Publications Archive • Page 24 of 32 • The Aspen Institute Economic Strategy Group

Book: Economic Policy in a More Uncertain World

The Aspen Economic Strategy Group’s Annual Policy Volume Economic Policy in a More Uncertain World marks the group’s 5th anniversary and is released against a backdrop historic economic and strategic uncertainty. The book’s seven chapters, each written by leading experts and edited by AESG Director Melissa S. Kearney and Deputy Director Amy Ganz, provide a deep-dive on long-term economic headwinds confronting the country, including demographic changes—declining fertility and population aging—and what a smaller worker to population ratio means in terms of slower economic growth, reduced revenue, and lower productivity growth. Additional chapters on the US immigration system and US innovation policy highlight potential solutions for countering these trends. Another chapter explores potential adverse impacts on local labor markets from the green energy transition and highlights policies to avoid repeating painful mistakes of the past, including the response to the decline of the coal industry and rise of globalization and automation. A final chapter highlights lessons learned from the unprecedented federal aid to state and local governments during the COVID-19 pandemic.

AESG co-chairs Henry M. Paulson, Jr. and Timothy Geithner lay out the stakes for the US economy in a foreword by asking: Can US firms continue to innovate the technologies of the future? Will the recent push for industrial policy help or hurt American firms? To what extent can public policy alter America’s demographic trends?

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Aspen Economic Strategy Group Releases New Policy Analysis on Why and How to Expand US Immigration

Immigration helps address the US’ growing demographic challenges posed by declining fertility and aging population and spurs economic growth

Contact: Kelly Friendly
kellyfriendly@gmail.com

Washington, DC — December 6, 2022 — The Aspen Economic Strategy Group (AESG) today released a paper, “Why and How to Expand US Immigration”, by Tara Watson, the David M. Rubenstein Fellow at the Brookings Institution, showing immigration can help address the demographic challenges in the United States and spur economic growth. The paper will be included in the AESG’s policy volume “Economic Policy in a More Uncertain World” which will be released in January 2023 to mark the fifth anniversary of the founding of AESG.

“The evidence is overwhelming that well-designed immigration reform is our best hope for spurring economic growth and helping the United States confront the growing demographic challenges we face from declining fertility,” said Watson, who makes clear policy recommendations within the paper, including:

Gradually expand legal family immigration each year, expand employment-based migration opportunities, and loosen per-country caps
Shift towards permanent rather than temporary migration pathways
Discourage visa overstays and penalize employers who hire unauthorized immigrants
Offer relief to long-term undocumented residents
Redistribute funds to localities and individuals adversely affected by immigration
Fund the bureaucratic infrastructure so that the system functions smoothly

Watson aims to inject fact-based economic analysis into a policy debate that is often characterized by political extremes. The paper describes economic benefits of immigration for the US economy, including:

The foreign-born population participates in the workforce at a higher rate than native-born Americans and are more likely to move to areas of greater economic opportunity.
The federal government also gains from payroll and income taxes paid by immigrant workers, who often consume less in government benefits relative to what they pay in.
Immigrants can help the US address its growing demographic challenges posed by population aging and declining fertility.

The paper calls for policies to help individuals and communities who are adversely impacted by immigration, including workers at the bottom of the US income distribution and state and local governments in immigrant-heavy areas.

Watson portrays an immigration bureaucracy overwhelmed by administrative backlogs and outdated policy. For example:

In 2021, an estimated 250,000 green cards were “wasted” when permanent admissions authorized by law were not processed and cannot be used in future years.
The backlog of pending green-card and other permanent adjustment-of-status applications grew from 3 million in 2013 to 8.4 million in 2022.
Quotas for family preference migration and employment-based admissions have not been updated since 1990.

Congress has not authorized any significant immigration packages since 1996 and this inaction has led local authorities to take action, resulting in an immigration policy that is inconsistently enforced throughout the country. The paper calls for bipartisan comprehensive reform as a necessary step towards a functional immigration policy.

