[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 115-416
EXAMINING THE RISE OF AMERICAN EARNINGS AND LIVING STANDARDS
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 26, 2018
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
32-379 WASHINGTON : 2018
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Erik Paulsen, Minnesota, Chairman Mike Lee, Utah, Vice Chairman
David Schweikert, Arizona Tom Cotton, Arkansas
Barbara Comstock, Virginia Ben Sasse, Nebraska
Darin LaHood, Illinois Rob Portman, Ohio
Francis Rooney, Florida Ted Cruz, Texas
Karen Handel, Georgia Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York Martin Heinrich, New Mexico,
John Delaney, Maryland Ranking
Alma S. Adams, Ph.D., North Amy Klobuchar, Minnesota
Carolina Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia Margaret Wood Hassan, New
Hampshire
Colin Brainard, Executive Director
Kimberly S. Corbin, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Erik Paulsen, Chairman, a U.S. Representative from Minnesota 1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New
Mexico......................................................... 2
Witnesses
Dr. Casey Mulligan, Chief Economist, Council of Economic
Advisers, Washington, DC....................................... 5
Dr. Russell Roberts, Research Fellow, Hoover Institution,
Stanford University, Stanford, CA.............................. 7
Mr. Stephen Moore, Distinguished Visiting Fellow, The Heritage
Foundation, Washington, DC..................................... 8
Dr. Heather Boushey, Executive Director and Chief Economist,
Washington Center for Equitable Growth, Washington, DC......... 10
Submissions for the Record
Prepared statement of Hon. Erik Paulsen, Chairman, a U.S.
Representative from Minnesota.................................. 28
Prepared statement of Hon. Martin Heinrich, Ranking Member, a
U.S. Senator from New Mexico................................... 29
Prepared statement of Dr. Casey Mulligan, Chief Economist,
Council of Economic Advisers, Washington, DC................... 31
Prepared statement of Dr. Russell Roberts, Research Fellow,
Hoover Institution, Stanford University, Stanford, CA.......... 35
Prepared statement of Mr. Stephen Moore, Distinguished Visiting
Fellow, The Heritage Foundation, Washington, DC................ 43
Prepared statement of Dr. Heather Boushey, Executive Director and
Chief Economist, Washington Center for Equitable Growth,
Washington, DC................................................. 52
Response from Dr. Mulligan to Questions for the Record Submitted
by Chairman Paulsen............................................ 62
Response from Dr. Mulligan to Questions for the Record Submitted
by Representative Karen Handel................................. 63
Response from Dr. Roberts to Questions for the Record Submitted
by Representative Karen Handel................................. 64
Response from Mr. Moore to Questions for the Record Submitted by
Chairman Paulsen............................................... 65
Response from Mr. Moore to Questions for the Record Submitted by
Representative Karen Handel.................................... 65
Response from Dr. Boushey to Questions for the Record Submitted
by Representative Carolyn B. Maloney........................... 66
Report submitted by Representative Maloney titled
``Disaggregating growth: Who prospers when the economy grows''
by Heather Boushey and Austin Clemens.......................... 67
EXAMINING THE RISE OF AMERICAN EARNINGS AND LIVING STANDARDS
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WEDNESDAY, SEPTEMBER 26, 2018
United States Congress,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to call, at 10:47 a.m., in Room
1100, Longworth House Office Building, the Honorable Erik
Paulsen, Chairman, presiding.
Representatives present: Paulsen, Schweikert, Delaney,
Maloney, and Handel.
Senators present: Heinrich and Lee.
Staff present: Ted Boll, Colin Brainard, Kim Corbin,
Gabrielle Elul, Hannah Falvey, Connie Foster, JP Freire, Ricky
Gandhi, Colleen Healy, Christina King, Paul Lapointe, Alex
Schibuola, Ruben Verastigui, Jim Whitney, Scott Winship, and
Tommy Wolfe.
OPENING STATEMENT OF HON. ERIK PAULSEN, CHAIRMAN, A U.S.
REPRESENTATIVE FROM MINNESOTA
Chairman Paulsen. Good morning. We will call this committee
hearing to order.
America is a beacon to the world. It is the land of
opportunity, where everyone has a shot at the American Dream.
Our Nation isn't perfect, of course, and not everyone gets to
start from the same position. Many Americans face tremendous
adversity, and as lawmakers, we must avoid standing in the way
of Americans being able to enter the workforce or switching to
jobs that pay more, offer better benefits, or provide greater
flexibility.
Since commonsense pro-growth policies have been
implemented, we have seen a groundswell in opportunity. The so-
called quit rate, as measured by the Bureau of Labor
Statistics, is at its highest since 2001. Workers are more
confident to leave their old jobs for new ones. Job
satisfaction is at its highest since 2005, according to a
survey by The Conference Board.
These are positive signs as opportunities expand for
everyday Americans. And contrary to claims that economic growth
is only benefiting the wealthy, the unemployment rates among
those workers who normally face the greatest challenges in the
job market have fallen drastically since pro-growth policies
were initiated. Among those without high school diplomas, the
unemployment rates of Blacks, Hispanics, and Whites have fallen
8.1, 3.8, and 3.3 percentage points, respectively.
According to a Washington Post analysis, there has been a
3.3 percent increase in jobs for blue-collar workers in goods-
producing jobs, the best rate since 1984. A New York Times
article states that the number of Americans seeking Social
Security disability benefits is plunging, a startling reversal
of a decades-old trend. It cites a stronger economy as the
cause.
This is how we look at the full picture of our economy, by
looking at a variety of indicators. While my friends on the
other side of the aisle look at the downward movements and
measures of average and medium worker earnings, they fail to
see that the median worker today is not necessarily the same
person as last month or last year or a decade ago. It is
possible for these measures to decline even when wage rates are
rising.
Many critics fail to acknowledge that people move in and
out of different income ranges over their lifetime. Just
because it is not easy to measure progress across a population
of over 320 million people, we should not assume people are
tethered to a given income percentile over their lifetime,
despite ample evidence to the contrary.
Millions of people from all over the world continue to
relocate to the United States, despite tremendous risks and
numerous challenges and, clearly, it is because America remains
the land of opportunity. We must take care in reading headline
statistics; otherwise, we risk creating policies that destroy
the potential for real progress.
If we allow people to thrive, they will thrive. If we allow
American businesses to invest in their employees, they will
invest in their workers. If we let Americans keep more of their
money, they will put it to the best uses for their families and
their own well-being, and our economy will thrive.
Our future will only be brighter if we allow the path of
smart economic policy. Our prospects for a brighter future will
be dimmed if we go back to the old ways. For instance,
Democrats have threatened to increase taxes to where they were
prior to the Tax Cuts and Jobs Act. America's tax rate for
doing business would surge back to the highest in the developed
world and would undo the growth-enhancing economic incentives
that have powered increased private domestic investment and
economic growth in less than 2 years. American workers will not
have as much of the capital investment to work with that is
critical to raise productivity, and that would be bad news for
future wage growth.
The success of recent economic policy is clear. We are
again relying on the ability of people to climb up the economic
ladder to grow and thrive.
Our star panel of witnesses today will help explain the
progress made to date and how and why with pro-growth policies
we can continue to prosper as the great Nation that we know
America to be.
Before I introduce our witnesses, though, I now yield to
Ranking Member Heinrich for his opening statement.
[The prepared statement of Chairman Paulsen appears in the
Submissions for the Record on page 28.]
OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A
U.S. SENATOR FROM NEW MEXICO
Senator Heinrich. Thank you, Mr. Chairman.
Well, it feels like deja vu all over again. Another hearing
on the Republican tax law passed 9 months ago. Another attempt
by Republicans to convince their constituents that they are
better off because of that law. But there is a problem. Despite
White House promises, working families aren't better off, and
another hearing is not going to change that.
Wages are stuck. The typical worker's hourly wages, after
adjusting for inflation, were lower in August than they were a
year ago. What has increased is the cost of this tax giveaway.
When Republicans passed the bill last December, the
estimated cost was $1.5 trillion, with a T. Today, it stands at
$1.9 trillion. It was a massive waste of resources when workers
could least afford it and when we should have been investing in
our people and our communities.
Most working Americans have been treading water, with
middle-class earnings stalled for years. The typical man
working full time year-round earned less in 2017, after
adjusting for inflation, than in 1973. While earnings have been
stagnant or shrinking, the cost of childcare, of housing, of
education have climbed higher, with student loan debt exploding
in the past decade.
We will hear today that we just need to look at different
inflation measures or use a different survey and then
everything looks fine. But telling people across my State,
don't worry, you are doing better than you realize, won't make
it easier for them to pay their kids' college tuition. It won't
help them get health insurance or treatment for addiction.
Even as those in the middle class work harder and harder to
make ends meet, those at the top continue to reap large income
gains. Between 1980 and 2014, the top 1 percent saw their
pretax incomes grow by 204 percent, while incomes for the
bottom 50 percent remained virtually flat. And with passage of
the Republican tax bill, the gap between those at the top and
everyone else is likely to grow significantly wider.
Part of the challenge we face is that we need better, more
timely economic data to help us craft smart, forward-looking
policies. Knowing in real time who is actually benefiting from
economic growth and who is not is key to designing new policies
that generate growth which benefits everyone.
Along with Leader Schumer and some of my JEC colleagues, I
have introduced legislation that instructs the Bureau of
Economic Analysis to start reporting on new Income Growth
Indicators. These measures would show how incomes are growing
at different levels of income, painting a clearer picture of
who the economy is actually working for.
We also need a sustained effort to lift the working
standards of working families, to help workers chart a brighter
course for themselves and their families. We should invest in
programs that reward work and help Americans prepare for 21st
century jobs.
Increasing the value of Pell Grants so that a college
education is within reach for more students is a good place to
start. I have a proposal to expand Pell Grants for students
across the country. In New Mexico, the increased grant would
cover the full cost of tuition at all of New Mexico's in-State
colleges and universities.
Let's expand the Earned Income Tax Credit so that work pays
better and more families are able to afford the basic
necessities. We should have done that in the Republican tax
bill.
Rather than turning the clock back again, allowing
insurance companies to deny coverage to those with preexisting
conditions, as the Trump administration is trying to do, we
need to build on recent gains to make healthcare more
accessible and more affordable.
We also need to be smarter about how we use our Nation's
fiscal resources. After squandering $1.9 trillion on the tax
bill, the House is preparing to vote on the Republicans' tax
plan 2.0. This legislation would add $3.2 trillion to the
deficits from 2029 to 2038, bringing the total cost of their
tax policy above $5 trillion. And remember, the majority of
these costly tax breaks go to the richest among us.
I don't think we can have a hearing on living standards
without asking ourselves what will happen to the quality of
life for tens of millions of Americans who count on Social
Security, Medicare and Medicaid if Republicans add literally
trillions to deficits and then turn to these programs as their
piggybank. The consequences would be disastrous.
I look forward to the testimony from our witnesses and a
little healthy debate, Mr. Chairman.
[The prepared statement of Senator Heinrich appears in the
Submissions for the Record on page 29.]
Chairman Paulsen. Thank you, Senator Heinrich.
And I will now introduce our witnesses.
Dr. Casey Mulligan is currently on leave as a professor
with the University of Chicago to serve as chief economist with
the President's Council of Economic Advisers. Dr. Mulligan was
also a professor at Harvard University and Clemson University,
and has authored two well-known books: The Redistribution
Recession: How Labor Market Distortions Contracted the Economy;
and Side Effects: The Economic Consequences of Health Reform.
He is affiliated with a number of research organizations,
including the National Bureau of Economic Research, the George
Stigler Center for the Study of the Economy and the State, and
the Population Research Center. He received his doctorate in
economics from the University of Chicago and his BA in
economics from Harvard University.
And we should note that Dr. Mulligan's parents are with him
in the audience today.
Dr. Russell Roberts is also with us. He is a research
fellow at Stanford University's Hoover Institution. He is also
the host of EconTalk, which is a podcast discussing a variety
of topics with economists, authors, and business leaders. Dr.
