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3/5/2022

Remarks by Secretary of the Treasury Janet L. Yellen at Stanford Institute for Economic Policy Research’s 2022 Economi…

Remarks by Secretary of the Treasury Janet L. Yellen at Stanford
Institute for Economic Policy Research’s 2022 Economic Summit
March 4, 2022

As prepared for delivery
Let me start by thanking the Stanford Institute for Economic Policy Research, and especially
Director Mark Duggan, for inviting me to participate in todayʼs event. SIEPR has an impressive
track record of supporting high-quality, impactful economic policy research, and it is an honor
to be part of this organizationʼs Economic Summit. It is a special privilege, too, to follow these
remarks with a discussion with Professor John Shoven, whom I am fortunate to have known
for over half a century.
While it is not the topic of my remarks today, I wanted to start out by just saying my thoughts
continue to be with the people of Ukraine as they fight back against an unprovoked invasion
of their homeland. The United States and our partners and allies have already leveled
significant costs to the Russian economy and President Putin, and we will continue to do so if
he furthers his invasion. Iʼm sure we may discuss this more in our conversation following my
remarks, but this continues to be a top priority for President Biden and the entire
Administration.
My remarks today will focus on economic disparities across communities and racial groups. Iʼll
argue that targeted investments to address these disparities can not only mitigate growing
inequality, but also propel sustainable macroeconomic growth.
My remarks will briefly document the extent of the dispersion across communities and race,
before turning to a strategy Iʼve termed “Modern Supply Side Economics” to frame how key
aspects of the Presidentʼs economic agenda can boost growth while addressing such
inequality.
To start, Iʼll begin with the empirical fact that the U.S. economy is characterized by vastly
divergent economic conditions across places.
While the relevant definition of “place” can depend on context—sometimes it can be a city,
other times itʼs a neighborhood, or even a single building—the residents and workers who
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Remarks by Secretary of the Treasury Janet L. Yellen at Stanford Institute for Economic Policy Research’s 2022 Economi…

populate these places endure wide variation in resources, opportunities, and standards of
living.
And the magnitude of this variation is striking
Consider the gap in social and economic metrics between counties in the top and bottom
quintiles, as calculated by economists Ryan Nunn and Jay Shambaugh. Looking across select
years over the past two decades, they find that the median household income is just $40,300
for the bottom quintile, compared to $83,000 for the top.
The poverty rate was 22.7% for the bottom quintile, but only 8.1% for the top. Housing
vacancy rates were 21.7% in the worst-performing quintile, but only 5.2% in the best. Others
have found similar divergences in rates of opioid addiction, childhood poverty, and
incarceration, to name a few.
Two specific metrics merit special mention given their outsized impact on the potential
output of a local economy. One is educational attainment, which is a strong predictor of
economic and social wellbeing across U.S. counties. Increases in educational attainment can
explain roughly 11% to 20% of U.S. productivity growth in recent decades, according to a U.S.
Department of Education report that examined the link between education and economic
productivity.
A second important metric is participation in the labor market.
As economist Tim Bartik points out, labor force participation varies substantially across metro
areas, with a participation gap of 9 percentage points between the 10th and 90th percentiles
of the employment rate distribution – roughly equivalent to the di erence between the 1st
and 22nd place among OECD countries.
What emerges from these statistics is a portrait of an economy fractured by zip code, where
economic resources are increasingly concentrated in the best-endowed areas, while the rest
of the economy languishes—creating persistent income disparities.
Economists have identified plausible explanations for this geographic stratification.
One possibility is that it reflects the economics of agglomeration. The notion of
agglomeration is that economic activity naturally clusters in close proximity due to
transaction costs associated with distance and the spillover benefits of closeness. Yet –
variation across places cannot be explained solely by agglomeration. And even if it could, that

