In recent decades Americans have seen a huge increase in trade (flows of exports and imports). This influx in global trade has posed significant challenges to U.S. workers. The trade flows (and policy responses to them) have contributed to anemic wage growth for workers without a college degree, caused severe damage to manufacturing communities throughout the country, and represent an increasingly unsustainable organization of global production and consumption.1 People in the U.S. have good reason to be conflicted about the challenges that globalization and the rise in trade pose to their working lives and communities, and the potential benefits trade can create.

U.S. workers have also watched as too many policymakers enthusiastically push a proliferation of trade agreements. These agreements have accelerated trade flows and carved out corporate-driven “rules of the game” for a globalization that puts almost no priority on the well-being of regular people in the United States or the resilience and sustainability of the overall economy. Most of the Washington, D.C., establishment has supported these trade agreements, promising a supposed influx of good jobs and increased standards of living that would come because of increased trade.

Given this history, it is no surprise that many of these workers want something different from policymakers regarding our nation’s approach to globalization. And the Trump administration’s current approach is certainly different—it is even worse than what came before. This approach is motivated by ever-changing and contradictory goals and is built entirely on threats of historically high and broad-based tariffs that change by the day (or even hour) rather than opportunities for mutual benefit from cooperation.

Ratcheting up tariffs across the board is not a serious response to, nor will it solve, the larger challenge of lackluster wage and job growth for noncollege workers. Lower tariffs were not a significant driver of the larger trade flows that pressured wages for these workers in recent decades. This is not to say that there are not real problems with the U.S.-led global trading system nor useful changes to be made to policies regarding globalization. But historically high and broad tariffs are not among them, and domestic policy choices have had much more to do with the wage suppression most U.S. workers have experienced in recent decades (Mishel and Bivens 2021).

In this paper, we provide a rough outline for how those concerned about the economic plight of working-class Americans should approach issues concerning globalization and trade. Often the best approach to issues intersecting with international trade does not directly implicate traditional trade policy tools (like tariffs). For that reason, we say that these recommendations constitute a progressive approach to globalization in the 21st century.

Key challenges that globalization poses to U.S. workers:

• Growing import flows from lower-wage nations and threats to offshore jobs put modest, but steady, downward pressure on wages of workers without a college degree.
• Chronic trade deficits have reduced employment in U.S. manufacturing and raised our foreign debt.
• The inflation stemming from pandemic and war shocks between 2020 and 2024 highlighted the fragility of global supply chains. These supply chains should be strengthened to prepare for a future prone to larger and more frequent shocks.
• Competition from foreign trading partners that permit unfair and abusive labor practices has made labor artificially cheap.
• A failure to harmonize climate regulations internationally threatens to see greenhouse-gas polluting production simply migrate away from the United States to low-standard locales rather than being reduced globally, undermining U.S. industry and forcing the burden of adjustment onto workers in greenhouse gas-intensive sectors.
• A failure to harmonize corporate tax treatment internationally allows corporations to play countries off each other and ensures that some countries will almost always have incentives to act as tax havens, making it harder for all countries to impose reasonable taxes on corporate profits.

Although policymakers from both parties have too often been reluctant to admit to the problems created by a U.S.-led, corporate-friendly global trading system, none of these problems presents insurmountable challenges. Our key recommendations to solve the central problems of globalization are the following:

• While trade flows have put downward pressure on wage growth for large portions of the U.S. workforce in recent decades, trade policy would have only weak and unreliable effects in reversing this. Instead, policymakers should strengthen key domestic policy bulwarks that underpin workers’ leverage and bargaining power to boost wage growth. These domestic policies include a substantial increase in the minimum wage, protections for workers to freely associate and bargain collectively in unions, and full employment macroeconomic policy management, which will have larger and more reliable effects on wage growth.
• Reducing damaging trade deficits cannot be solely achieved through trade policy unless it is so restrictive that it functionally returns the country to an isolated regime with no trade at all. Instead, more balanced trade will only result from macroeconomic policies consistent with lower trade deficits, including exchange rate management and a reasonable mix of fiscal and monetary policies.
• Supply chain resilience is important, yet individual businesses will underinvest in it without public support. Collapsing supply chains initially sparked the post-COVID-19 inflationary spike across the globe. Supply chains remain vulnerable to disruptions from natural disasters, geopolitical events, and even human and computer errors. Unless one is entirely confident that these events will never happen again, the costs of supply chain fragility are potentially large enough that it’s worth using policy measures to build up supply chain resilience. Trade policy tools like tariffs and subsidies are potentially useful measures here.
• The U.S. should reward countries that respect labor rights with preferential access for their imports and should incentivize other countries to enforce labor standards. This can be done by imposing tariffs that shrink as countries improve in upholding labor rights. These tariffs cannot fully protect U.S. workers from competition from countries where exploitation makes labor cheap, but tariffs can provide some buffer from this, and imposing them provides a valuable political signal that simple fairness matters for trade policy (as it does for all other types of policy).
• Effective climate policy must be global, if not universal. In terms of driving destructive climate change, it does not matter where greenhouse gas pollution originates. National policies that raise the price of pollution locally but simply push emitting factories offshore fail to deal with the overall problem while putting domestic industries at unfair disadvantage. Until there is a more coordinated global approach to greenhouse gases (a global carbon tax or something similar), national governments should be willing to leverage trade policy tools (like tariffs tied to the intensity of greenhouse gas emissions involved in producing imports) to promote lower-pollution industries while avoiding “carbon leakage,” reduce global emissions, and incentivize industry investments in carbon-reducing technologies.
• International coordination of tax policy that ensures large multinational corporations pay their fair share in taxes would help U.S. workers far more than either higher tariffs or more trade agreements. The global tax system currently provides easy access to tax havens for corporations and encourages the offshoring of both paper profits and real factories away from the United States. Much of this problem can be solved unilaterally, but even the remaining problems constitute a far more important and pressing target for useful international coordination than further trade agreements do.

Policy recommendations to address these challenges

In this section, we provide some high-level recommendations about how policies should address globalization’s challenges.

Trade policy can do little to spur wage growth, but domestic policies would be much more effective

The production of imports from lower-wage nations tends to intensively use noncollege labor relative to U.S. exports. This means that the pattern of trade flows between these nations and the U.S. reduces the demand for noncollege labor in the United States, as imports displace more noncollege labor than exports support. Hence, trade flows put steady, albeit modest, downward pressure on wage growth for noncollege workers, a group comprising over 60% of the workforce (EPI 2025). The downward pressure on wage growth is nontrivial. Between 1979 and the mid-2010s, these trade flows likely depressed wages of noncollege workers by between 5%–6% (Bivens 2013; Autor, Dorn, and Hanson 2011). For workers who have seen extremely slow growth in wages over this entire period, another 5%–6% of wage growth would have been most welcome.

Crucially, this downward wage pressure stemming from trade flows does not just affect workers in tradeable industries. It spills over and puts downward pressure on wages for noncollege workers throughout the economy. Further, the wage suppression that trade flows imposed on noncollege workers allowed income gains for college-educated workers and business owners. 2 Yet policymakers never offered compensation to noncollege workers at anything close to the scale of this redistribution of income away from them. Instead, policymakers offered vague promises of retraining and empty assurances that trade was always “win-win.” This policy neglect added a deep insult to the injury of trade-induced wage suppression for these workers.

Yet it is important to remember that this policy neglect was not confined to globalization. In fact, nontrade forces supported by intentional policy decisions were putting far more intense downward pressure on wages than trade flows did.3 One aspirational benchmark for wage growth is economywide productivity growth. In the 30 years after World War II, broadly equal wage growth among all workers was clearly a target for policymakers who supported strong institutions (from unionization to fast-growing minimum wages to the maintenance of full employment) to meet this target. But over the 1979–2019 period, wage growth for noncollege educated workers decoupled from overall productivity growth, and as productivity growth continued, worker wages lagged behind—cumulatively by close to 50 percentage points over this period.

Trade competition certainly contributed to this decoupling and stagnation of wages. But analysis shows that nontrade sources explain three-quarters or more of the entire wage suppression these workers experienced in this time (Mishel and Bivens 2021). Reversing the nontrade forces that have contributed to wage suppression would do far more to help noncollege workers than any policy that could influence trade flows. Further, besides these nontrade forces having more force in boosting wage growth, they are also far more reliable in their effect. The policy levers available to influence trade flows are generally weak and unreliable unless taken to utterly extreme levels.

Finally, while growing trade flows with lower-wage nations reduced wage growth for noncollege labor in recent decades, they also boosted business profits and wages for workers with a college degree. Using tariffs to reverse these trade flows might, after long periods of time, lead to a reorientation of production in the United States that boosts demand for noncollege labor and raises their wages (though it might not). If tariffs did lead to this production reorientation, however, it would also lead to reduced wages for college-educated labor and lower profits, and the decline in college wages and profits would be larger than the increase in noncollege wages.

To be clear, this distributional shift toward noncollege labor and away from college-educated labor and profits would be a progressive outcome, and if it was the only option available to policymakers to make noncollege wages rise faster, we would be in favor of it. But it would be an extremely inefficient way to boost noncollege workers’ wages. Other wage-boosting policies like increased unionization or maintenance of full employment would not clearly lead to overall growth declines and might even boost growth. In short, while rising trade flows have put downward pressure on noncollege wages in recent decades, using the tool of tariffs to reverse this would be an extremely inefficient way to raise noncollege wages relative to other available tools.