Roberts has been a professor at George Mason University;
Washington University in St. Louis; the University of
Rochester; Stanford University; and the University of
California, Los Angeles. He received his doctorate in economics
from the University of Chicago and his BA in economics from the
University of North Carolina at Chapel Hill.
Mr. Stephen Moore is a distinguished visiting fellow at The
Heritage Foundation and an economic analyst with CNN. Mr. Moore
was also a senior economics writer for The Wall Street
Journal's editorial board and the founder of the Club for
Growth. He has authored and coauthored multiple books on
economic policy. He received his MA in economics from George
Mason University and his BA in economics from the University of
Illinois at Urbana-Champaign.
Dr. Heather Boushey is the executive director and chief
economist at the Washington Center for Equitable Growth. She
writes regularly for The New York Times, The Atlantic, and
Democracy, in addition to making frequent television
appearances. Dr. Boushey also served as a senior economist with
the Joint Economic Committee. She received her doctorate in
economics from The New School for Social Research and her BA in
economics from Hampshire College.
Welcome to all of you, and thank you for joining us today.
You will each have 5 minutes for your presentations.
And, Dr. Mulligan, you are recognized for 5 minutes.
STATEMENT OF CASEY MULLIGAN, CHIEF ECONOMIST, COUNCIL OF
ECONOMIC ADVISERS
Dr. Mulligan. Good morning, Chairman Paulsen and Ranking
Member Heinrich and members of the Committee. I appreciate the
opportunity today to comment on wages and labor market
performance.
The American economy is growing again, but many in the
media and policy circles and academia have been puzzled by what
appears to be stagnating real wages. The hourly amount that
workers are paid can be an important indicator of economic
performance and economic policies. But how wages are measured
turns out to greatly affect estimates of their level and their
trend over time.
Several features of the available wage data provide an
incomplete picture. Most national measures of wages focus on a
ratio that has cash earnings in the numerator and a denominator
of either the time worked or the time paid. Wage changes are
then calculated as the difference between the ratio today and
the ratio a month ago or a year ago or in the past.
But because cash earnings do not adequately count the full
compensation, namely the fringe benefits that are available on
many jobs, and the usual measures neither net out payroll or
income taxes owed as a consequence of working, this approach
misses an important part of the economic value of work for the
worker and his or her family. Moreover, cash earnings are
naturally measured in dollars and, thus, affected by changes in
the value of a dollar over time due to inflation.
In addition to the difficulty with focusing on cash
earnings in the numerator, the denominator in the calculation
poses additional challenges for accurate measurement of wages.
Although not all the wage data do so, it is important to
distinguish between hours paid and hours actually worked,
because a number of employers now are giving their employees
pay when they are not at work, maybe on vacation, sick leave,
or parental leave. As the BLS recognizes in its productivity
statistics, hours worked rather than hours paid is the proper
denominator for measuring either productivity or what a worker
received per hour worked.
All the current data measures begin with a sample of
individuals who happen to be employed at the time of the
survey, or maybe they begin with a sample of jobs held by those
individuals. But the people employed today, as the Chairman
said, are a different group of people than who were employed
last year and quite a different group of people who were
employed a decade ago.
Movements of people in and out of the workforce
systematically bias the usual wage growth measures away from
being reliable indicators of what individuals are experiencing.
Every year, young, inexperienced people enter the workforce and
are thereby included for the first time in the national average
at wages below those of more experienced workers. And every
year, some of the most experienced and highly paid people
retire from the workforce and they stop being included in the
national average. Both these lifecycle events substantially
reduce the national average wage, especially now that the baby
boomers are retiring, even though no individual necessarily has
a wage that is reduced.
Now, all these issues can be addressed and valid inferences
can be obtained by properly using the various publicly
available wage data. The recent BLS fringe benefit data show
how workers have been receiving bonuses, which contribute to
the growth of their compensation but are not included in the
headline wage measures. The data also show how employers have
been providing more paid time off, which means that earnings
per hour worked is increasing more than earnings per hour paid.
Health insurance, on the other hand, has not significantly
added or subtracted from recent compensation growth rates.
Holding the composition of the workforce constant, the
annual growth rate of real compensation over the past year has
been about one percentage point higher than the usual wage
measures deflated with the CPI-U. In other words, real wages
grew 1.0 percent rather than the .1 percent that is usually
reported from the monthly real earnings release. Moreover,
taking into account the personal income part of the tax reform,
after-tax real compensation grew 1.4 percent over the past
year, again, well above the headline measures.
I want to be clear that this analysis is not a critique of
the Federal bureaus that provide us such excellent data. The
Federal agencies are providing a number of data products that
address each of the things I mentioned today. The problem is
that these additional products get too little attention when it
comes to assessing how the labor market is performing.
When the average real household income grows at 1.4 percent
per year, that means more than a thousand dollars every year
added beyond what is required to keep up with inflation. The
additional income is even greater when we recognize that the
average household now, as the Chairman has said, has more
members with jobs than in the past, and that each worker is
also accumulating work experience over time that translates
into yet higher pay. None of this is a surprise, given that
recent Federal policies have been encouraging business
formation and removing disincentives to work.
I look forward to your questions.
[The prepared statement of Dr. Mulligan appears in the
Submissions for the Record on page 31.]
Chairman Paulsen. Thank you, Dr. Mulligan.
And, Dr. Roberts, you are recognized for 5 minutes.
STATEMENT OF RUSSELL ROBERTS, RESEARCH FELLOW, HOOVER
INSTITUTION, STANFORD UNIVERSITY
Dr. Roberts. Chairman Paulsen, Ranking Member Heinrich,
Vice Chairman Lee, distinguished members of the Committee,
thank you for the opportunity today to testify on the crucial
issue of American earnings and living standards.
Adjusted for inflation, the U.S. economy has grown
dramatically over the last 30 to 40 years. How much of that
growth has gone to the average person? According to many
economists, the answer is basically zero.
In a recent gloomy study of the American economy that
Ranking Member Heinrich mentioned, economists Piketty, Saez,
and Zucman find that the bottom half of the American economy
gained essentially nothing between 1980 and 2014, while incomes
of the top 1 percent tripled. New York Times columnist David
Leonhardt concluded that the very affluent and only the very
affluent have received significant raises in recent decades.
Noble Laureate Paul Krugman, writing in 2014, said that, quote,
``Wages for ordinary workers have, in fact, been stagnant since
the 1970s.''
But these depressing conclusions and others like them rely
on studies and data that are incomplete or flawed. They
understate economic growth for the poor and the middle class
because they use measures of prices that mis-measure inflation.
They leave out important components of compensation, such as
fringe benefits. And many of the most pessimistic studies about
the fate of the middle class ignore the fall in the marriage
rate that distorts measurements of progress.
When Piketty, Saez, and Zucman say that incomes of the top
1 percent tripled between 1980 and 2014, you might think that
people who were in the top 1 percent in 1980 earned three times
more than that by 2014, but that isn't what their numbers
measure. Their numbers show that the richest 1 percent in 2014
made three times what the richest 1 percent in 1980 made. It is
not the same thing.
The richest people in 2014 aren't the same people. A lot of
them, people like LeBron James or the founders of Google, Larry
Page and Sergey Brin, weren't alive in 1980.
The same is true of the middle class. The change in median
income between 1980 and 2014 doesn't capture what actually
happened to the people who were at or near the middle.
Most of the gloomy studies take a snapshot at a point in
time and compare it to a snapshot later, ignoring the fact that
the people in the pictures aren't the same.
To find out how economic growth affects people at different
income levels, you have to follow the same people over time. A
number of studies have done that. I summarize five of them in
my written testimony. The results are quite cheerful when
compared to the gloomy studies that take snapshots of the
American economy.
Studies that follow the same people over time, using survey
data, find that since the 1970s, people raised in poor families
have a much better chance of surpassing the income of their
parents compared to children from rich families. They find that
children raised in poor families have gains in income relative
to their parents that are larger than the gains to children in
middle-class families which, in turn, are larger than the gains
to the richest families.
Studies that use tax data to follow the same people from
the 1980s find that the poorest people have the biggest gains
in income over time, followed by the middle class and, in fact,
the richest people make little or no progress in these studies.
The economic growth of the past 40 years did, in fact, help the
poor and the middle class. A rising tide does, in fact, lift
most of the boats, and it lifts the smallest boats the most.
The yachts, the income of the rich, pretty much stays where it
is or even falls a little.
Now, don't cry for the rich. Even if they stood still over
the last few decades, they had a very pleasant economic life.
There is still lots of inequality in America, but measured
inequality masks the growing prosperity of average and poor
Americans over time. And those gains are understated, I
believe, because even the best measures of inflation overstate
the rise in prices and, therefore, understate the gains in
income for all Americans.
This does not mean that everything is fine in the American
economy. We can do better. There are special privileges
reserved for the rich that reduce their risk of downward
mobility. Financial bailouts are the most egregious example,
and we should stop that. There are too many barriers, like
occupational licensing and the minimum wage, that handicap the
disadvantaged desperately trying to get a foothold in the
workplace. And the American public school system is an utter
failure for too many children who need to acquire the skills
necessary for the 21st century. But the glass is at least half
full.
All Americans deserve the chance to get ahead, to thrive,
and to flourish. The focus on the gloomy narrative misleads us
as to what needs fixing. We should instead focus on getting rid
of the barriers that block access to prosperity. And let's
remember that economic growth can and does benefit all
Americans, especially the poor and the middle class.
Thank you very much.
[The prepared statement of Dr. Roberts appears in the
Submissions for the Record on page 35.]
Chairman Paulsen. Thank you, Dr. Roberts.
And, Mr. Moore, you are recognized for 5 minutes.
STATEMENT OF STEPHEN MOORE, DISTINGUISHED VISITING FELLOW, THE
HERITAGE FOUNDATION
Mr. Moore. Thank you, Mr. Chairman. Thank you, Mr. Vice
Chairman, for the opportunity to testify this morning. It is a
privilege to be here.
I thought I would talk a little bit about--as many of you
probably know, along with Larry Kudlow, I served as one of the
senior economic advisers to the Trump campaign and helped
author one of the early versions of the Trump tax cut. So I
thought I would relate to you how we came about these policies,
why we did, and how we think they are working.
And I would start by simply saying this: The philosophy, I
believe, of what Donald Trump is trying to do in terms of
economic policies is all focused on growth. Growth, growth,
growth. How do you get the economy growing faster?
Now, that higher growth does not necessarily mean you are
going to get higher wages, but I can guarantee you this: If you
don't have growth, you are not going to get higher wages. So
higher growth is a precondition to getting higher living
standards and higher wages.
So I brought a few charts that I would like to show, if I
may. This is the first on why it is that growth is so
important. This is what we call the Obama growth gap. And it
shows that this recovery that we had over the last 8 years, it
has been--to give Barack Obama his due, it has been a long and
durable recovery, Mr. Chairman, but it has been a very flat
recovery. And, in fact, if you look at these numbers, you can
see that the growth rate of the economy over that 7-year period
was about 14.9 percent. The light blue line you are looking at
in the middle is the economic growth rate during an average
recovery, because we had about eight recessions since World War
II.
And then I like to compare the Obama record with the Reagan
record, because Obama and Reagan used very different approaches
to dealing with the recession. Of course, you see that we grew
much, much, much faster under Reagan out of the recovery--in
the recovery than we did under Obama. I don't think that is by
accident. I think that is because most of the policies that
were put in place under Reagan were pro-growth, and many of the
policies under Obama were antigrowth.
But the bottom line here is that if we had a recovery under
Obama that had been as strong as a normal recovery, we would
have had $2 trillion more GDP by 2016. If we had a Reagan-style
recovery, we would have had $3 trillion more.
Now, if you will turn to the next chart, this is
interesting and it gets to this point about--Mr. Heinrich, you
were making the point that the cost of the tax cut has
increased from $1.4 to $1.9 trillion. Let me explain why the
CBO is saying that. And it turns out that actually it proves
the success, not the failure, of the tax cut.
