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Second/Third QUARTER 2020
FEDERALRESERVE
RESERVEBANK
BANKOF
OFRICHMOND
RICHMOND
FEDERAL
Reimagining Suburban
Utopia in the 1960s
Equality and the Making of Columbia, Md., and Reston, Va.
Faster
Employment Data
Closing the Rural
Broadband Gap
Interview with
Joshua Gans
Volume 25
Number 2
Second/Third
QUARTER 2020
FEATUREs
4
The Coronavirus Crisis and Debt Relief
Loan forbearance and other debt relief have been part of
the effort to help struggling households and businesses
Econ Focus is the
economics magazine of the
Federal Reserve Bank of
Richmond. It covers economic
issues affecting the Fifth
Federal Reserve District and
the nation and is published
by the Bank’s Research
Department. The Fifth
District consists of the
District of Columbia,
Maryland, North Carolina,
South Carolina, Virginia,
and most of West Virginia.
Director of Research
Kartik Athreya
Director of Publications
8
Closing the Digital Divide
Digital connections have become more important in a time of
social distancing, but rural broadband access still lags behind cities’
Jessie Romero
Editor
David A. Price
Managing Editor
Lisa Kenney
Staff WriterS
John Mullin
Hailey Phelps
Tim Sablik
Editorial Associate
Katrina Mullen
DEPARTMENTs
1 President’s Message/Confronting a Tragic Reality
2 Upfront/Regional News at a Glance
3 At the Richmond Fed/The Fed Experience
12 Research Spotlight/Don’t Graduate into a Recession
13 Book Review/Reprogramming the American Dream: From Rural
America to Silicon Valley — Making AI Serve Us All
14 Federal Reserve/The Fed’s Emergency Lending Evolves
18 Interview/Joshua Gans
23 Economic History/The Making of Reston and Columbia
27 District Digest/Learning About the Labor Market from
High-Frequency Data
32 Opinion/A Teachable Moment?
Contributors
Emily Wavering Corcoran
Emily Green
Joseph Mengedoth
Design
Janin/Cliff Design, Inc.
Published by
the Federal Reserve Bank
of Richmond
P.O. Box 27622
Richmond, VA 23261
www.richmondfed.org
www.twitter.com/
RichFedResearch
Subscriptions and additional
copies: Available free of
charge through our website at
www.richmondfed.org/publications or by calling Research
Publications at (800) 322-0565.
Reprints: Text may be reprinted
with the disclaimer in italics
below. Permission from the editor
is required before reprinting
photos, charts, and tables. Credit
Econ Focus and send the editor a
copy of the publication in which
the reprinted material appears.
The views expressed in Econ Focus
are those of the contributors and not
necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.
ISSN 2327-0241 (Print)
ISSN 2327-025x (Online)
Cover Images: Map of Columbia from Howard County, Md.;
Reston Town Center District Plan courtesy of the Reston Museum.
President’s Message
Confronting a Tragic Reality
O
ur nation has recently increased its focus on
a tragic reality: Life outcomes vary widely by
race. In July, the unemployment rate for black
Americans was 14.6 percent, more than 5 percentage
points higher than the rate for white Americans. Even
before the current crisis, when unemployment was at historic lows, there was a gap of around 3 percentage points.
Median income for white households in 2018 was $71,000,
compared with $41,000 for black households. The wealth
gap is even larger: White households’ median net worth is
nearly 10 times higher than that of black households.
And if you’re white, you’re even likely to live longer.
Here in Richmond, life expectancy can vary by as much
as 20 years between some of the poorest, mostly black
neighborhoods and the most affluent, mostly white neighborhoods. We also see disparities in the disproportionate
toll the pandemic is taking on communities of color.
My office is in the former capital of the Confederacy.
When I look out my window, I can see the island where
Union prisoners of war were held and the ruins of a bridge
burned by retreating Confederate troops. The legacy of
this era still affects outcomes today, in ways both obvious
and subtle.
Our small towns in the Fifth District have a larger black
population than in the nation as a whole; nearly 20 percent of our small-town residents are black compared with
about 9 percent nationwide. This is particularly true in the
Carolinas, where many plantations were located. Nearly
37 percent of South Carolina’s small-town population is
black. And we know smaller towns in this country have
struggled economically.
There are of course also significant black populations
in our district’s major cities, and these cities are thriving
along many dimensions. But they generally also display
some of the worst economic mobility in the country.
According to research by economists Raj Chetty, Nathaniel
Hendren, Patrick Kline, and Emmanuel Saez, Charlotte,
N.C., has the worst economic mobility of the nation’s 50
largest metro areas. Raleigh was number 48 on the list, and
Baltimore was number 37.
Education is critical to growing incomes and wealth.
But the black residents of our region were explicitly
denied equal access to education for nearly a century after
the Civil War. We know that kind of disadvantage can be
hard to overcome even generations later.
Even after schools became integrated, “white flight”
to private schools and the suburbs largely resegregated
Southern school systems once again. And limitations on
cities’ ability to grow left their educational funding
disadvantaged as well. For example, Baltimore’s current
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boundaries were effectively
fixed by a 1948 change in the
law that allows county residents to reject any future
annexation attempts by the
city.
The Jim Crow era limited
black individuals’ ability to
access credit, build businesses,
and thereby create wealth.
Many instead chose to emigrate
from the South to seemingly
more attractive parts of the
country. Those who remained have struggled with credit
for generations, starting with the sharecropping model that
left so many in peonage.
The regional Fed banks are charged with understanding the dynamics within our districts. In pursuit of that
goal, we have been investing in research that addresses
these issues and the racial inequities that result. We are
analyzing how to support smaller towns, where residents
suffer from educational disparities, isolation, and low
workforce participation. We have work underway on
economic mobility, a particular issue in our larger cities. Motivated by research finding that well over half of
income and wealth inequality is determined by a person’s
circumstances at age 23, we have been studying the critical
role of early childhood education and the preparation
students need to succeed in college. In the area of financial markets, we’re working to understand differences in
white and black people’s opportunities to borrow, and our
community development team has launched a program
to connect banks with community reinvestment projects.
The racial disparities in our district are the result of
hundreds of years of unequal access and unequal treatment. In the context of a country with great challenges,
we recognize ours are even greater. We’re committed to
playing a positive role in finding the solutions.
EF
Tom Barkin
President
Federal Reserve Bank of Richmond
This column is adapted from a longer essay published on the
Richmond Fed’s website.
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
1
UpFront
Regional News at a Glance
By K at r i n a M u l l e n
MARYLAND — In early July, Norwegian aquaculture firm AquaCon announced
it will invest $1 billion over five years to build three Atlantic salmon indoor fish
farming tank facilities on the Eastern Shore. AquaCon said it selected this strategic
partnership with the University of Maryland, Baltimore County (UMBC) and
the University System of Maryland’s Institute of Marine and Environmental
Technology for its geographical, technological, and educational significance,
including extensive research from UMBC marine biotechnology professor
Yonathan Zohar.
NORTH CAROLINA — The North Carolina Department of Commerce
awarded Centene Corp. a Job Development Investment Grant that will
reimburse Centene nearly $400 million for its East Coast regional headquarters
and technology hub in Charlotte, which is likely to begin construction this year.
Centene is a provider of health insurance to state and private health care
programs. The $1 billion long-term investment will add an estimated 3,237 jobs
in health care, technology, and administration.
SOUTH CAROLINA — Community Works, a nonprofit financial organization
in Greenville, and Benedict College, a historically black college in Columbia,
will soon host women’s business centers to provide the state’s women-owned
small businesses with resources and opportunities to start, retain, or grow their
businesses. Selected by the U.S. Small Business Administration, these two sites join
more than 100 women’s business centers throughout the country.
VIRGINIA — Gov. Ralph Northam announced that in January 2021, Virginia
will join 10 Northeast and mid-Atlantic states as a full member of the Regional
Greenhouse Gas Initiative (RGGI), a market-based cooperative with a mission to
fight climate change, reduce greenhouse gas emissions, and advance the economy.
With this announcement, Virginia becomes the first Southern state to participate
in the RGGI, which requires the state to cap carbon dioxide emissions and limit
pollution to achieve the cap or purchase allowances from an RGGI auction. The
General Assembly passed legislation that allows the state to use these auction
proceeds toward other environmentally conscious programs.
WASHINGTON, D.C. — Mayor Muriel Bowser and the Office of the Deputy
Mayor for Planning and Economic Development will issue a request for proposal
later this year for the redevelopment of the Malcolm X Opportunity Center, a
community center, as well as start the surplus process for redevelopments of the
Frank D. Reeves Municipal Center, a city office building, and Hill East District,
a 67-acre tract. Mayor Bowser’s administration has said these projects will seek to
advance equity in their selections of both contractors and tenants. The NAACP
has announced that it will relocate its national headquarters to the Reeves Center.
WEST VIRGINIA — In late June, Sens. Shelley Moore Capito, R-W.Va., and
Joe Manchin, D-W.Va., announced a $10 million grant from the U.S. Department
of Agriculture’s National Institute of Food and Agriculture (NIFA) to West
Virginia University. As one of eight universities receiving the grant through
NIFA’s Sustainable Agricultural Systems program, the university will use the
funding to research how to improve the nation’s food supply. The research will
focus on sustainability to support consumers, producers, and the economy,
particularly those in rural areas who may have less access to inexpensive and healthy
foods.
2
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
ATTHERichmondFED
The Fed Experience
By H a i l e y P h e l p s
P
Thousands
eople often associate the Richmond Fed with
promoting price stability and ensuring the security
of the nation’s financial system. Most people don’t know
that it also operates a museum about the economy,
which includes a 27.5-pound gold bar and a reconstructed 1970s living room in which visitors learn about that
decade’s inflation.
Ten years ago, the Richmond Fed created the Fed
Experience to help students and the general public learn
about the roles that individuals and the Fed play in the
economy. The museum takes up most of the first floor of
the Richmond Fed’s headquarters. Its exhibits, many of
them interactive, explore the history of the Fed and its
role in the economy regarding monetary policy, supervision of financial institutions, and cash processing. Visitors
also learn about the Fed’s dual mandate of maximum
employment and price stability.
Prior to the Fed Experience, the first floor of the
Richmond Fed contained a smaller museum, the Money
Museum, where visitors examined different types of bank
notes and coins. Following the 2007-2008 financial crisis,
the Richmond Fed began planning a new, more ambitious
public exhibit space, which opened in July 2010.
“In terms of development, it was truly a bankwide
project,” says Melanie Rose, the Richmond Fed’s assistant
vice president for research administration, who was the
manager of the economic education team at the time.
“Employees from economic education, research, facilities,
corporate communications, procurement, and many other
departments contributed.”
Stories from Fed employees and their families were featured prominently in the Fed Experience when the exhibit
opened. In addition, community members and students
from the Fifth District are featured in the depictions on
the walls and in the interactive displays. “It was important
for us to convey the interaction of people and the economy
and how the choices of real people affect the economy,”
Rose says.
Although the museum was originally designed with
middle school students in mind, the economic education
team has developed tour programs to accommodate visitors of all ages. The Fed Experience offers guided tours for
schools, colleges, adult groups, and mixed groups such as
families. Currently, high school students make up the largest proportion of visitors. On average, the Fed Experience
welcomes 5,000 to 6,000 guests each year.
The response from educators over the years has
been highly positive. “We’ve been able to build a loyal
audience of teachers who bring their students year after
https://bit.ly/covid-charts
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year,” says Sarah Gunn, the current leader of the economic education team.
The guided tour focuses on the history and functions
of the Fed and how it connects to the students. The tour
is tailored to the grade level and aligned with the economics and personal finance standards for Virginia. The
economic education team also developed a tour for high
school students that focuses on resume writing, networking, the relationship between education and income, and
jobs at the Fed and in the greater Richmond area.
Since 2010, the Fed Experience has undergone several changes. One addition to the tour is a visit to cash
processing, where visitors see how millions of dollars are
counted, sorted, and shredded. “The cash processing tour
was added when the Richmond Fed commemorated its
centennial in 2014. And we’ve kept it as part of our standard tour since then because it was so popular,” Gunn says.
The Fed Experience has also expanded its program to
include a summer tour. The Summer Camp Challenge is a
field trip opportunity for summer camps in the Richmond
area to introduce K-8th grade students to basic economic
concepts such as productive resources and the characteristics of money. In years past, this program has brought in
approximately 1,000 summer campers per year.
As a result of the COVID-19 pandemic, the Fed
Experience has been closed to visitors since mid-March.
Though the Richmond Fed plans to reopen the museum
when conditions permit, no reopening date has been
announced. In the meantime, the economic education
team has developed an online program called the Fed
Experience: Road Show to engage students virtually with
Fed Experience content. They plan on launching the
program in the fall to present content and facilitate interactive activities virtually with students.
The Fed Experience: Road Show is a response to the
pandemic, but it’s expected to become a permanent
offering. “It will allow us to reach students who couldn’t
otherwise come to us, whether that’s because parts of our
district are too far away to visit or because schools don’t
have the resources to bring the students on-site,” Gunn
says. “We’ll continue with both.”
In a recent statement, Kartik Athreya, executive vice
president and director of research, said the new version
of the Fed Experience is part of a larger effort to open the
department’s programs to off-site participation. “With a
focus on innovation and inclusivity, the coming months
will be ones where we focus on how best to deploy and
adapt all of our content in a way that meets our audiences
where they are — not where we are.”
EF
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
3
Loan forbearance
The
Coronavirus
Crisis and
Debt Relief
and other debt relief
have been part of the
effort to help struggling
households and
businesses
By John Mullin
T
he pandemic’s harmful financial effects have been distributed unevenly — so much so that
the headline macroeconomic numbers generally have not captured the experiences of those
who have been hardest hit financially. Between February and April, for example, the U.S.
personal savings rate actually increased by 25 percentage points. This macro statistic reflected the
reality that the majority of U.S. workers remained employed, received tax rebates, and reduced
their consumption. But the savings data did not reflect the experiences of many newly unemployed
service sector workers.
And there are additional puzzles in the data. The U.S. economy is now in the midst of the worst
economic downturn since World War II, yet the headline stock market indexes — such as the Dow
Jones Industrial Average and the S&P 500 — are near record highs, and housing prices have generally remained firm. How can this be? Many observers agree that the Fed’s expansionary monetary
policy is playing a substantial role in supporting asset prices, but another part of the explanation
may be that the pandemic’s economic damage has been concentrated among firms that are too
small to be included in the headline stock indexes and among low-wage workers, who are not a
major factor in the U.S. housing market.
4
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
Share this article: https://bit.ly/debt-covid
Policymakers have taken aggressive steps to mitigate the pandemic’s financial fallout. Among the most
prominent have been IRS tax rebates, the expansion of
unemployment insurance benefits, and forgivable Payroll
Protection Plan (PPP) loans for businesses. But these fiscal steps have been complemented by an array of policies
specifically designed to ease private sector debt burdens.
The CARES Act, for instance, mandated debt forbearance
on federally backed mortgages and student loans. And
the Fed — in addition to launching several new lending
facilities — has coordinated with other federal bank regulators to encourage banks to work constructively with
their clients in need of loan restructurings. (See “The
Fed’s Emergency Lending Evolves,” p. 14.) While less wellpublicized than the fiscal steps, these debt relief measures
are arguably no less consequential.
A Role for Debt Relief
The economic policies that have been adopted in
response to the crisis were designed to meet multiple
goals. The most immediate concerns were to provide
safety net aid to those in need and to stimulate aggregate
demand. But there was also a longer-term objective: to
improve the foundation for future growth by helping
households and firms maintain their financial health.
This goal is being addressed partly by fiscal transfers to
households and firms to help them avoid depleting their
assets and increasing their debts. But crucially, the goal
is also being advanced by policies designed to keep the
supply of bank credit flowing and to prevent unnecessary
loan defaults and business failures.
