What a strong economy can and can’t fix

The U.S. has recovered from the COVID-19 pandemic’s economic disruption with a strong economy, but a strong economy alone doesn’t address all the challenges Americans face. As part of the Brookings Election ’24 initiative, Wendy Edelberg talks about where the economy is doing better – increasing wages, decreasing inflation – and other areas where social policies can step in to fill the gaps on housing, child poverty, and more.

TRANSCRIPT

PITA: You are listening to The Current, part of the Brookings Podcast Network. I’m your host, Adrianna Pita. Leading up to the U.S. elections in November, Brookings aims to bring public attention to consequential policy issues confronting voters and policymakers. You can find explainers, policy briefs, other podcasts, and more. Plus, sign up for the biweekly email by going to brookings.edu/election24. In today’s episode, we’re talking with Wendy Edelberg, senior fellow and director of the Hamilton Project here at Brookings, about some of the economic issues facing voters and policymakers in the run up to the election. Wendy, thanks for talking to us today.

EDELBERG: I’m delighted to be here.

PITA: So the $64,000 question of the year, of the election, is not just how is the economy doing, but how do people think the economy is doing? Now, I realize I’m being a little unfair because reams have been written about this, we had a whole event, and I’m giving you one question about what’s your take on that gap between macroeconomic indicators and people’s experience of the economy? How much of it is actually economic areas, how much of it is communication issues?

EDELBERG: So maybe part of the answer is that it’s not really a $64,000 question. It’s a $64 million question now. So, part of the answer surely has to do with inflation and that people just hate inflation. And when I say inflation, if you’re thinking carefully about that, you’ll think I’m talking about an increase in prices. Inflation is all about how much prices are growing period after period. But surely people hate that. And we had bouts of very significant inflation that is largely in the rearview mirror, but what we’re left with across a lot of goods and services is higher prices. Just the level is higher. And everybody knows that if they walk into a store with a certain amount of money in their pocket, that they would be better off if the price on the shelf was lower. Like, that’s just a truism. And you don’t think that if the price on the shelf were lower, then you may well have less money in your pocket. That’s just not how the brain works. And so higher prices are just bad. And I think that is surely why some people have a really negative response to how the economy is doing right now.

That said, across a number of dimensions, the economy is doing quite well. The labor market is doing well. We have a lot of investment in different areas. As much as the housing market has been hammered by monetary policy being as tight as it is, the housing market has also been remarkably resilient. There’s a lot to like about this economy, and inflation is running at about 2.5%, which is within spitting distance of the Fed’s target of two. So, it’s a pretty strong economy.

I would never in a million years want to convince somebody that they have the wrong impression of the economy. My guess, my intuition, just doing a little of my own navel-gazing and stepping outside of my lane as an economist, is that I think there’s a lot of anxiety about what the future holds. And if you’re a person paying attention to political events, you’re either going to be on one side of those events and one side of what’s happening politically, and think the future might be dire, or you might be on the other side, and think the current reality is dire. In either case, whichever side of that debate you’re on, that’s anxiety-producing. So, I think that’s part of it. And then maybe inching back into my lane as an economist, I think the other part of the problem is that there’s a fair bit of anxiety about what the future economy holds. Our economy looks different now than it did before the pandemic, and we’re all grappling with how much do we work at home? How much do we go into the office? Do we finally need to redo our homes to make our homes more acceptable for just working at home 2 or 3 days a week? How does that work? Are we ever going to have business travel again? Are we ever going to have gyms again? I mean, there’s a lot about the economy – you know, I’m touching on maybe surface things, but there’s a lot quite fundamental about the economy that’s still a little up in the air.

PITA: All right. One of the criticisms about the recovery that came out of the Great Recession was that, sure, the jobs eventually came back, but so many of them were minimum wage jobs. And so, people had work, but that maybe wasn’t enough to provide for them. What is the recovery now looking like in terms of wage gains, in terms of the type of work that people can get?

EDELBERG: So, there are two ways that we can think about what’s happened to wages over the past couple of years. One is that we can look at what’s happened to wages for a particular job, and we put out a piece not so long ago about it really depends on which wage measure you use, depends on which inflation measure to use, if you want to think about are wages growing faster than prices or vice versa. But generally speaking, on the whole, wage growth for a particular job relative to prices have done okay, but not great. Now for some jobs, particularly, remarkably, lower-wage jobs, wages have actually done pretty well. But I think that only tells part of the good news story, which is one of the big developments in the labor market we saw over the last few years was people quitting their previous jobs and taking new jobs, in crazy big numbers. And it looks from the data like people were jumping to better jobs. They were taking opportunities that weren’t available before. And getting what we call as economists better matches, more productive matches with higher wages. So, we’re not going to capture that in data that looks at the wage of a particular job. But what we are seeing are nice increases in income. And so I think even here there is a nice bit of good news on what’s happening to people’s income.

PITA: I haven’t heard anyone say the “Great Resignation” actually had a good side. So that’s a fantastic analysis.

EDELBERG: It was a very good thing. It was incredibly disruptive. It’s a little painful for an economy to throw all of the workers up in the air and see where they all land, when they come back down to earth. Wouldn’t have chosen that for our economy, but it probably left us in a more productive place.

PITA: Okay. One of the things you touched on your first answer was the question of housing. And as you mentioned, COVID-era inflation and a lot of other factors has cooled off, but housing costs remain high. What are some of the factors driving that, and what are some of the policies that can make a difference there?

