Massive government-mandated and private-sector debt relief during the COVID-19 pandemic was well-targeted and helped mute economic distress for millions of Americans, finds a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 9.

About 60 percent of borrowers who entered debt forbearance have exited it as of May, but an important policy question looms for how to deal with any remaining “forbearance overhang,” particularly for mortgages, if mandated forbearance expires as scheduled at the end of September, write the authors—Susan Cherry and Amit Seru of the Stanford Graduate School of Business, Erica Jiang of the University of Southern California, Gregor Matvos of Northwestern University, and Tomasz Piskorski of Columbia University.

In Government and private household debt relief during COVID-19, the authors studied forbearance using a representative credit bureau panel of more than 20 million U.S. consumers. They estimate that, between March 2020 and May 2021, more than 70 million consumers with loans worth $2.3 trillion entered forbearance, missing $86 billion of their payments. During that period, 6.3 million mortgages, 11 million auto loans, 68 million student loans, and 62 million revolving loans (such as credit cards) were in forbearance.

Government mandates account for about 80 percent of debt relief during the pandemic but about 20 percent (for larger mortgages, auto loans, and revolving loans) was provided voluntarily by the private sector, according to the paper. Debt relief was automatically extended to all federal student loan recipients, but mortgage and other types of borrowers had to ask for it. This self-selection feature resulted in a better-targeted policy for mortgages, according to the authors.

“We find that debt relief reached its intended target, since forbearance rates are higher in regions with the highest COVID-19 infection rates and the greatest local economic deterioration,” they write.

The question now, especially for mortgage loans still in forbearance, is how borrowers can repay their arrears manageably. The authors estimate that, by the end of September, the forbearance overhang for all loan types will amount to more than $70 billion and, for mortgages, to about $15 billion (or $14,200 per borrower).

They suggest two solutions for mortgages. First, missed payments could be added to the existing loan balance, which would allow borrowers to spread out repayment over the remaining life of the loan, which averages about 25 years for borrowers in forbearance. Second, borrowers with federally insured mortgages could be allowed to refinance at current low-mortgage rates and add missed payments to their new loan balance.

Seru, in an interview with The Brookings Institution, said he worries that some lenders, particularly non-banks, known as shadow banks, have less capacity and experience than other lenders to modify mortgages. He suggested that it may take additional government action, such as more guidance from the government-sponsored mortgage insurers Fannie Mae and Freddie Mac. Guidance permitting only limited discretion to lenders would promote a uniform approach, he said.

“I do worry that unwinding will be problematic because there is no one size fits all,” he said. “If there is no clear mandate on what unwinding entails, you will see different lenders behaving differently, as we showed was the case during the Great Recession. Some lenders will say, ‘Look, we can’t handle this, we must foreclose.’”

Citation

Cherry, Susan, Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru. 2021. “Government and private household debt relief during COVID-19.” BPEA Conference Draft, Fall.

      

Longstanding racial and ethnic disparities in the United States have hurt not only the people who experience the disparities but have hurt all Americans by depressing U.S. economic output by trillions of dollars over the past 30 years, suggests a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 9.

The authors— Shelby R. Buckman, Laura Y. Choi, Mary C. Daly¸ and Lily M. Seitelman, all of the Federal Reserve Bank of San Francisco—considered differences from 1990 to 2019 among white, Black, and Hispanic men and women, ages 25-64. They looked at disparities using five metrics: employment (the percentage of people with jobs); hours worked; educational attainment (the level of education completed); educational utilization (the extent to which people are in jobs that fully use their education); and earnings gaps not explained by those factors.

Then, in The economic gains from equity, they conducted a thought experiment, asking: “How much larger would the U.S. economic pie be if opportunities and outcomes were more equally distributed by race and ethnicity?” Their answer is $22.9 trillion over the 30-year period.