The CARES Act contains several important debt
relief provisions. In addition to allowing for the deferment of student loan debt repayments and providing
debt service forbearance and foreclosure protection for
borrowers with federally backed mortgages, the legislation also mandated the relaxation of certain accounting
standards — making it more attractive for banks to offer
debt forbearance to households and firms affected by the
pandemic. In support of the legislation’s intent, federal
bank regulators at the Fed and other agencies issued
an interagency statement on March 22 confirming that
financial institutions could make pandemic-related loan
modifications without having to downgrade the loans
to the category of Troubled Debt Restructurings (or
TDRs). Since it is costly for banks to recategorize loans
as TDRs, this interpretation helped to remove an impediment to loan restructurings.
Bank regulators followed this up by issuing a statement
in June that outlined supervisory principles for assessing
the safety and soundness of financial institutions during
the pandemic. According to the statement, regulators
“have encouraged institutions to use their capital buffers
to promote lending activities.” Moreover, the regulators
emphasized that they “view loan modification programs
as positive actions that can mitigate adverse effects on
borrowers due to the pandemic.” They sought to assure
bankers that bank examiners “will not criticize institutions
for working with borrowers as part of a risk mitigation
strategy intended to improve existing loans, even if the
restructured loans have or develop weaknesses that ultimately result in adverse credit classification.”
This guidance has been implemented by the Fed’s
regional bank supervisors, including those in the Fifth
District. “We want the banks to be part of the solution
and to continue to lend,” says Lisa White, executive
vice president of the Supervision, Regulation, and Credit
department at the Richmond Fed. “Overall, the banks
were more resilient from a capital perspective heading
into the current crisis compared to the last,” she says.
“The philosophy behind the interagency guidance was
to convey our planned supervisory approach and clearly
communicate what we will be most focused on as we assess
how banks are handling the challenges associated with the
pandemic.”
When supervisors evaluate how well banks have performed during the crisis, she explains, “we are going to
assess how well they have managed their deferral and forbearance programs, and we will put more emphasis — even
more than we’ve had in the past — on their underwriting
and risk management practices versus just the results or
how they translate into a particular loan’s performance.”
Loan Forbearance and Households
Prior to the pandemic, the household sector’s credit
metrics appeared to be in good shape. In 2019, the
overall delinquency rate for consumer credit stood at a
post-financial-crisis low of roughly 5 percent, as declining mortgage delinquencies in recent years had roughly
offset increased auto loan and credit card delinquencies.
Moreover, the aggregate data showed no noticeable
upward trend in personal foreclosures and bankruptcies. These signs of health may have partly reflected the
conservative underwriting practices that creditors had
adopted after the 2007-2008 financial crisis, when they
shifted toward making loans to borrowers with higher
credit scores.
But these numbers may not adequately reflect the
financial vulnerability of many low-income households.
According to the research and consulting firm Financial
Health Network, as many as 33.9 percent of those
surveyed in 2019 stated that they were “unable to pay all
bills on time.” The same survey found that, among those
who make less than $30,000, only 34.7 percent stated
that they have a “manageable amount of debt.” These
numbers are consistent with the notion that there is a
significant part of the U.S. population that lives paycheck
to paycheck and is quite vulnerable to interruptions in
income.
These vulnerable low-income households bore the
brunt of the economy’s job losses at the onset of the
pandemic. Based on an analysis of ADP data presented
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
5
Forbearance Jumped in April and May
MILLIONS
Residential mortgages in active COVID-19 forbearance plans
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
March 24
April 24
May 24
June 24
July 24
August 24
Source: Black Knight
at a recent Brookings Papers on Economic Activity
conference, employment losses were disproportionately
high among the quintile of employees with the lowest
pre-pandemic wages. That quintile had a greater than
35 percent decline in employment by April, which contrasts sharply with the less than 10 percent decline in
employment for those in the highest-wage quintile.
The notion that many households stand on shaky
financial ground finds support in the rapidity with which
borrowers have sought out debt forbearance. According to
Black Knight, a provider of mortgage data, the number of
mortgages in forbearance increased from close to zero in
March to over 4 million in May. That figure represented
roughly 8 percent of active mortgages. (See chart.)
It appears that banks have generally been receptive
to forbearance requests by their consumer credit clients. “We’ve been very public with statements on the
consumer side, letting clients know that if you are in
trouble, contact us,” says John Asbury, CEO of Atlantic
Union Bank. “What’s happened is the borrowers have
contacted us and said, ‘I’m having financial challenges.’
For borrowers with no previous payment problems, we
have typically granted 90-day deferrals for the consumer,
no questions asked.”
Forbearance programs are likely to help mitigate
defaults and foreclosures, at least in the short run. In a
recent Richmond Fed working paper, Grey Gordon and
John Bailey Jones concluded that mortgage forbearance,
student loan forbearance, and fiscal transfers will keep
delinquency rates from increasing much in the near future.
According to their analysis, the forbearance programs are
likely to have the greatest effect, with fiscal transfers playing a smaller role.
But consumer loan forbearance is no panacea. It does
not eliminate debt but merely provides borrowers with
time to improve their repayment capacity. If U.S. unemployment remains substantially above pre-pandemic
levels, the economy may see a substantial increase in
defaults as forbearance arrangements expire.
6
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
Loan Forbearance and Businesses
The negative effects of social distancing have been most
strongly felt among relatively small businesses. In part,
this is because small businesses are disproportionately
represented in many of the hardest-hit industries, such as
hotels, restaurants, and retail trade. But it also reflects the
relative financial vulnerability of small firms. This point
was highlighted in a September 2019 study by JPMorgan,
which found that, in the typical community, 47 percent of
small businesses had two weeks or less of cash liquidity.
In more normal times, insufficient revenue and inadequate access to capital are among the most frequent
reasons for small business failures. During the current
crisis, of course, these problems have become particularly
widespread. According to a recent survey by MetLife
and the U.S. Chamber of Commerce, 70 percent of small
businesses “are concerned about financial hardship due to
prolonged closures” and 58 percent “worry about having
to permanently close.” Two-thirds of survey participants
agreed that minority-owned businesses “have been disproportionately impacted by COVID-19.”
The risk of permanent closure was underscored in a
recent report by the business review website Yelp. Yelp
found that 132,500 of the firms that it tracks were closed
for business on July 10 and that a little more than half of
the closures were permanent.
As with consumer credit, many banks have been
offering forbearance plans to their business clients who
have been negatively affected by the pandemic. Atlantic
Union Bank, for example, has already modified over 700
business loans in segments it has identified as “COVID-19
sensitive.” By the third week of April, Atlantic Union
had already made roughly 4,000 pandemic-related loan
modifications, accounting for 14.8 percent of the bank’s
overall loan portfolio. These modifications have been
particularly concentrated among its loans to hotels,
restaurants, health care, and retail.
“We have offered payment deferrals in cases where
we fundamentally believe there will be an operating company to work with on the other side,” says John Asbury
of Atlantic Union. “Then we can work with them and
monitor their operations. However, if we ultimately lose
confidence in the company’s viability, then we have to
treat it differently and downgrade the loan’s risk rating.
We don’t want to push problems down the road.”
In some cases, forbearance programs for real estate
developers have had favorable knock-on effects. Such
was the case with Lion’s Paw Development, a Richmond
firm that has built many restaurants for “mom and pop”
operators. When Lion’s Paw was offered a real estate loan
deferment by its bank, it gave the firm the flexibility to
offer rent forbearance to its retail tenants. “I’ve worked
out rent forbearance deals with many of my tenants,” says
Charlie Diradour, president of Lion’s Paw. “I’m going to
send the tenants addendums to their leases that acknowledge that rent payments have not been paid for April,
May, June, and maybe July. We’re going to add those
months on the back end of their current terms.”
Yet many small businesses remain vulnerable to being
shut down. This risk presents a major concern for
policymakers, because small-business closures not only
eliminate job opportunities, they also deplete the assets
of business owners — thus damaging their ability to
make future investments.
The Forgiveness Frontier
Some observers have advocated debt forgiveness for the
most vulnerable — not only for reasons of fairness, but
also to remove excessive debt burdens that block the path
to future growth.
For Michael Hudson of University of Missouri,
Kansas City, author of the 2018 book ...and forgive them
their debts: Lending, Foreclosure and Redemption from Bronze
Age Finance to the Jubilee Year, solutions for the current
pandemic and its related debt burdens should draw on
history. For example, in ancient Mesopotamia, under
the Laws of Hammurabi, periods of debt forgiveness
called “jubilees” were periodically invoked after a famine
or other natural disaster created levels of debt that could
not be addressed by regular means. “But Hammurabi
was not a Utopian idealist when he forgave the debts,”
says Hudson. “He recognized that it’s not worth slowing
down the whole economy and putting it into recession
just so creditors can get paid.”
To be sure, such a policy would place the burden of the
crisis on another group, namely creditors. The long-term
effects on the availability and pricing of credit are hard
to predict. But in Hudson’s view, bankers, creditors, and
landlords have done well enough over the past 10 years to
warrant a similar policy today. “They can afford to take a
hit — a write-down — the rest of the economy cannot.”
Other observers have called for more modest debt relief
measures. For example, Joseph Stiglitz offered some ideas
on the topic of debt relief in a recent interview, including
a proposal to lower what he called the “usurious interest
rates” on credit card debt. Observing the unequal impact
of the crisis, Stiglitz added, “And for those businesses that
are getting so much help from the government, part of
that should be used to help the debtors, who otherwise
will sink under a mountain of debt.”
A proposal to address the debt burdens of small businesses was recently published in the Brookings Papers on
Economic Activity by Markus Brunnermeier of Princeton
University and Arvind Krishnamurthy of Stanford
Re a d i n g s
Brunnermeier, Markus, and Arvind Krishnamurthy. “Corporate
Debt Overhang and Credit Policy.” Brookings Papers on Economic
Activity, Summer 2020.
Debt forgiveness was practiced in ancient Mesopotamia. The Laws
of Hammurabi, seen here, laid out situations in which debt slates
could be wiped clean, such as if “a storm prostrates the grain, or the
harvest fail, or the grain does not grow for lack of water; in that year
he need not give his creditor any grain.”
University. They posited that increased debt loads lead
firms to focus on meeting debt obligations rather than
keeping workers employed or pursuing new investment
projects. In their view, rather than stimulating demand,
the government policy’s main aim should be to provide
insurance to firms and workers by injecting “liquidity
into small and medium sized firms that are liquidity
constrained.”
The initial responses to the crisis by fiscal and monetary policymakers and bank regulators have been massive
in scope. Together, they have provided safety net assistance, supported aggregate demand, and helped many
households and businesses preserve their financial health
and avoid default. Despite these efforts, many lower-wage
workers and small businesses continue to struggle financially, and economists and policymakers continue to
consider the best policy responses.
EF
Hudson, Michael. … and forgive them their debts: Lending, Foreclosure
and Redemption From Bronze Age Finance to the Jubilee Year. Dresden:
ISLET-Verlag, 2018.
Gordon, Grey, and John Bailey Jones. “Loan Delinquency
Projections for COVID-19.” Federal Reserve Bank of Richmond
Working Paper No. 20-02, April 15, 2020.
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7
Closing the
Digital Divide
Digital connections have become
more important in a time of social
distancing, but rural broadband access
still lags behind cities’
By Tim Sablik
F
or better or worse, the internet has become increasingly indispensable to the way we connect with each
other. In 2000, only about half of American adults
were online; today, nine in 10 are. Yet despite living in the
country where the internet was born, not all Americans
have equal access to it.
Much of this gap is along geographic lines. According
to the Federal Communications Commission (FCC),
98.5 percent of urban households have access to fast wired
home internet, while only 77.7 percent of rural residents
do. In many states, one doesn’t need to travel far outside
of metro areas to see stark differences in connectivity.
Virginia provides a good example of this contrast.
Northern Virginia is home to the largest collection of data
centers in the world, handling more than 70 percent of all
internet traffic by data volume. Residents there and in other
major metropolitan areas across the state enjoy easy access
to speedy broadband networks. But for residents in more
sparsely populated communities, options are more limited.
“From where I work in downtown Richmond, I could
reach multiple communities that don’t have broadband
access in a 45-minute drive in any direction,” says Evan
Feinman, chief broadband adviser to Virginia Gov. Ralph
Northam. “A significant majority of Virginia counties have
unserved residents.”
For families sheltering at home during the coronavirus
pandemic, a reliable internet connection has become even
more of a necessity. Businesses have asked workers to
telecommute, schools have moved to online classrooms,
and doctors have turned to telemedicine for nonemergency care, all in an effort to reduce person-to-person
contact and slow the spread of the virus. Indeed, access
to broadband may be crucial to enabling households to
follow social distancing guidelines. A recent National
Bureau of Economic Research working paper by Lesley
Chiou of Occidental College and Catherine Tucker of
the Massachusetts Institute of Technology’s Sloan School
of Management found that income and access to reliable
home broadband played a role in whether or not households stayed home during the pandemic.
8
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Having access to broadband is just one step to crossing
the digital divide, though. Even if broadband service is
available, low-income households may not be able to afford
it, and lack of digital training can dissuade households from
subscribing. These adoption barriers extend beyond the
rural-urban divide, affecting households in cities as well as in
the country. To the extent that social distancing measures
persist or return in the future, closing the digital divide may
be a more pressing concern now than ever before.
Mapping Need
For most of the 21st century, discussions of the digital
divide have focused on expanding the availability of
broadband, a catchall term for any high-speed internet
connection. The FCC defines broadband as a connection
with download speeds of at least 25 megabits per second
(Mbps) and upload speeds of at least 3 Mbps. By all measures, the United States has made progress in expanding
broadband access, but there is debate over just how much.
Since 2014, the FCC has required all broadband providers to report where they currently offer service or
could provide it without an “extraordinary commitment of
resources.” According to the FCC’s data, the gap between
rural and urban areas in the availability of broadband has
narrowed from 36.1 percentage points in 2014 to 20.8 percentage points in 2018, the latest year of data available. But
everyone, including the FCC, acknowledges shortcomings
with this data. The main problem is that broadband providers are only required to report whether they provide service
at the census block level. In densely populated urban areas,
census blocks may indeed be the size of a city block. But in
rural areas, census “blocks” can cover thousands of square
miles. As long as an internet service provider (ISP) has
connected one customer in that census block, it can count
the entire block as served, even if many households actually
lack service.
“There are many areas that the FCC classifies as
served, but when you meet with people in that community, they will say that they don’t have broadband or
that their connectivity is awful,” says Robert Hinton,
Share this article: https://bit.ly/rural-internet
The Rural-Urban Digital Divide
Percent of U.S. adults who are home broadband users
PERCENT
chairman of the West Virginia Broadband Enhancement
Council, which was created by the state legislature to
oversee broadband issues.
The Pew Research Center has used surveys to track
home broadband subscriptions since 2000, and their data
also point to a persistent rural-urban divide. (See chart.)
An accurate picture of which communities are unserved is
important for determining which regions have the greatest need. It also plays a role in determining eligibility for
federal subsidies to build broadband infrastructure.
The gap between rural and urban broadband infrastructure is largely an issue of profitability. Fiber-optic cables
are the current gold standard for broadband because they
enable the fastest speeds and largest data capacity, but
building out a fiber network is expensive. Estimates vary,
but the U.S. Department of Transportation placed the
cost of building a new fiber network at around $27,000
per mile.
In densely populated cities, service providers can
recoup these fixed costs more easily through a large subscriber base. But in sparsely populated rural locations, the
cost of laying fiber can easily exceed the returns. Difficult
terrain can further raise the costs of reaching remote
places. West Virginia, which ranks 48th among states in
terms of broadband access according to the FCC, faces
challenges of both density and topography.
“Our terrain is beautiful, but when it comes to building
infrastructure like broadband, it certainly is an impediment,” says Hinton.
