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A decade into the 21st century, the role of manufacturing in global and metropolitan economies continues to evolve. After 20 years of rapid globalization in which manufacturing production shifted to emerging markets, demand for consumption is growing there, too. Emerging market demand, in fact, has unprecedented momentum as 1.8 billion people enter the global consuming class. At the same time, a robust pipeline of product innovation and manufacturing processes has opened new ways for U.S. manufacturing companies to compete.

On November 19, the Metropolitan Policy Program at Brookings hosted a forum to release a report from the McKinsey Global Institute that examines the role of manufacturing in advanced and developing economies and the choices that manufacturers grapple with in this new era of global competition. Following presentations by the authors, an expert panel discussed the key trends shaping manufacturing competitiveness, global strategies, the next era of manufacturing innovation, and what these changes imply for growth and employment in manufacturing across the globe.

Video

• Bruce Katz: A Region Has to Know What It Can Do Well
• Martin Baily: Manufacturing Creates Jobs
• Katy George: Manufacturing Is an Entity That Is Constantly Shifting
• James Manyika: Manufacturing Matters a Great Deal
• Gardner Carrick: Education Is Key
• James W. Griffith: Closing Remarks

Audio

• Global Manufacturing: Entering a New Era

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20121119_global_manufacturing

Once upon a time, ambitious young people with a knack for math and science went to work in manufacturing. They designed planes, computers, and furniture, figured out how to lay out an assembly line, helped to make new cars faster and refrigerators more efficient, pushed the limits of computer chips, and invented new medicines. But, as the role of manufacturing diminished in advanced economies, the brightest talents tended to gravitate to finance and other service fields that were growing rapidly – and paying well.

But here’s some news: global manufacturing has the potential to stage a renaissance and once again become a career of choice for the most talented.

Of course, any manufacturing rebound in the advanced economies will not generate mass employment; but it will create many high-quality jobs. There will be more demand for software programmers, engineers, designers, robotics experts, data analytics specialists, and myriad other professional and service-type positions. In some manufacturing sectors, more such people may be hired than will be added on the factory floor.

Exploding demand in developing economies and a wave of innovation in materials, manufacturing processes, and information technology are driving today’s new possibilities for manufacturing. Even as the share of manufacturing in global GDP has fallen – from about 20% in 1990 to 16% in 2010 – manufacturing companies have made outsize contributions to innovation, funding as much as 70% of private-sector R&D in some countries. From nanotechnologies that make possible new types of microelectronics and medical treatments to additive manufacturing systems (better known as 3D printing), emerging new materials and methods are set to revolutionize how products are designed and made.

But, to become a genuine driver of growth, the new wave of manufacturing technology needs a broad skills base. For example, it will take many highly-trained and creative workers to move 3D printing from an astounding possibility to a practical production tool.

Consider, too, the challenges of the auto industry, which is shifting from conventional, steel-bodied cars with traditional drive trains to lighter, more fuel-efficient vehicles in which electronics are as important as mechanical parts. The Chevrolet Volt has more lines of software code than the Boeing 787. So the car industry needs people fluent in mechanical engineering, battery chemistry, and electronics.

Manufacturing is already an intensive user of “big data” – the use of massive data sets to discover new patterns, perform simulations, and manage complex systems in real-time. Manufacturing stores more data than any other sector – an estimated two exabytes (two quintillion bytes) in 2010. By enabling more sophisticated simulations that discover glitches at an early stage, big data has helped Toyota, Fiat and Nissan cut the time needed to develop new models by 30-50%.

Manufacturers in many other branches are using big data to monitor the performance of machinery and equipment, fine-tune maintenance routines, and ferret out consumer insights from social-media chatter. But there aren’t enough people with big-data skills. In the United States alone, there is a potential shortfall of 1.5 million data-savvy managers and analysts needed to drive the emerging data revolution in manufacturing.

The shift of manufacturing demand to developing economies also requires new skills. A recent McKinsey survey of multinationals based in the U.S. and Europe found that, on average, these companies derive only 18% of sales from developing economies. But these economies are projected to account for 70% of global sales of manufactured goods (both consumer and industrial products) by 2025. To develop these markets, companies will need talented people, from ethnographers (to understand consumers’ customs and preferences) to engineers (to design products that fit a new definition of value).

Perhaps most important, manufacturing is becoming more “democratic,” and thus more appealing to bright young people with an entrepreneurial bent. Not only has design technology become more accessible, but an extensive virtual infrastructure exists that enables small and medium-size companies to outsource design, manufacturing, and logistics. Large and small companies alike are crowd-sourcing ideas online for new products and actual designs. “Maker spaces” – shared production facilities built around a spirit of open innovation – are proliferating.

And yet, across the board, manufacturing is vulnerable to a potential shortage of high-skill workers. Research by the McKinsey Global Institute finds that the number of college graduates in 2020 will fall 40 million short of what employers around the world need, largely owing to rapidly aging workforces, particularly in Europe, Japan, and China. In some manufacturing sectors, the gaps could be dauntingly large. In the U.S., workers over the age of 55 make up 40% of the workforce in agricultural chemicals manufacturing and more than one-third of the workforce in ceramics. Some 8% of the members of the National Association of Manufacturers report having trouble filling positions vacated by retirees.

Indeed, when the NAM conducted a survey of high-school students in Indianapolis, Indiana (which is already experiencing a manufacturing revival), the results were alarming: only 3% of students said that they were interested in careers in manufacturing. In response, the NAM launched a program to change students’ attitudes. But not only young people need persuading: surveys of engineers who leave manufacturing for other fields indicate that a lack of career paths and slow advancement cause some to abandon the sector.

Manufacturing superstars such as Germany and South Korea have always attracted the brightest and the best to the sector. But now manufacturers in economies that do not have these countries’ superior track record must figure out how to be talent magnets. Manufacturing’s rising coolness quotient should prove useful, but turning it into a highly sought-after career requires that companies in the sector back up the shiny new image with the right opportunities – and the right rewards.

ABSTRACT

Recent literature has expressed considerable pessimism about the prospects for both productivity and overall economic growth in the U.S. economy, based either on the idea that the pace of innovation has slowed or on concern that innovation today is hurting job creation. While recognizing the problems facing the economy, this paper offers a more optimistic view of both innovation and future growth, a potential return to the innovation and employment-led growth of the 1990s. Technological opportunities remain strong in advanced manufacturing and the energy revolution will spur new investment, not only in energy extraction, but also in the transportation sector and in energy-intensive manufacturing. Education, health care, infrastructure (construction) and government are large sectors of the economy that have lagged behind in productivity growth historically. This is not because of a lack of opportunities for innovation and change but because of a lack of incentives for change and institutional rigidity.

Download the full paper »

Downloads

• U.S. Productivity Growth: An Optimistic Perspective

The weakness of the economic recovery in advanced economies raises questions about the ability of new technologies to drive growth. After all, in the years since the global financial crisis, consumers in advanced economies have adopted new technologies such as mobile Internet services, and companies have invested in big data and cloud computing. More than 1 billion smartphones have been sold around the world, making it one of the most rapidly adopted technologies ever. Yet nations such as the United States that lead the world in technology adoption are seeing only middling GDP growth and continue to struggle with high unemployment.

There are many reasons for the restrained expansion, not least of which is the severity of the recession, which wiped out trillions of dollars of wealth and more than 7 million US jobs. Relatively weak consumer demand since the end of the recession in 2009 has restrained hiring and there are also structural issues at play, including a growing mismatch between the increasingly technical needs of employers and the skills available in the labor force. And technology itself plays a role: companies continue to invest in labor-saving technologies that reduce demand for less-skilled workers.

So are we witnessing a failure of technology? Our answer is "no." Over the longer term, in fact, we see that technology continues to drive productivity and growth, a pattern that has been evident since the Industrial Revolution; steam power, mass-produced steel, and electricity drove successive waves of growth, which has continued into the 21st century with semiconductors and the Internet. Today, we see a dozen rapidly-evolving technology areas that have the potential for economic disruption as well in the next decade. They fall into four groups: IT and how we use it; machines that work for us; energy; and the building blocks of everything (next-gen genomics and synthetic biology).

Wide ranging impacts

These disruptive technologies not only have potential for economic impact—hundreds of billions per year and even trillions for the applications we have sized—but also are broad-based (affecting many people and industries) and have transformative effects: they can alter the status quo and create opportunities for new competitors.

While these technologies will contribute to productivity and growth, we must look at economic impact in a broader sense, which includes measures of surplus created and value shifted (for instance from producers to consumers, which has been a common result of Internet adoption). The greatest benefit we measured for autonomous vehicles—cars and trucks that can proceed from point A to point B with little or no human intervention. The largest economic impact we sized for autonomous vehicles is the enormous benefit to consumers that may be possible by reducing accidents caused by human error by 70 to 90 percent. That could translate into hundreds of billions a year in economic value by 2025.

Predicting how quickly even the most disruptive technologies will affect productivity is difficult. When the first commercial microprocessor appeared there was no such thing as a microcomputer—marketers at Intel thought traffic signal controllers might be a leading application for their chip. Today we see that social technologies, which have changed how people interact with friends and family and have provided new ways for marketers to connect with consumers, may have a much larger impact as a way to raise productivity in organizations by improving communication, knowledge-sharing, and collaboration.