So if you look at this chart, what you are looking at is
from the time right before we passed the tax cut in December of
2017--so the picture that the CBO took of the economy before
that, and then comparing that with the most recent forecast the
CBO has put out on growth. This is the most amazing story.
In just 7 months, CBO has revised its 10-year forecast for
the economic growth of the U.S. economy by $6 trillion. Think
about that. In 7 months, they have increased their growth rate
forecast by $6 trillion. That didn't happen by accident, Mr.
Chairman. It happened because you passed the tax cut.
And by the way, I wouldn't say it is only the tax cut. It
is all these other factors, the deregulations, the pro-America
trade policies. But anyway, so the cost of the tax cut has not
gone up from $1.4 to $1.9 trillion. We estimate just that extra
$6 trillion of GDP growth is going to lead to somewhere in the
neighborhood of $1 trillion more Federal revenues. And if you
look at it that way, then the tax cut, two-thirds of the tax
cut has already been paid for just by the economic growth that
we have gotten over the last 7 months.
In terms of how Americans feel about the economy, you can
see that, in the next chart, that 3 out of 10 to 4 out of 10
Americans rated the economy as good or great during the Obama
years. Today, according to the latest numbers, 7 out of 10
Americans rate the economy as good or great. They realize
something big is happening with the economy.
If you will look at the next chart, it shows where we are
creating jobs. This is one of my favorite ones. This is
manufacturing jobs, it is construction jobs, it is mining jobs.
These are those middle-class jobs that are good-paying jobs
that have been leaving. And you can see that we have created
about a million new manufacturing, construction, and mining
jobs in just the last 18 months. That reverses the trend. Look
at mining and logging. Look at, you know, what has happened
with construction. It is going through the roof.
And then finally, I would say, what do we need to do to
keep growth up and to get wages higher? Skip this next chart,
if you might, and go to the next one. This one, I think this is
the central problem we have with the economy right now. How do
we get people into the workforce? Because people can't earn a
living, they can't have a high wage if they don't have a job.
And what is so interesting about this is that--this is since
January of 2000--you are seeing that for older Americans--
obviously, we have an aging population. Older Americans are
more likely to be working today than they were in 2000. So
their labor force participation rate has gone up.
But what is disturbing is look at what has happened to the
labor force participation rate of younger workers. They have
been actually dropping out of the workforce. A lot of studies
show that when people start working at a later age--I mean,
when they start working at an earlier age, their lifetime
earnings are higher. We have got to get young people into the
workforce. It is the best thing we can do for their wages.
Thank you.
[The prepared statement of Mr. Moore appears in the
Submissions for the Record on page 43.]
Chairman Paulsen. Thank you, Mr. Moore.
And now, Dr. Boushey, you are recognized for 5 minutes.
STATEMENT OF HEATHER BOUSHEY, EXECUTIVE DIRECTOR AND CHIEF
ECONOMIST, WASHINGTON CENTER FOR EQUITABLE GROWTH
Dr. Boushey. Thank you, Chairman Paulsen, Vice Chairman
Lee, and Ranking Member Heinrich, for extending an invitation
to speak here today. I am honored to be here.
My name is Heather Boushey, and I am executive director and
chief economist at the Washington Center for Equitable Growth.
We seek to advance evidence-backed ideas and policies that
promote strong, stable, and broad-based economic growth. I am
here today to talk about how the economy is working and not
working for most American workers.
My fellow witnesses have talked about how Americans are
doing well, but the reality is, for many American workers, this
is just not the case. I think I am the gloomy economist up here
today.
Over the past few decades, incomes and wealth have surged
for those at the top, while earnings for low- and middle-income
Americans have stagnated. And the reports and top-line
statistics that we currently rely on to inform us about the
economy often mask the economic situations our friends and
neighbors across the country and in your districts are facing.
As the Joint Economic Committee considers the needs of
Americans up and down the income spectrum, you should consider
supporting the Measuring Real Income Growth Act of 2018, which
was introduced by Senator Schumer and Ranking Member Heinrich
in the Senate and by Representative Maloney in the House. This
bill directs the Bureau of Economic Analysis to provide the
American public with measures of how economic growth is
impacting Americans of different income levels.
GDP growth is one of our most well-known economic metrics,
but it does not reflect how the economy is performing for
everyday Americans. Academic economists have constructed a
dataset like the one the Ranking Member's bill would direct the
Bureau of Economic Analysis to build. It gives us a complete
picture of how economic growth over the past 60 years has been
shared by American workers.
In 2014, for example, the data tell us that total national
income growth was 2.1 percent, but for the remaining--for the
lowest earning 50 percent of all Americans, incomes grew by
just 0.4 percent, while the growth for the richest 1 percent of
Americans was 5.1 percent, more than five times as large. This
group at the top enjoyed more than 13 times greater growth than
that experienced by most Americans.
Looking at aggregate GDP growth alone leads to misleading
conclusions about how well the economy is serving its citizens.
Unequally shared growth has detrimental effects on our economy.
One particularly stark example is provided by economist Raj
Chetty, who found that the likelihood of children earning more
than their parents in the United States has declined between
the mid 20th century and today. He and his colleagues find that
children born in 1940, just before the baby boomers made their
way into the world, had a 90 percent chance of earning more
than their parents. But for Gen Xers, those born in 1980, it is
a coin flip, a 50/50 chance that they would earn more than
their parents.
This is not a good outcome in a growing economy. According
to Professor Chetty, two-thirds, two-thirds of the gap in
mobility between children born in 1940 and those born in 1980
is explained by faster income growth at the very top and
stagnating incomes at the middle and bottom.
Policies like the recent Republican tax cuts are likely to
further increase economic inequality in the United States. The
nonpartisan Tax Policy Center estimates that the Tax Cuts and
Jobs Act will cause inequality to increase sharply, with high-
income families enjoying larger income gains in both the short
and long term than low- and middle-income families. Meanwhile,
we have lowered our ability to finance the much needed
investments that have kept children and families out of poverty
and grow our middle class.
The purpose of the tax system, as with public policy in
general, is to support the living standards of American
families. With legislation like the Tax Cuts and Jobs Act, and
the additional tax giveaways that Congress is currently
considering, we limit our ability to invest in infrastructure,
social insurance, and medical research, all of which support
the well-being of American families.
As this Committee considers the ways to make a difference
in the lives of Americans up and down the income spectrum, I
urge you to consider more than just the headline numbers. Our
economy is growing, but that growth is distributed unequally,
and many Americans are being left out. And that inequality is
itself hampering upward mobility for a large share of American
people. I would urge the Committee to think about how we can
deliver economic growth that is beneficial for all Americans.
Thank you for allowing me to speak today, and I look
forward to answering any questions.
[The prepared statement of Dr. Boushey appears in the
Submissions for the Record on page 52.]
Chairman Paulsen. Thank you, Dr. Boushey.
And during our question-and-answer period, I would just ask
members to keep their questions and comments to 5 minutes. And
I will begin.
Let me start, Dr. Mulligan, with you first. I think we all
know the economy is performing remarkably well in the last 2
years since economic policy has changed. I think there have
been only 8 months in the last 49 years where unemployment has
been below 4 percent, and three of those months have been this
year.
Indeed, economic growth has clearly exceeded the so-called
new normal rate we were told to expect, never getting above 2
percent. We could never get above that any longer as a country.
We were told to expect that, which is far below the post-war
trend. Consumer confidence is now at, essentially, record
highs. And, indeed, the data for business investment,
production, and employment are positive without unsettling
inflation. And the Federal Reserve Chairman, Jay Powell, has
also said the economy is doing very well.
After implementation of tax reform at the beginning of this
year, many employers started paying their workers special
bonuses, better compensation, better benefits. Worker job
satisfaction is up, as their willingness now to change jobs is
now a sign of rising confidence.
Dr. Mulligan, maybe you can elaborate a little bit on what
prompted the Council of Economic Advisers to prepare the primer
on proper wage measurement that you are speaking about today.
Dr. Mulligan. Yes. As you mentioned in the introduction,
most of my career has been as a professor at the University of
Chicago in the social sciences. And there, we literally have it
etched on the wall: When you cannot measure, your knowledge is
meager and unsatisfactory.
And the CEA--that is why I was so glad to join the CEA.
That is their mission. We are the geeks. We are supposed to
measure things and give the information to you guys to make the
tradeoffs for the people.
And in my own career, I started from the beginning
measuring the labor market, measuring human capital. I
testified in this Committee before on measuring after-tax wages
and pretax wages. In our field, we know how to do these things.
When we have the data, we know how to do it.
And we just, at the CEA, we just apply the same old methods
that have been used and tried and tested on how to measure
labor market performance. And you want to look at the whole
package of what people get. Sick pay, they value that. Paternal
leave, they value that. Health insurance, they value those
things.
And then you want to turn around and understand, what are
they able to buy? How much are they having to give off in
taxes? How expensive are the things that they want to purchase?
And that was the motivation for the CEA report.
Chairman Paulsen. Now I will go to Mr. Moore. And, Dr.
Roberts and Dr. Boushey, you can comment last. But can you give
me a perspective a little bit perhaps on just the economy and
how are workers doing? How are consumers and businesses doing?
And do you believe that economic improvements are, in fact,
being widely shared?
Mr. Moore.
Mr. Moore. Well, look, if you look at the data on wages, I
think, you know, Mr. Heinrich has a point that, you know, we
have been stuck, you know, for 20 years in flat wages. And, in
fact, I would make the case this is one of the reasons Donald
Trump won the election. The middle class hadn't seen gains in
20 years.
And I will tell you this. You know, there is a perception
out there that this tax cut that you all passed last December
was for the rich. And I guarantee you, every conversation I
ever had with then-candidate Trump was how do we get middle-
class wages up. And there are two things in this bill, I think,
that have really helped--look, it is early in the game in terms
of wages, so we don't have a lot of great data. We do know that
the Heritage study shows that just in terms of tax cuts to
middle-class families, the average family is saving $2,000 a
year. So that ain't nothing, right? I mean, that is a nice
bonus to their paycheck.
But we thought that two things could happen that would
raise wages over time. Number one, we want businesses to invest
more, right? The only way you can over time--and we have got
three--another economist on this platform, so tell me if you
think I am wrong, but you need businesses to invest more in
capital, and that plays out in higher wages.
The capital-labor ratio and the wage rate are like 95
percent correlated over time. And so we want businesses to
invest more, and so far so good on that. We are seeing some
really healthy increases in business investment. I go around
the country, by the way. I have been everywhere from Portland,
Oregon, to Portland, Maine. Every city you go in, all you see
is cranes, building, apartment buildings, condos, factories,
warehouses. Those are workers that are getting those jobs.
The second thing we wanted to do was to create a tighter
labor market. Boy, do we have a tight labor market right now.
According to the latest CB--I mean the Bureau of Labor
Statistics monthly jobs report, there are 6-1/2 million more
jobs than people to fill them.
That is creating a lot of opportunities for workers to, you
know, bargain higher wages with their employers. If they don't
like their job now, they can go to--you know, if they don't
like what Joe is paying them, they can go to Sally and get a
pay raise. So those kinds of factors, I think, will lead to the
kind of higher wages that we all would like to see.
Chairman Paulsen. I know that upward mobility is key, as
you talked about a tight labor market. So of all 435
congressional districts, the district I represent has the
lowest unemployment in the country at 1.9 percent.
Senator Heinrich, you are recognized for 5 minutes. Senator
Heinrich.
Senator Heinrich. Mr. Chairman, I am an engineer by
training, so I am a fan of data and I don't think we should
ever shy away from the data. But let me suggest that maybe what
we should have done here is to actually have a hearing with
hourly workers to ask them how they are faring, rather than
asking economists how workers are faring. And I think this
hearing is an example of exactly why D.C. so often looks out of
touch.
Mr. Moore, you stated that CBO estimates show that the tax
cuts are paying for themselves, but this is precisely the
opposite of what CBO is saying. They have directly stated that
the tax cuts will cost $1.9 trillion even after factoring in
additional growth.