Macroeconomic policies supporting a ‘strong’ dollar are the real causes of damaging trade deficits

Trade deficits are driven near entirely by the value of the U.S. dollar being too high to balance imports and exports—an outcome that can be traced to macroeconomic policy choices.4 A high value of the dollar makes imports cheap to U.S. consumers and makes U.S. exports expensive on global markets. This, in turn, leads to an excess of imports over exports. It is often taken as given that the United States should pursue a “strong dollar” policy, and that has often been the implicit (sometimes even explicit) goal of Treasury departments during both Republican and Democratic administrations. This bias toward dollar strength has led directly to toleration of excess trade deficits.

A rule of thumb for thinking about policies to reduce trade deficits and boost manufacturing is simply that if a given policy does not lead to a reduction in the value of the U.S. dollar, it will not have any traction in reducing trade deficits. The value of the U.S. dollar is driven by the demand and supply of dollar-denominated assets in global markets—traditionally called the capital account of the United States’ international balance of payments and now sometimes referred to as the financial account. When the demand for dollar-denominated assets is high relative to supply, the dollar rises in value and vice versa (Blecker 2009).

This rule of thumb is why tariffs are highly unlikely to be effective in reducing U.S. trade deficits unless raised to prohibitive levels. Tariffs actually raise the value of the U.S. dollar, which causes exports to fall roughly in proportion to the import declines following imposition of tariffs. This effect is compounded by the fact that many U.S. exports today contain substantial imported content, which causes export prices to rise directly in response to tariffs.5

Currency interventions from foreign governments

The demand for and supply of these dollar-denominated assets is set by macroeconomic policy decisions. One such decision is to allow the capital account to be influenced by intentional decisions of foreign governments. Often, for example, the Chinese and Japanese governments have intervened in global financial markets to purchase dollar-denominated assets to keep the demand for dollars high and to subsequently allow their own exports to gain a cost advantage in U.S. consumer markets. U.S. policy encouraged such policy actions through trade agreements that incentivized offshoring manufacturing production and strong support for financial liberalization that exposed countries to excessive risks of currency, banking, and financial crises.

The role of private capital flows

Another decision is to allow the capital account to be influenced by speculative private capital flows, even if they lead to an uncompetitive value of the dollar. In the late 1990s, for example, capital flowed from European countries to the United States largely due to European investors looking to buy rapidly appreciating U.S. corporate equities. When the U.S. stock market bubble eventually popped, the flow of capital from Europe largely dried up, and the dollar lost considerable value relative to the euro. This reversal led to a welcome decline in the U.S.–euro area trade deficit in the early 2000s. Until the end of 2024, a similar trend seemed to be occurring as the U.S. stock market had seen very large gains relative to those in Europe. This was associated with a large increase in the dollar’s value in recent years. The recent sharp decline of U.S. stock markets has not been mirrored in Europe, so some welcome relief from chronic upward pressure on the dollar stemming from these capital flows may well arrive over the next year.

The safe haven of the U.S. dollar during financial crises

As liberalized global financial markets have grown more volatile and prone to crisis (Reinhart and Rogoff 2011; Claessens and Kose 2013), nation states and financial institutions have sought to insulate themselves by accumulating ever-greater reserves of U.S. dollar financial assets. This demand to acquire dollar-denominated assets led directly to upward pressure on the dollar, which, in turn, led directly to these countries running large trade surpluses (that is, selling more exports to the United States than the imports they buy from the United States). This practice of self-insuring against systemic financial risks caused by liberalized global markets accelerated following the 1997–1998 Asian Financial Crisis, when countries learned it was too costly to depend on external institutions like the International Monetary Fund to help manage these risks.

When instability threatens international capital markets, investors and financial institutions “flee to safety,” meaning they sell off relatively risky assets and buy relatively safe U.S. dollar assets. The worsening of the dollar’s overvaluation occurs at a time when U.S. exporters are under the highest stress. The upshot of all of this is that a more effective international regime to aid countries facing currency and financial crises could reduce the need for countries to “self-insure” by trying to build up dollar reserves. This would be good for both the self-insuring countries who could now use precious financial resources on other social goals and for U.S. trade deficits.

Fiscal and monetary policy choices

Fiscal and monetary policy decisions are other macroeconomic policy choices affecting the U.S. trade balance. In regard to fiscal policy, when the U.S. economy is near full employment, federal budget deficits can push up trade deficits. If budget deficits run at full employment lead to higher interest rates (as they often do), this will lead foreign investors to demand more dollar-denominated assets to earn these now-higher rates. Increased demand for U.S. assets, in turn, causes the dollar to appreciate and the trade deficit to expand.

In regard to monetary policy, the same dynamic holds when the Federal Reserve raises interest rates. Whatever the source, a widening spread between U.S. and foreign interest rates attracts more capital to dollar-denominated assets, and this causes a rise in the value of the dollar, which, in turn, harms U.S. net exports.

Strategies to manage the value of the dollar

Keeping the value of the dollar at a level that more closely balances imports and exports, hence, requires a range of macroeconomic strategies. The most controversial would see the U.S. engage in more active currency management to ensure that foreign influences—either intentional government policy decisions or destabilizing private capital flows—are not allowed to push the demand and supply of dollar-denominated assets out of balance. Currently, Congress requires the U.S. Treasury to monitor currency management by foreign countries and make biannual reports naming countries that undertake active currency management for competitive gain. In practice, Treasury has more often than not demurred on naming clear instances of currency management. (Treasury 2024).

The U.S. government has much stronger options than mere surveillance and naming to countervail trade-distorting currency practices of other countries. If, for example, a foreign government began buying dollar-denominated assets, the U.S. could simply begin buying assets denominated in the currency of the foreign government, thereby neutralizing the effect of the foreign governments’ intervention in the U.S. capital account.6 Another possible option is for U.S. policymakers to institute a “market access charge” such as the one proposed in the 2019 bill, Competitive Dollar for Jobs and Prosperity Act (2019) that would levy a small tax on the foreign purchase of U.S. dollar assets for countries maintaining sustained trade surpluses with the United States (Hansen 2017).

Running fiscal and monetary policies that are consistent with lower levels of interest rates would also relieve upward pressure on the dollar’s value and help close trade deficits. On the fiscal side, this simply means that when the economy is at full employment, deficits should not be increased or should even be reduced. The how of this deficit reduction at full employment is every bit as important as the how much in terms of its effect on the welfare of U.S. residents, but it is the how much that determines the degree to which deficit reduction can help pull down the trade deficit.7 On the monetary side, the Federal Reserve should set interest rates at the lowest level consistent with stable inflation and avoid periods when unnecessarily high interest rates put upward pressure on the value of the dollar.

The advantages of a stronger dollar

Among policymakers, the reflexive privileging of a “strong dollar” policy has contributed to chronic trade deficits in the United States. However, any change in the value of the dollar creates both winners and losers. A strong dollar, for example, makes imports cheap to U.S. consumers and foreign travel more affordable for U.S. residents. It also makes it easier for U.S. businesses both domestically and abroad to attract foreign capital for investment projects. It allows retailers like Walmart and Amazon to source goods more cheaply for resale. These are not trivial benefits.

The advantages of a weaker dollar

But a lower value of the dollar would bring its own significant benefits. Most importantly, U.S. exports would be on a much more level playing field in global markets. Export-oriented production in the United States would expand. Domestic businesses competing with imports would gain competitive breathing room and expand their production. The manufacturing sector in the United States would expand. The reduction in trade deficits would lead to less future income leaking out of the U.S. to foreign investors.

Globalized supply chains are fragile. Industrial policy and trade protection can support their resilience

In recent decades, multinational corporations have prioritized maximizing short-term profits, even at the expense of investing in the resilience of their supply chains. For example, a company that focuses on maximizing current profits might source all inputs from the single lowest-cost producer. They might also minimize the size of their inventories of key inputs to production since inventories, by definition, are inputs not being sold in the current period and generating profits.

This short-term focus both ignores risks to the company’s own operations from supply chain disruption and creates a negative spillover cost for other businesses and consumers that rely on their products. In the jargon of economists, underinvestment in supply chain resilience creates a negative externality, a cost of business that is absorbed by others besides the actor undertaking it.

Underinvestment in supply chain resilience is a valid target of industrial policy interventions, sometimes including trade protection. For example, businesses focused on resilience should spread production of key inputs among different producers to hedge against the risk of disruption at a key link in their production chain, even if this modestly boosted the current cost of producing these inputs.8 This could also include “reshoring” of key inputs if policymakers were worried about threats to resilience stemming from international conflicts that would stop the ability to source imports. One way to ensure this greater regional diversity (including a larger role for U.S. production) of key inputs could include trade policy measures like tariffs.

This logic lies behind the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act passed in the Biden administration. It offers subsidies for chipmakers to set up manufacturing facilities within the U.S., largely in hopes of avoiding the extreme shortage of chips that drove the first wave of inflation in the post-pandemic recovery. There are also undeniable geostrategic issues driving the CHIPS Act (for good or for ill), but even these geostrategic concerns largely center on the basic question of how to make the U.S. economy more resilient to economic shocks.

Further, a resilience-minded business could maintain buffer stocks of key inputs (such as semiconductor chips or fuel oil), so they can keep production flowing in the event of supply delays or disruptions. Failure to do so can create large costs for the firm and the broader economy, as evidenced by the inflation stemming from pandemic- and war-related supply shocks between 2020 and 2024. One obvious long-running example of this is the Strategic Petroleum Reserve, which the federal government can run down or build up to help smooth out fluctuations in energy costs.

