Systems Failure: Jason Furman on the cost of economic inequality

Jason Furman (Intro): You look at a family with children that got more money in nutrition or housing or cash or healthcare or preschool or what have you, and you look at that child 20 years later, you are going to see them more likely to be working, more likely to be earning more, less likely to be in prison, less likely to be suffering a serious health problem. So, there used to be this dichotomy between short-run Band-Aids and long-run mobility, but turns out a lot of families with children, the problem they face is financial stress. You alleviate that financial stress and that's not just helping the present, it's an investment in the future.

Ralph Ranalli (Intro): Hi. Welcome to PolicyCast, I’m your host, Ralph Ranalli. Today we’re continuing the series of episodes we're calling, “Systems Failure,” featuring conversations about inequalities and disparities in the systems that play an increasingly important role in how we live our lives. We’re also talking about strategies to change those systems to make them more equitable. For this episode we turn to economics with our guest, Professor Jason Furman, who holds appointments both at the Kennedy School and at the Harvard University Department of Economics. A former economic advisor to President Obama, Professor Furman recently testified before Congress and called inequality a fundamental problem for the U.S. economy. He also says that systemic inequality and economic disparities are everyone’s problem, not an issue for people on the lower rungs of the economic ladder.

Ralph Ranalli: Hello Jason, welcome to PolicyCast.

Jason Furman: Great to be on here.

Ralph Ranalli: You recently testified before the House Select Committee on Economic Disparity and Fairness in Growth, and you called inequality a fundamental challenge of our economy. You also said that inequality is pervasive by race, ethnicity, gender, income, education, and other dimensions. How did we get here, to the point where inequality is a threat to the overall U.S. economy?

Jason Furman: That's a really big question. And I actually used to teach, and hopefully will again, an entire course at the Kennedy School that answers just that one question and didn't even answer it. It tried to answer just that one question. Broadly speaking, I think the fundamental problem is slow income growth; that it used to be for a typical family their income would double once a generation. Now it takes over a hundred years to double. There are many other issues—education, environment, crime, and the like—where you see slow progress, growing disparities and the like, but for me the most fundamental one is income and the slow down and almost stagnation of income growth. You go one level deeper, and there's three things going on. One is that the pie is growing less quickly than it used to. We're actually not innovating as much as we were before. Second, the pie is being divided up more unequally than it used to be divided up. And third for a while, we were making up for this with more two-earner couples, but now we're seeing less of that, as employment has leveled off for women and continued to fall for men.

Ralph Ranalli: Income, wealth, employment, poverty, and other economic outcomes are systematically much worse for Black and Latino people and households. And I was actually shocked to read what you said about the Black male versus white male earnings gap, which is that it’s the same now as it was back in 1950. That's 70 years with basically no progress. Now that doesn’t exactly sound like the arc of the moral universe bending towards justice. Have we built an economy where inequality is a feature of the system, and not an anomaly?

Jason Furman: I don't subscribe to a Marxist view that everywhere and always you need to keep some people down in order for some people to be up. I don't think that. I think in a lot of cases, inequality is actually hurting everyone. You're taking people that could make tremendous contributions to the economy, maybe the next Einstein, but if the next Einstein doesn't go to preschool and goes to a really crappy lower school and is in a neighborhood with a lot of lead in the pipes and crime in the area, they may not develop those innovations and everyone is going to lose out. So I think a lot of this is more of a failure of imagination and choices by society, rather than some inherent class conflict that we can't get around.

Ralph Ranalli: I was doing some reading on the effects of inequality, and in 2014, the international Organization of Economic Cooperation and Development said their research showed that rising inequality in the United States had reduced cumulative GDP per capita by five percentage points between 1990 to 2010. Is it universally true that everyone does better when society is less unequal? And if so, why doesn’t the general public have a better understanding of that?

Jason Furman: Yeah, I don't know. Look, I don't think it's always and everywhere the case, but a lot of attempts to estimate the degree to which inequality hurts growth, and some estimates like the OECDs and some other ones as well, have found a large negative effect. Other estimates have been less sure. What that says to me is, first of all, there are some forms of inequality and some causes of it that are definitely bad for growth. Now, if your inequality is that half your schools are dramatically underfunded, that's going to be bad for growth. If your inequality is that somebody who's successful can benefit from their success because they made a great innovation, that form of inequality might be good for growth. And so it's going to depend case by case. At a very minimum though we know that you can reduce inequality quite a lot.