Why misrepresent CBO's findings? Why not just say, I
disagree with CBO's findings?
Mr. Moore. Well, look, Mr. Chairman--I mean, Mr. Ranking
Member, it is simply a fact that they have increased their
economic growth estimate from before the tax cut to today by--
--
Senator Heinrich. Agree, they did increase their estimate
for growth, but then they said that $1.9 trillion in costs
would occur even with the additional----
Mr. Moore. So let me explain why that is. So what they are
saying--I mean, this is static analysis on steroids. So what
they are saying is that none of the increase in economic growth
is attributable to the tax cut, but the reason we did the tax
cut was to get the economic growth rate up. So----
Senator Heinrich. Well, let's take the tax cut aside. The
cost is the cost.
Mr. Moore. The cost of the tax bill is higher, according
to--in other words, what they are saying is incomes are higher
and you are getting a bigger economy and, therefore, you have
lower tax rates, so you are going to generate less revenue. But
that is--the reason we have the $6 trillion higher growth----
Senator Heinrich. Clearly, you and the CBO disagree on how
to model this. So let's move on to GDP.
I think GDP is useful. It is certainly the most commonly
used indicator to measure the growth of the economy, but it
certainly also doesn't tell the whole truth, and it certainly
doesn't tell the truth about how costs and growth are shared
across the economy.
So, as I mentioned in my previous statement, I would like
to see the government measure how economic growth is
distributed across households at different levels in the
economy. And I would be curious from all of you, actually, and
we will just start with Dr. Boushey and go across the panel. A
simple yes-or-no question: Do you agree that having more
detailed data on who is benefiting from growth would allow us
to better evaluate the long-term impacts of something like the
tax cuts?
Dr. Boushey. My simple answer to that is yes. And I think
my question to those who don't agree that the answer is yes is
why you wouldn't want to know where GDP growth goes. It is a
really fundamental question for our economy, our society, our
democracy. Where does that growth grow and why? What are the
reasons that we should not do this? And I think the bar should
be very high.
Senator Heinrich. Mr. Moore.
Mr. Moore. I don't know the specifics about your bill, but
certainly when we measure economic policy, economic growth is
not everything, right? And we do want to measure how these
policies are affecting the middle class and the least among us.
So, you know, I would like to see the particulars of your bill,
but absolutely, we should look at how the middle class and low-
income people are being affected.
Senator Heinrich. Thank you.
Dr. Roberts.
Dr. Roberts. I totally agree with you. I think GDP is
useful, but it, of course, hides what is going on underneath,
and we care deeply about how it is distributed. The studies
that I mentioned are studies that actually do see how growth
has affected people at different parts of the income
distribution, and they all contradict the narrative that is
based on a different kind of data, which I think is the wrong
kind of data.
The studies that follow people over time at different parts
of the income distribution find that the largest gains go to
the poor, the middle class does very well, and the rich gain
nothing or lose money, lose ground.
Senator Heinrich. I am still looking for those poor who
feel like they have really done great in the last 20 years, but
I do appreciate your point.
Dr. Mulligan.
Dr. Mulligan. As I quoted, when you cannot measure, your
knowledge is meager and unsatisfactory. So, please, let's have
the data. I would also say, please, let's not do the misguided
economic theory that the economy is a zero-sum game. It is not
a zero-sum game. Everybody can benefit at the same time. So
more income at the top doesn't mean less income at the bottom.
But sure, please, let's measure.
Senator Heinrich. In your statement, Dr. Mulligan, you
highlighted that if we include benefits, then wage growth is
higher. And that is true. Not much, but a little bit higher,
certainly. But there are tens of millions of Americans that
receive very few benefits from their employers. There are a lot
of workers who receive none. Low-wage workers are the least
likely to receive benefits. Is there some substantial value in
looking at wage growth, in and of itself, without fringe
benefits?
Dr. Mulligan. Again, when I put it in a market context,
Adam Smith talked about this is compensating difference. So,
yes, there are jobs that don't offer benefits, health insurance
benefits, let's say, or sick leave. But they would tend to
offer other things; maybe a nice schedule or a good location or
what have you. And I would want to look at the full picture.
In the CEA's analysis, we included all the Americans, to
the extent that the Census Bureau measures them, with our
sample of hundreds of thousands of people. So all kinds of
people were included in there, including the ones that you
mentioned.
Chairman Paulsen. Thank you.
Representative Schweikert, you are recognized for 5
minutes.
Representative Schweikert. Thank you, Mr. Chairman.
And, look, this is one of those hearings you sort of look
to, but I am hoping we can sort of geek out for a moment. And
just quick comments on some of the other testimony we have had.
Our baseline before the tax reform was what in the next
decade or two decades, about what, 1.8, 2 percent was the
baseline GDP growth. The baseline math I think that came out of
joint tax was if over the next 10 years we could have a .4
percent growth additional on top of that 1.8, the tax reform
paid for itself.
Well, GDP now, right now--now, I know it is just a
snapshot--has us at 4.4. So I am sort of heartbroken. There
does seem to be this left-right divide on wanting to sort of
talk down what should be sort of a joyous opportunity for,
particularly, when we actually start to look at what is
happening with blue-collar, those without a high school
education. And we are only, what, 9 months or 8 months into
actually datasets of post-tax reform and a lot of other things
going on.
I think I have a more elegant question to go across. If
what I am seeing in Arizona right now with my unemployment
statistics, with people actually recruiting workers from the
homeless campus because they are so desperate for labor, what
do we as policymakers, whether you be on the left or the right,
what do we do to continue it? As you know, Arizona I think in
the first quarter had some of the fastest growing wage growth.
What do we do policy-wise to continue that?
Doctor, for you, when we see the benefits that have
happened so far this year, how do we create this sort of growth
stability? Because we are out of the growth recession. How do
we maximize this curve for as long as possible?
Dr. Mulligan. I should preface by saying the CEA, we are
the geeks, we run the numbers. We do not make the policy. We
are aware of the President's agenda and we are studying that.
So one of the things that I think people haven't
appreciated yet, and we are going to roll some measures out, is
about regulation and deregulation. Regulation is a big problem
for business and for the labor market, and steps toward
streamlining how businesses run would be very helpful for
productivity and wages.
Representative Schweikert. Dr. Roberts.
Dr. Roberts. There is an infinite number of things you
could do to make the economy more effective. Many of them are
not under your direct authority. Many of them are State and
local regulations that I think make life very difficult for the
poorest among us. I mentioned occupational licensing, State
minimum wages--or local minimum wages that I think keep people
from getting into the labor market, and particularly real
estate housing and land use regulations and restrictions that
help rich Americans and make it much harder for poor Americans
to come to the cities where the best opportunities are.
And I think, Ranking Member Heinrich, I think that is an
area that I think to the extent that you can do something about
that. The ability to move to where the jobs are is, I think,
greatly restricted by the current real estate market and the
rental market for especially young people, and it is a tragedy.
Representative Schweikert. Mr. Moore. Could you do your
mike button?
Mr. Moore. There was an article in--I think it was in The
Wall Street Journal a week or two ago about that truckers in
Texas are now getting $25,000 and $50,000 signing bonuses, you
know, like they are Derek Jeter or something like that, I mean.
So, I mean, employers are really hungry to get workers. And
I do anticipate that they are going to--if we continue to see
this strong demand for workers, you are going to see increases
in wages, which is exactly what we want.
The one thing I would just add to this, I think one of the
biggest problems, in terms of when you just look at wages why
they aren't growing, is the healthcare costs. And I think this
is something we kind of all would agree on. We may have very
different prescriptions about what to do about the healthcare
cost.
Representative Schweikert. Was that a pun?
Mr. Moore. Sorry?
Representative Schweikert. Never mind.
Mr. Moore. No, I am just saying, you know, that that--as
Casey Mulligan was just saying, that, you know, when you have
employers that face higher and higher healthcare costs, that
comes out of the wages of the workers. If we can do something
to lower health insurance costs for employers--ObamaCare was
supposed to do it, it obviously didn't work--you will help
drive up wages.
Representative Schweikert. Dr. Boushey.
Dr. Boushey. So growth happens when you see increases in
productivity and increases in people participating in the labor
force. Keeping this recovery going, I think one of the things
that we should be focusing on--a number of my colleagues have
talked about labor force participation. There are a number of
policies that could pull those folks who are still not back in
the labor force back in if the employment rate continues to be
lower than it was. So things like addressing the challenges
that families face between work and care, policies like
universal childcare, paid family leave, paid sick days and the
like could go a long way.
Representative Schweikert. I think you are brilliant on
labor force participation, because whether it be those things,
the ability to access work, but also our incentives not to work
that are often built into our social entitlement systems.
Look, we never really get around to the honest conversation
of velocity of our brothers and sisters being able to move from
poverty statistics and up. We know we just spent a couple
decades where velocity had seemed to shrink. I am desperately
hoping we are back to a time where there is opportunity,
because that is the most honest, fair thing for all of us. And,
hopefully, it is all of our goal.
And with that, I yield back, Mr. Chairman.
Chairman Paulsen. Representative Delaney, you are
recognized for 5 minutes.
Representative Delaney. Thank you, Mr. Chairman.
Mr. Moore, I just wanted to follow up on the Senator's
question about your view of the tax cuts. You had said that the
economic growth projections were updated by $6 trillion, based
on the stimulative effect of the tax cuts, which I agree they
have been stimulative and they have driven the economy to
higher levels. And then you said that will likely produce a
trillion dollars of additional revenues, which already pays for
two-thirds of the tax cut.
But isn't ``already'' not the right word there? Because if
they actually take the stimulative effect and they projected it
out for 10 years, isn't really the thing to say that that is
the most it can ever do is pay for two-thirds, unless the rate
of growth were, in fact, to accelerate above what the rate of
growth is now?
So isn't that the right way to think about it? It has
already been modeled for 10 years, based on what you said.
Unless economic growth rates continue to accelerate at an
increasingly faster rate, the tax cuts will never pay for
themselves.
Mr. Moore. What they have basically done is they have
looked at the economic growth that has happened just in the
last 6 to 9 months.
Representative Delaney. Yes.
Mr. Moore. And they are saying, wow, this is a lot higher
than we thought it would be. And when you get----
Representative Delaney. And they projected it out 10 years.
Mr. Moore. Right. Yes.
Representative Delaney. And you are saying that is another
trillion dollars.
Mr. Moore. Right.
Representative Delaney. So that is all we will ever get is
my point.
Mr. Moore. What they are saying is we have had this bump up
in growth, right?
Representative Delaney. Yes.
Mr. Moore. And that even if we revert back to the low
growth rate we have had over the last decade of like 1.8
percent, so you get like the 4 percent bump up and so
everything in the future is higher, right? And so they are
assuming that you revert back to the low growth rate.
Now, look, I think you are going to have--we can all
disagree about what growth will be in the future, but the point
is, just based on what has already happened, they say you are
going to get this extra $6 trillion.
Representative Delaney. Let me just switch for a second.
Dr. Roberts, I just have a question about kind of averages and
what has happened. I mean, just to frame the question, like if
you, me, and my favorite recording artist, Bruce Springsteen,
were to go to lunch, someone would accurately say that that
table, on average, has 17 Grammies. Well, in reality, he would
have 50, and I don't know, you may have a Grammy, I don't.
Neither of us.
So are you familiar with the work of Ray Dalio, who is a
very successful investor? He recently deconstructed all the
economic data since 1980 and basically broke the country down
into the top 40 percent and the bottom 60 percent. And he said
the top 40 percent used to make two and a half times more than
the bottom 60; now they make four times more. They used to have
six times the wealth; now they have ten times the wealth. They
used to spend twice on their education of their kids; now they
spend four times.
And his point is, there is really no average American
anymore, that there is the average of the top 40 and the bottom
60, and those groups are kind of stunningly disconnecting,
which, in my judgment, is because the world has changed
profoundly, because of globalization and technological
innovation. And we haven't done the basic things we should have
done to update the social compact, if you will, to prepare our
workers for this change. So they have been left behind.
