Public Affairs Forum
September 13, 2017
Steven Fazzari, left, and Stuart Andreason
Sameera Fazili: Welcome to another Federal Reserve Bank of Atlanta's Economy Matters podcast. I'm Sameera Fazili, with the Atlanta Fed's Community and Economic Development team. Income inequality is all over the news headlines these days. On today's podcast, we're going to be asking how rising inequality might be affecting businesses, consumers, and workers.
Income inequality—and the related issue of economic mobility—is a topic the Federal Reserve System has been paying close attention to. Researchers across the Fed are trying to understand how inequality could be affecting our mission, particularly our mandate of supporting full employment, and Chair [Janet] Yellen has called attention to how rising inequality could be impacting access to opportunity.
To help us further explore these questions, I'm talking today with Professor Steven Fazzari from Washington University in St. Louis, where he is a Bert A. and Jeanette L. Lynch Distinguished Professor of Economics. Steven's recent work focuses on the macroeconomic effects of rising inequality and financial fragility in the US household sector. His research and commentary on economic conditions and public policy have appeared in national and international media. We are also joined by my Atlanta Fed colleague Stuart Andreason, who is the director of the Atlanta Fed's new Center for Workforce and Economic Opportunity. Steven and Stuart, thank you for joining us today.
Steven, I'm going to start with you. Your research suggests rising inequality is part of the reason our economic growth has been so weak over the past few years. How might inequality hurt overall growth in the U.S.? A lot of other countries have higher growth rates despite having even wider inequality than we do.
Steven Fazzari: Well, I think you have to make a distinction between the ways that different countries generate the growth in spending they need to drive their economy. If you take a country like China, which has a lot of inequality...but they're basically export-led—their demand is being driven by rising exports—and that's the real progressive part of their economy. They're actually trying to change things to be more consumption-oriented, but historically they've been export-led.
In the U.S., I think it's fair to say we're a consumer-led economy, and we have been for quite some time, and so when you get rising inequality, it's hard to generate the demand you need to keep the economy ticking. I like to think of the economy as a big recycling machine because people earn their income, but then to keep things going they spend that income. And that spending becomes the revenue to the business that allows them to pay income in the next year, so you've just got to keep the recycling going.
As more and more of the income goes to the higher part of the income distribution, this recycling doesn't work as well, for two reasons: one is the rich in general spend less, they save more out of their incomes—they don't recycle as much—and also, they pay a higher rate in taxes. So they just they don't put the money back into the economy to the same amount, so we have a harder and harder time generating the demand growth we need to keep the economy perking along.
Fazili: Is your research showing this? Is it showing that people are spending less, consuming less, as inequality has gone up?
Fazzari: Well, that's an interesting question. Actually, we had less saving and more spending for much of the time from the early 1980s, up until the eve of the financial crisis. And we also had rising inequality, so it seems a bit inconsistent. But I think there's an important explanation—a pretty straightforward explanation—and that's rising household debt. As inequality was rising, we kept consumption going, but in an unsustainable way because people were taking on more and more debt—especially borrowing against their homes, either directly or with home equity credit lines—and the result was that the economy perked along all right until that borrowing was cut off in the crisis, at which time we had a historic drop in consumption, one of the biggest drops of consumption, certainly in the postwar period, looking like the Great Depression.
And it really hasn't recovered. Some of my recent research is looking at this in detail and trying to define the amounts of money that households are actually spending—which is a little hard to measure, because things like Medicare and Medicaid and other things like that really aren't things the households spend, even though they're counted in the government's aggregate consumption statistics. And what we're seeing is that the recovery in household spending since the Great Recession is by far the weakest of any recovery since at least the 1970s—at least, that's as far back as our data go. I think that's why we're seeing relatively low growth, and I think rising inequality is an important part of what explains that trend.
Fazili: So Stuart, I want to turn to you to reflect on something Steven just said: he mentioned how our economy operates as a big recycling machine, so for our economy to grow, for businesses to sell goods, people have to have the money to spend. Well, to spend money you have to earn money, and that in some way is what you focus on at the Atlanta Fed's Center for Workforce and Economic Opportunity. Can you tell our listeners about the work of your new center?
Stuart Andreason: Sure. And I actually think that there's a great connection here. We focus on workforce and economic opportunity, primarily focused on what you describe—how workers and employers are able to address their skill needs, and the role that employment and education and training play in providing economic opportunity. We can get into a lot of different definitions of what exactly economic opportunity is, either for workers or for businesses, but it's roughly what we're talking about—it's the ability to live a life where people are able to sustain their family, to purchase goods, to build wealth and assets, and to have some level of sustainability, stability in their life, and resilience—being able to recover from shocks that come along throughout their life.
