issue: Economy

Price Controls Won’t Fix What’s Ailing the Restaurant Industry

Posted on by The Progressive Policy Institute

The restaurant industry is hurting. Between February and April of last year, more than 6 million food service workers lost their jobs.1 As of December, more than 110,000 restaurants had closed permanently or long-term.2

The industry has some big chains, but most restaurants are quintessentially small businesses. More than 9 in 10 restaurants have fewer than 50 employees. More than 7 in 10 restaurants are single-unit operations.3 Restaurants also offer lots of entry-level jobs for less-skilled workers (almost one-half of workers got their first job experience in a restaurant).

There is almost no safe way to allow indoor dining during an outbreak of a lethal, airborne, and highly contagious virus. Customers must remove their masks to eat and restaurant dining is traditionally done indoors with tightly packed groups of people. Some restaurants have chosen to remain open by relying on pickup and delivery orders instead of indoor dining, and for certain kinds of food, like pizza, this is a natural extension of their previous business model. For others, it’s a difficult transition to figure out pricing and what types of food work for takeaway. Many restaurants rely on third-party services for aggregating online orders and for fulfilling the delivery to customers.

Delivery services have been one of the few sectors expanding during the pandemic, providing work for those who need it and helping many Americans stay safe during the pandemic. With the goal of helping restaurants, some states and cities have temporarily capped the commissions these platforms can charge restaurants for delivery. These price controls are popular with elected officials because they look like a cost-free way to help struggling restaurants, but their costs are hidden, not free, and will hit small restaurants and their workers hardest.

While well-intentioned, imposing price controls will slow the economic recovery in a sector that’s among the hardest hit by COVID. To understand why, it’s important to know how these platforms work. Food delivery services are multi-sided markets, meaning the platform owner is trying to connect multiple “sides” of the market in mutually beneficial exchange. In this case, the business is trying to connect three groups: drivers, restaurants, and consumers. The balance of fees, commissions, and prices on all three sides of this market is set to achieve a high volume of orders, meaning revenue for restaurants and earnings for delivery drivers. Price controls on one side of the market upset this delicate balance.

In general, most economists view price controls as an ineffective and inefficient means of achieving lower costs for underserved groups. In a classic example, rent control leads to underinvestment in construction and maintenance of housing. Landlords are incentivized to convert their apartments into condos or let friends and family live in the units. Under rent control, property owners often charge a large upfront payment to secure a lease. Economists are also skeptical of vaguely written price gouging laws or price controls on essential medical supplies during a public health emergency. A much better solution, many economists argue, is for the government to step in and pay the market rate (to encourage supply) and redistribute the goods based on need.

There is a narrow range of circumstances when price controls can be beneficial for social welfare. In static and monopolistic markets, price controls can make sense to prevent dominant incumbents from charging monopoly prices and harming consumers. A second exception to the rule is during a natural disaster or other emergency. If supply is extremely inelastic (meaning non-responsive to price changes) during a crisis, then price-gouging laws can be beneficial on net. But to be clear, these laws need to be precise and narrow in scope.
If the emergency lasts beyond a few days or weeks, then relaxing price controls might be necessary to encourage an increase in supply.

Neither of these exceptions applies to the food delivery market in this crisis. The market for food delivery services is highly competitive (aggregate profits in the industry are negative4) and the current public health emergency has already lasted for more than a year. Instead, we can expect price controls on food delivery to have the usual negative effect. And based on early data from the cities that have capped commissions, that’s exactly what’s happening.5 Companies are shifting the costs from restaurants to consumers in the form of higher fees, and because consumers are generally more sensitive to price increases, this is leading to a reduction in output in these markets.6 Fewer orders means less business for restaurants and less income for drivers.

There’s a better way forward. The federal government can provide (and has provided) direct bailouts of the businesses and their workers. Unemployed workers have received extended and bonus unemployment benefits. These benefits should be continued for the duration of the public health emergency. Restaurants should receive grants and loans so they can continue paying rent and other fixed costs while closed. These programs should be funded to the level that every restaurant can benefit from them. “Just give people and businesses cash” sounds simple (and expensive), but the alternatives are much worse. Providing no help to restaurants would force them to choose between closing permanently or staying open — thus exacerbating and prolonging the pandemic. Imposing price controls will likely lead to a reduction in output, harming consumers, drivers, and restaurants in the process. The answer is for the federal government to help bridge the gap to the end of the pandemic by continuing and increasing its support for workers and businesses.

INTRODUCTION: RESTAURANTS NEED HELP

The restaurant industry has been hit especially hard by the pandemic. COVID-19 is an airborne respiratory illness that spreads most easily when people are (1) indoors (2) unmasked (3) and close together for an extended period of time. Unfortunately, that description matches restaurants perfectly, which is why many states forced them to close indoor dining during various stages of the pandemic. It’s not the fault of restaurant owners or workers that they were unable to stay open, so policymakers have a duty to make them whole.

More than one in six restaurants have been forced to close permanently — about 110,000 establishments — according to data from the National Restaurant Association.7 Small local restaurants are doing much worse than large chains, which have the advantages of “more capital, more leverage on lease terms, more physical space, more geographic flexibility and prior expertise with drive-throughs, carryout and delivery,” according to the Wall Street Journal.8

 

Understandably, federal, state, and local governments are trying to support the restaurant industry during this difficult time. The federal government supported restaurant workers with extended and bonus unemployment benefits and it supported businesses through the Paycheck Protection Program (PPP) with $350 billion in April 2020 and $284 billion in December 2020.11 Of course, state and local governments, most of which have balanced budget rules12 (and none of which can print its own currency), are unable to serve as lender or insurer of last resort. Good intentions — the desire to help local restaurants — have unfortunately led some states and cities to adopt a shortsighted and counterproductive policy response: price controls.

San Francisco was one of the first cities to institute a commission cap on meal delivery services, limiting the fees they can charge restaurants to 15 percent.13 Seattle, New York, Washington, D.C., and other cities soon followed suit. As expected, the food delivery apps raised consumer fees in response. DoorDash added a $1.50 “Chicago Fee” to each order after the City Council capped restaurant commissions at 15 percent.14 Uber Eats added a $3 “City of Portland Ordinance” surcharge after the city imposed a 10 percent commission cap.15 In Jersey City, in response to a 10 percent commission cap, Uber Eats added a $3 fee and reduced the delivery range for restaurants.16

To understand why these measures haven’t achieved their stated aims, and why they will likely continue to have unintended consequences, first we need to understand what price controls are and the limited contexts in which they are effective.

WHY PRICE CONTROLS ARE USUALLY BAD

A price control is a government mandate that firms in a given market cannot charge more than a specified maximum price for a good or service (e.g., rent control for apartments) or they cannot charge less than a specified minimum price for a good or service (e.g., minimum wage for labor). Governments usually implement price controls with a noble aim of reducing costs of essential goods (e.g., shelter, fuel, food, etc.) for low-income people or supporting the revenues of a favored industry (e.g., price supports for farmers).

Policymakers tend to justify the imposition of a price control by arguing that the unrestrained forces of supply and demand will not ensure an equitable distribution of resources in essential markets. For politicians seeking to retain their jobs, price controls have the added benefit of being “off-budget,” meaning elected leaders don’t need to raise taxes to pay for them. While the costs of price controls may be unseen from a budgetary perspective, they are certainly not zero. Consumers, workers, and businesses are harmed by the lost output due to shortages under a price ceiling and excessive output under a price floor.

As Fiona Scott Morton, a professor of economics at Yale University, wrote, “If government prevents firms from competing over price, firms will compete on whatever dimensions are open to them.”17 And there are a multitude of dimensions beyond price. In response to price controls during World War II, hamburger meat producers started adding more fat to their burgers. Candy bar companies made their packages smaller and used inferior ingredients. During WWI, consumers who wanted to buy wheat flour at official price often had to buy rye or potato flour too.18

Generally speaking, after rent control takes effect, landlords reduce their maintenance efforts on rent-controlled apartments.19 They also pull rental units from the market and either sell them as condos or let friends and family live in them. Landlords can also capture some of the original economic value of their rental units by adding a fixed upfront payment to rental agreements. When airfare prices were set by the Civil Aeronautics Board between 1938 and 1985, airlines competed on other non-price dimensions, including improving the meal quality and increasing the frequency of flights and the number of empty seats.

The stricter the price controls are, the more likely bribes and other black market activity will substitute for previous white market activity. Even worse, the black market has higher prices than the legal market because sellers need to be compensated for the risk of being caught and punished by the authorities. Queuing and rationing are also extremely common under price controls. Hugh Rockoff, a professor of economics at Rutgers University, explains how price controls on oil had this effect in the 1970s:

 

Because controls prevent the price system from rationing the available supply, some other mechanism must take its place. A queue, once a familiar sight in the controlled economies of Eastern Europe, is one possibility. When the United States set maximum prices for gasoline in 1973 and 1979, dealers sold gas on a first-come-first-served basis, and drivers had to wait in long lines to buy gasoline, receiving in the process a taste of life in the Soviet Union.20

Henry Bourne, an early twentieth century economist, perhaps summed it up best when describing price controls in France during the French Revolution:21

It was the honest merchant who became the victim of the law. His less scrupulous compeer refused to succumb. The butcher in weighing meats added more scraps than before…other shopkeepers sold second-rate goods at the maximum [price]… The common people complained that they were buying pear juice for wine, the oil of poppies for olive oil, ashes for pepper, and starch for sugar.

Indeed, price controls do not make competitive pressures magically go away; they merely get sublimated into other dimensions of competition — and those who abide by the spirit of the law are punished the most. The aforementioned problems are why economists dislike price controls and favor market-clearing price mechanisms. The Initiative on Global Markets (IGM) regularly surveys a group of leading economists on various questions of public interest. The questions related to different kinds of price controls have been quite lop-sided.
A 2012 survey about rent control asked the following question:22

Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.

And here are the results:

A 2014 survey asked about surge pricing:23

A 2020 survey points to an alternative mechanism for achieving the efficiency benefits of high prices without incurring the distribution costs:

Governments should buy essential medical supplies at what would have been the market price and redistribute according to need rather than ability to pay.

THE EXCEPTIONS WHEN PRICE CONTROLS ARE GOOD

There are two general exceptions when the benefits of price controls might outweigh the costs. First, in markets with natural monopolies and static competition, price controls can prevent dominant incumbents from harming consumers by charging monopoly prices (and restricting output). This is generally how utilities regulation works in the US. Electricity, natural gas, water, and sewage are examples of natural monopolies. It would be highly inefficient to lay two sets of water, gas, or sewage pipes to every house. Similarly, it wouldn’t make sense to have two electrical grids that connect to every house.

There are also low risks to investment efficiency by imposing price controls on these services. We have very likely reached the end of history in terms of innovation in water, sewage, and natural gas. Firms don’t need the incentive
of large monopoly profits to invest in water innovation because it’s just water. The optimal number of competitors in these markets is likely one. Utility regulators work closely with these companies to set prices that allow the firms to recover their fixed costs while earning a reasonable but not extortionate profit.

As Noah Smith, a columnist for Bloomberg, pointed out recently, economists have warmed to one other type of price control over the last few decades: the minimum wage.24

 

And this shift has occurred for the same reason economists are less worried about price controls in utilities markets: lack of competition. Empirical evidence has started to pile showing significant monopsony power in labor markets, particularly in rural areas.25 As this annotated chart from Noah Smith shows, when a firm has monopsony power in a local labor market, a minimum wage can actually increase employment.

 

This isn’t the case in all labor markets, of course. Urban markets have much more competition for low wage workers than rural markets. And economists are still worried that a national minimum wage of $15 per hour might lower employment in many states.26 But modest minimum wage increases are a price control that economists feel increasingly comfortable supporting.

The other axis to consider in addition to competition is time. Is the price control permanent or temporary? In the event of natural disasters and public emergencies, price controls (such as price gouging laws) can be reasonable. The normal reason policymakers should allow prices to spike in response to surging demand is to incentivize more supply to enter the market. But in a period of days or a couple of weeks during a disaster, supply may essentially be fixed (due to lack of outside access to the affected market). For very limited periods of time, caps on prices can ensure that a fixed quantity of supply is not allocated merely on willingness to pay (which is often a function of wealth as much as preferences).

PRICE CONTROLS AND MULTI-SIDED PLATFORMS

Before we examine how price controls are likely to affect the food delivery market, let’s first review the basic business models in question here, because they are distinct from traditional markets with only one type of customer. Food delivery apps are operating what are known as multi-sided platforms or markets.

What’s a multi-sided platform?
First it’s important to understand network effects. There are direct network effects and indirect network effects. Direct network eff

ects are when a product becomes more valuable to an individual user as more total users start using it. The telephone is the classic example. A telephone is only valuable insofar as it can be used to call other people who also own telephones. Indirect network effects are when consumers derive value from a distinct group of users on a platform. For example, consider shopping malls. The shopping mall owner needs to appeal to tenants to ensure the mall has lots of attractive stores for shoppers. But stores only want to sign lease agreements for space in shopping malls with lots of shoppers. The shopping mall owner is in a sense a matchmaker for these two groups. Newspapers and magazines are another example from the analog era. Advertisers want to advertise in publications with a lot of readers and readers want to read engaging content at a low cost. Publishers bring readers and advertisers together in a mutually beneficial exchange.

Digital markets often have these indirect network effects, too. For example, drivers want to drive on ride-hailing apps with lots of riders and riders want to ride on ride-hailing apps with lots of drivers. It’s Uber and Lyft’s job to set the price schedule (the commission it charges drivers, incentives it offers drivers and riders) at the optimal level. The same is true for operating systems. App developers want to develop apps for platforms with lots of users and users want to use platforms with lots of apps. Ditto for video game consoles: video game developers want to develop games for consoles with lots of gamers; gamers want to buy consoles with lots of games. The charts to the right show which products and services have direct network effects, indirect network effects, or both.

