[Senate Hearing 116-123]
[From the U.S. Government Publishing Office]
S. Hrg. 116-123
ECONOMIC MOBILITY: IS THE AMERICAN DREAM IN CRISIS?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
ECONOMIC POLICY
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ON
EXPLORING BARRIERS TO ECONOMIC MOBILITY AND MAKING THE AMERICAN DREAM
ATTAINABLE FOR ALL AMERICANS
__________
JULY 17, 2019
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: http: //www.fdsys.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
39-541PDF WASHINGTON : 2022
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
______
Subcommittee on Economic Policy
TOM COTTON, Arkansas, Chairman
CATHERINE CORTEZ MASTO, Nevada, Ranking Democratic Member
KEVIN CRAMER, North Dakota ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska DOUG JONES, Alabama
DAVID PERDUE, Georgia TINA SMITH, Minnesota
THOM TILLIS, North Carolina KYRSTEN SINEMA, Arizona
JOHN KENNEDY, Louisiana
Kyle Hauptman, Subcommittee Staff Director
Carol Wayman, Democratic Subcommittee Staff Director
(ii)
C O N T E N T S
----------
WEDNESDAY, JULY 17, 2019
Page
Opening statement of Chairman Cotton............................. 1
Prepared statement........................................... 30
Opening statements, comments, or prepared statements of:
Senator Cortez Masto......................................... 2
Prepared statement....................................... 31
Senator Kramer............................................... 4
WITNESSES
Oren M. Cass, Senior Fellow, Manhattan Institute for Policy
Research....................................................... 5
Prepared statement........................................... 33
Responses to written questions of:
Senator Cortez Masto..................................... 77
Senator Sinema........................................... 77
Yuval Levin, Ph.D., Director of Social, Cultural, and
Constitutional Studies, American Enterprise Institute and
National Affairs............................................... 7
Prepared statement........................................... 43
Ramesh Ponnuru, Visiting Fellow, American Enterprise Institute... 9
Prepared statement........................................... 48
Senator Cortez Masto..................................... 78
Senator Sinema........................................... 78
Thea M. Lee, President, Economic Policy Institute................ 11
Prepared statement........................................... 51
Senator Sinema........................................... 79
Keith R. Miller, Principal, Franchisee Advocacy Consulting....... 12
Prepared statement........................................... 63
Senator Sinema........................................... 82
Additional Material Supplied for the Record
Bloomberg article submitted by Senator Cortez Masto.............. 92
Letter from the Pit Owners' Association.......................... 96
Letter from the Maine Franchise Owners Association............... 97
Letter from the Meineke Dealers Association...................... 98
Letter from the 2019 NAASF Board of Directors.................... 99
Letter from the National Coalition of Associations of 7-Eleven
Franchisees.................................................... 100
Letter from the American Association of Franchisees & Dealers.... 101
Letter to Federal Trade Commission Chairman, Joseph Simons, from
Congressmen Cardenas, Bilirakis, et al......................... 102
Letter from the International Franchise Association.............. 105
Letter from Federal Trade Commission Acting Secretary, April J.
Tabor, from the International Franchise Association............ 108
Prepared statement of the International Franchise Association.... 116
Letter from the National TUPSSO Franchise Owners Association..... 118
Letter from the International Association of Kumon Franchisees... 119
Letter from the Max Independent Franchise Owners Association..... 120
(iii)
ECONOMIC MOBILITY: IS THE AMERICAN DREAM IN CRISIS?
----------
WEDNESDAY, JULY 17, 2019
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Economic Policy,
Washington, DC.
The Subcommittee met at 9:38 a.m. in room SD-538, Dirksen
Senate Office Building, Hon. Tom Cotton, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF SENATOR TOM COTTON
Senator Cotton. This hearing will come to order.
Welcome to the Economic Policy Subcommittee hearing on this
important topic of ``Economic Mobility: Is the American Dream
in Crisis?'' I would like to thank Senator Cortez Masto and the
witnesses for being here and also our Banking Committee staff
for their help pulling this all this together. Now I want to
introduce our witnesses.
Mr. Oren Cass is a Senior Fellow at the Manhattan Institute
and the author of the 2018 book, ``The Once and Future Worker:
A Vision for the Renewal of Work in America.'' Mr. Cass was
formerly the Domestic Policy Director of Senator Romney's
Presidential campaign in 2012.
Dr. Yuval Levin is a Resident Scholar at the American
Enterprise Institute and the founding Editor of National
Affairs. Dr. Levin served as a Member of the White House
Domestic Policy staff under President George W. Bush.
Mr. Ramesh Ponnuru is a Visiting Fellow at the American
Enterprise Institute, a Senior Editor for National Review, and
a columnist for Bloomberg Opinion.
Ms. Thea Mei Lee is President of the Economic Policy
Institute and formerly the Chief International Economist for
the AFL-CIO. She has served on advisory boards for the State
Department and the National Bureau of Economic Research.
And Mr. Keith Miller is the founder of Franchisee Advocacy
Consulting. A Subway franchisee himself since 1988, he served
as Director on the North American Association of Subway
Franchisees.
Thank you all for coming and for your testimony. Your
written testimony will be entered into the record.
We are here to discuss economic mobility and the American
Dream. When economists discuss these things, they often think
in terms of GDP growth and consumer prices. To exaggerate just
a little, they often seem to believe that so long as the
economy grows at 3 percent and Americans can afford more cheap
plastic stuff from China, America must doing great. But is that
really true?
When I talk to Arkansans, I hear a different story. Most of
them do not dream of extravagant wealth, much less abstract
ideas like ``economic growth'' and ``consumer surplus.'' They
know a life of getting and spending cannot hope to fulfill
one's dreams.
Instead they dream of a career that pays an honest wage so
they can live in a decent neighborhood. They dream of getting
married and starting a family. And, ultimately, they dream of
passing on this standard of living to their children--plus a
little bit more. That is the American Dream I hear, according
to the Arkansans that I know.
The question for today is: Is our Nation helping Americans
achieve this American Dream, or are we failing them?
I have to say, I think in some important ways our Nation is
failing our fellow citizens. The labyrinth of subsidies,
regulations, and misguided priorities constructed here in
Washington often does little to help a large majority of
Americans who do not graduate from college, the ``Silent
Majority'' who work with their hands and on their feet.
Our Government does not offer these Americans much beyond
occasionally moralizing about their supposed shortcomings: ``go
to college,'' ``abandon your hometown,'' ``learn to code.''
What they really need are more viable career paths that do
not require expensive educations. There are many good-paying,
honorable jobs for people without college degrees in this
country. But how do we create even more of them? How do we
prepare workers so they are ready for those jobs?
There is another urgent context for today's hearing as
well: our economic competition with China. For decades,
Washington has pursued a policy of integration with China. The
architects of this policy hoped naively that enriching the
Chinese Communist Party would make it more pliable and less
communist. Instead, it gave China the means to challenge
America around the world--all while decimating the American
heartland.
If we want to remain the world's strongest economy, we need
to marshal every citizen, every skill, every talent at our
disposal. We will need to recover the vitality, productive
abilities, and indeed the patriotism that contributed to
America's resounding triumphs in the past century.
If we build a more productive economy, it will serve not
only our strategic interests as a Nation, but the interests of
the American people, by helping them achieve the American
Dream.
I look forward to your thoughts and to my colleagues'
questions.
Senator Cortez Masto.
OPENING STATEMENT OF SENATOR CATHERINE
CORTEZ MASTO
Senator Cortez Masto. Thank you, Chairman Cotton, and
welcome to all our witnesses today.
I appreciate the Chairman suggesting a hearing to explore
barriers to economic mobility in the United States. The Senate
Banking Committee has jurisdiction over many of the most
pressing issues facing Americans today--from housing, to
lending, to transportation, and today we discuss how Congress
can improve economic outcomes for children and families and
entrepreneurs.
We want our children to grow up and become financially
self-reliant. We want the children of renters to be able to own
their own homes if they wish. And we want children whose
parents struggled to put food on the table to be able to afford
a full pantry and even a few meals out every month.
We want children who survived homelessness to grow up with
an income adequate to not just pay the rent but save for their
children's college education and their own retirement. We want
workers retiring from one career to be able to open a small
store and have it thrive.
Yet those dreams--the American Dream--are unattainable for
too many. Parents who lack affordable bank accounts end up with
financial products that can lead to a debt trap. As they
struggle with bank fees, they may see their car repossessed,
resulting in getting fired from their job and getting evicted
from their home.
The average college senior graduates with more than $30,000
in debt, and total student debt nationwide has topped $1.5
trillion. And some college graduates cannot find jobs that pay
enough to manage their crushing student loan debt. They delay
starting a family, buying a home, and saving for retirement for
a decade or more because of this.
An entrepreneur buys a franchise business but finds the
business never earns as much as she was promised. As she
struggles to keep her store in the black, she does it all on
her own. She cannot afford to hire employees and pay them a
living wage. That is wrong.
It is wrong that the ZIP Code where a child is born and
grows up affects their future income and financial success more
than the child's education, aptitude, or work ethic.
It is wrong that a lack of affordable financial products
prevents families from building up savings to respond to a
broken arm or a broken car without a major financial crisis.
It is wrong that corporations use noncompete clauses, union
busting, and arbitration clauses to keep wages low and
corporate profits high.
And it is wrong that high housing costs, lack of affordable
child care, and inadequate transit restrain economic mobility
for struggling families and young adults.
It is wrong that entrepreneurs who purchased a franchise--
many of them immigrants, retirees, and veterans--were misled by
unfair contracts, deceptive financial information, and
nondisparagement clauses.
We need solutions. And we know many of them are already out
there.
In their written testimonies today, the witnesses have
suggested significant investment in education, health, and
other public services. They want to empower workers and
franchise owners. They recommend tackling monopolies and
corporate concentrations that drive out competition and result
in lower wages for workers.
We have seen how Government can protect homeowners, small
business owners, and entrepreneurs from predatory and abusive
practices and financial products.
I thank all of the witnesses for being here today. I look
forward to hearing the testimonies, working with all of you as
we move forward. In fact, I hope that, as Mr. Cotton said, what
we are focusing here on Congress is how we ensure that
everybody has the opportunity to achieve that American Dream.
So thank you.
Senator Cotton. Thank you, Senator Cortez Masto.
I would move to your opening statements at this point, but
we are going to have a brief break in that order because
Senator Cramer has to preside over the Senate in about 15
minutes, and I want to give him a chance to speak. Then we will
come back to you for your opening testimony. Presiding officer
duty is called a ``duty'' because the junior Senators have to
do it all the time, not the senior Senators. But some Senators
like it because it is the one time that you get called
``President'' around here.
So, Senator Cramer.
OPENING STATEMENT OF SENATOR KEVIN CRAMER
Senator Cramer. I appreciate that, Mr. Chairman. It is also
the one time that your chief of staff cannot get hold of you,
so there are other benefits.
Anyway, thank you for accommodating that, and thanks to all
of the witnesses for being here. And thanks for this important
topic. I just want to say a couple things up front, put
something in the record, and then hope I can get back before it
is over, but I have my doubts.
Just so you know, I grew up in a home with a rural electric
lineman daddy who actually quit high school after the 11th
grade because he could make so much money being a rural
electric lineman. Fortunately, today, through the IBEW and the
rural electric cooperatives and others, they now get a little
better training in advance of that.
So those are my roots, and I come from a place in North
Dakota where, frankly, an MBA is not nearly as valuable as a
CDL. And we have an economy that really, I think, highlights
some of what we hope to be able to talk about and maybe learn
something about today.
I am always drawn back to that great line of Steve Martin's
in a movie where he said, ``It is easy to be a millionaire.
First, get yourself a million bucks.'' Well, you know, that is
not so easy. But the American Dream is alive and well, but we
have two statistics in this country, two data points that are
in conflict on a regular basis, and no more so than right now,
and that is, we have a very low unemployment rate and we have a
very low workforce participation rate. To me, that screams
opportunity--if we just match all of our resources and assets
and policies with an economy. And so I am looking forward to
the testimony.
I wanted to put one thing into the record, Mr. Chairman,
that I will be highlighting. This is the slide right here. This
is a slide--and I have four slides that correspond, but I want
to highlight this one. This is a slide that I asked one of the
companies in North Dakota who has 400 employees to give me,
because when they told me this, I had a hard time believing it.
As you can see, it demonstrates the five different degree
levels, education levels, and the annualized earnings base,
bonus, and overtime, of course, and it shows you how they
correspond. And it is a bit upside down compared to what we
might think.
But you will notice, of course, that the post-high school
certification student or graduate has the highest earning power
in North Dakota at $143,000, more than the master's degree,
more than the associate degree, more than the bachelor's
degree. And I highlight that just to demonstrate that--I do
believe the American Dream is alive and well, but we need to
maybe emphasize a few things a little bit differently, whether
it is in student loans, whether it is in education
opportunities, perhaps as much as anything in our culture and
how we talk around the kitchen table with our families. And I
just hope--I am grateful for the opportunity to at least
highlight one picture of the American Dream that is alive and
well if, in fact, we can align our policies properly.
And with that, I would just ask for unanimous consent to
place the slides in the record, and then I look forward to
everybody's testimony.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Cotton. All those slides will be placed in the
record, and they really do tell a remarkable story, that the
highest earning potential for this company in North Dakota is
not college degree, it is not even an advanced degree, but a
high school degree with a certification for some of the high-
skilled labor that the North Dakota economy needs.
Senator Cotton. Thank you, Senator Cramer, and enjoy
presiding over the Senate and the fascinating speeches you will
hear there.
All right. Now we will go to the witness testimony.
Mr. Cass.
STATEMENT OF OREN M. CASS, SENIOR FELLOW, MANHATTAN INSTITUTE
FOR POLICY RESEARCH
Mr. Cass. Thank you, Chairman Cotton, Ranking Member Cortez
Masto, and Members of the Committee, for having me here today.
I want to start with where Senator Cotton started, which I
think is exactly the right question when discussing the
American Dream: What is it that Americans actually dream of? We
tend to think
especially here in Washington, that it is escaping their
circumstances, attending a prestigious university, and perhaps
doing a job like many of the ones here. But that is not, in
fact, the case.
In 2017, the Pew Research Center studied the question of
how Americans define the American Dream and found that economic
concerns rank low. By far, the components of life most often
deemed essential were ``freedom of choice in how to live'' and
``having a good family life.'' Next came ``retire comfortably''
and ``make valuable contributions to community.'' Last, and
ranked essential by only one in nine Americans, was ``become
wealthy.''
Another poll conducted by Pew in 2014 adds further
perspective: 92 percent of Americans said that ``financial
stability'' was more important to them than ``moving up the
income ladder.''
Now, good economic outcomes obviously are a critical
prerequisite to these priorities. Exercising freedom of choice
in how to live is difficult without the capability to achieve
self-sufficiency. Financial stability itself suggests a certain
degree of labor market success. But, in general, the American
people appear to have a much richer and more nuanced view of
the determinants of their quality of life than do many of their
leaders, who have tended to equate prosperity with growth,
material living standards, and equality of opportunity on the
economic ladder.
American politics often starts from the presumption that
our goal is ``equal opportunity'' defined as ``equality of life
chances''--that is, where a child starts should have no bearing
on where he ends up and that everyone should have an equal
chance of arriving at any destination.
The problem is that that is plainly impossible in a world
in which individuals possess different innate characteristics
and grow up in different environments.
A more pragmatic vision of equal opportunity, more
consistent with how Americans actually think about the American
Dream, entails removing any public impediments that obstruct
individuals from pursuing their goals. Unfortunately, we may
have to accept that that will not get us as far as we would
like.
Consider the findings of the Brookings Institution's
Richard Reeves, who used data from more than 5,000 Americans
born mostly in the 1980s and 1990s to compare the income
quintile in which they were born to that which they ended up in
as adults. So, for instance, what share of those born in the
bottom 20 percent of the distribution ultimately reached the
top 20 percent?