“The persistence of systemic disparities is costly, and eliminating them has the potential to produce large economic gains,” the authors write. Standard economic models often assume markets work efficiently and thus suggest explanations—such as unmeasured differences in productivity or cultural differences—that would support the existence and persistence of racial and ethnic gaps. The authors instead assume talent and job and educational preferences are distributed evenly across race and ethnicity. They then show the economic effects of disparities that hold people back from fully realizing their potential.

The persistence of systemic disparities is costly, and eliminating them has the potential to produce large economic gains

“The opportunity to participate in the economy and to succeed based on ability and effort is at the foundation of our nation and our economy,” they write. “Unfortunately, structural barriers have persistently disrupted this narrative for many Americans, leaving the talents of millions of people underutilized or on the sidelines. The result is lower prosperity, not just for those affected, but for everyone.”

“With considerable pressures weighing on U.S. economic potential in coming decades, the time seems right to take a new perspective and imagine what’s possible if equity is achieved,” the authors conclude.

The authors note in the paper that they built on the work of others and cite in particular the work, dating to 1985, of four African-American economists: William A. Darity, Patrick L. Mason, William E. Spriggs, and the late Rhonda M. Williams.

Citation

Buckman, Shelby R., Laura Y. Choi, Mary C. Daly¸ and Lily M. Seitelman. 2021. “The economic gains from equity.” BPEA Conference Draft, Fall.

Conflict of Interest Disclosure

Shelby R. Buckman is a graduate student in economics at Stanford University and a past employee at FRBSF during which time she did the majority of her contribution to this paper; Laura Y. Choi is vice president of community development at the Federal Reserve Bank of San Francisco; Mary C. Daly is president and chief executive officer of the Federal Reserve Bank of San Francisco, CRIW member, and IZA research fellow; Lily M. Seitelman is a graduate student in economics at Boston University and a past employee at FRBSF during which time she did the majority of her contribution to this paper. Beyond these affiliations, the authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of San Francisco. Any opinion, findings, and conclusions or recommendations expressed in this material are those of the authors(s) and do not necessarily reflect the views of the National Science Foundation. This material is based upon work supported by the National Science Foundation Graduate Research Fellowship under Grant No. DGE-1840990 and Grant No. DGE-1840990.

      

Monetary policymakers trying to judge whether elevated inflation this year will persist should—heeding past lessons from the United States and abroad—carefully track inflation expectations, suggests a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 9.

The author—Ricardo Reis of the London School of Economics—examined the expectations of consumers, professional forecasters, and markets for inflation in the United States during the late 1960s and early 1970s (when inflation started climbing), during the early 1980s (when inflation stabilized), and during the COVID-19 pandemic. He also looked at episodes in Brazil and South Africa between 2010 and 2016, and in Turkey after 2017.

“If expectations of inflation rise, households will buy more goods today, savers will shift away from nominal assets [such as bonds], workers will demand higher wages, and firms will post higher prices, all of which lead inflation to rise,” he writes in Losing the inflation anchor. And he warns, “if expected inflation rises, then only a deep recession can keep inflation down.”

He compared trying to anticipate future inflation to sitting on a beach trying to figure out, before it is too late, if a boat is drifting away from shore, and likened inflation expectations gauges to “a grainy picture of the boat’s anchor.”

After examining expectations data for last year and this year, he concludes “the jury is out on whether inflation is going to drift away.” He finds reasons for some concern from household surveys but says monetary policymakers still have time to respond.

The paper begins by focusing on the U.S. experience between 1965 and 1974. Current widely used gauges of expectations, such as the monthly University of Michigan Surveys of Consumers and inflation-indexed Treasury securities, did not exist then.

However, Reis looked at rarely used data, including a short-lived quarterly precursor to the Michigan surveys and the gold futures market in Zurich, Switzerland. He concludes that expectations for U.S. inflation began rising as early as 1967. Had the rise in expectations, and their importance, been recognized earlier, Fed policymakers might have considered acting more forcefully to damp inflation. The Fed did not bring inflation, and expectations, under control until, under Chair Paul Volcker, it undertook highly restrictive monetary policy between 1979 and 1983.

