An economic revival policy that fits rural areas well

Paul Krugman’s recent opinion piece in the New York Times argues that eastern Germany and southern Italy show that the US can’t help it’s rural citizens. I’m not sure I follow his argument in the piece, but he’s right that there are several reasons to believe that most large-scale economic policy proposals do not work well in rural areas. There is, however, one policy that would work particularly well.

Large-scale economic revival policies that have garnered a lot of political attention include: antitrust (essentially breaking up large corporations), raising the federal minimum wage aggressively, and instituting a jobs guarantee. I see each as working much better in cities and suburbs than in rural areas.

Expanding and enforcing antitrust law would push back against firm monopoly and monopsony power. Studies show that the consolidation of industries has been bad for workers. In the example of hospitals, when there is only one company running all of the hospitals in a city, it becomes harder for medical care workers to quit a bad job and move to a better one. As a result, hospitals can pay workers less, offer fewer benefits, and use more contractors. The issue here is that in a rural area there’s likely only one hospital anyway (or one factory or one chicken processing plant, etc). So it wouldn’t be efficient to split the rural hospital in two. There just aren’t enough patients to justify double the number of MRI machines, administrators, and accountants.

With the federal minimum wage unchanged for nearly a decade, and currently set at a poverty rate of $7.25 for an hour of work, raising the federal minimum wage seems like a no-brainer. The pushback to a higher federal minimum wage often comes from employers in rural areas. Their argument is that many jobs in rural areas would not make sense if the minimum wage was, say, $15.00 an hour, so the increase would disproportionately create job loses in rural areas. Thankfully, many states and cities are already moving towards a $15.00 minimum wage without federal intervention. But in many rural areas, the current optimal minimum wage is probably quite a bit lower than $15.00, perhaps $10.00 or $11.00 (granted federal wage increases would be gradual, but the point is that the optimal minimum wage is generally considered to be lower in rural areas, though there are exceptions). This is because the marginal productivity of a larger share of workers in rural areas is less than $15.00 per hour, compared to workers in cities and suburbs.

The jobs guarantee elicits comparisons to the Civilian Conservation Corps, which was very active in rural parts of the US. The idea of the jobs guarantee would be to turn the unemployment office into the employment office and to offer a $15.00/hour job to anyone who wants one. For rural areas the jobs guarantee wage faces the same problem as the minimum wage proposal discussed above, but additionally, there are highly-localized pockets of deep despair and poverty in rural areas. For example, my parents live in a town of about 5,000 people that has lost more than 2,000 jobs to trade since the 1990s. Perhaps I am not being creative enough, but I’m not sure there’s enough work (without adding equipment, tools, supervision, or expertise) to support even 400 new federal jobs in the area. Vegetable gardens, picking up trash, and childcare might be able to accommodate a few hundred people, but the problem is so large and so localized that I worry about what several thousand federal workers would actually do all day in the tiny town. In the case of my parents’ town, it’s probably better to just give people the money and not worry about what they do all day than to have them carry rocks back and forth between two piles.

There is one policy that fits rural areas better than it fits anywhere else: increasing who gets ownership income.

Ownership income is the main explanation for why the super-rich are so damn rich. Bill Gates, while known for Microsoft (which benefited massively from intellectual property protections), actually owes much of his wealth to diversified investments (getting paid for owning things other than Microsoft). Rich people own an enormous portion of the country’s stocks, bonds, and real estate, and these investments offer a return that equates to an increasingly large share of national income. With labor income, which has also seen the rich (CEOs, doctors, lawyers) pull away from everyone else, time is an equalizer. Everyone gets the same amount of time (24 hours per day). But when it comes to ownership income, whoever owns the most and the best gets the most money. The majority of people don’t own anything that offers a return (to keep with the analogy, they have 0 hours per day), while the wealthiest people own tens of billions of dollars of productive assets (they have millions of hours per day).

This is not a natural outcome but the direct result of US rules, which means it doesn’t have to be that way. A combination of two policy proposals would result in a very effective way to improve quality of life for people, that works particularly well in rural areas. First, Dean Baker proposed a scrip tax that would replace the US corporate income tax with the ownership of non-voting shares (say 25%) of each company. The idea here is that corporations do everything they can to avoid paying taxes, and usually are pretty good at it. But if the treasury owns a portion of the shares of those companies, then it eliminates the need to tax them. When the company does well and makes more money so does the treasury. The scrip tax could be used to create Matt Bruenig’s proposed social wealth fund (SWF). Essentially think of this as an index fund that is owned by every person in the US equally. Each person would receive dividend payments from this fund, just like rich people do now. For a family of four, this dividend would be several thousands of dollars a year that they would get the same way rich people get their money, just by existing in a system designed to benefit them. **In his report, Matt discusses several ways to pay for the SWF; I’m personally drawn to the funding idea from Dean, which is why I combine the two ideas in this blog post.**

Why would expanding ownership income work for rural areas? First, fewer people in rural areas have ownership income now, compared to cities and suburbs. We can see this in both the Survey of Consumer Finance and the Current Population Survey. Ownership income is rare in metro areas (cities and suburbs), but is even more rare in rural areas. That said, the scrip tax/SWF would not be a transfer from cities and suburbs to rural areas, but a transfer from the ultra rich to everyone else. There are very rich people everywhere, including in rural areas.