One of the most important questions for the owner of a multi-sided platform is how to set the prices on each side of the market. Economic research shows that the platform owner should charge lower prices to the side of the market that has relatively elastic demand (meaning consumers are sensitive to price changes and will change their quantity demanded sharply) and higher prices to the side of the market that has relatively inelastic demand.27 The most elastic side should pay the lowest price, and often it makes sense to charge them below-cost prices (“free shipping” or “free delivery”). That’s the “subsidy” side of the platform. The side with the lower elasticity of demand is the “money” side. Generally speaking, consumers have a higher elasticity of demand and suppliers (e.g., drivers, merchants, developers, hosts, etc.) have a lower elasticity of demand.

What are the likely effects of a price control on a multi-sided platform?

Research from Rob Seamans and Feng Zhu studied how Craigslist’s entry into various local markets affected the classified ads business of local publishers.28 Remember, newspapers are also operating multi-sided markets. They need to attract a large number of readers so they can then attract a large number of advertisers. Most classified ads on Craigslist are free, so its market entry represented a marked increase in competition on one side of the publisher’s market. For publishers, this leads to “a decrease of 20.7 percent in classified-ad rates, an increase of 3.3 percent in subscription prices, a decrease of 4.4 percent in circulation, an increase of 16.5 percent in differentiation, and a decrease of 3.1 percent in display-ad rates.” The authors go on to show that “these affected newspapers are less likely to make their content available online.” Changes on one side of a multi-sided market ripple throughout the other sides.

While the research literature on multi-sided platforms offers some insight about what might happen in the event of a price control on one side of food delivery platforms, we can also just look at real world evidence to see what’s happening. According to a recent article in Protocol:

On May 7, Jersey City capped delivery app fees charged to restaurants at 10%, instead of the typical 15% to 30% many such platforms take. The next day, Uber Eats added a $3 delivery fee to local orders for customers and reduced the delivery radius of Jersey City’s restaurants.

Now, fewer people are ordering from the restaurants via Uber Eats and instead are shifting to other platforms, the company and the town’s mayor both confirmed to Protocol.29

When cities or states impose a price control on the commissions delivery apps can charge restaurants, they are unknowingly destroying the delicate balance platform owners have struck to attract enough consumers and suppliers on the platform to make the economics work. In cases where the government hasn’t capped commissions and fees across all sides of the platform, the first step for the app owner is to raise fees on consumers to make up for the lost revenue from the restaurant. But as mentioned earlier, the consumer side has a higher elasticity of demand than the restaurant side, so an equivalent price increase will disproportionately decrease demand on that side of the market.

Poorly designed price controls can also have a disparate impact on different business models in the same market. In the food delivery business, for example, there are two common business models with starkly different cost structures. Some companies merely aggregate online orders and leave the restaurant to handle final delivery on its own. The commissions for these services tend to be 15 percent or lower because the costs are much lower than full delivery services. Other services are full stack — they handle the transaction from the beginning of the order until it’s been delivered to the customer. These services charge higher commission rates (up to 30 percent) because paying drivers for their time and expenses is much more costly than merely aggregating online orders. Naive commission caps favor the aggregators over the full stack delivery service providers because the cap is usually non-binding on the low-cost business model. But that low-cost business model is also less innovative. Full-service delivery platforms are reducing transaction costs low enough to bring an entire new category of restaurants into the delivery market.

Price controls would also disproportionately hurt small restaurants. Large chains like McDonald’s negotiate commission rates as low as 15 percent with delivery platforms because they can offer a high, steady volume of orders as well as their own large marketing budgets.30 Smaller restaurants are riskier partners and therefore pay higher commission rates — meaning price controls would disproportionately impact small restaurants. Commission caps might also lead to more vertical integration between restaurant chains and delivery services. Some large chains like Domino’s Pizza already employ their own delivery drivers.31 If enough cities and states implement price controls on third party delivery services, then more chains with high order volumes might decide to bring delivery services in-house to avoid the caps (because there are no commissions in a vertically integrated company).

So, what is the likely effect of these commission caps? Higher consumer fees. Longer wait times. Lower quality service. Reduced restaurant and delivery zone coverage. A switch from full service delivery apps to aggregators. And an increased incentive for the largest restaurant chains to vertically integrate with delivery services.
Lastly, it’s important to note that neither of the two exceptions for the general rule against price controls hold in this case. First, food delivery service markets are highly competitive.32 Most of the companies in this market haven’t been able to reliably turn a profit yet. As Eric Fruits, the chief economist at the International Center for Law and Economics, noted,

Much attention is paid to the ‘Big Four’ — DoorDash, Grubhub, Uber Eats, and Postmates. But, these platform delivery services are part of the larger foodservice delivery market, of which platforms account for about half of the industry’s revenues. Pizza accounts for the largest share of restaurant-to-consumer delivery.33

He goes on to point out that restaurants can also always offer their own delivery service, which serves as a check on the market power of third-party food delivery apps. And restaurants also have the option of apps like ChowNow, Tock, and Olo that offer online ordering as well at substantially lower commissions, largely because they do not offer delivery.

Second, the pandemic is a chronic rather than acute public health emergency. It is now entering its second year and we are still months away from readily available vaccinations for all groups. Price controls would reduce supply at a time when people desperately need delivery services to maintain social distancing.

CONCLUSION: A BETTER WAY FORWARD

While bailouts are never uncontroversial, bailing out the restaurant industry is an easy call. There is no moral hazard risk as there was with the bank bailouts in 2008, when it was reasonable to worry that bailed out financial firms would increase their risky behavior in the future knowing that they would be bailed out in the event of a crisis. In this case, restaurants won’t change their behavior in the future in a way that increases the odds of a deadly pandemic.

A viral pandemic is a perfect example of an exogenous shock — an Act of God (or “force majeure” as insurance contracts put it). By definition, the pandemic affects everyone. Private insurance markets don’t work for pandemics as well as they do for fires or natural disasters because a pandemic occurs everywhere all at once. The private insurance provider would be forced to pay out to all its insured entities simultaneously. Normally,
a majority of an insurer’s clients would be unaffected by an event and their premiums would be used to finance payouts for those harmed. In the case of a pandemic, everyone is harmed.

The federal government is the appropriate entity for collectively insuring the population against these kinds of macro-level risks. Using its fiscal and monetary capacity, the government can efficiently insure the entire population across time. Fiscal support comes in the form of deficit-financed spending (we’re effectively borrowing from our future, richer selves) and monetary support comes in the form of lower interest rates and guaranteed loans for businesses and state and local governments.

Deficit spending will need to be paid for in the future, either via inflation or taxes. But deficit-spending during a crisis is consistent with welfare-enhancing public policy. Income has diminishing marginal returns. In a time of crisis, we want to be able to borrow against our collective future income, which is exactly what deficit spending allows us to do. Just give people money — don’t mess with prices.

Report Calls for New National Commitment, Vigorous Response to Hunger and Malnutrition in America

Posted on by The Progressive Policy Institute

WASHINGTON, D.C. — A new brief released today from the Progressive Policy Institute (PPI) targets the federal response to the hunger crisis resulting from the COVID-19 pandemic and recession.

It discusses the valuable policies contained in President Biden’s recent executive orders and the proposed American Rescue Plan legislation and also identifies additional policies to address hunger, including reducing concentration in the food industry, using modern information technologies to help low-income Americans cut through siloed bureaucratic obstacles, and expanding food aid for low-income children.

Key recommendations from the brief include: 

• Extend the Pandemic EBT program through the pandemic and economic recovery to provide low-income children with free or subsidized meals during weekends, holidays, and summer break. To be better prepared for a future crisis, Congress should also leverage the P-EBT program to create a permanent authorization for states to issue replacement benefits, giving them more flexibility to respond in a crisis.

• Study the success of the P-EBT program with an eye to converting it into a Summer EBT program post-Covid to bridge the gap in nutrition during the summer months and reach more low-income children in rural and underserved communities.

• Pass legislation, such as the Pandemic Child Hunger Prevention Act, in future recovery legislation, to allow all children free access to breakfast, lunch, and after school snack programs either in school or through “grab and go” and delivery options, as well as reduce bureaucratic barriers for schools to deliver meals to kids.

• Focus on stricter antitrust enforcement in the food industry to help consumers facing increasing prices for basic nutrition staples, such as meat and eggs.

• Use information technology to modernize social service delivery and reduce the administrative burden on low-income people. For example, Congress should enact the HOPE Act, which would create online accounts that enable low-income families to apply once for all social programs they qualify for, rather than forcing them to run a bureaucratic gauntlet.

• Pass the bipartisan Healthy Food Access for All Americans (HFAAA) Act, put forth by Sens. Mark R. Warner, Jerry Moran, Bob Casey, Shelley Moore Capito, which provides incentives, including tax credits or grants, to food providers who serve low-access, rural communities. Draft legislation that provides grants to states to fund the establishment and operation of grocery stores in rural and underserved communities.

Veronica Goodman, PPI’s Director of Social Policy, and Crystal Swann, Senior Policy Fellow, are co-authors of the brief, and said this: 

“The Trump administration’s feeble response to America’s hunger crisis was a national disgrace, one of the many ways in which it thoroughly bungled the nation’s response to the Covid pandemic. The contrast with the Biden administration’s sharp focus on hunger and decisive moves to alleviate it couldn’t be more dramatic.

Nonetheless, it should be just the beginning of a new national commitment to wiping out hunger and malnutrition in America. It’s time for a vigorous public response to growing concentration in the food industry, as well as a new push to use modern information technologies to help low-income Americans cut through burdensome bureaucratic obstacles and take charge of their economic security. We’ve also learned lessons during the pandemic for how to provide meals to families outside of the traditional systems, and we should preserve these going forward in the effort to be better prepared for a future crisis and to curb hunger in America.”

Read the full report here.

Many Roads to a Living Wage

Posted on by The Progressive Policy Institute

The Congressional Budget Office has dealt another blow to progressive hopes for swift action to raise the U.S. minimum wage to $15 an hour. It released a new study this week estimating that while the wage hike would lift 900,000 Americans out of poverty, it also would cost 1.4 million workers their jobs.

Liberal economists challenged the job loss figures, calling CBO’s methodology outdated. But the report feeds growing doubts that Senate Democrats will be able to shoehorn the measure into the big relief bill they hope to pass under “reconciliation” rules that allow for a simple majority vote. That means Republicans could filibuster it to death.

These setbacks raise an important tactical question: In a commendable effort to give working Americans a raise, are progressives fixating too narrowly on the minimum wage? After all, there are other policy tools at their disposal that could lift workers’ earnings without sacrificing jobs or harming small businesses. And these policies — essentially rewards for work delivered through the tax system — could be taken up under reconciliation.

It is abundantly clear that progressives, led by Sen. Bernie Sanders, have made several mistakes in their single-minded pursuit of the $15 wage boost. The first was claiming that it could pass through reconciliation. However, CBO had previously found that Sanders’s proposed “Raise the Wage Act” would have a negligible effect on the federal budget.

So Sanders pushed CBO to produce a new score using different methodology that he thought would make a persuasive fiscal case for the increase. Instead, CBO’s new analysis said that raising the minimum wage to $15/hour would kill over one million jobs while adding $70 billion to the federal deficit. As President Biden has noted, it’s unlikely the measure could get around Senate rules that prohibit the inclusion of non-fiscal policies for which the budgetary impacts are “merely incidental” in a reconciliation bill.

Moreover, West Virginia Sen. Joe Manchin already made clear he would oppose a $15 minimum wage because of the impact it would have in his low cost-of-living state, meaning the proposal wouldn’t have the simple majority needed to pass it.

Nonetheless, most Democrats, including Sen. Manchin, are united in their desire to raise the federal minimum wage, now stuck at a paltry $7.25 an hour. And not just Democrats: polls show solid majorities in favor of a $15 wage. Last November, even as Democratic candidates up and down the ticket got shellacked in a reddening Florida, 60 percent of voters backed a referendum to raise the state minimum to $15.

But as with many ideas that are simple and popular in concept, the apparent consensus breaks down when policymakers plunge into the devilish details: How high should the wage go, how quickly, and how uniformly should it be applied? Does it make sense to mandate $15 an hour in all 50 states, or allow for differences in the cost of living? What’s the impact of a big hike on jobs and small businesses in America’s less prosperous places?

Since Democrats evidently lack the votes to pass a $15 minimum wage, they should get what they can from Republicans who favor more modest increases, and look for other ways to make up the difference.

Specifically, they could expand tax credits designed to make work pay. The model here is the federal Earned Income Tax credit, which matches the earnings of low-wage workers dollar for dollar up to a certain threshold, after which it begins to phase out. It’s both an incentive and reward for work that’s become, after Social Security, America’s most successful anti-poverty policy.

What’s needed now is to move this “work bonus” principle up the income scale, with an eye toward raising incomes of non-college educated workers who have seen meager wage gains in recent decades.

For example, Brookings Institution economist Belle Sawhill has proposed giving all U.S. workers a 15 percent raise up to some annual ceiling, phasing out as earnings rise $40,000 a year.

PPI has proposed to absorb the EITC into an expanded Living Wage Credit that reaches deeper into the heart of the working class. The cost of these new credits could be defrayed by taxing the unearned incomes of wealthy Americans.

Such public subsidies for private work would lift wages for lower-skilled workers without pricing them out of labor markets or forcing the small companies that employ them out of business. And, as tax credits, they could be passed under budget reconciliation rules even without Republican support.

The minimum wage is a venerable policy, but progressives don’t need to put all of their eggs in this particular policy basket. Fortunately, there’s more than one road to establishing a genuine living wage in America that honors the dignity of work of all kinds and keeps working families from falling out of the middle class.

This piece was also posted on Medium.