EDELBERG: Okay, bunch of stuff to say here about housing costs. So, I think we’ve had, in terms of the drivers of why we’ve seen strong increases in rent, first, I should say we don’t really know, but we’re all kind of grappling around and trying to figure this out as the evidence comes in. It certainly looks like there was a very significant change in preferences for housing. And this comes back to what I talked about with working from home. We really changed how much space we want in our homes and what we’re doing with our homes, and we want to live here and not there. And housing construction, for reasons I’ll come to in a minute, is pretty slow to keep up with changes in demand. So that’s part of it. Another part of it is that we’ve actually seen over the course of partly 2022, very much so in 2023, a very big increase in immigration. CBO estimates that almost 3.5 million people on net immigrated to the United States last year. That’s a really big number, and that is surely putting upward pressure on rents. It’s hard to know exactly how much, because it’s hard to know how quickly those new immigrants are forming new households. Are they doubling up with family members or are they doubling up together? But nonetheless, directionally, I am super confident that the increase in immigration led to higher rents.

And then on the flip side, now let’s talk about supply. So, I would not even remotely be the first person to point out that zoning restrictions in various localities has been a massive impediment to increases in housing supply. Some communities are starting to make some headway on this, and maybe they’re showing the way to other communities, but it has just meant that supply has been way too slow. So, one thing that we know is for low-income households, the share of those low-income households who are paying more than a third of their income in rent is much too high, and it’s rising. We know that the share, the number of people who are single and are unsheltered, living on the streets, has risen about 50% since before the pandemic. And this is in the context of a very strong economy. So, I actually think this gives us some clarity of what a strong economy can fix and what a strong economy can’t fix. We have a strong economy and we still have far too much housing instability. This, to me, shows a clear and obvious place where we need better policies. A strong economy is not going to fix the housing market.

PITA: What are some of those policies that you would love to see?

EDELBERG: Well, if you want to give me the magic wand, we need to do a complete overhaul of zoning restrictions. That will help increase supply. We need to empower communities to do more with blighted areas, to make sure that there’s housing being built in the places people want it, and we’re getting rid of blighted housing stock where people don’t want it. In terms of making housing more affordable, I know that there’s a lot of policies out there on the table to help subsidize homeownership. I’m actually way more interested in policies that help renters who are housing insecure. I think that that’s where the low-hanging fruit is for policy. So, the fraction of people who should be eligible for housing vouchers but get them is just embarrassingly low. And it’s because housing vouchers in the U.S. are way underfunded. We just need to do more to help our most vulnerable.

PITA: On a similar train of thought, talking about the anxieties that people have about the economy, there’s the big question about who is the economy working for, right? We see headlines about record corporate profits, and then we turn around and see the same tech companies laying off lots of workers. The video game industry right now in particular is having some really scary numbers of layoffs. We also see stories about some cities and regions that are doing really well, and other cities and regions that are being more left behind. What’s sort of your take on this idea about when we say the economy’s doing well, who’s being left out of that?

EDELBERG: First I want to say, even though I’m going to offer a bunch of caveats to this, I actually do think the economy is working pretty well. So, the unemployment rate is 3.9% on average. Now, it’s not the same rate for every demographic group, but in general, for most demographic groups, if 100 people show up and want work, in the ballpark of 95 of those people can find work. That’s pretty good. And as I said, wages are doing pretty well. So, I think, broadly speaking, the economy’s doing okay. Echoing a point that I made before, if we look at which kinds of families are still dealing with a lot of financial anxiety, even in the context of this really strong economy, I think it tells us where a strong economy just isn’t going to do it. And we need better policies. So, for example, in the latest readings, child poverty rates after taxes and transfers were about 12.5%. That’s embarrassing. We’re a really rich country. What the heck. 12.5% of our children after taxes and transfers are in poverty. The Black-white wealth gap is also embarrassingly huge. So for every $100 that the average white family has in wealth, the Black family, according to estimates by my colleague Andre Perry, has about $15 in wealth. And a strong economy on its own isn’t going to close that gap. It’s not going to bring parity in wealth between Black families and white families. We need policies. And so — both federal policies and state and local policies. So, where you look at who this economy isn’t doing enough for, it doesn’t mean let’s run the economy hotter. It means let’s fix our social insurance system. Let’s fix our tax system. Let’s make sure that every child in this country starts out with equal opportunities, regardless of the accident of which parents they’re born to. These are places for policy to step in.

PITA: So, you’re sort of already getting into my final question, which is, say, what are some of these missing pieces? If you had your magic wand, what’s the area you think policymakers should be focusing on more or next? What are the priorities?

EDELBERG: So, since I’ve talked so much about the kinds of social policies that I think if I were in charge, we were put in place, I want to go up another thousand feet as to what I wish policymakers were doing more in terms of the policy conversation. And that’s trying to communicate to people and elicit from people what kind of federal government – or state and local government; my lens is always the federal government – what we want government to do for us. I don’t think that we have anything close to a national consensus on that. So, I think we talk sort of piecemeal about we want the government to do this on Social Security. We want the government to do that in helping children have access to health care. We do it in all of these piecemeal ways. But I think we just need to have a national conversation of how we want the federal government to support people, to support the economy, to affect the distribution of income and wealth. I’m not naive. We’re not going to have that conversation. But if I had a big wish that could come true, it would be that we decide as a country what kind of government we want. Because then, frankly, I think the conversation about how to fund it becomes a whole lot easier. First, we have to decide we value it. Then there’s the obvious step of, well then, gee, we need to pay for it. And then, okay, let’s go to the technocrats and like ask them what are different ways that we can pay for it and how should we do the tax system. But first we need that first step of what do we want the government to do for us.

PITA: Like you said, the $64 million question, only, maybe even more at that point. All right, Wendy, thank you very much for talking to us today. We’ll have links to some of the pieces that you mentioned for our listeners to find on the show notes. And again, they can go to Brookings edu slash election 24 for more information about the policy areas that are priorities for this election. Thank you.

EDELBERG: Yeah. Thank you.