
which are going to rise as a shared GDP.
So I think if you took a lot of money and gave it to people
on a flat basis who made $60,000 a year, that means you'd have
to do less of all the other things I just said or you'd have
to cut a bunch of well-targeted programs
for low income households.
So I don't love it as an idea.
>> In your opinion how significant has the growing
racial diversity in the workforce affected inequality
and participation rates?
>> In some ways you've seen in incomes a reduction
of disparities by, and I showed you the top 1% doing well
relative to others.
But if you look at, you know,
the black white earnings differential
or labor market opportunities now compared to, you know,
decades ago, that has improved.
If you look at labor force participation,
Hispanic men participate at higher rates than white men,
although black men participate at significantly lower rates
and then the unemployment rate is higher for African Americans
and for Hispanics than it is for whites.
So there's still a substantial amount of disparity
and inequality by race.
I think that's an important dimension to look at
and understand the problem.
To some degree some
of the solutions don't necessarily have race in them.
So if you look the Affordable Care Act
for example African Americans are much higher ratio
of health uninsurance than whites.
The Affordable Care Act didn't have any provision
for African Americans.
It had a provision for people
who had a hard time getting insurance and you look
at the result of it,
the uninsured rate decline much more dramatically
for African Americans than it did for whites.
I showed you the overall.
You look at the recovery act that again
for the most part was a macroeconomic policy
and the unemployment rate for African Americans
and Hispanics fell more quickly than it did for whites
because we're sort of all familiar
with the first fired in the recession.
But it also as you strengthen the economy can be helped.
So I think some of it is a useful prism and it's important
to understand discrimination and the role
that that's played in labor market.
But some of the solutions are broader ones as well.
>> So you mentioned that the administration's response
to the financial crisis was correct
but that we pivoted too soon.
Can or should we correct this now and if
so what will the effect be on inflation?
>> So, you know, the too soon was we,
it launched something called the American Jobs Act
in the fall of 2011.
And we called for about a $500 billion second round
We ended up getting about 150 billion of that 500.
And then at the end of 2012 we didn't want the payroll tax cut
to go away.
We didn't want extended unemployment insurance benefits
to go away.
And those both went away.
So you had these two different places where we either wanted
to have affirmative new policies or we wanted
to continue our existing ones
and not have them go away so quickly.
So that created more a fiscal headwind
than we should have had.
Monetary policy partially compensated for that.
They saw what was going on with us.
They realized we weren't doing everything we were supposed
And they helped, you know, make up for it which is part
of what has limited the consequences.
In terms of where we are now I don't think we're all the way
recovered but I think we're most
of the way there in a cyclical sense.
Structural sense we still have this big challenge
in terms of incomes.
But our unemployment rate, our part time, all of that is most
of the way there, it's not all the way there.
I think additional demand would be welcome and helpful
but I don't think we need a huge amount of it to come
from fiscal policy at this stage.
I think a little bit of it would help.
I think it would be especially useful
if it was not just fiscal policy for the sake of demand
but it was something like infrastructure that was helping
to build up our supply and our productive capacity
over time and in the future.
If we did a lot of fiscal policy there's a chance
that that would mean, you know, more inflation.
But there's also a chance that the fed would see that,
offset it, and we'd have higher interest rates
and a different mix of the way we were getting
to the same level of aggregate demand.
So I think for the most part we're in a world now
where monetary policy will offset a decent amount
of fiscal policy but not completely.
>> It seems quite possible
that the next administration will see a substantial increase
in the deficit.
What do you think are the economic consequences both
in the short and long term?
>> In terms of the approach that I think I would take
to the deficit is, the most important is do no harm.
And then the second most important is to start
to make some progress over the medium and long run.
So we in the beginning of 2009 restored something called
statutory pay-go that said any change you made to tax
or spending you had to fully offset.
And we pretty consistently applied
that to everything medium and long run.
We didn't apply it to things like the recovery act
that were designed as temporary emergency provisions.
But when we did the Affordable Care Act I can't tell you the
amount of pain we went in because it didn't just need
to pay for itself over the first decade but need
to over the second, third, fourth,
and then there was this bill that amended it
that also needed to do the same thing.
And we went to great strides to make sure that it would do that.
So I think unfortunately there has, you know,
the rules around statutory pay-go were repealed
when republicans took control of congress.
And they don't abide by the same, you know, you need to pay
for everything while you do it.
The paying for everything while you do it has the advantage
of not making the problem worse.
I think that's for the most part sufficient in the short run
but in the long run we're going to need to actually deal
with the long run deficit.
So if it does go up over the next couple
of years that's something I'd be concerned about.
Not predicting a crisis that would result from it,
I think we have a lot of people that want
to lend the United States money and lend us money quite cheaply
and I don't think that's going to change.
But I mean interest rates will go up but they won't,
I don't think they'd change in some dramatic fashion.
But I think it more chips away at our national savings,
chips away at our ability to either invest
or to fund our investment domestically which the benefits
of future growth would go to repaying our creditors rather
to us and put us in a worse position over time.