PPI Statement on the National Apprenticeship Act of 2021

Posted on by The Progressive Policy Institute

Last Friday, the U.S. House of Representatives voted to dramatically expand investment and access to apprenticeships with the passage of the National Apprenticeship Act of 2021 under the leadership of Rep. Bobby Scott. This legislation had been passed in November in the last Congress, however, the Republican Senate Majority failed to take up the bill for a vote. With Democrats now in the majority, there is renewed hope that the country’s underfunded and outdated apprenticeship system can finally be modernized to meet our 21st-century workforce needs.

The reauthorization of The National Apprenticeship Act is estimated to create nearly one million high-quality apprenticeship opportunities and includes provisions that target opportunities for key groups, such as young adults, childcare workers, and veterans. The bill also aims to increase apprenticeships in industries that do not require a four-year degree for well-paid jobs, such as healthcare, IT, and financial services. 

For the more than 10 million workers who have lost jobs or been laid off, there is no guarantee that their jobs will be there once our country returns to normal. Some estimate that at least 3.7 million Americans will not have jobs to return to. Many will have to reinvent themselves and apprenticeships can play a critical role in helping workers get back to work better after the pandemic.

Apprenticeships are an overlooked option to put workers on a path to better employment and the National Apprenticeship Act would remedy this gap. The United States lags behind many other OECD countries in investments to apprenticeships to provide immediate options for laid-off workers. Currently, there are only about 440,000 registered apprentices in the U.S. and often, in states where apprenticeships are available, there are too few slots to meet demand. If the United States were to create as many apprenticeships as a share of our labor force as in Europe that number would be nearly ten times higher. 

As policymakers consider how to help American workers weather the Covid recession, PPI strongly supports an increase in public investment in apprenticeships and work-based “career pathways” training programs that connect workers, including those laid off during the pandemic, to well-paying careers. We look forward to its progress in the Senate Health Education Labor and Pensions Committee under Senator Patty Murray, and we encourage the Senate to pass this important workforce legislation. 

PODCAST: Congresswoman Suzan DelBene on “Getting to Yes”

Posted on by The Progressive Policy Institute

PPI President Will Marshall welcomes Representative Suzan DelBene of Washington State’s First District to this episode of the PPI Podcast. The two discuss the Republican party’s identity crisis, the issue of Marjorie Taylor Greene, and the need for the GOP to come to the table on a broad relief package.

They also talk about DelBene’s involvement in the New Democrat Coalition, the House’s largest ideological caucus focused on a solutions-oriented approach to bipartisan legislation for economic growth and progress. Will Marshall hits on the importance of purple districts like DelBene’s, and she highlights the necessity of proving governance still works.

Opportunity for Biden Administration to Boost Jobs and Economic Growth is Hiding in Plain Sight

Posted on by The Progressive Policy Institute

WASHINGTON, D.C. – A new report co-authored by the Progressive Policy Institute’s Caleb Watney and Doug Rand and Lindsay Milliken of the Federation of American Scientists, highlights a significant opportunity for the Biden Administration to boost entrepreneurship and create up to a million new jobs through a little-known immigration rule.

For the United States in particular, foreign-born entrepreneurs have made up an extraordinary share of our most successful companies and technological achievements. To encourage the vitally important flow of immigrant entrepreneurs, and to accommodate the growing need for an entrepreneur-specific pathway into the country, the Department of Homeland Security (DHS) adopted the International Entrepreneur Rule (IER) in early 2017.

The rule was quickly put on hold by the incoming Trump Administration but was never removed from the Code of Federal Regulations. According to the new report, with support from the Biden Administration, the IER could quickly become an essential pathway to attract and retain foreign-born entrepreneurs who seek to build their businesses within the United States.

KEY PROPOSALS INCLUDE: 

  • Publicize the International Entrepreneur Rule and credibly signal to stakeholders that the IER will receive agency attention and resources
  • Issue new guidance documents to agency adjudicators to clarify evidentiary standards and make it reasonably straightforward for investors to prove they meet qualifying criteria
  • Issue new guidance directing U.S. Citizenship and Immigration Services (USCIS) and U.S. Customs and Border Protection (CBP) to grant beneficiaries the full initial 30 months of parole, absent extraordinary circumstances
  • Issue future rulemaking to improve the IER based on feedback from stakeholder groups
  • Pursue a long-term legislative solution to stabilize immigration pathways for entrepreneurs

Co-author Caleb Watney, the director of innovation policy at PPI, had this to say about the findings and key proposals: “Countries all over the world are competing to attract the best talent to their shores. Unlike Canada, Australia, and the United Kingdom, the United States has no statutory immigration pathway designed for entrepreneurs. The International Entrepreneur Rule is a powerful tool to help solve this gap and should be embraced by the Biden Administration to increase U.S. dynamism, economic growth, and job creation. Now is the time to build back better and ensure the United States’ place as the best place to start a new business and to welcome brilliant entrepreneurs from across the globe.”

Why Biden Has The Right Covid Relief Strategy

Posted on by The Progressive Policy Institute

President Biden met with 10 Republican senators on Monday to discuss their proposed $600 billion alternative to his $1.9 trillion American Rescue Plan. Both the White House and Sen. Susan Collins described the meeting as a productive exchange of ideas and the start of continued talks. But some Democrats believe these discussions are doomed from the start and want Biden to focus on passing his plan through reconciliation – a complicated process that allows budgetary legislation to pass with just 51 votes instead of the 60 required to bypass the filibuster on all other legislation. Although Democrats are right to move forward with reconciliation, there are several reasons why it makes sense for Biden to pursue the talks further and seek common ground beyond just a platonic ideal of “bipartisanship.”

Read the full piece here.

Memo to President Biden: A Reality-Based Approach to Drug Pricing

Posted on by The Progressive Policy Institute

Four Ways the Pharma Sector is Performing Well, Four Big Problems, and Three Straightforward Solutions

In this paper we summarize the state of today’s pharma sector with four ways it is performing well and four big problems.

Then we propose three key policy proposals that the Biden Administration can use to address the problems:

  1. A cap on out-of-pocket costs, including co-pays, similar to legislation proposedin 2018, should dramatically improve Americans’ experiences with drug pricing.
  2. A shift to point-of sales rebates should benefit consumers and align their incentives with actual net prices.
  3. Building on the successful rapid creation and testing of the Covid vaccines, President Biden should convene a high- level “Biopharma Regulatory Improvement Commission” to accelerate pharma innovation and deployment in order to boost health and cut costs.

 

EXECUTIVE SUMMARY

The U.S. pharmaceutical industry is one of the nation’s crown economic jewels. It is also one of its knottiest policy problems. The pandemic performance of U.S. pharma companies, working in concert with global partners, has been nothing less than outstanding. Producing multiple safe and efficacious vaccines in less than a year is a testament to the expertise and capabilities of the industry.

On the other hand, Americans have a deeply held distrust of the pharma industry. A Gallup survey taken in summer 2020 still showed the pharmaceutical industry at the bottom of the American approval list, ahead of only the federal government. True, that’s a gain over the previous year, when it was literally rock bottom, but it still isn’t good.

In this paper, we identify four ways that the U.S. pharma sector is performing well, and four big problems (Summary Table 1). Some of them are surprising, in a positive sense. For example, despite all of the headlines about cost pressures, overall spending on pharmaceuticals has been slowly dropping as a share of GDP. Pharma manufacturers revenues, net of discounts and rebates, fell from 1.75 percent of GDP in 2010 to 1.66 percent in 2019 (based on IQVIA Institute data). Also surprisingly, household out-of-pocket expenses for prescription drugs, including Part D premiums, fell from 0.36 percent of GDP in 2010 to 0.32 percent in 2019 (based on national health expenditures data from the Centers for Medicare and Medicaid).

On the negative side, a small portion of Americans have huge out-of-pocket prescription drug bills. In 2018, roughly 1 percent of Americans paid more than $2,000 in out-of- pocket drug expenses, not including Part D premiums (based on our analysis of Medical Panel Expenditure Survey data).

Equally worrisome, most Americans face sharply rising out-of-pocket drug costs as they age. This “prescription escalator”—the result of a steep age-usage curve and per-prescription copays— has the effect of increasing individual spending by 5-6 percent per year, even if underlying drug prices are flat.

 

How can President Joe Biden address these problems, while taking advantage of the good features of the U.S. system? To address the political and human toll of the current system of pharma insurance, Biden should support legislation to cap out-of-pocket drug payments. That’s the best way to control the low but real possibility of huge out-of-pocket payments. It’s also the best way to get a handle on the “prescription escalator”—the sharp rise in out-of- pocket payments as Americans age.

Second, Biden should preserve the recently finalized Medicare Part D Rebate Rule that replaces drug rebates with point-of-sale consumer discounts. Discounts paid directly to consumers at the point of sale, rather than rebates paid retrospectively to insurers or pharmacy benefit managers, would significantly lower out-of-pocket costs, clarify the true cost of prescription medications, and allow consumers and physicians to make better cost-benefit trade-offs. The would also be a good launching pad towards the introduction of new legislation to enact similar changes in the commercial market. Together, these changes would fix the opaque rebate system and could create the conditions for list prices to come down.

 

Third, Biden should take a page from the successful Covid vaccine effort. U.S. businesses and government agencies have spent almost $2 trillion since 1995 on biotech and other health-related R&D, and this knowledge was mobilized quickly to generate new vaccines and therapies. Still, in the normal course of business it would have taken years rather than months to bring the new technology to bear. What’s needed is a high-level “Biopharma Regulatory Improvement Commission” to identify the regulatory and financial impediments to faster useful biopharma innovation, without sacrificing safety at all.

INTRODUCTION

The U.S. pharmaceutical industry is one of the nation’s crown economic jewels. It is also one of knottiest policy problems faced by Washington. The pandemic performance of US. pharma companies, working in concert with global partners, has been nothing less than outstanding. The production of multiple safe and efficacious vaccines in less than a year is a testament to the expertise and capabilities of the industry.

On the other hand, Americans have a deeply held distrust of the pharma industry. A Gallup survey taken in summer 2020 still showed the pharmaceutical industry at the bottom of the American approval list, ahead of only the federal government. True, that’s a gain over the previous year, when it was literally rock bottom, but it still isn’t good.

President Joe Biden comes into office with a comprehensive plan for dealing with what he calls “runaway” drug prices, including establishing an independent review board to assess the value of new drugs, and limiting list price increases for all brand, biotech, and “abusively priced” generic drugs to the rate of inflation.

But Biden’s plan may be aiming at the wrong targets. The two best aggregate measures of the economic burden of pharma spending— overall net spending on pharmaceuticals as a share of GDP and household out-of-pocket drug spending, including Part D premiums, as a share of GDP—have been trending down, not up.

Proposals to restrain list prices are not likely to accelerate these aggregate declines. List prices are important, but because of rebates and discounts they do not directly correlate payments to manufacturers or with out-of-pocket spending by households.

While proposals to restrain list prices may be helpful for patients lacking insurance, and among those in plans with high deductibles and coinsurance, list prices do not typically reflect the price that most patients pay out of pocket due to the impact of rebates and discounts on plan benefit designs.

True, an increasing share of prescriptions are reimbursed by means of co-insurance, which apparently sets the out-of-pocket cost for a drug as a fixed percentage of the list price for that drug. But even then, remember that insurance companies control that apparently fixed percentage and can easily raise it any time they want. As a result, lowering the list price of a drug might or might not decrease the out-of-pocket cost, depending on how the insurance company adjusts the cost-sharing arrangements.

The real problem lies in the way the drug reimbursement system has evolved over the years, exposing Americans to co-pays that seemingly shift randomly from year to year, a small portion of Americans have huge out- of-pocket prescription drug bills, which is bad enough. Most Americans face sharply rising out-of-pocket drug costs as they age (“the prescription escalator”). In some ways the drip- drip of drug co-pays is a form of psychological torture.

To address the political and human toll of the current drug reimbursement system, Biden must support legislation to cap out-of-pocket drug payments. One model is the Capping Prescription Costs Act of 2018, introduced
by Sens. Elizabeth Warren (D-Mass.) and Ron Wyden (D-Ore.) which set caps for prescription drug copays at $250 per month for individuals and $500 per month for families. That’s the best way to control the low but real possibility of huge out-of-pocket payments. It’s also the best way to get a handle on the “prescription escalator”— the sharp rise in out-of-pocket payments as Americans age.

Equally important, Biden should support the implementation of the Medicare Part D rebate safe harbor final rule and propose follow-on legislation that would encourage point-of-sale discounts in the commercial market as well. These discounts would finally reach consumers directly (instead of insurers or pharmacy benefit managers). From an economic perspective, this approach has several virtues. It can lead to a substantial reduction in out-of-pocket costs at the point of sale, clarify the true cost of prescription medications, allow consumers and physicians to make better cost-benefit trade- offs. Importantly, it would ensure that patient coinsurance is based off of net prices (vs list prices), which is far easier for everyone to understand.

Finally, Biden should learn a lesson from the successful Covid vaccine effort. The mRNA vaccines from Pfizer and Moderna show
that with the right motivations, advanced biotechnology that might have otherwise languished on the shelf can innovate and createbeneficial medicines.

What we need now is a focused effort to get most useful drug innovations out of the almost $2 trillion that businesses and government agencies have spent in the U.S. on health- related R&D since 1995. With the successful Covid vaccine effort as a role model, what’s needed is a high-level “Biopharma Regulatory Improvement Commission” to identify the regulatory and financial impediments to useful innovation.

THE FACTS: HOW THE PHARMA SECTOR IS PERFORMING WELL

Before addressing policy changes, we must understand what’s working and what isn’t about the sprawling system of drug innovation, spending, and reimbursement. The common belief is that drug spending is out of control. But a reality-based analysis, based on solid statistics, paints a very different picture.