In more-recent episodes, policymakers in Brazil, observing that inflation in 2010 was on target, sharply cut interest rates in 2011. But inflation was restrained only temporarily because of government controls on gasoline and diesel prices, and expectations became unanchored between 2011 and 2016. In Turkey, political pressure on the central bank by President Recep Erdogan in the run-up to elections had, by the end of 2017, unmoored inflation expectations. Actual inflation surged in 2018 and 2019.

South Africa between 2010 and 2016 offers a counter example. Actual inflation pushed to the upper bound of the central bank’s target, but—citing temporary shocks to food and electricity prices—it did not sharply tighten monetary policy. Data shows that expectations remained anchored, and inflation subsided.

Reis writes that it is too soon to tell whether inflation expectations in the United States are drifting away now, as they did in the late 1960s, or whether they will remain anchored despite temporary shocks to key prices, as they did in South Africa. Professional forecasters have only slightly raised their inflation expectations for the United States. Market expectations have moved significantly higher this year but only after falling in 2019 and 2020. Household expectations, however, have jumped up faster in just six months than almost any time since the 1980s.

“Inflation is going to be quite high in 2021. Whether it is a short blip or whether inflation will get out of hand depends on expectations, and there are some worrying signs in the data right now,” he said in an interview with The Brookings Institution. “Ultimately expectations depend on what policy will do in the next few months: Will the FOMC let the anchor drift or not?”

Citation

Reis, Ricardo. 2021. “Losing the inflation anchor.” BPEA Conference Draft, Fall.

Conflict of Interest Disclosure

Ricardo Reis’ research is supported by a 5-year grant from the European Research Council. Other than the aforementioned, the author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.

      

The green investments in Senate-passed, bipartisan infrastructure legislation could, over several years, help manual laborers whose jobs are at risk as the world transitions away from fossil fuels, suggests a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 9.

The authors—David Popp and Ziqiao Chen of Syracuse University, Francesco Vona of OFCE Sciences-Po, and Giovanni Marin of the University of Urbino Carlo Bo—derived implications for the bipartisan legislation, still pending in the House, after examining the long-term impact of the $62 billion in green investments in the Obama administration’s 2009 American Recovery and Reinvestment Act.

By 2017, the green investments in the 2009 act—in addition to benefiting the environment—had created 640,000 jobs per year (mostly in manual labor work), or slightly more than 10 jobs for every $1 million invested, they find in The employment impact of a green fiscal push: Evidence from the American Recovery and Reinvestment Act.

The authors found that job creation was much stronger, and could be estimated with more confidence, in areas where the workforce already had a high level of green skills. In the 25 percent of commuting zones with the strongest skill distribution, green job creation was twice the creation in the average commuting area. Areas with high levels of green-job skills tended to be the wealthiest, they note, “thus, using green stimuli as part of a green energy transition may exacerbate regional inequities.”

That underscores the importance of training for the new jobs. “Any green spending plan intending to create green jobs should include funds for job training to ensure a smooth transition into green jobs for displaced workers in fossil fuel and energy intensive sectors,” the authors write.

This year’s bipartisan legislation, based on the Biden administration’s larger American Jobs Plan, includes funds for green investments such as electric vehicle charging stations, modernizing the electricity grid, and improving climate resilience. But it also provides money for plugging orphan oil and gas wells and cleaning abandoned coals mines, which should benefit communities hurt economically by the transition to clean energy.

Any green spending plan intending to create green jobs should include funds for job training to ensure a smooth transition into green jobs for displaced workers in fossil fuel and energy intensive sectors.

“Communities and groups that have been in danger of losing jobs have been very vocal opponents of the green energy transition,” Popp said in an interview with The Brookings Institution. “This policy has acknowledged that these losses are real and tried to do something about that. That’s really important.”

The paper also noted that job creation from green investments in the 2009 act was slower, compared with other investments in the act. Most jobs were created from 2013 to 2017, suggesting, the authors write, that green investments are “more effective for reshaping an economy than for restarting an economy” and, thus, would not have been effective way to address economic disruptions early in the COVID-19 pandemic.