Do you dispute that that is actually happening?
Dr. Roberts. Well, I haven't seen--you asked me if I was
familiar with his work. I have seen many things he has written.
I haven't seen that particular analysis. Many of those analyses
rely on household income. And, of course, there has been an
extraordinary transformation of household structure in the
United States since 1980, since late 1970s.
There has been a huge increase in divorce, a reduction in
the proportion that is married, and a large increase in the
number of households that are headed by a single person. The
delay in marriage rate, the increase in divorce, and then the
reduction in remarriage has caused there to be a lot more
people living on their own. Now----
Representative Delaney. But wouldn't, in fact, what has
happened actually cause that? So I would agree that that has
been an accelerant of the change.
Dr. Roberts. It could.
Representative Delaney. But that phenomena that you are
talking about, the rate--because in the instance of marriage,
for example, it has never been healthier in the top third of
this country and it has never been worse in the bottom two-
thirds. So those are accelerants, but isn't the disconnection
the underlying cause of those accelerants?
Dr. Roberts. Well, they could be a factor, and the
causation could run in both directions. What is certainly true,
though, is that when we try to measure what has happened to the
groups of people in a different part of the income
distribution--which is a good idea because the average is not
representative. So we go to median, then we go to the middle
quintile, we go to the bottom quintile. What we do is, if we
don't correct for those changes in structure, we get a
distorted measure of how those people are doing.
One way to solve that is to follow the same people over
time. And when you do that----
Representative Delaney. Do you think those changes account
for those dramatic differences, actually, though?
Dr. Roberts. Well, when you look at the same people over
time, you see that the story is reversed from the one we
usually hear. The poorest and the middle class get more of the
gains than the rich, and that the income distribution is
actually shifting toward--the reason that the bottom is not
doing so well is that people are doing better moving into the
middle and the upper class.
Representative Delaney. This reminds me of the--and I don't
mean this disrespectfully at all--the Mark Twain expression,
``lies, damned lies, and statistics,'' right? And that is kind
of part of our problem----
Dr. Roberts. Oh, yeah.
Representative Delaney [continuing]. Which is really trying
to agree on the facts here.
So, anyway, I yield back, Mr. Chairman.
Chairman Paulsen. Representative Maloney, you are
recognized for five minutes.
Representative Maloney. Thank you, Mr. Chairman and Ranking
Member. And I thank all of the panelists.
And I would particularly like to thank Dr. Boushey for your
kind words about the legislation that the Ranking Member and I
put forward. And I want to give you credit for the research
that you did that provided the intellectual foundation for the
bill.
And I really urge my colleagues here to read her report on
disaggregating growth and measuring who prospers when the
economy grows, and ask unanimous consent to put it in the
record.
[The report titled ``Disaggregating growth: Who prospers
when the economy grows'' appears in the Submissions for the
Record on page 67.]
Representative Maloney. So I would like to ask you, Dr.
Boushey, why is wage and jobs data alone not sufficient to
understand the economic status of most Americans? And how does
a single estimate of GDP fail to represent the economic health
of our families and our Nation?
Dr. Boushey. Thank you. Thank you, Congresswoman Maloney,
and thank you for your support of this idea. We think it is an
important one for the American people.
And one of the things that we see and we kind of--we see in
this conversation today, we often have this conversation about
what is happening in terms of growth separate from how that is
actually benefiting the American people. And it is time that we
actually merge those conversations together. So when we talk
about economic performance, we are actually talking about who
benefits up and down the income spectrum, not this abstract
notion of growth being one thing and what is happening to
American families being a separate issue, with data delivered
on different months and days. So we are not having that
conversation together. I think it is imperative that we start
talking about them together.
And I think that once you do, you see this different trend
emerge, which is that the economy can grow, but only the people
at the top benefit. And I take very seriously many of the
comments of my colleagues up here that, you know, that we need
good data, that we need to look at what happens to people over
time and look at mobility. But one thing that we need to make
sure of and that this data would allow us to do is to look at
what younger people are experiencing in the economy, cohorts of
people over time, different demographic groups.
And one of the things that we know is that people who have
come up since the 1980s are actually seeing worse outcomes than
their parents at similar ages. That is probably one of the most
important metrics for American economic success.
So it is not enough to just follow people over time or to
look at the aggregates, but to look at how cohorts have been
faring over time and to see that actually younger and younger
cohorts are not seeing the benefit of the American Dream, the
benefit of economic growth, and that that underpins, I think, a
lot of the frustration that American families are feeling.
Representative Maloney. Well, can you give us an
explanation of why wage growth is slow despite what is
otherwise a strong economy?
Dr. Boushey. Well, there has been a lot of debate among
economists on these issues. And, you know, some argue that it
is continued ongoing slack in the labor market; that although
we are at full employment measured by the unemployment rate,
the share of Americans with a job remains lower than it had
been in other recoveries. That may be playing a factor. But I
think there is more consensus on the fact that it is because of
the slow productivity growth, that that has been--that the pace
of that has slowed and so you are not seeing the foundation for
wage growth.
However, the big issue does appear to be that even when we
see productivity growth, even when we see those gains, even
when we are at full employment, workers aren't benefiting. So
that comes down to their bargaining power, the declining
unions. And increasingly, economists are showing evidence that
the rise in the concentration of capital, that the rise in what
economists call monopsony power, which is a mouthful, but it
basically means that in a lot of communities workers have few
or maybe only one potential employer. Certainly, you know,
healthcare is a perfect example. If you are a nurse and you
work at a hospital, almost any hospital you work at is owned by
the same person. These all drag down wages.
Representative Maloney. My time is almost up, but I would
like to mention, as you know, the tax cuts were sold to the
American people on the basis of three primary claims: that they
would be fair, not tilted towards the wealthy; that they would
create jobs; and that they would increase wages.
In the interest of time, I just want to flip to the third
point: wages. I would like to really go to a chart that was
produced by your organization. And this graph shows various
projections of the impact of the first round of the tax cuts on
wages. And can you help us understand this slide? Why is there
such a large disparity between various estimates of wages
growth? I mean, it is probably----
Dr. Boushey. Well, and I think in many ways, unfortunately,
the CEA report that was talked about today actually sort of
demonstrates the case that we actually haven't seen the kind of
wage growth that we would expect after these tax cuts, based on
the arguments that were presented in advance and the estimates.
That if that tax cut was successful, we should have seen
sharply rising wages and, instead, we have seen wages that
have--they have been increasing sort of on par with what they
were doing before. They should have increased sharply relative
to trend. That is not what we have seen. That is what was
predicted. The American people were lied to or we didn't get
what we deserved.
And then second, you know, what we have seen is most of the
money has been going to stock buybacks. We are now back to
where we were at the record-breaking level in 2007. What
happened in 2008, right? This was not a good economic
indicator. So the tax cuts have created growth. They should
have. It was a lot of money pumped into the U.S. economy. It
would have been ridiculous if growth hadn't gone up. But it has
not delivered the wage gains that they said it would. Wages
should have increased sharply, they should have spiked. They
didn't. And instead, that has all gone disproportionately to
share buybacks, benefiting the richest Americans, and not
leading to the productivity gains that we need to see to grow
our economy over the long term.
Representative Maloney. Thank you. My time is up.
Chairman Paulsen. Thank you, Dr. Boushey. I think our other
witnesses may disagree with that.
But, Senator Lee, you are recognized for 5 minutes.
Senator Lee. Thank you, Mr. Chairman. Thanks to all of you
for being here. It is good to see you.
Dr. Roberts, I would like to start with you. Could you
explain something to us, just in a minute or so, called
Simpson's paradox?
Dr. Roberts. Only a minute? Could I----
Senator Lee. You have a great vendor online that does it in
a couple minutes.
Dr. Roberts. Simpson's paradox is the phenomenon that
composition changes can affect how people in trends are
measured over time. To take an example, there is a study done
of poverty rates from 1967 to 2003 by Hilary Hoynes, Marianne
Page and Ann Huff Stevens in the Journal of Economic
Perspectives. Every type of family had a dramatic drop of at
least 20 percent in the poverty rate, except for one group
which was 10 percent. That group was very small. That was, I
think, single men without children. But women with children,
their poverty rate fell by more than 20 percent. Married
couples, their poverty rate fell by more than 20 percent.
So when you look across all six groups, you would think
that the average poverty rate should have dropped by about 20-
something percent. One group had a 29 percent drop. A huge
decrease, wonderfully, in the poverty rate among single women
with children.
But the poverty rate barely budged. How could that be?
Shouldn't it be a weighted average of the different groups? And
the answer is it is not because the proportions of the groups
change. And over that time period, we got an enormous increase,
almost a doubling, in the group with the highest poverty rate,
which was single women with children. So as a result, the
measured poverty rate didn't change.
The question is, when you are looking at how growth affects
poverty, you probably want to take into account the fact that,
at the same time, demography, the demographic structure of the
United States was changing, and you wouldn't want to say that
the economic growth over that time period had no effect on
poverty if at the same time there was something else going on.
How did I do?
Senator Lee. So they don't all weigh the same and they
shake down differently.
Dr. Roberts. And the weights change over time.
Senator Lee. I have got a graph in front of you that I
think tends to show some of this. So----
Dr. Roberts. Simpson's paradox.
Senator Lee. Yes, exactly. So between 1969 and 2016, as
this chart indicates, median household income rose by 37
percent, but the increase would have been much larger if there
had not been significant changes in family formation, family
structure, and family dissolution. And among households that
are headed by married parents, median income nearly doubled.
And among households headed by single mothers, it rose by more
than 60 percent. And yet, you see that the median household
income rose by 37 percent, which is significantly lower than
this lowest performing cohort that I described.
So would you say this is an example of Simpson's paradox
being played out?
Dr. Roberts. It is. And it is an example of how challenging
it is to assess the effect of the economy on different groups
when other things are happening in the background. It is really
a lesson in the complexity of economics and how often Mark
Twain was right, because sometimes it is very hard to know what
statistics are actually measuring.
Senator Lee. As the studies done by my Social Capital
Project have shown, families today are twice as likely to be
headed by a single parent as they were at the end of the
sixties.
So I would like to ask you, is there anything that we can
look to in terms of Federal policy that might either be pushing
this trend or that could alleviate it, could improve it? In
other words, people tend to perform better if they have two-
parent households. What Federal policies, if any, can you think
of that might help that?
Dr. Roberts. Well, I will leave my other panelists to
respond more to that, but I would simply say that I don't think
we fully understand the causal relationship between family
structure and income.
I don't think the Federal Government should be necessarily
in the business of particularly trying to design the American
family, but they should get rid of any barriers that make it
expensive to be married. I would certainly agree with that.
Senator Lee. Sure. And I agree with you on both points. It
is not the Federal Government's business to coerce, cajole, or
lead people into any particular family structure. If, on the
other hand, it is doing something to actively discourage people
from getting married, if it is punishing them for doing so,
that could be a problem and it could be a problem that leads to
less favorable economic outcomes.
Mr. Moore, in the time I have left, would you have anything
to add in terms of Federal policy that might be affecting this?
Mr. Moore. You mean with respect to----
Senator Lee. Family formation, dissolution.
Mr. Moore. Welfare policy. I mean, you really have to look
at whether our welfare policies are encouraging out-of-wedlock
births and whether it is leading to higher divorce rates. And
there is some evidence that it is. So we ought to have policies
on welfare that encourage work and discourage nonmarriage.
Mr. Moore. Thank you very much. I see my time has expired,
Mr. Chairman.
Chairman Paulsen. Thank you.
Senator Heinrich has another question.
Senator Heinrich. Dr. Roberts, I wanted to follow up on
something you said and would even be curious to hear my
colleagues' opinion on this. I don't want to misquote you, but
I think you said one of the things we need to do is make sure
that people can move to where the jobs are.
And I often hear this with regard to rural versus urban
demographics, that people should just move to where the jobs
are. We used to take the approach that we need to connect our
economy and invest in rural areas as opposed to just say to
rural people they should move to the cities.