Let’s briefly go through each of these:

» Positive Fact #1:
Overall net spending on pharmaceuticals has been slowly dropping as a share of gross domestic product (GDP).

Net spending on pharmaceuticals is defined as the net amount that drug manufacturers receive for their products, after accounting for rebates and other price concessions. The difference between drug spending calculated with list prices vs net prices is huge and growing. In 2019, for example, the IQVIA Institute estimated that the net revenue received by manufacturers of $356 billion was 47 percent below drug spending valued at list prices, $671 billion. By comparison, this gap between net revenues and spending valued at list prices was only about 37 percent in 2014 and 34 percent in 2010.

Net revenues as a share of gross domestic product (GDP) are a good measure of the burden of pharmaceutical spending on the overall economy, representing the amount paid to manufacturers. Since 2010, net manufacturer revenue has increased by 36 percent, compared to a 48 percent increase in overall gross domestic product. As a result, net manufacturer revenue as a share of GDP fell from 1.75 percent of GDP in 2010 to 1.66 percent in 2019.

What this information tells us is that the overall burden of drug spending on the economy— consumers, private companies, government, hospitals, insurance companies, wholesalers, pharmacy benefit managers—has been falling slightly. But analyzing the impact on any particular market participant is very difficult, because the discounts and rebates are so opaque.

» Positive Fact #2:
The combination of Medicare Part D and the Affordable Care Act (ACA) has slightly reduced household out-of-pocket (OOP) expenses for prescription drugs as a share of GDP.

You wouldn’t know it from all the Congressional hearings that feature Americans having trouble paying for drugs. But on average, the drug cost burden on households has been falling over time, measured as a share of household income or GDP. That’s true, even if we include Medicare Part D premiums when calculating out-of-pocket spending, since from the perspective of Part D participants their premiums also come out of their pockets.

Based on the latest CMS data, released in December 2019, household out-of-pocket expenses for prescription drugs, including Part D premiums, fell from 0.36 percent of GDP in 2010 to 0.32 percent in 2019. Other data sources, such as the Consumer Expenditure Survey from the Bureau of Labor Statistics, show roughly the same pattern.

These figures measure the average burden on households. As we will see later, there are outliers who have to pay much more. But at least the aggregate data is positive.

» Positive Fact #3:
Pharma industry spending on R&D has slightly risen as a share of GDP.

One of the great paradoxes of the U.S. health care system is the poor perception many Americans have of the pharmaceutical industry. Nevertheless, pharma companies have been taking on more of the financial burden and risk-taking associated with drug research and development over the past decade, even while public sector funding has stagnated. Since 2010, federal and state spending on health-related R&D, mostly through NIH, has only risen by 7 percent, from $35.2 billion in 2010 to $37.6 billion in 2019.

The pharma industry spending on R&D items such as pre-clinical drug development and clinical trials has skyrocketed, from $57.3 billion in 2010 to $89.8 billion in 2019, according to figures from the Bureau of Economic Analysis (BEA). This corresponds to an increase of 57 percent, faster than the 48 percent gain in GDP over the same period. As a result, pharma industry spending on R&D rose from 0.38 percent of GDP in 2010 to 0.42 percent in 2019 (based on BEA data).

» Positive Fact #4:
The U.S. pharma industry was able to develop safe and efficacious vaccines within a year

Using a variety of different approaches, pharma firms in the United States and around the world were able to create safe and effective vaccines in less than a year. First out of the gate were Pfizer and Moderna with their mRNA-based vaccine technologies, never before successfully used for a vaccine. However, other vaccines using more familiar technologies are not far behind.

But the big advantage of mRNA vaccine technology is that it can be quickly adjusted to new variants of Covid. Moreover, now that the technology has been shown to be effective, it has the potential to quickly create vaccines against other viral scourges, such as influenza and HIV. So the silver lining from the Covid cloud is that it may have opened up new avenues for dealing with disease.

WHERE THE PROBLEMS ARE

We certainly don’t want to leave the impression that the pharma sector and pharma pricing are free of blame. An honest approach also tells us where four big problems are, as shown in Table 2.

» Negative Fact #1:
A small portion of Americans have huge out-of-pocket prescription drug bills.

One staple of the drug price debate are congressional hearings that highlight heartbreaking stories of people who can’t afford to pay for their medicines. Are these people reflective of a broader problem?

The answer is yes and no. In fact, our analysis of 2018 MEPS data suggests that over 3 million Americans paid more than $2000 in out-of- pocket drug expenses in 2018, not including Part D premiums. That’s about 1 percent of the population, but it’s still an unacceptably high number that need to be addressed by policymakers.

Consider the high cost of insulin, a product with huge rebates. Indeed, rebates for insulin products often reach as much as 70 percent of the list price, so the net price after rebates is much lower than the list price. However, those rebates are typically paid to the health insurance company or the prescription benefit managers (PBM), rather than to the consumer.

As a result, patient coinsurance is often based on the list price, while high manufacturer rebates are collected by insurers. At the same time, benefit designs that place even higher out-of-pocket burdens on patients continue to grow, exacerbating affordability challenges for patients.

» Negative Fact #2:
Most Americans face sharply rising out-of- pocket drug costs as they age.

In addition to the small but significant fraction of the population with high out-of-pocket costs, the widespread anger of Americans at drug companies is fueled by what we call the “prescription escalator.”

It turns out that the use of medicines can rise steeply as people age. For example, in 2018, individuals between the ages of 35 and 44 filled an average of 7.2 prescriptions, including refills, compared to an average of 12.2 prescriptions for those between the ages of 45 and 54 and 18.1 prescriptions for those between the ages of 55 and 64. This 150 percent increase in the number of prescriptions as people age corresponds to an equivalent rise in prescription drug spending, since the structure of health insurance generally charges co-pays for each prescription. This “prescription escalator”—the result of a steep age-usage curve and per-prescription copays—has the effect of increasing the typical individual’s spending by 5-6 percent per year, even if underlying drug prices are flat.

Indeed, even if underlying drug prices are flat, most Americans see their drug spending rise year after year much faster than other types of medical spending. As a result, the share of out- of-pocket spending going to drugs increases as Americans age, making it seem like drug costs are more of a burden.

» Negative Fact #3:
The complicated and opaque system of rebates and discounts means that costs to patients and providers are only tenuously connected to list prices.

We have decent measures of how much consumers pay for drugs through various surveys. We also have good measures of how much pharma manufacturers receive in net revenues, because that number is reported on financial statements. But the flows of money back and forth through PBMs, insurance companies, and hospitals are much more opaque. The rebates and discounts are not simply a percentage of the price. Sometimes they are tied to volume, sometimes to the efficaciousness of the drug, and sometimes they are mandated by law. Much of the time, they are not public.

However, it’s clear that list prices bear only the slightest resemblance to the actual net costs. On an aggregate level, between 2014 and 2019 spending at list prices rose at an annual rate of 7.1 percent, far faster than GDP growth. Meanwhile, actual net outlays by payers only rose at a 4.1 percent annual rate, equal to the rate of GDP growth (based on data from the IQVIA Institute).

The lack of connection between list and net prices makes it very hard for consumers, doctors and policymakers to understand the true cost of drugs.

» Negative Fact #4:
Misaligned regulatory and financial incentives may be holding back pharmaceutical innovation.

Before the Covid pandemic, there was a sense among economists that the enormous spending on biopharma basic and applied research had underperformed. The promise of biotech had been cheaper, faster drug development and a raft of new cures. Instead, the cost of drug development had soared, and only 14 percent of drugs that enter clinical trials get approved.

There are three leading hypotheses, all of which may have some degree of truth:

  • The intricacies of medicine and the human body are more complicated than first thought.
  • The desire for profits could be diverting biopharma firms from truly important drug development.
  • Excessive or misdirected regulation could be raising drug development costs and slowing down biotech innovation.

Facing pressure from the pandemic, regulators and manufacturers were able to work together to greatly accelerate the pace of Covid-19 vaccine development, innovating to bring new technologies into the market without compromising drug safety and efficacy testing. Companies developed vaccines and tested them, even while building manufacturing facilities. The government issued fixed-price contracts for millions of doses to transfer risk to Washington, which could bear it.

As everyone knows, the process produced several successful vaccines. This implies that the full capabilities of private and public R&D are not being utilized in the current regulatory and financial structure.

IMPLICATIONS FOR POLICY

Americans deal with a very complicated reimbursement scheme for drugs, where the list price has very little connection with either the net price that manufacturers receive, or the out-of-pocket expenses paid by patients. Some out-of-pocket costs are set as a percentage of the list price in terms of co-insurance, but that’s variable as well, since the insurance companies can adjust the co-insurance percentage when they set up their plans each year.

To meaningfully improve prescription drug affordability, President Biden should pursue reform of plan benefit designs that directly reduces out-of-pocket costs for consumer. Capping out-of-pocket costs, for example, is both relatively simple and delivers significant political bang for the buck.

One particular model is the Capping Prescription Costs Act of 2018, introduced by Sens. Elizabeth Warren (D-Mass.) and Ron Wyden (D-Ore.) which set caps for prescription drug copays at $250 per month for individuals and $500 per month for families. That’s the best way to control the low but real possibility of huge out-of-pocket payments. It’s also the best way to get a handle on the “prescription escalator”—the sharp rise in out-of-pocket payments as Americans age.

How expensive would this or a similar program be? Suppose our target was to hold annual out-of-pocket costs down to $2000 per year for individuals. Based on our analysis of 2018 MEPS data, that cap would cost $2.4 billion annually for people 65 and over, less than 3 percent of total expenditures by Medicare Part D, the prescription drug benefit program, net of rebates.

As a complementary effort, President Biden should preserve the recently finalized Medicare Part D Rebate Rule that replaces drug rebates with point of sale consumer discounts. Such discounts would be paid directly to consumers rather than to insurers or pharmacy benefit managers. Such a program would have several effects. First of all, the rebates on expensive drugs would actually benefit the patients taking those drugs. That’s what Americans really want.

Point-of-sale consumer discounts would also clarify the true cost of prescription medications and allows consumers and physicians to make better cost-benefit trade-offs. And it would largely address the problems associated with the disconnect between list and net prices. An opaque system does not foster good decision- making. Finally, the Medicare Part D Rebate Rule could also serve as a launching pad towards similar legislation in the commercial market.

Finally, Biden should help regulators and companies learn the right lesson from the successful Covid vaccine effort. The biopharma sector had an enormous stockpile of knowledge and manufacturing know-how that mobilized quickly to generate new vaccines and therapies. The government supported the effort with funding and fixed-price contracts to buy hundreds of millions of doses of the still-yet unproven vaccines. While there are issues with distribution, the development and production worked as well as could be expected.

Still, under the usual regulatory framework and business decision-making it would have taken years rather than months to bring the new technology to bear. The FDA has its usual step-by-step procedures which tend to discourage disruptive but potentially beneficial innovations. Pharmaceutical manufacturers, which invest huge amounts in R&D, are naturally attuned to the regulators and the need to focus on drugs that will get through the approval process.

Biden should appoint a high-level “Biopharma Regulatory Improvement Commission” to identify the regulatory and financial impediments to faster useful biopharma innovation. PPI has in the past proposed a new approach to improve regulations without sacrificing consumer and worker protection. Such legislation has been introduced several times in Congress.

What Biden needs now, though, is a commission that is narrowly focused on finding a way to accelerate biopharma innovation, without sacrificing an ounce of safety. At the end of the day, the best way to reduce the cost of medications may be to improve the ease of innovation.

 

Beyond “Buy American”: Why U.S. Manufacturing Needs A National Resilience Council

Posted on by The Progressive Policy Institute

We strongly support President Biden’s signing of the Executive Order beefing up Buy American provisions for federal purchases. The executive order would use “the full force of current domestic preferences to support America’s workers and businesses.

But much more needs to be done, since domestic manufacturing is much weaker than most people realize.  Most important, multifactor productivity in domestic manufacturing–the broadest measure of the ability of U.S. factories to turn inputs into useful goods–actually fell from the previous business cycle peak in 2007 to 2019, before the Covid recession started.  In other words, domestic manufacturing is becoming less competitive, not more competitive.

That’s why Biden needs to go beyond Buy American in order to boost domestic manufacturing. In our August 2020 report on how to “Spur Digital Manufacturing in America,” we propose a  “National Resilience Council” to lead a push to stimulate local production, shorten supply chains, create high-wage factory jobs and make our manufacturing sector more resilient in crises.

The National Resilience Council would be tasked with identifying those industries and capabilities that are strategic, in the sense of improving the ability of the economy to deal with shocks like pandemics, wars, and climate changes. These areas are likely to be underinvested by private sector companies, who quite naturally don’t have an incentive to tackle these sorts of large-scale risks.

The goal would be a resilient manufacturing recovery,  based on flexible, local, distributed manufacturing—relatively small efficient factories that are spread around the country, using new technology, knitted together by manufacturing platforms that digitally route orders to the nearest or best supplier. To achieve this goal, we make four concrete proposals:

  • First, we should double the National Science Foundation’s roughly $8 billion budget, with more of an emphasis on manufacturing-related areas such as materials sciences.
  • Second, the government can shore up the nation’s supplier base by providing $200 million in low-cost loans and grants to help small and medium manufacturers test and adopt new production technologies, including digital advances such as robotics and additive manufacturing. Even in a low-interest rate environment, capital is relatively scarce for companies that are too small to tap the bond market
  • Third, the National Resilience Council should sponsor a Manufacturing Regulatory Improvement Commission, along the lines that PPI has suggested in the past. We have no desire to roll back essential environmental and occupational health regulations. But we do want to consider whether rules governing manufacturing have become so restrictive as to unnecessarily force out jobs
  • Fourth, the federal government should take the lead to create a common “language” so that product designers, manufacturers, and suppliers can more easily work together online, just like DARPA helped create the basic structure of the Internet in the late 1960s. Just as a young person can write an app, put it online, and find users around the world, it should be possible to create a design for a new product and easily find potential local manufacturers.