Second, rural areas face a problem with diversity of industry. On an aggregate level, rural areas have all sorts of industries, just as cities and suburbs do. But on a local level, there is often one dominant industry, an outcome that is much less common in cities and suburbs. For example, my parents town made nylon starting in the 1930s. This was the industry that employed pretty much everyone, directly or indirectly. The main street was “Nylon Boulevard,” and the town called itself “the nylon capital of the world.” When nylon production was moved to Mexico (and then subsequently Asia and Brazil), there was no other industry for the former nylon workers to move into. The people with the means to leave did, but many people were tied to their homes (now much more likely to have an underwater mortgage and much harder to sell) and families and were subjected to a downward spiral that continues today. Had the nylon factory been in a city, the workers could have stayed in their homes but more easily switched jobs, simply because there are so many more industries in a densely populated local area (there are counter-examples here, like Youngstown, OH, but on average this is the case).

With the scrip tax and social wealth fund, 25% of those nylon-producing assets would have been owned by the fund, while the nylon workers who own shares of the fund would own a tiny portion of every industry. Thus, the result is a diversification of assets. If one geographic area or one industry gets hit, everyone in the US loses a few pennies in the value of their share of the fund, but the local area’s total set of assets are at least slightly more diversified. Their shares of the fund are much more stable relative to their local economy. Certainly the job losses would still devastate the area, but at least one source of income would be largely unchanged (or even increase, as the outsourcing resulted in higher profits for the DuPont corporation).

Lastly, prices are 12 percent lower in rural areas compared to non-rural areas. This is one of the reasons the minimum wage proposals don’t work as well in rural areas, but it is also the reason that ownership income expansion works particularly well in rural areas. Since each person in the US would own the same portion of the fund, each person, no matter where they live, would get the same amount in their dividend payment. However, this dividend payment would buy more goods and services in rural areas than it would in cities and suburbs. The difference in prices is partially because land values differ so much between rural areas and cities/suburbs. An acre in southwest Delaware is never going to be worth as much as an acre in downtown Seattle.

While there are certainly details to be worked out for any large-scale economic policy, it is silly to suggest that the failure of Germany and Italy prove there’s no policy that would help US rural areas. Norway and Alaska offer a counter-example that would work well.

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College degree boom and a changing labor market baseline

The March FOMC meeting minutes, released today, noted that increased education is changing the unemployment baseline:

A few participants warned against inferring too much from comparisons of the current low level of the unemployment rate with historical benchmarks, arguing that the much higher levels of education of today’s workforce—and the lower average unemployment rate of more highly educated workers than less educated workers—suggested that the U.S. economy might be able to sustain lower unemployment rates than was the case in the 1950s or 1960s.

It’s worth reiterating the Fed point with another labor market example. From the CPS, the median weekly earnings of women between the age of 25 and 54 increased steadily from 1997 to 2003 and again from 2014 to present.

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But women with a college degree in this age group did not see the more recent increase. Instead, their earnings are nearly $50 per week below the 2003 peak, after adjusting for inflation.

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The same wage series for those with less than a bachelor’s degree and those with advanced degrees also peak around 2003. The increase in education is what explains overall median wage growth. Because college educated workers earn more than workers without a college degree–and because so many more people have obtained college degrees compared to 2006–median wages for the entire group increase.

The increase in the share of this group with a college degree is so astounding that the population of 25-54 year old women without at least a bachelor’s degree has been falling rapidly since 2007.

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Recent overall wage growth is not driven by an unsustainable unemployment rate, but by families and individuals sacrificing time and money for a decreasing reward.

The U.S. economy looks a lot better, starting in 2014

As we head into 2018, I still occasionally see arguments about the U.S. economy based on data that do not cover the years from 2014 to present. There is presumably nothing wrong with pre-2014 data, but it is worth keeping in mind that the economy looks a lot better since 2014. Perhaps most notably, wages and employment prospects improve for large portions of the population, an encouraging change in direction after many consecutive years of loss or stagnation. Recent data show a stronger economy coexisting comfortably with the environmental and labor policies of the past four years.

Specifically, three major pieces of the U.S. economic growth puzzle fall into place around 2014 and boost growth each year since: lower oil and energy prices, tighter labor markets, and available low-cost credit. These are discussed below and captured by the period averages in table 1.

