Toward American Economic Recovery
Dean Doug Elmendorf
Delivered to The Berkeley Forum, February 25, 2021

Hello, and thank you for that kind introduction. I am delighted to be here with you today in The Berkeley Forum.

The United States is suffering from a collection of crises, including an economic crisis. Our current national situation has been described as what health care providers call an “acute on chronic” condition--that is, a condition in which a patient has unresolved chronic health problems and then experiences an acute health problem that is worse because of the chronic problems. In the United States today, we have an “acute on chronic” condition. We have acute crises in our health and wellbeing, our democracy and governance, our economy, and more--and these acute crises are worse because they come on top of chronic problems with our health, our democracy, and our economy.

I do not mean to be discouraging. As serious as these problems are, we know ways to address them, and many people of knowledge and goodwill are eager to make a positive difference. I hope that you are among those people. We have a lot of work to do, so let’s get at it.

I want to spend the next 20 minutes offering ideas for generating an economic recovery that responds to both our acute economic crisis and our chronic economic problems. These ideas are based on my values and on my reading of the evidence about how public policies affect the economy and people’s lives. In my view, there are three key requirements for moving toward a full economic recovery in this country:

First, we need to provide economic relief and stimulus until the pandemic has truly eased. Second, we need to empower people to find good work that pays enough to support themselves and their families. And third, we need to strengthen the safety net for people who are not working. Let me take each of these pieces in turn.

First, economic relief and stimulus are needed to limit the human and economic toll of the pandemic. 

About 10 million fewer people are working in this country today than a year ago, and we are putting people back to work at only a slow pace. With lost incomes, many people are behind on their rent, staying in their homes so far through the flexibility of their landlords and moratoriums on evictions. Demand at food banks is notably higher. On the bright side, vaccinations against COVID are starting to take hold, which increases hope that we will return to many more in-person interactions by the middle of this year. But the proverbial light at the end of the tunnel is still a long way off. Even if we increase the vaccination rate above its current million-and-a-half people per day, many Americans will still be unvaccinated by the summer. And the spread of new variants of COVID presents new risks.

Therefore, national economic policymakers should provide both relief and stimulus. By “relief,” I mean support for struggling families, businesses, and state and local governments. By “stimulus,” I mean a boost to overall spending, which would increase businesses’ sales and need for workers. Many types of policies would provide both relief and stimulus. Those policies include payments to households, loans to businesses, and grants to state and local governments.

An important debate is occurring now about how much additional relief and stimulus should be provided. The federal government has already enacted significantly more relief and stimulus than it did in the wake of the financial crisis and Great Recession a dozen years ago. That is very welcome. In 2008 through 2010, federal fiscal policy provided a vitally important boost to economic activity. However, fiscal support turned into fiscal restraint in 2011 and later, which significantly slowed the economic recovery and kept more people unemployed for longer than would have been the case if fiscal policy had remained supportive. That premature fiscal tightening was one of the most significant mistakes of economic policy in the past half-century, and I am glad that we are not repeating it.

Still, saying that we should “go big” now does not tell us “how big” we should go. President Biden and Congressional Democrats have proposed a package of spending increases and tax reductions totaling $1.9 trillion. My own assessment is that $1 trillion of spending increases and tax reductions would be appropriate to counteract the pandemic—a figure that is a good deal smaller than the current package.

But I think the Democrats want to go bigger for two reasons. One is that they want to provide a bigger boost to people’s incomes than is needed just to counteract the pandemic; they have other goals in mind, and I will come back to those goals later in my remarks. The other is that we do not know how much is needed to counteract the pandemic, and the risks of providing too much fiscal support are far less than the risks of providing too little.