Policymakers at both the federal and state level have
explored various ways to offset some of the cost of reaching unserved customers. At the federal level, this has
mostly taken the form of infrastructure grants and subsidies. In January 2020, the FCC launched its Rural Digital
Opportunity Fund, which sets aside $20 billion over the
next decade to finance the construction of broadband
networks in unserved rural areas. And in December 2019,
the U.S. Department of Agriculture announced $600 million in funding for the ReConnect Program in the form of
grants, loans, and grant/loan combinations to deploy rural
broadband.
Nearly every state also has its own grants for broadband. For example, North Carolina’s Growing Rural
Economies with Access to Technology (GREAT)
Program provides grants for broadband development
in distressed communities from a $10 million pool. The
Virginia Telecommunications Initiative has a budget of
$19 million to provide grants for broadband projects.
Funding for subsidies is finite, however, which means
policymakers need to know how to direct the money to
where it will do the most good. To qualify for subsidies,
firms need to show that they plan to build infrastructure in
unserved areas — a challenge if service maps are inaccurate.
In March 2020, President Donald Trump signed into law
the Broadband Deployment Accuracy and Technological
Availability Act, also known as the Broadband DATA Act,
90
80
70
60
50
40
30
20
10
0
2000 2002
Urban
2004 2006 2008
Suburban
2010
2012
2014
2016
2018
Rural
Source: Pew Research Center
which requires the FCC to collect more granular data on
broadband availability and create a process for consumers
and ISPs to challenge coverage data that they believe is
inaccurate. But it will take time for those data to be collected. Some states have decided not to wait.
Feinman says that instead of relying on the FCC’s maps,
Virginia allows firms to apply for broadband infrastructure
grants to build a network in any area that they believe is
unserved. Incumbents in those regions then have an opportunity to submit a challenge and show that they do provide
service in those locations. The threat of state-subsidized
competition gives incumbents an incentive to disclose
where they actually provide broadband service.
“While an accurate map would be beneficial to our
efforts, we’ll be able to achieve universal coverage without
ever having generated a reliable Virginia coverage map,”
says Feinman.
Filling in the Middle
The gap in rural broadband coverage has often been framed
as a “last mile” problem. Internet infrastructure can be broken up into three categories: backbone, middle mile, and
last mile. While geography comes into play, these categories are more a description of the types of customers served.
Backbone infrastructure is the high-capacity fiber that
connects the large data centers that comprise the internet
itself. Middle mile infrastructure runs between the backbone and last mile connections, which serve households
and businesses.
In order to serve customers, ISPs need to build last
mile connections to the nearest middle mile or backbone
infrastructure. Those connections could be close or miles
away, and that distance affects the total cost of closing the
last mile.
“If you’re a company looking to provide service to a rural
area, the upfront capital costs are the real barrier to doing
that,” says John Horrigan, a senior fellow at the Technology
Policy Institute, a Washington, D.C., think tank that
receives support from major tech and telecom firms. “If
the government reduces that capital cost by building out
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9
Digital Divide Narrows with the Inclusion of
Mobile Wireless
Share of Households with Access to Wired Broadband
100
PERCENT
80
60
40
20
0
2014
Urban
2018
Rural
Share of Households with Access to Wired Broadband or Mobile LTE
100
PERCENT
80
60
40
20
0
2014
Urban
2018
Rural
Note: “Wired Broadband” refers to wired internet with download speeds of at least 25
Mbps and upload speeds of at least 3 Mbps. “Mobile LTE” refers to mobile wireless internet
with median download speeds of at least 10 Mbps and upload speeds of at least 3 Mbps.
Source: Federal Communications Commission, “2020 Broadband Deployment Report.”
the middle mile infrastructure, that makes it much more
attractive for private firms to come in and complete the last
mile investment to serve customers.”
Some states have spearheaded their own initiatives to
improve the middle mile. In 2013, Maryland completed the
One Maryland Broadband Network, a fiber-optic network
connecting government facilities and community anchor
institutions across the state, facilitating easier last mile
development.
Other states have partnered with private firms to build
out their middle mile. In West Virginia, electric companies
upgrading their networks to facilitate the development of
smart grids have agreed to run additional fiber capacity
and lease it to last mile carriers. Legislation passed in 2017
opened the door for ISPs to access roadbed right-of-way
for laying fiber. Previously, that access was limited to regulated utilities. As a result of the change, both Zayo Group
and Facebook announced plans to build middle mile networks in the state and lease capacity to last mile providers.
“Tech companies are running their own fiber to
10
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connect their data centers and their offices. In doing
so, they also make dark fiber available on the market for
anyone to lease,” says Hinton. Dark fiber is any unused
fiber-optic cable. Since the cost of building out a fiber
network doesn’t vary significantly by the number or size
of cables — most of the cost is in the easements and
construction — tech firms like Facebook and Google or
power companies creating a smart grid can fairly easily
create excess capacity on their network to lease to ISPs.
Fiber Alternatives
While fiber offers the best broadband speeds, it is also the
most expensive solution.
“It would be great to connect fiber to everyone, but
we have to think about the costs,” says Gregory Rosston,
senior fellow at the Stanford Institute for Economic Policy
Research. He served as deputy chief economist at the FCC
during the implementation of the Telecommunications
Act of 1996 and helped design and implement the first U.S.
spectrum auctions. “It is worth asking whether everyone
needs to have a fiber connection or whether other substitutes like satellite could be good enough.”
Traditionally, satellite internet service has been considered a poor substitute for fiber due to the time it takes
the signal to travel to a customer’s dish on Earth from the
satellite orbiting in space. While some internet applications like browsing the web and watching videos aren’t
affected by this delay, it poses a challenge for things like
real-time videoconferencing. Recently, low-Earth orbit
satellite networks, like SpaceX’s Starlink project and
Iridium Communications’ network, have promised to
provide broadband with much lower latency compared to
geostationary satellites.
“If this is successful, we could have pervasive broadband
coverage not just of the United States but the entire world
in the next three to five years,” says Rosston.
Another method of reaching unserved households without running cables all the way to the home is a hybrid
known as “fixed wireless.” Fixed wireless ISPs connect
transmission towers to the backbone or middle mile via
fiber and use wireless signals to beam that broadband to
customers.
“Depending on the design of your fixed wireless system,
you can run a broadband connection to someone’s house at
about a seventh the cost of fiber,” says Mike Wendy, director of communications for the Wireless Internet Service
Providers Association, a trade organization representing
fixed wireless ISPs.
Wireless providers don’t have to worry about securing
right of way or digging trenches to run cables to homes,
allowing them to reach customers more quickly. Wireless
networks aren’t completely immune to physical barriers,
however. They face a trade-off between speed and reach.
“On the lower part of the spectrum band, used in TV
and radio, the signal can travel far distances and through
solid objects,” says Wendy. “But you don’t get the massive
data capacity of broadband. As you move up into the midband and beyond, you get more capacity but can cover less
distance and need to maintain more line-of-sight between
the transmitter and receiver.”
Mobile wireless faces similar trade-offs. The new 5G
data networks being built by Verizon, AT&T, and newly
merged Sprint and T-Mobile promise speeds comparable
to or even faster than home broadband, but the signal has
a harder time crossing distances and penetrating buildings than existing 4G networks. Still, researchers and
policymakers have long hoped that mobile technology
might one day make building expensive fiber networks in
hard-to-reach places unnecessary for closing the digital
divide. A growing number of respondents to Pew Research
Center’s surveys already say that the reason they don’t
subscribe to home broadband is because smartphones and
mobile wireless satisfy their needs; some 45 percent said so
in 2019, up from 27 percent in 2015.
Counting mobile wireless as broadband makes the digital
divide seem much narrower. (See chart.) Still, relying only
on a smartphone to access the internet has shortcomings.
Most wireless plans place caps on how much data customers can use each month, whereas wired home broadband
services typically do not, or they have caps that are much
higher. Mobile wireless is also often slower than a wired
home connection, which may limit the ability of households
that rely on it to use applications like streaming video and
videoconferencing that have become even more important
during the COVID-19 pandemic.
“Those who rely only on smartphones for internet access
tend to be low-income households or households of color,”
says Horrigan. “They can only afford one way to get online,
and they choose the smartphone. Something that the pandemic has really shined a light on is that if you are reliant on
just a smartphone for internet access, there are many things
that are harder to do than if you had a wireline subscription
and a computer.”
Growing Adoption
While much of the focus in the policy debate over the
digital divide has been on improving access, barriers to
adoption also matter. Unsurprisingly, much of the research
on the economic benefits of broadband finds that it isn’t
enough for households simply to have access to it; they
must also decide to subscribe. Higher adoption rates can
also improve access by letting ISPs spread the capital costs
of new infrastructure across more customers.
Re a d i n g s
Chiou, Lesley, and Catherine Tucker. “Social Distancing, Internet
Access and Inequality.” National Bureau of Economic Research
Working Paper No. 26982, April 2020.
Horrigan, John B. “Reaching the Unconnected: Benefits for Kids
and Schoolwork Drive Broadband Subscriptions, but Digital Skills
Training Opens Doors to Household Internet Use for Jobs and
Learning.” Technology Policy Institute, August 2019.
A 2017 study by the Brookings Institution found that
nearly a quarter of Americans lived in low-subscription
neighborhoods, meaning that fewer than 40 percent of
households subscribed to broadband service despite having
access to it. As in the case of access, low subscribership
was more concentrated in rural areas. But the study also
found pockets of low adoption rates in cities, particularly in
neighborhoods with low median incomes and lower rates of
educational attainment.
As in the case of infrastructure costs, subsidies can
help reduce subscriber costs for low-income households.
As a condition for its merger with NBCUniversal in 2011,
Comcast agreed to create a discounted broadband plan for
low-income households. Comcast’s Internet Essentials program offers a broadband connection to eligible households
for about $10 a month. In a recent study of the program,
Rosston and Scott Wallsten of the Technology Policy
Institute estimated that about two-thirds of Internet
Essentials subscribers represented true gains in low-income
broadband adoption due to the discount. The remaining
one-third either switched from a competitor service or
would have subscribed anyway as part of a general upward
trend in broadband adoption.
Cost isn’t the only barrier to adoption, though. A 2015
article in Information Economics and Policy that attempted
to calculate households’ willingness to pay for broadband
found that around two-thirds of non-adopters indicated
that they would not consider subscribing to broadband at
any price. More recently, 80 percent of respondents to Pew
Research Center’s 2019 survey of non-broadband users said
that they had no interest in having home broadband service
in the future.
Households that have never had home broadband may
not be fully aware of its benefits. Comcast’s Internet
Essentials program includes access to discounted computers and free digital literacy training. In a 2019 paper,
Horrigan found that Internet Essentials subscribers who
had training were more likely to use the internet for schoolwork and job searching.
“We know that both discounts and digital skills training are effective,” says Horrigan. “The discount gets more
people online than would otherwise be the case, and digital
skills training makes people more likely to use the internet
for homework and lifelong learning.”
Closing the digital divide, it seems, means crossing
barriers not only of geography, but also of income and
awareness.
EF
Rosston, Gregory L., and Scott J. Wallsten. “Increasing LowIncome Broadband Adoption Through Private Incentives.” Stanford
Institute for Economic Policy Research Working Paper No. 20-001,
January 2020.
Tomer, Adie, Elizabeth Kneebone, and Ranjitha Shivaram. “Signs of
Digital Distress.” Brookings Institution Report, September 2017.
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11
Research Spotlight
Don’t Graduate into a Recession
B y E m i l y G r ee n
M
uch of the previous economic research on the
linked to unhealthy habits like smoking, drinking, and inacaftermath of recessions has focused on their
tivity. A secondary factor was “deaths of despair,” which
short-term effects on earnings and jobs. These
include deaths due to suicide, drug overdoses, and liver diseffects were thought to disappear after around 10 years.
ease. Overall, disease-related causes and deaths of despair
New research suggests that the picture is worse, with
accounted for nearly two-thirds of the increased mortality.
longer-term consequences not only for workers’ earnings,
The authors suggested that the stress of graduating into
but also for their health and family outcomes.
a recession likely encouraged unhealthy behaviors, which
In a National Bureau of Economic Research working
contributed to the negative long-term health outcomes.
paper earlier this year, Hannes Schwandt of Northwestern
Third, while examining the effects of graduating into
University and Till von Wachter of the University of
a recession on socioeconomic measures such as earnings
California, Los Angeles analyzed the effects of graduating
and family outcomes, the authors confirmed that initial
into the 1982 recession on mortality and socioeconomic
incomes were reduced. They then demonstrated the
status at midlife.
unexpected persistence of these
In their analysis, the authors
negative effects into midlife —
Hannes Schwandt and Till M. von
estimated the size of the midlife
every 1 percent increase in the
Wachter. “Socioeconomic Decline and
effects through a new approach.
unemployment rate at graduation
Death: Midlife Impacts of Graduating
First, they compiled health inforwas associated with a 1 percent
in a Recession.” National Bureau of
mation from U.S. vital statistics of
reduction in midlife earnings.
the Centers for Disease Control
Fourth, the authors quantified
Economic Research Working Paper
and Prevention, population and
the impact of graduating into a
No. 26638, January 2020.
socioeconomic data from the U.S.
recession on marriage, divorce,
Census Bureau and other related
and childlessness rates. Although
surveys, and state-level unemployment data in order to
they recognized the difficulty in separating causality, they
connect unemployment rates at graduation to lifetime
found that while recession graduates were initially more
outcomes. Then they created a novel measure of unemploylikely to marry, by middle age this trend reversed, with
ment that accounted for variation in economic conditions
higher divorce and childlessness rates.
and mitigated potentially confounding effects from interFinally, by comparing their findings across four demostate migration or individuals’ choices about when to enter
graphic subgroups — male and female non-Hispanic whites
the labor market.
and male and female nonwhites and Hispanics — the
The authors arrived at five major findings. First, by
authors found that although the overall mortality effects
comparing the mortality rates of those graduating into a
were similar across races, deaths of despair were more
recession to those graduating into standard or booming
prevalent among whites while disease-related deaths were
economic conditions, they found that the 1982 recession
more frequent among nonwhites. The authors noted that
graduates exhibited higher mortality starting in their late
epidemics during the sample period (such as the HIV and
30s and increasing through age 50. Specifically, every 1 percrack epidemics) may account for some of this variation.
cent increase in the unemployment rate at graduation was
In terms of socioeconomic effects, the negative effects on
associated with an increase in the mortality rate at age 49
both earnings and family outcomes were worse for whites.
of one death per 10,000. The authors also looked at how
Of the four groups, white men experienced the most signifmortality effects compound with age, estimating average
icant losses in long-term earnings, with consistent losses in
life expectancy loss from age 50 until death. The 1982 recestheir 30s compounding during their 40s.
sion graduates, who faced a reweighted unemployment rate
Schwandt and von Wachter’s unique approach allowed
that was 3.9 percentage points higher than what average
them to present evidence that the long-term effects of gradnon-recession graduates faced, lost six to nine months in
uating into a recession are costlier than previously believed.
life expectancy.
In fact, they suggested that their findings may underesSecond, by regressing causes of death for the 1982 gradtimate the true impact on mortality and socioeconomic
uates against the most common causes of death in the
status. Their results highlighted that white males may have
United States, the authors found that the primary factor
the most to lose by graduating into a recession and reinin higher midlife mortality was related to increases in heart
forced the link between economic conditions and morbiddisease, liver disease, and lung cancer, which are strongly
ity and mortality, one that worsens with age.
EF
12
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Share this article: https://bit.ly/recession-grad
BOOKREVIEW
Local Boy Makes Code
Reprogramming the American
Dream: From Rural America
to Silicon Valley — Making
AI Serve Us All
by Kevin Scott with Greg Shaw,
New York: HarperCollins, 2020,
285 pages
Reviewed by John Mullin
Image: Courtesy of HarperCollins Publishers
K
evin Scott grew up in the rural town of Gladys,
Va., amid an economy that was still dominated
by tobacco farming, textile manufacturing, and
furniture production. He recalls that “even as a kid I could
see the bitter end of an economy that used to hum along,
and I couldn’t wait to chase my own dreams of building
computers and software.” His journey took him all around
the globe, and after successful engineering stints at Google
and LinkedIn, he now serves as chief technology officer at
Microsoft, where he spends much of his time focusing on
artificial intelligence (AI).