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Executive Summary

The Aspen Economic Strategy Group (AESG), a program of the Aspen Institute, is composed of a diverse, bipartisan group of distinguished leaders and thinkers with the goal of promoting evidence-based solutions to significant U.S. economic challenges. Co-chaired by Henry M. Paulson, Jr. and Timothy Geithner and Directed by Professor Melissa Kearney, the AESG fosters the exchange of economic policy ideas and seeks to clarify the lines of debate on emerging economic issues while promoting bipartisan relationship-building among current and future generations of policy leaders in Washington. More information can be found at https://economicstrategygroup.org/.

The Aspen Institute is a global nonprofit organization committed to realizing a free, just, and equitable society. Founded in 1949, the Institute drives change through dialogue, leadership, and action to help solve the most important challenges facing the United States and the world. Headquartered in Washington, DC, the Institute has a campus in Aspen, Colorado, and an international network of partners. For more information, visit www.aspeninstitute.org.

COP27 and Climate Inequality

Much of the conversation at COP27 has focused on economic compensation and assistance for developing countries who will likely bear the greatest damages from climate change but contribute little to overall global emissions.

If carbon emissions are left unaddressed, the climate crisis will not only become more costly to global health and the global economy, but also will exacerbate inequality within the U.S. and around the world.

Projected changes in the frequency and severity of climate events vary starkly across local geographies and how these changes manifest is a major factor in shaping the economic impact of climate change around the world.

In a high emissions scenario, climate change could cost the U.S. 1.4 percent of GDP by 2030, growing to 2.4 percent of GDP by mid-century.

But climate change damages are also uneven and unequal. Hotter places tend to be poorer and less developed, leaving them vulnerable to the most pronounced effects of climate change without the resources needed to adapt.

Figure 12. Mortality Damage Function and Projected Change in Death Rate

Figure 14: Those Least at Fault Are Most at Risk
Countries’ share of current GHG emissions and projected increases in mortality from climate change by income quintile

To combat these challenges, AESG Author Trevor Houser emphasizes adaptation. In the US, this means preparing for the irreversible effects of climate change, including making coastal communities in the U.S. more resilient, expanding access to low-cost air conditioning, promoting climate-resistant crops in the plains states, and reducing wildfire risk.

As COP27 leaders negotiate over who will bear the costs of adaptation globally, they must also prepare for the reality of large-scale climate displacement.

This post is adapted from Trevor Houser’s chapter, “Climate Convexity: The Inequalities of a Warming World” featured in the Aspen Economic Strategy Group’s 2020 annual policy volume.

Will the climate incentives in the IRA be enough to meaningfully reduce emissions?

The Inflation Reduction Act of 2022 (the “IRA”) represents Congress’ most substantial attempt to date to lessen American reliance on fossil fuels and to transition the country’s power supply toward zero-emission sources. Per the Joint Committee on Taxation’s estimate, the Act commits approximately $369 billion toward measures aimed at improving energy security and mitigating the ongoing and multiplying effects of climate change. The IRA relies predominantly on market-based incentives, including tax credits, direct subsidies, and other carrots to induce private investment in renewable energy sources, rather than on emissions caps, carbon taxes, or other sticks to penalize the continued use of fossil fuels.

This approach is in tension with the conventional economic wisdom that carbon pricing is the most efficient and cost-effective way to reduce carbon emissions, compared to alternatives such as clean energy subsidies or a clean electricity standard. In his 2021 AESG paper, “Harnessing the Power of Markets to Solve the Climate Problem,” Gilbert E. Metcalf of Tufts University advocates for a deterrent-based approach to emissions reduction. According to Metcalf, a serious and cost-effective response to climate change must include a carbon tax as its centerpiece, in addition to policies that “encourage greater amounts of zero-carbon research and development, regulations to reduce [greenhouse gasses] not easily included in a carbon tax, and various initiatives to reduce barriers to the transition away from fossil fuels.” While the IRA makes significant efforts toward these intermediary steps, Congress’ failure thus far to impose either a carbon tax or a cap-and-trade program may, according to Metcalf, prove insufficient for achieving net-zero carbon emissions in the coming decades.