Citation

Popp, David, Francesco Vona, Giovanni Marin, and Ziqiao Chen. 2021. “The employment impact of a green fiscal push: Evidence from the American Recovery and Reinvestment Act.” BPEA Conference Draft, Fall.

Conflict of Interest Disclosure

This project was supported in part through the Smart Prosperity Institute Research Network and its Greening Growth Partnership, which is supported by a Social Sciences and Humanities Research Council of Canada Partnership Grant (no. 895-2017-1018), as well as by Environment and Climate Change Canada’s Economics and Environmental Policy Research Network (EEPRN). Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.

      

The U.S. government should update its approach to estimating an important metric underlying a wide range of federal climate policies—from power plant emissions rules to vehicle fuel economy standards, suggests a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 9.

The paper—The social cost of carbon: Advances in long-term probabilistic projections of population, GDP, emissions, and discount rates—examines a variety of models, estimates, and accounting that can help to build a better—and more accurate—social cost of carbon. The social cost of carbon is an estimate of the economic costs, or damages, of emitting one additional ton of carbon dioxide into the atmosphere, and thus the benefits of reducing emissions. The estimate informs billions of dollars of policy and investment decisions in the United States and abroad.

The paper’s authors are Kevin Rennert, Brian C. Prest, William A. Pizer, Richard G. Newell, and Roger Cooke of Resources for the Future, a non-profit research institution; David Anthoff, Cora Kingdon, and Lisa Rennels of the University of California-Berkeley; Adrian E. Raftery and Hana Ševčíková of the University of Washington; and Frank Errickson of Princeton University.

“The social cost of carbon is a vitally important metric for informing the climate policy of numerous entities, including most notably its role in guiding climate regulations issued by the U.S. federal government,” the authors write. “… It is critical that its calculation is supported by the best available science, including an explicit incorporation of uncertainty.”

To this end, the authors explore the challenges of—and potential solutions to—generating estimates that reflect the range of future socioeconomic projections. The paper presents an updated approach that reflects the latest understanding of population growth, per capita economic growth, projected emissions, and the earth’s climate, while also supporting calculations over the very long time-horizon of greenhouse gases emitted to the atmosphere.

The authors incorporate uncertainty in a manner that addresses previous limitations of the estimates and provide an economic discounting approach that reflects the intergenerational timescale of climate change.

“If you want to know what the damages from climate change are going to be, you have to understand the range of how many people could be on the planet, what the future economy could look like, and what that means for future greenhouse gas emissions,” Rennert said in an interview with The Brookings Institution.

The paper implements key recommendations from the National Academies of Sciences, Engineering, and Medicine that are guiding the efforts of the Interagency Working Group on the Social Cost of Carbon, an Obama-era body re-established by executive order on President Biden’s first day in office. The interagency working group currently uses an interim social cost of carbon of $51 and is expected to announce an updated value for this critical estimate in a January 2022 report. New research grappling with uncertainty around climate change finds that the social cost of carbon likely is higher than previously estimated, especially if appropriate weight is given to future impacts.

Citation

Rennert, Kevin, Brian C. Prest, William A. Pizer, Richard G. Newell, David Anthoff, Cora Kingdon, Lisa Rennels, Roger Cook, Adrian E. Raftery, Hana Ševčíková, and Frank Errickson. 2021. “The Social Cost of Carbon: Advances in Long-term Probabilistic Projections of Population, GDP, Emissions, and Discount Rates.” BPEA Conference Draft, Fall.

Conflict of Interest disclosure

This paper draws on several years of work by the Social Cost of Carbon (SCC) Initiative at Resources for the Future (RFF), an initiative funded by private individual and foundation donors. Raftery’s work was supported by NIH/NICHD grant R01 HD-070936. Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.

      

A surge in imports from China as it modernized its economy during the 1990s and early 2000s caused job and income losses in U.S. manufacturing communities that persisted for years after the import shock plateaued around 2010, finds a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 9.