To say that Scott is an optimist would be something
of an understatement. In Reprogramming the American
Dream, Scott lays out an extremely hopeful vision for AI.
In his view, the technology can create abundance and
opportunity for everyone, provided that our society takes
a principled and egalitarian approach to its development.
This is not to say that Scott fails to recognize AI’s potential problems. Rather, he recognizes the pitfalls but firmly
believes they can be overcome.
Scott attempts to counter some of the prevailing
stories about AI — both utopian and dystopian — with
what he sees as a more nuanced portrait of the technology’s current uses and potential. He confines most of his
analysis to “narrow” AI — those applications focused on
solving specific, well-defined problems. Although he tips
his hat toward the concerns of Stephen Hawking and
others that AI may eventually pose an existential threat
to mankind, he mostly focuses on the workaday world of
AI in its current industrial manifestations.
Much of AI is used to automate processes, and so discussions of AI often revolve around the themes associated
with automation — both the technology’s potential to
improve productivity and its potential to replace jobs.
Here, Scott recognizes that automation does replace jobs
but emphasizes that this process frees up labor for other,
potentially more fulfilling, tasks.
When it comes to the education and training necessary
to prepare workers for the economy’s new jobs, Scott
points to local solutions. In particular, he tells the story
Share this article: https://bit.ly/ai-book-review
of a partnership between a private firm and a local government in rural Iowa. The private firm established an office
to train young software engineers, and the local citizenry
passed a $35 million bond to finance a new high school
and adjacent community college that will jointly operate
a career academy to train workers for the high-tech jobs
of tomorrow.
Those new jobs are likely to be abundant, in Scott’s estimation, because AI can actually be highly labor intensive —
at least in its implementation stage. This observation seems
particularly germane to the AI subfield of machine learning, which has played a large role in Scott’s career. With
machine learning, computer algorithms are trained using
sample data to recognize patterns and draw inferences. It
turns out that the design and training of these systems takes
a lot of human input — as does the infrastructure supporting these projects.
Scott still feels a strong connection to his rural roots,
and it is his fervent hope that AI can stimulate the rebirth
of the rural economy. Here, one of his chosen models is
Germany’s highly successful Mittelstand sector, in which
small- and medium-sized firms leverage automation to
make leading products in narrow vertical markets. In his
view, AI creates efficiencies that make it easier than ever
to design, manufacture, and market innovative products.
As a U.S. example of such endeavors, he cites Warby
Parker. He also emphasizes AI’s potential to spur rural
growth in agriculture, where smart systems can optimize
the delivery of water, fertilizer, and pesticides.
Scott’s policy views are perhaps not so uncommon
for a U.S. technology entrepreneur. He conveys a belief
in the efficiency of markets, and he cautions against the
unintended effects of well-intentioned policies, such as
minimum wage laws and taxes on AI robots. But he also
favors a strong social safety net and substantial public
investments in education and infrastructure — rural
broadband connectivity, in particular.
Rather than emphasizing particular political solutions,
Scott sets out a set of general principles for the AI industry. Chief among these is the egalitarian goal that “we must
ensure that anyone — ideally, everyone — can participate”
in AI’s development and governance. He also favors the
adoption of a formal code of ethics for the AI industry,
similar to ones found in the legal and medical professions.
For AI experts, his advice is to “put your work in context”
and to think about how it is “impacting your fellow human
beings.” For technology developers, he offers the dictum,
“It’s not great AI if it’s unethical AI.” Although some readers may tire of such generalities, it is hard not to be buoyed
by his optimism about AI’s potential to help solve some of
humanity’s most pressing problems.
EF
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13
FEDERALRESERVE
The Fed’s Emergency Lending Evolves
The Fed is using emergency lending powers it invoked during the Great
Recession to respond to COVID-19 — but it cast a wider net this time
By T i m S a b l i k
A
s COVID-19 swept through the United States, the
Fed reached for its playbook from the last major
crisis in 2008-2009. Now, just as then, the central bank’s actions have been aimed at restoring markets
to normal functions during a major economic shock. In
an emergency meeting on Sunday, March 15, the Federal
Open Market Committee lowered the Fed’s interest rate
target to effectively zero and pledged to use its “full range
of tools to support the flow of credit to households and
businesses.”
“The cost of credit has risen for all but the strongest
borrowers, and stock markets around the world are down
sharply,” Fed Chair Jerome Powell told reporters in a press
conference following the meeting. “Moreover, the rapidly
evolving situation has led to high volatility in financial
markets as everyone tries to assess the path ahead.”
Many firms, both financial and nonfinancial, rely
on short-term debt to keep their operations running
smoothly. In a crisis, the normal market for credit can
grind to a halt — and with it, the ability of these firms to
borrow. Lenders find it difficult to assess the credit risk
of borrowers when the economy is changing rapidly, and
they have an incentive to hold onto liquid assets as insurance against uncertainty. To prevent a credit crunch from
rippling throughout the economy, central banks often
step in to act as a “lender of last resort” during crises — an
emergency source of credit for otherwise solvent firms
until normal credit market functions are restored.
In keeping with this role, the Fed announced it would
create several special lending facilities in the days following
its March 15 meeting. Some of these were first used during
the Great Recession of 2007-2009 and retired after the
recovery. The Fed also announced new facilities to lend
to corporations, small businesses, and municipalities. (See
table.)
“It took years for the Fed to develop the tools during the
2007-2009 crisis necessary to ensure the adequate provision
of liquidity and to manage threats to the financial system,”
says Kim Schoenholtz of New York University’s Stern
School of Business. “What’s remarkable this time around
is how, almost instantaneously, the Fed not only revived
all of the critical liquidity tools that were developed in the
previous crisis, but also added to them.”
For each of these programs, the Fed invoked section
13(3) of the Federal Reserve Act, which authorizes the Fed
to lend to a broader set of recipients during a crisis — or
14
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
as Congress put it, in “unusual and exigent circumstances.”
Few would argue that the pandemic does not qualify as
unusual, but deciding when and to whom the Fed should
lend has been a debate among policymakers and economists that stretches back to the Fed’s founding.
Lender of Last Resort … for Whom?
The Fed was originally created to solve a problem of liquidity in the banking system. Seasonal demands for cash placed
a strain on banks, leading to periodic banking panics. (See
“Liquidity Requirements and the Lender of Last Resort,”
Econ Focus, Fourth Quarter 2015.)
The framers of the Federal Reserve Act sought to solve
this problem by creating a system of regional Reserve
Banks that could purchase short-term commercial loans
from banks when demand for cash spiked. Member banks
could get cash from their Reserve Bank by exchanging commercial paper for it at the discount window.
(Originally, each Reserve Bank had a physical window
where member banks came for these exchanges; today,
discount window transactions are handled electronically.)
While the Fed was empowered to make loans to banks,
businesses and individuals couldn’t walk into their local
Reserve Bank and ask for a loan — the Fed was envisioned
as a “banker’s bank.”
That began to change during the Great Depression. As
banks failed throughout the country, the normal market
for commercial credit collapsed. Legislators and President
Herbert Hoover worried that it was not enough for the
Fed to support banks if those banks were reluctant or
unable to make loans for productive ventures. In 1932,
Congress made the change to the Federal Reserve Act
that authorized broader lending in “unusual and exigent
circumstances.” The new section 13(3) authorized Reserve
Banks to lend directly to individuals and corporations in
emergencies.
This new power put the Fed in the business of making
commercial loans, but it used that authority sparingly.
Reserve Banks made just 123 loans totaling $1.5 million
between 1932 and 1936 (around $28 million in today’s dollars). In a 2010 article in the University of Pennsylvania’s
Journal of Business Law, Alexander Mehra, a lawyer, argued
that this was likely due to several restrictions contained
in the original text of section 13(3). First, Reserve Banks
were only authorized to lend to individuals and businesses
against the same type of collateral that they accepted for
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lending to banks — short-term loans originating from
commercial activity. Businesses, individuals, and investment banks were unlikely to have this type of collateral,
making them ineligible for loans from the Fed.
Second, each loan required the approval of five of the
Fed’s governors, a difficult procedural hurdle to clear.
Finally, Congress had also created the Reconstruction
Finance Corporation (RFC) in 1932. The RFC was a
government-sponsored enterprise also tasked with making
loans to individuals and businesses. Those loans were generally available at more favorable terms than loans from the
Fed, which may further explain why the Fed had few takers.
Another reason section 13(3) saw little use was that
it was soon superseded by a further amendment to the
Federal Reserve Act in 1934 — the addition of section
13(b). That amendment placed fewer restrictions on
the Fed’s ability to lend to businesses and saw much
wider use. In the first year and a half, the Fed made
nearly 2,000 section 13(b) loans totaling $124.5 million
($2.3 billion today).
The Fed’s Board of Governors was initially supportive of these new lending powers, stating in a 1934 press
release that they would “aid in the recovery of business,
the increase of employment, and the general betterment
of conditions throughout the country.” But as with section
13(3), the Fed’s section 13(b) lending would also be overshadowed by the RFC. The RFC continued to be the industrial
lending agency of choice, and, aside from a brief resurgence
during World War II, the volume of the Fed’s section 13(b)
loans dropped significantly after 1935.
In the postwar period, Fed leaders began to question
whether the central bank should be involved in making
loans to businesses and individuals. In 1957, then-Fed
Chair William McChesney Martin told Congress during
testimony that while there might be a role for the government to address gaps in private sector lending, it was
not one that the Fed should play. Rather, he said it was
the preference of the Board of Governors for the Fed to
“devote itself primarily to the objectives set for it by the
Congress, namely, guiding monetary and credit policy so
as to exert its influence toward maintaining the value of
the dollar and fostering orderly economic progress.”
It took decades after the Fed’s founding, but eventually
economists and political leaders came to see the benefits to the economy of the Fed having monetary policy
independence.
“The question is whether it is appropriate to burden
a central bank that has the mandate of achieving price
stability and maximum sustainable employment with also
managing the supply of credit directly to nonfinancial
organizations, such as businesses, corporations, or municipalities,” says Schoenholtz. “Those credit allocation decisions are politically fraught. Back in the 1930s, I don’t
think anybody really understood the long-run benefits of
having an independent central bank.”
Congress ultimately agreed to remove those credit
allocation powers from the Fed. The Small Business
Investment Company Act of 1958 struck section 13(b)
from the Federal Reserve Act and transferred those
powers to the Small Business Administration (SBA). But
The Fed’s COVID-19 Emergency Lending Programs
Facility
Announced Launched New? Description
Primary Dealer Credit Facility
March 17
March 20 No
Extend credit to primary dealers
Commercial Paper Funding Facility March 17
April 14
No
Provide a liquidity backstop to U.S. issuers of commercial paper
Money Market Mutual Fund
Liquidity Facility
March 18
March 23
No
Makes loans available to eligible financial institutions secured by
high-quality assets purchased from money market mutual funds
Primary Market Corporate
Credit Facility
March 23
June 29
Yes
Purchase corporate bonds from eligible issuers
Secondary Market Corporate
Credit Facility
March 23
May 12
Yes
Purchase corporate bonds from eligible issuers in the secondary
market
Term Asset-Backed Securities
Loan Facility
March 23
June 17
No
Lend to holders of certain asset-backed securities backed by
consumer and small-business loans
Paycheck Protection Program
Liquidity Facility
April 9
April 16
Yes
Supply liquidity to financial institutions making PPP loans
Municipal Liquidity Facility
April 9
May 26
Yes
Purchase short-term notes from eligible U.S. states, counties, and
cities
Main Street Lending Program
April 9
June 15
Yes
Lend to small- and medium-sized businesses and nonprofit
organizations that were in sound financial condition before the
COVID-19 pandemic
soURCE: Federal Reserve Board of Governors
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
15
section 13(3), the original emergency lending authority
granted to the Fed, remained on the books.
Emergency Lending Makes a Comeback
In the decades after the Great Depression, the Fed
invoked section 13(3) on a few occasions but did not
actually make any loans. The emergency lending power
remained unchanged and dormant until the passage of
the 1991 FDIC Improvement Act, or FDICIA. The act
removed the restriction that emergency loans could only
be made against the same collateral accepted from banks
at the discount window. Any securities that the Fed
approved could now suffice as collateral.
As discussed in a 1993 article by Walker Todd, then
an assistant general counsel and research officer at the
Cleveland Fed, there was growing recognition among
policymakers in the aftermath of the savings and loan
crisis of the 1980s and 1990s and the stock market crash
of 1987 that liquidity crises could happen outside of the
traditional banking sector. If the Fed lacked the tools
to address those liquidity needs directly, such problems
could spill out into financial markets, resulting in crises
similar to the banking panics of the 19th century that the
Fed was created to prevent.
This became apparent during the financial crisis of
2007-2008, when troubles at large nonbanks created liquidity problems for the whole financial system. For the first
time since the 1930s, the Fed made emergency loans under
section 13(3) to a variety of financial and nonfinancial firms
when traditional credit markets seized up. These programs
were open to all qualifying firms in broad segments of
financial markets. The Fed also invoked section 13(3) to
offer direct assistance to support the resolution of specific
firms deemed “too big to fail.” This included assisting in
JPMorgan Chase’s purchase of Bear Stearns and extending
credit to American International Group to prevent its
bankruptcy.
After the crisis subsided, legislators debated whether
the Fed had gone too far in its emergency lending.
Providing liquidity on a general basis seemed in keeping
with the central bank’s role as a lender of last resort, but
providing direct assistance to specific firms was more
controversial. It placed the Fed in the role of potentially
picking financial winners and losers.
In the Dodd-Frank Act of 2010, Congress placed new
restrictions on the Fed’s emergency lending powers. The
Fed was no longer authorized to lend directly to individual firms. Instead, emergency loan facilities had to be
available through a “program or facility with broad-based
eligibility.” Dodd-Frank also required that any emergency
assistance needed to be “for the purpose of providing
liquidity to the financial system, and not to aid a failing
financial company.” Finally, any loans the Fed made
needed to be adequately secured to “protect taxpayers
from losses,” and the lending programs required “prior
approval of the Secretary of the Treasury.”
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Fed officials supported these changes. In 2009 testimony before the House Committee on Financial Services,
then-Fed Chair Ben Bernanke acknowledged that the
“activities to stabilize systemically important institutions
seem to me to be quite different in character from the
use of Section 13(3) authority to support the repair of
credit markets.” While he argued that directly intervening
to stabilize systemically important firms was “essential to
protect the financial system as a whole … many of these
actions might not have been necessary in the first place
had there been in place a comprehensive resolution regime
aimed at avoiding the disorderly failure of systemically
critical financial institutions.”
At the same time, Bernanke and his successors
supported giving the Fed some flexibility to respond to
liquidity emergencies where and when they emerged.
“One of the lessons of the crisis is that the financial system evolves so quickly that it is difficult to predict where
threats will emerge and what actions may be needed in the
future to respond,” Powell said in a 2015 speech while he
was a Fed governor. “Further restricting or eliminating the
Fed’s emergency lending authority will not prevent future
crises, but it will hinder the Fed’s ability to limit the harm
from those crises for families and businesses.”
The Next Chapter
The Fed would call upon its emergency lending powers a
few years later during the COVID-19 pandemic. Initially,
the Fed revived many of the same facilities it had used in
2007-2009 to make credit available to financial firms that
can’t access the discount window. But it also created new
facilities to extend credit to a wider range of parties.