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Remarks by Secretary of the Treasury Janet L. Yellen at Stanford Institute for Economic Policy Research’s 2022 Economi…

would not excuse policymakers from seeking reforms to spread economic gains more broadly
across the American landscape.
Just as we see variations in economic resources and outcomes across Americaʼs places, there
are also persistent disparities across the racial spectrum. And of course, it is critical to note
that place and race are deeply interconnected in the United States, due in large part to
decades of harmful policies designed to maintain residential segregation between races.
Disparities by race rival disparities across place. In terms of education and wages, for
example, Black and Hispanic workers lag behind their white counterparts on virtually every
metric. The gap begins early in a personʼs life, with white studentsʼ math skills at kindergarten
entry 0.5 standard deviations higher than Black studentsʼ and 0.7 standard deviation higher
than Hispanic studentsʼ on average.
These disparities in educational attainment continue through higher education, with 35% of
white adults earning a bachelorʼs degree or higher, compared to just 21% of Black adults and
15% of Hispanic adults. Large educational disparities, coupled with racial discrimination in the
labor market and other factors, lead to marked variation in wages and lifetime earning
potential. By the time workers have reached their peak earning years, the average wage of
Black and Hispanic workers is 75% that of whites.
Gaps in wellbeing and preparedness extend well-beyond education and labor market
experience.
Health disparities, for example, also begin early in life, and persist over the typical individualʼs
lifespan. Black and Hispanic Americans face higher rates of child abuse, lead exposure, obesity
in childhood, and chronic illness in adulthood, and endure more restricted access to quality
medical care.
These factors not only a ect wellbeing, they are also o en correlated with wages and
productivity in the labor market.
Disparities across people and places coexist with a macroeconomy that currently su ers from
acute long-term growth challenges, despite strong short-term growth. Under President
Bidenʼs leadership, the U.S. economy has grown rapidly during the recovery from the
pandemic, with GDP growing last year at the most rapid rate in 40 years.
But forecasters uniformly agree that growth over the next several decades will be sluggish,
limited by slow productivity growth and an aging population that restricts growth in labor
supply.
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Remarks by Secretary of the Treasury Janet L. Yellen at Stanford Institute for Economic Policy Research’s 2022 Economi…

These facts suggest the need for a policy approach that fosters greater equity across places
and races while, at the same time, propelling faster aggregate growth.
Enter Modern Supply Side Economics—a concept I laid out in a recent virtual address to the
World Economic Forum.
Modern Supply Side Economics aims to expand our nationʼs economic potential through
productivity-enhancing investments paired with policies to boost labor supply. In terms of the
aggregate production function, this approach raises labor productivity through deeper
physical capital—both public and private; higher human capital; and advances in science and
technology.
In addition, tax-based incentives and pro-family labor policies are designed to increase labor
force participation. Traditional supply side economics, in contrast, focuses largely on
augmenting the stock of private capital through policies that lower the user cost of capital—
mainly through tax cuts on investment.
In addition to its focus on this broader set of factors of production, Modern Supply Side
Economics is concerned with the distribution of investments across sectors, people, and
places.
Under the traditional approach, tax cuts that lower the user cost of capital typically initially
benefit capital owners; the benefits are then spread more broadly if—and this is a contentious
if—those cuts lead to broader investment.
This approach, however, can exacerbate long-standing disparities across place and race
because the initial benefits typically accrue to capital owners—a small and highly
concentrated group.
Then, if cuts in capital taxation do not promote broader investment in disadvantaged areas or
in projects that benefit households of color, the traditional approach tends to worsen
preexisting inequities.
The modern supply side strategy, by contrast, is focused on allocating investments in a more
systematic and equitable way—ensuring that disadvantaged communities and racial groups
receive an adequate share of investments in both physical and human capital. Indeed, it is an
explicit feature of this approach that individuals and areas that have been subject to the
underinvestment I described receive outsized consideration. Such an approach yields larger
aggregate gains under the basic economic premise that returns to investment exhibit
diminishing returns. In the context of investments in people, directing public resources to
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children and to workers who have received less education and training can yield the largest
bang for the buck—and a return that can last decades.
One example of the promise of the modern approach can be seen through initiatives that
remove lead from public water systems—a signature investment by the Biden-Harris
Administration that was included in the Bipartisan Infrastructure bill.
As research by economist Janet Currie and others has shown, lead exposure can cause
cognitive impairment in children, including significantly lower math and reading
comprehension scores—with children of color and families in disadvantaged communities
more likely to experience exposure. While traditional supply side economics would be unlikely
to address this concern, the modern approach recognizes the potential productivity boost
that comes with better academic proficiency owing to cleaner water.
In addition to this commitment to install lead-free pipes nationwide, the Presidentʼs
economic agenda includes an array of ambitious proposals designed to expand the productive
capacity of economy while promoting more inclusive growth.
For example, the agenda focuses on boosting labor force participation by raising e ective
wages and mitigating barriers to employment. In particular, it proposes an expansion of the
Earned Income Tax Credit—which is projected to raise the a er-tax wages for 17 million
workers—along with family-friendly proposals, such as tax credits and subsidies to make
childcare a ordable for low- and middle-income households; paid leave for workers; and
universal pre-k education for three- and four-year old children. It also proposes an ambitious
program to improve public transit systems.
A key element of the Presidentʼs agenda is to raise worker productivity through a collection of
human-capital initiatives that would expand access to early child education, make college
more a ordable, strengthen worker training, and achieve universal broadband access. All told,
these investments represent one of the most ambitious expansions in training and education
in our nationʼs history—an investment program that would revitalize the preparedness of our
nationʼs workforce.
The Administration has also made access to capital for disadvantaged communities a key
component of its economic strategy. This includes the State Small Business Credit Initiative
to generate capital for small business lending and investment, unprecedented expansions in
investments for community and economic development programs, and a Green Energy
Accelerator that would devote 40% of its resources to disadvantaged communities.
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3/5/2022