There may be cause for optimism, however, that the IRA’s incentives-based approach will make greater inroads toward an American power supply that relies less heavily on carbon emissions. In their 2021 AESG paper, “Challenges of a Clean Energy Transition and Implications for Energy Infrastructure Policy,” Ryan Kellogg of the University of Chicago and Severin Borenstein of UC Berkeley concur with Metcalf that market-based incentives are necessary but not sufficient for decarbonizing America’s energy supply but stop short of recommending a carbon tax over other alternative incentives. They emphasize that decarbonization will require additional policy measures, including investment in and deployment of novel technologies; redesigning wholesale power markets; strengthening federal authority over long-distance transmission siting; and reforming retail electricity pricing.

Kellogg and Borenstein build on these ideas in a 2022 paper focusing on the electricity sector, which suggests that incentives such as a clean electricity standard and subsidies could result in a similar reduction in emissions from electricity generators as would a carbon price. Conventional wisdom has held that carbon pricing exerts the greatest economic toll on the heaviest polluters, while clean electricity standards instead ensure that polluters running the highest operating costs are the most affected. These standards were therefore thought not to account for the intensity of carbon pollution in determining which polluters first leave the market. But Borenstein and Kellogg find in their study that fossil fuel generators’ private operating costs are highly correlated with their emissions. Because the dirtiest fossil fuel emitters also incur the highest operating costs, they would as a consequence be the first to exit the market upon the imposition of clean electricity standards. In Borenstein and Kellogg’s model of the electricity market, a clean electricity standard that phases out fossil fuel generation achieves a similar effect on emissions reductions in the electricity sector over a similar time period as does a carbon tax.

In the same study, Borenstein and Kellogg suggest that clean electricity subsidies may also improve incentives to adopt cleaner energy. States with the cleanest electricity generation, including California and New York, also tend to have retail electricity prices that are much higher than marginal cost. To the extent that a carbon tax would further raise the retail price of clean electricity, this pricing scheme might discourage the adoption of cleaner energy sources; consumers, for instance, may be less motivated to replace their gas-powered cars with electric vehicles. Policies that reduce retail electricity prices through incentives, rather than raise such prices through taxes, may therefore be preferred on the path toward a zero-carbon energy grid.

What’s After the Downturn?

AESG member Lawrence Summers and AESG director Melissa Kearney join Bloomberg TV’s David Weston to discuss what comes after the potential downturn and what the risks are of running out of workers.

Introduction: Rebuilding the Post-Pandemic Economy

The COVID-19 pandemic plunged the US economy into recession, challenged the survival of millions of businesses, and threatened the economic security of American households. The recession officially lasted only two months, ending in April 2020, but looming economic challenges remain and the path of the post-pandemic recovery is uncertain. The US labor market recovery is slow, global supply chains are disrupted, the pace of vaccination in the United States has stalled, and emerging variants of the virus threaten a return to pre-pandemic normalcy.

The pandemic also ushered in major changes to the US economy, many of which may persist even after the pandemic recedes. The sudden shift to working from home, changes in consumers’ preferences and habits, and the acceleration of technology adoption by businesses may have lasting effects on economic growth and inequality—for better or worse. Widespread school closures and the shift to remote instruction has impeded the educational and social development of US children and exacerbated already large disparities in learning, with potential long-term negative consequences.

At the same time, the pandemic and accompanying economic crisis prompted an unprecedented US policy response. Congress authorized trillions of dollars in spending to support businesses and households, staving off business failures and bolstering household income and savings. With aggregate demand now increasing, the US economy faces a new set of challenges—among them a higher inflation forecast driven by both demand and supply factors. The Biden administration and congressional Democrats are calling for trillions of dollars in federal spending on an ambitious package of health, education, early childhood, and climate initiatives, in addition to the $1 trillion bipartisan infrastructure package passed by the Senate in August 2021. Critics worry about the size and scope of the package, as well as the prospect of further deficit spending and higher taxes.