A more extensive set of policies to enhance the resilience of US manufacturing can be found here.

This blog was also posted to Medium. 

 

10 Questions About Trump, Big Tech, and Free Speech

Posted on by The Progressive Policy Institute

Twitter permanently banned Trump. Facebook suspended his account for at least two weeks. Apple and Google pulled the Parler app from their app stores. Amazon booted Parler off AWS. Stripe stopped processing payments for the Trump campaign’s website.

These decisions, among others, have sparked a renewed debate over the power that Big Tech companies have in society, and whether we need to revisit Section 230, net neutrality, or the Fairness Doctrine. Currently, the public discussion is dominated by loud voices making extreme, and often incorrect, claims. In my opinion, these voices are only grappling with the surface-level issues related to tech platforms and speech, which I address in the first seven questions. The final three questions are much harder to answer and require thinking on the margin about what our society values and what tradeoffs we are willing to make. If we focus our time and attention on these latter questions, we can hope to make real progress over time.

1. Is Big Tech more powerful than the government?

Austen Allred, the founder and CEO of Lambda School, tweeted, “Twitter, Facebook, Apple and Google, especially when acting in concert, are much more powerful than the government.” This claim doesn’t hold up to any level of scrutiny. The government has the power to tax you, imprison you, and kill you; the tech companies can delete your free account. Some conservatives have even argued the government should “nationalize Facebook and Twitter to preserve free speech,” the mere possibility of which should tell you who’s more powerful.

 

Journalist Michael Tracey said that Big Tech is “more powerful than most if not all nation states”, which seems absurd considering nine nation states have nuclear weapons.  He also claimed that you “cannot create an ‘alternative’ … at this point” which is directly contradicted by the fact that TikTok went from zero to nearly a billion users in just the last few years.

2. Has President Trump been silenced by Twitter and Facebook?

Trump has been permanently banned from Twitter and suspended from Facebook for at least two weeks. Obviously, his ability to speak directly to his audiences on those platforms has been greatly diminished. But that doesn’t mean he has been silenced or censored. A recent Reuters article asked “How will Trump get his message out without social media?” In short: The same way that every president did prior to 2008. What communications and media networks existed back then? Newspapers, magazines, broadcast TV, cable TV, radio, podcasts, email, text messages, and the open web.

Twitter is not real life. As economist Adam Ozimek said, “Only 22% of adults use Twitter. In contrast almost every house has a TV. The idea that there is some monopoly over access to the public here is really not compelling. Maybe you spend too much time on Twitter if you think that.” Furthermore, only about 10% of Americans are daily active users of Twitter. So that means if you check Twitter at least once a day, then you’re more “online” than 90% of Americans. Active Twitter users likely overrate its importance in the average person’s life relative to newspapers, talk radio, broadcast TV, and cable TV.

It’s also important to remember that Trump’s words haven’t been banned from the platform, only his personal accounts. If the president gives a public speech, or if the White House issues a press release, thousands of journalists will still cover and broadcast his words, in tweets and Facebook posts of their own. For example, on Wednesday, the White House released a statement from Trump urging “NO violence, NO lawbreaking, and NO vandalism of any kind.” The statement was immediately shared on Twitter by reporters and sent out via text message to the Trump Campaign’s subscribers.

Twitter and Facebook suspending Trump’s account is significant, there is no denying that. But the president of the United States can still communicate with the public.

3. Is deplatforming extremists a civil rights issue?

Some conservatives have tried to argue that if liberals think a baker should be required to bake a cake for a gay wedding, then Amazon should be required to provide cloud hosting for Parler and Twitter shouldn’t be allowed to ban Trump. However, these cases are not similar. The case of the baker and the gay wedding was controversial because it involved the collision of two protected characteristics: religious beliefs (of the baker) and sexual orientation (the gay couple).

 

In the cases of Parler and Trump, they were not deplatformed for belonging to a protected class or because of an immutable characteristic — they were deplatformed for inciting violence and insurrection. Repeated antisocial behavior is a perfectly legitimate basis for a platform to remove a user (or for a company to cease doing business with a counterparty). The question is not “should Amazon be allowed to discriminate against conservatives” but actually “should Amazon be required to do business with groups hell-bent on breaking the law.”

No one believes that every user should be allowed on every platform. Not even Parler allows users to post whatever they want:

[Parler’s] community guidelines warn users to avoid spam, blackmail, bribery, plagiarism, support for terrorist organizations, spreading false rumors, suggesting people should die, describing “sexual organs or activity,” showing “female nipples,” and using language or visuals “that are offensive and offer no literary, artistic, political, or scientific value.” Parler also advises users against “any other speech federally illegal in USA,” which the platform incorrectly claims includes doxing and “content glorifying violence against animals.”

That’s why appeals to slippery slope-type arguments are so unpersuasive in this debate. Every platform draws the line somewhere, and that line might move over time as public opinion shifts and as new information arises about what is and isn’t working under the prevailing content moderation policy. We don’t need to protest Facebook’s decision to ban Paul Joseph Watson, Laura Loomer, Alex Jones, and Milo Yiannopoulos by comparing it to what African Americans experienced in the Deep South during Jim Crow, as Will Chamberlain did in this 2019 article for Human Events. These are not civil rights issues — these are questions about what kinds of behavior particular platforms are willing to allow in their communities.

4. Would repealing Section 230 prevent Big Tech from deplatforming users they disagree with?

There continues to be lots of misinformation regarding Section 230 of the Communications Decency Act. Many Republican elected officials and conservative activists argue that recent events show why we need to repeal Section 230, which provides platforms and other interactive computer services immunity for the content users post. This argument relies on an intentional misrepresentation of the statute and the relevant case law. Here is the key part of Section 230 — “the 26 words that created the internet”, as Jeff Kosseff put it:

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

Prior to Section 230, if a platform tried to moderate content (say by taking down hate speech or incitements to violence), then the platform owner became liable for all the content that remained on the platform. This created perverse incentives. Platform owners basically faced two choices: (1) Engage in zero moderation to retain immunity — and watch the platform get overrun by Nazis or (2) Engage in maximum moderation to avoid getting sued for libel or other harmful content. Section 230 fixed this incentive problem by granting immunity to platform providers for users’ speech, thus enabling the platforms to engage in reasonable levels of content moderation.

 

Repealing Section 230 would do nothing to alleviate concerns about bias or censorship. As Senator Ron Wyden, one of the authors of Section 230, said, “I remind my colleagues that it is the First Amendment, not Section 230, that protects hate speech, and misinformation and lies, on- and offline. Pretending that repealing one law will solve our country’s problems is a fantasy.” All repealing Section 230 would do is force platforms back into the “all or nothing” choice on moderation. And because advertisers will not advertise on a platform filled with Nazis and pornography, it wouldn’t really be a choice at all. It’s likely the platforms would become much more aggressive in how they moderate content (if they continue to allow users to post at all). In other words, without Section 230, Trump would have been banned from Twitter years ago.

5. Is Twitter consistently enforcing its terms of service?

Whenever Twitter deplatforms a prominent right-wing figure, conservatives and others concerned with censorship accuse the platform of being biased because it leaves up similarly violent or misleading information from authoritarian rulers in Iran and China. FCC Chairman Ajit Pai called out a few tweets from Ayatollah Khamenei, the Supreme Leader of Iran, last May:

 

More recently, a tweet from the Chinese Embassy in the US tried to paint the ongoing Uyghur genocide in a positive light by saying it was furthering women’s empowerment: “Study shows that in the process of eradicating extremism, the minds of Uygur women in Xinjiang were emancipated and gender equality and reproductive health were promoted, making them no longer baby-making machines. They are more confident and independent.” Twitter initially refused to take down the tweet after Ars Technica reporter Tim Lee reached out to ask why it didn’t violate Twitter’s policies. Only after many others publicly shamed Twitter for its decision did the company finally relent and remove the tweet.

Those who say Twitter has enforced its policies inconsistently are right. But that doesn’t mean Twitter should leave Trump and other extremists alone. Arguing “worse people have gotten away with it” is like saying we shouldn’t arrest a murderer because some serial killers are still roaming free. Twitter should also ban dictators from using its platform and more quickly remove content that promotes or condones violence against anyone or any group of people.

6. Does Europe repress speech less than the US now?

There is also renewed debate about whether there should be one unified internet, or whether a splinternet is a better approach, with each nation governing its own internet.

 

While a further splintering of the internet seems almost inevitable at this point, it would be strange if Europe splits apart over concerns about repression of speech in the US, as Bruno Maçães speculated. The EU has many current (or proposed) laws that repress speech much more than in the US, including:

That’s to say nothing of how the US compares to authoritarian countries such as Russia or China. As Garry Kasparov said, censorship in the USSR is “when the state attacks a company for offending an official … not the other way around.” Or as Jameel Jaffer put it, “forcing publishers to publish the government’s speech is what happens in China.”

7. Can private companies violate your First Amendment rights?

Any debate over a high-profile user getting banned from a social media platform quickly devolves into the two sides talking past each other. Those critical of the decision to ban a user say that it’s a violation of that person’s free speech or First Amendment rights. The other side immediately latches on to the First Amendment part of that claim, pointing out (correctly) that the First Amendment restrains the government from infringing on ability to speak, not private companies or individuals. Since it’s so short, let’s just look directly at the text to make sure we’re all on the same page (emphasis added):

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Clearly, the First Amendment was not meant to abridge the rights of private entities and citizens. But “free speech” is a much broader concept than what’s written in the Bill of Rights. That’s one of the harder questions.

8. How much should private companies restrict free speech and free expression?

In everyday use, “freedom of speech” means the ability for someone to express their views or opinions without fear of retaliation (beyond verbal criticism). In other words, it means that people can speak their mind without fear of a disproportionate response. That doesn’t mean those restraints on speech are bad! As a society we make tradeoffs all the time between different values depending on the context. It just means that “free speech” as a concept is not limited to the First Amendment.

Some conservatives and libertarians think that by pointing out that private companies have First Amendment rights too, that’s the end of the conversation, when in reality it’s only the beginning of the conversation. We must admit that these tech platforms are powerful and the decisions they make affect billions of people worldwide. It is legitimate to raise concerns about who gets to be on and off the platform (even while recognizing the companies themselves are under cross-pressures, with conservatives arguing for a more hands-off approach and liberals arguing for more aggressive moderation).

To start answering the tougher questions, we first need to move past the false dichotomy of the individual and the state. As Noah Smith wrote in his own post about Big Tech and free speech, “Between the government and individual citizens lie a variety of mezzanine authorities who have real power, and whose actions can lead to a real loss of liberty.” Noah continued by citing one his previous pieces (emphasis added):

An ideal libertarian society would leave the vast majority of people feeling profoundly constrained in many ways. This is because the freedom of the individual can be curtailed not only by the government, but by a large variety of intermediate powers like work bosses, neighborhood associations, self-organized ethnic movements, organized religions, tough violent men, or social conventions…whom I call “local bullies.”…

In a perfect libertarian world, it is therefore possible for rich people to buy all the beaches and charge admission fees to whomever they want (or simply ban anyone they choose). In a libertarian world, a self-organized cartel of white people can, under certain conditions, get together and effectively prohibit black people from being able to go out to dinner in their own city. In a libertarian world, a corporate boss can use the threat of unemployment to force you into accepting unsafe working conditions. In other words, the local bullies are free to revoke the freedoms of individuals, using methods more subtle than overt violent coercion.

Such a world wouldn’t feel incredibly free to the people in it.

That’s why merely citing the First Amendment rights of private companies in these cases can leave people feeling hollow. And it’s why we need to thoroughly examine the market power in each layer of the tech stack to decide which layers should have both the responsibility and the ability to moderate content.

The answer here is that there is no clear answer: The decision to ban or not ban accounts or types of speech is inherently political and it’s wrapped up in the profit-maximization desires of the relevant companies. There is no clear rule you can write that will cover every case and there will be backlash no matter what decision these companies make. The existence of the public debate is what constrains platforms. On one side, groups concerned with freedom of expression will limit the platforms’ willingness to moderate. On the other side, those concerned with the negative externalities of certain speech will push platforms to be more heavy handed with their moderation. It is in these debates that societies can determine the level of moderation that is appropriate.

9. Which layer of the tech stack should have the responsibility for moderating content?

Here’s a framework for thinking about these issues: How much capital investment and time does it take to construct or find an alternative vendor, especially given government regulation? How close to the end users on social media platforms are these services? You can think of the tech stack in roughly three layers:

  1. The top layer is the social media apps and websites themselves (e.g., Facebook, Twitter, Parler, etc.);
  2. The middle layer is intermediaries or aggregators of apps and websites (e.g., app stores, browsers, search engines, etc.);
  3. The bottom layer is infrastructure providers (e.g., cloud providers, content delivery networks, the Domain Name System, internet service providers, utilities, payments, etc.).

On the top layer, it is relatively easy for a company to create its own app or website. Scaling these platforms to take advantage of network effects can be difficult, but it’s by no means impossible (see TikTok, Discord, Telegram, Signal, Snapchat, etc.).

In the middle layer, Google and Apple have a virtual duopoly (99% market share) in the smartphone operating system market, which makes their decisions regarding the default app stores on Android and iOS devices very important. But while securing distribution in the two major app stores can be hugely beneficial, it’s not necessary for adoption. Users can navigate directly to a website in a browser and Progressive Web Apps are bringing more and more functionality to web apps that was previously limited to only native apps. Companies can also have their users sideload another app store on Android devices, like Epic Games did for Fortnite. Hypothetically, if Chrome were to block users from accessing websites like Parler at the browser level, then that would be worrisome, as Chrome controls 63% of the browser market (while still noting that users can download alternative browsers such as Firefox or Brave).