Family structure almost entirely dictated opportunity. For
someone born in the bottom quintile to a married mother and
raised by both parents, the odds of reaching the top quintile
were higher than remaining in the bottom quintile. In fact,
those children faced almost perfectly equal chances of ending
in any of the five segments. Public impediments appeared to
exert little influence.
But for someone born in the bottom quintile to a never-
married mother, the odds of rising to the top quintile--5
percent--were one-tenth that of remaining in the bottom
quintile--50 percent. The private impediment was almost
insurmountable.
So in the face of dynamics like these, guaranteeing ``equal
opportunity'' the way we so often speak about it would require
implementation of public programs capable of counteracting all
of life's disadvantages. And American policymakers have come to
see
education as the panacea capable of accomplishing that and so
have embarked upon the quixotic quest of ``college for all.''
This approach has been a mistake whose primary victims are
precisely those it is intended to help--people who remain
unlikely to emerge successfully from a high-school-to-college-
to-career pipeline yet are offered no meaningful alternative.
The sad irony is that, in our attempt to deliver ``equal
opportunity,'' we have, in fact, constructed a public
impediment to it. I thought the definition that Senator Cortez
Masto provided as she was describing the American Dream was
very telling, and it was absolutely not one that would require
a college degree to achieve in this country.
If the aspirations of the American people--the real
American Dream--required an equalization of life chances, then
maybe we should continue tilting at that windmill. But,
fortunately, they do not. Policymakers should focus instead on
ensuring that every American has access to some minimum,
absolute level of opportunity to achieve self-sufficiency,
support a family, contribute to a community, and then provide
to his children even greater opportunity. And they should be
able to do that in safe, clean, connected communities free from
crime and addiction.
Historically, someone who earned the basic level of
education widely attainable within society, worked full-time,
and formed a stable family could reasonably expect to achieve
those things. And he could achieve them either by setting off
for a new city or staying right near home. And I would predict
that if we made that our focus, building that kind of
foundation under our economy, we would in the long run achieve
much higher levels of economic mobility than we are achieving
today.
Now, as I alluded to, I think the way to start down this
path is with dramatic reforms in education, shifting most of
the money we spend subsidizing higher education for the people
we expect to be our economy's winners toward other pathways
that would more effectively bridge from high school to life as
an adult and to careers that can achieve productive earnings
perfectly sufficient to support a family and allow Americans to
achieve the dream as they define it.
Thank you very much.
Senator Cotton. Dr. Levin.
STATEMENT OF YUVAL LEVIN, Ph.D., DIRECTOR OF SOCIAL, CULTURAL,
AND CONSTITUTIONAL STUDIES, AMERICAN ENTERPRISE INSTITUTE AND
NATIONAL AFFAIRS
Mr. Levin. Chairman Cotton, Ranking Member Cortez Masto,
Members of the Committee, thank you very much for the
opportunity to testify today.
It is very encouraging to see this Committee take up the
crucial question of economic mobility and seek to understand it
from a variety of angles and perspectives.
I am sure I do not have much to add to what my esteemed
fellow witnesses have to offer this morning, so maybe I can use
these brief opening remarks to stress a couple of general
points that I think ought to inform a discussion like this.
In my written testimony, I review some of the evidence
regarding trends in economic mobility in the last few decades
and find it discouraging in some key respects. The past few
years have witnessed relatively strong economic growth and,
with it, a modest and welcome uptick in various measures of
mobility as well. But these have to be understood against a
broader trend of fairly stagnant mobility.
I then take up some of the causes of diminished economic
mobility and the question of whether and how public policy
could make a difference.
Some barriers to mobility are likely to be very difficult
for public policy to influence constructively, especially the
decay of some key social institutions that are essential to
flourishing and, therefore, also to rising living standards.
But there are some obstacles that could be more open to product
interventions, and given our time constraints, I want to
quickly mention just one set of such obstacles here.
Simply put, it involves the rising cost of living for
working families. That may seem a strange subject on which to
raise alarms since inflation has been remarkably low for more
than three decades in America. But while that is true of
general inflation, household costs have actually risen
dramatically in three areas of particular importance to
economic mobility. We might call these the ``three H's'':
health care, housing, and higher education.
These three areas are of enormous importance to American
families who are striving to improve their living standards.
Health care and housing are often essentially unavoidable
expenses, while higher education is among the most effective
means of securing a middle-class lifestyle for the rising
generation. And yet in all three areas, we have seen prices run
far ahead of value for decades.
In all three areas, too, public policy has played a major
role in that increase in costs by simultaneously restricting
supply and subsidizing demand. That combination has predictable
consequences: It increases prices and, therefore, costs.
In health care, the supply restrictions have especially had
to do with the regulation of health insurance in ways that have
restricted options and competition and so have closed off
potential avenues for lowering costs. The subsidization of
demand, meanwhile, has consisted of the exceedingly generous
tax subsidy for employer-provided insurance, the enormous
growth of Medicaid, and new forms of subsidy in the individual
market.
In housing, we have seen local, State, and Federal policies
interact in ways that in many places have restricted supply
through tighter zoning while subsidizing demand through tax
benefits, home loan subsidies, and various kinds of first-time-
buyer benefits. Obviously, there was a huge crash in this
market a decade ago, but the basic pattern of Government
intervention did not change all that much in the wake of that
disaster.
In higher education, the restriction of supply happens
especially through the overly narrow accreditation process that
limits our definition of higher education and so limits options
for people seeking a better life. And the subsidization of
demand has happened especially through student loans and
assorted other tax benefits.
Each of these policies is plausibly defensible in itself,
of course. Some of them are much more than defensible. But the
sum of all of this has been a lot of inflation in three areas
that are crucial to the lives of vast swaths of our society who
are trying to rise.
A cost-of-living agenda that tried to counteract this
tendency should have a lot of appeal across party lines. There
are steps that could be taken on both the supply and the demand
sides of each of these sectors of the economy, as I suggest in
my written testimony.
There are many other obstacles to think about here, of
course, and my testimony gets at some of those. But I want to
just close by commending the Committee for taking up this very
important subject in the way that it is doing so. Mobility and
opportunity matters enormously. It has to be a priority for our
economic policy, and Americans have often understood our
National Government in particular to be rightly devoted to that
important cause.
In a message to Congress on the Fourth of July of 1861,
amid the painful early setbacks of the Civil War, Abraham
Lincoln tried to articulate what made that struggle worthwhile.
And when it came to describing what we valued in our
Government, Lincoln said this:
On the side of the Union it is a struggle for maintaining in
the world that form and substance of Government whose leading
object is to elevate the condition of men--to lift artificial
weights from all shoulders, to clear the paths of laudable
pursuit for all, to afford all an unfettered start and a fair
chance, in the race of life.
America has often been gloriously successful in advancing
that cause, but it has been noticeably less so in recent
decades. We have ignored that fact for too long. And I commend
this Subcommittee for turning its attention to this challenge,
and thank you for the opportunity of letting me testify.
Senator Cotton. Thank you.
Mr. Ponnuru.
STATEMENT OF RAMESH PONNURU, VISITING FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Ponnuru. Chairman Cotton, Ranking Member Cortez Masto,
and distinguished Members of the Committee, thank you for this
opportunity to testify on this important topic so central to
America's historic self-conception.
I wish to address absolute economic mobility, and I have
four main points to make about it.
The first is that our record for most of the period since
the turn of the millennium has been poor. Median family income
adjusted for inflation rose through the 1970s, 1980s, and
1990s, but then the numbers turned much less reassuring. Median
family income of 2014 was actually lower in inflation-adjusted
terms than it was in 2000. Over the last few years, the trends
have been positive and could become better still if the
expansion continues, but we have no reason for complacency.
Second, effective countercyclical policy is crucial for
upward mobility. Our poor performance over the last two decades
had a lot to do with the sharp recession that began in December
2007 and the agonizingly slow recovery from it. Median family
income dropped by more than 7 percent from 2007 to 2011, the
sharpest decline since we started tracking that data. And it
did not recover completely for 8 years. Stronger anti-recession
policies are, therefore, key to increasing upward mobility.
The Federal Reserve has primary responsibility for
countercyclical policy and deserves credit for several steps
that it took in response to the Great Recession. But there are
some reasons for worry. Whether its current regime is capable
of handling the next recession, particularly when it relies on
lowering interest rates that are already extremely low, is a
serious question. Its record of consistently undershooting its
own inflation target over the last decade also gives some
reasons for concern. The Federal Reserve needs to seriously
consider whether its current approach biases it toward
excessively tight monetary policy that makes recessions more
severe and recoveries weaker.
Third, mobility requires higher economic growth. Even
before the Great Recession, economic growth was slower than it
had been during past expansions, and it was the combination of
the sharp recession and this slow growth that made the overall
economic record of 2000 to 2014 so frustrating for most
Americans. Reforms that would raise the rate of economic growth
over the long run should be a high priority. In my written
testimony, I mention some areas that hold promise, including
changes to our tax laws with respect to investment and changes
to our immigration policies.
Fourth, and finally, geographic mobility enables economic
mobility. A common way that Americans have historically
bettered their lot is by picking up and moving to places with
more opportunities for them. But they have been doing a lot
less of that in recent years. Interstate migration rates have
been falling since 1980, and that trend has reduced wage
growth, productivity, and employment rates. At the same time it
has increased the length of spells of unemployment, and it has
increased the variation in income among regions of the country.
Public policy has likely played a role in these changes.
The restrictive zoning laws that Dr. Levin mentioned in many
jurisdictions, especially ones with rapid economic growth, have
made housing expensive and thus reduced the ability of
Americans in slower-growing regions to move there.
The expansion of occupational licensure by State
governments also works against mobility. Relocating in a new
State may require the acquisition of a new license in order to
work, and that can take time and money.
The Federal Government may be able to exert a positive or
at least a counteracting influence in some of these areas. But
even national attention to the mobility problem may spur
beneficial steps.
As this brief review suggests, increasing mobility is a
multifaceted challenge. But if the work is difficult, the
potential rewards are substantial and worth the seeking.
My thanks again to the Committee for the invitation to
speak.
Senator Cotton. Thank you.
Ms. Lee.
STATEMENT OF THEA M. LEE, PRESIDENT, ECONOMIC
POLICY INSTITUTE
Ms. Lee. Thank you, Chairman Cotton, Ranking Member Cortez
Masto, Members of the Subcommittee, for the opportunity to
speak to you today and for organizing this hearing on this
important topic of economic mobility and the American Dream.
What we are talking about here today is how policy choices
over recent decades have eroded access to the American Dream
for too many Americans and also how we can use policy to
restore opportunity and mobility for working people.
I think we all treasure the concept of the American Dream,
the idea of continuous upward progress generation after
generation. And the key message that I want to bring today is
that the lack of economic opportunity for low-wage and middle-
class American families is not an accident of history, not a
nameless economic force against which we find ourselves
powerless. Rather, the highly unequal distribution of resources
and opportunities within our society is a direct result of
policy choices that, together, have had the effect of weakening
the power of workers to defend their rights in the workplace
and in the political arena, thereby tilting the playing field
in favor of moneyed and corporate interests.
Moreover--and this is a key point--historic and ongoing
discrimination in many forms and in many areas--including
education, housing, and the workplace--has created obstacles to
economic advancement for working women, workers of color, LGBTQ
workers, and their families.
So while the subject of this hearing is economic policy, we
are really here to discuss something much more fundamental: the
idea of America as a Nation, who we are, who we want to be, and
whether we continue to strive to build a vibrant dynamic
society filled with opportunity for all or throw in the towel.
Inequality and the structural impediments to upward
mobility are not just unfair--they are also economically
inefficient. They represent wasted talent, potential output,
and intellectual contributions, and that should create the
urgency that we face today and that I sense from my fellow
witnesses. I appreciate the opportunity to be here with others.
So we made a distinction between mobility versus
opportunity, but we see it in the context of growing inequality
and wage stagnation, as some of my fellow witnesses have
mentioned. And a huge amount of mobility would be required to
counteract the unprecedented high and growing levels of
outright income and wealth inequality we are now experiencing
in the United States and we have been experiencing for about
four decades. That mobility just is not there.
So the challenge is, in the context of the growth of
inequality and stagnation of wages for the bottom and middle-
class workers, we need to create even stronger pathways, and we
have not seen them in past decades. And those challenges that
workers face are exacerbated by some of the bad policy choices
we have made and also by some of the employer trends toward
disempowering workers from their very first day on the job.
These contracts that require as a condition of employment that
workers sign away their right to class action or submit to
forced arbitration or noncompete agreements; also employee
misclassification, where workers are denied their right to be
treated as employees and instead are treated as independent
contractors; and also the attacks on unions.
But given all these economic trends, we see lobbying
efforts by profitable companies to renege on their obligations
as employers to their employees and to use the excuse of the
gig economy and the internet platforms trying to take power
away from workers.
And as Mr. Miller's testimony will show, even for small
businesses and franchise owners, the concentration of wealth
and political power creates inefficient and often unfair
outcomes.
We know that the most important pathway to the middle class
is a healthy labor market that provides sufficient employment
opportunities with good pay and benefits that are equally
accessible to all people. Government, individuals, and
institutions each play a role in creating pathways to the
middle class through the labor market.
We see the American people are working harder than ever,
sometimes at two or three jobs, with more education than
previous generations, and in an economy that is wealthier and
more productive than in the past. And yet they face these
challenges and the policies that have eroded their barganing
power.
So the key policy recommendations that we would put forward
as addressing some of these concerns include raising the
minimum wage, reforming labor law to ensure that workers have
the right to form unions and bargain collectively, making
sure--and I agree with Mr. Ponnuru on this--that Federal
Reserve policy is fairly balancing the risks to inflation and
trying to achieve full employment, and then making sure that
Government is using fiscal policy not just to address economic
downturns but also to target Government spending toward
addressing structural needs, like infrastructure investment and
employment programs targeted at poorer communities; renewing
our attention to the public education system; and last, but not
least, address longstanding and ongoing racial inequities in
housing, employment, and wealth.
So, with that, I look forward to your questions, and I
thank you again for the opportunity to be here today.
Senator Cotton. Thank you, Ms. Lee.
Mr. Miller.
STATEMENT OF KEITH R. MILLER, PRINCIPAL, FRANCHISEE ADVOCACY
CONSULTING
Mr. Miller. Chairman Cotton, Ranking Member Cortez Masto,
and Members of the Committee, thank you for your time today.
Today I will speak specifically about the franchise
industry. The franchise business model itself is a brilliant
model and one I support. However, because of little
transparency and oversight, it is also an industry with far too
many examples of predatory franchise companies that take
advantage of prospective entrepreneurs.
Most believe this large sector is heavily regulated. The
FTC does regulate pre-sale disclosure through the Franchise
Rule and requires prospective franchisees receive a Franchise
Disclosure Document (FDD). But I ask, how many of you actually
knew that the FTC does not even collect this disclosure, much
less review it.
Franchise Grade looked at 1,900 franchise systems, using
disclosure information from a 5-year period, and noted that
while 169,000 units had opened, almost 139,000 units had
closed, for a net gain of less than 30,000. If this high level
of failure were happening in the private market, it would be
bad enough. But the SBA loan guarantee programs are enabling
this failure and fraud. In 2013, the GAO reported that during
the previous 10 years, the SBA made guaranteed payments on
approximately 28 percent of 7(a) franchise loans.
Amin Abdelkarim immigrated from Egypt to Dallas and worked
two jobs at DFW to save in search of his American Dream. He
purchased a Dickey's Barbecue franchise. He was given a
disclosure document and a spreadsheet showing estimated startup
costs. The estimates were grossly incorrect, and his startup
capital was spent getting open. He opened his business in
August of 2018, and he contacted me 1 month later. He was
already broke and could not make the payment to a 7(a) loan.