>> Some contend that it's getting harder
to accurately measure GDP and GDP growth due to increases
in technology or whether or not this is the right measure
for economic well-being in general.
What do you make of this claim?
>> It's always been hard to measure GDP.
Robert Gordon has a book on the rise and fall of American growth
and has great examples of the statisticians.
I think did include cars until something like five years
after Ford introduced the Model A car.
And, you know, just missed all
of these quality improvements and expansion in it.
And it's really, I mean there are statisticians
that do a great job.
They're among the best in the world.
But it's really difficult to figure
out if something costs more this year than last year is it
because that thing is better than it was last year
in which case GDP went up.
Or is that someone wanted to raise the price of it
in which case it didn't.
I think there's a bit of evidence
that there may be more parts of our economy
where that's harder today than in the past.
But a lot of the, but there's things
that go the other direction too.
So, you know, one of the places that's hard is
in computer hardware.
We don't make a lot of computer hardware.
So insofar as we're making an error
and measuring quality growth in computer hardware,
that was a bigger deal 15 years ago when we made more
of it here than it is now.
And 1995 to 2005 which some of the people in this room remember
that period, that period began with if I made a social plan
and my friend didn't show up, I went and found,
I'm sorry 1995 to 2005.
In 1995 if I made a social plan with a friend
and didn't show up, I'd go find a pay phone
and call my answering machine and press a bunch of buttons
until I could get to the message.
By 2005 I had a cell phone and I had email
and I had a whole bunch of things.
So there was lot of progress in that decade.
And we actually, a lot
of it didn't show up in the statistics.
In some ways maybe more was missing from the data
in that decade than the decades since then
and the [inaudible] people have done that's shown that.
So I think we've always had an issue.
My guess is that issue's always gone in one direction.
So that's what I said before
that income growth used to be faster than 3.
Today it's higher than 0.4.
I'd shift them both up with huge amount of uncertainty
by about the same amount, maybe one a little bit more
than the other, but not radically change
in the conclusion.
In terms of GDP's wellbeing, absolutely it's not wellbeing
but it's pretty, and Betsy has done a lot on this,
it's pretty well correlated with it
that richer countries people tend to be happier
and having more GDP helps alleviate a lot of problems.
It tends to lead to higher incomes.
It puts you in a better position to engage in public programs
to help either share the benefits of the society
or invest more in your growth and reduces even just the amount
of fighting over scare resources.
So it's not at all sufficient.
We need to look at a wider range of things.
And I was focusing not on GDP but median household income
which I think in some ways captures it even better what
But that's pretty related to GDP and pretty important to people.
So I don't think on a quarter to quarter basis and worrying
about the macroeconomy, I think the GDP is not
such a terrible thing to look at.
>> Do you feel the Obama administration failed to develop
or publicize effective policies
to address middle class stagnation
and rising inequality?
Would better communication have stemmed the probability
of what some consider a demagogue winning the most
recent presidential election?
>> No comment on the last part.
The first part, you know,
President Obama has said exactly that before.
And I always have mixed feelings when I'm sitting
with my colleagues because I'm like oh, so it wasn't my fault,
it was the communications director's fault.
If only she had done a better job it would all be fine.
And that feels to me, I don't know, overly self-indulgent
and probably not a fair conclusion to reach.
I don't know, it's very hard to break through on stuff.
You know, I've had a lot of experiences where someone's
like you should only give a speech where he says blank.
And I'm like yeah he said that in every one
of his last eight speeches but it wasn't covered
on the evening news so you wouldn't know about it
and I don't blame anyone for not reading speeches
from beginning to end, so.
Some of this is hard to break through on
and hard to communicate about.
Some of it, you know, I showed you that graph at the beginning
that showed you the United States ahead of Japan
and the UK and the Euro area.
You know, but that's grading on curve.
You know, anyone sitting out there isn't comparing to those.
They're saying, I can't remember what the number is
but we're four or five percent ahead
of we were before the recession on a per capita basis.
That isn't great.
We should have had faster growth.
And they're not satisfied with it.
So, you know, I think there's some legitimate reasons,
I think there's a lot
of legitimate reasons people are concerned.
And there have been a lot of legitimate improvements.
And we've tried and I think it's hard, I don't know,
didn't fully answer your question,
but maybe that's evidence of the premise being correct.
>> So trade agreements are predicated on the belief
that winners will gain enough in surplus to be able
to compensate the losers for their losses.
Are we doing enough to insure that these transfers
of surplus are happening?
If not, what should we be doing?
>> So I think we should be doing more to share benefits.
And in some ways the fiscal changes I showed you
over the last eight years are a huge change.
You see a nine percentage point increase
in the tax rate from top 1/10 of 1%.
And an 18% increase in the after tax income of the bottom 20%.
So I don't think, you know, nothing has happened,
a decent amount has happened.
But we should be doing more to help people,
to help people especially not just in terms of incomes
but finding jobs through search, through training,
through assistance for housing and for mobility.
As well as something we've proposed called wage insurance
which when you take a new job if it doesn't pay as much
as your old one would pay you some of the difference
in terms of compensation.