Remarks by Secretary of the Treasury Janet L. Yellen at Stanford Institute for Economic Policy Research’s 2022 Economi…

A critical component of the Biden agenda involves the targeting of investments to mitigate
place- and race-based inequities. A sizable share of the Presidentʼs child-care reform agenda
flows through state programs to subsidize care for low-income families. Many of the
Presidentʼs housing reforms are directed at disadvantaged communities with deteriorating
housing stocks or a dearth of a ordable homes. Historically Black Colleges and Universities
also receive billions in support through the Presidentʼs agenda.
This targeting has two notable impacts. The first is that it promises to mitigate place- and
race-based disparities that have plagued our economy for far too long.
The economics literature shows these impacts could be substantial. Take, for example, the
proposed expansion in the Earned Income Tax Credit, or EITC, for childless adults. This
expansion is means-tested and thus highly progressive across the income distribution. The
EITC, however, also has outsized impacts for racial minorities, owing to the relatively high
prevalence of low-income Black households and the Creditʼs ability to impact Black workersʼ
labor market participation. Looking at the impact of the EITC since its inception, recent
research by Bradley Hardy, Charles Hoyakem, and James Ziliak found that the EITC
significantly closed racial income disparities across much of the income distribution.
A second potential impact of targeting is its potential to meaningfully boost aggregate
economic growth. For example, Mary Daly and co-authors simulate the economic production
surrendered to racial inequity over the past three decades and find that more equitable
education and labor market inclusion would annually add 760 billion to the economy. And
while it would be unreasonable to suggest that any single reform package would fully equalize
labor market outcomes for white and non-white workers, this calculation is suggestive of
meaningful gains.
Further evidence of the growth-boosting potential of targeted investments to reduce place
and race-based inequality comes in a recent paper by Chang-Tai Hsieh, Erik Hurst, Pete
Klenow, and Chad Jones. These researchers estimate that between 20% to 40% of gains in
economic output between 1960 and 2010 can be explained by inclusion of women and racial
minorities in highly skilled occupations, such as the rising share of non-white doctors.
In conclusion, Iʼll note that the link between greater equity and stronger growth is one of the
reasons the Biden-Harris Administrationʼs economic agenda embraces racial equity as a core
component.

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Remarks by Secretary of the Treasury Janet L. Yellen at Stanford Institute for Economic Policy Research’s 2022 Economi…

Of course, there is no greater American ideal than providing equal opportunity regardless of
race; this moral imperative is given voice in the Declaration of Independence and protected in
the Constitution. But as a purely economic matter, righting inequities is also one of the most
promising growth strategies we have in our toolbox.
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