Let me explain now why I think the risks are so asymmetric:

  • First, the Federal Reserve can offset excess demand for goods and services and the risk of higher inflation by raising the federal funds rate, but it cannot readily offset inadequate demand because the funds rate is currently at zero. That is, the Federal Reserve’s ability to use monetary policy to keep the economy on track is asymmetric today: With interest rates already so low, the Fed can slow the economy by raising rates, but cannot readily spur the economy by lowering rates. That asymmetry means that fiscal policy needs to bear the load of providing more support for the economy.
  • Second, the human and social costs of excess unemployment are very high. Recessions are very harmful not because they cause a small decrease in everyone’s incomes but because they cause a very big drop in some people’s incomes. We need to provide enough relief and stimulus to reach as many people as possible.
  • Third, we saw in the few years before the pandemic how a low unemployment rate is especially important for the economic well-being of lower-income people, who had benefited little from overall economic growth during the preceding few decades. The biggest job losses during the pandemic have been among lower-wage workers, and we need to give them a real boost.
  • And fourth, the federal budget situation is not a significant constraint. Even though federal debt is historically high relative to the size of the economy, interest rates are very low now and are expected to stay low for many years.

I should add that we could avoid having to guess how much relief and stimulus to provide if fiscal policymakers could move more nimbly or if we established triggers for relief and stimulus based on the unemployment rate or other measures of economic conditions. Indeed, a number of economists--including my colleague Karen Dynan and I--have done research about ways to establish such triggers. But policymakers have not jumped on those ideas or demonstrated fast reactions to economic conditions during the past six months, so instead we will have to guess about how large a fiscal package we need.

The second big piece of generating an economic recovery that responds to both our acute economic crisis and our chronic economic problems is to empower people to find good work that pays enough to support themselves and their families.

Living standards for lower- and middle-income Americans have improved only slightly, on average, during the past few decades. While it is challenging to measure household incomes well, the data show clearly that market incomes of people across most of the income distribution have increased fairly little in recent decades, while market incomes of people at the top of the distribution have risen considerably. In particular, Americans who have less education or are living in certain parts of our country have had much less economic opportunity and much less improvement in their standard of living than Americans who have more education or are living in other parts of the country. Our tax and transfer system mutes this divergence in market incomes a little but not much: According to the latest data from the Congressional Budget Office, the top one-fifth of the distribution receives 55 percent of income before accounting for taxes and government benefits and 49 percent of income after including taxes and government benefits.

Adding to concerns about what has happened in the past, some people are worried, appropriately, that economic forces will make these problems worse over time. Over the coming decades, expanding use of self-driving vehicles, the diffusion of artificial intelligence, and other technological changes will probably eliminate a significant number of jobs that currently tend to be held by people without college degrees. Whether other forces will create more jobs for people without college degrees, and what those jobs will be like, are important questions.

A shortage of economic opportunity for many Americans has had a range of economic and social consequences. For example, the labor force participation rate for men without college degrees has fallen sharply relative to the participation rate for men with college degrees. In addition, Americans of my age in the top part of the income distribution are expected to live significantly longer than their parents, on average, while Americans of my age in the bottom third of the income distribution are expected to live no longer than their parents, on average. Moreover, some communities have been devastated by a loss of jobs stemming from technological change and growing imports, producing profound social cost as well as economic cost. And the growing divergence of income and wealth has significant damaging consequences for our political system, as some people’s perspectives end up receiving disproportionate weight in our policy choices and as other people lose confidence that the system is responsive to their needs.

To address these challenges, we need to focus our economic policy on improving standards of living for lower- and middle-income Americans rather than boosting total income or GDP. These goals are sometimes aligned, but not always. When there are tradeoffs between them, we should reject policies that would boost total income but hurt living standards for the less-well-off, and we should support policies that would diminish total income but boost living standards for the less-well-off. One shorthand description of this approach is to focus on raising median income rather than mean income.

This focus would lead us to a number of important policy steps:

  • First, we should improve education and training for people who do not have good access to education and training today. That means more support for early childhood programs, community colleges, and job-training programs. Broadening access to education and training would help empower more people to be effective in well-paying jobs. 
  • Second, we should improve jobs that are often held by people with less education and training so that those jobs become more rewarding and offer greater avenues for advancement. Concrete steps in this direction would include expanded career ladders and access to portable health insurance and retirement savings.
  • Third, we should raise the minimum wage. After adjusting for inflation, the minimum wage is lower today than at many times in the past 50 years, and raising it would increase the incomes of many lower- and middle-income people with only small effects on employment.
  • Fourth, we should reduce systemic bias against people because of their race and ethnicity, gender, sexual orientation, religion, and other characteristics. Giving everyone a fair opportunity to thrive in our society is a matter of basic justice, and it is also imperative to national economic success.
  • Fifth, we should increase public investment in infrastructure like transportation and water. Interest rates are so low that many potential investments pass a benefit-cost test. Moreover, public infrastructure can be especially important for the well-being of lower- and middle-income people because they are less able to use private substitutes for public services. Think, for example, about who is most dependent on bus routes and public water supply.
  • Sixth, we should run a “high-pressure economy,” by which I mean an economy in which the demand for workers is very strong. You picture a job market that is a pot of water bubbling vigorously. When the unemployment rate fell below 4 percent, prime-age individuals were entering the labor force in larger numbers than they were leaving it, and wage growth reached roughly its fastest rate in a dozen years. When we get beyond the pandemic, we should use monetary policy to keep the economy close to full employment.

Unfortunately, we have not pursued these policies in recent years and have indeed been going in the wrong direction in important ways. We have hardly even had a national conversation about the changing nature of education and employment, much less mounted a determined effort to empower lower- and middle-income Americans to do better. Exclusion and discrimination continue to block too many Americans from achieving all they could. And we have reduced federal investment in infrastructure to roughly the lowest percentage of GDP in my lifetime. But all of these policy directions can be changed.

The third big piece of generating an economic recovery that responds to both our acute economic crisis and our chronic economic problems is to strengthen the safety net for people who are not working. 

For many people, work provides dignity and purpose as well as income. It is crucially important that our public policies encourage and reward work, as I have discussed.

At the same time, many people are unable to work. Some are older and cannot continue to do the physically demanding jobs they did earlier in their lives. Some are physically or mentally disadvantaged in some way, and they are unable to find an appropriate job. Some are caring for older or younger family members so cannot hold down a paid job as well. And some lost jobs when the economy turned down or a key business left their town, and new jobs are not available.

I think that we have a moral responsibility to provide a minimum standard of living for people who are unable to work for these reasons. Unfortunately, if we gave more public support to everyone who is not working, we would enable some people who could work but would rather not to quit their jobs. But I do not think that problem should deter us from providing more support.

Two considerations beyond the moral ones are important to my thinking. One is that the federal budgetary cost of providing a minimum standard of living for everyone is not very large relative to the budgetary cost we are currently bearing of providing retirement and health benefits for all Americans over the age of 65. For example, the enactment of the Affordable Care Act—often called “Obamacare”—increased the number of Americans with health insurance by more than 20 million, which is a huge boon to them. To accomplish this goal, the ACA increased federal spending on health care subsidies. But those new subsidies represent only about 10 percent of total federal spending on health care, almost all of which supports care for Americans who are over the age of 65 or are officially deemed to be disabled.

The other consideration is that supporting working-age adults with little income is good for their children as well as for the adults themselves. A common argument for limiting public support for people who are not working is concern that social welfare programs can encourage habits--like not working--that make the children of recipients worse off. However, there is a growing body of evidence that the opposite is true: Children in families that receive public benefits have better labor-market incomes later in their lives than children in similar families that do not receive public benefits.

Therefore, given the moral imperative, the fairly low budgetary cost, and the positive effect on poor children when they grow up, I think we should strengthen the safety net. This strengthening includes expanding the child tax credit, which is part of the Democratic relief and stimulus bill and has been endorsed in various other forms by a number of Republican lawmakers.

In conclusion:

We have the policy tools to generate an economic recovery that responds to both our acute economic crisis and our chronic economic problems. Based on my values and my reading of the evidence, I think the crucial pieces are: first, economic relief and stimulus until the pandemic has truly eased; second, empowering people to find good work that pays enough to support themselves and their families; and third, strengthening the safety net for people who are not working.

I hope you have found my discussion of these policies to be illuminating and perhaps persuasive. But even more, I hope you are committed enough to making a better country that you keep thinking about these issues, learning all you can, coming to whatever conclusions seem right to you, and then participating vigorously in the political process on behalf of your views. Democracy only works if people are informed and engaged. Our country needs you.

Thank you.