China’s manufacturing exports rose starting in 1992 as it began transforming from a centrally planned to a comparatively market-oriented economy and shot up after it joined the World Trade Organization in 2001, write the authors—David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich, and Gordon Hanson of the Harvard Kennedy School.

The overall benefits to the U.S. economy (such as lower-priced consumer goods) were positive but small, they write in On the persistence of the China shock. However, U.S. communities producing goods competing with Chinese exports, such as furniture and textiles, suffered painful and long-lasting economic scarring and social problems.

“Labor markets more exposed to import competition from China experienced more plant closures; larger declines in manufacturing employment, employment-population ratios, earnings for low-wage workers, housing prices, and tax revenues; and larger increases in childhood and adult poverty, single-parenthood, and mortality related to drug and alcohol use,” they write.

Until recently, the prevailing view among many economists has been that workers who lost jobs from trade competition would move to labor markets with industries less exposed to trade. That might depress wages in those areas, but the effect of the trade shock would be diffuse. However, the authors found that the China trade shock generated only modest migration from affected areas, mostly by foreign-born workers and younger native-born adults (ages 25-39).

They looked at manufacturing employment in areas exposed to import competition from 2001 to 2019. They found that effect of the trade shock was concentrated in labor markets with below-average levels of college-educated workers and above-average shares of industries specializing in producing goods competing with imports from China. The effects grew increasingly negative until 2013, and then persisted through at least 2018, when their data end.

Some displaced workers benefited from the Labor Department’s Trade Adjustment Assistance (TAA) program, but overall its effect on per capita income in trade-exposed areas was “vanishingly small,” the authors write. The Trump administration’s trade war with China appears to have succeed in raising the prices of U.S.-made goods but not in expanding employment in the industries receiving import protection, they write.

“Presumably, job loss is equally scarring, no matter whether the underlying cause of displacement is import competition or technological change,” the authors note. Instead of protectionist measures such as tariffs or nationally uniform assistance such as the TAA, they observe that “fostering employment growth in regions beset by chronic joblessness”—whether from import competition or other causes—“may be the most comprehensive way to help workers facing persistent negative local labor demand shocks.”

Hanson, in an interview with The Brookings Institution, said place-based policies could take the form of increased unemployment insurance payments or an increased earned income tax credit in labor markets hit by shocks, as well as regionally tailored training programs for displaced workers and assistance and consulting for remaining employers.

“Nothing in our paper challenges the idea that free trade raises gross domestic product,” he said. “The question is what public policies do we want in place to ensure freer trade doesn’t generate concentrated pockets of hardship.”

Citation

Autor, David, David Dorn, and Gordon Hanson. 2021. “On the persistence of the China shock.” BPEA Conference Draft, Fall.

Conflict of Interest Disclosure

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. David Autor is on the Board of Economic Advisors for the Congressional Budget Office and the Advisory Board of the Opportunity & Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis. Other than the aforementioned, they are currently not an officer, director, or board member of any organization with an interest in this article.

      

Middle schoolers in U.S. counties where fewer adults have advanced cognitive skills seem less likely to develop advanced skills themselves, according to a paper presented at a Brookings Papers on Economic Activity conference on March 25.

In Advanced cognitive skill deserts in the U.S.: Their likely causes and implications, Caroline M. Hoxby of Stanford University maps county-level data from standardized tests to show which regions have higher percentages of adults and children with advanced skills and which areas have lower percentages. She compares data for adults, 12th graders, 8th graders, 5th graders, and 3rd graders and finds that regional patterns, evident among adults, only begin to emerge by 8^th grade and are similar to adults by 12^th grade.

This suggests, according to Hoxby, that early adolescence (from the ages of 10-11 to 14-15 for girls and from 11-12 to 15-16 for boys) is an “age of opportunity” for developing higher-order reasoning: a capacity to solve problems through logic, think in the abstract, engage in critical thinking, and derive general principles from a set of facts. According to neuroscientists, at those ages the frontal lobe of the brain, responsible for higher reasoning, is undergoing intense development.

