Click to watch the kick-off event for the Brookings Blueprints for American Renewal & Prosperity series, with a conversation focused on economic growth and dynamism.
The COVID-19 pandemic exacerbated many problems in the American economy and created new ones. Now, as a new presidential administration and Congress take office amid compounding historic challenges, Brookings’s Blueprints for American Renewal & Prosperity provide a series of innovative, implementable federal policy proposals. In the essays focusing on Economic Growth and Dynamism, Brookings scholars lay out policies that would rebuild the economy and provide more security and prosperity to workers and businesses.
William G. Gale
The Arjay and Frances Fearing Miller Chair in Federal Economic Policy
Senior Fellow - Economic Studies
Director - Retirement Security Project
Co-Director - Urban-Brookings Tax Policy Center
Senior Fellow - Brookings Metro
Senior Research Assistant - Tax Policy Center
Before the COVID-19 pandemic, the economy was running “hot,” with unemployment at a historically low rate, but there were clouds on the horizon. Slowing overall growth foreshadowed an uncertain economic outlook. The unsustainable federal budget created potential long-run concerns. The secular rise in income and wealth inequality exacerbated tensions that ran across many policy issues – a list including education, childcare, and health care.
And then COVID-19 hit, and the economy took a dive. Despite the severity of the crisis, Congress provided just one round of relief and stimulus. The federal budget deficit and debt rose substantially. The unemployment rate rose most among lower-income earners, women, minorities, and workers in industries most affected by public health measures: service, education, and hospitality, among others. The possibility of a K-shaped recovery—where the overall economy recovers, but many Americans already most affected by the COVID recession are left even further behind—looms large. The pandemic has made both economic inequality and the importance of policy interventions more evident.
With these considerations in mind, the Economic Growth and Dynamism series presents analysis and proposals that fall into three categories: improving fiscal and monetary policy; generating productivity and growth; and boosting the middle class. These issues now stand revealed as critical priorities for a nation in transition.
Fiscal and monetary policy
To start with, the need for relief—and likely stimulus—spending during the pandemic has sharpened questions of fiscal and monetary policies. The pandemic motivated aggressive relief spending in March with the CARES Act, which greatly boosted government spending on a temporary basis. The recession and policy responses to it raised federal deficits and debt to new highs. But now, even though the economy is still floundering and people are struggling, the assistance has largely run out. Can we afford more, given the long-term fiscal status of the federal government? Yes, say Senior Fellow William G. Gale and Senior Research Assistant Grace Enda in their brief. New interventions could take a variety of forms—including unemployment insurance, aid to state and local governments, stimulus checks to households—and would help the economy recover. The costs would be relatively low given how much interest rates have fallen. At this point, costs of too much stimulus are far less than too little—countries have historically tended to cut off stimulus too soon, extending the duration of economic slumps. Eventually, the long-term budget shortfall needs to be addressed, but it should not stand in the way of new stimulus policy today.
For his part, Senior Fellow William Galston focuses on the format of economic stimulus and calls for a new approach to economic stabilization funding so that the relief comes more quickly. State and local governments occupy a crucial space in the fiscal world because they provide many of the most important human services, including education, health, and welfare. At the same time, they are constrained by balanced budget rules that force them to cut spending (typically on those crucial services) or raise taxes when recessions hit. These responses are not only counterproductive on economic grounds since the policies will exacerbate any economic downturn, but they are also objectionable on humanitarian grounds, forcing the cuts on the people who need to aid the most.
Galston argues that Congress should preauthorize economic stabilization measures, the size and timing of which would be determined by quantitative triggers. When a state’s unemployment rate increases by a legislatively defined amount, the federal government’s matching payments for Medicaid and CHIP would automatically increase, and the state would qualify for extended and enhanced unemployment insurance as well. Direct assistance would be released on a state-by-state basis so that those experiencing disproportionately large economic hits would get more per capita. Assistance would go directly to localities as well. As the downturn abates, the extra federal aid in these three categories would be scaled back and would go to zero when conditions have returned to normal (as defined by legislation).
Among its many other effects, the COVID-19 pandemic has called into question the resiliency of Treasury liquidity in high-stress periods. In March, as concerns spread about the impact of COVID-19 on the economy, the prices of Treasury securities fell alongside equity and corporate bond prices, breaking the typical flight-to-safety pattern and necessitating dramatic interventions by the Federal Reserve in bond markets. Concerned about such disturbances, Senior Fellow Nellie Liang and the Bank Policy Institute’s Pat Parkinson explain in their brief that resilient markets for U.S. Treasury securities are essential to the strength and stability of the U.S. economy. Robust market of liquidity reduces the interest rate on federal debt; ensures that Treasuries can be an effective safe haven when asset prices fall; and makes them the benchmark against which risky assets are priced. To increase the supply of bond market liquidity in times of stress in order to preserve these benefits, the authors propose four complementary measures. First, a new Federal Reserve standing repo facility that would serve as a backstop for the U.S. financial system by providing funding to regulated dealers based on U.S. Treasury and agency collateral; second, serious consideration of a mandate for wider use of central clearing for Treasury securities; third, targeted changes to bank regulations that may be limiting market-making while not materially improving the strength of these firms; and, fourth, collection and disclosure of data to better monitor funding risks and leverage of dealers and non-bank financial intermediation. These measures would enhance the provision of liquidity to Treasury markets by increasing the market-making capacity of dealers, which would allow them to accommodate clients’ needs in abnormal periods, providing opportunities for smaller independent dealers to expand and diversify the provision of liquidity on the margin.