Because individual companies are unable to ensure systemic supply-chain robustness, the rational incentive for them is not to incur costs trying to do this. This market failure defines a key role for policymakers in creating incentives for investments to make supply chains more resilient. Besides creating incentives for more private investment, there are also explicitly public roles for policymakers in bolstering resilience. One key example is having federal agencies monitor supply chains for areas of weakness. Providing subsidies or other public supports for investments in resiliency is a worthy priority for policymakers concerned with the challenges of globalization.

The U.S. should buffer its workers against abusive foreign labor practices and incentivize trading partners to strengthen labor standards

The U.S. should reward countries that respect labor rights with preferential access for their imports and incentivize other countries to enforce higher labor standards. Laws and regulations protect workers and businesses against having to compete with producers willing to exploit vulnerable workers within the domestic economy. Given that, there is good reason to be concerned when this kind of unfair competition is embodied in imported goods as well.9

Much of the wage differential between U.S. workers and workers in lower-income countries like Mexico and China is driven by productivity differentials. The U.S. economy is the most productive in the world, while productivity (defined as average output generated in an hour of work) is much lower in our lower-income trading partners. But some of the wage differential between the U.S. and other countries reflects not just productivity differentials, but the state of labor standards and enforcement.

Econometric analysis by Rodrik (1999), for example, shows that the level of democratic institutions has large and significant impacts on national wages. Rodrik finds that moving from a level of democratic quality that characterized Mexico in 1999 to a level characterizing the United States in that year could see wages in Mexico increased by up to 40% even with no change in productivity. Palley (2005) further finds that this effect runs entirely through greater degrees of democracy leading to higher levels of labor standards, measured by the number of International Labour Organization (ILO) “core labor standards” ratified in a given country. In short, even after accounting for productivity differences, labor can be made significantly cheaper through nondemocratic, exploitative labor regimes.

Widespread violation of labor rights and democratic norms is problematic for fairness and for the competitive position of U.S. workers. In countries like China, substantial investments in production technologies and human capital development (health and education) are narrowing the productivity gap with the United States, which should, in theory, lead to less wage pressure. But if the degree of labor exploitation intensifies, this can undo some of the useful lessening of wage pressure that should have accompanied Chinese productivity growth.10 Even when low-income countries might wish to boost labor standards, the destructive race-to-the-bottom logic of global competition among open economies can lead them to hold back for fear of losing export competitiveness and foreign investment attractiveness.

There are many potential benefits for both U.S. workers and for workers throughout the world to engage in economic competition along many margins. But the scope of useful competition should be focused on who can make their exports more efficiently, not who can more effectively serve up their own nation’s workers for exploitation—whether by local or multinational firms. When trade competes on low labor standards, few of the potential benefits from trade flow to workers.

Two different groups have resisted efforts to incorporate enforceable labor standards within the structure of existing international trade rules. On one side, there are developing country interests concerned about losing the comparative advantage of exploitation who see labor standards as a kind of neoprotectionism. In theory and reality, strong labor protections favor, rather than hinder, growth in late-developing economies (Storm and Capaldo 2018). On the other side are advanced economy corporate interests profiting from this exploitation by substituting workers in their own countries for oppressed workers offshore.

The linkage between trade policy and labor standards has a long intellectual history, yet very few workable proposals have been made during that time. For most of this debate, the primary focus was on whether enforceable labor standards should be part of the main treaties governing the global economy, whether it be trade agreements between countries or multilateral agreements like the World Trade Organization (WTO). But these efforts largely aimed to put the onus for enforcing labor standards on national governments that may not have the capacity, resources, or interest in upholding worker rights instead of on the companies profiting from the exploitation. Further, the efforts were hampered by the need to achieve unanimity among parties to an agreement.

A different model was instituted with the so-called Rapid Response Mechanism (RRM) in the U.S.-Mexico-Canada Agreement (USMCA) that entered into force in 2020. In addition to implementing new and improved labor laws in Mexico, USMCA’s RRM allows enforcement of labor standards at the factory level by an independent panel investigation (rather than a government inspector for whom incentives may be conflicted) when freedom of association and collective bargaining labor rights are violated. While the RRM represents a substantial policy innovation, it is not a match for the challenge of lifting labor standards at a systemic level. To date, only slightly more than two dozen cases have been alleged (ILAB 2025). Meanwhile, wages in Mexican manufacturing today are below their level in 2002 in inflation-adjusted terms and now stand at just 10% of U.S. manufacturing wages, or a mere $2.76 per hour.11

A ranking system for countries based on respect for labor rights

There is, however, no real reason why the U.S. must wait until new trade agreements are signed to begin the process of incentivizing better labor standards in trading partners and buffering U.S. workers from destructive competition. Rodrik (2019), for example, urged the U.S. to institute unilateral domestic safeguards.

The broad brush of our proposal is simple. The United States (perhaps led by the International Labor Affairs Bureau (ILAB) in the Department of Labor) should work with other international bodies and experts to develop a five-tiered ranking of countries around the world based on their respect for labor rights.12 Tier one would be countries that have legislated and successfully enforce the highest degree of labor protections around the world. Tier five would be countries whose labor regime is so odious that the U.S. should simply refuse to accept their imports until it is improved. In between, tier two countries should face a 5% tariff on all exports to the U.S., tier three countries a 10% tariff, and tier four countries a 15% tariff.

Are we positive these are the exact right number of tiers and tariff levels? Of course not, but that’s something that could be researched and assessed by the institutional staff assigned to this task. Further, this proposal is not meant to be calibrated to precisely solve the entire problem of differing labor standard regimes around the world. Instead, it is meant to show that the U.S. government takes seriously how labor is treated around the world and how that spills over onto workers in the United States. It is also meant to provide a competitive buffer against unfair competition that is a bit more than purely symbolic. The highest tariff level here (15%) would cut roughly in half the wage penalty imposed by being in the bottom tiers of democracy or labor standards enforcements identified by Rodrik (1999) and Palley (2005).

One difference between this broad proposal and some others that try to address the “social dumping” of exploitative labor practices is that it is country-based, not product-based. Often proposals aimed at integrating labor standards and trade policy require a finding that abusive labor practices provide a competitive advantage in a particular export good. We think a country-based approach makes more sense for two reasons.

First, it requires much less granular information to sort countries into tiers based on their general approach to labor rights than it does to investigate the cost structure of every possible export to the United States and how it might be impacted by labor practices at particular plants. Second, poor countrywide labor practices have powerful externalities that will pull down wages paid in exporting plants, even if the plants themselves have decent labor standards. Export plant owners only have to pay wages above those in the surrounding labor market to attract the workforce they need. If the surrounding labor market has wages suppressed by substandard national labor policy practices, then the exporting plant can have decent labor practices within its walls yet benefit strongly from the substandard national labor environment. Given these considerations, a commitment to provide better market access to entire nations based on their labor practices is a more workable policy.

The highest tariff level in this broad proposal would not be trivial, and it certainly might apply to large and important trading partners like China unless they make some welcome changes to their labor rights regime. In this sense it might sit uneasily with our skepticism about the use of tariffs in the previous section on trade deficits. We argue that it doesn’t. This labor standards-based tariff would be in effect regardless of the state of trade balance between countries. It does not aim to reduce trade deficits (and it cannot). Further, unlike the second Trump administration’s tariffs, it has a clear goal and specifies a clear road map for how trading partners could change their behavior to have it removed.

Harmonizing climate policies will help reduce greenhouse gas emissions and strengthen U.S. industry

Without harmonized climate regulations, individual countries risk the migration of greenhouse gas-intensive production to low-standard locales and the replacement of domestic production with carbon-intensive imports. This dynamic means that national climate policies and emissions regulations might simply push production to lower-standard locales rather than reducing global emissions overall. If, for example, the U.S. instituted a carbon tax and China did not, instead of reducing carbon emissions globally, some of the effect of this U.S.-based tax could be to push production that emitted carbon offshore to China. This “carbon leakage” would undermine the environmental goals of the carbon tax, and it would see U.S. producers of these emitting industries having to find new economic activity to engage in for no particularly useful reason.13

All of this is highly theoretical so far. The U.S. does not have robust regulations against carbon emissions (in part because of rollbacks to key greenhouse gas regulations during the first Trump administration), and no such regulations seem to be on the horizon. But if the day comes when some countries want to move ahead with stricter emissions controls, these countries should have the freedom to use trade tools like tariffs based on the carbon content of goods to ensure that production is not just moved offshore.

But until there are internationally harmonized climate policies, the progressive approach to globalization for the United States would be to leverage trade policies to herd the global economy toward reduced greenhouse gas pollution and other economic practices that threaten planetary boundaries critical for sustained life on Earth (Richardson et al. 2023). As with labor standards, U.S. trade policy could be designed to reward countries pursuing climate change-mitigating policies that incentivize foreign producers to reduce polluting emissions and clean up their manufacturing industries. The latter could be accomplished by forcing the internalization of costs of greenhouse gas emissions embodied in imports. By preventing “leakage” of emissions to foreign pollution havens, U.S. climate policy would also ensure that domestic, emissions-intensive industries would not be put at a cost disadvantage while shouldering the burden of adjusting to low-carbon production on their own.