Thus, improving the early adolescent experience may be crucial to equipping people with the cognitive skills necessary for success in a job market that increasingly demands them, she said in an interview with Brookings. “If you are going to make an intervention to improve advanced cognitive skills, you need to hit early adolescence because that is when the brain is most responsive.”

Hoxby’s data map for adults shows advanced cognitive skills are generally, but not always, most prevalent in counties with colleges, high-tech companies, and other employers requiring advanced skills. These include the areas around Boston, New York City, and Washington, D.C.; coastal Washington state and Oregon; the Salt Lake City area; and, in California, San Francisco, Sacramento, Los Angeles, and San Diego. But they are also prevalent in the so-called “Lutheran Belt” (southern Minnesota and parts of Wisconsin, Iowa, and the Dakotas).

The map shows “advanced cognitive skills deserts” including one that runs through Appalachia (northeastern Mississippi, northern Alabama, northern Georgia, eastern Tennessee, eastern Kentucky, West Virginia, southeastern Ohio, Pennsylvania, and parts of the Carolinas, Virginia, Maryland, and New York), another in the Ozarks, and yet another that runs through inland areas of the South (parts of Louisiana and Mississippi, north Florida, northeastern Georgia, and parts of South Carolina and North Carolina). Even in these “deserts,” counties with colleges and universities have high percentages of people with advanced cognitive skills.

Hoxby concludes that evidence suggests that the scarcity of adults with advanced cognitive skills affects adolescents more than younger children. Middle schools in “deserts” may lack funding or find it hard to recruit skilled teachers. Low population density in some areas may prevent schools from being large enough to offer specialized classes.

But it may just come down to a relative neglect of early adolescents, she told Brookings. “Schools and communities do not always feel a sense of urgency about them, compared with younger or older children.”

In any case, she views the “deserts” as opportunities. “I believe that the vast majority of children can acquire advanced cognitive skills, as I define them. Deserts bloom when they get water. How do we know what can be attained unless we attend to the period at which the brain is most receptive?” she asked.

The paper also provides speculative evidence on possible links between advanced cognitive skills, economic fatalism, social trust, and politics. Students who reach the end of high school without acquiring advanced cognitive skills may see little hope for achieving economic security, Hoxby writes. They may resent and distrust intellectual “elites” with better prospects and support politicians who oppose trade and immigration.

Citation

Hoxby, Caroline M. 2021. “Advanced Cognitive Skill Deserts in the U.S.: Their Likely Causes and Implications.” BPEA Conference Draft, Spring.

Conflict of Interest Disclosure

The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this paper. They are not currently not an officer, director, or board member of any organization with an interest in this paper.

      

Reducing pre-trial detention by eliminating cash bail would generate significant economic returns for accused individuals and likely also their families and communities, suggests a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on March 25.

The authors—Will Dobbie and Crystal Yang of Harvard University—note that more than 10 million people are arrested each year in the United States and that, at any point in time, roughly half a million are in pre-trial detention. They cite “the all-too-common stories of arrested individuals who, despite being first-time offenders accused of low-level crimes, spent months in pretrial detention and faced subsequent long-term damage in the form of family separation, work interruption, and loss of housing, or even death.”

“Many of these harms can result even when the period of incarceration is brief and even if individuals are not ultimately convicted of any crime,” they write in The economic costs of pretrial detention.

To assess the effects of pre-trial detention on individuals, particularly younger people, Dobbie and Yang looked at employment and income of people arrested in Miami and Philadelphia from 2007 to 2014. Reviewing evidence in previous research, they note that pretrial detention decreases the probability of employment three to four years after the bail hearing by 9.4 percentage points. And, under a series of assumptions, they estimate that defendants detained pre-trial lost $29,001 in income on average over a lifetime compared with defendants who weren’t detained pre-trial.

Using 1990-2009 county-level data (the most recent available) from a U.S. Department of Justice survey, they show that counties with higher detention rates also experience, on average, higher poverty rates and lower employment rates, particularly for Black individuals. And, the authors present evidence showing reduced economic mobility for children in counties with higher pre-trial detention rates.