You can expand opportunity quite a lot and not hurt economic growth at all and possibly even help it. And so fundamentally there's not a really large trade-off that should deter us from action here. So then why don't more people act? I guess you need a political scientist, not an economist, to help ponder that mystery. I think some of it is just mistaken ideas about public policy. I think there's some people that might even genuinely think that school class size doesn't matter, that school funding is unrelated to school class size, and so there's nothing we can do to improve education.

Ralph Ranalli: And of course the backdrop to all of this is that it's happening during the COVID-19 pandemic, which you called the most traumatic economic event that the world has endured since the Great Depression. There’s been a lot of talk about the recovery from the pandemic has been K-shaped and unequal in itself. Would you mind talking a little bit about the K shaped recovery and the government pandemic responses and their overall effect on inequality?

Jason Furman: Yeah. And to have this conversation, we're going to need to distinguish between your market income, what happens to you on the job, and your income after taxes and transfers, what you get after government benefits. If you look at the former, the pandemic was devastating for disparities. The unemployment rate went up, properly measured above 15% according to the official measurement, it just got to 15%. When the overall unemployment rate went up by that amount, the unemployment rate for black Americans went up even more than that. For Hispanics, it went up even more than that. And so it greatly exacerbated these disparities. You looked at that six months later, people with a college education were pretty much back to the same employment rate they'd had prior to the pandemic. People with high school or less was almost all of what the remaining job loss was even six months later.

So, in the market, it really ripped things apart in terms of disparities. The public policy response was really progressive and really, really large. It wasn't as large, always, as I wanted it. There were certain people it left out, especially some undocumented Americans who I think should have been included more but overwhelmingly sort of a A- or B+ in terms of a response. When you gave money to the unemployed that helped the unemployed. You got a larger fraction of your previous earnings the lower your income was. In fact, if your income was low, you got more from unemployment than you had previously been getting on the job, depending on what month we're talking about. The rules changed a lot. Checks—a $1000 check, a $2,000 check—that matters a lot more if your family makes $20,000 a year than if your family makes $120,000 a year. So if you look at what happened to people after taxes and transfers, you see a story where there were millions suffering, millions left out, but tens of millions that actually really benefited from the policy response.

Ralph Ranalli: So there have been some successes in combating disparities and inequalities in this initial response to the pandemic. But I think you've also written in the op-ed space about taking that a step further, and recommending that the Biden administration tackle these systemic inequalities in a more fundamental way.

Jason Furman: Yeah. I think the problem is that all the problems we're talking about were there in 2019. And if you went through a year of unemployment during the pandemic, you might have a harder time finding a job even a couple years from now. You might have lower earnings a couple years from now, but all the policies I was just talking about were temporary. Unemployment insurance expired at the beginning of September. Most of the last checks went out in March and April of this year, very important. One continued longer, which was for children. And so, that this response was a Band-Aid trivializes; it was a really, really large response to the problem, but that large response was temporary. And there was a problem that preexisted it, and some problems that will continue to linger out of the pandemic itself.

And that's why we need more permanent solutions. One of those would be what's called a child allowance. In the United States, there's a tax credit if you have a child, but it has this weird feature that if your income is low, you don't get it. If your income is in the middle, you get it. Well, some of the people who need it most don't get it. So you should give it to them. The other thing is it's way better to give people just a monthly check per child, rather than you get it all as a refund or something like that in April the following year, when you may have had a lot of expenses in the year before that.

So one thing that the March legislation signed by president Biden did was established this child tax credit. It took the child tax credit we have, turned it into child allowance, made it monthly, made it available for all low and middle income families, but only for one year. And so that needs to be continued. That's going to take more legislation.

Ralph Ranalli: Can you give us some examples of other longer term systemic measures that can be taken to address fundamental economic inequality?

Jason Furman: There are so many causes to the economic inequalities and then also similarly many solutions. I don't think there's any one magic bullet in getting money to the right people. And you need to finance that, so you need to get money from the right people, raising taxes on high-income households and expanding benefits for middle- and especially lower-income households is one of the common themes. You can do that with cash, like the child allowance, you can expand nutritional assistance, you can do it with housing vouchers. Right now I think roughly one in five people that are eligible for housing vouchers actually get them because there just isn't enough money for everyone who's eligible for them. So there's a lot of different ways. What's interesting is researchers that have studied these different ways of providing assistance have found that for all of them, if you're doing it for a family with children, you're actually helping that child in the long run.
    