On the bottom layer, one troubling story is what an internet service provider did in rural Idaho: YourT1Wifi.com, an internet service provider based in Priest River, Idaho, decided to block access to Twitter and Facebook after some of its customers complained about the platforms banning President Trump. That’s why large ISPs have committed themselves to net neutrality principles that would require no blocking, and why we need net neutrality legislation that would require no blocking without going through Title II at the FCC. It’s also why it’s good news that Elon Musk’s Starlink, a satellite broadband service, is already in public beta.

The bottom layer includes services that would be harder for social media platforms to replicate on their own: utilities (e.g., electricity, natural gas, water, sewage, telephone), internet service providers (ISPs), content delivery networks (CDNs), the Domain Name System (DNS), credit card companies (Visa and MasterCard), cloud providers (e.g., AWS, Azure, Google Cloud) and other payment systems (e.g., Stripe, PayPal, etc.). It would be very hard for a business to lay its own internet fiber, build its own electrical grid, or create an alternative to the Domain Name System. Utilities are especially powerful because they have a lot of local market power (often they’re a de facto monopoly in a community). By contrast, payment processors and cloud providers compete in global markets that are highly competitive, giving companies alternative options if they’re banned by one service provider. Generally speaking, we should be more wary of imposing liability on this layer of the tech stack for what users post on social media. Instead, policy should hew towards neutrality (with exceptions for illegal activity).

10. When should we require neutrality?

Following the framework detailed above, Apple and Google banning Parler from their app stores is a bigger deal than Facebook and Twitter banning Trump from their platforms. And what occurred in the infrastructure layer (i.e., AWS banning Parler and Stripe banning the Trump Campaign) is a bigger deal than what the app stores did. That means we should closely examine the AWS and Stripe cases to make sure these are indeed competitive markets.

First, AWS does not have a monopoly on cloud services (it has a 32% market share). Gab, a free speech social media platform with zero censorship and lots of Nazis, and PornHub, a website that needs no explanation, both operate without relying on the Google and Apple app stores or AWS for cloud services. Parler put itself in this situation by relying on a risk-averse mainstream cloud provider when there were numerous other options for hosting (including self-hosting). (The latest news is the Parler is now switching over to Epik, the cloud provider that hosts Gab). The same is true for Stripe, which only has an 18% market share. While the payment processor is part of the infrastructure layer, there are dozens of other competitors in the market that are available to the Trump Campaign. If these companies in the infrastructure layer had been monopolies, policymakers should have stepped in to enforce a neutrality standard.

 

 

David Sacks, an entrepreneur and venture capitalist, expressed a common sentiment among those displeased with the recent bans by Big Tech: If individuals or apps get banned at every layer of the tech stack — from consumer-facing apps down to infrastructure services — then there is no recourse for those who have been deplatformed. But that’s not actually true. If a user gets banned from Facebook or Twitter, there are numerous alt-tech social media platforms they can join. And after Parler was banned from the Google Play Store and the Apple App Store, it could still be accessed directly from a browser on the open web (or downloaded from a sideloaded app store on Android devices).

As David Ulevitch, a venture capitalist at Andreessen Horowitz, pointed out, even AWS doesn’t “hold the keys to the internet.” There are dozens of other cloud providers, and many companies still self-host using their own servers on-premise (traditional on-prem spending exceeded cloud spending until just last year). While it might be preferable for infrastructure companies to remain neutral (and they might welcome a law taking the decision off their hands), in competitive segments of the infrastructure layer we shouldn’t be too worried about companies exercising their right to not do business with reckless social media platforms.

Conclusion

Somewhat overlooked in this whole debate is that it’s not just Big Tech that’s turned on Trump and his supporters. Virtually all of corporate America has decided enough is enough. The Wall Street Journal is collecting an ongoing list of corporations that have paused PAC donations to politicians. It’s up to more than 50 corporations and includes every household name you can think of, from AT&T to Boeing to Walmart. The most common targets of corporate ire are Trump and the Republican members of Congress that objected to the certification of the Electoral College. The House of Representatives just voted to impeach the president for a second time. Maybe this whole debate is missing the forest for the trees — maybe it’s about way more than Big Tech?

It’s also worth caveating that much of the foregoing analysis will look very different depending on whether law enforcement and national security agencies have been in direct contact with the tech companies regarding imminent threats of violence. If that’s the case, then I think many of the tech platforms decisions look different (save for the decisions to ban Trump). In that context, they wouldn’t be exercising their own discretion over what speech should or should not be allowed on their platforms so much as responding to an implicit or explicit government order. Given the lack of publicly available information right now, we can’t know for sure what the government did or did not tell the tech companies.

At the end of the day, these are complicated issues. Here are the bottom-line takeaways:

  • Social media apps and websites can survive without depending on Big Tech (many alt-tech sites already do).
  • Trump may be banned from Facebook and Twitter, but he’s still the president of the United States and he has not been silenced.
  • Banning right-wing extremists or those who incite violence is not a slippery slope toward an Orwellian dystopia, and it’s certainly not a civil rights issue.
  • No, Big Tech is not more powerful than the government; the government can tax you, imprison you, and kill you.
  • A private company can’t violate your First Amendment rights, but it can restrict your ability to speak freely.
  • Repealing Section 230 would not solve any of these issues; nationalizing the companies in question would cause even more problems.
  • Twitter should ban both Trump and the Supreme Leader of Iran from its platform (and CCP propaganda).
  • This is not about just Big Tech — most large corporations no longer want to be associated with Trump, Parler, or the Republicans who objected to the certification of the Electoral College.
  • Despite all this, the US still values free speech more than any other country in the world.

 

This piece was also published on Agglomerations here.

The Latest in Social Science Research

Posted on by The Progressive Policy Institute

Earlier this month, I attended the annual meeting of the Allied Social Science Associations (ASSA), organized by the American Economic Association, on behalf of PPI. The three-day conference featured hundreds of presentations and papers on economics and social science research and was held virtually this year, sparing me a frigid trip to Chicago. The three topics that I highlight below from the conference address housing, inequality, and wealth building, with links to relevant PPI policy ideas.

Creating Moves to Opportunity: Experimental Evidence on Barriers to Neighborhood Choice

Raj Chetty and Nathaniel Hendren of Harvard University presented the latest findings from their housing mobility program in the Seattle area, Creating Moves to Opportunity. The researchers designed a randomized controlled trial that gave low-income families the choice to move to higher opportunity areas through housing vouchers. They “provided services to reduce barriers to moving to high-upward-mobility neighborhoods: customized search assistance, landlord engagement, and short-term financial assistance” and families were not required to move to high-opportunity neighborhoods to receive a voucher. 

Their services-based intervention proved successful. Families who received support in search assistance, landlord engagement, and short-term financial assistance moved to high-upward-mobility areas at a rate of 53%, compared with 15% of those who did not. Additionally, families who chose to move to higher opportunity areas reported higher levels of neighborhood satisfaction after moving, tended to stay in their new neighborhoods, and did not make sacrifices on other aspects of neighborhood quality. 

This study fits into a larger body of research and evidence illustrating that social programs are more effective when explicitly designed to reduce administrative burdens and search costs for participants. The authors note that “these findings imply that most low-income families do not have a strong preference to stay in low-opportunity areas; instead, barriers in the housing search process are a central driver of residential segregation by income. Interviews with families reveal that the capacity to address each family’s needs in a specific manner from emotional support to brokering with landlords to customized financial assistance was critical to the program’s success. The authors conclude that “redesigning affordable housing policies to provide customized assistance in housing search could reduce residential segregation and increase upward mobility substantially” and note that the intervention is relatively inexpensive given the induced outcomes and overall size of the programs.

Rethinking Inequality with James K. Galbraith, Joseph E. Stiglitz, Jason Furman, and Teresa Ghilarducci

This macroeconomics panel provided a sweeping assessment of different trends in inequality, shining a light on the way that the pandemic has revealed and worsened inequities. 

Of note, Jason Furman of Harvard University focused his discussion on several key points about inequality. He explained that while the pandemic has caused a massive increase in inequality, an overlooked outcome of government aid through stimulus checks and unemployment insurance might ultimately be a reduction in inequality as measured in many Americans’ after-tax income. Furman discussed that the causes of inequality are complex and that there is not one grand unifying theory for the widening gap over the past few decades. He did point to competition policy as one key area where inequality could be reduced through more “vigorous antitrust enforcement” to bring the market closer to competition.

With reference to his first point on a potential decrease in inequality during the pandemic, PPI’s Brendan McDermott recently discussed in a blog post the essential role that government assistance has played in poverty reduction during the Covid recession and how at the onset of the pandemic, researchers found that the poverty rate fell because of “a massive infusion of federal aid.”  

Can Baby Bonds Address Historic Racial Injustice?

Steven McMullen of Hope College shared his paper examining whether baby bonds can help reduce the racial wealth gap among Black families. A baby bond is a government-funded trust account which every child receives at birth. He considers higher deposits from the government for children in lower-income households, creating a progressive impact. The policy would be race-neutral, even if the effect is not. When the participants reach adulthood, the money would be released to be used for purposes such as education, housing, or retirement spending. The author concludes that this is a promising proposal to increase intergenerational wealth among Black and lower-income families and close the yawning racial wealth gap.

In a 2020 paper titled “Democratize Capital Ownership,” PPI’s Jason Gold discusses his idea for government-funded baby bonds linked to national service as a way to tackle the widening wealth gap. He proposes that the federal government seed an account at birth for every U.S. child and the initial investment would be put into a market index or target date fund. Families would be able to contribute post-tax earnings and the funds would be released at age 18 if the account holder agrees to perform a year of national service before they turn 25. The account savings could be used for “post-secondary education, a down payment on a first home, or starting a business.”

Thank you to the ASSA organizers and presenters for a smooth and productive conference this year despite the pandemic and virtual format!

PPI Applauds President-Elect Biden’s Ambitious Agenda to Get the Pandemic Under Control

Posted on by The Progressive Policy Institute

America, it appears we have a real president again.

President-elect Joe Biden yesterday unveiled an ambitious agenda for getting the pandemic under control, helping jobless Americans recover through the Covid recession, throwing a lifeline to millions of small businesses, strengthening the safety net for our most vulnerable citizens, and opening public schools.

PPI applauds the President-elect for stepping boldly into a total vacuum of leadership in Washington. His decision to “go big” with a $1.9 trillion package is just the jolt we need to galvanize national action and spur the sharing of resources to vaccinate Americans faster, protect the vulnerable and speed up economic recovery.

Above all, it’s a welcome sign that experience, honesty and compassion are returning to the White House after a four-year absence. In Joe Biden, Americans will once again have a leader who can make their government work for them.

The details of the Biden plan will be worked out in the weeks ahead. What follows are reactions by PPI policy analysts to its key proposals.

History tells us that Biden’s front-loaded $1.9 trillion fiscal stimulus plan is essential for helping the U.S. economy accelerate out of the Covid Recession and bring jobs back to millions of Americans.  Small businesses, especially, will benefit from the flow of money to poor and middle-class Americans. And if the country has to take on more deficits, this period of low interest rates is the perfect time.

The Biden plan does come with some important risks. We may be facing a weaker dollar down the road, which would lead to rising import prices and higher inflation. Nevertheless, those potential problems are worthwhile given the magnitude of the current crisis. – Dr. Michael Mandel, Chief Economic Strategist 

President-Elect Biden’s proposed $1.9 trillion coronavirus relief plan extends the 15% increase in the Supplemental Nutrition Assistance Program (SNAP) benefits and proposes additional $3 billion in funding for the Women, Infant and Children program, both programs are incredibly essential to supporting the more than 30 million adults and over 12 million children suffering from food insecurity in the United States.  The plan also includes $350 billion in aid to state and local governments which is critically needed during this economic downturn because many cities and local governments use those flexible dollars to support their anti-hunger initiatives including food pantries, senior nutrition and other nutrition programming.  – Crystal Swann, Senior Policy Fellow

The American Rescue Plan is ambitious and boldly prioritizes the needs of working families and those struggling the most during this Covid recession. PPI supports President-elect Biden’s call for an increase in the minimum wage to $15, with a phased approach that takes into account regional differences. The expansions of the Child Tax Credit and Earned Income Tax Credit will reduce child poverty by an estimated 50 percent and alleviate economic hardship for workers without children. The Rescue Plan also has critical support for housing and unemployment, provides funding for childcare, and extends paid family and sick leave for workers affected by the pandemic through September, expanding these benefits to cover an additional 100 million workers. We encourage Congress to move forward swiftly to provide this relief to the American people. – Veronica Goodman, Social Policy Director

It’s refreshing to see the Biden-Harris administration release a policy plan that meets the gravity of this moment. After 20 million Americans have been infected with and almost 400,000 Americans have died from Covid-19, it’s clear that we need policies that will stem the tide of the raging pandemic. A national vaccination effort as proposed by President-elect Joe Biden is the quickest way to get back to normal life and improve the economy.

I am pleased to see the incoming administration prioritize many good policies including increasing surveillance of virus mutations, using the National Guard and the Defense Production Act to support vaccination and testing efforts, and investing $20 billion dollars in the ‘last mile’ of vaccine distribution to get it into more people’s arms faster. While the darkest days of the pandemic may still lie ahead, the plan put forth by the Biden-Harris administration is the quickest way to end this pandemic once and for all. – Arielle Kane, Director of Health Care

President-elect Biden should be commended for offering an ambitious action plan to end the covid pandemic and save the American economy. If even a fraction of these new relief measures were enacted, they would cement the United States’ fiscal response to the pandemic recession as the largest in the world. PPI also applauds the president-elect’s commitment to pursue automatic triggers and stands ready to support those efforts however we can. Lawmakers should enact such mechanisms to provide economic support consistent with the real needs of our economy while preserving fiscal space for the next component of Biden’s recovery agenda. Building back better will require making unprecedented investments in infrastructure and scientific research to mitigate climate change and lay the foundation for long-term growth. – Ben Ritz, Director of the Center for Funding America’s Future

Why A Digital Advertising Services Tax Will Undercut the Small Business Recovery: The Maryland Case

Posted on by The Progressive Policy Institute

EXECUTIVE SUMMARY

As of November 2020, employment in Maryland was down more than 4 percent compared to a year earlier. Small businesses are suffering. Nevertheless, the state’s revenues for the 2021 fiscal year are coming in better than expected in spring 2020, buoyed by federal stimulus and continued employment of white collar workers.