His message to me was: ``In a few weeks, I will find myself, my
disabled wife, and my 89-year-old mother-in-law in the street,
with no house, no car, and no money.''
Here is the problem in the industry: Far too many profit
from the sale of a franchise, yet far too few, if any, are held
accountable for the success of the franchise purchaser.
Mark Shor retired from his IT job and bought an Experimac
franchise in Henderson, Nevada. The franchisor directed him to
a specific loan broker that provided him with the projection
spreadsheet that showed revenue of nearly $700,000 in year one
and $995,400 in year two. Both, if you look at today's
disclosure document, are well above the numbers in that. He is
now surviving by dipping monthly into his retirement to pay his
SBA loan.
Michael Hataway is a Complete Nutrition franchisee in Reno.
Since the franchisor has pulled all their support, wrongly sent
out an email to his customers that his location has been sold,
and aggressively marketed online sales, his sales have crashed.
His finances are in shambles, and he is heading toward default.
Jamie Stephens is another Complete Nutrition franchisee
with stores in North Dakota and Minnesota. He has SBA loans
totaling $1.5 million and has the same issues with his
franchisor. But do not worry about the franchisor. They still
kept their $49,500 franchise fee.
Finally, Huntington Learning Centers. The Inspector General
at SBA found that 7(a) loans were made with inflated revenue
projections. Bob Spada from Connecticut was one such
franchisee. He was again directed to a specific loan consultant
to work with and applied for a loan. He received a $300,000
loan on a $500,000 first-year projection. Later he found out
that actual for an average center in the first year was
$249,000. As he dug for the reasons for this high projection,
he discovered the devious means. To qualify for that $300,000
loan, he would need about a $75,000 profit in that first year
to meet the required debt service coverage ratio. To reach that
profit level, and reverse engineering the numbers, you come up
with $500,000 in revenue. Bob was forced into bankruptcy, total
losses of his mortgage, equity loan, and credit cards more than
doubled the SBA loan. So who accounts for those losses to the
economy?
I appreciate the Banking Committee's consideration of ways
to curb some of these abuses and have provided some corrective
steps to clean up the industry. I appreciate Ranking Member
Cortez Masto specifically on her commitment for SBA
transparency lending.
In summary, the franchise business model can be, and should
be, a model for economic mobility and realizing the American
Dream. However, leaving the industry to police itself is not
working, and destroying lives while some profit. There is no
reason for this, and access to SBA money should be the model of
transparency for the industry, one that ensures the best
underwriting procedures to those in search of the American
Dream.
Thank you.
Senator Cotton. Thank you, Mr. Miller.
I want to begin the questions by exploring the relationship
between wages and employment on the one hand and immigration on
the other hand. The full Committee had Federal Reserve Chairman
Jay Powell testify last week. One thing he noted is what he
called ``the widening gap in the economic status and prospects
between those with a college degree and those without one.''
One example he used in particular is the percent of American
men who had a job in 1967 versus 2017 by education level.
In 1967, men with a college degree were 95 percent
employed; in 2017, 90 percent employed. So only a 5-percent
decline.
High school education, however, went from 95 percent
employed--the same as those with college degrees--down to 80
percent. And for those without high school, in 1967 90 percent
employed, all the way down to only 70 percent employed.
Now, I have a chart behind me that indicates immigration
population and the share of immigrants over time. I would note,
of course, the vast majority of immigrants throughout our
history have been unskilled or low-skilled workers; today only
1 in 14 persons are admitted to this country and given a green
card because of their job skills, education, and so forth. That
is to say nothing of the millions of temporary non-immigrant
workers we have in our economy and to say nothing of the
million of illegal immigrant workers we have either.
Mr. Ponnuru, when you look at this chart and you see the
decline in immigration levels starting roughly around the late
1930s, and due in part to the Depression, obviously, due in
part to the 1924 immigration law, continuing into the 1970s, a
period after World War II of great prosperity, and then you see
the increases, rapid increases, in fact, starting in the 1970s,
a result in part of the 1965 law, what relationship do you see
on the one hand between wage declines for working-class
Americans, job prospects for working-class Americans, and on
the other hand large increases in unskilled and low-skilled
immigration?
Could you turn your----
Mr. Ponnuru. Thank you. Well, I think that the level of
immigration that we have had and the basis on which we have
admitted the immigrants have not been well geared toward
increasing American prosperity, and particularly at the low end
of the labor market. There is some evidence to suggest that a
large influx of low-wage labor is going to have a depressing
effect at that end of the market; with a shift in the basis of
immigration toward the recruitment of people who we need for
higher-skilled tasks would not have that kind of effect.
And so there are, I think, two pathways by which a
different immigration policy would help the American economy.
One is by increasing our overall productivity levels and
changing our average skill level and the other is by relieving
some of that pressure at the low end of the labor market.
Senator Cotton. So I have introduced legislation that would
revamp our legal immigration system, the way we grant green
cards to foreign nationals in this country, that would shift it
substantially away from extended family reunification or the
diversity lottery and toward high-skilled workers who already
have job offers that pay more than the local economy average,
that speak English well, that have advanced degrees and so on
and so forth. What kind of economic impact do you think we
would see both overall and kind of the abstract terms? What
would that mean for Americans with high school degrees or with
less than high school degrees?
Mr. Ponnuru. I think it would have a positive effect. It
would be good for the GDP numbers, and it would also make it
possible for people at the lower rungs of the economic ladder
to make upward progress.
Senator Cotton. OK. Thank you.
I will now recognize Senator Cortez Masto. I think this is
a theme to which I will return later, though.
Senator Cortez Masto. Thank you.
Mr. Miller, I would like to explore with you the
franchisor/franchisee arrangement. Can you talk a little bit
about the FDDs that are utilized? My understanding is they are
notoriously complicated and imbalanced legal documents. Talk to
me about how we can improve the FDDs and related contracts and
prevent some of the mistreatment that you just talked about
with respect to the franchise owners.
Mr. Miller. Well, in one part, the document is so huge, the
disclosure document. It is 500 pages to 1,000 pages. So you
have got to remember a lot of what the industry advertises to
for those seeking the American Dream of, you know, ``be your
own boss, no experience necessary'' proven business models. So
you are often reaching out to people who are not, you know,
having MBAs, and yet you are giving them this document that is
500 to 1,000 pages. So trying to find the nuggets of
information in there is very difficult.
You also have the financial performance part of that
document, which is not a required piece. A franchisor can just
say, ``We choose not to put anything in the financial
representation part.'' That can be left out.
Senator Cortez Masto. And explain that, if you would, a
little bit more. For somebody who wants to start a business,
they are going to have to take a loan out and start as a
franchisee. But wouldn't it be helpful for them to have from
the franchise owner, to receive in that FDD actual revenue,
store closing information that would help them as well as the
SBA that is going to be giving them the loan to see how
successful this franchise company could be?
Mr. Miller. Well, there are two parts to that. First of
all, obviously, if it is a franchise business model that is
supposed to be proven, there is history and data. It is not
like I am going up and opening Keith's Subs tomorrow and have
no history. So there is history there. And, again, this data is
not required.
The SBA requires you to come up with first-year
projections. Well, first-year projections have to start with
some kind of revenue projection. Every franchise company knows
what sales are happening in each of their outlets. That is how
they collect royalties. So why are we not requiring, when
people are accessing Government/taxpayer-guaranteed money this
first-year revenue number that everybody has? And what makes it
worse, the second step is if you notice in my examples almost
every one of these people were assigned to a hand-picked
specific loan broker or consultant that the franchisor gave
them. These people are giving revenue numbers outside of the
disclosure document and not violating any disclosure law by
doing that.
I have copies of spreadsheets that people have gotten from
these loan brokers. This is the information that is going on
the SBA loan, and this is how they are qualifying. These loan
brokers, as I said, have actually figured out how to reverse
engineer, if you are taking out X amount of a loan, how much
profit you have to show to get that loan, and then figure out
how much revenue they have to show to get that.
Senator Cortez Masto. And the franchisee does not see that
information because that is shared between the franchisor and
the broker?
Mr. Miller. Well, no, the broker will probably show it to
the franchisee, but a third step, I guess, in there is--and the
SBA actually presented this at a conference--that franchisors,
to help loans get approved, can talk to the bank, but before
they do so, sign a confidentiality agreement so they do not
violate any of the disclosure laws. I cannot think of anything
in the world where the borrower who is signing on the dotted
line does not know every bit of data that went into that
decision.
Senator Cortez Masto. And then the financial disclosure
documents or the franchise disclosure documents, they also
contain nondisparagement clauses. Explain how that impacts the
actual individual owner.
Mr. Miller. So people always talk about doing due diligence
in the industry before they buy a franchise. Well, one of those
parts of the due diligence is calling existing owners. Those
franchise agreements have that nondisparagement clause in it. I
can tell you, if I am in one of my stores and somebody calls me
and starts asking questions, and let us say I have a negative
experience, am I going to really say so? I do not know who is
on the other end of the line. And while that may not itself
cause the termination, it is not hard to be more difficult on a
franchisee.
The second part of the due diligence would be following up
with past franchise owners who have gotten out of the system,
and you have two problems there. Number one, the list in the
disclosure document shows their store location. Well, they are
ex-franchisees. They are not at that store location anymore, so
you do not have access to reach them, number one. And, number
two, if they have had a bad experience and been terminated,
there is usually nondisclosure clauses as part of that and,
therefore, they cannot comment or say anything.
Senator Cortez Masto. Thank you.
Senator Cotton. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. Thank you all for
being here.
This is kind of personal to me. About a month ago, I was
down in northern Florida, coming back from Sea Island, and when
I go down to Jacksonville--that is where I grew up. I went to
the trailer park I grew up in. The reason I go there is to try
and find some kid that is like me: 19-years old, living in a
trailer park, not going to high school, trying to figure out a
way to get out of that circumstance; six brothers--five
brothers and sisters, three of which never graduated high
school; two got their GEDs; two of us went on to get a college
degree. I did after attending two technical schools and three
other schools and getting my degree when I was 36-years old.
I did that in an environment in the 1980s, beginning in the
1980s, because we actually had optimism, and we took it on
ourselves to get the degrees, get the additional education, and
then move up. So I go to that trailer park trying to find a 17-
year-old or 18-year-old to say, ``I did it. You can, too.'' So
what I am really interested in are the policies that are going
to make sure that those teenagers coming up today have the same
opportunities that we do.
And I will as a footnote, for my five brothers and sisters,
the two that went to get their GED, the one that never
graduated high school, they are all living happy, stable lives.
Mr. Cass, you mentioned in some of the research from, I
think it was, Pew that we get so obsessed with mobility, but it
sounds like to me at least in one of those reports there was
more of a focus on stability. Can you tell me a little bit more
about that?
Mr. Cass. Yeah, thank you for that question and for that
background, which I think is actually really illustrative of
the theme that I want to emphasize. When most Americans--and,
of course, we cannot speak of all Americans, but, generally
speaking, when Americans think about their own goals and dreams
for themselves, their children, it is those things. It is to
have a stable life, to be able to support themselves, to have a
good family, and for some people, particularly who have strong
academic aptitude, that college education makes tremendous
sense as part of that.
The problem is there are a lot of people for whom college
is unlikely to be the best pathway to that, and when by default
we say for everybody, including the children who might be
growing up in a trailer park, even in a very wealthy community,
there are plenty of kids who are not going to be very
successful in college. We know that from the data.
Senator Tillis. I actually want to tap into something else,
because even upward mobility with respect to education--I think
of that slide that talked about a business in South Dakota,
Senator Cramer's example, is a good one, where you make more
money with a CDL than you make with an MBA. That may not be
true over the course of time, but it is true right now given
the economic dynamics in South Dakota.
I guess I am trying to figure out how to--one of the things
we need to do, number one, does anybody on the panel think that
bigger Government and smaller corporations are the solution to
this problem? Ms. Lee?
Ms. Lee. Well, I think there is certainly a role for a
strong Government that is focused on fairness and equality. Not
so much smaller corporations, but I think when we do not
address concentration of market power, we give too much power,
inordinate power to corporations, and sometimes they use that
in their own interests and against that of working people.
Senator Tillis. I for one believe that we came out--
fortunately, I was not 18 in 1968. I was 18 in 1978. And it is
actually when our country took a very different turn in terms
of the relationship of Government to the private sector, so I
think we need to be very careful to think a big-gov solution on
tracking people and education or controlling the size of
corporations or getting them to a point where they need to be
broken up I think are absolutely at odds with what we are
trying to accomplish with this hearing and for opportunities
for people who have my same circumstances, and as Mr. Cass
rightly pointed out, even people in high-net-worth households.
So I would just say that I do believe that we need to find
more opportunities, that Government needs to play a role. But
what I absolutely reject is--I will give you this last story.
It is somebody I spoke with yesterday, someone who immigrated
from India in the 1970s because he concluded he could not be a
doctor in that country because he was not of the right caste
and he did not have the right connections and it is a big
government in India. So he decided to come to the United States
where he could study medicine and become a doctor, and he did.
That is another realization of an American Dream.
So I think as we start looking and crafting solutions for
how we actually continue to have that opportunity for
stability, opportunity for mobility, count me in on anything
that gets Government out of the way but inspires people to
realize the same dream I did.
Thank you, Mr. Cotton, Senator Cotton, Chairman Cotton.
Senator Cotton. Senator Smith.
Senator Smith. Thank you, Chair Cotton, and thank you
Ranking Member Cortez Masto. And thanks to all of you for being
here.
Ms. Lee, you say in your testimony that the most important
path to the middle class is a healthy labor market that
provides employment opportunities with good pay and benefits
equally available to all. Could you talk a little bit about how
we ought to think about the trade negotiations that we are
currently looking hard at, especially USMCA, and how decisions
around USMCA can contribute or not to that healthy labor market
that creates opportunities for everyone?
Ms. Lee. Thank you so much, Senator Smith, for the
question. The healthy labor market has so many components to
it. One is the Federal Reserve, but the other is how the United
States engages in the global economy and what are the set of
rules that we put in place that are balancing the interests of
working people, the environment, consumers, and businesses.
Certainly, the USMCA negotiations, the renegotiation of NAFTA,
has addressed some of those issues around strengthening the
worker rights provisions in NAFTA and strengthening the rule of
origin. And it has not addressed other issues around the price
of pharmaceutical products and some of the environmental
protections.
But it is part of this ongoing conversation that we are
having about how do we engage in the global economy. What we
have not done in the past is put American workers and
manufacturing and communities at the center of our trade
policy. We have been too focused on corporate profits and
outsourcing opportunities and not enough on a healthy domestic
manufacturing sector and all the kinds of supports that
manufacturing needs, in terms of tax treatment, training
opportunities, and infrastructure. We have had failures
domestically as well as in trade policy. If the United States
wants to be a global leader in trade in 2019 and 2020 and
beyond, we cannot do that by cheapskating infrastructure,
skills, and educational opportunities. We need to have basic
rules in place that are encouraging exports and domestic
production and not outsourcing.
Senator Smith. Thank you very much. So, really, you are
saying that in our overall goal of having a healthy labor
market in the United States, which is going to create the kind
of mobility and also shared opportunity, that we can accomplish
that with good, strong trade deals but that put American
workers at the--you know, and that strong labor market not as
an afterthought but as a forethought in the way that we
negotiate these deals.
Ms. Lee. Exactly. I think thoughtful trade policies that
put workers, American manufacturing, and domestic producers at
the center are an essential, but not the only, part of a
healthy labor market.
Senator Smith. Thank you.