The European Union is already putting such a policy regime in place with the Carbon Border Adjustment Mechanism (CBAM). This mechanism, in essence, levies a tariff on goods equivalent to the cost of greenhouse gas emitted during production in the country of origin. Beginning in 2026, EU importers will be required to purchase CBAM certificates covering the embodied emissions they import, consistent with EU pricing for equivalent emissions. Foreign producers that pay for emissions costs domestically will receive credits against fees due under the CBAM. Initially, the EU’s CBAM will apply to imports of iron, steel, and aluminum products; cement; fertilizer; hydrogen and electricity goods; with the mechanism expanding to cover imports from additional emissions-intensive industries, such as chemicals and polymers, down the road.

A policy to level the playing field in terms of emissions pollution is critical both to addressing the imminent climate crisis and to ensuring fair competition for U.S. industries. These industries are among the world’s cleanest producers but are up against other countries whose rapidly expanding production capacities are among the world’s dirtiest (Hersh and Scott 2021). During the Biden administration, the United States and European Union made strides toward a cooperative regime to limit unfair global competition from polluting imports with the Global Arrangement on Sustainable Steel and Aluminum. The agreement would provide a platform for onboarding like-minded countries intent on greening the most pressing industrial emissions (Mullholland and Meyer 2024; Malhotra and Tucker 2023). Legislators have already introduced a number of proposals for U.S. versions of a CBAM (JEC 2024).

This approach to limiting global greenhouse gas emissions and the competitive advantage for polluting countries also may conform to World Trade Organization (WTO) rules. The WTO carves out explicit rights for national regulation of “process and production methods,” recognizing that traded goods can be distinguished by how they are made, although WTO case law has yet to define clear boundaries for how such distinctions can be regulated (Benson et al. 2023; Porterfield 2023).

New international agreements should focus much more on taxes than on trade

Most of the benefits of freer trade can be secured by countries unilaterally and do not require international agreements. If a country decides that it is in their economic interest to allow imports to enter without tariffs, they do not need to strike an agreement with a trading partner to allow this. These unilateral tariff reductions are usually the largest source of estimated gains from trade by far.

Taxing capital income (profits from corporations and returns to wealth), however, is different. Here, effective policy requires some degree of international coordination. Without this, some countries will seek to become tax havens and carve out benefits for themselves at the expense of other countries’ ability to tax the richest entities in society. 14

The levers of international reform that would end tax havens and profit-shifting by rich corporations are well known and require political will to enact. One obvious lever would be for countries to agree upon and adopt a global minimum tax on corporate profits, regardless of where profits are booked. Proposals to adopt such a global minimum tax could, by themselves, raise roughly $500 billion over the next decade (Clausing 2021). The Biden administration made some promising first steps in cobbling together an international coalition to adopt and enforce such a tax—but future policymakers need to build on this progress, not tear it down.

Other reforms would build on Senator Sheldon Whitehouse and Congressman Lloyd Doggett’s No Tax Breaks for Outsourcing Act (2025), which would, among other things, fully tax the foreign income of U.S. multinational corporations, eliminate the tax-free return on foreign tangible assets, and eliminate a subsidy for excess profits from exporting that exists in current law. The overarching principle is that taxes owed should depend on the level of income, not the type of income (or one’s accountant’s creativity in claiming what type of income is being earned).

The current method of taxing capital incomes, and especially the corporate income tax, provides an incentive for corporations to shift both accounting profits and tangible production abroad.15 The current tax method essentially subsidizes firms to generate income outside of the United States. This is a perverse and inefficient setup, one aiming to serve the interests of rich corporations rather than the broad U.S. economy. It can be stopped with some straightforward policy changes.

Conclusion

Donald Trump’s approach to trade policy is bad for the United States and the rest of the world. But this does not imply that the pre-Trump global trade regime was working well. As usual, Dani Rodrik (2019) has put it best, arguing about Trump’s first term: “In a way, one of the worst consequences of Trump [emphasis added] is that he is reinforcing the views of the architects of the existing system as to why there shouldn’t be a change.”

The flawed approach inherited by Trump’s first administration perpetually sought to extend a set of international agreements and norms that privileged corporate interests over workers. From a progressive perspective, the bad part of this system was that it privileged corporate interests. From Trump’s perspective, however, the bad part was that it was a set of international agreements.

The Biden administration made some useful breaks with past practice on globalization. While the administration did not go far enough on many margins, it set off in a useful direction. The administration prioritized the effect of trade on workers, not just consumers, and didn’t prioritize corporate-led trade agreements. Key industrial policy targets aiming to solve market failures were put ahead of ideological fealty to free trade. In short, the Biden administration was not simply a return to the pre-Trump globalization regime that was so bad for American workers—instead they had tentatively begun charting a new path.

The second Trump administration has completely spurned this new path and doubled down on xenophobia and dominance displays as the center of trade policy. If this policy approach continues, it will lead to a poorer United States and a poorer global economy. It will not lead to a renaissance of good jobs in manufacturing.

At some point, a serious approach to the challenges of globalization will need to be reestablished. We hope this paper can help spark and inform that more serious debate.

Notes

1. See Bivens 2017 for an overview of the effect of globalization on American wages and how policy has amplified the harms of globalization. U.S. Bureau of Labor Statistics (BLS), “Table A-4. Employment Status of the Civilian Population 25 Years and over by Educational Attainment: Monthly, Seasonally Adjusted” retrieved from FRED, Federal Reserve Bank of St. Louis, February 12, 2025. David H. Autor, David Dorn, and Gordon H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review 103, no. 6 (2013): 2121–2168.

2. The theory here (supported by evidence) is called the Stolper-Samuelson theorem. Its broad outlines are explained in Bivens 2017. The summary is that it predicts that trade with labor-abundant countries will lower wages in the United States and raise returns to other factors of production (like human capital).

3. See Mishel and Bivens 2021 for a decomposition of all the policy changes that led to wage suppression and wage inequality.

4. For a broad overview of trade deficits and their economic effects, see Blecker 2009.

5. See Steil and Della Rocca 2021 for an assessment of the economic effect of tariffs introduced in the first Trump administration. Another obvious issue in regard to tariff effects on the balance of trade is the retaliation that may occur.

6. See Gagnon 2020 for a discussion of countervailing currency intervention and its role in keeping trade deficits manageable for the U.S.

7. See Bivens 2019 on how different routes to deficit reduction imply very different outcomes for the welfare of most Americans. In a nutshell, deficit reduction achieved through higher levels of revenue raised progressively (mostly from rich households and corporations) can see deficit reduction go hand in hand with improved welfare for most, but deficit reduction achieved through cuts to income support, social insurance and public investment programs will harm welfare for the majority.

8. See Acemoglu 2021 for a broad discussion of how private investment decisions can lead to supply chain fragility.

9. See Rodrik 2019 for a good overview of these types of fairness concerns when domestic regulation and the rules of the global economy seem to conflict.

10. From 2010 to 2025, Chinese output per hour of work increased from 11% to 24% of the U.S. productivity level (ILO 2025a, 2025b). A recent ILO report (2025a) confirms China’s expanding use of mass detention and forced labor in export industries. Friedman 2014 shows how labor regulation in China has evolved to increase repression as wages and development have increased—a model that is being exported to other developing economy countries with increasing Chinese foreign direct investment.

11. EPI analysis of ILO (2025b) and BLS (2025a, 2025b) data.

12. There are numerous bodies around the world that collect detailed information on the state of labor rights in countries around the world. Freedom House periodically publishes a report on the global state of workers’ rights, the International Labour Organization and the International Trade Union Confederation annually track countries’ progress in protecting key labor freedoms, and the WageIndicator Foundation and the Centre for Labour Research collaborate to produce a tiered ranking of countries’ labor protections called the Labour Rights Index. In short, much of the raw material to provide a ranking of the type called for in this report already exists.

13. See Sato and Burke 2021 for an explanation of “carbon leakage.”

14. See Zucman 2015 for an overview of the problem of tax havens.

15. For evidence on this, see Kimberly Clausing, “Profit Shifting and Offshoring, Then and Now,” and Rebecca Kysar, “Profit Shifting and Offshoring in the New International Regime,” presentations for “Will the Trump Tax Cuts Accelerate Offshoring by U.S. Multinational Corporations?,” a conference hosted by the Economic Policy Institute, May 7, 2018.

References

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Research has played a key role in the environmental justice movement

The environmental justice movement began in the late 1980s when organizers and residents protested the illegal dumping of toxic waste in Warren County, North Carolina—the state’s most heavily Black-populated area. These demonstrations led the United Church of Christ Commission for Racial Justice to publish a landmark study showing that minority communities were disproportionately targeted for toxic waste sites. Targeting these communities was not incidental—it reflected a deliberate strategy to place hazardous facilities in areas where residents lacked the political power or resources to resist.

As the study garnered national attention, the EPA established the Office of Environmental Justice in 1992. President Clinton followed by issuing Executive Order 12898 that directed federal agencies to develop strategies for addressing the disproportionate health and environmental impacts on low-income communities and communities of color. This executive order became a cornerstone of federal enforcement of environmental justice—until Trump rescinded it on the second day of his presidency.

To support the implementation of Executive Order 12898, the EPA later developed the Environmental Justice Screening and Mapping Tool (EJScreen), but Trump’s EPA removed the tool in early February. First released to the public in 2015, EJScreen offered nationally consistent data on 13 environmental burden indicators, alongside six demographic variables relevant to minority and historically marginalized communities. By combining environmental and demographic data, the tool generated Environmental Justice Indexes for each burden, helping to highlight areas of concern.