You look at a family with children that got more money in nutrition or housing or cash or healthcare or preschool or what have you. And you look at that child 20 years later, you are going to see them more likely to be working, more likely to be earning more, less likely to be in prison, less likely to be suffering a serious health problem. So, there used to be this dichotomy between short-run Band-Aids and long-run mobility, but turns out a lot of families with children, the problem they face is financial stress. You alleviate that financial stress and that's not just helping the present; it's an investment in the future.

Ralph Ranalli: In terms of the labor market right now, a lot of people are seeing what's happening and they're confused. They go to their local coffee shop in the middle of the afternoon only to find that it’s closed because they can only hire one shift worth of workers and they have nobody to work in the afternoon. Is that a longer-term trend that's been exacerbated by the pandemic? Or is that a short-term trend caused by the pandemic? Should people be worried about the labor market in the long term?

Jason Furman: Two years from now or maybe even a few months from now, it won't be anything like this. We don't know exactly for sure, but it's been a strange situation. Normally when the unemployment rate is relatively high it's because employers don't want to hire anyone. And one thing you see is that wages go down, because if no one wants to hire anyone, you don't need to post much of a wage. Lately, wages have actually been rising pretty strongly, at least nominal wage is not adjusting for inflation and that's because employers really do seem to very, very much want to hire people and people are in less of a hurry to get back. Part of that is like the economy was ripped apart, society was ripped apart, takes a while to match everyone up to jobs, get everyone back in it.

I think unemployed insurance has played a role. I think it was appropriately generous in January, February, and March. By June and July I think it should have been phased down some and tapered off and matched the situation that we faced in terms of the pandemic and the economy. But that unemployment insurance is down. The bigger problem we've had for many, many decades has more been not enough employers want to hire people and that has caused downward pressure on wages. So that's very different from what we've seen this year, where employers do genuinely want to hire people and as a result, there's been upward pressure on wages.

Ralph Ranalli: One thing you said that I want to circle back to is the fact that the number of women entering the workplace has leveled off. But during the time when it was increasing, the increase in two-earner households was effectively masking the stagnation of wages after the 1970s. Household income was going up, but that was because you now had two paychecks in the home instead of one, not because wages were keeping pace with productivity or the cost of living. What do you think long-term effects are going to be of that leveling off?

Jason Furman: Yeah, so just stepping back, in 1948, about one out of every three women between the age of 25 and 54 was working. By 2000, it was about two out of three women between the age of 25 and 54. That was massively consequential for the American economy that you had an influx of tens of millions of people contributing to the market economy in the way they hadn't before, contributing in really important ways, but not to the market economy. And it was really important for households that now more often had two earners rather than one earner. From 2000 to 2020, the employment rate of women in that age group has been stuck at two thirds. It hasn't made progress. 

Now I don't have some view as to what the employment rate should be. It shouldn't be a hundred percent. There's all sorts of people that have all sorts of reasons why in any given year they don't want to work. What worries me is that we don't really enable people to fully make that choice. Childcare is really expensive, so if you want to get a job it's really expensive to pay the childcare. There's not a lot of flexibility in jobs in the United States. There's no national paid leave system, although that's a chance that that is changing. And so if you look in Europe, for example, where you have more childcare, you have more paid leave, you have more flexible workplaces, you also observe more than two out of three women working. And so I don't think our goal should be some particular numerical target for how many women work or how many men work. I think our goal should be enabling people to make the best choice for themselves. If we did enable people to make the best choice for themselves, you would see more, both men and women working, but especially women where the gap between the United States and other countries is the most glaring.

Ralph Ranalli: So I think what you were alluding to about childcare is what's going on in Congress right now, which is there is a push to pass two separate infrastructure packages. One package that's much more classically what people think of as infrastructure, roads, bridges, physical infrastructure, but also to redefine infrastructure as things like childcare and healthcare. Have the inequalities become so pronounced that the conversation is opening up in terms of what infrastructure is and how we talk about it?  