Under the circumstances, enacting a new tax that would be especially harmful to small businesses seems like a mistake. However, in spring 2020 Maryland state legislators approved a new tax on annual gross revenues derived from digital advertising services in Maryland, with the proceeds to be devoted to education. The bill, which broadly covered “advertisement services on a digital interface,” was vetoed in May 2020 by Governor Larry Hogan, with the veto potentially in line to be overridden by the state legislature in the session that began mid- January 2021.

In this paper we will explore the economics of digital advertising and the economics of a digital advertising services tax, with special attention to Maryland. We make four main points:

  • The price of digital advertising has fallen by 42 percent since 2010 across the United States. This decline has fueled a sharp reduction in ad spending as a share of GDP.
  • Our calculations suggest that the falling price of digital advertising is saving Maryland businesses and residents an estimated $1.2 billion to $2 billion per year, based on the size of the state’s economy.
  • Passing the digital advertising services tax is likely to reduce the cost benefits of digitaladvertising to Maryland businesses and residents. In particular, the tax will drive up the price of help-wanted ads in Maryland, making it harder to connect unemployed Maryland residents with local jobs. In addition, employers will rely less on public ads and more on personal connections with friends and family, disadvantaging less- connected groups such as minorities and immigrants.
  • Raising money for education is a worthwhile goal. But the appropriate source of funds are broad-based taxes such as sales tax or an income tax, rather than a narrow and distortionary tax on one small but vital segment of the economy. In addition, moving to a combined corporate income tax framework could help reduce income shifting and increase tax revenues.

 

THE ECONOMICS OF DIGITAL ADVERTISING

Before discussing the particulars of the Maryland digital advertising tax, we’ll consider the broader economics of digital advertising. Prior to the widespread use of the Internet, the legacy media–newspapers and local television and radio stations– had a near-stranglehold on local advertising. Newspapers, especially, used that market power to raise advertising rates, because local retailers and other businesses had no other good alternatives if they wanted to reach nearby consumers. According to data from the Bureau of Labor Statistics, the average price of newspaper advertising tripled between 1980 and 2000, rising far faster than the overall consumer price level (which doubled over the same period).1

As a result, businesses had to pay increasingly large sums for consumer-oriented advertising in the pre-Internet days. For retailers, restaurants and other local businesses who wanted to reach new customers, there were few viable alternatives.

Equally important, local employers had to shell out for “help-wanted” ads in newspapers in order to find good workers. Newspapers could and did jack up the price of these employment ads because businesses—especially small businesses—had no other way to reach potential employees before the era of digital advertising.

When we look back to the era before digital advertising, it is stunning how newspapers used help-wanted advertising as a high-priced cash cow. Consider, for example, the price of help-wanted ads in the Washington Post before the widespread use of digital advertising. In 1980 the Washington Post charged potential employers $1.98 for a single line in an employmentclassified ad, placed a single time in a dailyedition.

By 1990 the price of that same single line in a Washington Post help-wanted ad had risen to $6.70, a 240 percent increase. The price increases continued for the next decade, with the price of a line in a help-wanted ad rising to $11.06 by 2000, another 65 percent gain, far exceeding the 34 percent increase of the consumer price index over the same period.2

These ads were expensive—running just one five-line help wanted ad for just one week in 2000 would cost around $85, without volume discounts and including the more expensive Sunday edition. Small businesses who did not have their own HR departments, especially, had no other choice except to pay big bucks to the newspapers in order to hire.

Employers got huge price relief as the Internet became more important. Rather than being forced to run high-priced ads in newspapers, they could shift their help-wanted ads to online portals such as Craigslist, Monster.com and Indeed.com, which were both much cheaper and much easier for jobseekers to search. For comparison, today a Craigslist job posting in the DC area—which gives employers a full paragraph to work rather than just five lines–costs $45 for 30 days (Baltimore is priced at $35 per ad).3

Since 2010, the overall price of digital advertising has fallen by 42 percent, according to the BLS. (That figure excludes print publishers such as newspapers.). By comparison, the price of newspaper advertising, both print and digital, is down by only 7 percent since 2010.

This drop in price for digital advertising has been a tremendous boon for businesses, especially small businesses like restaurants and retailers, who used to have a limited set of options for consumer advertising. Businesses of all typesnow find it much cheaper and easier to post help wanted ads and find qualified help.

On a macro level, businesses and consumersare benefiting from the lower cost of digitaladvertising. In 2019, advertising amounted to about 1 percent of gross domestic product (GDP). That’s down from 1.5 percent in 2000, and an average of about 1.3 percent in the 1991-2000 period.4

In other words, the shift to digital advertising has lowered ad spending by about 0.3-0.5 percent of GDP. This is money that goes directly into the pockets of businesses and consumers.

What about Maryland? According to the Bureau of Economic Analysis (BEA), Maryland’s state GDP was roughly $400 billion in 2019.5 Applyingnational figures, that suggests digital advertisingis saving Maryland businesses and consumers about $1.2-2.0 billion per year.

IMPACT OF DIGITAL ADVERTISING TAX

Keeping in mind the lower price of digital advertising, what economic impacts would we expect from the proposed digital advertising services tax? H.B. 732 proposed a new tax on the annual gross revenues derived from digital advertising services in Maryland. The tax rate would vary from 2.5 percent to 10 percent of the annual gross revenues derived from digital advertising services in Maryland, depending on a taxpayer’s global annual gross revenues. To be required to pay the tax, a taxpayer must have at least $100 million of global annual gross revenues and at least $1 million of annual gross revenues derived from digital advertising services in Maryland.

Note that this is a tax on gross receipts, a type of state tax that has been judged by economists as intrinsically problematic.6 Gross receipt taxes are exceptionally sensitive to market structure, since the tax can be theoretically applied at each stage of the advertising production and sales process, which could lead to double (or multiple) taxation. In this case, the Maryland tax authorities will have to determine the “real” seller of the digital advertisements, which in many cases is not obvious.

Note also that the legislation does not actually specify what it means for digital advertising services to be “in Maryland.” That task is left up to the state’s Comptroller. But it seems clear that at a time when users are increasingly concerned about privacy, the legislation will effectively force advertisers to identify the location of people who view or click on digital ads. That is a move in the wrong direction, and might even violate the laws of some states or countries where the digital advertising companies are headquartered.

Because the digital advertising services tax, as proposed, is a tax on gross receipts rather than income, it has the potential to badly hurt profit margins. Consider Yelp, for example, the well-known company whose mission is to connect consumers with local businesses. As reported in Yelp’s 2019 annual report, the company has global revenues of $1 billion, virtually all fromdigital advertising, and an after-tax profit marginof 4 percent. Since Maryland accounts for 2 percent of U.S. GDP, that suggests Yelp’s Maryland revenues are $20 million, well over the threshold for applying the 10 percent tax rate in the proposed legislation.

The implication is that the proposed digital advertising services tax could turn Yelp’s Maryland business into a money-losing proposition. That’s insane. Yelp’s only options would be to either withdraw from the Maryland market or significantly raise its advertising prices (which would be difficult to do in a competitive market).

Whether digital advertising companies raise their rates or withdraw from Maryland, it would be bad news for local businesses trying to recover from the pandemic recession, and bad news for consumers who would just be crawling out of their pandemic-induced depression. Using digital advertising, owners are able to reach customers, showcase products, even confirm they are still open. Raising the price of digital advertising and reducing its availability could help slow those recovery efforts.

Or consider the impact of the proposed tax on “help wanted” postings. Since these ads have to identify a location of the job, it will be easy to connect the receipts to Maryland. Clearly what will happen is that Craigslist and other job sites will likely put a surcharge on Maryland- based help-wanted ads to account for the digital advertising services tax. The implication is that advertising for a job in Maryland will be more expensive than it was prior to the tax. That may even put Maryland employers at a disadvantage in attracting talented workers.

At the margin, Maryland employers will reduce their purchases of digital help-wanted advertising. In that way, the introduction of a digital advertising services tax will slow down the rate of hiring in the state.

The other likely effect is that employers will rely more on personal networks such as friends and family to fill positions, rather than advertising on the open internet. This is bad news for groups that are less well-connected, such as low-income workers, minorities and immigrants.

THE NEED TO RAISE REVENUE

Some people argue that taxing advertising to pay for education is a good trade-off for society. After all, the benefits of education are undeniable, while advertising is annoying to many people.

But advertising does have the virtue of allowing consumers to uncover cheaper and better goods and services, and aiding jobseekers in finding better employment opportunities. Recent economic research has actually looked at the plusses and minuses of taxing or fining advertising and transferring the proceeds to low-income workers.7 Calibrating the model using real world numbers, they found that the “advertising equilibrium modeled is surprisingly close to being efficient.” The implication, at least from the initial research, is that taxing digital advertising doesn’t gain much.

What are the alternative sources of revenue for education in Maryland? There is now the possibility of additional state support packages from the federal government in 2021. And in terms of taxes, without delving deeply into details, economists believe that the best taxes are broad and non-distortionary. That would argue in favor of increasing the top tier of the Maryland income tax, now set at 5.75 percent for taxable income over $250,000, especially since many high-income individuals have done well during the pandemic recession. Such an increase would raise revenues without imposing large deadweight losses on the state economy.

On the corporate income side, one possibility is for Maryland to shift to a system of “combined filing” for state corporate income tax. That would treat a parent company and its subsidiaries as one entity for state income tax purposes, according to the Center for Budget and Policy Priorities, “thereby helping prevent income shifting” and potentially raising money.8

By comparison, a tax on digital advertising would dampen the ability of Maryland businesses to reach out to customers precisely at the time when it is needed—coming out of the pandemic recession. Small Maryland businesses trying to regain their customers need as much access to digital advertising as possible. Putting a tax on digital advertising is like taxing the future—and that’s never a good idea.

A Note to President-elect Biden: The Impact of the EU DMA on US Jobs

Posted on by The Progressive Policy Institute

President-elect Joe Biden has got plenty on his plate to worry about. Covid, recession, uniting a divided country, rebuilding relationships with our allies. But if he wants a strong job recovery, he might want to make sure that someone on his staff is keeping an eye on the new draft legislation that the European Union just announced, the Digital Markets Act (DMA). If it goes into effect as written, it would create a new category of “gatekeepers” that targets the largest U.S. tech firms with extensive new regulations and the potential for huge fines, up to 10% of global revenues.

It will take a year or more before these draft regulations go into effect. But when they do, the new EU regulations may hold back the U.S. economic recovery that Biden and his team are counting on. The problem: Jobs generated by the tech/ecommerce sectors were a key part of the positive US labor market story before the pandemic.  Many of those jobs are “export-oriented,” in the sense of being tied to the global leadership of the big tech companies. So when the EU imposes tighter controls on tech firms in Europe, that’s likely to slow the job recovery at home as well.

How important is the tech/ecommerce sector for job growth? Our analysis of U.S. job data shows that tech/ecommerce sector jobs grew by almost 19 percent from 2016 to 2019, almost four times the 5 percent growth of overall private sector jobs. That means the tech/ecommerce industries directly accounted for 791,000 net new jobs from 2016 to 2019, without even accounting for spillover effects.  This total includes App Economy jobs, ecommerce fulfillment jobs, cloud computing jobs, database jobs, and customer tech support jobs.

During the pandemic, the tech/ecommerce sector has continued to hire while the rest of the economy has contracted. From October 2019 to October 2020, the tech/ecommerce sector gained 200,000 jobs while the rest of the private sector lost 8 million jobs. Historically, the pattern is that the particular industries which continue to grow during a recession are also the ones that lead the subsequent recovery. This is an unusual sort of recession, but if the pattern holds, the tech/ecommerce industries will be a key force propelling the Covid rebound.

But here’s the issue with the EU regulations. Many of the tech/ecommerce jobs in the U.S. are export-based, in that they are strongly tied to overseas sales. The big tech companies make huge people-intensive investments in research and product development at home which help support their overseas operations. To the degree that the EU regulations reduce the profitability of overseas operations of big U.S. tech firms, that will reduce employment at home, just like any restrictions on exports.

We will not go into detail on the new EU regulations here. It’s important to note, however, that if they are implemented in their current form, they would impose a long list of new obligations on “gatekeepers.” The definition of “gatekeepers” appears to be broad:

Providers of core platform providers can be deemed to be gatekeepers if they: (i) have a significant impact on the internal market, (ii) operate one or more important gateways to customers and (iii) enjoy or are expected to enjoy an entrenched and durable position in their operations.

However, because of the particular thresholds that are being proposed, it appears that the “gatekeeper” designation is only going to apply to American firms.

As we consider the domestic implications of the EU regulation,  it’s worthwhile to say a bit about the political impact of tech/ecommerce jobs in the aftermath of the presidential election. Our calculations show that jobs in the tech/ecommerce sector grew at roughly the same rate in the states that Biden won (19% from 2016 to 2019) versus the states that Trump won (18.7% over the same stretch) (Figure 1). In other words, both Biden states and Trump states have been benefiting from the global presence of the tech/ecommerce sector, with tech/ecommerce job growth far faster than that of the private sector in both cases.