Now, this is such an interesting topic. I want to go to
another issue. You all have recently done some looking at what
is going on with teachers and teacher shortages. This is
something--just the other day I heard from Minnesota's
superintendents who are describing at this time of the year
they are looking to fill jobs in teaching professions, and this
is the case across the board, rural areas, small towns, and the
big cities. They are barely getting a one-to-one application
pool for these open positions, and so it is a significant issue
across all areas. And so I am very concerned about this.
Could you talk a little bit in the short time that I have
about what you see contributing to this and what we ought to be
doing to think about this as we talk about how important
education is as a component of mobility and opportunity?
Ms. Lee. Yes, thank you so much. What the Economic Policy
Institute research has shown is that there is a real wage gap
between teachers and people with comparable education
experience in the private sector, around 17 percent on a
national basis. It is much higher in certain States. Over time,
States have been undercutting teacher pay, and then they are
concerned when there is a teacher shortage, and they cannot
find the teachers they need. These are people that we are
entrusting with our children's education. I think we have all
agreed that this is an essential part of economic mobility and
opportunity. If we want to attract the very best people into
the teaching profession, we need to make sure we are paying
them at least as much as we pay people with comparable
educational backgrounds in other sectors. This will take a
national commitment to addressing the shortfall in teacher pay,
and that will go a long way.
Also, we need to give teachers the support they need at
school in other areas, too. We need to invest in a safe and
healthy school environment with adequate support staff around
social services and so on----
Senator Smith. Mental health.
Ms. Lee. Mental health, absolutely, in schools. Thank you.
Senator Smith. Thank you very much.
Thank you, Mr. Chair.
Senator Cotton. Senator Sasse.
Senator Sasse. Thank you, Mr. Chairman and Ranking Member,
for holding this hearing. I think this is one of the most
important topics that we do not consider nearly enough around
here. And just to underscore one of the really important things
that has been said already, Dr. Levin, your point about median
household experience at a consumption level with inflation and,
in particular, health care, higher education, and housing, and
the point you made about restricted supply and subsidized
demand inevitably producing inflation, which is unsustainable
and unjustifiable in those sectors, and all sort of money
equality where the consumer is not actually empowered in that
decisionmaking equation. So I think that alone makes this
hearing worth having, Mr. Chairman.
I would love to hear a few of you debate the future of the
median worker experience over the next decade, if you would. In
my neighboring State of Wyoming--we do not have exactly
vacation destinations that have entire communities that look
like Jackson Hole. But in Wyoming, there is now a shorthand
that a lot of people live in the broader county around Jackson
Hole, in Jackson proper, where they say that almost everybody
who lives in Jackson or who visits Jackson is either a three-
house or a three-income person. You have got the people who
live in Jackson as one of their two or three or four housing
destinations in life, or you have people in the uberization
economy, to put it broadly, that are cobbling together wages
from a whole bunch of different jobs. Absent big debates right
here about policy changes--and those are important debates that
flow from this conversation, but I would love to hear you all
speculate on what do you think the median worker experience is,
duration at a job, combination of different income sources, 10
years from today. Mr. Cass, can we start with you?
Mr. Cass. The median worker experience is certainly a
single full-time job.
Senator Sasse. In 2030?
Mr. Cass. Yes. I mean, it is--the share that is working
multiple jobs is so low now that to reach a majority by 2030
would be extraordinary. And the same goes with respect to the
gig economy where people who are genuinely using that as their
primary income as opposed to a supplement or a sort of
flexibility is extraordinarily low. So I do not see that sort
of shift reaching the median as quickly as 2030. I think all of
the trend lines absent policy change point to an ever greater
divide in our labor market between a higher end that consists
of primarily college-educated people earning higher incomes in
single typical jobs and everyone else who has not been given
the opportunity to develop the skills to work in that kind of
job and that is more likely to find less stable, lower-paying
employment.
Senator Sasse. Dr. Levin, let us just go down the table.
Mr. Levin. Well, thanks for the question. I think it is a
very important question to raise, and it points to a pattern
that I would describe as a kind of bifurcated concentration
where we have in a lot of areas in American life, and not just
in terms of income but in a lot of the ways our cultures lives
now, too, we have concentration at the top and at the bottom,
and the median just matters less. It describes less than we
would imagine. There are fewer people near the median than
there might have been in the America of the middle of the 20th
century.
I do think that it is easy to overstate the transformation
and the direction of the gig economy, which at least for now is
not really happening in the economic data just yet. It is easy
to imagine that could happen, that could become transformative,
but I do agree that it is likely that in 20 years the median
worker is still a full-time employed worker. But, again,
because the median matters less, I think we have to think about
how to make opportunities available to people for whom the way
to be in the upper concentration as opposed to the lower now is
basically now a college degree. And there have to be more
options than that because a college degree is not and cannot be
the only way to move up in American society.
And I think the Federal Government has a lot of say over
what other options exist through the kind of power that it
exercises over the accreditation of higher education, informal
power through student loans and the rest of it, but enormous
power. And we have to make it a priority to open up more
options for people after high school and to think of the step
after high school as the first step into adult life rather than
thinking of college as just 13th grade and that is what you do
when you graduate. That is not what most people do when they
graduate. It does not need to be. And there are ways to give
people other opportunities, other ways of moving forward, that
right now, frankly, Federal policy is standing in the way of in
a lot of ways.
Senator Sasse. Mr. Ponnuru?
Mr. Ponnuru. So I agree with the things that have been said
so far. In terms of the percentage of American workers with
multiple jobs, the latest number is that it is about 5 percent.
It has moved in a very narrow range. It is actually a little
bit down from where it was 25 years ago. So I think that the
median worker is going to be somebody with one full-time job.
I think one interesting question which is policy dependent
is going to be: To what extent is that worker dependent on his
job for nonwage benefits? What percentage of his compensation
will be wages and what percentage will be benefits? I think
that the Government plays a big role in affecting that, and not
always a positive one.
Senator Sasse. Mr. Chairman, could I ask for one extra
minute so Ms. Lee can have a shot at this, too?
Senator Cotton. By all means.
Senator Sasse. Thank you.
Ms. Lee. Thank you, Senator Sasse, for the question. I
think it is an excellent question, and I would say it depends
on the path we take and that you take as a legislative body,
that if we continue on our current path, we could end up with
more bifurcation between the three-house or the three-job
people, and that kind of polarization in the labor market where
you have a small number of very, very wealthy people and a
large number of people who cannot afford sometimes to get to
work or child care or health care, and that is something which
I think should trouble us.
So the questions that we have, I think, in terms of policy
choices are whether as labor markets evolve, as technology
changes, whether we give employers more and more power to
undermine workers' bargaining power through forced arbitration,
noncompete, employee misclassification, or whether we make sure
that workers can really exercise their voice at work, their
rights that we have, symmetry of information and disclosure,
the kinds of issues that Mr. Miller raised.
So I think those are really important decision points that
you all have to make as to where we end up 10 years from now.
Senator Cotton. We will go to the second round of
questioning starting with Senator Cortez Masto.
Senator Cortez Masto. Thank you.
Let me follow up on that, Ms. Lee, because I think this is
an important topic. So I come from Nevada. It is a right-to-
work State, but we have strong organized labor. In fact, we
have in Nevada one of the smallest gender pay gaps in the
country. There is still a group, but it is smaller. And it is
partly because of our strong union presence.
I saw a study. According to the Pew Charitable Trust, women
in unions make 88 percent of what men earn compared with the 81
percent that women make outside unions.
So, in addition to shrinking that pay gap, I guess my
question to you is: How do unions improve the financial status
of low-wage and middle-class families and give that worker
power back? What are the benefits that we see? Because too
often I see our unions are just being attacked or denigrated,
and really what they are doing is fighting for those middle-
class and working families.
Ms. Lee. Thank you so much for the question, Senator Cortez
Masto. Unions do close the race and gender pay gap, and partly
it is because they make sure that workers are treated equally.
There is a certain amount of fairness at the workplace that is
statistically proven in union workplaces. And unions actually
help non-union workers as well as union workers. It is an
interesting fact. In States with higher union density, the
wages for non-union workers are also higher because employers
are operating in that competitive environment.
But the value of a union, to individual workers and
employers, and to the economy, is that it provides a voice and
a channel for workers, a democratic voice for workers, and it
provides countervailing power. So if we think about the
evolution of the U.S. economy over the last 20 or 30 years
where there is more and more wealth amassed in a small number
of individuals, and corporations are getting bigger and more
powerful, who stands up for working people? A union is the
countervailing power and the countervailing voice for working
people. And as unions have been attacked and denigrated and
weakened and eroded, we have actually seen the erosion of the
middle class at the same time. So you can superimpose the
decline of unions with the decline of the middle class in the
United States over the last couple of decades.
Congress does have an opportunity to rebuild that and also
to modernize our labor laws as we come into a new era. We do
not have the labor market that we had 75 years ago. Our labor
laws need to evolve to make sure that whatever kinds of
employment opportunities people have, that they can exercise
their voice at work. They can come together with their co-
workers to exercise that right. So I am happy to see that
Congress is beginning to take that up.
Senator Cortez Masto. Thank you.
Mr. Ponnuru, let me ask you, do you believe that immigrant
labor is displacing and/or lowering the wages for workers on
our cattle ranches and farms in this country?
Mr. Ponnuru. I think that there is some evidence, although
it is disputed, that particularly for people without high
school diplomas, immigration has had a negative effect on
wages. Whether that is the case in every sector of the economy
and every place, of course, is a different question. But I
think that, one, there is some evidence and, two, it stands to
reason that a larger supply will tend to reduce the price--in
this case, the price of labor.
Senator Cortez Masto. Yeah, and I would be curious to see
the data that you have, because I have not seen that data, and
I will tell you--and, Ms. Lee, I will have you answer this as
well. Come to Nevada. Talk to our farmers and cattle ranchers.
This is the first thing I hear, is that there are individuals
that--they open it up to Americans or citizens, whatever you
want to say, and they do not want to do these jobs. And so they
are having immigrant labor coming in to do the jobs, and they
are paying them very well.
And so that is what I see in Nevada. I do not see a
displacement. I do not see a lowering of wages for immigrants.
In fact, I see just the opposite, that the immigration in this
country has contributed to our economy, and it does not
displace workers.
Ms. Lee, I am curious to see what data or information you--
--
Ms. Lee. I can provide some citations, but I think over
time the empirical evidence about the impact of immigrants on
the U.S. workforce has changed, and we do not see the negative
impact that we used to see. One of the key things, I think, is
how we treat immigrant workers. Unscrupulous employers can take
advantage of immigrants without legal status to undermine wages
and to treat workers as disposable. They can call the
immigration services if those workers try to organize a union
or ask for a raise or ask for a bathroom break or safety
goggles. That is more the problem than it is the number of
immigrants or even the education status of those immigrants.
Senator Cortez Masto. Thank you.
Senator Cotton. So unscrupulous employers who want to
exploit immigrant labor is a real problem. That is one reason
why I support mandatory and permanent employment verification
systems so all employment work sites require an accurate and
timely check of one's immigration status.
I would also add that I hear some of the same complaints
from Arkansas employers, that there are not enough workers.
There are still 50,000 Arkansans who are not working. Of the
working-age population, I think, in this country, it is more
like 5 million. Most of the time when employers say Americans
will not do this job, they put a period at the end of that
sentence when it deserves a comma followed by a clause saying
``at the wage I want to pay them.'' And one thing we have seen
over the last 2 years is that as wages go up for working-class
Americans, more people are coming off the sidelines.
I want to turn, though, away from immigration. We discussed
that in the first round, which is one way you can hurt blue-
collar jobs by importing workers to take them. A second way is
through bad trade agreements by exporting their jobs to other
countries. I want to focus here in particular on China. I think
one of the worst decisions in Washington in the last 20 years--
and both parties are guilty of it--was first to grant China
most-favored-nation status after that had been rebranded
permanent normal trade relations, and then to admit them into
the WTO. There were many predictions by politicians on both
sides about China becoming a more liberal and democratic
society and respecting its people's rights and paying its
workers more and becoming a more normal, civilized nation.
There is no set of predictions that has failed more terribly, I
would submit, in the last 20 years than the prediction about
what would happen with China.
If these jobs were not to be done in America, at least
maybe they could have been done in a country like India or
Vietnam that is not explicitly committed to displacing America
as the world's super power. This has no doubt had terribly
negative effects on the manufacturing base and blue-collar
workers in this country.
Mr. Cass, I want to talk to you about that so-called China
shock, as some people call it, and what we can do to reverse it
and also reinvigorate the industrial base here in America and
blue-collar jobs in the manufacturing sector.
Mr. Cass. Yes, thank you, and I think it is important to
recognize that the trade and immigration discussions are really
two sides of the same coin. You know, I agree entirely with Ms.
Lee that we want to have a healthy labor market, we want
workers to have power in that market, and so incredibly
important is the question of who gets to be a worker in that
market. Who do employers have access to to get the work done?
And, historically, the answer has been the people in America.
And through both our immigration and then our trade policies,
specifically with Chinese, we have changed that answer to
whoever in the world you can find to do it most cheaply. And in
that sense, immigration and trade have very parallel effects,
both of which to the detriment of American workers. And what we
have seen with China in particular is a very enthusiastic
choice of employers to have things made there. And what we have
seen with the China shock in particular--and that happened with
unprecedented speed--is just the shuttering of factories in the
United States and the shifting of that production.
And I think it is important to emphasize that while
politicians were entirely wrong about PNTR, this is essentially
what economists said would happen. Standard economics of free
trade says, well, yes, all of the manufacturing that can be
done more cheaply with less skilled, oppressed workers in
China, firms will move it there. The problem is that economists
did not attend to the question of what would happen to the
workers left behind. They either assumed that they would simply
retrain for new jobs quickly or that ultimately, in fact, it
does not matter what happens to workers as long as stuff gets
cheaper for everybody.
And so those are the effects that we have seen, and I
think, again, from both the trade and immigration lenses,
focusing on this idea that constraining who employers and firms
can use as their labor pool is critical to strengthening the
health of the labor market and, therefore, the opportunities
for American workers.
Senator Cotton. Dr. Levin, could you weigh in on the
question?
Mr. Levin. Yeah, I certainly agree with what Mr. Cass has
said, and I would add that there are other elements that enter
this question when we talk about China in particular, because
China also presents various kinds of national security issues
where it matters where certain things are made. It matters that
the United States has the ability to produce some things and
not just to consume those things. And so it does seem to me
that the question--even for those of us who believe in free
trade as a general matter, the question has got to take
specific forms in specific instances, and China presents a set
of challenges that should have been thought about rather
differently.
It also matters ultimately what it is that people in
America do. You know, I think an economist looking at what has
happened since China entered the WTO could say unemployment is
lower now than it was then. And it is. But there is a
difference between service work and manufacturing work, a
difference in terms of its effects on communities, its effect
on families, its effect on the lives of workers that just has
to be taken seriously or we cannot surrender ourselves to
abstract economic theory and imagine that that is all there is
to social policy and public policy. There is more to it.
Senator Cotton. Ms. Lee, it looked like you wanted to
respond.
Ms. Lee. I did. Thank you so much, Mr. Chairman. I would
just like to say in defense of economists that not all
economists drank the Kool-Aid in terms of China PNTR. I worked
for the AFL-CIO during the debate, and we were fighting very
hard not just about whether China would join the WTO but on
what terms. And it was our view that our negotiators were
putting too much emphasis on multinational corporate profits
and mobility and flexibility and not enough on American jobs.
And we did not assume that American workers would automatically
be reemployed. Most economists were saying it was going to be
fine, that we were going to have a smaller trade deficit with
China and so on, and that did not happen.