I'm positive that trade causes diffused benefits
and concentrated costs, that's very well documented
and a reasonably obvious thing.
I'm much less sure that trade contributes to inequality.
Trade does contribute to, may contribute to inequality
on the production side where it's part
of what has maybe favored more skilled workers and enabled them
to earn more relative to less skilled workers.
But I don't think we should sneer at thinking
about the consumption side of the equation.
And tradeables and manufactured goods are a larger fraction
of the consumption bundle of low income households
and moderate income households and high income households.
And so on the consumption side it's played a big
And put another way, if I asked anyone in this room
to design a policy to reduce inequality,
your idea probably wouldn't be that if you had a backpack made
of nylon or some other manmade fabric it would have an
A backpack made of leather, it would have a 10% tariff.
And a backpack made of cotton that would have a 6% tariff.
And those numbers are a little bit wrong
but they're close to right.
You know, and you also wouldn't have,
if you had a stainless steel spoon that you wanted to buy
that you would pay I believe it's a 10 or 15% tariff
on all stainless steel spoons made abroad.
But this is, and this one is literally true
and exactly right, if you want to buy a silver spoon
for your child that is tariff free.
So I don't think, I think that's a really crazy way to think
that you should deal with inequalities
through a patchwork set of tariffs that were set
in random ways by lobbyists for a variety of industries that,
you know, raise prices for the things that people pay.
So I think we should do the compensation.
I think we should be concerned especially
about the concentrative loss.
I think we should be really concerned about that.
But I'm less convinced about the inequality.
>> So knowing what you know now and knowing
that President Elect Donald Trump will be taking office
in two months, how would you approach economic policy
differently for the Obama administration
if you could do it all over again?
>> All of it, no.
You know, the one, this is
like I would have answered the same way without, you know,
[inaudible] on this one I might even have been more worried
in that regard just politically not economically.
That I am worried about not
where we are cyclically right now.
I think we're in good shape in terms of the rising rate
of wages I showed you, consumers are confident,
they're spending a lot.
So I'm not worried about a recession tomorrow.
What I am worried about is there will be some bad thing
that happens in the global economy or the U.S. economy
at same date at some point in the future.
That we have less monetary ammunition to deal with it
and so fiscal policy has to play a bigger role.
What I'm worried about is there's a lot of controversy
over that role for fiscal policy.
And I told you in 2011 and '12 we were blocked
from what we wanted to do.
I wish when we did the recovery act that maybe we had put
in place more automatic things.
So when the unemployment rate goes up you get to stay
on unemployment insurance for longer.
When the economy goes down it hurts state budgets,
state contract and that hurts the economy.
We should automatically raise the amount
of Medicaid money that states get.
That, you know, maybe we even look at other things on the tax
and spending side that improve what are called the automatic
stabilizers, things that happen automatically in a recession.
And what's nice about those is there's a real complementarity.
If you give money to people when they need it,
it helps them smooth their consumption and insure
at an individual level against shocks.
And because they're smoothing their consumption they're
spending more and it helps the overall economy.
So I think that's something
that if we had done probably would last forever,
would help us deal with recessions better in the future.
You know, other things you can't, you know,
if I had known Donald Trump was going to be President
or I'd known Hillary Clinton had been President, in either one
of those cases I would have wanted
to pass the Affordable Care Act with 50
or 60 votes in the senate.
Depending on how it's done you can change the Affordable Care
Act so there's nothing you can do.
You know, maybe I regret it wasn't a
But, you know, in fairness I didn't think
of that at the time.
I guess you could have skipped the whole Supreme Court thing
too if you had done it as a constitutional amendment.
So the more I think about that, yeah, maybe I'll make
that my idea for what we should have done differently.
>> This will be the last question.
What are you plans for after January 20th?
>> I, you know, love working
on the policy issues that I've worked on.
I started out as a graduate student in economics.
And I think John Leahy who was my advisor could tell you,
I think I was pretty much as narrow as anyone else
who was a graduate student.
And then I sort of accidently ended up in Washington
and discovered that I liked a wide range of policy issues.
I like to combine a little bit of politics and economics
to figure out how you can navigate to get something done,
not just what the pure best idea on paper was.
And I liked talking about and communicating those ideas.
I've had the best job in the world to do that set of things
for the last 3-1/2 years.
So I will have to go off and find the second best job
in the world that allows me to do the same things.
But I'll but, you know, writing, researching, thinking,
speaking about, etc. the types of issues
that we've all been talking about today.
I just will have like four people
in the audience rather than all of you.
So thank you for being here today.
>> Thank you very much.
[ Audience Applause ]
>> Thank you Jason, that was indeed very wide ranging.
It was also very substantive so we very much appreciate that.
I'd also like to thank all of you for joining us today.
While this is the last policy talks
of 2016 we do have a pretty strong line up for 2017.
So I encourage you to take a look at our website.
And we hope to see you again next semester.
We also hope that you'll stay to continue the conversation
and enjoy some refreshments out in our great hall.
There is a reception there so please stay and join us.
And please join me in a final round of thanks to Jason Furman.
[ Audience Applause ]