There are also lags and displacements as new technologies are adopted and their effects on productivity are felt. Over the next decade, advances in robotics may make it possible to automate assembly jobs that require more dexterity than machines have provided or are assumed to be more economical to carry out with low-cost labor. Advances in artificial intelligence, big data, and user interfaces (e.g., computers that can interpret ordinary speech) make it possible to automate many knowledge worker tasks.

More good than bad

There are clearly challenges for societies and economies as disruptive technologies take hold, but the long-term effects, we believe, will continue to be higher productivity and growth across sectors and nations. In earlier work, for example, we looked at the relationship between productivity and employment, which are generally believed to be in conflict (i.e., when productivity rises, employment falls). And clearly, in the short term this can happen as employers find that they can substitute machinery for labor—especially if other innovations in the economy do not create demand for labor in other areas. However, if you look at the data for productivity and employment for longer periods—over decades, for example—you see that productivity and job growth do rise in tandem.

This does not mean that labor-saving technologies do not cause dislocations, but they also eventually create new opportunities. For example, the development of highly flexible and adaptable robots will require skilled workers on the shop floor who can program these machines and work out new routines as requirements change. And the same types of tools that can be used to automate knowledge worker tasks such as finding information can also be used to augment the powers of knowledge workers, potentially creating new types of jobs.

Over the next decade it will become clearer how these technologies will be used to raise productivity and growth. There will be surprises along the way—when mass-produced steel became practical in the 19th century nobody could predict how it would enable the automobile industry in the 20th. And there will be societal challenges that policy makers will need to address, for example by making sure that educational systems keep up with the demands of the new technologies.

For business leaders the emergence of disruptive technologies can open up great new possibilities and can also lead to new threats—disruptive technologies have a habit of creating new competitors and undermining old business models. Incumbents will want to ensure their organizations continue to look forward and think long-term. Leaders themselves will need to know how technologies work and see to it that tech- and IT-savvy employees are included in every function and every team. Businesses and other institutions will need new skill sets and cannot assume that the talent they need will be available in the labor market.

Event Information

Productivity growth in the United States slowed sharply around 2005, which has contributed to slow growth in wages and downward revisions to estimates of long run economic growth. The global economy has grown incredibly fast since 1950, with global GDP expanding six-fold and average per capita income nearly tripling. A larger workforce and increased productivity spurred this growth. However, the global workforce is expected to grow more slowly over the coming years, and peak in size around 2050. If strong economic growth is to be achieved, in both the United States and globally, productivity must increase strongly.

On Wednesday, April 8, the Initiative on Business and Public Policy hosted an event exploring these and related issues. The event featured keynote remarks by Jason Furman, Chairman of the Council of Economic Advisers, and Alan Greenspan, former Chairman of the Federal Reserve Board. James Manyika and Jaana Remes of the McKinsey Global Institute considered the potential for faster global productivity growth. Marco Annunziata of General Electric will gave his perspective, and Martin Baily looked at explanations for slow growth in the U.S. economy.

Download a McKinsey report on global productivity trends »

Video

• Opening keynote by Jason Furman
• Global growth: Can productivity save the day in an aging world?
• Closing keynote by Alan Greenspan

Audio

• Achieving strong economic growth

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• MGI_Global_growth_Full_report_February_2015pdf (3)
• 20150408_strong_economic_growth_transcript
• BAILY_slides
• GREENSPAN_slides
• REMES_MANYIKA_slides

November's U.S. Bureau of Labor Statistics (BLS) employment report showed continued improvement in the job market, with employers adding 211,000 workers to their payrolls and hourly pay edging up compared with its level a year ago. The pace of job growth was similar to that over the past year and somewhat slower than the pace in 2014. For the 69^th consecutive month, private-sector payrolls increased. Since the economic recovery began in the third quarter of 2009, all the nation’s employment gains have occurred as a result of expansion in private-sector payrolls. Government employment has shrunk by more than half a million workers, or about 2.5 percent. In the past twelve months, however, public payrolls edged up by 93,000.

The good news on employment gains in November was sweetened by revised estimates of job gains in the previous two months. Revisions added 8,000 to estimated job growth in September and 27,000 to job gains in October. The BLS now estimates that payrolls increased 298,000 in October, a big rebound compared with the more modest gains in August and September, when payrolls grew an average of about 150,000 a month.

Average hourly pay in November was 2.3 percent higher than its level 12 months earlier. This is a slightly faster rate of improvement compared with the gains we saw between 2010 and 2014. A tighter job market may mean that employers are now facing modestly higher pressure to boost employee compensation. The exceptionally low level of consumer price inflation means that the slow rate of nominal wage growth translates into a healthy rate of real wage improvement. The latest BLS numbers show that real weekly and hourly earnings in October were 2.4 percent above their levels one year earlier. Not only have employers added more than 2.6 million workers to their payrolls over the past year, the purchasing power of workers' earnings have been boosted by the slightly faster pace of wage gain and falling prices for oil and other commodities.

The BLS household survey also shows robust job gains last month. Employment rose 244,000 in November, following a jump of 320,000 in October. More than 270,000 adults entered the labor force in November, so the number of unemployed increased slightly, leaving the unemployment rate unchanged at 5.0 percent. In view of the low level of the jobless rate, the median duration of unemployment spells remains surprisingly long, 10.8 weeks. Between 1967 and the onset of the Great Recession, the median duration of unemployment was 10.8 weeks or higher in just seven months. Since the middle of the Great Recession, the median duration of unemployment has been 10.8 weeks or longer for 82 consecutive months. The reason, of course, is that many of the unemployed have been looking for work for a long time. More than one-quarter of the unemployed—slightly more than two million job seekers—have been jobless for at least 6 months.  That number has been dropping for more than five years, but remains high relative to our experience before the Great Recession.

If there is bad news in the latest employment report, it's the sluggish response of labor force participation to a brighter job picture. The participation rate of Americans 16 and older edged up 0.1 point in November but still remains 3.5 percentage points below its level before the Great Recession. About half the decline can be explained by an aging adult population, but a sizeable part of the decline remains unexplained. The participation rate of men and women between 25 and 54 years old is now 80.8 percent, exactly the same level it was a year ago but 2.2 points lower than it was before the Great Recession. Despite the fact that real wages are higher and job finding is now easier than was the case earlier in the recovery, the prime-age labor force participation rate remains stuck well below its level before the recession. How strong must the recovery be before prime-age adults are induced to come back into the work force? Even though the recovery is now 6 and a half years old, we still do not know.

The latest BLS employment report showed remarkable strength in the U.S. job market even as global financial markets were trembling. Employers added 292,000 to their payrolls in December. Upward revisions in previous BLS estimates also boosted gains in October and November. In the last quarter of 2015, payrolls increased at a rate of 284,000 per month, a remarkable performance in the face of rising uncertainty about prospects for the world economy. U.S. employers added a total of 2.65 million jobs in 2015, the second best calendar-year gain of the current recovery. (Gains were stronger in 2014 but smaller in earlier years of the recovery.)

As usual, private employers accounted for an overwhelming share of the job gains. Ninety-seven percent of the gains in the fourth quarter and 96 percent of the gains last year occurred as a result of employment gains in the private sector. Whatever the uncertainty of the world economic outlook, U.S. employers have enough confidence in their own prospects to keep adding to their payrolls at a healthy clip. Public employment remains about 375,000 (1.7 percent) lower than it was at the onset of the Great Depression. Though government payrolls are now growing, in percentage terms they have been rising much more slowly that private payrolls.

Editor’s note: The following remarks were prepared and delivered by Gary Burtless at a roundtable sponsored by the American Tax Policy Institute on January 7, 2016. Video of Burtless’ remarks are also available on the Institute’s website. Download the related slides at the right. 

To eliminate suspense from the start: Nothing I am about to say undermines the popular narrative about recent inequality trends.  For the past 35 years, U.S. inequality has increased.  Inequality has increased noticeably, no matter what income definition you care to use.  A couple of things you read in the newspaper are untrue under some income definitions. For example, under a comprehensive income definition it is false to claim that all the income gains of the past 2 or 3 decades have gone to the top 1 percent, or the top 5 percent, or the top 10 percent of income recipients.  Middle- and low-income Americans have managed to achieve income gains, too, as we shall see.

Tax policy certainly affects overall inequality, but I shall leave it for Scott, David, and Tracy to take that up. Let me turn to my main job, which is to distinguish between different reasonable income measures.

The crucial thing to know is that contradictory statements can be made about some income trends because of differences in the definition of income.  In general, the most pessimistic statements about trends rely on an income definition that is restrictive in some way.  The definition may exclude important income items, items, for example, that tend to equalize or boost family incomes.  The definition may leave out adjustments to income … adjustments that tend to boost the rate of income gain for low- or middle-income recipients, but not for top-income recipients.

The narrowest income definition commonly used to evaluate income trends is Definition #1 in my slide, “pretax private, cash income.”  Columnists and news reporters are unknowingly using this income definition when they make pronouncements about the income share of the “top 1 percent.”  The data about income under this definition are almost always based on IRS income tax returns, supplemented with a bit of information from the Commerce Department’s National Income and Product Account (NIPA) data file.

The single most common income definition used to assess income trends and inequality is the Census Bureau’s “money income” definition, Definition #2 on the slide.  It is just the same as the first definition I mentioned, except this income concept also includes government cash transfer payments – Social Security, unemployment insurance, cash public assistance, Veterans’ benefits, etc.