Spurring economic growth
Moving beyond issues surrounding the fundamentals of monetary and fiscal policy, Senior Fellow Martin Baily notes that once the pandemic is under control, the challenge of raising the long-run economic growth rate will resurface. He proposes several approaches that, in combination, could spur long-term growth: worker training and re-training to create a more productive, more inclusive economy; immigration reform to bolster the growth rate of the American workforce, including innovators who drive America’s technological leadership from Silicon Valley; public financing of loans and grants for struggling companies to help businesses and the economy; and finally, additional federal funding for research and development, given the weakness in manufacturing productivity described in this report.
Digital technologies offer another opportunity to generate productivity growth. Visiting Fellow Zia Qureshi illustrates how the COVID-19 pandemic reinforces rising inequality as it accelerates the uptake of automation. To counter this trend, the innovation economy must be broadened to disseminate new technologies and productive opportunities among smaller firms and wider segments of the labor force—democratizing innovation. Further, competition policy should be revamped for the digital age with more antitrust enforcement—and issues revolving around data, digital platforms, and monopolization—must be addressed, says Qureshi. To tackle this new agenda, the FTC or a new federal regulatory unit should strengthen the regulatory framework for digital markets. Updating the century-old patent system, making more public investment in research and development, reskilling workers, and strengthening the foundation of digital infrastructure and digital literacy would have several auspicious effects: delivering both more robust and more inclusive economic growth by allowing more firms to participate in the innovation economy and ensuring workers can use technological advancements. This technology policy agenda can reduce inequality and economic insecurity more effectively than fiscal redistribution alone.
The pandemic has also made the need for better support to institutions of higher education and better worker training and protection more urgent and apparent. Institutions of higher education were challenged by falling enrollment and a transition to online instruction. Additionally, the pandemic will alter the demand for skills by accelerating trends toward automation, making the recovery for those already in the labor market more difficult. With those changes, as well as the ongoing pandemic putting workers at economic and physical risk, policies have done little to support private-sector unions—a traditional source of training and protection for workers. Brookings Fellow Kristen Broady and Research Assistant Moriah Macklin and former Research Assistant James O’Donnell propose increased federal funding for institutions of higher education and a government commitment to providing broadband access for students—a necessity for training especially during the pandemic. Additionally, new federal policies can encourage these institutions to support worker training by teaching skills valued by employers. For those in the workforce, a shift towards a sectoral bargaining union system would provide higher wages and worker protection, reduce employee turnover, and provide more formal and informal opportunities for worker training. Worker training and labor reforms will help people and businesses adapt to a post-COVID economy
Finally, COVID-19 has highlighted the chronic economic problems facing millions of Americans. Over the last few decades, middle class incomes, after taxes and benefits, have grown half as fast as those of both the rich and poor. Senior Fellows Richard Reeves and Isabel Sawhill posit that to provide immediate assistance to the middle class, Congress should eliminate income tax for most middle-class households by raising the standard deduction to $100,000 (for a married couple). For longer-term assistance, in terms of economic mobility, the government should provide two years of post-secondary education for free in exchange for a year of national service. Additionally, the authors outline a broader pro-work policy agenda for the middle class—a higher minimum wage, worker tax credits, incentives for training, and a fiscal and monetary plan to achieve full employment. To fund these initiatives, the authors call for higher taxes on carbon, capital, and consumption—effectively a reform of the U.S. tax code—founded on clear principles of fiscal prudence and fairness, with the goal of rewarding work, improving the environment, and meeting the specific needs of workers and the middle class.
In the United States, the neighborhood in which one lives has always influenced one’s access to economic opportunity. Place-based inequities by race and income—stemming from decades of discriminatory policies and practices—have only become more exposed, and more devastating, amid the health and economic fallout of the COVID-19 pandemic. On the whole, place-based policies aimed at addressing social and economic disparities have made few dents in the systematic exclusion of people and neighborhoods. Senior Fellow Jennifer S. Vey, Fellow Tracy Hadden Loh, and Kresge Foundation Presidential Fellow Elwood Hopkins put forth a specific, actionable proposal for how the federal government can partner with state and local governments to facilitate the local ownership of real estate in disinvested urban and rural commercial corridors, many of which have been hit hard by the COVID-19 economic downturn. To strengthen communities, the federal government should establish and capitalize state revolving loan funds that would provide direct seed capital to locally managed neighborhood investment funds that allow residents—together with other investors—to purchase and develop or redevelop land or buildings in communities meeting recommended criteria. Cities and regions will not overcome the impacts of COVID-19 and longstanding economic inequalities unless they grapple with how structural disadvantages associated with place diminish economic opportunity. The program proposed here would address place-based inequities head on by supporting investment in real estate projects through structures that encourage locally led growth and revitalization from which community residents can materially benefit.
As a group, the Economic Growth and Dynamism series of Brookings Blueprints for American Renewal & Prosperity puts forth recommendations to meet immediate and long-term goals. Managing and recovering from the COVID-19 crisis requires a commitment from the new Biden-Harris Administration and Congress to relief and to inclusive growth. The essays in this series propose a number of ways our leaders can respond cogently to the lessons learned from a tumultuous year and work towards a fairer and more prosperous future. Beyond this series, our colleagues’ Blueprints for American Renewal & Prosperity offer additional ideas for an economic recovery that benefits vulnerable workers, communities of color, and the environment.