Capture

Savings on energy boosted household finances

First, the price of oil fell sharply in 2014 and has remained low due to slowed demand from China, a large increase in domestic oil and gas production, increased green energy production, and more efficient energy use (for example more hybrid and electric cars). Several years with an average discount of 35 percent on oil, and similar discounts on other sources of energy, has improved household finances and boosted the economy. It translates to higher real income for Americans facing lower prices less at the pump, at the store, and on utilities.

Household spending on gasoline and similar fuels accounted for 2.5 percent of U.S. GDP from 2010 to 2014, but has fallen to an average of less than 1.8 percent of GDP from 2014 onward and is currently down to around 1.5 percent of GDP. Rather than save the money left over from less expensive commutes, which could have the effect of slowing the economy, Americans have turned it into new spending. Meanwhile, U.S. energy production has been expanding despite lower prices for gas and oil, thanks in part to increased export capabilities. Reasonably good fortune for both consumers and producers in the industry does not scream overly burdensome regulation.

Yellen pushed unemployment lower than expected

Next, the unemployment rate is currently much lower than many economists had believed it could go, and the Fed should get some credit for this. In January 2014, the unemployment rate was 6.6 percent and 76.4 percent of Americans age 25-54 had jobs. Instead of responding to missing-yet-theoretically-predicted inflation as the unemployment rate neared 5.5 percent, Chair Yellen’s Fed allowed the rate to fall to the current 4.1 percent. As of November 2017, inflation is low and stable and 79 percent of Americans age 25-54 have jobs, an increase over the January 2014 level equivalent to 3.3 million jobs. The rebound in employment for ‘working-age’ Americans should bring pause to claims that the economy has permanently written off portions of its previous workforce. The economy is not only still adding jobs at a rapid pace, but it is still pulling workers off of the sidelines and into the labor market. These trend are even more pronounced for black and Hispanic Americans.

Critically, when we near full employment, as we are doing now, there are no longer huge numbers of available unemployed workers to compete for new jobs or to replace workers who quit. As unemployed workers become scarce, businesses must increasingly compete with each other as employers. They do so by raising wages and making jobs better, and by better training and equipping existing workers. Benefits of full employment therefore include both increased wages and increased productivity. As pointed out by Dean Baker and others, recent data suggest that we are seeing this benefit. 

Borrowing is back despite [efforts at] regulation

In addition to benefits from more employment, Fed policy has kept mortgage rates and other borrowing costs low, further boosting the overall economy. At the end of 2017, the average interest rate for a 30-year fixed rate mortgage is slightly less than four percent. For context, this rate, which partially determines how much people pay for a home loan, had not fallen below five percent prior to the great recession. Importantly, unlike in the years immediately following the crisis, consumer access to credit has been growing in recent years, making loans both relatively cheap and more readily available. The often discussed credit freeze seems to thaw from 2014 to 2017.

Mortgages for younger Americans also become more common in recent years. First-time buyers made up only 29 percent of home sales in 2013, according to a June 2017 report from Genworth Mortgage Insurance, well below the 2009 or 2010 level. However, by 2016 new buyers make up 37 percent of sales, the highest share since 1999. I suspect that the average age of new home buyers is older now than it was in 1999, but average years of schooling have also increased over this period, so some delay to home ownership is expected. Commonly-accepted notions of young Americans shunning home ownership by choice (think avocado toast memes) are starting to look as suspicious as the financial sector claims about regulation preventing lending.

Gains from inherited policy can be saved or squandered

Many stories that make sense when describing the lack of economic recovery from 2008 to 2013 fail to fit the recent data. Peak oil, job-stealing robots, aging populations, crippling regulation, and people playing video games, we have been told, consign us to a different growth path. But, as I have discussed, contrary to the prediction of these stories, data covering the years since 2014 show rebounding employment rates, reasonable energy prices and interest rates, and the potential for strong wage and productivity growth. Beyond serving as face value good news, the sustained economic turnaround started in 2014, suggesting that the worker and environmental protection policies in place over the last four years are not too burdensome. As long as people like them, these policies should be maintained; the economy is growing just fine with them in place. If people particularly like some, like health care exchanges, there’s no reason not to improve or expand them.

Despite rapid improvement since 2014, the economy can still add millions of jobs before reaching full employment. This offers room for the current administration to score more policy gains than just the ones it has inherited (little additional growth is expected from its single policy accomplishment, the TCJA). Low-hanging fruit stems from the current interest rate of 2.75 percent on 30-year treasury bonds. Given the low cost of borrowing, the U.S. has little excuse for carrying a long list of unstarted infrastructure projects into 2018. The current administration, with a Republican majority in all three branches of government, is unhindered in its ability to shift more growth levers in the ‘four percent’ direction and push the country closer to full employment, and can do so with federal investments in infrastructure. Doing the opposite, such as by making unpopular cuts to social insurance, would have the effect of slowing the economy. New data and economic theory agree with voters on this one: keep the policies that work and focus on infrastructure.