EJScreen played a key role in guiding the EPA’s development of policies and programs, while also empowering the public to conduct research and advocate for environmental and health equity. Since the removal of EJScreen from the EPA’s website, various organizations have worked to recreate the tool and host its data elsewhere; however, the tool will not be updated by the EPA, nor will it serve as a guiding tool for the agency.

The economic costs of air pollution

One of the environmental indicators available in EJScreen is potential exposure to fine particulate matter, or PM 2.5. This particle pollution is smaller than 2.5 micrometers in diameter and originates from both natural and human-made sources, including indoor and outdoor environments. In outdoor air, PM 2.5 is primarily produced through combustion—such as emissions from gas and diesel vehicles, as well as coal and fracked gas-fired power plants. Both short- and long-term exposure to high concentrations of PM 2.5 have been linked to serious cardiovascular and respiratory health risks, including nonfatal heart attacks, asthma in children, and premature death.

Research also demonstrates that communities of color and low-income communities face greater exposure to air pollution. Interlocking systems of discrimination—such as racist housing policies, government disinvestment, and economic exploitation—have shaped the social and spatial dynamics that place communities of color in closer proximity to sources of air pollution. These structural forces continue to drive the disproportionate environmental burdens these communities face. Black and Latine populations, in particular, are exposed to significantly more air pollution than they produce—underscoring the systemic nature of environmental injustice.

Air pollution is also a significant barrier to workers’ health and productivity. Employees in low-wage and manufacturing industries are especially vulnerable, often exposed to harmful air contaminants that can lead to illness and reduced workplace performance. Research shows that the lifetime medical and productivity costs of a single new asthma diagnosis was approximately $49,600 per case across all age groups in 2021. Yet, with only 58% of low-wage workers having access to paid sick leave and Congress considering devastating cuts to Medicaid, support for protecting their health—and the environmental conditions of their workplaces—remains dangerously inadequate.

Working families also bear the cost of how PM 2.5 impacts children’s cognitive function and overall children’s health. The economic and health burdens of air pollution have far-reaching, long-term impacts on workers—especially in communities of color and low-income families—threatening both economic stability and overall well-being.

Mapping injustice with environmental data

Using EJScreen data, we analyzed potential community-level exposure to PM 2.5 relative to the state average, and how relative exposure varies with the racial demographics of communities in similar income classes. EJScreen provides data at the Census tract level—census-defined geographic units within county boundaries that typically range from 1,200 to 8,000 people.

Figure A indicates that for each income class, the share of tracts with greater potential exposure to PM 2.5 (compared with their state’s average) typically rises with the share of people of color (POC) in the area. Tracts with the highest proportions of people of color (at least 60%) stand out most. Among tracts that are 20–40% low income, nearly three-quarters (72.6%) of those with at least 60% people of color have greater potential exposure. In tracts where the share of population is at least 40% low income, nearly two-thirds (65.1%) of tracts with at least 60% people of color exceed their state’s average exposure level. Conversely, tracts with the lowest shares of people of color (less than 15%) consistently show the smallest share of elevated exposure compared with state averages for the same income class. To be clear, tracts cannot be compared across income classes as the basis of comparison for each tract is their respective state’s average within the income class.

Figure A

The removal of EJScreen significantly hinders government entities, organizations, and communities’ ability to assess the persistence of disproportionate health and economic impacts experienced by low-income communities and communities of color. Data erasure adds an additional barrier for communities to advocate for their needs and access critical resources to prevent and mitigate the harms of PM 2.5 and other environmental burdens.

Impacts of environmental data erasure

EJScreen provided accessible data to both the EPA and the public on environmental disparities that persist to this day. Federal recognition of environmental racism and environmental justice helped hold the EPA accountable in planning and implementing its programs. Under the Biden administration, the EPA explicitly made efforts to better implement environmental justice into their regulatory and enforcement work. Additionally, the Inflation Reduction Act and the Infrastructure Investment and Jobs Act provided major funding for local air monitoring, which is critical for measuring the extent of harm caused by air pollutants. By contrast, Trump issued an executive order directing Attorney General Pam Bondi to stop the enforcement of state and local climate and environmental justice policies—marking an escalation in his administration’s attacks on environmental equity. Coupled with efforts to expand coal and fossil fuel production, these actions pose far-reaching consequences for the health and safety of communities already burdened by environmental harm.

Tools like EJScreen enable federal and state agencies to craft clear, data-driven policies that protect the health and safety of vulnerable communities. While the EPA’s EJScreen is no longer accessible, at least 16 states have developed their own environmental justice screening tools, each with varying indicators, data sources, and user interfaces. Although these state-specific tools can be useful for localized analysis, they lack the national consistency that the EPA’s EJScreen provides. Without a federal baseline, states may interpret and apply environmental justice data differently—leading to fragmented efforts and uneven protections.

When federal data are censored or erased, it undermines the ability of researchers and policymakers to document harm and expose persistent disparities that might otherwise remain invisible. The EPA plays a critical role in advancing environmental justice—and restoring its data tools is essential to protecting workers and the communities they live in.

Put simply, the IRA puts the U.S. on a path where meeting its global climate change commitments is within reach—commitments which would provide a genuine chance at securing a livable planet for future generations if they are kept. At the beginning of August 2022, there was no such path to secure this livable future, but there is now—and that is a mammoth victory.

The IRA was essentially a climate change bill that included extraordinarily important health and tax changes as ride-alongs. If the bill had only included these health and tax policy changes, it would have been eminently worthy of applause. The fact that these changes were essentially side-shows to the IRA’s climate impacts is one clue about how transformative it might turn out to be.

Starting with these opening acts of tax and health policy, the IRA’s key components were:

Health policy: The key health policy changes in the IRA included a substantial increase in the generosity of tax credits to subsidize the purchase of health insurance through the marketplace “exchanges” in the Affordable Care Act (ACA), along with provisions to allow firmer bargaining over the pricing of pharmaceuticals purchased by Medicare. Both of these are big steps forward in U.S. health policy.

The expanded premium tax credits radically increase the affordability of exchange premiums for a wide range of U.S. households. These expanded tax credits expire in 2025—the same time as many provisions of the Trump administration’s Tax Cuts and Jobs Act (TCJA). This sets up a highly salient contrast for what will be more important to Congress in that year—preserving tax cuts mainly aimed at the richest households, or continuing to ensure healthcare affordability for those families who cannot find decent coverage through their employers.

The drug pricing changes both increase affordability to families and are forecast to reduce federal government payments for drugs under Medicare by nearly $240 billion over the next decade. Putting some discipline on the upward march of drug prices in the U.S. has been a key progressive priority for decades. There is still room to limit drug price increases even more, but this is an excellent step forward.

Tax policy: The key tax provisions in the IRA include a minimum tax on corporate income, an excise tax on stock buybacks, and a substantial increase in resources for Internal Revenue Service (IRS) enforcement. Each of these are significant and progressive changes in tax policy. The corporate minimum tax is projected to raise more than $220 billion over the next decade from corporations who have used loopholes to avoid paying their proper share of taxes in the past.

The stock buyback excise tax raises less money, but breaks important new ground in taxing stock returns rather than accounting profits of corporations. Given the rampant abuse of loopholes and financial engineering that allows firms to report deceptively low accounting profits, shifting to a regime of taxing stock returns instead could be transformative.

The expansion of IRS resources could well be the most valuable IRA tax provisions (even given the partial cutback in these resources included in the debt ceiling deal at the beginning of 2023). The nonpayment of taxes legally owed is estimated to be $600 billion annually. The bulk of these unpaid taxes is owed by the richest 5% and even 1% of households. If the full value of the “tax gap” could be collected with better enforcement, this by itself would essentially stabilize the nation’s long-run debt ratio with no other changes needed. While it is unlikely that enforcement alone could collect this much revenue, this clearly shows that enormous sums are available if IRS enforcement can be made more effective. Starving the IRS of enforcement resources and mandates has been a Republican priority for decades, and it constitutes an enormous gift to corporations and rich households who don’t want to pay taxes.

Climate and clean energy provisions: The climate and clean energy provisions of the IRA are its most-known features, and the ones that make it qualify as an “industrial policy” measure. This “industrial policy” label often makes some assume that it is aimed at boosting overall U.S. manufacturing. But unlike industrial policy debates of decades past, the IRA is clear-eyed about its goals—reducing greenhouse gas (GHG) emissions from usage of fossil fuels and transitioning to cleaner sources of energy—and has specific policies well-tailored to meet these goals. Given this narrower (yet still vital) target, it should not be judged by whether it succeeds in boosting manufacturing writ large.

The dominant strategy the IRA employs to lead the clean energy transition is subsidies—paying U.S. businesses, households, and even sub-national governments when they make investments that will lead to reduced GHG emissions. The fiscal support it provides for these investments admirably matches the scale of the decarbonization challenge in front of us. The decision to use subsidies to encourage clean energy investments reflects some hard learning from previous efforts to pass transformative climate bills. These previous efforts—like the American Clean Energy and Security (ACES) Act of 2009—relied on measures to increase the price of carbon emissions rather than subsidies to reduce the cost of clean energy adoption.