But I would say that the United States does need to
reorient its trade policy, particularly with respect to China,
which is our most problematic and most lopsided trading
relationship. We need to address the systematic and egregious
unfair trade practices. I would put two or three at the top of
the list for China. One is manipulation or misalignment of
currency. The other is illegal subsidies that we have not done
a good job addressing, even though we have tools under the WTO
to do so. And the third is workers' rights. When we engage in
this trade relationship with China and we do not address the
fact that workers in China do not have basic human rights at
the workplace, that they cannot form an independent democratic
union if they want to do so, we are putting American workers
and thereby American businesses that are still producing on
American soil in direct competition with workers who are not
free to negotiate for their fair share. And that has led to
this imbalance. It is not just the size of the trade deficit
with China. It is also the composition. Our bilateral trade
deficit with China is in advanced technology products, it is in
important areas where the Chinese government has been very
strategic about addressing 5-, 10-, 15-year plans. On the other
hand, the U.S. Government has not been strategic and does not
have a coherent, comprehensive plan to address that or even to
identify it as a problem.
So I would say it is an important issue in terms of a
healthy U.S. labor market going forward. So thank you for the
opportunity.
Senator Cotton. If China had allowed total unfettered
access to its market for American manufactured goods over the
last 30 years and totally excluded investment banks, hedge
funds, and consulting firms, do you think the consensus in
Washington might be different on the trade question?
Ms. Lee. Maybe.
Senator Cotton. Thank you.
Senator Smith.
Senator Smith. Thank you, Mr. Chair.
I am interested in this conversation about the interplay
between a healthy labor market and immigration and want to just
agree with Senator Cortez Masto that what I hear in Minnesota
is issues around the shortage of labor, especially in
agriculture and food processing and seasonal work. But, Chair
Cotton, you make a point, which is people say--you know, this
question of nobody is available to do the work at that wage. So
I would like to ask Ms. Lee, what can we do to increase wages?
Ms. Lee. Thank you. Well, there is a minimum wage bill that
will be taken up by the House tomorrow, so that is an
exciting----
Senator Smith. When is the last time we raised the minimum
wage?
Ms. Lee. It was 9 or 10 years ago, so this is the longest
stretch we have gone without raising the minimum wage. The
minimum wage now is 25 percent below where it was in real terms
in 1968. This is an enormous erosion in a wealthy society, a
society that is more productive, more technologically advanced
than it was in 1968. We ought to be able to pay workers enough
so that they can afford to feed their families and have a
decent place to live. We need to fix our broken labor laws so
that workers have a fair chance at coming together to be able
to bargain for their fair share of the wealth that they create.
Senator Smith. This is a question that I ask Minnesota
businesses all the time. If you have trouble recruiting people
to fill the jobs that you have, have you tried paying more?
Ms. Lee. Yes, as an economist, you have to say there is no
such thing as a labor shortage. There are only wages that are
too low.
Senator Smith. Right.
Ms. Lee. It should be very straightforward, that if you
want to attract more and better workers, do not sit there with
the same low wage and scratch your head as to why people are
not lining up to take those jobs. Maybe you need to just pay
more and not argue for more visas or other things.
Senator Smith. It would suggest that there is something
that is not working in the labor market, that there is an
imbalance of power in the labor market, which causes wages not
to be stagnant while there is so much wealth in the economy.
Ms. Lee. When we are at a place where real wages for the
bottom 70 percent of American workers have been stagnant for 20
or 30 years, there is clearly something broken there. Wages are
so low that it is actually dysfunctional. Maybe Senator Cramer
mentioned it earlier--that there is a low labor force
participation rate in the economy. Raising wages, empowering
workers to form unions, protecting labor standards, and making
sure that labor relations are fair would actually draw people
into the labor force. Wages might be so low and jobs so bad
that it is rational for people not to come to work if they
cannot pay for transportation and child care.
Senator Smith. Thank you. I have another couple minutes.
Would anybody else on the panel like to respond to this issue?
Mr. Miller?
Mr. Miller. I would like to, because I think those of us in
the quick service franchise world are kind of stuck in the
middle on this, and that is because, yes, we see a real
shortage of workers. And then you ask the question, well, why
don't we pay more? And we are in a margin squeeze right now.
Our whole industry is in a margin squeeze, yet you see many of
our franchise companies reporting record earnings per share
while the local franchise owner is working harder and longer
for less money than ever.
Senator Smith. So who is squeezing the margin, Mr. Miller?
Mr. Miller. Well, between national promotions many times--I
mean, I am in California, so obviously we are not the cheapest
labor market in the world. You know, consumers are--you know,
overbuilding of our industry, we have too many restaurants--I
mean, the pace of restaurants being built outpaces population
growth. Therefore, you know, simple economics. I am a sandwich
guy. I can figure these economics out. And the pie is getting
cut too tight. But, you know, the franchise company makes more
and more. If you build ten units, you know, instead of eight
units, they get it on top-line revenue; we are getting it on
bottom-line profit.
Senator Smith. Someone is taking the money.
Mr. Miller. Yes.
Senator Smith. Right. Thank you.
Mr. Miller. We are--like you say, pay more, but our
business model is not allowing us to pay more at this point.
Senator Smith. Thank you, Mr. Chair.
Senator Cotton. That buzzer you heard was votes being
called on the Senate floor, so I think we are going to have to
adjourn here. But I do want to thank--oh, Senator Cortez Masto
has follow-up.
Senator Cortez Masto. Thank you, because I do want to
follow up on that conversation because this is the reason why I
am introducing legislation later this month to ensure that
prospective franchise owners receive accurate revenue and store
closing information from the franchise corporation before they
receive a guaranteed loan from the Small Business
Administration. But let us elaborate on this, Mr. Miller,
because what I hear from our Nevada franchisees is that--I will
give you an example. Some franchise owners I have heard from
tell me they are forced to sell products that they and their
customers do not want, that they are charged fees for services
that are not valuable to them, and they stay open longer than
is profitable, and only buy products and services from approved
and overpriced vendors. And I am assuming that is because that
is what they are told to do or dictated to by the terms of the
contract with the franchisor. Is that correct?
Mr. Miller. That is correct.
Senator Cortez Masto. And that goes to why you just talked
about your margins----
Mr. Miller. Margins, and I will give an example because it
was blatantly obvious to everyone. Quizno's grew to about 5,000
units. It is now a little under 400 units. And the interesting
part is it was not that they were a consumer failure. The
business model failed. Quizno's took on additional debt, the
corporation, to try to expand. They also owned the distribution
channel. And what was happening was, as they started getting
cash-flow tight, they would increase the margins on the
distribution model. When they filed bankruptcy, they were
actually collecting almost double the amount of revenue off of
their distribution channel as they were off of royalties. They
were collecting 7 percent royalties; 21 percent, there is no
way they could make it in our industry. So there are ways--and
when we go to disclosure, one of the big problems with
disclosure is disclosure is only valid the day you get that
disclosure. So if you went to go buy a Quizno's and you would
see maybe, oh, they were--people talk about rebates or
kickbacks in our industry, and they have to be reported. But
let us say for the last 20 years a brand took 1 percent rebate
from the vendors and then used that for advertising. Full
transparency, I would not mind that. That is what is in the
disclosure document. You buy that franchise, and what happens
if next year they take 10 percent rebates? Because the contract
says they can take rebates. It does not cap it. And so here you
have this disclosure that for 20 years they have taken 1
percent. They raise it to 10 percent, that completely changes
your business model.
Senator Cortez Masto. Thank you, and thank you for--Ms.
Lee, did you have a comment?
Ms. Lee. Just a quick point--I wanted to reinforce what Mr.
Miller is saying. One of the things that we are seeing is a
risk shift from employers to workers or to franchisees. In Mr.
Miller's testimony, he talked about a lot of the ways in which
there is only an upside for the franchise companies. For the
franchisees, the little guys, there are so many risks and so
many unfair conditions imposed. These are the same kinds of
things we see in terms of the battle in California over Uber
drivers, where the company has all the upside and the workers
take on the risk. Workers take on the expenses of gas and
upkeep and repairs on their cars, but also the risk of not
enough business. The company cannot lose from that model. They
have all these folks that are just circulating around, driving,
and wasting their time. And so the shift from being an employer
to having a bunch of independent contractors who own their own
equipment and take on all the risk is one of those things that
has systematically undermined worker power in the economy.
Senator Cortez Masto. Thank you. And thank you to all the
panelists. This was a great conversation today. Thank you.
Senator Cotton. Thank you to the witnesses. We Senators
need to go vote, so this hearing is adjourned.
[Whereupon, at 11:05 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR TOM COTTON
Welcome to the Economic Policy Subcommittee hearing on this
important topic of: ``Economic Mobility: Is the American Dream in
Crisis?'' I'd like to thank the Senator Cortez Masto and the witnesses
for being here, and also our Banking Committee staff for their help
putting this together.
Now I'd like to introduce our terrific witnesses.
Mr. Oren Cass is a Senior Fellow at the Manhattan Institute and the
author of the 2018 book, The Once and Future Worker: A Vision for the
Renewal of Work in America. Mr. Cass was formerly the Domestic Policy
Director of Mitt Romney's Presidential campaign in 2012.
Dr. Yuval Levin is a Resident Scholar at the American Enterprise
Institute and the Founding Editor of National Affairs. Dr. Levin served
as a Member of the White House Domestic Policy staff under President
George W. Bush.
Mr. Ramesh Ponnuru is a Visiting Fellow at the American Enterprise
Institute, a Senior Editor for National Review, and a Columnist for
Bloomberg Opinion.
Ms. Thea Mei Lee is President of the Economic Policy Institute and
formerly the Chief International Economist for the AFL-CIO. She has
served on advisory boards for the State Department and the National
Bureau of Economic Research.
Mr. Keith Miller is the founder of Franchisee Advocacy Consulting.
A Subway franchisee himself since 1988, he served as Director on the
North American Association of Subway Franchisees. Thank you all for
coming and for your testimony. Your written testimony will be entered
into the record.
We're here to discuss economic mobility and the American Dream.
When economists discuss these things, they often think in terms of GDP
growth and consumer prices. To exaggerate just a little, they often
seem to believe that so long as the economy grows at 3 percent and
Americans can afford more cheap plastic stuff from China, that America
must doing great. But is that really true?
When I talk to Arkansans, I hear a different story. Most of them
don't dream of extravagant wealth, much less abstract ideas like
``economic growth'' and ``consumer surplus.'' They know a life of
getting and spending cannot hope to fulfill ones dreams.
Instead they dream of a career that pays an honest wage so they can
live in a decent neighborhood. They dream of getting married and
starting a family. And ultimately, they dream of passing on this
standard of living to their children--plus a little bit more. That's
the American Dream I hear, according to the Arkansans that I know.
The question for today is: Is our Nation helping Americans achieve
this American Dream, or are we failing them?
I have to say, I think in some important ways our Nation is failing
our fellow citizens. The labyrinth of subsidies, regulations, and
misguided priorities constructed by Washington does little to help the
large majority of Americans who don't graduate from college; the
``Silent Majority'' who work with their hands and on their feet.
Our Government doesn't offer these Americans much beyond
occasionally moralizing about their supposed shortcomings: ``Go to
college,'' ``abandon your hometown,'' or ``learn to code.''
What they really need are more viable career paths that don't
involve expensive educations. There are many good-paying, honorable
jobs for people without college degrees in this country. But, how do we
create more of them? How do we prepare workers so they're ready for
those jobs?
There's another urgent context for today's hearing as well: our
economic competition with China. For decades, Washington pursued a
policy of integration with China. The architects of this policy hoped
naively that enriching the Chinese Communist Party would make it more
pliable and less communist. Instead, it gave China the means to
challenge America around the world--all while decimating the American
heartland.
If we want to remain the world's strongest economy, we'll need to
marshal every citizen, every skill, every talent, at our disposal.
We'll need to recover the vitality, productive abilities, and indeed
patriotism that contributed to America's resounding triumphs in the
past century.
If we build a more productive economy, it'll serve not only our
strategic interests as a Nation, but the interests of the American
people, by helping them achieve the American Dream.
I look forward to your thoughts and to my colleagues' questions.
______
PREPARED STATEMENT OF SENATOR CATHERINE CORTEZ MASTO
Thank you Chairman Cotton and welcome to all our witnesses here
today.
I appreciate Chairman Cotton suggesting a hearing to explore
barriers to economic mobility in the United States.
The Senate Banking Committee has jurisdiction over many of the most
pressing issues facing Americans today--from housing, to lending, to
transportation.
Today, we discuss how Congress can improve economic outcomes for
children and families.
We want our children to grow up and become financially self-
reliant.
We want the children of renters to be able to own their own homes
if they wish.
We want children whose parents struggled to put food on the table
to be able to afford a full pantry and even a few meals out every
month.
We want children who survived homelessness to grow up with an
income adequate to not just pay the rent but save for their children's
college education and their own retirement.
We want workers retiring from one career to be able to open a small
store and have it thrive.
Yet, those dreams--the American Dream--are unattainable for too
many.
Parents who lack affordable bank accounts end up with financial
products that can lead to a debt trap. As they struggle with bank fees,
they may see their car repossessed, resulting in getting fired from
their job and getting evicted from their home.
The average college senior graduates with more than $30,000 in
debt, and total student debt nationwide has topped $1.5 trillion
dollars.
And some college graduates cannot find jobs that pay enough to
manage their crushing student loan debt. They delay starting a family,
buying a home, and saving for retirement for a decade or more.
An entrepreneur buys a franchise business but finds the business
never earns as much as she was promised. As she struggles to keep her
store in the black, she does it all on her own--she can't afford to
hire employees and pay them a living wage. That's wrong.
It is wrong that the ZIP Code where a child is born and grows up
affects their future income and financial success more than that
child's education, aptitude or work ethic.
It is wrong that a lack of affordable financial products prevents
families from building up savings to respond to a broken arm or a
broken car without a major financial crisis.
It is wrong that corporations use noncompete clauses, union busting
and arbitration clauses to keep wages low and corporate profits high.
It is wrong that high housing costs, lack of affordable child care
and inadequate transit restrain economic mobility for struggling
families and young adults.
It is wrong that entrepreneurs who purchased a franchise--many of
them immigrants, retirees and veterans--were misled by unfair
contracts, deceptive financial information, and nondisparagement
clauses.
We need solutions.
And we know many of them are already out there.
In their written testimonies, the witnesses have suggested
significant investment in education, health, and other public services.
They want to empower workers and franchise owners. They recommend
tackling monopolies and corporate concentrations that drive out
competition and result in lower wages for workers.
We have seen how Government can protect homeowners, small business
owners and entrepreneurs from predatory and abusive practices and
financial products.
I want to especially thank Mr. Keith Miller who took the red eye
from California to be here today.
Mr. Miller has helped Nevada franchise owners who have seen their
incomes plummet when they bought a franchise. These entrepreneurs were
upper-middle class but now face foreclosure and bankruptcy in a few
months or years only because they bought a franchise.
Later this month, I plan to introduce legislation to ensure
prospective franchise owners receive accurate revenue and default
information from the franchise corporation before the franchisee
receives a guaranteed loan from the Small Business Administration. I
encourage others to join my bill.
In closing, I look forward to hearing from today's witnesses.
It is my hope that today's hearing will jumpstart a discussion on
the Senate Committee of Banking, Housing and Urban Affairs about how we
can improve economic mobility for current and future generations.
I hope to work with my colleagues in the Senate on solutions.
Because every family in America hopes for the same thing: that
their children's lives will be more stable, safer, and more prosperous
than their own.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF YUVAL LEVIN, Ph.D.
Director of Social, Cultural, and Constitutional Studies
The American Enterprise Institute and National Affairs
July 17, 2019
Chairman Cotton, Ranking Member Cortez Masto, and Members of the
Committee: Thank you for the opportunity to testify today.
It is very encouraging to see this Subcommittee take up the crucial
question of economic mobility, and seek to understand it from a variety
of angles and perspectives.