A slightly more expansive definition (#3) also adds food stamp (or SNAP) benefits plus other government benefits that are straightforward to evaluate. Items of this kind include the implicit rent subsidy low-income families receive in publicly-subsidized housing, school lunch subsides, and means-tested home heating subsidies.

Now we come to subtractions from income. These typically reflect families’ tax obligations.  The Census Bureau makes estimates of state and federal income tax liabilities as well as payroll taxes owed by workers (though not by their employers).  Since income and payroll taxes subtract from the income available to pay for other stuff families want to buy, it seems logical to also subtract them from countable income. This is done under income Definition #4.  Some tax obligations – notably the Earned Income Credit (EIC) – are in fact subtractions from taxes owed, which would not be a problem in the case of families that still owe positive taxes to the government.  However, the EIC is refundable to taxpayers, meaning that some families have negative tax liabilities:  The government owes them money.  In this case, if you do not take taxes into account you understate low-income families’ incomes, even as you’re overstating the net incomes available to middle- and high-income families.

Now let’s get a bit more complicated.  Forget what I said about taxes, because our next income definition (#5) also ignores them.  It is an even-more-comprehensive definition of gross or pretax income.  In addition to all those cash and near-cash items I mentioned in Definition #3, Definition #5 includes imputed income items, such as: 

• The value of your employer’s premium contribution to your employee health plan;
• The value of the government’s subsidy to your public health plan – Medicare, Medicaid, state CHIP plans, etc.
• Realized taxable gains from the sale of assets; and
• Corporate income that is earned by companies in which you own a share even though it is not income that is paid directly to you.

This is the most comprehensive income definition of which I am aware that refers to gross or pre-tax income.

Finally we have Definition #6, which subtracts your direct and indirect tax payments.  The only agency that uses this income definition is principally interested in the Federal budget, so the subtractions are limited to Federal income and payroll taxes, Federal corporate income taxes, and excise taxes.

Before we go into why you should care about any of these definitions, let me mention a somewhat less important issue, namely, how we define the income-sharing group over which we estimate inequality.  The most common assessment unit for income included under Definition #1 (“Pre-tax private cash income”) is the Federal income tax filing unit.  Sometimes this unit has one person; sometimes 2 (a married couple); and sometimes more than 2, including dependents.

The Census Bureau (and, consequently, most users of Census-published statistics) mainly uses “households” as reference units, without any adjustment for variations in the size of different households.  The Bureau’s median income estimate, for example, is estimated using the annual “money income” of households, some of which contain 1 person, some contain 2, some contain 3, and so on.

Many economists and sociologists find this unsatisfactory because they think a $20,000 annual income goes a lot farther if it is supporting just one person rather than 12.  Therefore, a number of organizations—notably, the Luxembourg Income Study (LIS), the Organisation of Economic Cooperation and Development (OECD), and the Congressional Budget Office (CBO)—assume household income is equally shared within each household, but that household “needs” increase with the square root of the number of people in the household.  That is, a household containing 9 members is assumed to require 1½ times as much income to enjoy the same standard of living as a family containing 4 members.  After an adjustment is made to account for the impact of household size, these organizations then calculate inequality among persons rather than among households.

How are these alternative income definitions estimated?  Who uses them?  What do the estimates show?  I’ll only consider a two or three basic cases.

First, pretax, private, cash income. By far the most famous users of this definition are Professors Thomas Piketty and Emmanuel Saez.  Their most celebrated product is an annual estimate of the share of total U.S. income (under this restricted definition) that is received by the top 1 percent of tax filing units.

Here is their most famous chart, showing the income share of the top 1 percent going back to 1913. (I use the Piketty-Saez estimates that exclude realized capital gains in the calculation of taxpayers’ incomes.) The notable feature of the chart is the huge rise in the top income share between 1970—when it was 8 percent of all pretax private cash income—and last year—when the comparable share was 18 percent.  

I have circled one part of the line—between 1986 and 1988—to show you how sensitive their income definition is to changes in the income tax code.  In 1986 Congress passed the Tax Reform Act of 1986 (TRA86). By 1988 the reform was fully implemented.  Wealthy taxpayers noticed that TRA86 sharply reduced the payoff to holding corporate earnings inside a separately taxed corporate entity. Rich business owners or shareholders could increase their after-tax income by arranging things so their business income was taxed only once, at the individual level.  The result was that a lot of income, once earned by and held within corporations, was now passed through to the tax returns of rich individual taxpayers. These taxpayers appeared to enjoy a sudden surge in their taxable incomes between 1986 and 1988.  No one seriously believes rich people failed to get the benefits of this income before 1987.  Before 1987 the same income simply showed up on corporate rather than on individual income tax returns.

A final point:  The chart displayed in SLIDE #6 is the source of the widely believed claim that U.S. inequality is nowadays about the same as it was at the end of the Roaring 1920s, before the Great Depression.  That is close to being true – under this income definition.

Census “money income”: This income definition is very similar to the one just discussed, except that it includes cash government transfer payments.  The producer of the series is the Census Bureau, and its most famous uses are to measure trends in real median household income and the official U.S. poverty rate. Furthermore, the Census Bureau uses the income definition to compile estimates of the Gini coefficient of household income inequality and the income shares received by each one-fifth of households, ranked from lowest to highest income, and received by the top 5 percent of households.

Here is a famous graph based on the Bureau’s “median household income” series.  I have normalized the historical series using the 1999 real median income level (1999 and 2000 were the peak income years according to Census data).  Since 1999 and 2000, median income has fallen about 10 percent.  If we accept this estimate without qualification, it certainly represents bad news for living standards of the nation’s middle class. The conclusion is contradicted by other government income statistics that use a broader, more inclusive income definition, however.

And here is the Bureau’s most widely cited distributional statistic (after its “official poverty rate” estimate).  Since 1979, the Gini coefficient has increased 17 percent under this income definition. (It is worth noting, however, that the portion of the increase that occurred between 1992 and 1993 is mainly the result of methodological changes in the way the Census Bureau ascertained incomes in its 1994 income survey.)

When you hear U.S. inequality compared with that in other rich countries, the numbers are most likely based on calculations of the LIS or OECD.  Their income definition is basically “Cash and Near-cash Public and Private income minus Income and Payroll taxes owed by households.”  Under this income definition, the U.S. looks relatively very unequal and America appears to have an exceptionally high poverty rate.  U.S. inequality has been rising under this income definition, as indeed has also been the case in most other rich countries. The increase in the United States has been above average, however, helping us to retain our leadership position, both in income inequality and in relative poverty.

We turn last to the most expansive income definition:  CBO’s measure of net after-tax income.  I will use CBO’s tabulations using this income definition to shed light on some of the inequality and living standard trends implied by the narrower income definitions discussed above.

Let’s consider some potential limitations of a couple of those definitions.  The limitations do not necessarily make them flawed or uninteresting.  They do mean the narrower income measures cannot tell us some of the things that users claim they tell us.

An obvious shortcoming of the “cash pretax private income” definition is that it excludes virtually everything the government does to equalize Americans’ incomes.  Believe it or not, the Federal tax system is mildly progressive.  It claims a bigger percentage of the (declared) incomes of the rich than it does of middle-income families’ and especially the poor.  Any pretax income measure will miss that redistribution.

More seriously, it excludes all government transfer payments.  You may think the rich get a bigger percentage of their income from government handouts compared with middle class and poorer households.  That is simply wrong.  The rich get a lot less.  And the percentage of total personal income that Americans derive from government transfer payments has gone way up over the years.  In the Roaring 1920s, Americans received almost nothing in the form of government transfers. Less than 1 percent of Americans’ incomes were received as transfer payments.  By 1970—near the low point of inequality according to the Piketty-Saez measure—8.3 percent of Americans’ personal income was derived from government transfers.  Last year, the share was 17 percent. None of the increase in government transfers is reflected in Piketty and Saez’s estimates of the trend in inequality.  Inequality is nowadays lower than it was in the late 1920s, mainly because the government does more redistribution through taxes and transfers.

Both the Piketty-Saez and the Census “money income” statistics are affected by the exclusion of government- and employer-provided health benefits from the income definition. This slide contains numbers, starting in 1960, that show the share of total U.S. personal consumption consisting of personal health care consumption.  I have divided the total into two parts. The first is the share that is paid for out of our own cash incomes (the blue part at the bottom).  This includes our out-of-pocket spending for doctors’ charges, hospital fees, pharmaceutical purchases, and other provider charges as well as our out-of-pocket spending on health insurance premiums. The second is the share of our personal health consumption that is paid out of government subsidies to Medicare, Medicaid, CHIP, etc., or out of employer subsidies to employee health plans (the red part). 

As everyone knows, the share of total consumption that consists of health consumption has gone way up.  What few people recognize is that the share that is directly paid by consumers—through payments to doctors, hospitals, and household health insurance premium payments—has remained unchanged.  All of the increase in the health consumption share since 1960 has been financed through government and employer subsidies to health insurance plans. None of those government or employer contributions is counted as “income” under the Piketty-Saez and Census “money income” definitions.  You would have to be quite a cynic to claim the subsidies have brought households no living standard improvements since 1960, yet that is how they are counted under the Piketty-Saez and Census “money income” definitions.

Final slide: How much has inequality gone up under income definitions that count all income sources and subtract the Federal income, payroll, corporation, and excise taxes we pay?  CBO gives us the numbers, though unfortunately its numbers end in 2011.

