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5/5/2020 Remarks by Deputy Secretary Raskin at the Committee for Economic Development Spring Policy Conference U.S. DEPARTMENT OF THE TREASURY Press Center Remarks by Deputy Secretary Raskin at the Committee for Economic Development Spring Policy Conference 4/13/2016 As Prepared for Delivery WASHINGTON - Thank you for that kind introduction. It is a pleasure to be here with the Committee for Economic Development, an organization that—from its inception—has been committed to promoting sustained economic growth and development to benefit all Americans. For nearly 75 years, CED has helped to shape our economic policy agenda by bringing together business and government leaders to develop well-researched analysis and well-reasoned solutions. The report the Committee for Economic Development released today—on the subject of economic inequality—builds on your long legacy of advancing our nation’s economic policy. The Committee on Economic Development is to be commended for embracing the topic of economic inequality—a subject that raises important questions about our country’s economic resilience, but also a topic that is easily politicized and vulnerable to less than careful analysis. The preparation of your report, “Tackling Economic Inequality, Boosting Opportunity: A Blueprint for Business,” is evidence of your commitment to approaching challenging and complex problems with analytical rigor. So today, I would like to invoke the work of this report in the context of macro-economic growth—and in particular, macro-economic resilience—by which I mean the pace and durability of the economy’s ability to grow after a business cycle downturn. The most dramatic example of macro-economic resilience in recent history—an example which we are still experiencing in terms of post-downturn resilience—is, of course, the most recent recession. Eight years ago, the worst financial crisis since the Great Depression triggered that recession. Real GDP shrank 4.2 percent between the final quarter of 2007 and the second quarter of 2009. When the President took office in early 2009, the economy was shedding 750,000 jobs per month. In total, 8.7 million Americans lost their jobs, millions of American households lost their homes, and household wealth fell to its lowest level since 2004. The recovery took hold midway through 2009, and since then the economy has expanded at an annual rate of 2.1 percent. In the years after employment hit bottom in February 2010, the number of jobs has risen by 14 million. In 2010, the unemployment rate was ten percent; now, in 2016, it is five percent. Today, consumer confidence is near an eight-year high,— and despite what looks to be a weak first quarter consensus forecasts expect real GDP growth of 2.1 percent this year. It has taken time to recover from this last recession. In the first two years following the trough, GDP grew at a 2.2 percent annual rate, a full percentage point slower than the two years following the 2001 recession. And while the unemployment rate started to come down during that period, measures of underemployment barely budged. The number of people working part time for economic reasons – which rose to 9 million during the recession, more than double its pre-recession average – had declined by less than 500,000 during the first two years of the recovery. As highlighted in the CED report, U.S. inequality has risen substantially since 1970. For example, the share of market income received by the top ten percent of U.S. households was 33 percent in 1970. By 2010, that figure rose to 48 percent. Similarly, the top 1 percent of households held 40 percent of the wealth in 2010, up from 28 percent in 1970. This income and wealth inequality is more extreme in the U.S. than in most other rich countries. The question suggested by this post-crisis recovery path, in light of your careful report on inequality, is whether either one has anything to do with the other. In other words, are postcrisis recoveries affected by greater levels of inequality? Earlier, in 2013, as a Federal Reserve Governor, I asked a slightly different question: whether our country’s inequality of income or wealth contributed, as a causal factor, to the financial crisis.[1] But today, on the other side of the downturn, the question I want to ask is whether and how such heterogeneities influence the pace and durability of recoveries. One area of widespread agreement is that financial crises are harder to recover from.[2] Accordingly, on the front end, in order to reduce the likelihood of another severe financial shock and protect the economy, the Administration has put policies in place that strengthen our financial system. These include measures to bolster bank capital, so that banks bear their own risk and are positioned to absorb rather than amplify losses; to improve transparency in our markets, so that risk is clear to participants and regulators; and to ensure that if a bank falters it can be resolved without destabilizing the broader economy, so that the firm’s stakeholders, not the taxpayers, bear the risk of the firm’s activities. These regulatory reforms will be one factor that will mitigate the prospects of a devastating financial crisis. Another factor is the well-being of our nation’s households. We know that prior to the Great Recession, many low- and middle-income households had endured thirty years of sluggish real-wage growth. They also held a larger share of their wealth in housing than high-income households, and their housing assets had been financed with large amounts of debt. As a result, they were sharply susceptible to a decline in house prices. The unexpected and steep drop in house prices reduced household wealth and access to credit, leading households to reduce their spending. Underwater borrowers and heavily indebted households were left with little collateral, which limited their ability to refinance existing debt and take advantage of lower interest rates. If they lost their jobs, and wanted to relocate, their inability to sell their homes hindered their ability to find new jobs. Spending declined, especially for indebted households as they faced impaired access to credit and tried to find better paying jobs. And for many months, businesses did not find it cost-effective to create new jobs or pay their existing workers more when demand for their goods or services was so low. This all led to a downward momentum, and a prolonged recovery, because of course as spending declined, so did the prospects and confidence of both businesses and households. In short, the well-being of our nation’s households determined, in some measure, the path of our recoveries. If the well-being of our nation’s households is a function of income and wealth inequality, to what extent did our country’s large and growing disparities in wealth and income contribute to this slow economic recovery? Income and Wealth Heterogeneity Slow Recoveries https://www.treasury.gov/press-center/press-releases/Pages/jl0420.aspx 1/3 5/5/2020 Remarks by Deputy Secretary Raskin at the Committee for Economic Development Spring Policy Conference There is increasing documentation showing that widening income and wealth inequality has been among the most pronounced structural change to the U.S. economy since the late 1970s. [3] The challenge of inequality is compounded by the persistent effects of flat wage growth. The recovery has been particularly tough for households lower in the income distribution. Every quintile experienced 2014 mean real incomes below their pre-recession peak, and only the top two quintiles had real gains in mean income over the last ten years.