We focus largely on labor market issues and employment policies that affect low- and moderate-income individuals. The center really acts as a bridge between practice—so people that are doing work to help support people's employment—and the research community, to help develop innovative approaches to developing economic opportunity so that people that are looking for ways to move up the economic ladder can do that, and that businesses are able to find ways to grow. We know that skill development, education, supporting people's employment is part of that picture, but it's really part of a broader mosaic of strategies that can help improve opportunities for workers.
Fazili: So Steven. Stuart's center acts as a bridge between policy and practice. I wanted to see if we could shift to the policy level now and get your policy prescriptions about what the policy implications of your research are in the short or long term, focused especially on low- and moderate-income workers—the ones who tend to spend the money that they earn.
Fazzari: Right. So, the main objective from a policy point of view for that particular issue—there are lots of important policy objectives, but for that particular objective—is to get money into the pockets of people who will spend it. So the thing I would list first is a middle-class tax cut. We're having a lot of talk about tax reform in the country these days, and I think we could see more economic growth to the extent that we put more money back into the pockets of people who will recycle it back into the economy—and that would certainly be low-income workers, moderate-income workers. And in fact, our research suggests that people spend the vast majority of their income pretty far up into the income distribution—although much less so at the very top. So to the extent that tax reform puts money into the pockets of people who will spend it, I think it'll be more effective.
The second thing I would mention is an increase in the minimum wage. This is a controversial area, although most economic research these days, empirical work, shows that job losses are not that significant when minimum wages go up moderately, and especially if they're raised in a state or the country as a whole rather than just in a small area. So that I think specifically can help with the lowest part of the income distribution, but there's evidence that suggests that when the lowest part of the wages go up you see wages going up further up the distribution as well, and so that can help with issues of, broadly, inequality and also help stimulate consumer spending.
If we're thinking about the long term, I think it's really where the bridge between what Stuart's working on and my perspective really comes in, because it's the hardest part but probably the most important part—which is to see more income growth across the wage distribution—not because we legislate it through minimum wages, but because that's what happens in the private sector, ultimately. We had that kind of growth in the postwar decades where incomes were rising generally across the income distribution, but we've lost that since the 1980s.
The problem there is I don't think anybody fully understands what to do and how to do that, and that's why I really appreciate the work that people are doing here at the Atlanta Fed to try to explore those issues.
Fazili: All right, Stuart, that means that you have the hard job of fixing this for everyone. I think that's what Steven just told us. So as we close, do you have any final thoughts on work-based strategies to help improve economic mobility?
Andreason: Yes, I actually think that there's a lot going on that are attempts to do exactly what Steven's talking about. We have different channels for those things, often things that we don't think of as employment policies. I think that one of the tricks is that through—ideally, hopefully—through skill development and finding ways to increase productivity, in the long term that's going to lead to some of those wage gains and money that's actually just getting paid through the labor market to lower-skilled, middle-income workers.
But as people think about the slightly shorter term, I want to make sure that people remember that there are a lot of things that are attempting to do this. Now, do we have the best channels for them? Do we feel like they're doing the best job that they can? But there are a lot of things that we don't think of as employment supports, whether it's state-sponsored, high-quality child care, and programs that provide early educational opportunities—particularly to single parents. These are things that not only provide benefits to the young child but also help parents manage their family life and be available to work, to be able to get to work.
And there are a lot of other ones that would be completely different, but as we get to a tighter labor market we have to think about what supports are necessary to help support people with criminal backgrounds or drug addiction issues. These are people that have found themselves with great challenges in getting into the labor market, find themselves stuck in lower-income jobs, and finding ways to support them is important.
The same is true of things like the Earned Income Tax Credit. People often don't think of that as a workforce development initiative, but it's been one of the widely accepted and popular supports that have helped bring a lot of people out of poverty and supported people at the lower income levels. Employment and education are part of that, but it's not always just skill development. There are a lot of ways that we're supporting workers. We need to think through how we can do that, how we can help to remove barriers and support employment in a lot of ways. That's the short term. Long term, there are other things, but we've got to find ways to be thinking broadly.
Fazili: Thank you so much, Steven and Stuart. And that brings us to the end of another Economy Matters podcast episode. I want to encourage our listeners to check back to the Atlanta Fed's website for our Center for Workforce and Economic Opportunity to see the kind of resources that are going to be coming online through that center, for those who are interested in working on the ground on strategies to improve labor market opportunities and lift wages across the economy. Please see the Atlanta Fed's web page, frbatlanta.org, for economic and banking information, and for materials on community and economic development topics as well. Thank you for listening.