Here are CBO’s estimates of real income gains between 1979 and 2011.  These numbers show that real net incomes increased in every income category, from the very bottom to the very top.  They also show that real incomes per person have increased much faster at the top—over on the right—than in the middle or at the bottom—over on the left.  Still, contrary to a common complaint that all the income gains in recent years have been received by folks at the top, the CBO numbers suggest net income gains have been nontrivial among the poor and middle class as well as among top income recipients.

Suppose we look at trends in the more recent past, say, between 2000 and 2011.  That lower panel in this slide presents a very different picture from the one implied by the Census Bureau’s “money income” statistics.  Unlike the “money income numbers” [SLIDE #9], these show that inequality has declined since 2000.  Unlike the “money income numbers” [SLIDE #8], these show that incomes of middle-income families have improved since 2000.  There are a variety of explanations for the marked contrast between the Census Bureau and CBO numbers.  But a big one is the differing income definitions the two conclusions are based on.  The more inclusive measure of income shows faster real income gains among middle-income and poorer households, and it suggests a somewhat different trend in inequality.

The pace of employment gains slowed in January from the torrid pace of the previous three months. The latest BLS jobs report shows that employers added 151,000 to their payrolls in January, well below monthly gains in October through December. In that quarter payrolls climbed almost 280,000 a month. For two reasons, the deceleration in employment gains was not a complete surprise. First, the rapid growth payrolls in the last quarter did not seem consistent with other indicators of growth in the quarter. Preliminary GDP estimates suggest that output growth slowed sharply in the fourth quarter compared with the previous two. Second, I see few indicators suggesting the pace of economic growth has picked up so far this year.

It’s worth noting that employment gains in January were far faster than needed to keep the unemployment rate from increasing. In fact, if payrolls continue to grow at January’s pace throughout the year, we should expect the unemployment rate to continue falling. As usual in the current expansion, private employers accounted for all of January’s employment gains. Government payrolls shrank slightly. The number of public employees is about the same as it was last July. Over the same period, private employers added about 213,000 workers a month to their payrolls. In January employment gains slowed in construction and in business and professional industries. Payrolls shrank in mining. Since mining payrolls reached a peak in September 2014, they have fallen 16 percent. Manufacturing payrolls rose slightly in January, but payroll gains have been very slow over the past year. Employment in the temporary help industry contracted in January. The industry has seen no net change in payrolls since October.

Average hourly pay in private companies edged up in January. The average nominal wage was 2.5 percent higher than its level 12 months earlier. This is a faster rate of improvement compared with what we saw earlier in the recovery, when annual pay gains averaged about 2.0 percent a year. The modest acceleration in nominal pay gains has occurred against the backdrop of slowing consumer price inflation. The combination has given workers real wage gains approaching 2.0 percent over the past year.

The BLS household survey showed a small drop in unemployment. The jobless rate fell to 4.9 percent, just 0.3 points above its average level in 2007, the last year before the Great Recession. The drop in unemployment was the result of a rise in the number of survey respondents who were employed. The labor force participation rate increased in January, and it has increased 0.3 points since October.

This rebound in labor force participation is modest compared with the drop that occurred between 2008 and 2015. From 2007 to January 2016 the adult participation rate fell 3.4 percentage points. Roughly half the drop is traceable to population aging, but the other half is due to factors related to the deep slump or to long-term factors that have affected Americans’ willingness to enter or remain in the workforce. If we assume all of the drop was due to factors that have temporarily discouraged jobless adults from seeking work, then we can recalculate the unemployment rate to reflect the rate we would see if all of these discouraged workers were reclassified as unemployed. That calculation suggests the current unemployment rate would be about 7.4 percent rather than 4.9 percent.

It is of course unlikely all the adults who’ve dropped out the labor force would stream back in if job finding got easier and real wages continued to rise. It is encouraging to see, however, that participation is now climbing after a long period of decline. Over the past four months, the labor force participation rate of 25-54 year-olds increased 0.5 percentage points.

Gary Burtless, a senior fellow in Economic Studies, explains new research on the growing longevity gap between high-income and low-income Americans, especially among the aged.

“Life expectancy difference of low income workers, middle income workers, and high income workers has been increasing over time,” Burtless says. “For people born in 1920 their life expectancy was not as long typically as the life expectancy of people who were born in 1940. But those gains between those two birth years were very unequally distributed if we compare people with low mid-career earnings and people with high mid-career earnings.” Burtless also discusses retirement trends among the educated and non-educated, income inequality among different age groups, and how these trends affect early or late retirement rates.

Also stay tuned for our regular economic update with David Wessel, who also looks at the new research and offers his thoughts on what it means for Social Security.

Show Notes

Later retirement, inequality and old age, and the growing gap in longevity between rich and poor

Disparity in Life Spans of the Rich and the Poor Is Growing

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Researchers have long known that the rich live longer than the poor. Evidence now suggests that the life expectancy gap is increasing, at least here the United States, which raises troubling questions about the fairness of current efforts to protect Social Security.

There's nothing particularly mysterious about the life expectancy gap. People in ill health, who are at risk of dying relatively young, face limits on the kind and amount of work they can do. By contrast, the rich can afford to live in better and safer neighborhoods, can eat more nutritious diets and can obtain access to first-rate healthcare. People who have higher incomes, moreover, tend to have more schooling, which means they may also have better information about the benefits of exercise and good diet.

Although none of the above should come as a surprise, it's still disturbing that, just as income inequality is growing, so is life-span inequality. Over the last three decades, Americans with a high perch in the income distribution have enjoyed outsized gains.

Using two large-scale surveys, my Brookings colleagues and I calculated the average mid-career earnings of each interviewed family; then we estimated the statistical relationship between respondents' age at death and their incomes when they were in their 40s. We found a startling spreading out of mortality differences between older people at the top and bottom of the income distribution.

For example, we estimated that a woman who turned 50 in 1970 and whose mid-career income placed her in the bottom one-tenth of earners had a life expectancy of about 80.4. A woman born in the same year but with income in the top tenth of earners had a life expectancy of 84.1. The gap in life expectancy was about 3½ years. For women who reached age 50 two decades later, in 1990, we found no improvement at all in the life expectancy of low earners. Among women in the top tenth of earners, however, life expectancy rose 6.4 years, from 84.1 to 90.5. In those two decades, the gap in life expectancy between women in the bottom tenth and the top tenth of earners increased from a little over 3½ years to more than 10 years.

Our findings for men were similar. The gap in life expectancy between men in the bottom tenth and top tenth of the income distribution increased from 5 years to 12 years over the same two decades.

Rising longevity inequality has important implications for reforming Social Security. Currently, the program takes in too little money to pay for all benefits promised after 2030. A common proposal to eliminate the funding shortfall is to increase the full retirement age, currently 66. Increasing the age for full benefits by one year has the effect of lowering workers' monthly checks by 6% to 7.5%, depending on the age when a worker first claims a pension.

For affluent workers, any benefit cut will be partially offset by gains in life expectancy. Additional years of life after age 65 increase the number years these workers collect pensions. Workers at the bottom of the wage distribution, however, are not living much longer, so the percentage cut in their lifetime pensions will be about the same as the percentage reduction in their monthly benefit check.

Our results and other researchers' findings suggest that low-income workers have not shared in the improvements in life expectancy that have contributed to Social Security's funding problem.

It therefore seems unfair to preserve Social Security by cutting future benefits across the board. Any reform in the program to keep it affordable should make special provision to protect the benefits of low-wage workers.

Editor's note: This piece originally appeared in The Los Angeles Times. 

The latest BLS jobs report shows little sign employers are worried about the future strength of the recovery. Both the employer and household surveys suggest U.S. employers have an undiminished appetite for new hires. Nonfarm payrolls surged 242,000 in February, and upward revisions BLS employment estimates for January added almost 21,000 to estimated payroll gains in that month.

The household survey shows even bigger job gains in recent months. An additional 530,000 respondents said they were employed in February compared with January. This follows reported employment gains of 485,000 and 615,000 in December and January. Over the past year the household survey showed employment gains that averaged 237,000 per month. In comparison, the employer survey reported payroll gains averaging 223,000 a month.

These monthly gains are about three times faster than the job growth needed to keep the unemployment rate from climbing. As a result, the unemployment rate has fallen over the past year, reaching 4.9 percent in January. The jobless rate remained unchanged in February because of a continued influx of adults into the workforce. An additional 555,000 people entered the labor force, capping a three-month period which saw the labor force grow by over 500,000 a month. The labor force participation rate continued to inch up, rising 0.2 percentage points in February compared with the previous month. Since reaching a 38-year low in September 2015, the labor force participation rate has risen 0.5 points.

More than half the decline in the participation rate between the onset of the Great Recession and today is traceable to the aging of the adult population. A growing share of Americans are in late middle age or past 65, ages when we anticipate participation rates will decline. If we focus on the population between 25 and 54, the participation rate stopped declining in 2013 and has edged up 0.6 percentage points since hitting its low point. The employment-to-population rate of 25-54 year-olds has increased 3.0 percentage points since reaching a low in 2009 and 2010. Using the employment rate of 25-54 year-olds as an indicator of labor market tightness, we have recovered about 60 percent of the employment-rate drop that occurred in the Great Recession. Eliminating the rest of the decline will require a further increase in prime-age labor force participation.