Jason Furman: Yeah. I don't care a lot about the terminology. If preschool or caregiving or childcare is a good idea then I'm for it; if it's a bad idea I'm against it. And I don't really care whether you call it infrastructure or whether you decide you're going to reserve that word for roads and bridges. But what I think is important is you are seeing Congress move forward pretty comprehensively, not in every nook and cranny, but in most of the nooks and crannies where some of these problems have developed and cropped up. 

And there's no doubt that investing in people, especially investing in children can have a very high rate of returns. You spend money today and if it's on a child that may not do anything for the economy until 20 years later when that child has grown up and is contributing to the workforce, but it may do a lot 20 years from now. And so you want to make sure you're not so myopic that you make the mistake of something that has a very high rate of return, especially compared to the cost of financing. Right now the federal government can borrow at effectively zero cost adjusted for inflation. You want to make sure you're not neglecting those investments with their long term payoff.

Ralph Ranalli: OK, I take your point about the semantics, but isn’t it true that sometimes when you’re not boxed in by a particular definition, it allows you to look at something in a new way. In this case, it’s the difference between looking at a child’s welfare as mostly their parents’ problem versus looking at investing in children more generally as a societal good. I guess that's my question. Are we starting to think about those things differently?

Jason Furman: In one sense, we're starting to, in one sense, we're resuming a very old conversation. The United States was the pioneer in the world in making high schools available and free and largely expected for all Americans. We did that in mostly the 1910s, 20's, and 30's in the high school movement. That was in part a reaction to the economy clearly changing. In factories it wasn't just that you need sort of a mindless automaton moving things, you needed people that actually understood the machinery, that knew a bit of engineering. They could read the instructions and the like, so it became clear that we needed that economically.

It also became clear that I benefit more when I'm in proximity to other educated people; they benefit more when they're in proximity to me. And so there's this social spillover at stake in society. And so the United States when we were undergoing the massive transformation from farms to factories, it did a huge amount, mostly at the state level, to expand education, expand these opportunities. What you're seeing now is saying as we shift to a service economy, we need to do the same thing and by the way, where do we need to expand at both ends? You're starting earlier than kindergarten, which was covered for the last century of years and later than 12th grade. So in some sense, this is a longstanding tradition and in another sense, it's a significant revival of it.

Ralph Ranalli: You were a top economic advisor to president Obama for eight years. Has your view of inequality and the crucial nature of these economic disparities changed or evolved since that time?

Jason Furman: I don't think so. The data on inequality and disparities, that was crystal clear in 2015, it wasn't lost on President Obama. It wasn't lost on me. Some of the research that I was talking about earlier, that when you give money to families with children, it has long term benefits. That's new. When I say new: in 2015 I knew it; in 2010 I don't think anyone knew it. So, we knew that preschool could have long term benefits, but cash for families with young children? That's a pretty cool thing that has long-run benefits too. 

Now I've also placed increased emphasis in my understanding of how the monopolization of parts of the economy has played a role in perpetuating and expanding inequality and the role that increasing competition could play in leading to fairer outcomes. So I'd say some of the tools have a better appreciation of today than certainly I used to have, and I think that researchers in general and policymakers in general used to have.

Ralph Ranalli: What's your hope for what can be accomplished in terms of  reducing inequality and  these economic disparities over say the next three years, the rest of the Biden’s first term in office?

Jason Furman: My hope is that we can have some immediate benefits. The most important would be a full and strong recovery of the macro economy. The unemployment rate was three and a half percent before the pandemic. It's now above 5%. It would be nice for it to come down. So, one recover the extra layer of damage on top of the system, that's fully achievable within three years. Second, that we start to make some immediate progress. For example, if you raise the minimum wage that helps people right away, just as soon as you raise it. But third, that we also are taking steps that you won't actually see the benefits of them in any huge and obvious way, maybe for 10, 20, 30 years, because there just aren't enough things we can do in the next three years that will solve the problem in the next three years. There's a lot of things that could put us on a better path to solving the problem.

Ralph Ranalli: Well, thank you, Jason, for being here with us today. 

Jason Furman: Great. And I love talking both about problems, but also that we spent a lot of time on solutions. 

Ralph Ranalli: Thanks for listening. If you'd like to learn more about our podcast, please visit our page on the main Harvard Kennedy School website. And if you have a question or a suggestion, please send us an email at policycast@hks.harvard.edu.