Amidst these domestic challenges, the geopolitical landscape facing the United States continues to shift, in particular with China’s rapid ascendance as a major economic rival able to wield greater economic and political influence across Asia and the much of the world. The need to maintain American competitiveness in this changing global context highlights the need for well-designed investments at home, in infrastructure, in human capital, and in basic science and technology.
Rebuilding the Post-Pandemic Economy considers several current, major economic challenges facing the nation. Its eight chapters served as background reading materials for the Aspen Economic Strategy Group annual meeting in July 2021 and are now published as a resource for broader policy audiences.

Part 1 consists of five chapters that focus on various elements of the US economic recovery following the Covid-19 pandemic. Chapter 1 highlights productivity gains that could result from the sudden shift to working from home if US households were to have universal access to reliable, high-speed internet. Chapter 2 discusses lessons learned from the novel business recovery programs introduced during the pandemic and their applications for “garden variety” recessions. Chapter 3 presents strategies for preventing long-term unemployment and assisting workers whose jobs have been permanently lost as a result of sectoral reallocation. Chapter 4 discusses the underlying causes of longstanding inequities in the US K-12 education system, which were laid bare by the pandemic, and promising avenues for systemic improvement. Chapter 5 addresses the current state of American trade policy, including reforms to promote American geopolitical interests and economic recovery.

Part 2 consists of three chapters that focus on the US infrastructure agenda. Chapter 6 addresses the economics of infrastructure investment, emphasizing the central role of cost-benefit analysis in selecting projects. Chapter 7 focuses on federal regulatory reforms and infrastructure investments necessary to support the US economy’s transition to clean energy sources. Chapter 8 makes the case for greater federal investment in research and development (R&D) based on the extremely high social return on such investments and their role in promoting broader innovation and prosperity.

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Foreword: Rebuilding the Post-Pandemic Economy

After suffering the worst economic shock since the Great Depression last year, the American economy is recovering in fits and starts. While many businesses are reopening their doors and thriving, others are struggling with tenuous demand, supply constraints, and higher labor costs. Americans are traveling, dining out, and resuming other activities that weren’t possible before vaccines. Yet, remaining uncertainty about the course of the virus continues to hamper a full return to normal activity.

The COVID-19 pandemic reinforced and exacerbated many of the biggest structural economic challenges in our society. It precipitated the largest economic relief and stimulus spending in US history and rewrote the playbook for responding to future economic crises. The pandemic also transformed the way that millions of Americans live and work, with automation, e-commerce, and telework all playing a bigger role.

The pandemic and its aftershocks reignited not only the perennial debates about the appropriate role and size of government, but also present new and urgent questions about how the post-pandemic economy will take shape.

What are some initial lessons we can take away from the novel government programs that were deployed to provide economic relief and stimulus? What kinds of investments do we need to make to our infrastructure so that it is once again the envy of the world? After a year of widespread school closures, what have we learned about the role of K-12 education in perpetuating or reducing social and economic inequities? And how should American trade policies evolve to promote economic recovery and strengthen America’s role in the global economy?

None of the answers to these questions are predetermined. The choices and actions of policymakers in Washington and around the country can and will make a difference.

This book is an attempt to elucidate some of the challenges and opportunities of the post-pandemic economy. At its core, it underscores that the challenge for economic policymakers is not simply to return to the pre-pandemic economy—rather, it is to rebuild an economy that is more prosperous, dynamic, fair, and resilient to future shocks in the post-pandemic era. We hope that the non-partisan, evidenced-based research and recommendations contained in this volume are helpful towards this end.

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Data-Driven Opportunities to Scale Reemployment Opportunities and Social Insurance for Unemployed Workers During the Recovery

Job loss during recessions can have long-lasting, negative consequences for workers and their families. In particular, long-term unemployment—and the associated exhaustion of unemployment insurance (UI) benefits—is associated with sustained income loss and increases in poverty. Workers who are less-educated, racial and ethnic minorities, younger, and female are especially at risk of economic hardship and adverse long-term consequences from job loss and long-term unemployment.