[4] At the household level, real incomes have slowly and incompletely recovered from pre-recession levels, especially in the bottom and middle of the income distribution. The median household earned around $57,000 in real terms in 2007, fell to $52,000 by 2012, and only rebounded to $54,000 in 2014.[5] Economic gains in the past 30 years have not been broadly shared. Only a small part of the widening disparity can be explained by compositional changes like lower marriage rates among middle-income households. The 99th percentile has been the big winner over the past generation, with real income gains of 77 percent.[6] This growing heterogeneity has been understood as an issue of fairness and morality, pitting the “have-nots” against the “haves.” But outside of the political context, a political context where these economic realities are quickly assigned moral meanings, we can see the issue as one that contains significant economic implications for growth. We now understand that there are a number of mechanisms by which inequality may be harmful to sustainable economic growth.[7] We know from our history that our economy grows sustainably from the middle out, when growth is more widely shared. And there’s some evidence that at certain levels of inequality in income and wealth, growth actually slows altogether.[8] As the Center’s report points out: “Excessive inequality can degrade the overall performance of the economy.” And this has been borne out in the economic data, in studies done by researchers at the IMF and the OECD. For example, IMF economists showed that across countries, less inequality tends to be associated with longer spells of economic growth. [9] And importantly, when we look at these studies, the relationship holds up even when other factors commonly believed to determine growth duration are taken into account, such as external shocks, initial income, institutional quality, openness to trade, and macroeconomic stability. [10] Further, research suggests that inequality is not only a robust and powerful determinant of the duration of growth spells, but of the pace of medium-term growth. [11] In short, focusing resources on reducing inequality is an important component of supporting strong and sustained growth, and when we fail to consider inequality, we risk growth that is slow and unsustainable. Conclusion And this, I believe, is the challenge. Because growing levels of inequality are a threat to durable economic recovery, we need to think about designing policies that address the challenges to growth stemming from these levels of inequality. From the perspective of having come through the crisis and its devastating losses, how can we be smarter next time? Your report and the panelists you have assembled today are laying the foundation for policies and perspectives that incorporate an understanding of the landscape of incomes and wealth in our economic analysis. With this understanding, we can begin the work necessary to craft measures that assure that we have the ability as a country—as communities of businesses and households—to create a resiliency from downturns that limits the losses to our collective prosperity. As we engage in this work, which you are deepening today with the next panel assembled, we need to think broadly about options. For example, addressing a weak resilience brought about by greater income and wealth disparities may be better enhanced through a more intentional fiscal policy. Automatic stabilizers are particularly helpful as they are fast acting and budget friendly - raising the amount of money they pour into the economy in busts and reducing the amount of money during boom times. These automatic stabilizers, often forms of social insurance, have a key role to play in mitigating drops in consumption for individual households, the businesses they support, and aggregate demand in the economy as a whole. Automatic stabilizers put money in the hands of those who need it the most and are likely to spend it, yielding large fiscal multipliers. Governments have many tools at our disposal to maintain household consumption in times of need. While food assistance, through programs like SNAP, help provide food security during macroeconomic downturns, temporary expansion of food stamps, which can be implemented quickly through electronic debit cards, is particularly beneficial. Doing this, as was done in 2009, could avoid the long-term costs of malnutrition and have potentially high multiplier effects that could bolster economic activity. In general, the thoughtful report of the Committee for Economic Development can lead the way to a more powerful and granular understanding of what appears to be a great and growing structural change in our economy’s distribution of incomes and wealth. And with that understanding, we can begin to explore options and opportunities that promote more sustained and inclusive growth and prosperity. Thank you. ### [1] Sarah Bloom Raskin, “Aspects of Inequality in the Recent Business Cycle,” Remarks at the 22nd Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies, April 18, 2013. Available at: https://www.federalreserve.gov/newsevents/speech/raskin20130418a.pdf. [2] Carmen M. Reinhart and Vincent R. Reinhart, “After the Fall,” NBER Working Paper No. 16334, September 2010. Available at: http://www.nber.org/papers/w16334.pdf. [3] Congressional Budget Office, “The Distribution of Household Income and Federal Taxes, 2011.” Available at https://www.cbo.gov/publication/49440. [4] Treasury Department calculations of U.S. Census data. Data available at: https://www.whitehouse.gov/the-pressoffice/2013/12/04/remarks-president-economic-mobility [5] Ibid. [6] Congressional Budget Office, “The Distribution of Household Income and Federal Taxes, 2011.” Available at: https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/49440-Distribution-of-Income-and-Taxes-2.pdf. [7] Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note, February 2014, available at: https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf. [8] Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note, February 2014, available at: https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf ; Andrew G. Berg and Jonathan D. Ostry, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” IMF Staff Discussion Note, April 8, 2011, available at: https://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf. [9] Andrew G. Berg and Jonathan D. Ostry, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” IMF Staff Discussion https://www.treasury.gov/press-center/press-releases/Pages/jl0420.aspx 2/3 5/5/2020 Remarks by Deputy Secretary Raskin at the Committee for Economic Development Spring Policy Conference Note, April 8, 2011, available at: https://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf. [10] Ibid. [11] Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note, February 2014, available at: https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf. https://www.treasury.gov/press-center/press-releases/Pages/jl0420.aspx 3/3
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