In short, unlike past bills, the IRA approach emphasizes carrots rather than sticks. In a perfect world described by introductory economics textbooks, there are reasons to think that a broad-based increase in the price of carbon-emitting activities would be the better way to go. But in the real world where the most important constraint is what could actually be passed into law, creating a coalition of producers who have been incentivized to go all-in on large clean energy investments worked to get IRA passed.

This coalition, and the reduced cost of clean energy investments stemming from the investment wave of the next decade, should make future efforts to also raise the price of GHG emissions (through either legislative measures or through direct regulation) a more manageable lift. Further, most of the IRA’s clean energy tax credits are open-ended—so long as investments are made, they will receive the subsidies. This means that arbitrary legislative numerical limits will not constrain the IRA’s contribution to clean energy investments in the coming decade. Even better, these new investments will not rely entirely on private-sector profit-making calculations because of the important “direct pay” provisions in the act.

These direct pay provisions allow parties to receive the subsidies even if they do not have tax liability themselves. This means that non-profit entities and state and local governments (including school districts) that decide to undertake clean energy or efficiency investments will receive incentives. This gives concerned citizens who want to lobby their state and local governments to undertake smart investments a huge potential tool—one that is already being used to great effect.

A number of the subsidies in IRA hinge on the domestic content of investments. For example, the consumer tax credits for the purchase of new electric vehicles (EVs) are only eligible for vehicles assembled in North America and get larger if components of the battery supply chain are also domestically produced. These domestic content requirements have become a source of controversy, but there are plenty of reasons to think they are a net plus. For one, again, the best feature of any prospective climate bill in 2022 was political viability. To the extent that the domestic content requirements boosted political support for the IRA, they are incredibly valuable. For another, the U.S. auto sector has been hamstrung for years (or decades) by a number of policy errors. For example, exchange rates have been misaligned for decades—reducing competitiveness for U.S. producers—while many of our most important trading partners in the auto sector have failed to keep their economies pinned anywhere near full employment, a failure that has reduced demand for U.S. exports. Subsidizing auto production in the U.S. without any comprehensive fix to these larger problems would have resulted in too many of these subsidies leaking abroad relative to the efficient optimum. A comprehensive fix to these larger problems contained within the IRA was obviously far outside the scope of the bill, but imposing domestic content requirements to stem some of the leakage abroad specifically from EVs was not.

Very early data seem to argue that companies are indeed ramping up investment in response to the subsidies. Over the past year, investment in manufacturing structures (i.e., building new factories or expanding existing ones) has risen by a staggering 54%. Crucially, this boost to investment will provide support to the exact economic activities that otherwise may have been depressed by recent Federal Reserve interest rate hikes. If the U.S. economy navigates through 2023 without a recession (which is happily looking more likely all the time), it may well have the trio of industrial policy bills—and particularly the IRA—to thank for this.

Of course, the IRA is far from perfect, and it does not solve all problems in the U.S. economy. For one, it’s an industrial policy bill, and many of the key challenges the U.S. economy faces are not well-suited to industrial policy solutions. And even some opportunities it had to ameliorate some of these more fundamental problems in the U.S. economy were lost along the way.

For example, recent decades have seen ferocious employer opposition to unionization and collective bargaining, and public policy has not maintained a level playing field that protects workers’ organizing rights against this opposition. This means that whenever any kind of economic churn moves jobs out of legacy unionized sectors in the U.S. and into new sectors, the new jobs are far less likely to be unionized. In the case of autos, the churn induced by a large transition out of producing internal combustion engine vehicles and into EVs means that the new EV jobs will—absent some policy support—be less likely to be unionized. Automobile companies are clearly planning for this, and a disproportionate share of new EV investments look to be flowing to so-called “right-to-work” (RTW) states in the South where new organizing is incredibly difficult (though perhaps not impossible, as the recent recognition victory for the United Steelworkers at the Blue Bird electric school bus plant in Georgia highlights).

Early versions of the EV tax credits would have made the credits significantly larger for vehicles made with unionized labor, providing an incentive for auto companies to be more open to allowing workers to bargain collectively. But this union bonus was stripped out of the bill before final passage after heavy lobbying from nonunion auto companies and parts manufacturers (whose production is often located in Southern RTW states), with Senate Republicans and Joe Manchin (D-WV) lining up to oppose it. Currently, there is no policy lever in the IRA that would support strong labor standards in the production of EVs. The IRA does have strong labor standards for lots of investment flows it subsidizes, particularly in the construction of new plants. For example, many of the energy efficiency and renewable energy tax credits get larger if the projects meet prevailing wage and apprenticeship requirements. These strong labor standards for some green investments make the lack of these standards in the production of EVs a noticeable gap.

The IRA’s weaknesses should be addressed going forward by federal, state, and local policymakers. And the huge economic challenges that cannot be addressed optimally by the tools of industrial policy remain. But the IRA provides a path for a livable future for future generations that just was not apparent over a year ago. We need further action to ensure the path is taken, but it’s infinitely better to have it than not.

This turn towards industrial policy has been applauded by many on the center left. This applause is merited—the embrace of industrial policy is essential if we are to achieve key national priorities like fighting climate change and building a more robust care economy. The embrace of industrial policy is also a clear rejection of the most doctrinaire versions of the neoliberal worldview that guided both parties’ policymaking decisions in recent decades, decisions which led to economic growth that was both anemic and unfair.

But industrial policy by itself will not transform the U.S. economy in all the ways that are needed. This will be true no matter how well these policies are implemented. Industrial policy refers to a specific set of policy tools aimed at specific policy targets. It does not include the universe of all things that are “not neoliberalism.” This means that even expansive industrial policy implemented wisely will have quite small effects, for example, on economywide income inequality. To move the dial on inequality, another portfolio of policies is needed that will build workers’ leverage and bargaining power in labor markets.

In this report, we highlight the enormous good that smart, well-implemented industrial policy measures can do—but we also identify what other policy measures are needed to ensure that economic growth is both fast and broadly shared. 

Defining industrial policy

Discussions around industrial policy often suffer from vagueness, so we offer a crisp definition up front. Industrial policy is the use of a set of specific policy tools—including subsidies, tax incentives, regulations, research and development support, and tariffs—to support particular industries that are strategically important. The goal is to change the sectoral composition of output that the economy produces—i.e. incentivize the production of more of some goods and services and less of others.

Why is industrial policy needed?

The obvious question raised by industrial policy advocacy is why some sectors deserve government support to expand. The most common answer is market failures. Two examples of market failures that should be addressed by industrial policy are greenhouse gas (GHG) emissions and the underprovision of care work.

Greenhouse gas emissions (GHG) and their effects on the climate are often called the world’s worst market failure. The production of GHG emissions results in unpriced externalities—these emissions are overproduced relative to a situation in which their full social cost was accounted for. Externalities are costs from an economic transaction that are borne by parties outside the transaction. So, if I buy electricity from a power utility that uses coal-fired power plants, the utility and I are the direct parties to the transaction. Some of the costs of the transaction fall on me in the form of fees I pay for electricity. But because burning coal to generate electricity results in GHG emissions that do damage to people who are not direct parties to the transaction, the costs of the transaction (my electricity bill) are inefficiently low, and so I will consume too much coal-fired electricity.

The obvious solution to unpriced externalities is to price them: Calculate the social cost of GHG emissions and add this to the private cost of emissions charged by the coal-fired plant. This type of “carbon tax” would increase the price of fossil-fuel based energy relative to renewable energy, and demand would shift towards renewables.1 Politically, pricing GHG emissions has been a much harder lift in the U.S. than directly subsidizing renewable energy, but direct subsidies to renewables should provide the same incentives as a carbon tax.2 The Inflation Reduction Act (IRA) contains numerous direct fiscal subsidies to invest in renewables or energy efficiency, making it a key plank of the new industrial policy in the U.S.

The care sector—both child and elder care—is also often identified as a worthy target of industrial policy support.3 Again, the argument largely rests on grounds of market failure. In the case of child care, the cost of this care is often frontloaded in the working lives of parents, falling on them when they have lower incomes than they will later in their careers. In a world of perfect capital markets, parents of young children could seamlessly borrow today to meet the costs of child care and pay the loans back when their incomes are higher later in life. But, of course, we do not live in a world with perfect capital markets. A system of public subsidies to parents of young children that is financed by taxes (including on these same parents later in their lives, when they are no longer receiving the subsidies but are earning higher incomes on average) can largely mimic the effects of well-functioning capital markets.4

Further, the social benefits of high-quality child care are likely far higher than the strictly private benefits. Children who receive high-quality care in their younger years are more likely to stay in school longer, graduate college, and have higher earnings.5 They are also less likely to have contact with the criminal justice system or draw on income support and public assistance programs.6 These “spillover” benefits mean that investments in child care made strictly on the basis of returns that accrue to the parents and children directly will be inefficiently low.

What determines if industrial policy is the right tool to solve a particular market failure?

Market failures can be addressed in a variety of ways besides industrial policy. One obvious market failure that has led to huge public efforts in advanced economies is the instability of privately-provided health insurance. Because of a range of well-documented market failures, private markets do not provide affordable access to health insurance (as well as many other kinds of insurance).7 In most advanced economies, however, the solution to this problem has not been industrial policy tools that aim to shift resources between sectors; instead, it has been public financing or provision of health insurance.

It is also worth noting that some economic problems need to be addressed even if they do not stem strictly from market failures. For example, much of U.S. poverty stems from households having too many members who do not work in paid labor markets. Young children, older people, and those with disabilities that make work nonviable cannot be reasonably expected to earn money through labor markets, yet these groups still need resources to live. Poverty driven by the problem of insufficient workers per household is not a market failure per se, and the answer to this problem is not industrial policy that shifts resources across sectors. Instead, it is using welfare state programs to provide incomes, even to nonworkers.   