We Americans have always prided ourselves on the extraordinary
degree of mobility this country has made possible for its citizens--the
idea that, with hard work and a little luck, an immigrant or a child of
poor parents can start out with nothing and end up successful and rich.
We still believe this about ourselves. International comparisons of
public opinion find that Americans express far greater confidence than
citizens of other developed nations that hard work is rewarded and that
everyone has a real chance to rise out of poverty. But by many
measures, the United States actually does not stand out among advanced
economies in terms of economic mobility, and has not for decades.
At some level, we surely sense this even if we do not know all the
facts and figures. There is a divergence between what many Americans
want to believe about our country and its promise and what we know to
be true about the circumstances and pressures too many Americans now
face. Americans at the bottom of the income scale do not have enough
opportunities to move up, many in the middle feel stuck, younger
workers are having trouble getting started, and Americans in general
seem less inclined to follow after opportunities. These various
challenges are all distinct, but they all describe forms of immobility.
In what follows I will offer a brief overview of the state of
mobility in our economy and a few thoughts about potential policy
responses.
______
Economic mobility is ultimately about improved living standards
over time. It is therefore a measure of material progress, and of
whether our economy is allowing people to better their conditions,
which must after all be its primary purpose.
Mobility is notoriously difficult to measure, in no small part
because even agreeing on its basic meaning is a challenge. But to keep
things relatively simple for our purposes, we can begin to understand
the state of economic mobility in America by breaking it down into two
key components: relative mobility and absolute mobility.
Relative mobility refers to a person's economic status in relation
to the Nation as a whole. Economists often describe it in terms of
moving up the income quintiles, and the rest of us tend to think of it
in the form of rags-to-riches stories. Can someone born in poverty
today rise into the middle class and beyond it? Does the child of a
middle class family stand a reasonable chance of ending up wealthy? Or
are people destined to end up roughly where they start? The available
evidence suggests that in terms of relative mobility we are now lagging
behind Canada and much of northern Europe. Economist Markus Jantti and
his team have found that over the past generation about 25 percent of
Danish men who were born in the bottom 20 percent remained in that
lowest quintile as adults, compared with 42 percent of American men.
Some economists have questioned the methodology behind this finding and
suggest mobility looks rather similar across the developed world. But
no one argues that Americans are at this point uniquely mobile. At best
we are on par with Europeans and Canadians.
And this is not because relative mobility has declined in America
in the 21st century. Although you would not know it from some of our
political debates, the data suggest that our national level of relative
mobility has been remarkably stable--and remarkably low--for at least
the last five decades. A child born to parents living in poverty at any
point since the mid-1960s has had only about a 30 percent chance of
ever making it into the middle class, and about a 5 percent chance of
ending up in the highest fifth of income earners. Rags to riches
stories, even rags to comfort stories, are awfully rare. And this has
not changed much in living memory.
It is far too difficult to rise out of poverty in America, and it
was so even throughout what we have thought of as America's postwar
economic golden age. This problem has not gotten markedly worse (or
better) as inequality has grown, and it has not improved or worsened
with rising or falling growth, or tax rates, or spending levels.
Neither party's economic prescriptions seem likely to change it much.
It will require some new thinking.
The story of absolute mobility, meanwhile, is more complex and
suggests some significant problems of relatively recent vintage.
Absolute mobility involves changes in people's living standards not
relative to society as a whole but relative to their own past or to the
prior generation. Are you better off than you were 10 years ago? Are
you wealthier than your parents were at your age?
By this measure, America looks rather good over the long run but
rather bad over a shorter run and the difference is one major reason
why mobility should be a priority for us. Data from the Pew Economic
Mobility Project show that the vast majority of Americans, about 84
percent, now have higher incomes than their parents did at their ages--
adjusted for both inflation and family size. Such intergenerational
absolute mobility is actually highest among the poor: fully 93 percent
of Americans in the lowest fifth of earners have higher incomes and
greater purchasing power than their parents did at their ages, compared
to 70 percent of Americans in the top fifth. Overall American living
standards have risen over time, and this has lifted essentially
everyone's living standards some, even if it has not done much to
change people's relative positions in society.
But the significance of this good news is limited in two ways that
will help us to clarify the mobility challenge as policymakers must now
confront it. First, strong absolute mobility amid weak relative
mobility means that people are more comfortable where they are in life,
but that they are not moving ahead in terms of skills or status. The
mother working long days behind a restaurant counter in the hope that
her children have better opportunities than she did would not be
satisfied to hear that her children will be a little better paid for
working behind that same counter all their lives.
Second, and perhaps most important, absolute mobility has declined
significantly in the last two decades, so that while most Americans are
doing better than their parents did at the same age they are often not
doing better than similarly situated families (and maybe even their own
families) were doing 20 years ago. This is the most pressing way in
which many Americans are feeling the sting of immobility these days--as
stagnant wages create the sense that they're running in place.
The simplest way to illustrate this trend is to consider the median
family. Adjusted for inflation and expressed in 2017 dollars, the
median American household's income was $60,062 in 1999 and $61,372 in
2017, according to most recent available data from the Census Bureau.
In other words, the purchasing power of the median family has barely
budged over the course of the last two decades.
The average household is a little smaller than it was two decades
ago, but even adjusted for family size the median income today is
essentially where it was in the late 90s. This is in part the effect of
the severe 2008-09 recession, which reduced household incomes sharply
for a time, but it is largely a result of the fact that incomes have
simply not been growing quickly, even in good times, especially since
the beginning of this century. The last 2 years have seen meaningful
improvements, and these should not be underestimated, but neither
should they be overstated. Mobility remains a serious concern, and
would become all the more of a problem if the economy slows.
That last point suggests, of course, that robust economic growth is
an essential precondition for robust economic mobility. This is
doubtlessly true. But although growth is necessary for mobility, it is
not sufficient. A mobility agenda must begin with growth, but cannot
end with it--and growth should not be pursued at the expense of other
necessary preconditions for mobility.
What other obstacles to mobility do policymakers need to be aware
of, then? I would like to focus here on two sets of obstacles in
particular. I emphasize them not because they are the only barriers to
much-improved economic mobility but because I think they are barriers
we too often tend to overlook, and so would benefit from greater
attention and--up to a point--might also benefit from some policy
responses.
______
The first of these is the rising cost of living for working
families. It may seem strange to raise alarms on this front, since
inflation has been remarkably low for more than three decades in
America. But while this is true of general inflation, household costs
have actually risen dramatically in three areas of particular
importance to economic mobility. We might call them ``the three H's'':
health care, housing, and higher education.
These three areas are of enormous importance to American families
in the working-class and middle-class who are striving to improve their
living standards. Health care and housing are often essentially
unavoidable expenses, while higher education is among the most
effective means of securing a middle-class lifestyle for the rising
generation. And yet in all three areas we have seen prices run far
ahead of value for decades.
In all three areas, too, public policy has played a major role in
that increase in costs by simultaneously restricting supply and
subsidizing demand. Subsidizing demand while restricting supply has
predictable consequences: It increases prices, and therefore costs.
In health care, the supply restrictions have especially (though by
no means exclusively) had to do with the regulation of health insurance
in ways that have restricted options and competition and so have closed
off potential avenues for lowering costs. The subsidization of demand,
meanwhile, has consisted of the exceedingly generous tax subsidy for
employer-provided insurance, the enormous growth of Medicaid, and new
forms of subsidy in the individual market through Obamacare as well as
new subsidies for prescription drugs.
In housing, we have seen local, State, and Federal policies
interact in ways that in many places have restricted supply through
tighter zoning while subsidizing demand through tax benefits, pseudo-
governmental home-loan subsidies, and various kinds of first-time-buyer
benefits. Obviously there was a huge crash in this market a decade ago,
but the basic pattern didn't change in the wake of that crash.
In higher education, the restriction of supply happens especially
through the overly narrow accreditation process (which is a function of
public policy combined with politically enabled incumbent control of
the process) and subsidization of demand has happened especially
through student loans and assorted tax and other benefits.
Each of these policies is plausibly defensible in itself. And even
the combination of restricting supply and subsidizing demand can be
defended: If the government is going to provide a subsidy for
something, it needs to have some definition of that something so that
the money is used for its intended purpose, and that definition is
inherently going to constrict and regulate the subsidized good. But the
sum of all this has been a lot of inflation in three areas that are
crucial to the lives of vast swaths of our society.
A cost-of-living agenda that tried to counteract this tendency
should have a lot of appeal if our politics ever gets back to thinking
in terms of solving problems people face rather than just revving up
outrage. There are steps to be taken on both the supply and the demand
sides of each of these sectors of the economy, though political
pressures will surely make addressing the supply restrictions more
attractive than reducing subsidies for demand. That means opening up
more options in health care and higher education through Federal policy
changes (like broadening the definition of qualified health insurance
and allowing greater experimentation in the accreditation of higher
education and the uses of student aid). In housing, the politics of any
changes on both the supply and demand sides would be exceedingly
painful, particularly because the subsidization of demand generally
happens at the Federal level while the restriction of supply is largely
local. But that doesn't make such reforms any less important.
Rising living costs--paying more and more without getting more and
more--naturally obstruct economic mobility. And they are among the
obstacles to mobility for which public policy is most at fault, and
could do the most to overcome.
______
If cost-of-living pressures are among the barriers to mobility that
might prove most amenable to public-policy responses, the second set of
barriers I'd like to emphasize may well be the least amenable: Simply
put, among the most significant obstacles to economic mobility in
contemporary America is the breakdown of the capacity of many Americans
to amass social capital.
Social capital describes the resources at our disposal to enable
effective cooperation--the skills, habits, networks, arrangements,
grooves, and channels that make it possible for our society to hold
together and for its members to benefit from it. It is absolutely vital
to economic mobility, and to the health of our society more broadly.
Such capital is amassed within institutions, as the result of the kind
of connections we make and formation we receive in the family, the
community, the church, the school, the union, the workplace, the market
economy, politics, and other arenas of mutual action.
The concept of social capital offers a particularly helpful lens
through which to better understand obstacles to mobility and
opportunity in America because it offers us the promise of overcoming
the familiar partisan division between focusing on money and focusing
on culture.
The fact is that our country has become deeply divided and
fragmented in ways that create some particularly pernicious and
complicated obstacles for Americans trying to rise out of poverty. And
our political system has sought to pin the blame for this phenomenon
somewhere without fully acknowledging its character. The left tends to
see economic inequality as the root of all other forms of social
fracturing, and argues therefore that a policy of more aggressive
redistribution would not only help ease income inequality but also
mitigate the political power of the wealthy, strengthen poor
communities and families, and create more opportunities for all. An
emphasis on cultural problems like family breakdown, many progressives
now suggest, is a distraction from these real causes--if not an attempt
to blame the victims and opportunistically advance an oppressive
cultural agenda that can only further burden the most disadvantaged.
The right sees cultural disintegration--marked especially by the
breakdown of family and community--as the source of the persistence of
entrenched poverty in America. Conservatives therefore argue that
social policy must focus on family and community, and worry that the
Left's misguided efforts to address entrenched poverty through greater
economic redistribution can only make things worse by hampering the
economy, distorting the personal choices of the disadvantaged with
perverse incentives, and exacerbating dependency.
In an effort to avoid the rather obvious conclusion that cultural
and economic factors are inseparable, progressives and conservatives
thus tend to exaggerate the implications of their favored explanations.
They predict that either growing inequality or increasing family and
cultural breakdown, respectively, will turn out to be unsustainable,
and so will lead to a cataclysm, or a rip in the social fabric that
will force a great reckoning.
But things are likely both better and worse than that: Both growing
inequality and increasing social breakdown may well be sustainable, but
may not be compatible with human flourishing. We are not headed for a
cataclysm, but we are stuck in a rut, and getting out of it will
require understanding it. No moment of change will be forced upon us,
so if we are to revive the fortunes of the least among us, we will need
to act.
It is precisely mobility that is imperiled when people are denied
the means to amass greater social capital. Without robust social
capital, the material benefits provided by the welfare state could
never be enough to enable disadvantaged Americans to rise. Without
robust social capital, no amount of moralizing about discipline and
responsibility could make a difference in the lives of broken families
and communities. Social capital is what makes it possible for help to
help.
And the liberalization of our society--both moral and economic--has
undermined our capacity to sustain and replenish social capital. That
liberalization has advanced under a banner of individualism, seeking to
liberate each of us from constricting moral constraints and from
oppressive regulation but in the process often also unmooring us from
relationships of mutual obligation. And as it has advanced, it has also
robbed us of mutual trust, which is an essential ingredient in the
development and retention of social capital.
Social capital is built up slowly and exhausted slowly. It is built
by long, arduous work constructing relationships, establishing
institutions, cultivating norms, shaping expectations, and developing
mutual trust. Decline is often slow as well. We can burn this capital
for a long time while taking it for granted. But we have lived through
a very long decline in social capital in recent decades, and its
effects are being visited upon us now--and especially upon the most
vulnerable among us.
The steps we incline instinctively to take in response can make the
problem worse. The expansion of welfare programs that substitute for
thick social networks with a check and the acceleration of efforts to
liberate the economy from socially imposed restraints for the sake of
greater growth that might help everyone both tend to exacerbate the
pattern by which the mediating layers of our national life are emptied
out. Those layers, between the individual and the national state, are
where social capital is built up and put to use. And a replenishment of
social capital, a recovery of the capacity to make use of opportunities
and to endure setbacks, will require a revitalization of those middle
spaces.
This is a cause toward which our national politics is not now
naturally disposed. Instead, we incline to a politics that answers the
problems created by an excessive individualism by further empowering
the national government. It is important to see that this inclination
is likely a symptom of the problem we are in need of solving.
Radical individualism involves the corrosion of people's sense of
themselves as defined by a variety of strong affiliations and unchosen
bonds and its replacement by a sense that all connections are matters
of individual choice and preference. It breaks up clusters of people
into isolated units. Politically, such individualism tends to weaken
mediating power centers that stand between the individual and the
Nation as a whole--from families to local communities (including local
governments), schools, religious institutions, fraternal bodies, civil-
society organizations, labor groups, and the small- and medium-sized
businesses that comprise much of the private economy. In their place,
it strengthens individuals on the one hand and a central government on
the other, since such a government is most able to treat individuals
equally by treating them all impersonally. For this reason, a hyper-
individualist culture is likely to be governed by a hypercentralized
government, and each is likely to exacerbate the worst inclinations of
the other.
Some of the most distinctive problems of our era--the detachment
from family, work, faith, and community, and the persistent patterns of
bifurcated concentration throughout the American experience--are in
important respects functions of a view of society as consisting only of
individuals and a state, and are particularly difficult for a nation
that often understands itself that way to address.
The problems we confront therefore call for solutions that somehow
reinvigorate the middle layers of society, and resuscitate our
mediating institutions. Those institutions may be the ones most capable
of addressing the characteristic problems of our diffusing society--and
the isolation and alienation that are such prominent symptoms of so
many of those problems--without requiring the kind of wholesale
national reconsolidation and re-centralization that simply aren't
plausible now. They might better allow us to pursue diversity without
atomism, profusion without isolation, and a great variety of ways of
life without estrangement from the sources of human flourishing.
This would seem to make subsidiarity--the entrusting of power and
authority to the lowest and least centralized institutions capable of
using them well--a key to addressing some of the most stubborn
obstacles to mobility in American life. Beyond the familiar policy
applications of this kind of approach--in school choice, say, or in
some conservative approaches to health care reform--there are ways that
forms of decentralization could be of some use in taking on some of the
distinct problems of this particular time. It could help, at least at
the margins but maybe also near the core, to combat wage stagnation and
the loss of working class jobs for instance by enabling experimentation
not only with welfare and wage supports but with different forms of
labor law and worker organizing and by encouraging competition in
higher education and skills training that can create new opportunities.