Reducing pre-trial detention from 38 percent (the figure for felony defendants in 2009) to 10 percent—through reforms such as the elimination of cash bail—would produce substantial economic benefits, they argue. If money bail were eliminated, they estimate that up to 2.8 million fewer people would be detained per year. (Some defendants would continue to be detained on the grounds that they are dangerous.) And, they estimate that eliminating money bail could increase aggregate U.S. income by up to $80.9 billion per year.

“If you want to improve economic outcomes … you don’t want to just look at changing labor-market policies, you also want to think about reforms to criminal-justice policies,” Yang said in an interview with Brookings. “We think focusing on the pre-trial system is a good place to start.”

Citation

Dobbie, Will and Crystal Yang. 2021. “The Economic Costs of Pretrial Detention.” BPEA Conference Draft, Spring.

Conflict of Interest Disclosure

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper.

      

Historically large aid provided during the COVID-19 pandemic prevented dire hardship for millions, but some people who needed aid were left out and some aid went to people who didn’t need it, according to a paper presented at the Brookings Papers on Economic Activity conference on March 25.

Also, policymakers will need to consider how to unwind support while also shifting aid to meet ongoing needs, write Krista Ruffini of Georgetown University and Abigail Wozniak of the Federal Reserve Bank of Minneapolis.

In Supporting workers and families in the pandemic recession: Results in 2020 and suggestions for 2021, the authors evaluate the expansion and extension of unemployment insurance, economic impact (stimulus) payments, and the Paycheck Protection Program. They also examined the expansion of the Supplemental Nutrition Assistance Program (SNAP) and federal. state and local eviction moratoria.

“Overall, we find the programs were highly successful at delivering intended aid in 2020,” they write.

They cite evidence showing the unemployment insurance expansion increased spending by the unemployed and reduced inequality. However, they note that a large share of support payments went to households who saved rather than spent it. At the same time, economic impact payment recipients were drawn from Internal Revenue Service and Social Security Administration databases, leaving out many working-age people who did not earn enough to file tax returns. Going forward, the authors recommend using Medicaid enrollment information to reach more people. Also, they cite research showing the Paycheck Protection Program preserved many small businesses but said the evidence on whether it preserved jobs is mixed.

Eligibility for SNAP vouchers to purchase groceries was expanded during the pandemic, benefits were increased for some recipients, and recipients were allowed to receive benefits for longer. However, the maximum benefit (for the lowest income recipients) was not increased. The authors note a Census Bureau survey showing food insecurity remained high throughout 2020. They write that it is too soon to judge the full effect of the eviction moratoria but noted the survey shows around four percent of renters and homeowners feared losing their housing in the near future, likely similar to or higher than before the pandemic. The survey suggests aid needs to be better targeted to people with the greatest needs, they write.

Looking ahead, policymakers should begin considering ways to smoothly phase out support as the economy recovers, the authors write. Instead of arbitrary expiration dates, or “cliffs,” policymakers should tie benefits to the state of the economy as measured, for example, by a mix of labor market indicators. Also, programs that could potentially distort economic decision-making should be phased out first, starting with the Paycheck Protection Program and then proceeding to some of the unemployment insurance expansions and lastly withdrawing support that is not directly tied to work.

The authors call for more spending to address the long-run effects of the pandemic. These include effects of extended schooling disruptions, acute mental health trauma, prolonged periods of poor mental health, and persistent health impacts of COVID infections. They suggest Veterans Administration mental health services could be expanded to non-veterans and that mental health care could be provided to parents through schools. Disability insurance system guidelines could be developed for medium- or long-run work disruptions due to persistent COVID symptoms. They also advocate developing systems for weathering and containing any new outbreaks caused by virus variants, including by supporting firms that offer paid leave to employees that need to receive testing or isolate.

Citation

Ruffini, Krista and Abigail Wozniak. 2021. “Supporting Workers and Families in the Pandemic Recession: Results in 2020 and Suggestions for 2021.” BPEA Conference Draft, Spring.