What determines if industrial policy is the right tool to solve a particular market failure?  In brief, a market failure merits industrial policy attention if it is mostly about a misallocation of resources across economic sectors.

One admirable advance in recent industrial policy discussions is a more realistic mapping between the stated goals of industrial policy efforts and the tools proposed to achieve them. This greater realism does not mean that the ambition of industrial policy has been curtailed—addressing the challenge of climate change is very ambitious—but it does mean that the challenges today’s interventions are aimed at are driven by the type of misallocation between sectors that industrial policy’s tools are well-crafted to solve.

Historically, a realistic mapping between the stated goals of industrial policy and the tools wielded has not always been a feature of these debates. For example, in previous decades, calls for industrial policy often implicitly argued that the goal should be to increase the size of the manufacturing sector generally. Yet the policies often put forward were generally far too limited to boost overall manufacturing activity.8 Because policies were rarely advanced that matched the scale of the stated goal, pessimism about the potential merits of industrial policy developed. Today’s debates are informed by this lesson and have seen a more realistic mapping of policy tools onto specific targets.

Today’s industrial policy targets are pressing and can be addressed by reallocating resources between economic sectors. Climate change, the care shortage, and the fragility of supply chains are all serious problems worthy of large-scale responses. 

The promise—and the limits—of using industrial policy to solve economic problems

As mentioned above, industrial policy can solve market failures that occur because the allocation of resources across sectors is suboptimal. These problems are often enormous, so industrial policy can do huge good.

Almost by definition, industrial policy has much less reach to solve problems that recur commonly across all sectors. These problems are often enormous, and independent policies outside of the industrial policy toolkit must be used as well.9

Where industrial policy can deliver the goods

In this section, we highlight how the tools of industrial policy can help meet climate and care challenges, and we sketch out how success in using industrial policy to address these challenges would likely show up in economic statistics.

Addressing the climate crisis

Climate change is the single largest threat to future prosperity in the United States and globally, so the benefits of effective policy to mitigate climate change are enormous. Further, the entire problem driving global climate change is a misallocation of resources across sectors: too much production of fossil-fuel energy sources, too little production of renewable energy, and too few investments in efficiency.10 This misallocation is the result of market failures that industrial policy tools (again, like the subsidies in the Inflation Reduction Act [IRA]) can help correct.

Strengthening the care economy

Similarly, there is a clear shortage of care work in the United States relative to the underlying social need. In the case of child care, because parents’ incomes are low when they have young children, the pressing social need for high-quality child care does not translate into effective demand for it in markets. Besides low parental resources, there is the additional issue that the full value of effective child care is not captured only by the parents and kids using it—there are spillover benefits to society overall. Constrained parental resources and the wedge between private and social benefits keep resources from flowing into the care sector to allow sufficient capacity to be made available to families that need it.

Recent proposals to build up the care sector in the U.S. economy rest on public subsidies to make the care affordable. This would see resources flow towards the care sector and more output (and employment) centered there.

Industrial policy measures that move resources across sectors can help mitigate climate change and boost work in care sectors; in turn, these interventions would result in higher rates of economic growth and consumption. The magnitude of the impact of these interventions on future growth and improved living standards would be very large.11 In this sense, industrial policy tools provide powerful levers to make the economy stronger.

Strengthening supply chains

Another big plank of the current industrial policy push is strengthening supply chains to avoid crises like those that kicked off the inflation of 2021 and 2022. A range of stressors—mostly related to the pandemic but also due to idiosyncratic events like a fire at a key semiconductor factory—led to a collapse in the supply of inputs for many goods in 2021 and early 2022. These input bottlenecks, combined with changing allocation of consumer demand as a result of the pandemic, caused a large spike in inflation.12

This episode laid bare the fragility of many modern supply-chains. Private actors who make decisions about the composition of these supply-chains are driven by considerations of their own profits. If it is more profitable for them to spread out input production across many locations, they will do that. Even if they properly assess the risk to their own profits of potential disruption stemming from the long and fragile supply-chains they have created, they likely do not assess (or care about) the wider social costs of supply-chain breakdowns. In a sense, the risks posed by excessively fragile supply chains are an externality—a cost not fully factored in by any market participant.13

The CHIPs and Science Act is aimed at shoring up the most obvious input disruption that occurred during the pandemic—the shortage of semiconductor chips. The bill provides subsidies for domestic production with the hope that the 2021–2022 bottlenecks in that sector can be avoided in the future, even in the face of potential geopolitical turmoil. The future effect of these interventions will be a bit harder to assess than efforts in the climate and care spaces. Very few people claim that these efforts should boost average growth; instead, the hope is that disruptions will be reduced and growth will be less variable. This would be an important benefit if borne out, though it would be harder to see clearly in macroeconomic aggregates.

Where other policies are needed—reining in inequality

The persistent rise in income inequality is one of the largest problems that has plagued the U.S. economy in recent decades. For example, the share of market income claimed by the top 1% of households essentially doubled between 1979 and recent business cycle peaks like that in 2019.14

This rise in overall income inequality has been driven largely by developments in the labor market and, more specifically, by the failure of wages for the vast majority of workers to rise in line with growth in economywide productivity.15 Productivity is the average amount of income generated in an hour of work in the economy. It represents the long-run ceiling on growth in average living standards. If productivity is rising faster than hourly wages for the vast majority of workers, this means that income is showing up in places besides these workers’ paychecks. These other places that have seen outsized income growth include the wages and salaries of corporate managers, executives, and other highly paid professionals (like doctors), as well as in higher profits and business income and housing rents.

Reining in—or even reversing—the rise in inequality will hence require boosting the leverage and bargaining power of typical workers in the labor market. This rebalancing of labor market power will require a host of different policies—and most of them have little to do with “industrial policy” per se. Three key policies to rebalance labor market power include: the maintenance of high-pressure labor markets with very low unemployment;16 the restoration of the effective right to unionize and bargain collectively;17 and the strengthening of key labor standards, like raising the value of the federal minimum wage.18

None of these policies implicate the allocation of resources across sectors. Instead, they aim to boost labor’s bargaining power in every sector. Because these policies are neutral about the sectoral distribution of resources, they do not fall under the rubric of industrial policy.19 But these policies—and others that boost the bargaining power of typical workers across many or all sectors—are a necessary condition to begin reversing trends in inequality.

The clearest reason why interventions outside of the industrial policy toolkit are needed to address economywide trends in inequality is that the sectors dubbed worthy of strategic boosting from industrial policy do not employ enough workers to make meaningful changes in aggregate wage trends. Most workers in the U.S. will spend most of their working lives in sectors that are not “strategic” in the sense of receiving industrial policy aid. Yet these workers obviously deserve decent pay and working conditions as well. The restaurant sector, for example, is highly unlikely to successfully lobby for long-run subsidies or other industrial policy aid. Still, the sector employs millions of workers, and policy efforts that increase pay in that sector will do enormous good for human welfare.

Additionally, even workers in strategic sectors that receive industrial policy support will not necessarily see substantially higher wages due to this support. In competitive labor markets, workers in sectors whose output is boosted by industrial policy aid would not receive any bump due to this increased demand because workers in nonstrategic sectors could easily replace incumbents, which would keep wages in check. In the less-than-competitive labor markets of the real world, workers in strategic sectors might receive some spillover wage effect of industrial policy aid, but it will still be muted.

But can industrial policy effectively fight inequality if it’s implemented in a progressive way?

The limits of traditional industrial policy tools in boosting economywide wages are well-recognized. This recognition often leads to calls to implement industrial policy with complementary policies to make headway on boosting workers’ bargaining power. For example, in initial versions of the subsidy for electric vehicles (EVs) that ended up in the IRA, the subsidy was larger for EVs made with unionized labor in the United States. In many provisions in both the IIJA and the CHIPS and Science Act, state governments can allow project labor agreements (PLAs) that set wage standards.

Tying industrial policy aid to mandates to improve job quality makes sense. This linkage between industrial policy and labor standards has a rich and successful history in the United States. Yet even the most ambitious and progressive implementation frameworks for industrial policy will not move the needle that much in terms of reducing inequality economywide.

The reason is again the small number of workers who will have their working conditions tied to receipt of industrial policy aid. For example, early child care workers and home health care workers combined total under 3 million workers in the United States. Say that ambitious industrial policy efforts swelled this number to 3 million and included wage standards that led to annual wage gains of $10,000 per worker on average. The boost to the wage bill of the bottom 80% of the workforce (the group whose hourly pay has de-linked from aggregate growth) would be roughly 0.5%. In short, these gains would be most welcome for those workers receiving them, but they would not fundamentally change the mammoth rise in inequality that has characterized recent decades.

Further, these complementary policies accompanying industrial policy implementation will often hold otherwise malign wage effects constant. For example, wages for jobs in fossil fuel extraction and staffing fossil fuel burning utilities tend to be relatively high paid. This is overwhelmingly because unions were able to gain a foothold in these sectors in earlier historical periods when business and government were more supportive of (or at least less hostile towards) collective bargaining. But, because of outright hostility toward unions beginning in the late 1970s, fewer and fewer jobs in the U.S. economy are unionized, and more and more workers have been denied the benefits of collective bargaining. This means that as industrial policy efforts aimed at hastening the needed green transition are brought online, it is highly likely that the new jobs supported by industrial policy would—all else equal—be nonunionized and pay substantially less than the jobs that are lost as we shift from fossil fuel to renewable energy. If implementation policies associated with industrial policy support could neutralize this otherwise negative wage effect, it would be a huge policy victory. But further progress would still be needed to boost wage growth going forward.