It could help us meet the challenge of better enabling economic
mobility, as well, by allowing for experimentation with various
approaches to assisting Americans in need. Experimentation, after all,
is what you do when you do not know the answer. And it is hard to deny
that when it comes to our most profound socioeconomic problems in
America, we do not have a reliable formula for effective help. The
challenge facing welfare reformers is daunting: They have to find ways
to help people who lack not only money but often also stable families,
functional communities, and decent schools. They have to encourage work
and responsibility while offering aid, and they often have to help
people break bad habits or confront addiction or abuse while also
respecting their dignity and independence. This can't be done by a
government check. Welfare often works best when it is accompanied by
advice, by obligations, and by evident compassion at a personal level.
Using public resources to let different institutions--from State social
agencies to local civic groups to churches and nonprofits--try
different ways of meeting this challenge in different circumstances is
what we need to do when solutions are not clear, and when it isn't
clear that any one solution will suffice in different circumstances.
That kind of policy logic, the logic of subsidiarity, would serve us
well in many arenas.
______
Needless to say, neither an emphasis on restraining increases in
the cost of living nor an emphasis on empowering mediating institutions
offers a simple recipe for greater economic mobility in America. But
these are both areas that require greater attention. Seeing them more
clearly would help us better understand the broader challenge of
mobility. And it is right that this broader challenge should be front
and center in our economic thinking.
There is more to political life than economics. But prosperity
matters, and mobility is the right way to think about what prosperity
means. Americans have often understood our national Government in
particular to be rightly devoted to that cause.
In a message to Congress on the Fourth of July, 1861, amid the
painful early setbacks of the Civil War, Abraham Lincoln sought to
articulate what made the struggle worthwhile. When it came to
describing what we valued in our Government, Lincoln said this:
On the side of the Union it is a struggle for maintaining in
the world that form and substance of Government whose leading
object is to elevate the condition of men--to lift artificial
weights from all shoulders, to clear the paths of laudable
pursuit for all, to afford all an unfettered start and a fair
chance, in the race of life. Yielding to partial and temporary
departures from necessity, this is the leading object of the
Government for whose existence we contend.
America has often been gloriously successful in advancing that
cause, but it has been notably less so in recent decades. We have
ignored that fact for too long. I commend this subcommittee for turning
its attention to this challenge, and I thank you for the opportunity to
testify.
______
PREPARED STATEMENT OF RAMESH PONNURU
Visiting Fellow, The American Enterprise Institute
July 17, 2019
Chairman Cotton, Ranking Member Cortez Masto, and distinguished
Members of the Economic Policy Subcommittee of the Senate Committee on
Banking, thank you for convening this hearing on ``Economic Mobility:
Is the American Dream in Crisis?'' I am a visiting fellow at the
American Enterprise Institute, a fellow at the National Review
Institute, a senior editor at National Review, and a columnist for
Bloomberg Opinion. This testimony reflects my own views and not those
of any organization with which I am affiliated. It is an honor to be
testifying before you.
Our topic today, economic mobility, has been central to America's
self-conception and so it is fitting that legislators should examine
its condition today and what can be done to improve it. While we
rightly prize relative mobility--the chance to move over the course of
a lifetime from the poorest to the richest segment of society, which
implies the chance to move in the opposite direction--our main concern
is and should be absolute mobility. We want and should want the bulk of
our population to be able to perform rewarding work, to have the
wherewithal to raise a family, and to enjoy rising living standards
over time.
There is a widespread sense that this kind of economic progress is
a thing of the past. Today I wish to make four main points about
economic mobility.
Our recent record on mobility has been poor.
There has been less mobility in recent decades--but it is important
to get the timeline correct in order to draw the right lessons from it.
It is often claimed, for example, that the average wage, adjusted
for inflation, has fallen over the last 50 years. The Pew Research
Center suggests that this figure peaked in 1973.\1\ But widely repeated
claims of this nature turn out, thankfully, to be misleading, for two
main reasons.
---------------------------------------------------------------------------
\1\ DeSilver, Drew. ``For Most Americans, Real Wages Have Barely
Budged for Decades.'' Pew Research Center. August 7, 2018. Accessed
July 13, 2019. https://www.pewresearch.org/fact-tank/2018/08/07/for-
most-us-workers-real-wages-have-barely-budged-for-decades/.
---------------------------------------------------------------------------
First, wage figures ignore nonwage compensation, which has been a
rising share of compensation over time.\2\ While it may be argued that
government policies should change in ways that would encourage a shift
in that mix back toward wage compensation, that's a different question
from the one we would face if total compensation had been stagnant or
falling for more than four decades.
---------------------------------------------------------------------------
\2\ See, e.g., Appelbaum, Binyamin. ``One Reason for Slow Wage
Growth? More Benefits.'' The New York Times. September 25, 2018.
Accessed July 13, 2019. https://www.nytimes.com/2018/09/25/us/politics/
wage-growth-benefits.html.
---------------------------------------------------------------------------
Second, the estimate of falling wage compensation is itself based
on a faulty method of adjusting for inflation. Pew, for example, uses
the Consumer Price Index--and specifically a measure called CPI--U. It
overestimated housing inflation before 1983. Before 1999, it did not
account for the way consumers blunt the impact of inflation by changing
their behavior, and it still does not fully account for it. Using the
PCE deflator to estimate inflation over time avoids these problems.\3\
Over time the difference is large: It turns out that the average wage
rose 21 percent from 1973 through 2018 rather than falling.\4\ Average
compensation must have risen even more. One could certainly wish that
the increase had been even larger, but this is not a picture of decline
or stagnation.
---------------------------------------------------------------------------
\3\ For more on this, see Winship, Scott. ``Debunking Disagreement
Over Cost-Of-Living Adjustment.'' Forbes. June 15, 2015. Accessed July
13, 2019. https://www.forbes.com/sites/scottwinship/2015/06/15/
debunking-disagreement-over-cost-of-living-adjustment/.
\4\ Author's calculation using data available at
fred.stlouisfed.org.
---------------------------------------------------------------------------
Median family income over this stretch of decades has also grown.
The family in the middle of the income spectrum in 2015 made 45 percent
more than its counterpart in 1970, again using the PCE deflator.\5\
That gain of course reflects not only rising wages but increased labor-
force participation by women.
---------------------------------------------------------------------------
\5\ Ibid.
---------------------------------------------------------------------------
The point of providing this reassuring data is not to deny that our
country has any problems with respect to absolute economic mobility. It
is to identify the problems we have more precisely. The data are not
uniformly positive. The median family income of 2014 was actually
lower, in inflation-adjusted terms, than it was in 2000. It had risen
by 11 percent from 1970 to 1985, and by another 24 percent from 1985 to
2000.
The American mobility machine has stalled out for much of this
century. The trends over the last few years have, on the other hand,
been pretty good, and could get better if this expansion continues.
Effective counter-cyclical policy is crucial for economic mobility.
The poor performance of household income for much of the last two
decades had a lot to do with the sharp recession that began in December
2007 and the agonizingly slow recovery from it. Median family income
dropped more than 7 percent from 2007 through 2011, the sharpest
decline since this data series started in 1953. It did not recover
completely until 2015.
When thinking about increasing absolute upward mobility, then, it
is vital to consider whether our anti-recession policies are
sufficiently effective. This is especially the case because the effects
of recessions linger. The lost output and time in the workforce is
never fully regained, and people who begin their working lives during
recessions have lower lifetime incomes as a result of that timing.
In the United States, the Federal Reserve has primary
responsibility for counter-cyclical policy. It is frequently asserted
that it acquitted itself well in the response to the Great Recession.
That it avoided some of the worst mistakes central banks can make is
beyond dispute. But there is no reason for complacency about its
record. The institution's first move after the collapse of Lehman
Brothers was a contractionary one: beginning the policy of paying banks
interest on excess reserves, which has depressed lending and reduced
the effect of the stimulative policies that it adopted thereafter.
The Federal Reserve has consistently undershot its inflation target
over the last decade and even pursued a course of interest-rate
increases while undershooting it. Whether the institution will be
effective in fighting the next recession, given the limited room to cut
interest rates, is also in question. The Federal Reserve should give
serious consideration to whether its current approach biases it toward
excessively tight monetary policy, making recessions more severe and
recoveries weaker than they could be and thereby suppressing growth in
employment and incomes.\6\
---------------------------------------------------------------------------
\6\ I have written a short article on this topic recently. Ponnuru,
Ramesh. ``Better Inflation Targets Will Help in the Next Recession.''
Bloomberg Opinion. April 23, 2019. Accessed July 13, 2019. https://
www.bloomberg.com/opinion/articles/2019-04-23/better-inflation-targets-
will-help
-in-the-next-recession.
---------------------------------------------------------------------------
Mobility requires higher economic growth.
But cyclical factors are not the only reason for the disappointing
performance of most of the last two decades. Even before the great
recession, economic growth was slower than it had been during past
expansions. It was the combination of slow growth and sharp recession
that made the overall economic record of 2000 to 2014 so frustrating
for most Americans.
Economic growth isn't everything, but it is a prerequisite for
broad-based prosperity. Reforms that would raise the rate of economic
growth over the long run should therefore be a high priority.
While there is no silver-bullet solution to raising economic
growth, some policy changes hold promise. One would be to continue to
reform the tax code to reward investment in the United States. A
particular priority should be a permanent provision allowing businesses
to write off investments immediately while scaling back the
deductibility of debt.
Another promising idea would re-orient our immigration system to
the recruitment of individuals with economically useful skills rather
than to the reunification of extended families. This shift would be
conducive to opportunity, possibly in two ways. It would raise average
productivity, and it might help to boost wages at the low end of the
labor market. There is some, albeit disputed, evidence that low-skilled
immigration has reduced the wages of high-school dropouts--some of
whom, it should be noted, are themselves immigrants. It might be that
relatively low-skilled immigrants would find more opportunity for
upward movement in the United States if there were fewer of them.
Geographic mobility enables economic mobility.
A common way that Americans have historically bettered their lot is
by picking up and moving from places with few opportunities to ones
that are thriving. But they have been doing a lot less of that in
recent years. Interstate migration rates have been falling since
1980.\7\ While the reasons for this change are not well understood, one
might expect--and some evidence suggests--that it has reduced wage
growth, productivity, and employment rates, and at the same time
increased the duration of spells of unemployment and the variation in
income among regions of the country.
---------------------------------------------------------------------------
\7\ Molloy, Raven, Smith, Christopher L., Wozniak, and Abigail K.
``Declining Migration within the United States: The Role of the Labor
Market.'' NBER. April 17, 2014. Accessed July 13, 2019. https://
www.nber.org/papers/w20065.
---------------------------------------------------------------------------
Public policy has likely contributed to the reduction in geographic
mobility in multiple ways. Restrictive zoning laws in many
jurisdictions, especially ones with rapid economic growth, have made
housing expensive and thus reduced the ability of Americans in slower-
growing regions to move there. A relaxation of these rules would
conversely be expected to expand opportunity. But since many of the
economic gains would be reaped by people who are not currently voting
within those jurisdictions, while those who already reside there might
see their property values decline, the political obstacles to local
action are formidable.
The expansion of occupational licensure by State governments also
works against mobility. In the 1950s, 5 percent of workers held jobs
requiring a government license; by 2008 that figure had risen to 29
percent. Licensing can suppress economic mobility within particular
communities by making it more difficult for people to begin working in
the field of their choice, and it can also limit mobility among
communities as relocating in a new State may require the acquisition of
a new license in order to work. Licensing has been estimated to reduce
interstate migration by as much as 20 percent.\8\ Those who already
possess licenses are, however, motivated to resist liberalization.
---------------------------------------------------------------------------
\8\ Johnson, Janna E., and Kleiner, Morris M. ``Is Occupational
Licensing a Barrier to Interstate Migration?'' NBER. December 2017.
Accessed July 13, 2019. https://www.nber.org/papers/w24107.pdf.
---------------------------------------------------------------------------
Many of our government benefit programs--including programs that
help with housing, child care, job training, and groceries--are
operated by States and localities and vary from one jurisdiction to the
next. Moving can mean re-applying for benefits via unfamiliar
enrollment processes. Here the path to better policy is both
politically and conceptually thorny, since the problem arises from the
way our government's Federalist structure has evolved.
The Federal Government may be able to exert a positive or at least
counteracting influence in some of these areas. My American Enterprise
Institute colleague Michael Strain has suggested that several months of
unemployment benefits be made available in a lump sum to aid relocation
for people seeking greener pastures.\9\ But even national attention to
the mobility problem may spur beneficial steps in some places.
---------------------------------------------------------------------------
\9\ Strain, Michael. ``A Jobs Agenda for the Right.'' National
Affairs. Winter 2014. Accessed July 13, 2019. https://
www.nationalaffairs.com/publications/detail/a-jobs-agenda-for-the-
right.
---------------------------------------------------------------------------
As this brief discussion of mobility suggests, increasing it is a
multifaceted challenge. It would require sustained attention to
multiple policy areas, some of them Federal, some of them State and
local, where obstacles to mobility have grown without notice. But if
the work is difficult the potential rewards are substantial, and worth
the seeking.
My thanks, again, to the Committee for the invitation to speak.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Addendum
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTION OF SENATOR CORTEZ MASTO FROM OREN
M. CASS
Franchise Loan Transparency Act
Q.1. At the hearing, my pending bill, the Franchise Loan
Transparency Act was discussed, attached is proposed bill text
and a short description of the bill. Please share with me your
thoughts and concerns about the bill (See Appendix 1, pg. 85).
If you can also note if you would recommend legislators support
or oppose it, that would be helpful.
A.1. I have not studied the issue closely enough to offer an
informed opinion about the bill.
------
RESPONSES TO WRITTEN QUESTION OF SENATOR SINEMA FROM OREN M.
CASS
Q.1. Our country is in the longest period of economic expansion
in U.S. history, with a reasonably strong labor market. Yet,
wage growth continues to lag most economists' expectations. Why
do you think that is?
A.1. Standard labor-market measures (e.g., the unemployment
rate) may not fully reflect the market's dynamics, for several
reasons. One reason is that an unprecedented share of prime-age
workers left the workforce in recent years and they are
returning only gradually it is difficult to know how much slack
remains. Another is that, in an era of globalization, the pool
of labor to which employers have access is not necessarily
bounded by the American market. In many cases, the option to
move work overseas serves as a check on the pressure to raise
domestic wages. The Nation's refusal to enforce its immigration
laws likewise offers firms access to large pools of labor that
are poorly captured in traditional data.
Q.2. According to recent reports, including the Federal
Reserve's 2019 Consumer & Community Context report and Freddie
Mac's June 2019 survey, fewer millennials are buying homes due
to the rise in student loan debt. What kind of implications
will a decline in home ownership by younger Americans have on
the housing market?
A.2. It would be difficult to predict effects in the housing
market without knowing more about consumer behaviors--for
instance: Are they simply choosing to rent instead of buy? Are
they reducing their expenditures on housing? Are they remaining
in their parents' homes rather than forming new households? All
those questions merit further study.
Q.3. We hear from small- and mid-sized employers that they
cannot find individuals with the skills necessary to fill jobs.
How do we encourage skills development and retention? How do we
enable Americans to move to where good jobs are and succeed?
A.3. I would refer the Senator to my written testimony and
accompanying report, ``The Workforce-Training Grant: A New
Bridge from High School to Career'' (Manhattan Institute, July
2019), which describes the failures of our college-focused
education system to provide most people with the skills they
need to succeed in the labor market, and proposes an
alternative in which employers rather than colleges play the
leading role. I would also note that having Americans ``move to
where good jobs are'' is neither a desirable nor likely
outcome. People value the ability to reside near family and
friends in the communities where they have built their lives
and a well-functioning American economy would ensure that
widespread prosperity reaches them in those places.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR CORTEZ MASTO FROM
RAMESH PONNURU
Franchise Loan Transparency Act
Q.1. At the hearing, my pending bill, the Franchise Loan
Transparency Act was discussed, attached is proposed bill text
and a short description of the bill (See Appendix 1, pg. 85).