Through the Primary and Secondary Market
Corporate Credit Facilities, the Fed can purchase bonds
directly from large, highly rated corporations and supply
loans for companies to pay employees and suppliers. The
Main Street Lending Program, announced in April and
launched in June, offers five-year loans to businesses that
are too small to qualify for the Fed’s other corporate
credit facilities. The Municipal Liquidity Facility makes
loans available to state and local governments. And
the Fed’s largest new program to date is the Paycheck
Protection Program Liquidity Facility, which provides
liquidity to financial institutions participating in the
SBA’s Paycheck Protection Program (PPP). Businesses
can take out loans through the PPP that can be forgiven
if they use the money to retain workers on payroll. The
Fed has agreed to provide credit to financial institutions
making PPP loans, accepting those loans as collateral.
Since the PPP loans are guaranteed by the federal government through the SBA, the Fed faces no risk of losses
on this program.
While the Fed has announced a wider range of emergency lending programs than in 2007-2009, the total dollar
amount of loans has been smaller so far. As of mid-August,
the Fed had about $96 billion in outstanding section 13(3)
Once More Unto the Breach
$BILLIONS
loans. (See chart.) In
Federal Reserve Emergency Loans Outstanding
fact, the Fed began
120
to wind down some
Municipal Liquidity Facility
of the first programs
100
Term Asset-Backed Securities Loan Facility
launched in March
80
as financial markets
Paycheck Protection Program Liquidity Facility
stabilized from the
60
Commercial Paper Funding Facility
initial disruptions of
40
Primary and Secondary Market Corporate Credit Facilities
the pandemic.
The Fed’s emerMoney Market Mutual Fund Liquidity Facility
20
gency lending during
Primary Dealer Credit Facility
0
the pandemic has
March 15
April 15
May 15
June 15
July 15
August 15
been shaped by the
changes made to
Note: Values for the Main Street Lending Program were zero or rounded to zero on the scale of this chart during this period. Main Street Lending Program
section 13(3) by
loans outstanding totaled $226 million as of Aug. 12.
Dodd-Frank. All the
Source: Federal Reserve Board of Governors
lending facilities have
broad-based eligibility rather than being open only to a
hand, an expectation that the Fed will act as a backstop
specific firm or a small set of firms. The Fed obtained permay distort market prices and encourage excessive levermission from the secretary of the Treasury before creating
age in the long run. It can be challenging for a central bank
each facility, and the Treasury has provided a backstop
to balance these considerations.”
against losses for any facilities that are not inherently risk
Indeed, some Fed scholars have argued that the
free. Those Treasury funds were appropriated through
newly created programs designed to lend to businesses
the Coronavirus Aid, Relief, and Economic Security, or
and governments step beyond the boundaries DoddCARES, Act.
Frank established around emergency lending. In a May
There is some precedent for the Fed providing liquidity
working paper, Lev Menand of Columbia Law School
support during a pandemic. During the Spanish Flu outargued that the new facilities created to extend credit to
break of 1918, banks faced liquidity strains. A recent paper
businesses and municipalities sidestep the Dodd-Frank
by Haelim Anderson of the Federal Deposit Insurance
requirement that section 13(3) lending should be for the
Corporation, Jin-Wook Chang of the Federal Reserve
purpose of “providing liquidity to the financial system”
Board, and Adam Copeland of the New York Fed found
since the recipients are not financial firms. Instead of
that banks that were members of the Federal Reserve
amending the Federal Reserve Act to loosen restrictions
System were able to continue or even expand lending
on Fed emergency lending, when Congress appropriated
during the pandemic because of their access to central
the funds for these facilities in the CARES Act, it simply
bank liquidity, while nonmember banks curtailed lending.
stated that they were for the purpose of providing liquidThe researchers argued that this highlights the impority to the financial system.
tance of the Fed having the flexibility to act as a lender
“If lending directly to business is a way to provide
of last resort to financial firms outside of the traditional
liquidity to the financial system, then any lending meets
banking sector.
the requirement and the words added [to the Federal
But such flexibility may come at a price. “If markets
Reserve Act] in 2010 have no meaning,” Menand wrote.
know the Fed can be relied upon as a liquidity backstop,
After largely walking away from lending to nonfinanthe Fed can nip market disruption in the bud,” says Alex
cial firms for decades, the Fed has found itself acting as
Wolman, vice president for monetary and macroecoa lender of last resort for more than just banks during
nomic research at the Richmond Fed. “We saw that play
two crises in the span of a dozen years. This has sparked
out during the current crisis — initial market volatility in
renewed discussion among economists and policymakers
March subsided after the Fed took action. On the other
over just what it means to be a lender of last resort. EF
Readings
Anderson, Haelim, Jin-Wook Chang, and Adam Copeland. “The
Effect of the Central Bank Liquidity Support during Pandemics:
Evidence from the 1918 Spanish Influenza Pandemic.” Federal
Reserve Board of Governors Finance and Economics Discussion
Series No. 2020-050, June 5, 2020.
Mehra, Alexander. “Legal Authority in Unusual and Exigent
Circumstances: The Federal Reserve and the Financial Crisis.”
Journal of Business Law, Fall 2010, vol. 13, no. 1, pp. 221-273.
Menand, Lev. “Unappropriated Dollars: The Fed’s Ad Hoc Lending
Facilities and the Rules that Govern Them.” ECGI Working Paper
Series in Law No. 518/2020, May 2020.
Sastry, Parinitha. “The Political Origins of Section 13(3) of the
Federal Reserve Act.” Federal Reserve Bank of New York Economic
Policy Review, September 2018.
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
17
Interview
Joshua Gans
On managing pandemics, allocating
vaccines, and low-cost prediction
with AI
EF: How did you become interested in economics?
Gans: I was interested in science fiction in high school. I
read a novel by Isaac Asimov called Foundation. I saw what
was going on in that book and in economics as sort of similar and quite interesting.
Foundation has a premise that a hero character invents
a science called psychohistory. In psychohistory, you can’t
predict individuals, but you can predict large movements
in society and social forces on a galactic scale, because you
know, why not? (Laughs.)
The book got me interested in the possibility of being
able to predict with social science in the same way that
physicists were able to predict movements of planetary
bodies and so on. Economics turned out to be nothing like
that, but that’s another matter.
I didn’t think of economics as a profession until much
later, but that’s when I started getting interested in studying it.
Making Sense of the Coronavirus
EF: What led you to write your new book on the economics of the coronavirus? Had you done research in
this area before?
Gans: What led me to write it is I didn’t know what else
to do. Back in March, I was stuck at home, so I decided
to write a book.
18
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P h o t o g r a p h y : C o u r t e s y o f t h e R o t m a n S c h o o l o f M a n a g e m e n t , U n iv e r s it y o f T o r o n t o
Economist Joshua Gans spent the past quarter
century researching issues that range from digital currencies to the economics of scientific
publishing, from antitrust policy to entrepreneurship, from net neutrality to artificial intelligence.
Last spring, he became one of many millions who
found themselves stuck in lockdown and thinking
about the coronavirus. He found an outlet for his
energies in researching and writing about policy
responses to the crisis. The resulting book, The
Pandemic Information Gap: The Brutal Economics of
COVID-19, will be published by MIT Press in
November. In a departure from usual publishing
practice, reflecting the urgency of the topic, an early
version of the book was released online in April
under the title Economics in the Age of COVID-19.
A native of Australia, Gans came to the United States
in 1990 to pursue his Ph.D. at Stanford University.
Today, he is a professor at the University of Toronto’s
Rotman School of Management, where he teaches
entrepreneurial strategy and the economics of artificial intelligence. Gans is also chief economist of the
Creative Destruction Lab, a program for advanced
technology startup companies. The organization,
founded at the Rotman School and with branches at
other universities, provides mentoring and networking
opportunities to selected companies in technology
areas that include artificial intelligence, blockchain,
energy, and space.
In addition to his book on the SARS-CoV-2 pandemic, Gans is the author or co-author of, among
other books, Innovation + Equality (MIT Press, 2019),
Prediction Machines (Harvard Business Review Press,
2018), and The Disruption Dilemma (MIT Press, 2016).
David A. Price interviewed Gans via videoconference in June 2020.
On any scale of normal scholdown. Locking down is terribly
“I think this pandemic has surely
arly credentials, I didn’t have any
painful; that’s why you don’t
disrupted everything in terms of the
background for this book. I had
want to go through it in the first
development of AI for normal business
done some health economics
place. But you may have to. So
practices. Because we don’t know what there’s a separate factor, which
and studied some of the other
normal is anymore. The problem with
topics in this book, like innovais resolve — how far are you
having everything rely on a statistical
tion. But beyond that, no. The
willing to go to push the spread
main reason I decided to do it
down.
model is that if you have a major
was that I figured at this time
structural break, those models break too.”
everybody who was a real expert
EF: Looking at this set of
was going to be busy. (Laughs.)
choices that you’ve outlined,
My idea was to explain what’s going on from the eyes
where has the United States been and where do you
of an economist. The challenge was that of course things
think it should be or should’ve been?
were moving very quickly. From conception to publication was a couple of days over a month, which is kind of
Gans: Early in the crisis, people in the United States and
ridiculous. MIT Press had a lot to do in that time, also.
Canada were not talking about the virus as something
They had to have it peer reviewed because they won’t just
we needed to suppress completely. The discussion was
publish anything. They had to have it copy edited. They
mainly, “We’re going to push down the curve, and then
opted to do a whole lot of things in parallel that they norwe’ll wait for a vaccine.” But the evidence both historically
mally do sequentially.
and now with this virus is that, as I said, you can achieve
Another move that was unusual was that when the
suppression in months if you act quickly. You have to keep
book went out for peer review, MIT Press also posted the
working at it because if you don’t have a vaccine, the disdraft online. Everybody could see it and comment on it.
ease can crop up again, but it’s manageable.
Those comments turned out to be quite valuable. With
In the United States, different states are using different
those comments and some further thinking and research,
policies. Most states appear to be following the doctrine of
I’ve now written a version of the book that’s twice the size,
pushing down the curve and waiting for a vaccine. But there
which will come out in November.
are some states that have opted to do nothing. That doesn’t
mean you get everybody riding around and getting ill,
EF: Did you change your mind about anything since
because people exercise their own judgment, but it means
writing that first draft?
you get these outbreaks and ups and downs as a result. And
it’s not just states in the United States; Sweden and Brazil
Gans: Yes. What’s reflected in the book that’s coming out
also did that. For me, it’s an odd thing to be doing.
is that I now see these pandemics as manageable things.
Policymakers have to react right away and stay the course,
Rationing a Vaccine
but pandemics can be managed. If I had to guess how
history is going to judge this period, the judgment is going
EF: When a vaccine is ready, presumably there won’t
to be that this shouldn’t have been a two- to three-year
be enough right away for everyone who wants it. If
calamity, it should have been a three-month calamity.
that happens, what’s the best way to allocate it?
The need for testing aggressively at the beginning had
Gans: This is a huge issue that’s coming. The CDC already
to be appreciated. You aggressively isolate people you find
has a list of how to allocate flu vaccines based on how
who are infected, you trace who they had contact with,
essential you are and how at risk you are.
and you aim for quick, complete suppression. The counThe essential part of course makes sense. Everybody
tries that had had experience with pandemics — Hong
we decided was essential in March should be considered
Kong, South Korea, Taiwan, most of Africa — got it right
essential and get the vaccine first. But on the at-risk side,
away. They knew what the problems would be if they
we get into really interesting issues. Normally, it would
didn’t do anything about it. So experience with viruses was
be pregnant women and young children who would get
definitely a factor. But Canada had that and didn’t quite
the vaccine first. It doesn’t look like that’s necessarily the
get its act together quickly enough. Some provinces were
at-risk population this time around.
better than others. Quebec was way too slow and has had
But does that mean you want to give it to the most at
the worst problem. Australia and New Zealand lucked out
risk — the elderly — up front? That’s not as clear either,
because of their distance, which gave them time to underbecause the elderly aren’t running around in public and
stand what to do.
getting exposed.
But once the virus breaks out, then you’ve got a probWho else would you want to give it to? You’d want to
lem. Then you’ve got to do the complete lockdown. And
give it to people who are in close quarters. Prisoners would
we’re seeing places that did a complete lockdown — like
be obvious choices on moral and practical grounds.
they did in Italy, France, and Spain — squash it all the way
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
19
Joshua Gans
the cost of communication and
Then there’s the debate about
➤ Present Positions
search. How will it do that, and
whether to use market forces —
Professor of Strategic Management
why is it important?
willingness and ability to pay — versus
and Jeffrey S. Skoll Chair of Technical
something else, like a lottery. My guess
Innovation and Entrepreneurship,
Gans: Artificial intelligence is a term
is, officially, it’ll be a lottery. I’d rather
Rotman School of Management,
that gets bandied around to mean
have a lottery but allow people to sell
University of Toronto; Chief
all sorts of things. We have a pop
their dose to somebody else who’s furEconomist, Creative Destruction Lab,
culture version; we have technical
ther down, who got a worse ticket. At
University of Toronto
versions.
least that would be aboveboard and
➤ Selected Additional Affiliations
At the University of Toronto, we
clear. And if you’re someone who’s
Research Associate, National Bureau of
have
a startup program I’m involved
poor who can stay at home when the
Economic Research; Research Affiliate,
in
called
the Creative Destruction
vaccine is in short supply, you can benCenter for Digital Business, Sloan
Lab. The program doesn’t make
efit from staying at home instead of
School of Management, Massachusetts
financial investments; we connect
getting a vaccine.
Institute of Technology
the accepted companies with invesWhatever the right policy, the
➤ Selected Past Positions
tors and advisers. We were seeing
issues should be discussed and underProfessor of Management, Melbourne
novel kinds of software applications
stood. Another reason I would like to
Business School, University of
coming up in 2013 and 2014. People
have the discussion about rationing is
Melbourne (2000–2011)
were saying the technology was “artithat I would like governments to see
➤
Education
ficial intelligence,” but it wasn’t clear
how bad rationing is going to be —
Ph.D.
(1995),
Stanford
University;
to us for a while what they meant. It
because one of the best ways to get
B.Econ
(1989),
University
of
turned out that it actually was much
rid of a rationing problem is to have
Queensland
more familiar than that. It was ultino scarcity.
mately just an advance in statistics.
There are also the international
But
it
was
a
big
advance,
an advance that took advantage of
issues: Which country gets the vaccine, what are their
the
computational
power
and large datasets we now have.
intellectual property rights, what are their manufacturing
It
was
about
being
able
to
take a bunch of data and use it
capabilities? Not everyone is going to build all their own
for
the
purposes
of
prediction.
plants. What’s going to happen?
Some tasks may be obviously based on prediction, like
Normally, what would happen is all the countries of
forecasting demand. But a lot of tasks that don’t seem like
the world would be getting together and deciding on that
prediction problems can be framed as prediction proballocation right now. There are some things going on
lems, such as a computer being able to look at a photo and
there, but it seems that the United States, Russia, China,
tell you what’s in it. You aren’t actually requiring the comand India aren’t participating in that discussion. So that
puter to know if a photo has a frog in it. You’re asking the
doesn’t look like it’s going to end well.
computer: What’s your best prediction of what a human
would call what’s in it?
EF: When you look at future treatments, do the same
That best guess is based on the computer having seen
issues play out in the same way?
a million photos that people have labeled as containing a
frog and another million photos that they haven’t. That’s
Gans: The issue of treatments is a little bit easier because
enough for machine-learning algorithms to work out
you don’t need enough for everybody. You just need
whether a new photo has a frog in it or not.
enough to treat the sick. And fortunately, at any given
It turned out a lot of tasks that had been thought of as
time, there aren’t that many people sick. Unless, of course,
hard to implement on computers — image recognition,
the virus goes out of control and there are a lot of people
natural language processing, predictions about human
sick, with intensive care units filling up — that’s going to
behavior — were within the range of machine learning and
create scarcity on the treatment side. That was the whole
became really cheap.
discussion back in March: Let’s not let that happen. Let’s
One of the companies we met with, called Atomwise,
keep the infection rate low so we can treat everybody.
was using artificial intelligence to predict whether a particuAs it turned out, overrunning of hospitals was avoided
lar protein was more likely to bind with other molecules for
by the skin of our teeth. If we had waited another week, it
the purposes of developing drugs. That is the sort of innowould’ve happened.
vation that could really speed up the drug discovery process.