Figure 1: Broad-based Tech/Ecommerce Job Gains (percentage change, 2016-19)
Tech/ecommerce jobs Private sector jobs
Biden states 19.0% 4.7%
Trump states 18.7% 5.0%
*NAICS 4541, 493, 5112, 518, 519, 5415.

Data: Bureau of Labor Statistics

 

From another perspective, the contribution of the tech/ecommerce sector to overall job growth  has been rising in both the Biden and Trump states. For example, in the Trump states, the share of net private sector job creation coming from tech/ecommerce rose from 8% in the 2013-2016 period to 10.4% in the 2016-2019 period.  The Biden states show a similar trend. In both cases that upward arc would likely be interrupted  by the EU’s implementation of the DMA, undercutting a key industry needed for recovery from the Covid downturn.

 

 

 

 

 

Republican Demands For Covid Relief Forced Some Bizarre Choices

Posted on by The Progressive Policy Institute

The nearly 5600-page omnibus government funding and covid relief bill passed by Congress yesterday was an undeniable win for the American people, providing much-needed relief for those most affected by the pandemic. In addition to preventing a government shutdown, the bill extended and expanded unemployment insurance; provided aid to restaurants, airlines, and other businesses heavily impacted by the pandemic; and provided robust funding for vaccine distribution to help end the pandemic sooner and get people back to work. It also included other important policy developments, such as a long-stalled proposal to limit surprise medical billing and investments to combat climate change. But an arbitrary demand from Republicans that the bill not exceed $1 trillion, combined with their monomaniacal focus on business tax cuts, resulted in some bizarre and unfortunate tradeoffs.

Read the full piece here.

Considering eCommerce wages

Posted on by The Progressive Policy Institute

Bloomberg recently ran an article about the impact of Amazon fulfillment centers on warehouse wages. The story’s point was simple: “A Bloomberg analysis of government labor statistics reveals that in community after community where Amazon sets up shop, warehouse wages tend to fall.”

A bit of background here: The once-sleepy warehousing industry, which was nobody’s idea of a growth sector, used to be the equivalent of serviceable shoes.  Companies would put up warehouses  to store parts that were heading to domestic factories, and to store finished products  that were on their way from domestic manufacturers to retailers and business purchasers. Later, as U.S. factories closed, warehouses held mountains of imports from China and other countries.

Prior to the ecommerce era, the whole notion of a governor or mayor  proclaiming “We need another warehouse as a source of good jobs!”  was laughable. Indeed, warehousing in most counties was a tiny source of jobs, often too small to be measured and reported by the Bureau of Labor Statistics.

But the ecommerce boom has supercharged the warehousing industry. Most eCommerce fulfillment centers are counted as warehouses by the BLS, but as I wrote in my 2017 report, these fulfillment centers  “bear the same relationship to ordinary warehouses as jet planes bear to bicycles. Whereas an ordinary retail warehouse is a stopping place for bulk shipments on the way to stores, a fulfillment center dynamically responds to orders from individual customers, integrating many different vendors.”

Thus, the Bloomberg story is covering an important topic, as I told the reporter. And given my long history as chief economist and economics writer at BusinessWeek (in its pre-Bloomberg days),  I strongly support journalistic organizations doing data-driven reporting. It’s the right way to go.

But based on my own analysis, I strongly disagree with the conclusions in the story. More broadly, I’m concerned with the need to put data into context.

Let’s start by taking a closer look at BLS data for wages for production and nonsupervisory workers in the warehousing industry, which are the floor workers that we actually care about.   Rather than falling, as the story implies,  hourly earnings for production and nonsupervisory workers in the warehousing industry, adjusted for inflation,  have risen by  11.5% in the “e-commerce era” (2013-2019). (details available on request). That’s a far bigger gain than other major sectors, including retail, manufacturing and healthcare (Figure 1).

 

 

 

 

To put this in context, this increase in real wages for production and nonsupervisory workers—who make up almost 90 percent of the employees in the “warehousing and storage” industry (NAICS 493)—comes after many years of declining real wages in an industry that was moribund and stagnant before it was transformed by the coming of ecommerce (Figure 2)

Why do these figures paint a very different picture than the Bloomberg article? One key difference comes from  the limitations of the particular wage measure that Bloomberg used,  average weekly wages from the Quarterly Census of Employment and Wages (QCEW).  I will discuss here some of the strengths and weakness of the QCEW wage measure that the Bloomberg article uses.

Second, the Bloomberg piece misses the broader context of the ongoing transformation of consumer distribution, which has integrated retail, warehousing, and delivery in a way that was never possible before. Ecommerce uses technology to create jobs, boost productivity, and raise pay by shifting workers from low-paid brick-and-mortar retail jobs to much better paid ecommerce fulfillment jobs.  I will discuss this broader point as well.

We start with a description of the wage measure used by the Bloomberg article. The QCEW collects data on employment and wage payments on a detailed industry and county basis. It enables economists to say, for example, that there were 898 employees in the warehousing industry in Mercer County (NJ) in 2013, rising to 6115 employees in 2019.  (Mercer County is the location of the Robbinsville (NJ) Amazon facility featured in the Bloomberg story). The QCEW data also reports that wage payments to warehousing workers in Mercer County rose from $46,223,000 in 2013 to $222,356,000 in 2019, and that average weekly wage fell from $990 to $699 per week.

What do we make of this decline in average weekly wages? The QCEW data are very useful, if handled with care. But the QCEW has limitations. First, there is no information on hours of work on a county and industry level, so average weekly wages can rise or fall as workers work more or fewer hours per week. If there are more part-time workers, average weekly wages can fall, even if hourly wages stay the same.

Second, the lack of QCEW data on hours of work by industry and county means that  hourly earnings cannot be calculated from the QCEW data without making additional assumptions. (For example, the Bloomberg article appears to report hourly earnings for warehousing workers in Mercer County, saying that “Six years ago, before the company opened a giant fulfillment center in Robbinsville, New Jersey, warehouse workers made $24 an hour on average, according to BLS data. Last year the average hourly wage slipped to $17.50.”  I could be wrong, but it appears to me that this calculation was done by assuming that average hours worked per week in the warehousing industry in Mercer County did not change after Amazon opened its facility. If so, the Bloomberg piece should have reported that assumption.).

Third, QCEW weekly wages can change as the composition of the workforce changes. For example, if the composition of warehouses shift towards relatively fewer high-paid managers and relatively more nonsupervisory workers, that could lower average weekly wages even if the wages for the nonsupervisory workers was actually rising.

A simple example will make that point. Suppose that we start off with a sleepy little warehouse with 1 manager earning $1200 per week and 1 “picker and packer” earning $600 per week. Then the average weekly pay for the entire operations is $900 per week.  Now suppose that the operation expands to hire 7 more “picker and packer” and in order to attract the new workers their pay is raised to $660 per week. Then the average weekly pay falls to $720 per week, even though pay for individual workers has increased (Calculations available upon request).

A related point is that average weekly wages in the QCEW data can rise if younger and lower-paid workers are laid off. So in the example above, if the single picker and packer was laid off, leaving only the manager, the weekly wage at the “warehouse” would go from $900 to $1200. My analysis of the BLS county-level data (details available on request) shows a negative correlation between job growth and weekly wage growth in warehousing over the time period 2007 to 2019.. Indeed, many of the counties with the biggest wage growth in warehousing also have shrinking warehouse employment. Meanwhile, fast-growth counties, whether they have an Amazon facility or not, show relatively slow warehousing wage growth on average.

Fourth, the QCEW is sensitive to the form of compensation.  Employer payments for benefits such as health care and retirement contributions are not generally counted as part of QCEW wages (though some states do count 401k contributions).  So if there is a shift towards employers who pay better benefits, that does not show up in the QCEW wages.

In addition, most stock options are generally not counted as part of QCEW pay until they are exercised and become taxable income. Similarly, restricted stock units (RSU) are generally not counted as part of QCEW pay until they vest and become taxable.

This last point, while wonky, is relevant for analyzing Amazon pay in particular. According to press reports, many Amazon fulfillment center workers received restricted stock units during the years covered by the Bloomberg study. According to one source,  Amazon RSUs vest at 5% after one year, another 15% after two years, another 40% after three years, and the final 40% after four years. For example,  a big chunk of compensation paid to an Amazon fulfillment center worker in 2014  would not show up in the QCEW data until 2017 and 2018. That would artificially depress the initial reported wages when a new fulfillment center opens, especially given the rise in Amazon stock prices.

To further complicate matters, when Amazon raised its minimum wage to $15 in 2018, it also changed the form of its compensation package for fulfillment center workers, including phasing out RSUs. These changes make it very difficult to interpret the recent QCEW wage figures. My best guess is reported weekly wages in warehousing are significantly underestimated, but coming up with a quantitative figure would require an in-depth analysis of the Amazon pay package, which I have not done, as well as an estimate of worker churn.

The BLS offers alternative sources of pay data. The Current Employment Statistics  program asks a sample of businesses to report wages and hours by industry,  with an additional category of production and nonsupervisory employees. These figures, which do *not* include annual bonuses, were reported in Figures 1 and 2. As noted, they show strong growth in real hourly earnings for production and nonsupervisory workers in the warehousing industry.  The caveat is that they do not reflect changes in the annual bonus structure of the industry.

Another source of pay data is the Occupational Employment Statistics (OES) program, which offers detailed data on pay for occupations in different industries and locations. The OES enables us to compare “apples to apples,”  matching up the same occupations in different industries. In particular , laborers and material movers, who make up about 45% of the warehousing workforce, average $16.19 per hour in the warehousing industry. That’s more than workers in the same occupation make in manufacturing ($15.78) or the private sector as a whole ($14.64), as shown in Figure 3.

Taking these numbers on face value suggests that laborers and material movers  can do better in the warehousing industry than in the rest of the economy, which is probably the right comparison to make. Note, interestingly enough, that the overall wage in warehousing is lower than manufacturing or private, pulled down by a lower white-collar wage. However, as before, the key caveat is that these figures do not include annual bonuses, exercised stock options or tuition repayments. So the lower wages for white-collar workers should be taken with a grain of salt.

Figure 3. 2019 average hourly pay, dollars per hour (OES)
Warehousing Manufacturing Private sector
All occupations        19.77        26.09        25.20
Management Occupations        52.65        65.11        60.26
Business and financial operations        31.99        36.92        37.92
Computer and mathematical occupations        33.56        49.38        45.88
Office and Administrative Support        19.62        20.91        19.46
Installation, Maintenance, and Repair        24.82        25.98        23.95
Transportation and material moving occupations        17.96        17.58        18.01
Laborers and material movers        16.19        15.78        14.64
Packers and Packagers, Hand        15.01        13.94        13.30
Data: BLS (OES)

But that’s enough about the wonky dive into the data. Now let’s consider the broader question about how to best measure the impact on the labor market of the ongoing transformation of the retail, warehousing, and delivery industries.

Conventional retailing—especially big box retailing—turned the store into the warehouse, and consumers into pickers and packers.  Clothes, electronics, and building materials were stacked to the ceiling, as buyers roamed the “miles of aisles.” Households had to drive to stores and effectively be their own delivery services. In return, they could get everything they needed in one place.

E-commerce flips the equation.  The picking and packing function is done by ecommerce fulfillment workers, saving household time and creating jobs. These jobs are clearly better paid than the typical jobs in the brick-and-mortar retail sector, by about  30 percent.

Even during the pandemic, the  jobs  generated in electronic shopping, ecommerce fulfillment and delivery either more than or almost compensates for the jobs  lost in brick-and-mortar retail, depending on the month. For example, if we compare October 2019 to October 2020, brick-and-mortar lost 269,000 full-time-equivalent (FTE) jobs while ecommerce industries (NAICS 4541, 492, and 493) gained 295,000 FTE jobs, for a net plus.

Even as the new consumer distribution sector—retail, warehousing, and delivery–uses technology to improve productivity, it’s generating new higher-paying jobs. From October 2019 to October 2020,  average hourly earnings in the combined retail, warehousing, and delivery sector rose by 5.2 percent, far above the rate of inflation and beating the average private sector wage growth of 4.4 percent (by this time I don’t need to remind you of the multiple caveats).

What about the labor market in Mercer County, home of the Robbinsville (NJ) fulfillment center featured in the Bloomberg story? It turns out that looking at the broader consumer distribution sector–compromising retail, warehousing and couriers and messengers (local delivery)–gives a very different picture than simply focusing on warehousing (Figure 4).

Over the 2013-2019 period Mercer County employment in the consumer distribution sector—comprising retail, warehousing and couriers and messengers (local delivery) expanded by 25%, almost double the rate in the rest of the private sector (Figure 4). That’s all coming from warehousing, and it’s unalloyed good news for Mercer County workers, because they have access to many more job opportunities.

Similarly, total wage payments in the consumer distribution sector expanded by 42%, also much faster than the rest of the labor market. That’s good news for the local economy, and tax revenues.

And wage growth in the consumer distribution sector was somewhat faster than the rest of the labor market, as workers were hired in warehousing jobs that paid significantly more than brick-and-mortar retail in the county. These figures suggest that Mercer County’s workers and local economy benefited from the transformation of the consumer distribution sector (once again, all caveats apply).

 

Figure 4. Mercer County (NJ), percentage change, 2013-2019
Consumer distribution* private sector minus consumer distribution
Jobs 25.1% 13.0%
Total wage payments 42.4% 27.5%
Average weekly wages 13.8% 12.8%
*Retail, warehousing, couriers and messengers
Data: BLS QCEW

 

I’m going to stop this overly-long blog post here. The bottom line is that the Bloomberg story tackled an interesting and important question, but if reporters do data-driven stories, they need to be more sensitive to the strengths and weaknesses of the underlying data. Interrogate the data as they would interrogate a source, rather than taking it for granted. Let the readers know where the assumptions are and the problems are. Give them alternative perspectives and context.