Please share with me your thoughts and concerns about the bill.
If you can also note if you would recommend legislators support
or oppose it, that would be helpful.
A.1. I have not studied this issue but commend the senator for
calling attention to it. Before proceeding with Federal
legislation, I would want to have a stronger sense that the
problem is both large in scale and persisting at that scale (or
growing in scale). If, for example, we are seeing increased
transparency within the current regulatory environment, change
to that environment may not be necessary. The potential costs
of the proposed regulations would also be needed. Further study
may thus be called for to determine whether regulatory change
is required.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM RAMESH
PONNURU
Q.1. Our country is in the longest period of economic expansion
in U.S. history, with a reasonably strong labor market. Yet,
wage growth continues to lag most economists' expectations. Why
do you think that is?
A.1. Some economists believe that as unemployment rates fall,
wages should rise in some predictable way. But this belief is
erroneous. Employee compensation, adjusted for inflation, has
been growing roughly in line with productivity.
Q.2. According to recent reports, including the Federal
Reserve's 2019 Consumer & Community Context report and Freddie
Mac's June 2019 survey, fewer millennials are buying homes due
to the rise in student loan debt. What kind of implications
will a decline in home ownership by younger Americans have on
the housing market?
A.2. Student-loan debt has likely played a role in reducing
millennials' home ownership rate, but there are additional
reasons for the generational decline in that rate. Millennials
are also marrying later than previous generations and having
smaller families (although the high price of housing may affect
these decisions, and therefore the causal arrow points in both
directions). In many cases, millennials began their working
lives in a sharp recession and a slow recovery from it, which
made it harder for many of them to save for a downpayment.
Lending standards are also stricter than they were. Millennials
have also disproportionately looked for housing in high-cost
areas.
Some analysts have speculated that millennials place a
lower value on home ownership than previous generations, seeing
it for example as an inferior investment to stocks. To the
extent such changes in preferences are reducing home ownership,
the effect should be to make renting more expensive and housing
less so, and policymakers should not be greatly concerned. To
the extent that restrictive zoning laws and other public
policies have reduced homeownership rates, on the other hand,
they need to be revisited.
Q.3. We hear from small- and mid-sized employers that they
cannot find individuals with the skills necessary to fill jobs.
How do we encourage skills development and retention? How do we
enable Americans to move to where good jobs are and succeed?
A.3. As my fellow witness Oren Cass has pointed out, about a
sixth of young people follow the path our educational system
seeks to put them on: earning a high-school diploma, enrolling
in college, obtaining a college degree, and then getting a job
that requires that degree. That fortunate fraction enjoys high
lifetime earnings. The system needs to change to work better
for the vast majority of Americans. In particular, we should
expand vocational-education options involving employers.
As for matching workers and employers geographically: There
is a natural incentive for people to move where they can earn
higher wages. They must weigh them against their existing
family and community ties, their desire to stay where they have
been, and so forth. To the extent government policies make it
harder for people to move, however, it impedes the healthful
functioning of our labor market. Restrictive zoning laws,
onerous and geographically varying occupational licensing
requirements, and lack of portability in government benefits
could all be changed in ways that make it easier for people to
move where the jobs are. The government could also offer
mobility grants, letting people take unemployment benefits in a
lump sum in order to finance a move to a place where they can
more readily find employment.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM THEA M.
LEE
Q.1. Our country is in the longest period of economic expansion
in U.S. history, with a reasonably strong labor market. Yet,
wage growth continues to lag most economists' expectations. Why
do you think that is?
A.1. It is true that nominal wage growth is relatively
lackluster, especially considering that unemployment has been
below 4 percent for a year and a half, and we are 10 years into
an economic recovery. In our view, there is no single cause,
but a cumulation of factors over several decades.
Josh Bivens, EPI research director, wrote: ``This failure
of wages to get in gear should tell us three things: (1) there
remains room for unemployment to fall even further (https://
www.epi.org/blog/the-fed-shouldnt-give-up-on-restoring-labors-
share-of-income-and-measure-it-correctly/); [1] (2) policy and
labor market institutions have been turned decisively against
(https://www.epi.org/publication/what-labor-market-changes-
have-generated-inequality-and-wage-suppression-employer-power-
is-significant-but-largely-constant
-whereas-workers-power-has-been-eroded-by-policy-actions/) most
workers' ability to bargain effectively for wage increases; [2]
and (3) if we don't reorient these policies and institutions to
support wage growth, workers will have to rely solely on high-
pressure labor markets to see raises in the future--but these
high-pressure labor markets have been the exception and not the
rule (https://www.epi.org/publication/the-importance-of-
locking-in-full-employment-for-the-long-haul/) for most of the
time in recent decades.[3] ''
[1] https://www.epi.org/publication/labor-day-2019-macropolicy/#_note2.
[2] https://www.epi.org/publication/labor-day-2019-macropolicy/#_note3.
[3] https://www.epi.org/publication/labor-day-2019-macropolicy#_note4.
It is no coincidence that this is the longest period in
U.S. history without an increase in the Federal minimum wage,
which is now worth 17 percent less than it was 10 years ago--
and 31 percent less than in 1968.
Another major concern is the decline in manufacturing
employment over the last 40 years, which has traditionally been
the sector of the economy that pays relatively high wages to
the noncollege-educated workers who still make up a large
majority of the U.S. workforce. The workforce has shifted
toward the service industry. In addition, growing trade
deficits have cost the United States 5 million manufacturing
jobs in the last two decades. EPI research indicates that
manufacturing jobs offer total compensation that is 15 percent
higher than the nonmanufacturing sector. The evidence over the
same period suggests that there is a widening gap between the
wages earned by those with higher education and those without.
One important step we can take toward getting the trade balance
back on track is to rebalance trade by realigning the dollar.
The decline in union membership has also had a negative
effect on the pay and benefits of both union and nonunion
workers. The share of workers covered by a collective
bargaining agreement dropped from 27.0 percent to 11.7 percent
between 1979 and 2018, meaning the union coverage rate is now
less than half where it was 40 years ago. Without the right to
collectively bargain, workers lack leverage to ask for better
pay and benefits. It is also worth noting that people of color
have historically benefited disproportionately from
unionization. On average, a worker covered by a union contract
earns 13.2 percent more than a peer with similar education,
occupation, and experience in a nonunionized workplace in the
same sector. One step legislators can take to sustain
unionization is to support the Protect the Right to Organize
(PRO) Act, which would make it easier for employees to
collectively organize and bargain for better wages and
benefits.
Q.2. According to recent reports, including the Federal
Reserve's 2019 Consumer & Community Context report and Freddie
Mac's June 2019 survey, fewer millennials are buying homes due
to the rise in student loan debt. What kind of implications
will a decline in home ownership by younger Americans have on
the housing market?
A.2. The burden of student debt is an important reason that
millennials may not be buying homes, but we also need to
consider the fact that they have suffered from the post-
recession job market. Due to their experience with the
recession, individuals may also view home ownership as a risky
asset. The combination of debt burden, a weak job market (in
terms of real wages), and low home ownership rates will present
challenges to the millennial generation and the economy in
coming decades, as these factors will negatively impact wealth
accumulation and retirement security.
Q.3. We hear from small- and mid-sized employers that they
cannot find individuals with the skills necessary to fill jobs.
How do we encourage skills development and retention? How do we
enable Americans to move to where good jobs are and succeed?
A.3. On average, American workers have more education and more
skills than past generations. But it is also true that the U.S.
Government spends less (as a percentage of GDP) on workforce
development and training than other wealthy industrialized
countries, and the private sector does not compensate.
According to the National Skills Coalition, ``The U.S. invests
just .1 percent of GDP on active labor market policies, less
than any other industrialized country except for Mexico.
Australia invests 24 times that amount, and Ireland invests 48
times that amount. At the same time, the United States has the
largest economy in the world and more than 160 million workers
in the workforce.'' And Government spending on workforce
programs has plummeted in recent years, with the Workforce
Innovation and Opportunity Act (WIOA) spending cut almost in
half since FY2001.
Yet there is little evidence of a genuine shortage of
skilled workers. Evidence of a skills shortage would be
unusually strong wage growth for workers with the targeted
skills. If employers can't find the workers they need, they
will offer higher wages to attract needed workers from other
firms, who will then raise wages in an attempt to keep their
employees, and so on. Therefore, if a skills gap were the
problem, we would expect to see faster wage growth. Instead,
wage growth for many skilled workers has been relatively flat
over much of the last year, despite low unemployment rates. For
example, computer and mathematical science occupations, which
are often cited in conversations about skills shortages, have a
low unemployment rate, at 2.3 percent, but have also seen very
low real wage growth, at less than 1 percent in 2018.
One reason that firms are not raising wages, as one would
expect, is monopsony power. Monopsony occurs when there are a
limited number of employers offering skilled jobs in a given
area. So, when a firm with the power to set wages at a low rate
complains about not being able to find workers at the wages
they are offering, it's useful to remember that they are
choosing to keep wages low in order to increase profits. Under
such conditions, legislated interventions for wage increases
can lead to increases in employment, in addition to benefiting
individual workers.
But even in the absence of a skills shortage, there is no
question that both workers and employers benefit from high-
quality, well-designed and targeted training and apprenticeship
programs, ideally with a strong union partner. These programs
should be fully funded and focused on underserved communities
and evolving technologies.
------
Works Consulted
Bivens, Josh, and Heidi Sheirholz. ``Fair Competition in Labor
Markets Requires a Politician's Thumb on the Workers Side of
the Scale.'' ``Unrigging the Market: Convening to Restore
Competitive Labor Markets'' Hosted by the Harvard Labor and
Worklife Program, June 4, 2018. Accessed August 5, 2019.
https://lwp.
law.harvard.edu/files/lwp/files/webpage_materials_papers_
bivens_shierholz_june_13 _2018.pdf.
Gould, Elise. ``Job Growth Stays Solid but Wages Disappoint--
again.'' Economic Policy Institute (blog), August 2, 2019.
Accessed August 5, 2019. https://www.epi.org/press/job-growth-
stays-solid-but-wages-disappoint-again/.
National Skills Coalition: https://
www.nationalskillscoalition.org/federalpolicy/body/CIAW-Invest-
in-AW.pdf.
``Nominal Wage Tracker.'' Economic Policy Institute, 2 Aug.
2019, www.epi.org/nominal-wage-tracker/.
Schmitt, John, Josh Bivens, and Elise Gould. America's Slow-
Motion Wage Crisis. Report. September 13, 2018. Accessed August
5, 2019. https://www.epi.org/publication/americas-slow-motion-
wage
-crisis-four-decades-of-slow-and-unequal-growth-2/.
Scott, Robert. ``The State of American Manufacturing.''
Economic Policy Institute, February 5, 2019. Accessed August 5,
2019. https://www.epi.org/blog/the-state-of-american-
manufacturing-the-failure-of-trumps-trade-and-economic-
policies/.
Shierholz, Heidi, and Elise Gould. ``Why Is Real Wage Growth
Anemic? It's Not Because of a Skills Shortage.'' Economic
Policy Institute. July 19, 2018. Accessed August 5, 2019.
https://www.epi.org/blog/why-is-real-wage-growth-anemic-its-
not-because-of-a-skills-shortage/.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM KEITH R.
MILLER
Senator, thank you for your questions, and the opportunity
to provide my answers. As I stated at the hearing, my expertise
is within the franchise industry, and how that relates to,
realizing the American Dream. For me, it was important in my
testimony to not only discuss the issues but give real life
challenges franchise owners have seen. The franchise industry
should be the model for those seeking the American Dream, and I
wish to see improvements in the industry to make that hold
true.
Q.1. Our country is in the longest period of economic expansion
in U.S. history, with a reasonably strong labor market. Yet,
wage growth continues to lag most economists' expectations. Why
do you think that is?
A.1. Much of the labor growth in employment numbers come from
the continued growth in the number of businesses open, this is
especially true in the franchise industry, and even more true
in the quick service restaurant (QSR) industry. This growth has
far outpaced population growth. This fact means the pie is
being cut into more pieces, so the competition to draw that
population into the outlets is extreme, often using deep
discounting, which may keep the revenue moving, but squeezing
the profit margins of the outlet. Being a Subway franchise
owner, I have seen this first-hand. The franchised brands in
the QSR space have continued to push deep discounting. The
impact, with the added units in the total system, has often
seen the franchise company see increased profits, but the local
franchisees squeezed tighter on margins than ever. You have to
remember that it is these local franchisees that are the
employers of the masses, not the franchise company. Most of us
employers would like to pay higher wages to attract and retain
employees, but simply, we have to make the business model work
for us, which is a real challenge. I just don't think the
industry has realized that its sustainability long-term, is the
more balanced distribution of the monies in the business, from
the franchise company, to the franchise owners, to the
employees.
Q.2. According to recent reports, including the Federal
Reserve's 2019 Consumer & Community Context report and Freddie
Mac's June 2019 survey, fewer millennials are buying homes due
to the rise in student loan debt. What kind of implications
will a decline in home ownership by younger Americans have on
the housing market?
A.2. Well, this is probably not a question that goes to my area
of expertise, but I'll give my thoughts, tying it closer to my
expertise areas. The costs of education, as we know, have
skyrocketed, and creating a level of student debt never seen
before. On top of that, the so-called good jobs for graduates
seem to be centered in high cost housing markets. In many of
these markets, even well-paying jobs have no chance of success
in affording a home. I think the implications are widespread,
and not just on the housing market. One point to remember is
that many real estate firms operate under a franchise flag.
With less buyers, there will be less business, creating a
strain on the franchise owner. I think the big concern here is
that after finishing their education, many of these students
are unable to find jobs in an affordable area and are saddled
with debt and tight budgets. These tight budgets make them even
less likely afford normal spending, which drives many of the
franchised businesses. The high costs of education and
resulting debt are far reaching.
Q.3. We hear from small- and mid-sized employers that they
cannot find individuals with the skills necessary to fill jobs.
How do we encourage skills development and retention? How do we
enable Americans to move to where good jobs are and succeed?
A.3. The statement is correct that we cannot find enough
individuals. There is a critical labor shortage. Franchised
business can be split into two, those that require skilled
positions, and those that need little in skills. For businesses
like automotive repair, for example, it seems few are being
taught the trades. In the push for higher education, the trade
skills seem to be lost. For many, avoiding the high cost of
education and learning a trade is likely better financial
decision, but we need to add more emphasis on that, and remove
the stigma that not attending college is bad. For businesses
that need untrained staff, and can train them, there are a few
problems. As mentioned above, due to the tight business model
margins, we often lose our best employees quickly to better
paying jobs, like the banking industry. If we had the margins
to pay better, that would help. However, I think we can do a
much better job assisting our lower skilled employees in
attaining better financial situations. It's an odd situation,
but one I have heard repeated, that as wages increase
(remember, I am in California which is a higher wage State),
many that are on government assistance can start to make too
much and start to lose their assistance. To the employer, it
means the employee asks to make the same total pay, reducing
hours, which means the need to hire more employees to satisfy
the same total labor requirement. In a tight labor market, that
is tough. We seem to have created systems with a ceiling, and I
think both business and government can do better to help people
bust through that ceiling. From a business standpoint, we can
have mentorship programs and certification programs that teach
these employees real skills that can later be used and
transferred to better jobs, more mobility. If the starting,
lower-paying jobs, were viewed in that light, the reluctance to
work in them would be lessened. From the governments point of
view, the ceilings on earnings for assistance need to be
adjusted and sliding. It should never be a good result for
someone to ask for less earnings than their potential, it
really benefits no one.
Appendix 1. Franchise Loan Transparency Act (Draft)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]