AI and the Cost of Prediction
And when that company came through, no one had heard
of these artificial intelligence tools. They ended up getting
EF: Let’s turn to your work on artificial intelligence.
frustrated and went to Silicon Valley, where they raised a
You’ve argued that AI will reduce the cost of prewhole lot of money, and they are now hugely successful. But
diction in much the same way that the web reduced
we learned from that that maybe we should find out more.
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will say, “Ah, that’s where the
Anyplace where you want to use
“A lot of tasks that don’t seem like
monopolist was.” If I could preprediction, it’s going become a
prediction problems can be framed as
dict which company it will be, I
lot cheaper, which means you’ll
prediction problems, such as a computer
would invest in them, but I can’t.
use more prediction and you’ll
being able to look at a photo and tell
What I can predict is that that
find more applications for it.
you what’s in it. You aren’t actually
will happen, because it’s always
I think this pandemic has
requiring the computer to know if a
what happens.
surely disrupted everything in
terms of the development of AI
photo has a frog in it. You’re asking the
for normal business practices.
computer: What’s your best prediction of AI and White-Collar Jobs
Because we don’t know what
what a human would call what’s in it?”
EF: Information technology
normal is anymore. The problem
in general is sometimes said
with having everything rely on
to be skill-biased, which is a shorthand way of saying
a statistical model is that if you have a major structural
it favors educated workers. Is that equally true of AI?
break, those models break too. If you were using one to
What will AI mean for white-collar jobs?
forecast demand, it’s bloody useless now.
EF: Regarding the public’s awareness of AI, is AI still
ahead of where people think it is?
Gans: No, I think we’re on the other side of the hype cycle
now. There are AI uses coming out all the time. It’s getting
nice and boring.
But there are exceptions. For instance, we have facial
recognition engines that can identify people, most of the
population now, which is the scarier end of this kind of
technology. We’re getting a bit of that.
EF: You’ve written that although data normally have
decreasing returns to scale, with AI they may have
increasing returns to scale. Why is that?
Gans: Normally, it’s decreasing returns to scale. Get a bit
more data, it doesn’t help you predict much.
The situation in which data can have increasing returns
to scale — economies of scale — is when you can get data
on a wider variety of things, including some things that are
very rare. For instance, Google, because of its reach, gets a
lot of queries that no one’s ever asked there before — queries that Microsoft doesn’t get. So if Google is using AI,
it can train off those more remote results. And so to that
extent, there’s an increasing return to scale.
EF: What do you think AI will mean for concentration
of markets?
Gans: When a development in productivity like AI comes
along, invariably people say, “It’s going to reinforce existing power.” But if it’s really a big change, it doesn’t tend
to do that. Why? Because it’s reducing the cost of something. And no one has a monopoly over the hardware, the
software, or even really the data to generate AI products
at the moment.
So I think it’s not going to reinforce existing power.
But if it follows the normal patterns, there will be a big
company, probably not one of the current ones, that will
eventually come out of this as the market leader and we
Gans: No one knows yet. You can come up with stories
either way.
The way I look at it is that AI is prediction and prediction is a component of decision-making — but it’s not
the only component of decision-making. In many applications, you still need people with the judgment to evaluate
what the trade-offs are of what they’re looking to do. Does
that come from people who have the highest education?
Possibly, but it’s not a given.
Part of the AI trend is taking very narrowly specified
tasks and automating them. For example, some call centers are suited to that. Then there are other activities that
we normally think of as requiring extensive education,
such as reading legal documents. Where it may have taken
you hundreds of hours to analyze a set of documents without AI, now it will take you, say, two hours. That makes
whoever is doing that two hours of work immensely productive, so that’s good for them. But the open question
will be, are there really enough legal documents to be
reviewed to keep everybody occupied who was previously
occupied with them?
Historically, we end up with more legal document
reviews to do. Or those people have found something
else to do. So I’m on the optimistic side that we’ll have
enough time such that we won’t see mass unemployment
or anything like that as a result of AI. But I find it hard to
predict who is safe.
EF: One reads about efforts in China to establish a
leadership position in AI. Do you have any view about
who’s going to dominate in this field?
Gans: It’s always hard to think about issues of national
dominance. I find them uncomfortable and not that useful. The only issue that’s interesting here is that if China
has an advantage, it has an advantage because it can collect
data so easily. Here, we haven’t been comfortable giving
up that level of data to some organization or a government.
I think what will happen is there will be some areas —
facial recognition, general surveillance, and things like
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
21
Gans: Right.
that — that China will be better at because they will do
more of it.
What the United States is doing and what the defense
departments are doing, we don’t know. Where that spills
over, we don’t know. I don’t think the Chinese are going
to get as good as the United States at targeting ads.
(Laughs.)
EF: What do you think are their main relative
strengths and weaknesses?
Gans: Well, Canada and Australia are the same in the sense
it’s mostly public universities. So it’s not as expensive. But
then again, there’s the perennial issue of somebody proposing to cut the budget and everybody panics.
The places I’ve experienced in the United States are
not representative. My experience has been in the elite
institutions. And it’s a bit of a mystery as to how the whole
thing works. Why is it that so many resources are devoted
to a relatively small number of people? These institutions
tend to be smaller, they get the smaller classrooms, the
professors have less teaching, higher salaries, etc., etc.
So you sit there and ask yourself, why is that persisting?
I can see what everybody’s learning, and it’s not that much
different between the elite places and the other places.
Yet you have people willing to pay many times more. You
get the sense that there is a sorting going on and that people were paying to be members of a better club. Whereas
in Toronto and Melbourne, the universities are huge.
Sixty, 70,000 people. That’s not so exclusive a club to be
a member of.
I don’t know the value of the club membership, but
you asked about what the differences are. Those are the
differences, I think.
Negotiating with Children
EF: Another area that’s been of interest to you is economics in parenthood. In your book Parentonomics,
you said that parents are in a weak negotiating position vis-a-vis their children when it comes to messy
rooms. Why?
Gans: That’s because you care about the mess in the room
and the children do not. It is much easier to negotiate an
outcome where you can find things that people care about
equally: You care about X as much as I care about Y. So to
negotiate with a child to clean up a messy room, you have
to be able to find in that negotiation bundle something
that the child cares as much about.
Now, in the time since I wrote the book, I’ve found the
most useful thing that I have that the child cares a lot about
is the access to the Wi-Fi. I have a button that I can press to
cut my children off from the internet. Suffice it to say, that’s
all I need. I may encounter resistance; I might encounter a
child saying, “Fine! Shut off the internet, I don’t need it!”
But a few hours later, I’m getting a clean room.
So there’s new technology that has changed the balance. The iPad and other such devices are a parent’s
dream. They are reducing the cost of punishment.
EF: What are you working on now?
Gans: I’m finishing up a textbook — a longstanding
textbook on entrepreneurship. I’m just about to pack off
that updated version of the pandemic book to MIT Press.
Then I’m not quite sure what I’m doing next. Probably
whatever it was I was doing before the virus. I can barely
remember.
EF
EF: You have experienced higher education in three
countries — Australia, Canada, and the United States
— as a student, a professor, or both.
u
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EconomicHIStory
The Making of Reston and Columbia
Reston, Va., and Columbia, Md., were founded in the 1960s
with similar visions for inclusive, connected communities
By E m i ly Wav e r i n g C o r c o r a n
I
Image: Pony Freundlich, courtesy of the Reston Museum
n the mid-1960s, Doris Briggs and her four children
drove the 700 miles from Chicago to Virginia in her
Chevrolet in pursuit of a new life. Briggs would later
recall, “Everybody said, ‘Don’t do it, don’t do it, you have
no friends.’ I said I have friends everywhere. And I had my
faith, had my four children, and I knew it was going to
be a better life for me.” Their destination, Reston, Va.,
promised a community-centered alternative to modern
suburbia that was inclusive of black families like the
Briggses — well before the Fair Housing Act of 1968
made housing discrimination illegal.
Beverly Cosham, another early black resident of
Reston, remembers facing similar skepticism and feeling
the same sense of conviction. “Everybody I knew said,
‘Why are you moving to Virginia? Aren’t you far enough
south in D.C.?’ Reston felt different. It was that bucolic,
safe, wonderful place.”
Reston was a “New Town,” one in a series of communities founded in the 1960s and ’70s across the United
States to reimagine suburban living. The communities of
the New Town Movement — including Reston’s northern neighbor, Columbia, Md. — were founded on similar
values but varied in their long-term viability.
Some, like Soul City, N.C., faced an assortment of
economic and political challenges that forced them
to shutter. Others, including Reston and Columbia,
achieved relative success in fulfilling their founders’
vision. Still, these communities have periodically made
compromises to preserve their economic feasibility and
continue to navigate challenging questions about affordability, inclusivity, and future development.
“Live, Work, Play”
The vision for Reston was enshrined in the town’s 1962
Master Plan by founder Robert E. Simon Jr. Development
would give priority to walkability and accessible amenities and would enable residents to live and work in the
same area. Reston would also be open to individuals of all
ages, incomes, races, and ethnicities — in fact, it was the
first integrated community in Virginia. Simon created
the community’s motto to capture this vision: “Live,
Work, Play.”
Simon was a New York real estate developer whose
vision for Reston grew from personal experience. As a
child, Simon grew up in New York City across from a
park. Later in life, he would recall how formative it was to
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grow up with easy access to nature, school, shopping, and
public transportation.
The son of a real estate developer father and a cultural
enthusiast mother, Simon was taught from a young age
to value aesthetics and cultural experiences. He traveled
to Europe frequently with his family, but it was during a
solo post-college European bike tour that Simon was first
exposed to dense neighborhoods centered on a plaza, which
would later inform his vision of Reston’s physical layout.
At 23, Simon inherited Carnegie Hall after his father’s
death and subsequently became president of the concert
venue. During this time, he was also a young father who
spent much of his time commuting. His dislike of that lifestyle further motivated his desire to create a self-contained
community. In 1960, Simon sold his share of Carnegie Hall
and an opportunity soon presented itself in the form of
6,750 acres for sale outside of Washington, D.C.
From the outset, Simon’s vision for the land was different; in the words of Francis Steinbauer, a design engineer
who worked on the master plan, Reston was “not just a
building project but a whole new way of living.” Practically,
this meant dense, mixed-use development that was not permissible under the existing zoning code in Fairfax County,
Va. Although the
county was resistant
at first, it ultimately
created a new zoning
code that rejected
the single-use standard of the day and
allowed for a mix of
single-family homes,
apartments, condominiums, commercial development,
recreational facilities, and open
spaces in proximity
to one another.
Reston was developed in 1964 as an “open
community,” one that welcomed all races and
religions into integrated housing communities.
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23
Reston was founded on April 10, 1964 — Simon’s 50th
birthday — with a name derived from his initials, R. E. S.
Seven principles drafted by Simon himself underpinned
the development and community. Among these were that
residents would be able to live, work and remain in Reston
“throughout their lives,” that all planning would focus on
“the importance and dignity of the individual,” that beauty
“should be fostered,” and lastly, that “Reston should be a
financial success.”
These principles directly informed the town’s design.
The master plan established seven villages, each with
a distinct architectural style and built for 10,000 residents. Each village was centered on a plaza that provided
walkable access to stores and restaurants, created jobs,
generated revenue through commercial leasing, and had
designated space for educational, recreational, and cultural programming.
Surrounding each plaza was an assortment of housing
types meant to cater to different life stages and income
levels — from more affordable apartments and condominiums to single-family homes. Schools, churches, job
centers, and parks were interspersed throughout the
villages.
Reston opened to residents in 1964 with Lake Anne
Village Center as its first village. On the whole, Reston
enjoyed an enthusiastic reception by early residents
and the media. Reston’s “early pioneers” were quick to
contribute to the town’s founding principles by, for example, establishing a neighborhood day care system and
contributing to weekly meetings on artistic and cultural
programming. But investors were somewhat less eager.
When seeking capital for the continued development
of Reston, Simon and his team were turned down by 50
different banks that were hesitant to participate in a project that broke from the norm. Large-scale development
projects like Reston are capital-intensive in their early
years — they require huge amounts of construction and
are slow to turn a profit. Few entities had the capital on
hand to make a project like Reston happen.
Oil companies were a rare exception. Gulf Oil Corp.
became an early investor in Reston, although development
was hampered by sluggish housing sales after the initial
surge of enthusiasm. Commuting also proved to be a significant challenge. While Reston promised access to retail
and some jobs, it remained disconnected from larger job
centers in the Washington, D.C., area. Residents often
needed to take on long commutes that were counter to the
town’s promise of living and working in the same place.
Despite early financial struggles, Simon refused to compromise on building materials or design, which drove up
construction costs. Three years after Reston’s founding,
struggles over home sales and development costs came to
a head when the Gulf Oil board of directors forced Simon
out.
In 1967, Gulf created a subsidiary, Gulf Reston Inc., to
manage the project. Gulf prioritized profitability but also
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largely followed the master plan. Central plazas remained
a fixture of the villages, but Gulf emphasized they needed
to be profitable.
Still, the social fabric of Reston was woven early on. Even
with the management shift, Reston’s community values
stuck and became an integral part of the town’s culture.
“The Next America”
Fifty miles northeast, Columbia, Md., was unveiled on
June 21, 1967. This new town was the brainchild of James
Rouse, a real estate developer, urban planner, civic activist, and philanthropist. Like Reston, Columbia was built
on a vision of livability and integration. Its motto, “The
Next America,” was meant to capture Rouse’s hope that
the community could serve as an example of pragmatic
utopianism for other communities across the nation —
that is, an example of social interaction and harmony that,
in Rouse’s words, could provide “an alternative to the
mindlessness, the irrationality, the unnecessity of sprawl
and clutter as a way of accommodating the growth of the
American city.”
In contrast with Simon’s youth in New York City,
Rouse grew up in Easton, Md., a small town on the upper
Eastern Shore near the Chesapeake Bay. Descriptions
of Rouse’s childhood are idyllic — an upbringing “right
out of small-town Norman Rockwell Americana.” Rouse
experienced close-knit community and natural beauty
from an early age, which would ultimately be coupled
with his tenacity, leadership qualities, business acumen,
religious convictions, and urban development experience
to create the vision for Columbia.
In 1933, Rouse moved to Baltimore and soon entered
law school at the University of Maryland. While still in
school, and in the midst of the Great Depression, he
began working for the Federal Housing Administration.
This experience imbued a deep understanding of the housing market, which served Rouse well when in 1951 — after
serving in the Navy during World War II and co-founding
a mortgage banking company — he chaired the Baltimore
Mayor’s Advisory Council on Housing Law Enforcement
as part of the nationally acclaimed Baltimore Plan to
redevelop slums in the city.
While the Baltimore Plan faced various political challenges and was only a partial success, it launched Rouse
to the national stage, shaped his commitment to urban
renewal, and helped form a conviction that he would
espouse for the rest of his life: “We must hold fast to the
realization that our cities are for people, and unless they
work well for people they are not working well at all.”
In the late 1950s and early 1960s, Rouse worked on two
pivotal large-scale commercial projects: Harundale Mall
in Glen Burnie, Md., and Cherry Hill Mall in Cherry Hill,
N.J. Harundale was the first enclosed shopping center
on the East Coast and helped spark the proliferation of
shopping malls nationwide, as well as Rouse’s vision of
an integrated, amenity-rich community anchored by a
I m a g e : C o u r t e s y o f C o l u m b i a A r c h iv e s ( P h o t o g r a p h C o l l e c ti o n )
shopping mall. Cherry Hill cemented this vision as a town
developed organically around the mall (and ultimately,
named itself after the shopping center). Rouse reasoned
that if he could plan for residential development at the
outset in conjunction with shopping, the result could be a
model urban center.