Two other indicators suggest the job market remains some distance from a full recovery. More than a quarter of the 7.8 million unemployed have been jobless 6 months or longer. The number of long-term unemployed is about 70 percent higher than was the case just before the Great Recession. Nearly 6 million Americans who hold part-time jobs indicate they want to work on full-time schedules. They cannot do so because they have been assigned part-time hours or can only find a part-time job. The number of workers in this position is more than one-third higher than the comparable number back in 2007. Nonetheless, nearly all indicators of labor market tightness have displayed continued improvement in recent months.

February’s surge in employment growth and labor force participation was accompanied by an unexpected drop in nominal wages. Average hourly pay fell from $25.38 to $25.35 per hour. Compared with average earnings 12 months ago, workers saw a 2.2 percent rise in nominal hourly earnings. Because inflation is low, this probably translates into a real wage gain of about 1 percent. While employers may have an undiminished appetite for new hires, they show little inclination to boost the pace of wage increases.

Critics of the nation's retirement system regularly complain that the system is in crisis. Too many private companies fail to offer their employees a retirement plan. Many employees who are covered by a plan fail to make contributions to it. Those who do make contributions may contribute too little or invest their savings unwisely. The end result: Many of us will reach retirement age with miniscule pensions or too little savings to enjoy a comfortable old age.

The argument that our retirement system has gaping holes is well founded. The notion that it faces an imminent "crisis" is nonsense. If the system currently faces a crisis, it has faced the same one for the past 40 years. While elderly Americans have seen their incomes and living standards improve in recent decades, the median working-age family has experienced little improvement in its real income. Nonelderly families that depend solely on the earnings of breadwinners who have below-average schooling saw a drop in their incomes.

In recent research with Brookings colleagues, I tracked the real incomes of families headed by aged and nonaged Americans. In the 34 years ending in 2012, the median real income of working-age families climbed a little more than 2 percent (in other words, by less than one-tenth of a percentage point per year). The median real income of families headed by someone past 62 increased a little more than 40 percent. The numbers suggest our retirement system is doing a decent job improving the living standards of the aged. Unfortunately, the labor market is doing a much worse job boosting the living standards of middle-class wage earners.

Critics of the retirement system might worry that it succeeds in protecting the incomes of the middle class elderly but fails to protect the incomes of the poor -- a concern not supported by the evidence. Income inequality has gone up among the elderly as it has among the nonelderly. But older low-income Americans have fared much better than low-income working-age adults. In the late 1950s, by far the highest poverty rate of any age group was that for people over 65. Even in the late 1980s, the elderly had a higher poverty rate than adults between 18-64. Since the middle of the last decade, however, the elderly have had the lowest poverty rate of any age group.

People who warn us of a retirement "crisis" are nonetheless correct in pointing to sizeable holes in the current system. Too few companies, especially small ones, offer their workers a retirement plan. According to recent government estimates, only about half of workers in companies with fewer than 100 employees are offered a retirement plan. Offer rates are higher in bigger companies and in government agencies, but about 30 percent of all employees are not offered any pension or retirement savings plan where they work. When retirement plans are offered, however, workers are very likely to participate in them -- even if they must make a voluntary contribution out of their pretax wages.

What is crucial for a retirement savings plan's success is automatic payroll withholding. Dollars that are withheld from workers' paychecks are harder for workers to spend on something other than retirement savings. A crucial improvement in our current system would be to require all employers to establish automatic payroll withholding for voluntary retirement savings in an IRA (individual retirement account). Companies that already offer a qualified pension or retirement savings plan should be exempt from any extra obligation.

The harshest critics of the current retirement system would go much further than this. Many want to bring back traditional retirement plans that guaranteed workers a specific monthly pension linked to their job tenure, final pay, and age at retirement. The advantages of such a plan for workers are that their employer is typically responsible for funding the plan and for ensuring that pensions are paid, regardless of the ups and downs of financial markets. A big disadvantage is that the promised benefits are not worth much if the worker's career with a company is cut short, either because of a layoff or quitting.

People who are nostalgic for old-fashioned pensions may be right that workers would prefer to be covered by such a plan, despite their disadvantages for short-tenure workers. I'm less persuaded that traditional pensions offer better protection to typical workers than modern 401(k)-type plans. Regardless of the pros and cons of the two kinds of plan, it is wildly unrealistic to think small employers or new employers will want to take on the risks and administrative burdens connected with an old-fashioned pension plan.

All U.S. workers are covered by a traditional, defined-benefit pension: it's called Social Security. It has worked well over the past four decades in protecting and even lifting the incomes of the retired elderly. It may not work as well in the future if benefits are cut substantially to keep the program solvent. Boosting workplace retirement savings is a sensible way to insure future retirees will have adequate incomes, even if Social Security benefits have to be trimmed. An essential first step to boosting savings is to require companies to put a retirement savings plan in every workplace.

Editor's note: This piece originally appeared in Real Clear Markets.

Ahead of Tuesday’s primary elections in Ohio, Florida and other states, the 2016 presidential candidates have been talking about the future of Social Security and its funding shortfalls.

Over the next two decades, the money flowing into Social Security will be too little to pay for all promised benefits. The reserve fund will be exhausted soon after 2030, and the only money available to pay for benefits will be from taxes earmarked for the program. Unless Congress and the President change the law before the reserve is depleted, monthly benefits will have to be cut about 21%.

Needless to say, office holders, who must face voters, are unlikely to allow such a cut. Before the Trust Fund is depleted, lawmakers will agree to some combination of revenue increase and future benefit reduction, eliminating the need for a sudden 21% pension cut. The question is: what combination of revenue increases and benefit cuts does each candidate favor?

The candidate offering the most straightforward but least credible answer is Donald Trump. During the GOP presidential debate last week, he pledged to do everything within his power to leave Social Security “the way it is.” He says he can do this by making the nation rich again, by eliminating budget deficits, and by ridding government programs of waste, fraud, and abuse. In other words, he proposed to do nothing specifically to improve Social Security’s finances. Should Trump’s deal-making fail to make us rich again, he offered no back-up plan for funding benefits after 2034.

The other three GOP candidates proposed to repair Social Security by cutting future pensions. No one in the debate, except U.S. Sen. Marco Rubio from Florida, mentioned a specific way to accomplish this. Rubio’s plan is to raise the age for full retirement benefits. For many years, the full retirement age was 65. In a reform passed in 1983, the retirement age was gradually raised to 66 for people nearing retirement today and to 67 for people born after 1960. Rubio proposes to raise the retirement age to 68 for people who are now in their mid-40s and to 70 for workers who are his children’s age (all currently under 18 years old).

In his campaign literature, Rubio also proposes slowing the future rate of increase in monthly pensions for high-income seniors. However, by increasing the full retirement age, Rubio’s plan will cut monthly pensions for any worker who claims benefits at 62 years old. This is the earliest age at which workers can claim a reduced pension. Also, it is by far the most common age at which low-income seniors claim benefits. Recent research suggests that low-income workers have not shared the gains in life expectancy enjoyed by middle- and especially high-income workers, so Rubio’s proposed cut could seriously harm many low-income workers.

Though he didn’t advertise it in the debate, Sen. Ted Cruz favors raising the normal retirement age and trimming the annual cost-of-living adjustment in Social Security. In the long run, the latter reform will disproportionately cut the monthly pensions of the longest-living seniors. Many people, including me, think this is a questionable plan, because the oldest retirees are also the most likely to have used up their non-Social-Security savings. Finally, Cruz favors allowing workers to fund personal-account pensions with part of their Social Security contributions. Although the details of his plan are murky, if it is designed like earlier GOP privatization plans, it will have the effect of depriving Social Security of needed future revenues, making the funding gap even bigger than it is today.

The most revolutionary part of Cruz’s plan is his proposal to eliminate the payroll tax. For many decades, this has been the main source of Social Security revenue. Presumably, Cruz plans to fund pensions out of revenue from his proposed 10% flat tax and 16% value-added tax (VAT). This would represent a revolutionary change because up to now, Social Security has been largely financed out of its own dedicated revenue stream. By eliminating the independent funding stream, Cruz will sever the perceived link between workers’ contributions and the benefits they ultimately receive. Most observers agree with Franklin Roosevelt that the strong link between contributions and benefits is a vital source of the enduring popularity of the program. Social Security is an earned benefit for retirees rather than a welfare check.

Gov. John Kasich does not propose to boost the retirement age, but he does suggest slowing the growth in future pensions by linking workers’ initial pensions to price changes instead of wage changes. He hints he will impose a means test in calculating pensions, reducing the monthly pensions payable to retirees who have high current incomes. Many students of Social Security think this a bad idea, because it can discourage workers from saving for retirement.

All of the Republican candidates, except Trump, think Social Security’s salvation lies in lower benefit payouts. Nobody mentions higher contributions as part of the solution. In contrast, both Democratic candidates propose raising payroll or other taxes on workers who have incomes above the maximum earnings now subject to Social Security contributions. This reform enjoys broad support among voters, most of whom do not expect to pay higher taxes if the income limit on contributions is lifted. Sen. Bernie Sanders would immediately spend some of the extra revenue on benefit increases for current beneficiaries, but his proposed tax hike on high-income contributors would raise enough money to postpone the year of Trust Fund depletion by about 40 years. Hillary Clinton is less specific about the tax increases and benefit improvements she favors. Like Sanders, however, she would vigorously oppose benefit cuts.