Conflict of Interest Disclosure

Krista Ruffini is a visiting scholar at the Federal Reserve Bank of Minneapolis. Abigail Wozniak is a labor economist at the Federal Reserve Bank of Minneapolis. She also holds unpaid advisory board positions at the McKinsey Institute for Black Economic Mobility and the Hennepin County Small Business Recovery. Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper.

      

The enormous $5.2 trillion U.S. fiscal response to the COVID-19 pandemic likely has put the economy on a path to recovery, but it may end up discouraging future spending on other pressing needs, warns a paper presented at a Brookings Papers on Economic Activity conference on March 25.

Though the response “runs the gamut from highly useful and appropriate to largely ineffective and wasteful,” Christina D. Romer of the University of California-Berkeley judges that the economy “is likely to do well” unless “vaccinations flag or become less effective as new variants emerge”

U.S. spending early in the pandemic (through July) was much larger as a share of gross domestic product (GDP) than in most other countries—50 percent larger than in the United Kingdom and roughly three times as much as in France, Italy, or Spain, she notes in The fiscal policy response to the pandemic. Moreover, countries’ fiscal responses to the pandemic were not related to their initial debt loads—a change from the usual pattern in which countries with high debt loads respond less strongly to crises.

Romer argues that pandemic recessions are fundamentally different from ordinary recessions, and thus require different policy responses. She writes: “The unique characteristics of a pandemic recession imply that fiscal policy during a pandemic should be geared much more toward helping those who are directly harmed rather than toward increasing aggregate demand more generally. That is, it should be aimed at providing social insurance rather than broad stimulus.”

The $599 billion added to the federal deficit to pay for public health measures was “clearly necessary and valuable,” she writes. “Because both the recovery of demand and the safe pace of economic growth depend on getting the virus under control, it was imperative to take aggressive action on public health measures.” Likewise, the expansion of unemployment insurance, at $748 billion, was “clearly appropriate to the unique circumstances of the pandemic.” Also, federal aid to state and local governments ($597 billion) was a cost-effective way to help them meet pandemic-related needs, offset lost tax revenue, and avoid layoffs.

But some federal spending was misguided. Although direct payments (up to $1,200 per person followed by $600 and $1,400) “surely gave many households a much-needed boost at a difficult time,” she writes. “Most of the money went to people who had not been economically harmed by the pandemic.”

The Paycheck Protection Program ($808 billion), which provided forgivable loans to smaller businesses that largely maintained their payrolls, was “an interesting and noble experiment, but it was problematic on many levels,” Romer writes. Two studies suggest the implied cost per job preserved was “on the order of $225,000 to $350,000.”

She also identifies areas that would have warranted increased spending. The lack of a substantial federal program to provide hazard pay to frontline workers who endangered their health by remaining on the job was “an important missed opportunity.” And, although the swift development of vaccines was a public health triumph, “the painfully slow progression from vaccine discovery to actual inoculation strongly suggests that more funding and effort was needed to set up effective and rapid distribution programs.” And, she notes, the United States conducts fewer virus tests per 1,000 people than many other rich countries and “is even worse at genetic sequencing of cases to identify variants and patterns of transmission.”

The fiscal response to the pandemic will push the U.S. debt-to-GDP ratio from 79 percent before it emerged to 110 percent by the end of the 2023 budget year, according to projections she cites. That likely won’t precipitate a fiscal crisis because “demand for U.S. government debt remains as strong as ever.” But she worries that the reduction in “fiscal space” will discourage policymakers from tackling issues such as climate change, crumbling infrastructure, and persistent poverty.

If “stimulus payments that did little to help those most affected by the pandemic end up precluding spending $1 trillion on infrastructure or climate change in the next few years, the United States will have made a very bad bargain indeed,” she writes.

Citation

Romer, Christina. 2021. “The Fiscal Policy Response to the Pandemic.” BPEA Conference Draft, Spring.

Conflict of Interest Disclosure

The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this paper. They are currently not an officer, director, or board member of any organization with an interest in this paper.