Rouse purchased large swaths of land in Howard County,
Md., to bring his model city to life. As was the case for
Simon in Fairfax County, the local building code needed
to be completely rewritten to enable Rouse’s urban vision.
Howard County’s local leaders and existing residents were
cautiously optimistic about the project and became more
assured with Rouse’s release of a master plan simply titled
“Columbia.” The plan established that the new city would
be an environmentally friendly “complete and balanced
community” that “set the highest possible standards of
beauty, safety and convenience,” without tax burdening
existing residents or increasing utility costs for the county.
Before construction began, Rouse led a 13-month planning process that brought together experts from a diverse
array of fields, such as education, recreation, sociology,
housing, religion, government, and medicine. This team
helped ensure that Columbia’s built design contributed
to the high standards of beauty, safety, and convenience
promised in the master plan.
The team also helped make sure that Columbia
would be economically feasible. Robert Gladstone, a
Washington, D.C., economist who sat on the planning
team, developed the Columbia Economic Model (CEM),
which guided the city’s development. The CEM required
employees to constantly seek efficiency in all activities
and projects and “ensured that all decisions made were
economically viable.”
The master plan called for the construction of 10 core
villages with 5,000 to 10,000 residents each. These villages
would surround an enclosed shopping mall. As in Reston
and other new towns, the villages were designed to be
self-contained communities with diverse housing stock,
ample amenities, jobs, and green spaces that enabled
a high quality of life. Columbia was also a purposefully
integrated community.
Unlike Simon, Rouse was first and foremost a businessman. He did not share Simon’s passion for design, and
this was apparent in Columbia’s housing stock. A typical
single-family home in Columbia was designed to be an
incremental improvement over existing suburban homes
of the day — for example, slightly larger floorplans and
more creativity in housing facades and landscaping. These
homes felt familiar to consumers, and Columbia did not
face the same home sale challenges that Reston did.
Media coverage of Columbia’s early years was positive
and helped attract new residents who shared Rouse’s commitment to inclusivity, civic duty, and the environment.
Among these early residents were William and Regina
Stebenne, who moved their family from the suburbs of
Rhode Island to the Village of Wilde Lake in August 1969.
Columbia founder James Rouse (center) discusses plans with
project director William Finley (left) and urban planner Morton
Hoppenfeld.
Their son, David Stebenne, is now a historian and
author of multiple works on Columbia and is clear about
the weaknesses and strengths that were built into the
city from the start. “James Rouse was that very unusual
American man who was not interested in cars,” he says.
“One of the greatest failures in terms of overall design was
to not do a kind of grid that would facilitate the easier
movement of cars.” But integration was a success. “Unlike
many other sizeable towns that tried to be racially diverse
and stable, Columbia succeeded. It was racially diverse
from the beginning, and it still is.”
Keeping the Vision Alive
In the decades after they were founded, Reston and
Columbia each faced challenges, many of which were
economic. For Reston, these included investor turnover
and tensions between financial viability and commitment
to the founding principles. For Columbia, these included
reckoning with some design weaknesses — including
transportation — and increasing density to develop an
economy of scale.
The 1970s, ’80s, and ’90s saw Reston change hands from
Gulf Oil Corp. to Mobil Oil Corp. Like Gulf, Mobil pursued
market-based development and followed the master plan to
a degree that allowed Simon’s vision to remain relatively
intact. In 1990, Mobil dedicated Reston Town Center, a
mixed-use shopping plaza that was the crown jewel of the
town and a central piece of the master plan. The lofty goals
established by Simon inspired Mobil’s planning team to
break from conventional commercial design — ultimately,
Reston Town Center was created as a place for people to
spend their time, in addition to their money.
Similarly, Columbia was not immune to business cycles
and faced its share of financial challenges over the years.
But, as David Stebenne points out, Columbia was the only
one of the suburban “new towns” of the later 1960s and
’70s in which the original developer was able to retain
long-term control over the project.
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
25
Three primary factors enabled Rouse to maintain
control. First was the conventional nature of the housing
stock. Second was Columbia’s concentration of business
parks. Both supported the economic viability of the
development through home sales, commercial leasing
income, and job creation. Third was the close professional
relationship that Rouse developed with Frazar Wilde,
president of Connecticut General Life Insurance Co., the
investment firm that financed the majority of Columbia’s
early development. Wilde focused on long-term profitability and also viewed Columbia as a project worthy of
investment for reasons beyond profitability, which mitigated the pressure that large-scale development projects
face to turn a profit as soon as possible. As David Stebenne
notes, “To the extent there are compromises, they don’t
stem from a lack of knowledge on the part of the developer … they stem more from larger macroeconomic forces
beyond Rouse’s control.”
After his retirement from the Rouse Company in 1979,
Rouse dove back into urban redevelopment through malls
that he called “festival marketplaces.” These projects
included Boston’s Faneuil Hall Marketplace and Quincy
Market and Baltimore’s Harborplace, which were meant
to help revive downtown areas by creating an amenity-rich
destination for residents and tourists alike. Simon, meanwhile, moved back to New York to manage smaller-scale
development projects but retired to Reston’s Lake Anne
neighborhood in 1993. He lived in his beloved community
until his death in 2015 at the age of 101.
Towns in Progress
Reston and Columbia continue to be thriving communities that must navigate new challenges that come with age.
As each passed its 50th anniversary, conversations began
about redevelopment.
Part of Reston’s continued vibrancy stems from its location in a region experiencing rapid economic growth, and
more recent planning has had to account for that growth.
A central innovation of Reston’s current Comprehensive
Plan, adopted in 2015, was a minimum 1-to-1 ratio of
residential to nonresidential development for the areas
around Reston transit stations, including Reston Town
Center. According to Robert Goudie, executive director
of the Reston Town Center Association, the ratio —
which had not been widely attempted in other mixeduse developments — was designed to set a minimum
Readings
George Mason University Libraries, Special Collections Research
Center, and Virginia Foundation for the Humanities. Reston@50:
Planning, Designing, and Marketing Reston. Fairfax County, Va.:
George Mason University, 2014.
Mitchell, Joseph Rocco, and David L. Stebenne. New City Upon A
Hill: A History of Columbia, Maryland. Charleston, S.C.: The History
Press, 2007.
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E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
requirement on residential in the downtown and thereby
“create a healthier jobs-to-households ratio in what previously were areas zoned largely or exclusively commercial
and mitigate congestion.”
The Washington, D.C., Metro extended a line to
Reston in 2014, and Fairfax County continues to review
key elements of the Comprehensive Plan in anticipation
of additional transit development and population growth.
Increased demand and redevelopment costs raise the cost
of living and challenge Reston’s original commitment to
affordability.
The “Downtown Columbia Plan” details Columbia’s
planned development from 2010 through 2040. This plan
balances growth with Rouse’s original principles and details
a process for community involvement. Transportation
continues to be a struggle for the area as more and more
Columbia residents face long commutes to Baltimore or
Washington, D.C.
Reston and Columbia illustrate the economic complexities that exist within a large-scale planned community, and
they share some commonalities that may have contributed
to their relative success. These include the early establishment of core values, innovative zoning, and prioritization of
profitability. Simon and Rouse’s clear and public core values
defined standards by which all design and business decisions
could be assessed and simultaneously attracted like-minded
residents who helped make those values a deep-rooted part
of the community culture.
Reston and Columbia were pioneers in mixed-use zoning;
today, mixed-use zoning and transit-oriented development are
priorities for many localities across the United States, particularly those seeking to increase density and provide accessible
amenities. The examples set by Reston and Columbia —
including their more recent and ongoing conversations about
transit design and the appropriate mix of residential and commercial development — have helped inform the development
of mixed-use zoning nationally.
Finally, Reston and Columbia indicate the importance
of the “mix” in mixed-use development — Goudie in
Reston and David Stebenne in Columbia both note that
commercial development provided critical income to help
maintain economic viability. Even with the changes that
Reston and Columbia have seen over the decades, it seems
clear that their conversations about community, diversity,
quality of life, and economic viability may never be over —
they will simply evolve.
EF
Tennenbaum, Robert (ed.). Columbia, Maryland: A Fifty-Year
Retrospective on the Making of a Model City. Brighton, Mass.: Harvard
Business Publishing, 2017.
Wingert-Jabi, Rebekah. Another Way of Living: The Story of Reston,
VA. United States: Storycatcher Productions, 2015.
DISTRICTDIGEST
Economic Trends Across the Region
Learning About the Labor Market from High-Frequency Data
B y J o s ep h M e n ge d o t h
E
mployment in the United States experienced
the sharpest decline on record in April as the
negative economic effects of the COVID-19 pandemic and social distancing measures caused employers
to cut almost 21 million jobs, on net. (The next largest
single-month decline was almost three-quarters of a
century earlier, in September 1945, when almost 2 million jobs were lost.) Yet the full severity of the job loss
was not known for quite a while: More than seven weeks
passed from when the first state, California, issued a
stay-at-home order on March 19 to when the Bureau
of Labor Statistics (BLS) released the first national
employment report fully reflecting the onset of the crisis, the report for April released on May 8.
Traditional sources of employment data are lagged,
sometimes by a lot. At the national level, the employment
report for a given month is typically released on the first
Friday of the following month. And those data are based
on a survey of firms that takes place around the middle of
the month. This is why the jobs report for March had yet
to show the full effect of the widespread social distancing
measures, since many of those were put into place in late
March and early April.
The BLS releases employment data for state and lower
levels of geography at even greater lags. For example,
the state-level data are typically lagged by another two
weeks, coming out in the middle to the end of the month.
County and metro employment and unemployment data
are released a few weeks after that. And the most comprehensive source of data on local employment comes from
the Quarterly Census of Employment and Wages, which
is released between five and six months after the quarterly
period ends. (For more on state and local labor market
data, see “State Labor Markets: What Can Data Tell (or
Not Tell) Us?” Econ Focus, First Quarter 2015.)
These lags are not new, or unknown, but in times
of rapidly changing circumstances, the data are not
sufficiently able to keep up with economic conditions.
Knowing that the official employment counts would
not be available for some time, economists, policymakers, and analysts looked during the COVID-19 crisis to
other sources that could shed light on how the virus and
the shutdown of economic activity were affecting the
labor market. This includes the Federal Open Market
Committee (FOMC), which, according to the minutes
from meetings held in March, April, and June, found that
traditional economic data could not capture the rapidly
evolving situation; instead, the committee referenced
high-frequency data.
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Unemployment Insurance Claims
One source that directly shows changes in labor markets
on an early basis, which the FOMC relied on in March,
April, and June, is weekly unemployment insurance claims.
Unemployment insurance programs are administered by
individual states. Every state is required to report the
number of initial and continued claims to the Department
of Labor, which in turn releases that data to the public
on the Thursday of the following week. As their names
imply, initial claims are the number of new claims filed in
the reference week, and continued claims are the number
of workers who were already collecting unemployment
benefits and remained unemployed in the reference week.
Because these data are timelier than payroll employment data from the BLS, they can serve as an early
indicator of an economic downturn. In normal times,
there is some variation in these data week to week as
people move from employment to unemployment and
back to employment or as some people decide to leave
the labor force rather than continue to look for a new job.
There are also seasonal patterns in the data, but those can
be removed by applying a statistical procedure known as
seasonal adjustment. Hindsight shows that in the weeks
leading up to the starts of the last several recessions, the
claims data tended to rise steadily and sometimes rapidly.
Take the Great Recession, for example. Data from the
payroll survey began showing the decline in employment
in February 2008, which was the first of 21 consecutive
months of job losses. If we look at the six months prior
to that, from August 2007 through January 2008, the payroll data were not alarming, with a slight increase in total
employment in the United States (0.3 percent or 388,000
jobs). At the same time, though, initial claims (after being
adjusted for seasonal trends) began to steadily increase,
and seasonally adjusted continued claims rose 12.4 percent
or by 314,000 jobs.
Likewise, evidence of an effect on employment from
the COVID-19 pandemic appeared in the initial and continued claims data several weeks before the payroll data
were available — but this time at rates never seen before.
The first increase in initial claims in the United States
came in the week ending March 14, when the number of
claims rose 33.3 percent or by around 70,000. In the next
week, initial claims rose more than tenfold from around
280,000 claims to almost 3.3 million and then more than
doubled the week after to almost 6.9 million. The same
data for Fifth District jurisdictions show similar trends
except for West Virginia, where the initial claims data
didn’t peak for another couple of weeks.
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
27
Continued Unemployment Insurance Claims
demand for workers. Fortunately, there are some other
high-frequency data sources that can give a glimpse into
the staffing needs of employers.
Source: Author’s calculations using data from U.S. Department of Labor via
Haver Analytics
A similar story evolved with continued claims, which
began to rise one week after the first spike in initial claims
and continued to increase sharply week over week for the
next several weeks. Claims rose nearly simultaneously
across jurisdictions at the start of the pandemic, but there
were variations in trends after that. Most notably, the
number of people filing continued claims began leveling
off and, in some cases, decreasing by the end of April or
the start of May — except for the District of Columbia,
where claims continued to rise and remained relatively flat
in May and June. (See chart.)
In addition to providing the data to the Department of
Labor, some state agencies release more detailed reports
of the initial claims data on their own websites. Virginia
is one of those states; its weekly reports include breakouts by gender, age, race, ethnicity, education level, and
occupation. These breakouts offer a view into disparate
impacts on different groups of people. The occupational
data, for example, showed that in the week of April 4, the
top two most affected occupations were food preparation
and serving related occupations and personal care and service operations. In contrast, just prior to the start of the
pandemic, the occupations with the largest numbers of
claimants were administrative support and construction.
This gave an early indication of which workers and industries might see the largest effects, which was confirmed in
the payroll employment data several weeks later.
But what about tracking the recovery in real time? One
of the limitations of these data is that we do not know the
characteristics of those who stop filing a continued claim
or the reason why they stopped. A drop-off in continued
claims could indicate that people are going back to work,
but it could also mean that people gave up looking for a
job or exhausted their benefits. So a drop-off doesn’t tell
us much about the types of people who stopped filing
versus those who remain on unemployment or the current
28
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
New Online Job Postings
Indexed to the week ending March 7, 2020
20
10
0
-10
-20
-30
-40
-50
-60
-70
District of Columbia
South Carolina
Maryland
Virginia
July 11
North Carolina
West Virginia
June 27
July 11
June 27
June 13
May 30
May 16
Maryland
Virginia
June 13
District of Columbia
South Carolina
May 2
April 18
April 4
March 21
March 7
0
May 30
2
May 16
4
May 2
6
April 18
8
Online Job Postings
One way to measure the current demand for workers is to
look at the job advertisements that employers are posting online. To do that, one could simply peruse sites like
LinkedIn or Indeed, but there are companies that offer
aggregated data from across multiple websites. One such
company is Chmura Economics & Analytics, a Richmondbased consulting service and data provider. Among the
company’s offerings is a database of online job postings
called Real-Time Intelligence (RTI).
To create the RTI database, Chmura’s computers
scrape information from over 30,000 websites every day,
including job sites like Indeed and individual company
websites. When the data are processed each night, any
duplicate postings that are identified are removed. One
of the many pieces of information that Chmura gets
from these websites is the date when the job opening
was first posted, if available. If no such date is available,
Chmura assigns one based on the first day on which their
scraping process found the post. This date can be used
as a filter and therefore allows a user to see how many
job advertisements were posted online over a particular
time frame.