In the AESG report “Data-Driven Opportunities to Scale Reemployment Opportunities and Social Insurance for Unemployed Workers During the Recovery,” economist Till von Wachter (UCLA) describes four immediate policy actions that could be taken to better insure and reintegrate workers at risk of long-term unemployment during recessions. Most, if not all recommendations, could be implemented by specific actors at the federal and state level without establishing new programs or creating new funding streams.

They include:

Harness states’ UI systems and similar large social programs to scale and target income support and workforce services to workers at risk of poverty or of adverse consequences from job loss and long-term unemployment.
Expand and subsidize Short-Time Compensation programs to speed rehiring, reduce churn, and allow and encourage job-related training during the recovery.
Institute a trigger-based policy grounded in economic theory that automatically adjusts benefits and eligibility for UI benefits to raise recipiency and equity.
Reform the UI data infrastructure to enable data-driven UI and workforce policy and support effective and equitable real-time decision making.

CONNECTING AND TARGETING INCOME SUPPORT AND WORKFORCE PROGRAMS
Income support and workforce programs are underutilized by the most vulnerable workers who are most likely to benefit from them. Though funding for income support and workforce services is often available, many unemployed or low-income workers are not aware of programs for which they might be eligible. Von Wachter proposes enabling government agencies to coordinate together to reach out to targeted groups of at-risk workers with information about income support and workforce services. Von Wachter draws on the example of a novel outreach program deployed by California’s unemployment agency during the COVID-19 recession, which sent messages to unemployed workers about the availability of CalFresh benefits and California’s SNAP program through the online accounts that claimants access for certifying UI benefits.

Government safety net programs, such as state unemployment insurance offices and workforce training offices, often have data that could be used for proactive outreach to workers who are at greater risk of long-term unemployment. However, fragmentation among government agency databases and the lack of an adequate infrastructure inhibits this data from being used to connect with at-risk workers.

Von Wachter proposes to harness existing service relationships between large government programs and the data infrastructure used to provide services to quickly and effectively reach out to at-risk workers with information about additional income support and workforce services.
The most at-risk workers would be systematically targeted with information about income support and workforce services using the administrative individual data that is already used to assess UI eligibility. Von Wachter emphasizes the importance of evaluating the effectiveness of services to continuously improve targeting and service offerings.

IMPROVING EMPLOYMENT-BASED LABOR MARKET INSURANCE, KNOWN AS SHORT-TIME COMPENSATION
Short-Time Compensation (STC), also called “Work Sharing,” provides workers with partial UI benefits while they remain employed at reduced hours with full benefits. The program also provides employers with the opportunity to reduce labor costs by reducing employee hours while avoiding layoffs. Currently, STC allows firms to rehire previously laid off workers on a part-time basis. By temporarily subsidizing part-time work, STC provides flexibility to firms and helps to speed the rehiring process during the recovery. By limiting layoffs, it also helps to minimize the number of job seekers and crowding in the labor market during recessions.

Even if firms permanently reduce employment as a result of the recession, shifting such permanent layoffs into the future when the labor market has gained strength can reduce the long-term cost of layoffs for workers and society. More generally, STC insures workers against earnings losses over the business cycle by linking payments to employment rather than unemployment, helping to reduce work disincentives. STC also helps workers maintain eligibility for the EITC, leveraging the fact that many income supports in the United States are provided through the tax system.

A central challenge to the STC program, which is part of the UI program and available in more than 30 US states, is that it is not well known among employers. Although participating employers are satisfied by the program, there is a lack of awareness among all employers. To increase awareness and uptake among employers, outreach could be targeted to employers in the same ways UI data could be used to target at-risk workers.