What exactly do you mean? Because my approach would be to
say, we need to connect those economies. We need to have
broadband in rural communities, for example, so that they can
access that economy. But I think to suggest to rural
communities that their solution is just to pick up and move to
the cities seems to be a little myopic.
Dr. Roberts. Well, that has been the trend of world history
for the last, I don't know, few hundred years. It is true in
China. It is true in the United States. People have chosen to
move to urban areas.
I didn't mean to suggest that we ought to encourage them to
move. I was suggesting that the barriers to that natural
movement, which is where the most dynamic parts of the economy
are right now, the barriers that are there because of the high
cost of housing and the high cost of real estate, those
barriers are artificially high due to restrictions on zoning
and other regulations.
As to connecting the rural to the urban, I think it would
be great if rural areas were thriving. I care more about the
people than the areas. I don't see any reason to invest
specifically in rural areas, per se. They should certainly have
the benefits that all Americans have that the Federal
Government's activity leads to. But I don't think we should
focus on the fact that those areas are struggling. I am worried
about the people that are there. We certainly should help them
invest in the skills they need. And if they want to stay in
those rural areas, which many people do, because it is a
different lifestyle and pleasant for a thousand other reasons
than high wages. I would never want to suggest that money is
the only thing that matters.
Chairman Paulsen. Thank you. Dr. Roberts, let me follow up
with one additional question before we close out. There are
increasing numbers in our population now that are retired or
going to be retiring soon. And that means you are going to have
fewer people with measurable income, though a lot of those
folks now will be drawing down their savings that they have had
accumulated over a lifetime.
So is income equality a very useful metric to measure
welfare or will this sort of demographic--it is a combination--
will this sort of demographic change affect our median
household income statistics?
Dr. Roberts. Well, it is incredibly complicated. Obviously,
we care. We have talked I think exclusively today about wages
and nonmonetary forms of compensation. Wealth, of course, also
matters. It points out to how complicated it is to assess well-
being. Some of the richest people today are very poor right
now. They are students. They are going to have successful
lives. We capture them in our data as poor, most of them, and,
of course, many of them will go on to be extremely successful
financially.
In terms of measurement, retirement and the increasing
numbers of people who are retired have distorted a number of
studies that have been done of well-being and the median and
trying to assess how people have done over time, because we
have, my generation--I am 64. I was born in 1954. I don't plan
to retire soon. I hope that is okay. I like working a lot. I
love my job.
But as that bulge of baby boomers goes out into the--went
out into the economy and now is leaving the economy, that is
causing all kinds of measurement changes.
Chairman Paulsen. Is there some other metrics that might be
better to help gauge----
Dr. Roberts. Say again.
Chairman Paulsen. Is there another metric we might use to
measure overall well-being?
Dr. Roberts. Well, I certainly would never want to use--as
I mentioned earlier, I would never want to use just money, but
we do want to at least see how people are doing financially.
And I am very--I like the idea of trying to measure how
people have done over time. I think it will show that the
American economy benefits a lot of people more than people tend
to think, because it is very dynamic. And its dynamism is
hidden by the fact that these underlying demographic changes--
we haven't talked about immigration, the large number of
people--you alluded to it earlier.
Poor people are desperate to come here for the opportunity
to be poor. They don't come here for welfare payments. They
come here for the opportunity to work. And they thrive. They do
much better than they did where they came from in their home
countries. But they really come here to improve the lives of
their children.
And, again, I think if we take a longer perspective, which
I think we should do with almost all economic policies, and
look across generations when we can, we should take account of
the fact that the longer run impact is tremendously larger than
the short run impact.
Chairman Paulsen. Dr. Mulligan, Representative Maloney had
put up the chart earlier about the CEA estimates earlier I
think on wage levels being higher. Any comments you may have to
refute that? I mean, you offered some of that in your
testimony. But, obviously, whether it is stock buybacks, that
is just not a dollar that disappears in the economy, that goes
somewhere else. But any other thoughts, in terms of your
analysis?
Dr. Mulligan. Yes. Thank you. I appreciate having the
opportunity. It was asserted that the CEA forecast for the year
2027 was, number one, out of bounds from the experts; and,
number two, that it was proven incorrect, okay?
Number one, it is not out of bounds from the experts. Two
experts wrote a paper together for Brookings. Professor Barro,
who was one of my teachers, and Jason Furman, who was one of
the main advisers in the Obama Administration, together they
wrote a paper, came up with a very similar estimate that CEA
did. That wasn't shown on that chart. Professor Kotlikoff did
an analysis, similar estimate. It wasn't shown on the chart. So
that was a cherry-picked chart in terms of CEA being out of
bounds.
The second thing is no decent statistician would use 5
months of data into the policy to refute a 120-month forecast.
And that is what was done here today, and that is absolutely
wrong. No econometrician or no statistician would advise doing
that, and I don't advise doing that. We have been 5 months
through. But if you want to play that game, then you should
take 1/24th of what was promised, because we are 1/24th of the
way there. And CEA's wage report clearly shows that people have
gotten way more than 1/24th of the way to the 10-year goal.
Thank you.
Chairman Paulsen. Well, I would like to thank again all of
you for being with us today and taking the time to provide your
testimony before the Committee.
And I remind members, should they wish to submit questions
for the record as well, the hearing will remain open for 3
business days.
And, with that, our hearing is adjourned.
[Whereupon, at 12:00 p.m., the committee was adjourned.]
SUBMISSIONS FOR THE RECORD
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I call this hearing to order.
America is a beacon to the world. It is the land of opportunity,
where everyone has a shot at the American dream.
Our Nation isn't perfect, of course, and not everyone gets to start
from the same position. Many Americans face tremendous adversity.
As lawmakers, we must avoid standing in the way of Americans being
able to enter the workforce, or switching to jobs that pay more, offer
better benefits, or provide greater flexibility.
Since commonsense pro-growth policies have been implemented, we
have seen a groundswell in opportunity. The so-called ``quit rate'' as
measured by the Bureau of Labor Statistics is at its highest since
2001. Workers are more confident to leave their old jobs for new ones.
The Atlanta Federal Reserve Bank's monthly Wage Growth Tracker,
which is derived from Census Bureau data, reports that wage growth
among job switchers was 3.3 percent higher than one year ago. Job
satisfaction is its highest since 2005 according to a survey by the
Conference Board.
These are positive signs as opportunities expand for everyday
Americans.
And contrary to claims that economic growth is only benefiting the
wealthy, the unemployment rates among those workers who normally face
the greatest challenges in the job market have fallen drastically since
pro-growth policies were initiated:
Among those without high school diplomas, the unemployment rates of
blacks, Hispanics, and whites have fallen 8.1, 3.8, and 3.3 percentage
points, respectively.
According to a Washington Post analysis, there's been a 3.3 percent
increase in jobs for blue-collar workers in goods-producing jobs, the
best rate since 1984.
A New York Times article states that ``The number of Americans
seeking Social Security disability benefits is plunging, a startling
reversal of a decades-old trend.'' It cites a stronger economy as the
cause.
This is how we look at the full picture of our economy: By looking
at a variety of indicators.
While my friends on the other side of the aisle look at downward
movements in measures of average and median worker earnings, they fail
to see that the median worker today is not necessarily the same person
as last month, or last year, or a decade ago. It is possible for these
measures to decline, even when wage rates are rising!
Many critics fail to acknowledge that people move in and out of
different income ranges over their lifetime.
Just because it is not easy to measure progress across a population
of over 320 million people, we should not assume people are tethered to
a given income percentile over their lifetime despite ample evidence to
the contrary.
Millions of people from all over the world continue to relocate to
the United States despite tremendous risks and numerous challenges.
Clearly it is because America remains the land of opportunity.
We must take care in reading headline statistics otherwise we risk
creating policies that destroy the potential for real progress.
If we allow people to thrive, they will thrive. If we allow
American businesses to invest in their workers, they will invest in
their workers. If we let Americans keep more of their money, they will
put it to the best uses for their families and their own well-being,
and our economy will thrive.
Our future will only be brighter if we follow the path of smart
economic policy. Our prospects for a brighter future will be dimmed if
we go back to the old ways. For instance, Democrats are threatening to
increase taxes to where they were prior to the Tax Cuts and Jobs Act.
America's tax rate for doing business would surge back to the
highest in the developed world, and would undo the growth-enhancing
economic incentives that have powered increased private domestic
investment and economic growth in less than two years. American workers
will not have as much of the capital investment to work with that is
critical to raise productivity, and that would be bad news for future
wage growth.
The success of recent economic policy is clear. We are again
relying on the ability of people to climb up the economic ladder, to
grow, and thrive.
Our star panel of witnesses will help explain the progress made to
date and how and why, with pro-growth policies, we can continue to
prosper as the great Nation we know America to be.
Before I introduce our witnesses, I now yield to Ranking Member
Heinrich for his opening statement.
__________
Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint
Economic Committee
Thank you Mr. Chairman.
I have a sense of deja vu--another hearing on the Republican tax
law that passed nine months ago. Another attempt by Republicans to
convince their constituents that they are better off because of that
law.
But there's a problem. Despite White House promises, working
families aren't better off, and another hearing won't change that.
Wages are stuck. The typical worker's hourly wages, after adjusting
for inflation, were lower in August than a year ago.
What has increased is the cost of this tax giveaway. When
Republicans passed the bill last December, the estimated cost was $1.5
trillion. Today, it stands at $1.9 trillion.
It was a massive waste of resources when workers could least afford
it and when we should have been investing in our people and
communities.
Most working Americans have been treading water, with middle-class
earnings stalled for years. The typical man working full time year
round earned less in 2017, after adjusting for inflation, than in 1973.
While earnings have been stagnant or shrinking, the costs of child
care, housing and education have climbed higher, with student loan debt
exploding in the past decade.
We'll hear today that we just need to look at a different inflation
measure or use a different survey, and then everything looks great.
But telling people across New Mexico, don't worry, you are doing
better than you realize won't make it easier for them to pay for their
kids' college. It won't help them get health insurance or treatment for
addiction.
Even as those in the middle work harder and harder to make ends
meet, those at the top continue to reap large income gains.
Between 1980 and 2014, the top 1 percent saw their pre-tax incomes
grow by 204 percent while incomes for the bottom 50 percent remained
virtually flat.
And, with passage of the Republican tax bill, the gap between those
at the top and everyone else is likely to grow significantly wider.
Part of the challenge we face is that we need better, more timely
economic data to help us craft smart, forward-looking policies.
Knowing in real time who is benefiting from economic growth--and
who is not--is key to designing new policies that generate growth which
benefits everyone.
Along with Leader Schumer and some of my JEC colleagues, I have
introduced legislation that instructs the Bureau of Economic Analysis
to start reporting on new Income Growth Indicators.
These measures would show how incomes are growing at different
levels of income--painting a clear picture of who the economy is
working for.
We also need a sustained effort to lift the living standards of
working families and to help workers chart a brighter course for
themselves and their families.
We should invest in programs that reward work and help Americans
prepare for 21st century jobs.
Increasing the value of Pell Grants so that a college education is
within reach for more students is a good place to start.
I have a proposal to expand Pell Grants for students across the
country--in New Mexico, the increased Grant would cover the full cost
of tuition at all of New Mexico's in-state colleges and universities.
Let's expand the Earned Income Tax Credit so that work pays better
and more families are able to afford the basic necessities. We should
have done that in the Republican tax bill.
Rather than turning the clock back and again allowing insurance
companies to deny coverage to those with pre-existing conditions, as
the Trump administration is trying to do, we need to build on recent
gains to make health care more accessible and affordable.
We also need to be smarter about how we use our Nation's fiscal
resources.
After squandering $1.9 trillion on the tax bill, the House is
preparing to vote on the Republicans' Tax Plan 2.0. This legislation
would add $3.2 trillion to deficits from 2029 to 2038, bringing the
total cost of their tax bills above $5 trillion.
And remember, the majority of these costly tax breaks go to the
richest among us.