Looking at the data by week for the Fifth District
shows the dramatic decline in new job postings starting in
mid-March — around the time when mandatory business
closings and social distancing measures were being put in
place. It’s no surprise that with many businesses essentially
shut down, there was little need to hire new employees, but
these data show the severity with which those job postings
declined. At the lowest point, in the week ending April 18,
new job postings across Fifth District jurisdictions were
April 4
PERCENT
10
March 21
12
March 7
14
PERCENT
Share of state noninstitutionalized population aged 16 and older
North Carolina
West Virginia
Source: Author’s calculations using data from Chmura Economics & Analytics
July 11
June 27
June 13
May 30
May 16
May 2
April 18
April 4
March 21
March 7
Percent
New Online Job Postings for Selected Occupations
down between 36.2 percent (in
Indexed to the week ending March 7, 2020
West Virginia) and 57.9 per40
cent (in South Carolina) when
compared to the number of
20
Transportation and Material Moving
new postings in the first week
0
Office and Administrative Support
of March. (See chart on previ-20
Sales and Related
ous page.)
Food Preparation and Serving
But what can these data
-40
Health Care Practitioners and Technical
tell us about the job recov-60
Computer and Mathematical
ery? For one, they show that
Business and Financial Operations
-80
West Virginia experienced the
Management
strongest and quickest bounce
-100
back in online job postings.
In fact, the number of new
postings in the week ending
Source: Author’s calculations using data from Chmura Economics & Analytics
July 18 exceeded the number
of postings in the first week of
March. One potential reason for West Virginia’s quicker
As with unemployment claims data, online job postrecovery in job postings is that the state was the first in the
ing data do not tell the whole story. For one, given the
Fifth District to ease restrictions on businesses and social
number of jobs that were lost in March and April, if the
gatherings. In fact, the Mountain State entered the second
number of new job postings matches the pre-pandemic
phase of its reopening on May 4, which was the same day
level, that doesn’t mean the labor market has returned to
that South Carolina entered its first phase and before any
the same level of demand. And one might expect to see
other Fifth District jurisdiction began easing restrictions.
the number of new job postings exceed the pre-pandemic
The RTI database includes many other variables that
level for some time in order to fully recover the jobs that
allow users to dig deeper into the data to see what types
have been lost.
of jobs were hit hardest and have recovered the most. For
Additionally, while the data do show some trends
example, Chmura’s web scraping tool examines job titles
in the types of jobs that are being advertised for, they
and job descriptions to assign each job posting an occudo not show how many of those jobs were filled. And
pation code based on the BLS’s Standard Occupational
with part-time jobs, in particular, they do not show how
Classification System. This allows users to examine trends
many hours a week employers needed workers. There is
in job postings for specific professions or to see what types
another high-frequency data source, however, that sheds
some light on the demand for hourly workers.
of occupations were in the highest demand in a particular
time period, which gives insight into the hiring trends in
Homebase
some of the hardest-hit industries.
Homebase is a company that provides free scheduling,
Among the eight occupation groups that accounted
time keeping, and communication products to local
for the largest shares of new job postings in the first week
businesses with hourly employees. These are primarily
of March, postings for food preparation and serving
restaurant, food and beverage, and retail businesses
related occupations declined the furthest in late March
that are individually owned, which were some of the
and early April, followed by office and administrative
hardest-hit industries. In response to the pandemic,
support, sales and related jobs, and transportation and
the company made some of its data free to the public
material moving occupations. (See chart.) This was an
so researchers and community members could track the
early indication that the effects on the labor market
number of hours worked by hourly and shift employees,
would be felt quite differently across different types of
the number of businesses that were currently closed, and
jobs, which was confirmed by the official payroll employthe employees who were not working. All told, these
ment data — several weeks after the online job posting
daily data are based on more than 60,000 businesses
data was available.
employing 1 million hourly employees. Data start in
The same data shed light on the recovery in employJanuary 2020 and are available to the public in more real
ment. Online postings for health care practitioners and
time upon request.
technical workers and transportation and material moving
Because the data are daily, and many businesses are
occupations surged in the Fifth District in the week endnot open seven days a week, the data exhibit some coning July 18. Postings for sales and related jobs also picked
sistent patterns due to normal closures on certain days
up in the first few weeks of July. This could be a sign that
every week, like weekends. To correct for this, the data
business conditions were improving at establishments
can be indexed to a prior period. Data used for this article
that employ these workers, such as doctor’s offices, shiphave been indexed to the median value for the same day
ping companies, and retail shops.
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
29
Hours Worked by Hourly Employees
District of Columbia
South Carolina
Maryland
Virginia
July 6
June 22
June 8
May 25
May 11
April 27
April 13
March 30
March 16
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80
March 2
PERCENT
Percent change relative to the median same day of the week in January 2020,
trailing seven-day moving average
North Carolina
West Virginia
note: The three pronounced dips in the data coincide with Easter Sunday, Memorial Day,
and Independence Day.
Source: Author’s calculations using data from Homebase
of the week for the period Jan. 4 to Jan. 31. This means,
for example, that the hours worked on Wednesday, July
1 would be indexed to the median hours worked over the
five Wednesdays in January. Looking at the data this
way allows comparison over time relative to a particular
period and across geographies.
Across Fifth District jurisdictions, the trends in these
data broadly coincide with where and when places began
to reopen. For example, hours worked by hourly employees in West Virginia and South Carolina have bounced
back quicker and are closer to their January levels
than in other states — perhaps reflecting that West
Virginia and South Carolina began their phased reopenings much sooner than other jurisdictions. The District
of Columbia, which was the last in the Fifth District to
reopen, remains the furthest from its pre-pandemic level.
(See chart.)
Homebase data are also available broken out by
industry. This means we can observe trends in the hours
worked at just food and drink establishments or the
number of businesses open in the personal care industry. In the Fifth District as a whole, these data show
trends that one might expect, namely, a steep decline
in employees working, hours worked, and locations
open (all the way to zero, in some cases) starting in
mid-March. The series then bottomed out and began to
rise around mid-April when businesses began to resume
operations on a limited basis, reflecting the phased
approach to reopening that was occurring across much
of the nation.
Hours worked leveled off or showed a slight declining
trend toward the end of July. This may be a signal that
the demand for hourly workers is slowing and may remain
30
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
below prior levels for some time. Of course, hourly workers are only one segment of the labor force, but this pattern anticipated a similar one in July payroll data, which
was released several weeks later and showed a slowdown
in the pace of hiring.
Richmond Fed Surveys
In addition to the high-frequency data sources that
have been discussed so far, the Richmond Fed has been
using its own surveys of business conditions to gain
further insights related to the pandemic. For example,
in the March surveys of manufacturing and service sectors, which were fielded between Feb. 26 and March
18, respondents were asked additional questions about
the impacts to their company so far due to COVID-19
and their expectations for the near term. Although the
Richmond Fed publicly releases the results only after
surveys have closed, staff often view responses as they
come in on a daily or weekly basis.
In general, over the survey period, firms were reporting
only minor negative effects on their operations, and most
of the comments indicated those were due to supply chain
disruptions from China and travel restrictions. By the
third week of the survey, however, responses indicated
that those negative impacts were escalating and outlooks
for the U.S. economy were deteriorating.
The April survey, which ran from March 26 to April
22, was broadened further to include labor market
specific questions. Specifically, that survey asked participants to indicate if they were reducing staff or the
hours worked by staff. Results from those questions
generally showed that the majority of responding firms
were not reducing staff or the hours worked by employees; however, similar to the March survey, the results
deteriorated as the survey continued. For example, in
the first week of the survey, only about 15 percent of
responding firms said they reduced staff, while in the
final week of the survey, approximately 40 percent said
they were cutting staff.
Then, in the May survey, the Richmond Fed collaborated with several chambers of commerce across the Fifth
District to reach even more participants with a set of
COVID-19 related questions. Overall, results from that
survey showed how the labor market responses of firms
varied by size and industry, with the most adverse effects
being felt in the accommodation and food services, retail
industries, and by small businesses. In contrast to earlier
surveys, the results were generally consistent over the
three weeks of the survey period.
The results of these surveys gave the Richmond Fed
timely information about firms’ experiences and the actions
they took while the COVID-19 situation was unfolding.
What’s more, they gave evidence that the changing nature
of the data over time means that one monthly indicator
alone may hide some underlying dynamics or, at the very
least, doesn’t tell the whole story.
Emerging Sources
A few newer sources have become available. The first is
the Real-Time Population Survey (RPS), which is a joint
effort between academic economists and the Dallas Fed.
The goal of the RPS is to provide a survey similar to the
BLS’ household survey of employment and unemployment
(the Current Population Survey), but it differs in that the
RPS is conducted online twice a month, and the results
are made available with a shorter lag. The results of the
RPS are plotted with the official BLS survey measures of
employment and unemployment in reports available on
the Dallas Fed’s website.
The U.S. Census Bureau also began conducting two
new high-frequency surveys to better understand the
effects of COVID-19 on the economy. The first was the
Household Pulse Survey, which was a weekly survey that
began on April 23 and concluded on July 21. The results of
the survey were posted one week after the survey period
closed and gave insights into issues such as childhood education (including availability of computers and internet),
employment, household spending and food sufficiency
and insufficiency, health, and housing. The data, which are
available at a national, state, and metropolitan level (for
the 15 largest metro areas), are still available on the U.S.
Census Bureau’s website at the time of writing this article.
The second new survey from the U.S. Census Bureau
is the Small Business Pulse Survey, which began on May
14 and is still ongoing. It is designed to provide information on small-business operations and finances, including
any government support they have received and their
outlook for the near future. These data are available at
the national and state levels and for the 50 most populous metro areas. An interactive dashboard shows which
industries and areas of the country have a relatively
higher share of small businesses being negatively or positively affected by the pandemic and where firms are the
most optimistic or pessimistic about the near future.
Conclusion
Although none are without limitations, each of these
high-frequency data sources offers a glimpse into the labor
market in nearer to real-time. The initial unemployment
insurance claims data were particularly useful in understanding how many and, in some cases, the characteristics
of workers who were being hurt during the crisis when
many businesses were scaling back or shutting down
operations.
The continued claims data were (and will continue
to be) a useful indicator to track the number of people
who are collecting unemployment each week. In terms
of labor demand, online job posting data offer a glimpse
into the types of jobs that employers are recruiting
for, and the Homebase data show trends in the hours
worked by hourly employees in some of the hardest-hit
industries. Lastly, the Richmond Fed has used and will
continue to use the ability to add special, topical questions to its surveys of business conditions to understand
the effects of the pandemic.
EF
The Richmond Fed has created Pandemic Pulse, an area on its
website that features interactive charts of various high-frequency
indicators.
u
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
31
Opinion
A Teachable Moment?
B y K a r t i k At h r e y a
I
n an open letter to economists, AFL-CIO chief
economist William Spriggs recently asked, “Is now
a teachable moment for economists?” From his perspective, the economics profession has done a poor job of
studying racial discrimination, and he expressed hope that
the death of George Floyd and the protests it spawned
will lead to improvement in how it approaches race. In my
role at the Richmond Fed, it is important for me to think
hard about how the profession has addressed race through
research and what it might do in the future.
Economists have been slow to view racial discrimination, especially in the modern era, as a central driver of
observed disparities. Interestingly, perhaps, this may be
because economists usually assume employers have no
concern for societal well-being and are only focused on
maximizing profits. In early models of discrimination,
notably those of Gary Becker, discriminating firms put
themselves at a labor-cost disadvantage and therefore
could only survive competition if a high percentage of
their competitors also practiced discrimination. This led
economists to suspect that other forces, including legal
limits on hiring black workers, were critical for perpetuating racist outcomes, since without them, it would be easy
for non-discriminatory firms to profit by hiring talented
workers without regard to race. Yet even as overt barriers
have disappeared, outcomes remain disparate.
Another prominent theory of racial discrimination holds
more promise. This approach, first formalized by Edmund
Phelps and Kenneth Arrow and advanced since then by
many others, emphasizes a potentially long-lived kind of
bias called “statistical discrimination.” It is based on the
idea that, faced with incomplete information about individuals, employers may be able to make statistically valid,
but not necessarily socially rational, inferences about individuals by taking into account the average attributes of their
group. Glenn Loury, for example, has developed dynamic
models of statistical discrimination in which “reputation
traps” create self-reinforcing cycles of poor opportunity and
insufficient investment in education and training. These
dynamic models suggest even more that disparities between
groups can be long-standing and pernicious in the absence
of government intervention. Sadly, individuals may suffer in
the interim for no reason other than entrenched pessimism
about them as a group. Notice that an obvious candidate is
the overt institutionalized racism of the past — it “initially”
limited opportunities and made such purely statistical
beliefs possible to hold in the first place.
In economics, the data always matter. So whatever our
theories may say, economists have produced many studies
that have identified evidence of racial discrimination.
32
E c o n F o c u s | s e c o n d / T h i r d Q u a r te r | 2 0 2 0
Much of this research has focused on labor markets and
has used statistical analysis to estimate whether race
remains a statistically significant determinant of wages
after taking into account various indicators of worker productivity, including education and experience.
Still, empirics can’t always settle things. Because most
of the data economists analyze don’t come from controlled
laboratory experiments, the possibility usually exists that
estimated results have been distorted by mechanisms that
have not been included in the analysis. This is called the
“missing variables” problem.
But it might be that the economics profession has
displayed a level of skepticism toward evidence of discrimination that goes well beyond what can be accounted
for by methodological rigor alone. In reference to the
profession’s frequent use of the missing variables critique,
Spriggs observed that “it looks like economists are desperate for a ‘Great White Hope,’ some variable that can be
used to once and for all justify racial disparities.”
Referring to the profession’s skepticism toward
evidence of racial discrimination, Arrow once said, “While
one can always invent hypotheses to explain away these
results, there is really no reason not to draw the obvious
conclusions.” Although Arrow was a giant in the field of
theoretical economics, his prior beliefs about discrimination were heavily influenced by real-life history prior to the
passage of the Civil Rights Act of 1964. “I can speak as a
witness here,” said Arrow, “it was simply well-known that
most good jobs were not available to blacks.” According
to Arrow, “any theory of racial discrimination … has to be
consistent with these patent facts.”
Arrow recognized a contradiction. In his view, the
market-based solutions produced by standard economic
models “tend to predict that racial discrimination will be
eliminated.” But since, in his view, this had not been borne
out by history, he counseled that “we must seek elsewhere
for non-market factors influencing economic behavior.”
This suggests that the profession may benefit by engaging
more seriously with the premise embraced by Spriggs and
so many social scientists outside the economics profession — that discrimination works through slowly evolving
institutions as well as through individuals.
Looking ahead, I hope recent events will energize
deeper engagement on racial bias by economists — very
much including the many working within the Fed — and
lead to better understanding of its effects and of policies
aimed at its elimination.
EF
Kartik Athreya is executive vice president and director
of research at the Federal Reserve Bank of Richmond.
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NextIsSue
Jumpy Companies
Research has shown that companies go through
periods of low investment punctuated by investment
“spikes.” But economists are divided about the cause
and significance of this volatile behavior. What role
does economic uncertainty play in firm investment?
And what is the relationship between investment
spikes and economic growth?
A More Resilient Meat Industry
The COVID-19 pandemic hit meat processing
facilities and led some grocery chains to limit meat
purchases. Changes in consumers’ preferences and in
industry economics have made the meat supply more
vulnerable — but it’s not clear that consumers would
want to pay the cost of a more resilient supply chain.
Economic History
Federal Reserve
One of the unforeseen consequences of the COVID-19
pandemic is that banks and businesses have reported
a disruption in the supply of coins. While there are
still plenty of coins to go around, many of them aren’t
circulating due to changes in business operations
and consumer payments in response to the virus. In
response, the Fed has convened a U.S. Coin Task Force
to identify solutions.
The Profession
Since the 1990s, the number of women studying
economics at both the graduate and undergraduate
level has been decreasing. As a result, fewer women
are becoming economists and their voices are
underrepresented in the profession. What is deterring
women from entering economics? And why does
gender diversity in economics matter?
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jobs and billions of dollars in revenue. But starting
in the 1990s, the industry began to shrink in the
face of increased competition from imports, a trend
that accelerated after 2000. Today, the industry is
recovering, though on a smaller scale.
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