To participate in STC programs, firms must first file an STC plan with the UI agency. The plan specifies the number of workers involved, the number of hours reduced, and the number of layoffs avoided. The administrative process of filing an STC plan can be burdensome for a single employer that does not know the program. Since payroll processors have to be notified of reductions in work hours, it makes sense to involve them in filing an STC plan, and because processors serve a large number of businesses, they would quickly gain substantial expertise in filing such plans. Additionally, businesses that operate in multiple states must comply with different STC program rules for each state, which can deter these employers from participation altogether. To avoid these complications, the US Congress should establish a unified set of rules for states’ STC programs and require the program in all states, which would also aid with scaling STC programs for payroll processors.

A third strategy for scaling STC programs is for Congress to require firms to participate in an STC program as a condition of receiving emergency business loans. While not all firms receiving loans will make employment adjustments, the fact that they applied for an emergency loan likely signifies the firm may need to do so during or after the period of the loan.

Von Wachter also argues that STC programs should be automatically subsidized by the federal government during recessions and that firms who participate in an STC program should be exempt from increases in payroll taxes due to a rise in UI receipt by their workforce.. Von Wachter argues the federal subsidy is necessary because firms are unlikely to internalize the social value of reducing layoffs and crowding in the labor market. In addition, enrolling in STC is more costly for firms than either full or partial UI because they must continue to pay for health care and pension benefits and incur administrative costs from joining the program. While in theory firms benefit from retaining skilled workers, the reality in a slack labor market is that firms are likely to be able to rehire laid-off workers.

Finally, von Wachter recommends allowing workers on STC to participate in training while their hours are reduced and while they are receiving partial unemployment benefits. He also suggests firms should be allowed to establish training plans as part of STC that would aim to increase the skills of the workforce.

ADJUSTING THE UI SYSTEM OVER THE BUSINESS CYCLE VIA AUTOMATIC TRIGGERS
There is widespread support among economists for automatically adjusting UI program benefits in response to changing labor market conditions, rather than relying on ad hoc action by US Congress and/or state legislation. The Extended Benefits program, which is available to workers who exhaust their regular unemployment benefits, incorporates triggers for additional weeks of benefits based on state employment conditions. Von Wachter recommends that increases in benefit durations during periods of high unemployment should be tied to automatic triggers. In addition, von Wachter also argues for automatically adjusting eligibility requirements and benefit levels over the business cycle.

Specifically, von Wachter recommends the following during recessions:

Use a measure of UI benefit exhaustion to design triggers for benefit extensions.
Automatically increase benefits to raise UI uptake and prevent hardship.
Broaden UI eligibility criteria, which plays an important role in determining UI access and should be relaxed during recessions to raise coverage and better assist claimants as they adjust to changing labor market conditions.

USE UI DATA AND RESEARCH TO ENABLE DATA-DRIVEN POLICY
Von Wachter suggests there is a wealth of data in the UI system that could be used to improve our understanding of the economy, the effectiveness of the UI program as a social insurance mechanism, and the administration of the UI program. In addition, the frequency of availability of such data is an advantage that policymakers should use to adjust decision-making quickly in response to changing conditions.

Von Wachter calls for modernizing reporting requirements of states’ UI systems to the US DOL to improve the ability to monitor the economy, assess the functioning of the UI system, and to provide accurate information about the UI program to the public and policymakers. He also recommends expanding data collection during the administration of UI benefits to improve program administration and better target workforce services. Creating a harmonized federal register of UI claims would allow for paying cross-states benefits, and more effective evaluation and research. Finally, von Wachter argues that researchers should be provided access to anonymized, individual-level UI claims for evaluation purposes and that state and federal agencies should develop long-term partnerships with academic and other research institutions to use the data for program evaluation and research.

Suggested Citation: von Watcher, Till. December 10, 2021. “Data-Driven Opportunities to Scale Reemployment Opportunities and Social Insurance for Unemployed Workers During the Recovery” In Rebuilding the Post-Pandemic Economy, edited by Melissa S. Kearney and Amy Ganz. Washington, DC: Aspen Institute. https://doi.org/10.5281/zenodo.14057494.

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Executive Summary