I don't think we can have a hearing on living standards without
asking ourselves--what will happen to the quality of life for tens of
millions of Americans who count on Social Security, Medicare and
Medicaid if Republicans add literally trillions to deficits and then
turn to these programs as their piggy bank.
The consequences would be disastrous.
I look forward to our witnesses' testimony.
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Response from Dr. Mulligan to Questions for the Record Submitted by
Chairman Paulsen
A frequently cited San Francisco Federal Reserve Bank paper
suggests that the Tax Cuts and Jobs Act may have little effect on
economic growth, but seems to equate the Tax Cuts and Jobs Act with a
Keynesian-style stimulus package.
Could you comment on the report's validity?
Does this study's results hold if the Tax Cuts and Jobs Act raises
the economy's potential as the Congressional Budget Office is
projecting?
The paper can be found at this link: https://www.frbsf.org/
economic-research/publications/economic-letter/2018/july/procyclical-
fiscal-policy-tax-cuts-jobs-act/
The San Francisco Fed report is concerned with empirical estimates
of government purchases multipliers, which is an entirely different
question from the GDP effects of cutting marginal tax rates on capital
and labor income, as TCJA did.\1\ Moreover, in practice many of the
changes in government purchases are lasting only a few years, whereas
the cut in the statutory corporate tax rate is permanent and expected
to permanently increase the Nation's capital stock and the productivity
of its workers.
---------------------------------------------------------------------------
\1\ The report refers to ``government spending,'' which is the sum
of transfers, government purchases, and interest, but it is actually
referring to studies of government purchases such as military and
highway spending. The distinction is important because transfers can
reduce employment and GDP even while purchases increase them (e.g., my
2012 book on The Redistribution Recession). If nothing else, we must
recognize that government purchases are part of GDP whereas transfers
are not.
---------------------------------------------------------------------------
The best approach for assessing the long-run GDP effects of a
permanent change in the business tax rate is to look at the effect of
the rate change on the cost of capital, and the responsiveness of
demand for capital services to a change in the cost of capital. TCJA
permanently reduced the cost of capital. A higher equilibrium capital-
labor ratio implies higher productivity, and thus higher output. In
other words, this approach shows how the business tax cuts permanently
increase the economy's potential.
An analogous approach could be used for the temporary individual-
income tax cuts. Alternatively, the large and growing time series
literature on the effects of exogenous tax shocks can be used because
these studies at least distinguish taxes from government purchases even
if they do little to distinguish temporary from permanent.
As noted in the 2018 Economic Report of the President, the
fundamental challenge to estimating the effects of changes in tax rates
on economic growth is that the timing of tax changes are generally not
random--historically, legislators tend to raise rates during periods of
expansion and lower them during periods of contraction. This can
negatively bias estimates of the effect of tax cuts on investment and
output.
As noted in the Economic Report of the President, there have been a
battery of peer-reviewed articles on this in top-5 economics journals
over the past two decades:
One is the approach called structural vector autoregression,
following Blanchard and Perotti (2002), in which the
identification of causal effects relies on institutional
information about tax and transfer systems and the timing of
tax collections to construct automatic fiscal policy responses
to economic activity. In their original study, Blanchard and
Perotti (2002) find an initial tax multiplier of 0.7 on impact,
with a peak impact of 1.33 after seven quarters. In contrast,
using sign restrictions to identify tax shocks, Mountford and
Uhlig (2009) find a peak-to-impact multiplier that is
substantially larger.
A second technique, originating with Romer and Romer (2010),
uses narrative history from Presidential speeches and
Congressional reports to identify exogenous tax changes with
political or philosophical, as opposed to economic,
motivations. These changes are unlikely to be correlated with
other factors affecting output. Tax changes unrelated to the
business cycle can be used as a quasi-natural experiment to
estimate the effect on economic output; this matters because if
tax cuts are a response to deteriorating economic conditions,
the data will show a spurious negative correlation between
taxes and growth. Romer and Romer estimate that a 1-percentage-
point increase in the total tax share of GDP decreases GDP by 1
percent in the first year and up to 3 percent by the third
year. They further find that a 1-percentage-point increase in
the total tax share of GDP decreases investment by 1.5 percent
in the first year and up to 11.2 percent by the third year.
Using Romer and Romer's (2010) series as an external instrument
for changes in average individual marginal tax rates, Barro and
Redlick (2011) similarly find that a permanent 1-percentage-
point reduction in the average marginal tax rate raises real
GDP per capita by 0.5 percent in the subsequent year,
corresponding to a conventional tax multiplier of 1.1. Applying
the narrative approach to U.K. data, Cloyne (2013) finds that a
1-percentage-point reduction in the total tax share of GDP
increases GDP by 0.6 percent on impact and by 2.5 percent over
three years, and raises investment by 1.2 percent immediately
and by 4.6 percent by the third year. Hayo and Uhl (2014),
using German output data, estimate a maximum response to a 1-
percentage-point drop in total tax liability (as a percentage
of GDP) of 2.4 percent. Applying a similar approach to fiscal
consolidations (tax revenue increases) across the OECD
countries, Leigh, Pescatori, and Guajardo (2011) find that a
tax-based fiscal consolidation of 1 percentage point of GDP
reduces GDP by 1.29 percent.
Mertens and Ravn (2013) develop a hybrid approach that combines
both methods. Because narratively identified shocks may be
prone to measurement error, and identification in a structural
vector autoregression framework can require questionable
parameter restrictions, Mertens and Ravn develop an estimation
strategy that utilizes Romer and Romer's (2010) narrative tax
shock series as an external instrument to identify structural
tax shocks, avoiding the need to impose parameter restrictions.
Utilizing this hybrid approach to analyze U.S. data, they
estimate that a 1-percentage-point cut in the average corporate
income tax rate raises real GDP per capita by 0.4 percent in
the first quarter and by 0.6 percent after a full year, with
the effect persisting through 20 quarters. Mertens and Ravn
additionally estimate that a 1-percentage-point cut in the
average corporate income tax rate generates an increase in
nonresidential investment of 0.5 percent on impact, with a peak
increase of 2.3 percent after six quarters. Also employing a
hybrid approach, Mertens and Montiel-Olea (2017) find that in
the first two years following a tax decrease of 1 percentage
point, real GDP is expected to be higher by about 1 percentage
point.
On the individual side, meanwhile, Mertens and Ravn estimate
that a 1-percentage-point cut in the average personal income
tax rate raises real GDP per capita by 1.4 percent on impact
and by a peak of 1.8 percent after three quarters. Though they
find that a 1-percentage-point reduction in the average
personal income tax rate has a negligible impact on inflation,
short-term nominal interest rates, and government debt, they do
find significant positive effects on employment, hours worked,
consumption, and durable goods purchases and nonresidential
fixed investment. In particular, they observe that a 1-
percentage-point decrease in the average personal income tax
rate results in a peak employment response of 0.8 percent after
5 quarters, and peak durable goods and nonresidential
investment effects of 5 and 4 percent, respectively, beyond one
year.
__________
Response from Dr. Mulligan to Questions for the Record Submitted by
Representative Karen Handel
Wage stagnation among men with no college degree receives more
attention than the tens of millions of women who have gained jobs and
advanced from entry-level wages over time.
Can you comment on female wage growth? (U.S. Census
Bureau data show that the 2017 inflation-adjusted median income for
women was 82.4 percent higher than in 1980 versus 13.5 percent for
men.)
Prime-age labor force participation has recently risen slightly,
but remains well below the pre-recession level.
Why is it so low?
What can draw those who are able bodied back to work?
From Q1 2017 through Q2 2018, the nominal median weekly wage among
women working full-time as wage and salary workers has increased by 2.6
percent. This slightly outpaces the 2.3 percent increase among men
working full-time as wage and salary workers. Similarly, among women
working part-time, nominal median weekly wages increased by 5 percent
since the start of 2017, compared to an increase of 3.6 percent among
similarly employed men during this period.\1\
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\1\ These data are from Bureau of Labor Statistics calculations
using Current Population Survey data. The part-time results are not
seasonally adjusted.
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For historical context, the wage growth of female full-time workers
has substantially outpaced that of men over the past 38 years since
1980. From Q1 1980 through Q2 2018 the average weekly wages of women
has increased by 27.5 percent in real terms, while the average weekly
wages of men has been roughly flat (as reported by BLS using the CPI-U
as an inflation measure; each of these would exhibit faster growth
using the PCE inflation measure).
The faster growth in wages among women from these official
statistics does not tell the whole story though, as more women are now
working and more women are now working full-time than was the case in
early 2017. There were 2.1 million more women working full-time in
August 2018 than in January 2017, and 300 thousand fewer women working
part-time.\2\ As women are moving from part-time to full-time work,
this will also result in further increases in wages that are not
reflected in the BLS computations described above.
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\2\ There also has been a long-run increase in full-time work among
employed women. In January 1980, 73.1 percent of working women worked
full-time. By August 2018, this share had increased to 76.1 percent.
---------------------------------------------------------------------------
In the Council of Economic Advisers' September report on wage
growth we outlined several adjustments to traditional wage statistics
reported by the Bureau of Labor Statistics which result in those
figures understating the actual growth in compensation that workers are
experiencing. These include an increase in the share of compensation
coming in the form of benefits, shifts in the composition of the
workforce as workers who were on the sidelines join or rejoin the labor
force, and counting after-tax compensation to include the direct
benefits of the Tax Cuts and Jobs Act. While we do not have a specific
break-out of these effects by gender, these effects are relevant for
considering women's wage growth in addition to being relevant for wage
growth among the entire population.\3\
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\3\ Mulligan and Rubinstein. ``Selection, Investment, and Women's
Relative Wages over Time.'' Quarterly Journal of Eocnomics. August
2008.
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Regarding your second question on prime-age labor force
participation rates, you are correct that prime-age labor force
participation remains below the pre-recession level (although the
prime-age labor force participation rate of has now recovered to its
2010 level and the 79.5 percent prime-age employment to population
ratio in July 2018 was the highest it has been since May 2008). It
remains low, in part, because there are workers who left the labor
force during the recession and its aftermath. These workers could be
incentivized to rejoin the labor market--potentially after years of not
working. In July, the Council of Economic Advisers released a report on
expanding work requirements in non-cash welfare programs, which
discusses policies to increase the incentives for able bodied prime-age
workers to reenter the labor market. These include expanding work
requirements, similar to those in place in TANF, to Medicaid, SNAP, and
housing assistance. As we note in that report, ``expanded work
requirements would increase the incentive for individuals to work
without exacerbating the high marginal tax rates faced by some current
low-wage, part-time workers'' adding that ``the evidence on welfare
programs suggests that work-conditioned programs are uniquely able to
both increase adult employment and improve child outcomes.''
The Affordable Care Act's employer mandate and premium tax credit
rules also penalize both earnings and full-time employment.\4\ A repeal
of the law would remove those disincentives and thereby increase full-
time-equivalent employment. Even with the law in place, allowing
families to pursue unsubsidized coverage options would increase
incentives to work and earn. The Trump administration has taken some of
these steps, such as expanding the range of (unsubsidized) short-term
limited-duration insurance plans that are permitted on the market (83
FR 38212).
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\4\ See my 2015 Side Effects and Complications, or my June 2015
Testimony to the Joint Economic Committee on this subject.
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__________
Response from Dr. Roberts to Questions for the Record Submitted by
Representative Karen Handel
Wage stagnation among men with no college degree receives more
attention than the tens of millions of women who have gained jobs and
advanced from entry-level wages over time.
Can you comment on female wage growth? (U.S. Census
Bureau data show that the 2017 inflation-adjusted median income for
women was 82.4 percent higher than in 1980 versus 13.5 percent for
men.)
Female wage growth has indeed been very impressive. And since I
believe that inflation since 1980 has been overstated, I think the
growth of female wages in real terms is even higher than the numbers
suggest. Equally important is that millions of women joined the labor
market over this time period. In 1980, there were a little over 20
million women who worked full-time and year-round. By 2015, that number
had more than doubled to 47 million. So the economy has created jobs
for millions of women at much higher pay than in the past.