None of the candidates has given us a detailed plan to eliminate Social Security’s funding imbalance. At this stage, it’s not obvious such a plan would be helpful, since the legislative debate to overhaul Social Security won’t begin anytime soon. Sanders has provided the most details about his policy intentions, but his actual plan is unlikely to receive much Congressional support without a massive political realignment. Cruz’s proposal, which calls for eliminating the Social Security payroll tax, also seems far outside the range of the politically feasible.

What we have learned from the GOP presidential debates so far is that Republican candidates, with the exception of Trump, favor balancing Social Security through future benefit cuts, possibly targeted on higher income workers, while Democratic candidates want to protect current benefit promises and will do so with tax hikes on high-income workers. There is no overlap in the two parties’ proposals, and this accounts for Washington’s failure to close Social Security’s funding gap.

Editor’s note: This piece originally appeared in Fortune.

The past few months have seen a flurry of reports on discouraging trends in life expectancy among some of the nation’s struggling populations. Different researchers have emphasized different groups and have tracked longevity trends over different time spans, but all have documented conspicuous differences between trends among more advantaged Americans compared with those in worse circumstances.

In a study published in April, Stanford economist Raj Chetty and his coauthors documented a striking rise in mortality rate differences between rich and poor. From 2001 to 2014, Americans who had incomes in the top 5 percent of the income distribution saw their life expectancy climb about 3 years. During the same 14-year span, people in the bottom 5 percent of the income distribution saw virtually no improvement at all.

Using different sources of information about family income and mortality, my colleagues and I found similar trends in mortality when Americans were ranked by their Social-Security-covered earnings in the middle of their careers. Over the three decades covered by our data, we found sizeable differences between the life expectancy gains enjoyed by high- and low-income Americans. For 50-year old women in the top one-tenth of the income distribution, we found that women born in 1940 could expect to live almost 6.5 years longer than women in the same position in the income distribution who were born in 1920. For 50-year old women in the bottom one-tenth of the income distribution, we found no improvement at all in life expectancy. Longevity trends among low-income men were more encouraging: Men at the bottom saw a small improvement in their life expectancy. Still, the life-expectancy gap between low-income and high-income men increased just as fast as it did between low- and high-income women.

One reason these studies should interest voters and policymakers is that they shed light on the fairness of programs that protect Americans’ living standards in old age. The new studies as well as some earlier ones show that mortality trends have tilted the returns that rich and poor contributors to Social Security can expect to obtain from their payroll tax contributions.

If life expectancy were the same for rich and poor contributors, the lifetime benefits workers could expect to receive from their contributions would depend solely on the formula that determines a worker’s monthly pensions. Social Security’s monthly benefit formula has always been heavily tilted in favor of low-wage contributors. They receive monthly checks that are a high percentage of the monthly wages they earn during their careers. In contrast, workers who earn well above-average wages collect monthly pensions that are a much lower percentage of their average career earnings.

The latest research findings suggest that growing mortality differences between rich and poor are partly or fully offsetting the redistributive tilt in Social Security’s benefit formula. Even though poorer workers still receive monthly pension checks that are a high percentage of their average career earnings, they can expect to receive benefits for a shorter period after they claim pensions compared with workers who earn higher wages. Because the gap between the life spans of rich and poor workers is increasing, affluent workers now enjoy a bigger advantage in the number of months they collect Social Security retirement benefits. This fact alone is enough to justify headlines about the growing life expectancy gap between rich and poor

There is another reason to pay attention to the longevity trends. The past 35 years have provided ample evidence the income gap between America’s rich and poor has widened. To be sure, some of the most widely cited income series overstate the extent of widening and understate the improvement in income received by middle- and low-income families. Nonetheless, the most reliable statistics show that families at the top have enjoyed faster income gains than the gains enjoyed by families in the middle and at the bottom. Income disparities have gone up fastest among working-age people who depend on wages to pay their families’ bills. Retirees have been better protected against the income and wealth losses that have hurt the living standards of less educated workers. The recent finding that life expectancy among low-income Americans has failed to improve is a compelling reason to believe the trend toward wider inequality is having profound impacts on the distribution of well-being in addition to its direct effect on family income.

Over the past century, we have become accustomed to seeing successive generations live longer than the generations that preceded them. This is not true every year, of course, nor is it always clear why the improvements in life expectancy have occurred. Still, it is reasonable to think that long-run improvements in average life spans have been linked to improvements in our income. With more money, we can afford more costly medical care, healthier diets, and better public health. Even Americans at the bottom of the income ladder have participated in these gains, as public health measures and broader access to health insurance permit them to benefit from improvements in knowledge. For the past three decades, however, improvements in average life spans at the bottom of the income distribution have been negligible. This finding suggests it is not just income that has grown starkly more unequal.

Editor's note: This piece originally appeared in Real Clear Markets.

No. We should exempt workers earning the lowest wages.

Social Security faces a serious funding problem. The program takes in too little money to pay all that has been promised to future beneficiaries. Government forecasters predict Social Security’s reserve fund will be depleted between 2030 and 2034. There are two basic ways we can eliminate the funding gap: cut benefits or increase contributions. A common proposal is to increase the age at which workers can claim full retirement benefits. For people nearing retirement today, the full retirement age is 66. As a result of a 1983 law, that age will rise to 67 for workers born after 1959.

When policymakers urge us to raise the retirement age, they are proposing to increase the full retirement age beyond 67, possibly to 70, for workers now in their 30s or 40s. This saves money, but it also cuts monthly retirement benefits by the same percentage for every worker, unless workers delay claiming benefits. The policy might seem fair if workers in future generations could all expect to share in gains in life expectancy. However, new research shows that gains in life expectancy have been very unequal, with the biggest improvements among workers who earn top incomes. Life expectancy gains for workers with the lowest incomes have been small or negligible.

If the full retirement age were raised, future retirees with high lifetime earnings can expect to receive some compensation when their monthly benefits are cut. Because they can expect to live longer than today’s retirees, they will receive benefits for a longer span of years after 65. For low-wage workers, there is no compensation. Since they are not living longer, their lifetime benefits will fall by the same proportion as their monthly benefits. Thus, “raising the retirement age” is a policy that cuts the lifetime benefits of future low-wage workers by a bigger percentage than it does of future high-wage workers.

The fact that low-wage workers have seen small or negligible gains in life expectancy signals that their health when they are past 60 is no better than that of low-wage workers born 20 or 30 years ago. This suggests their capacity to work past 60 is no better than it was for past generations. A sensible policy for cutting future benefits should therefore preserve current benefit levels for workers who have contributed to Social Security for many years but have earned low wages.

Editor's note: This piece originally appeared in CQ Researcher.

Voters and policy makers bemoan our crumbling roads, airports, and public transit systems, but few jurisdictions do much about it. The odd thing is that historically low interest rates now make it cheap to fix or improve our public facilities. The mystery is why decision makers have passed on this opportunity.

The sorry state of the nation’s roads, bridges, and public infrastructure has been widely reported. Every few years the American Society of Civil Engineers draws up a report card on U.S. infrastructure, highlighting its strengths and shortcomings in a variety of areas—drinking water systems, wastewater, dams, roads, bridges, inland waterways, ports. The report card spotlights areas where spending on maintenance falls short of the amount needed to keep our infrastructure functioning efficiently. For many kinds of infrastructure, a bigger population and heavier utilization require us to invest in brand new facilities. In its latest report card, the ASCE awards our public infrastructure a grade of D+.

It’s hard to think of a time more attractive for public investment than years when total demand for goods and services is depressed. The Treasury’s borrowing cost for investment funds is near historical lows. Since 2011, the interest rate on 10-year government bonds has averaged 2.3 percent. Savers buying inflation-protected bonds have been willing to lend funds to the federal government at a real interest rate of just 0.22 percent.

So long as there is excess unemployment, especially in the building trades, the labor resources needed to fix or improve public facilities should be abundant and relatively inexpensive. Employment in the construction industry has rebounded as home building and business investment have improved. Nonetheless, construction employment has recovered only half the loss it experienced between its pre-recession peak in 2006 and its post-recession low in 2011. Skilled labor is not nearly as abundant as it was in 2011, but the trend in wage inflation does not suggest employers are bidding up worker salaries.

The federal government’s failure to use fiscal policy and, in particular, public investment policy to bring the nation closer to full employment represents a notable lapse in policymaking, perhaps the most grievous lapse since the crisis began. It unnecessarily prolonged the suffering of the nation’s long-term unemployed and it wasted a rare opportunity to rebuild the nation’s public infrastructure at relatively low cost.

Why did this failure occur? One reason is that policy makers were too optimistic when the financial crisis took place back in 2008. Most public and private forecasts at the time understated the severity of the economic fallout from the bank meltdown. Decision makers in Congress and the Administration may have believed infrastructure investment would be unhelpful in the recovery. Well-conceived infrastructure projects take many months to design and many years to complete. Policy makers may have believed the economic crisis would be over by the time federally infrastructure spending reached its peak.

When forecasters and Democratic policy makers recognized their error, voters had elected a Congress that supported only one kind of fiscal policy to deal with the crisis—big tax cuts focused on high-income tax payers. Whether or not such a policy could have been effective, it would not make additional funds available for infrastructure projects.

Harvard’s Lawrence Summers and Rachel Lipset recently pointed to another reason voters have failed to back a big program to boost infrastructure investment—government ineptitude. In the Boston Globe they documented the painfully slow progress of the Massachusetts Department of Transportation in overhauling a bridge across the Charles River. The bridge, which was built over 11 months back in 1912, has so far required four years for its reconstruction. No end date is in sight. In addition to the over-budget cost of the project, the overhaul has also caused massive and highly visible inconvenience for drivers, cyclists, and pedestrians trying to move between Boston and Cambridge.

Few readers can be under the illusion Boston’s experience is exceptional. Many of us pass near or use public facilities that are being rebuilt or repaired. We often see bafflingly little progress over a span of months or even years. As Summers and Lipset note, the conspicuous failure of public managers to complete capital projects speedily and on budget undermines voters’ confidence that infrastructure projects can be worthwhile.

Despite wide agreement the nation’s infrastructure needs to be modernized, we have made little progress toward that goal. On the contrary, government capital spending has shrunk significantly as a share of the economy. In 2014, net government investment spending on items other than defense dipped to a 60-year low when spending is measured as a percent of GDP. Using this indicator, net government investment has shrunk almost half compared with its level in the first decade of the century. For many reasons this is a good time to fix our public infrastructure. It is also an excellent time to overhaul public management of government capital projects.

Editor's note: This piece originally appeared in Inside Sources.

Unlike prime-age Americans, who have experienced declines in employment and labor force participation since the onset of the Great Recession, Americans past 60 have seen their employment and labor force participation rates increase.

In order to understand the contrasting labor force developments among the old, on the one hand, and the prime-aged, on the other, this paper develops and analyzes a new data file containing information on monthly labor force changes of adults interviewed in the Current Population Survey (CPS).

The paper documents notable differences among age groups with respect to the changes in labor force transition rates that have occurred over the past two decades. What is crucial for understanding the surprising strength of old-age labor force participation and employment are changes in labor force transition probabilities within and across age groups. The paper identifies several shifts that help account for the increase in old-age employment and labor force participation:

• Like workers in all age groups, workers in older groups saw a surge in monthly transitions from employment to unemployment in the Great Recession.
• Unlike workers in prime-age and younger groups, however, older workers also saw a sizeable decline in exits to nonparticipation during and after the recession. While the surge in exits from employment to unemployment tended to reduce the employment rates of all age groups, the drop in employment exits to nonparticipation among the aged tended to hold up labor force participation rates and employment rates among the elderly compared with the nonelderly. Among the elderly, but not the nonelderly, the exit rate from employment into nonparticipation fell more than the exit rate from employment into unemployment increased.
• The Great Recession and slow recovery from that recession made it harder for the unemployed to transition into employment. Exit rates from unemployment into employment fell sharply in all age groups, old and young.
• In contrast to unemployed workers in younger age groups, the unemployed in the oldest age groups also saw a drop in their exits to nonparticipation. Compared with the nonaged, this tended to help maintain the labor force participation rates of the old.
• Flows from out-of-the-labor-force status into employment have declined for most age groups, but they have declined the least or have actually increased modestly among older nonparticipants.

Some of the favorable trends seen in older age groups are likely to be explained, in part, by the substantial improvement in older Americans’ educational attainment. Better educated older people tend to have lower monthly flows from employment into unemployment and nonparticipation, and they have higher monthly flows from nonparticipant status into employment compared with less educated workers.

The policy implications of the paper are:

• A serious recession inflicts severe and immediate harm on workers and potential workers in all age groups, in the form of layoffs and depressed prospects for finding work.
• Unlike younger age groups, however, workers in older groups have high rates of voluntary exit from employment and the workforce, even when labor markets are strong. Consequently, reduced rates of voluntary exit from employment and the labor force can have an outsize impact on their employment and participation rates.
• The aged, as a whole, can therefore experience rising employment and participation rates even as a minority of aged workers suffer severe harm as a result of permanent job loss at an unexpectedly early age and exceptional difficulty finding a new job.
• Between 2001 and 2015, the old-age employment and participation rates rose, apparently signaling that older workers did not suffer severe harm in the Great Recession.
• Analysis of the gross flow data suggests, however, that the apparent improvements were the combined result of continued declines in age-specific voluntary exit rates, mostly from the ranks of the employed, and worsening reemployment rates among the unemployed. The older workers who suffered involuntary layoffs were more numerous than before the Great Recession, and they found it much harder to get reemployed than laid off workers in years before 2008. The turnover data show that it has proved much harder for these workers to recover from the loss of their late-career job loss.

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Alert voters everywhere realize the economy is neither as strong as claimed by the party in power nor the disaster described by the opposition. The election season will bring many passionate but dubious claims about economic trends. People running for office know that voters rank the economy near the top of their concerns. Of course, perceptions of the economy differ from one voter to the next. A few of us are soaring, more are treading water, and too many are struggling just to stay afloat.

Since reaching a low point in 2009, total U.S. output—as measured by real GDP—has climbed 15 percent, or about 2.1 percent a year. The recovery has been long-lived and steady, a tribute to the stewardship of the Administration and Federal Reserve. The economic rebound has also been disappointingly slow in view of the depth of the recession. GOP office seekers will mention this fact a number of times before November.

Compared with the worst months of the Great Recession, the unemployment rate has dropped by half. It now stands at a respectable 4.9 percent, almost 3 points lower than the rate when President Obama took office and far below the rate in fall 2009 when it reached 10 percent. Payroll employment has increased for 77 consecutive months. Since hitting a low in January 2010, the number of workers on employer payrolls has surged 14.6 million, or about 190,000 a month. While the job gains are encouraging, they have not been fast enough to bring the employment-to-population ratio back to its pre-recession level. June’s job numbers showed that slightly less than 80 percent of adults between 25 and 54 were employed. That’s almost 2 percentage points below the employment-to-population rate on the eve of the Great Recession.

One of the most disappointing numbers from the recovery has been the growth rate of wages. In the first 5 years of the recovery, hourly wages edged up just 2 percent a year. After factoring in the effect of consumer price inflation, this translates into a gain of exactly 0 percent. The pace of wage gain has recently improved. Workers saw their real hourly pay climb 1.7 percent a year in the two years ending in June.

The economic bottom line for most of us is the rate of improvement in our family income after accounting for changes in consumer prices. No matter how household income is measured, income gains have been slower since 2007 than they were in earlier decades. The main reason is that incomes produced in the market—in the form of wages, self-employment income, interest, dividends, rental income, and realized capital gains—fell sharply in the Great Recession and have recovered very slowly since then. That a steep recession would cause a big drop in income is hardly a surprise. Employment, company profits, interest rates, and rents plunged in 2008 and 2009, pushing down the incomes Americans earn in the market. The bigger surprise has been the slow recovery of market income once the recession was behind us.

Some critics of the recovery argue that the income gains in the recovery have been highly skewed, with a disproportionate share obtained by Americans at the top of the income ladder. Economist Emmanuel Saez tabulates U.S. income tax statistics to track market income gains at the top of the distribution. His latest estimates show that between 2009 and 2015 income recipients in the top 1 percent enjoyed real income gains of 24 percent. Among Americans in the bottom nine-tenths of the income distribution, average market incomes climbed only 4 percent.

However, Saez’s estimates also show that top income recipients experienced much bigger income losses in the Great Recession. Between 2007 and 2009 they saw their inflation-adjusted incomes drop 36 percent (see Chart 1). In comparison, the average market income of Americans in the bottom nine-tenths of the distribution fell just 12 percent. These numbers mean that top income recipients have not yet recovered the income losses they suffered in the Great Recession. In 2015 their average market income was still 13 percent below its pre-recession level. For families in the bottom nine-tenths of the distribution, market income was “only” 8 percent below its level in 2007.

Only about half of households rely solely on market income to support themselves. The other half receives income from government transfers. What is more, this fraction tends to increase in bad times. Many retirees rely mainly on Social Security to pay their bills; they depend on Medicare or Medicaid to pay for health care. Low-income Americans often have little income from the market, and they may rely heavily on public assistance, food stamps, or government-provided health insurance. When joblessness soars the percentage of families receiving government benefits rises, largely because of increases in the number of workers who collect unemployment insurance.

Government benefits, which are not counted in Saez’s calculations, replace part of the market income losses families experience in a weak economy. As a result, the net income losses of most families are much smaller than their market income losses. The Congressional Budget Office (CBO) recently published statistics on market income and before-tax and after-tax income that shed light on the size and distribution of household income losses in the Great Recession and ensuing recovery. The tabulations show that, except for households at the top of the distribution, net income losses were far smaller than the losses indicated in Saez’s income tax data.

For example, among households in the middle fifth of the before-tax income distribution, average market income fell more than 10 percent in the Great Recession (see Chart 2). If we include government transfers in the income definition, average income fell 4.4 percent. If we account for the federal taxes families pay, average net income fell just 1 percent. In contrast, among households in the top 1 percent of the distribution, average market income fell 36 percent, average income including government transfers fell 36 percent, and average income net of federal taxes fell 37 percent. Government transfers provided little if any protection to top-income households.

The CBO income statistics end in 2013, so they do not tell us how net income gains have been distributed in the last couple of years. Nonetheless, based on Saez’s income tax tabulations it is very unlikely top income recipients have recovered the net income losses they experienced in the Great Recession. All the available statistics show household income gains since 2007 have been negligible or small, and this is true across the income distribution.