Prime-age labor force participation has recently risen slightly,
but remains well below the pre-recession level.
Why is it so low?
What can draw those who are able bodied back to work?
I don't think we understand this phenomenon fully. There has been a
lot of interesting speculation about both cultural causes as well as
changes in disability law and other regulations. But I don't think a
clear consensus has emerged that is convincing.
__________
Response from Mr. Moore to Questions for the Record Submitted by
Chairman Paulsen
A frequently cited San Francisco Federal Reserve Bank paper
suggests that the Tax Cuts and Jobs Act may have little effect on
economic growth, but seems to equate the Tax Cuts and Jobs Act with a
Keynesian-style stimulus package.
Could you comment on the report's validity?
Does this study's results hold if the Tax Cuts and Jobs Act raises
the economy's potential as the Congressional Budget Office is
projecting?
The paper can be found at this link: https://www.frbsf.org/
economic-research/publications/economic-letter/2018/july/procyclical-
fiscal-policy-tax-cuts-jobs-act/
The San Francisco Federal Reserve Bank study is a purely Keynesian
analysis of fiscal policy. It concludes that ``thanks in large part to
recently enacted tax cuts, U.S. fiscal policy has taken a decidedly
procyclical turn--providing stimulus when the economy is growing. In
fact, the projected increase in the Federal deficit over the next few
years would represent the most procyclical fiscal policy stance since
the Vietnam War.''
If there is any lesson to be learned from the last two presidencies
and the economic performance it is that standard demand-side economic
policies as tried by President Obama were failures. Government spending
does not create jobs, it reduces private sector growth and employment.
This is why the Obama Administration's own numbers found that the
economy would have recovered from the Bush recession more quickly and
more powerfully if the government had NOT spent and borrowed the $830
billion on the ``fiscal stimulus'' plan. The Keynesian playbook gave
America the worst recovery from a recession since the Great Depression.
The Trump tax cuts are SUPPLY SIDE policy moves. They shift the
supply curve out by increasing incentives for businesses to invest,
hire and innovate. Already they have expanded the 10 year window for
the economy 2018-27 by just over $6 trillion. It is hard to conceive of
a more positive result--so far. This means that about two-thirds of the
debt impact of the Trump tax cuts has already been erased thanks to the
phenomenal 3 to 4% growth path of the economy over the past twelve
months.
__________
Response from Mr. Moore to Questions for the Record Submitted by
Representative Karen Handel
Wage stagnation among men with no college degree receives more
attention than the tens of millions of women who have gained jobs and
advanced from entry-level wages over time.
Can you comment on female wage growth? (U.S. Census
Bureau data show that the 2017 inflation-adjusted median income for
women was 82.4 percent higher than in 1980 versus 13.5 percent for
men.)
Wage growth over the last 30 years has been significantly higher
for women than men. And the demographic group with the most economic
progress has been black women.
The very good news on the economy and wages is that since the Trump
tax cut, the largest wage gains went to low-income households and
households headed by workers without a college degree. The bottom 10%
in income saw wage gains of 5%. The top 10% of wage earners saw wage
growth of just over 3%. This would seem to validate the Trump claim
that the tax cuts were designed to help working class Americans. Retail
sector pay rose by nearly 4% while professional business workers saw
wage hikes of closer to 3%. This does not include bonuses. We have seen
three major retailers, Amazon, Disney, and Walmart raise starting wages
in the last year.
This is happening in part because we are seeing more capital
investment by businesses--as a result of the lower business tax rate
and expensing--which leads to greater worker productivity. It is also
occurring because the tight labor market has created more job options
for blue collar and lower skilled American workers. What is unique
about this Trump boom is that the rising tide is lifting all boats.
This was a tax cut for everyone--not just the rich.
Prime-age labor force participation has recently risen slightly,
but remains well below the pre-recession level.
Why is it so low?
What can draw those who are able bodied back to work?
Low labor force participation can be combatted through work for
welfare reforms, apprenticeship programs and higher wage rates to
entice more Americans to tilt toward work over leisure. We also need a
more robust work-based immigration system to get the best workers from
around the world here in the United States.
__________
Response from Dr. Boushey to Questions for the Record Submitted by
Representative Carolyn B. Maloney
1) The Measuring Real Income Growth Act (H.R. 6874) instructs the
Bureau of Economic Analysis of the Department of Commerce to produce,
as part of its quarterly analyses of Gross Domestic Product, estimates
of economic growth by income level. How would such additional analyses
improve our ability to shape public policy so that it better serves all
Americans? For example, how would it improve our understanding of the
economic status and the needs of Americans living in different cities,
states and Congressional districts?
The Measuring Real Income Growth Act would immediately require the
Bureau of Economic Analysis of the Department of Commerce to
disaggregate growth by income so Americans can see how income is
growing, or not, for those at the top, bottom, and middle of the income
distribution. These new measures will help policymakers track and
respond to increases in income inequality that reduce economic mobility
in the United States, and could help policymakers to trace the causes
of inequality to a number of social ills. They will also provide
information that can help us predict and plan for recessions. For
example, if the Bureau of Economic Analysis additionally disaggregates
consumption (as they have conducted preliminary research on), the
results could help us understand the uneven distribution of savings and
identify when consumption is being driven by debt, rather than income
gains.
This legislation also lays the groundwork for the possibility of a
more extensive effort to disaggregate growth in the future. The same
techniques could also give us growth disaggregated by geographic area.
More detailed economic data by State, county, or other geographic
region would help policymakers target place-based policies to address
areas that have been left behind by the modern economy.
2) Why is legislation like the Measuring Real Income Growth Act
(H.R. 6874) necessary when some prominent economists have been able to
independently produce analyses of GDP growth by income? Is there
support in the field of economics for disaggregating economic growth?
Federal collection of these data is important for several reasons.
First, federally produced distributional national accounts would be
consistent and reliable over time. Academic economists have made great
strides in pioneering these measures, but the production of important
national economic statistics should not be left solely up to non-
governmental sources. Academics' research priorities and available
funding will change over time, but policymakers and the public should
not be deprived of this data in the event that academics are unable to
continue producing it.
Second, having the Bureau of Economic Analysis produce
distributional national accounts would ensure this data is as current,
prominent and widely accessible as possible. It will also complement
for other Bureau products, such as on GDP, providing important context
for news outlets and other consumers of those reports.
Finally, Federal statistics are seen as unbiased, credible, and
valuable by most economic observers. The construction of economic
statistics is transparently documented by the agency that produces
them, allowing researchers to scrutinize the methodology themselves and
ensure that they are error free and that the statistical methodology is
sound.
There is significant support in the economics field for producing
such a measure federally. The principal authors of the current
estimates support the Federal production of these data. Two economists
who have won the Nobel Memorial Prize in Economics have stated that
they favor adding these measures to the national accounts: Robert
Solow, in a column written for the Washington Center for Equitable
Growth (``Improving the measurement and understanding of economic
inequality in the United States'' 07/12/2017), and Paul Krugman, in an
opinion piece in the New York Times (``For Whom the Economy Tolls'' 08/
30/2018).
__________
Washington Center for Equitable Growth
Disaggregating growth: Who prospers when the economy grows
Heather Boushey and Austin Clemens
March 2018
key takeaways
1. The measurement of Gross Domestic Product has fostered a
national fixation on ``growing the pie'' that ignores how growth is
distributed. That conventional wisdom has become antiquated, as more
and more of the Nation's growth has benefited the top 1 percent.
2. Policymakers interested in combatting rising income inequality
cannot evaluate the effectiveness of their policies without a
consistent, high-quality measure of how economic growth is distributed.
3. Existing statistics on inequality and the distribution of
economic gains produced by the Federal Government do not account for
all income, vastly underestimate the income of top earners, or are not
given the level of attention received by other major economic
statistical products.
4. A distributional component could be added to the National Income
and Product Accounts now, at least in part. The United States could
include many of the most desirable features of such a system, although
some others may require investments in new statistical infrastructure.
5. To create an accurate system of distributional accounts requires
the Bureau of Economic Analysis to have expanded access to tax data
held by the Statistics of Income division of the Internal Revenue
Service.
overview
The National Income and Product Accounts, or NIPA (also referred to
as System of National Accounts, or SNA, outside of the United States),
were a radical advance in economic measurement when they were
instituted in the early 20th century. These accounts track aggregate
output and income for the national economy. Most notably, they measure
Gross Domestic Product and the quarterly fluctuations in GDP that tell
us if the economy is growing or contracting. Before their advent,
ascertaining the health of the economy was an inexact and patchwork
procedure.
Great achievement though it was, even the creators of NIPA knew it
had limitations. One of these is the lack of data on how income is
distributed. In a section titled ``Uses and Abuses of National Income
Measurements,'' the 1934 report to Congress that is the first official
measurement of national income noted that ``The welfare of a nation
can, therefore, scarcely be inferred from a measurement of national
income.'' \1\ The author, future Nobel Laureate Simon Kuznets, was
careful to differentiate between the idea of aggregate economic output
and ``economic welfare.''
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\1\ Simon Kuznets, ``National Income, 1929-32'' (Washington: U.S.
Government Printing Office, 1934).
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The lack of data on how income is distributed is especially glaring
now in the face of rapidly increasing economic inequality. Through much
of the mid-20th century, economic growth was shared relatively equally
by all income groups. Starting around the 1980s, however, larger shares
of economic growth flowed to the top of the income distribution, with
the top 1 percent experiencing especially large gains. According to the
economists Thomas Piketty at the Paris School of Economics and Emmanuel
Saez and Gabriel Zucman at the University of California, Berkeley,
pretax income growth for the top 1 percent of all earners between 1980
and 2014 was 204 percent in the United States, far above the national
average of 61 percent.\2\
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\2\ Piketty, Thomas, Emmanuel Saez, and Gabriel Zucman,
``Distributional National Accounts: Methods and Estimates for the
United States.'' Quarterly Journal of Economics (2018, forthcoming).
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NIPA needs some renovations to update it for the 21st century.
Other researchers have suggested a broad range of possible
improvements. Most notably, former French President Nicolas Sarkozy
commissioned Nobel Laureates Joseph Stiglitz and Amartya Sen of Harvard
University and economist Jean-Paul Fitoussi at the Institut d'Etudes
Politiques de Paris to suggest how GDP could be rethought to more
accurately measure economic and social progress. The resulting report
contains a long list of suggested improvements, with suggestions that
address inequality as well as thoughts on how environmental quality and
life satisfaction could be better accounted for in national economic
statistics.
This report sets a more modest but equally important goal: Instead
of revolutionizing GDP, U.S. policymakers should evolutionize it. The
pages that follow explain why the United States needs to add an
explicitly distributional component to GDP and discuss how that goal
can be accomplished. Adding a measure of how income is distributed
would allow us to quantify inequality in our economy, and, in its most
advanced format, would let U.S. statistical agencies disaggregate
economic growth to see how the economy is performing for subgroups of
people according to their income, geographical location, gender, and
more. Being able to do so would enable policymakers at Federal, State,
and local levels to better understand the consequences of rising
economic inequality and design policies that encourage more equitable
and sustainable economic growth.
The time to make these improvements to NIPA is now. On a purely
pragmatic level, methodological advances and increased availability of
computational power make it practical to produce a more sophisticated
NIPA. But even in the 1930s, economists understood that NIPA should
eventually incorporate distributional data. Doing so responds to an
emerging economic challenge: In recent years, the share of income that
accrues to the top 1 percent has reached pre-Great Depression heights,
creating a new class of super-rich individuals who enjoy much faster
income growth than the ``merely'' rich and everyone else in society
today.
This report proceeds in three parts. The first section describes
the historical development of NIPA and recent efforts to update NIPA to
reflect new economic realities. The second section explains why
distributing national income is important. And the final section
enumerates the desirable features that a distributional system of
national accounts should have and discusses implementation of these
features in the United States.
https://equitablegrowth.org/research-paper/disaggregating-growth/
?longform=true