It is popular to say slow income gains in the middle and at the bottom of the distribution are due to outsize income gains among families at the top. While this story is at least partly true for the three decades ending in 2007, it does not fit the facts for the years since 2007. CBO’s latest net income tabulations show that inequality was almost 5 percent lower in 2013 than it was in 2007. The Great Recession hurt the incomes of Americans up and down the income distribution, but the biggest proportional income losses were at the very top. To be sure, income gains in the recovery after 2009 have been concentrated among top income recipients. Even so, their income losses over the recession and recovery have been proportionately bigger than the losses suffered by middle- and low-income families.

Editor's note: This piece originally appeared in Real Clear Markets.

Washington is again paralyzed and pulling back on clean energy economic development. Deficit politics and partisanship are firmly entrenched and the raft of federal financial supports made available through the 2009 stimulus law and elsewhere is starting to expire.

No wonder it’s hard to imagine—especially if you’re sitting in the nation’s capital—how the next phase of American clean energy industry growth will be financed or its next generation of technologies and firms supported.

And yet, one source of action lies hidden in plain sight. With federal clean energy activities largely on hold, a new paper we are releasing today as part of the Brookings-Rockefeller Project on State and Metropolitan Innovation argues that U.S. states hold out tremendous promise for the continued design and implementation of smart clean energy finance solutions and economic development.

Specifically, we contend that the nearly two dozen clean energy funds (CEFs) now running in a variety of mostly northern states stand as one of the most important clean energy forces at work in the nation and offer at least one partial response to the failure of Washington to deliver a sensible clean energy development approach.

To date, over 20 states have created a varied array of these public investment vehicles to invest in clean energy pursuits with revenues often derived from small public-benefit surcharges on electric utility bills. Over the last decade, state CEFs have invested over $2.7 billion in state dollars to support renewable energy markets, counting very conservatively.  Meanwhile, they have leveraged another $9.7 billion in additional federal and private sector investment, with the resulting $12 billion flowing to the deployment of over 72,000 projects in the United States ranging from solar installations on homes and businesses to wind turbines in communities to large wind farms, hydrokinetic projects in rivers, and biomass generation plants on farms. 

In so doing, the funds stand well positioned—along with state economic development and other officials—to build on a pragmatic success and take up the challenge left by the current federal abdication of a role on clean energy economic development.

Yet here is the rub: For all the good the funds have achieved, project-only financing—as needed as it is—will not be sufficient to drive the growth of large and innovative new companies or to create the broader economic development taxpayers demand from public investments.  Also needed will be a greater focus on the deeper-going economic development work that can help spawn whole new industries. 

All of which points to the new brand of fund activity that our paper celebrates and calls for more of. 

In recent years, increasingly ambitious efforts in a number of states have featured engagement on at least three major fronts somewhat different from the initial fund focus: (1) cleantech innovation support through research, development, and demonstration (RD&D) funding; (2) financial support for early-stage cleantech companies and emerging technologies, including working capital for companies; and (3) industry development support through business incubator programs, regional cluster promotion, manufacturing and export promotion, supply chain analysis and enhancement, and workforce training programs.

These new economic development efforts—on display in California, Massachusetts, New York, and elsewhere—show the next era of state clean energy fund leadership coming into focus. States are now poised to jumpstart a new, creative period of expanded clean energy economic development and industry creation, to complement and build upon individualistic project financing. 

Such work could not be more timely at this moment of federal gridlock and market uncertainty.

Along these lines, then, our paper advances several recommendations for moving states more aggressively into this new period of clean energy economic development. We suggest that:

• States should reorient a significant portion (at least 10 percent of the total portfolio) of state CEF money to clean energy-related economic development

• States, as they reorient portions of their CEFS to economic development, should better understand the market dynamics in their metropolitan regions.  They need to lead by making available quality data on the number of jobs in their regions, the fastest-growing companies, the critical industry clusters, gaps in the supply chain for those industries, their export potential, and a whole range of economic development and market indicators

• States also should better link their clean energy funds with economic development entities, community development finance institutions (CDFIs), development finance organizations and other stakeholders who could be ideal partners to develop decentralized funding and effective economic development programs

In addition, we think that Washington needs to recognize the strength and utility of the CEFs and actively partner with them:

• The federal government should consider redirecting a portion of federal funds (for instance, from federal technology support programs administered by the Department of Energy and other programs meant for federal-state cooperation) to provide joint funding of cluster development, export programs, workforce training, and other economic development programs  through matching dollars to state funds that now have active economic development programs, and to provide incentives to states without such programs to create them

• The federal government should create joint technology partnerships with states to advance each state’s targeted clean energy technology industries, by matching federal deployment funding with state funding.

• The states and the federal government, more generally, should look to “decentralize” financing decisions to local entities with street knowledge of their industries, relying on more “development finance” authorities that have financed traditional infrastructure and now could finance new clean energy projects and programs

In sum, our new paper proposes a much greater focus in U.S. clean energy finance on “bottom up,” decentralized clean initiatives that rely on the states to catalyze regional economic development in regions. Such an approach—which reflects the emergence of an emerging “pragmatic caucus” in U.S. economic life—is currently demanded by federal inaction. However, it might also be the smartest, most durable way to develop the clean energy industries of the future without the partisan rancor and obtuseness that has stymied federal energy policy. State clean energy funds—having funded thousands of individual projects—bring significant knowledge to bear as they focus now on building whole industries. For that reason, the funds’ transition from project development to industry creation should be nurtured and supported.

State clean energy funds (CEFs) have emerged as effective tools that states can use to accelerate the development of energy efficiency and renewable energy projects. These clean energy funds, which exist in over 20 states, generate about $500 million per year in dedicated support from utility surcharges and other sources, making them significant public investors in thousands of clean energy projects.

However, state clean energy funds’ emphasis on a project finance model—which directly promotes clean energy project installation by providing production incentives and grants/rebates—is by itself not enough to build a statewide clean energy industry. State clean energy funds also need to pay attention to other critical aspects of building a robust clean energy industry, including cleantech innovation support through research and development funding, financial support for early-stage cleantech companies and emerging technologies, and various other industry development efforts.

As it happens, some of these state clean energy funds are already supporting a broader range of clean energy-related economic development activities within their states. As more and more states reorient their clean energy funds from a project finance-only model in order to encompass broader economic development activities, clean energy funds can collectively become an important national driver for economic growth.

To become true economic development engines in clean energy state clean energy funds should:

• Reorient a significant portion of their funding toward clean energy-related economic development
• Develop detailed state-specific clean energy market data
• Link clean energy funds with economic development entitites and other stakeholders in the emerging industry
• Collaborate with other state, regional, and federal efforts to best leverage public and private dollars and learn from each other's experiences

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With Washington adrift and the United Nations climate change panel again calling for action, the search for new clean energy finance solutions continues.  

Against this backdrop, the Metro Program has worked with state- and city-oriented partners to highlight such responses as repurposing portions of states’ clean energy funds and creating state green banks.  Likewise, the Center for American Progress just recently highlighted the potential of securitization and investment yield vehicles, called yield cos. And last week an impressive consortium of financiers, state agencies, and philanthropies announced the creation of the Warehouse for Energy Efficiency Loans (WHEEL) aimed at bringing low-cost capital to loan programs for residential energy efficiency. WHEEL is the country’s first true secondary market for home energy loans—and a very big deal. 

Another big deal is the potential of bond finance as a tool for clean energy investment at the state and local level. That’s the idea advanced in a new paper released this morning that we developed with practitioners at the Clean Energy Group and the Council for Development Finance Authorities.

Over 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—and literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance clean energy projects, if only the clean energy community will embrace them.

So far, these authorities are only experimenting. However, the bond finance community has accumulated significant experience in getting to scale and knows how to raise large sums for important purposes by selling bonds to Wall Street. Accordingly, the clean energy community—working at the state and regional level—should leverage that expertise. The challenge is for the clean energy and bond finance communities to work collaboratively to create new models for clean energy bond finance in states, and so to establish a new clean energy asset class that can easily be traded in capital markets.

Along these lines, our new brief argues that state and local bonding authorities, clean energy leaders, and other partners should do the following: 

• Establish mutually useful partnerships between development finance experts and clean energy officials at the state and local government levels
• Expand and scale up bond-financed clean energy projects using credit enhancement and other emerging tools to mitigate risk and through demonstration projects
• Improve availability of data and develop standardized documentation so that the risks  and rewards of clean energy investments can be better understood
• Create a pipeline of rated and private placement deals, in effect a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities

State and local bond finance represents a powerful but underutilized tool for future clean energy investment.

For 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—and literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance clean energy projects, if only the clean energy community will embrace them.

So far, these authorities are only experimenting. However, the bond finance community has accumulated significant experience in getting to scale and knows how to raise large amounts for important purposes by selling bonds to Wall Street. The challenge is therefore to create new models for clean energy bond finance in states and regions, and so to establish a new clean energy asset class that can easily be traded in capital markets. To that end, this brief argues that state and local bonding authorities and other partners should do the following:

• Establish mutually useful partnerships between development finance experts and clean energy officials at the state and local government levels
• Expand and scale up bond-financed clean energy projects using credit enhancement and other emerging tools to mitigate risk and through demonstration projects
• Improve the availability of data and develop standardized documentation so that the risks and rewards of clean energy investments can be better understood
• Create a pipeline of rated and private placement deals, in effect a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities

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