One illustration of why progressive implementation of industrial policy that kept its distributional effects even neutral should be seen as a win is the sector that has arguably been the recipient of the most extensive industrial policy support throughout U.S. history: finance. Between deposit insurance, the day-to-day liquidity provisions of the Federal Reserve (like the discount window that provides overnight reserves at the Fed), and the regular occurrences of extraordinary support provided in financial crises, the financial sector is obviously far larger in capitalist economies than it would be without this public support. This public support of the financial sector is warranted—finance provides needed services to the rest of the economy, and these necessary services would not be provided at this scale without public backing. But this public support also justifies the regulatory and supervisory framework surrounding the financial sector. The history of finance in the United States is one of accepting public support (especially during bad times for finance) while constantly trying to escape regulation and supervision that constrains profits during good times. The period from the late 1970s to 2007 saw regulation and supervision atrophy. This resulted in exploding profits and incomes in the financial sector with very little obvious benefit to the rest of the economy and the spectacular crash of 2008 that demanded even more public support for the sector. In short, the industrial policy support the financial sector has received is a case study for how complementary policies (regulation and supervision in this case) are needed to ensure public support for a specific sector is not siphoned off into the incomes of economic players with substantial market power.

Ensuring progressive implementation of industrial policy efforts is crucial. But industrial policy cannot be relied upon to do jobs it is not built for—including the reduction of inequality throughout the economy.

Industrial policy and efforts to build worker power are not substitutes—but are strong complements

Different policy targets require different policy tools. The tools of industrial policy and the tools of an agenda to build workers’ power target different problems in the U.S. economy. Both sets of tools are needed, and they are poor substitutes for each other.

Though they are poor substitutes for each other, industrial policy and efforts to build workers’ power are strong complements.

At the most general level, to the degree that industrial policy promotes faster growth in average living standards and efforts to build workers’ power increase the equitable distribution of this growth, the two sets of policies combine to deliver far better growth for low- and moderate-income families. The shuddering slowdown in income growth for middle-income families that began around 1979 in the U.S. was driven in part by falling average growth rates and in part by a rise in inequality that saw middle-income families fall behind even the slower average growth.20

One key complementarity concerns the call for high-pressure labor markets with low unemployment to boost workers’ power and the need to move resources across sectors to achieve industrial policy goals. Put simply, workers (the most important resource) are far more willing to move across sectors during periods of high growth rather than during periods of slow growth.21 Hence, industrial policy efforts would benefit strongly from a generalized tight labor market.

Politically, there are also potential complementarities. Currently, there is debate about the implementation of the Biden industrial policy packages. Some have argued that there are too many strings attached in the implementation, particularly in the form of labor standards. As we noted before, much of the driving force behind including strong labor standards as part of industrial policy implementation is the generalized erosion of workers’ rights and bargaining power across the economy. For example, if workers shifting from fossil fuel extraction and utilities’ sectors into renewable energy generation were as likely to find high-paying unionized jobs in the new sector as the old, many of these implementation details would be unnecessary.

Alternatively, think of the (stripped out) higher subsidy for EVs made with union labor that was included in earlier versions of what became the IRA. This subsidy was only necessary because much U.S. auto production has moved to Southern states with so-called “right to work” (RTW) laws that make effective union organizing extremely difficult. Policymakers were concerned that the new jobs associated with the EV production chains would be in RTW states, and workers filling them would not benefit from collective bargaining. If the U.S. had a level playing field for workers looking to organize, regardless of which state a factory was in, adding a special boost to EV subsidies in the initial versions of IRA would not have been necessary.

In short, solving the generalized problem of degraded workers’ bargaining power would enable debates about industrial policy to flow much more smoothly. Policymakers could avoid the need to opportunistically solve the generalized problem of degraded workers’ bargaining power sector-by-sector in the details of industrial policy legislation and implementation.

Conclusion: We must seize the opportunities recent industrial policy action provides—and also continue the fight for a fairer economy using other tools

In the past year, major headway on key industrial policy challenges has been made, but major headway in rebalancing bargaining power in the labor market for typical workers has not.

The current debate over the implementation decisions made around the industrial policy bills passed in 2023 has been frustrating in a number of ways. But perhaps most frustrating is that the debate encourages people to think that the poles of ambition surrounding economic policy for coming years center entirely around whether industrial policy should be implemented with strong labor protections. That’s a fine debate to have, and we think that industrial policy should be implemented with strong labor protections. But regardless of how this debate shakes out, the mammoth problem of degraded worker power that has led to our incredibly unequal economy will remain until we address that issue head on. And addressing that issue is not about industrial policy.

Notes

1. We are using “carbon tax” here very loosely—there are many other policy schemes besides taxes that could also raise the cost of emitting greenhouse gases (issuing tradeable permits that grant the right to emit GHGs is the most well-known alternative system).

2. Because energy derived from fossil fuels and energy derived from clean sources are substitutes, anything that reduces the relative price of clean energy will see demand shift towards these sources. The relative price of clean energy can be reduced by raising the price of energy derived from fossil fuels by pricing GHG emissions, or by directly subsidizing the clean energy sector.

3. No large legislative win has been achieved (yet) in the care sector space, but I consider it important enough economically and salient enough politically to include in discussions of U.S. industrial policy.

4. A long economic literature identifies the many failures keeping private markets from offering affordable, high-quality long-term care and support services. Cutler 1996 provides a comprehensive overview.

5. See, for example, Lynch and Vaygul 2015.

6. Ibid.

7. The two most well-known failures in private insurance markets are moral hazard and adverse selection. Moral hazard means that insuring against a bad event disincentivizes efforts to avoid the event (so, people drive more carelessly if their auto is insured). Adverse selection is the phenomenon wherein any increase in the price of insurance will drive away the cheapest to insure and will leave the average person remaining in the insurance pool more expensive to cover. In the extreme, this can lead to a “death spiral” in which it is not viable for the insurance market to exist at all. Cutler and Zeckhauser 1998 is an excellent overview of the adverse selection problem.

8. The most common calls were for a mostly ad hoc series of trade protection and countervailing subsidies. But because manufacturing is an enormous and heterogenous sector, and because the final output of any given manufacturing sector is highly likely to use many inputs from other manufacturing sectors, industrial policies that boost output in one manufacturing sector are quite likely to depress output or incomes in others. So, for example, trade protection for the steel sector will certainly work to boost output of steel and is a reasonable response to dysfunctions in the global steel market that harm U.S. producers, but this trade protection is not an industrial policy that will expand the entire footprint of U.S. manufacturing.

Industrial policy that would aid the entire manufacturing sector is possible. The most feasible policy—and the one that is most doable economically—would be ending the chronic overvaluation of the U.S. dollar by actively managing its value relative to key trading partners. Other countries engage in this type of currency management to boost their manufacturing sectors, and it works when it is tried.

9. There is a rough analogy here to the distinction between the “income” and “product” sides of how we measure economic activity in the United States. The most common measures of overall economic activity calculated by statistical agencies around the world are gross domestic product (GDP) and gross domestic income (GDI). GDP and GDI are constructed to be identical to each other absent small measurement error. GDP is measured by looking at where consumers, businesses, and governments buy final goods and services. So, when a household buys an automobile, the government data agencies note the value of the car purchase as a consumption good and credit it towards GDP. GDI is measured by looking at where the income generated by producing and selling the car ends up. So, when autoworkers receive a paycheck for their work producing cars, their paychecks are noted by government data agencies as wage income and credited towards GDI. Because one person’s cost (the purchase of the car) is other peoples’ incomes (wages for autoworkers and car salesmen and profits for car companies), GDP and GDI should match exactly. Some small measurement errors inevitably keep them slightly different. Industrial policy aims to shift GDP between sectors—influencing what is produced and bought. But the distribution of the income generated by this production and purchase of goods and services is not changed directly by this sectoral shuffling of output.

10. This misallocation is driven by the derived demands for energy generated by fossil fuels versus clean energy. For example, lots of gasoline is demanded because consumers demand cars with internal combustion engines (ICEs). But this demand for autos powered by ICEs is itself a function of the relative cheapness of gas relative to other forms of energy that could (until recently in historical time) power automobiles. Further, lots of the consumer preference for cars with ICEs is simply a legacy of technological lock-in. But whatever the reason derived demand for energy from fossil fuels has historically been higher than that for clean energy, it was higher and hence drove the misallocation of resources.

11. The Stern review on climate change, for example, argues that 2–3% of GDP invested in climate change mitigation could avoid 6–11% of GDP in climate related damages—an extraordinarily high rate of return on public investment. Lynch and Vaygul 2015 document benefit to cost ratios from investment in high-quality universal prekindergarten of over 5—again, an extraordinarily high ratio.

12. See Bivens and Banerjee 2023 on how this inflation was started and sustained in recent years.

13. See Acemoglu 2021 for a good overview of these supply-chain dysfunctions.

14. See Bivens and Banerjee 2022 for documentation of the rise in inequality.

15. See Bivens and Mishel 2021 for evidence of how labor market imbalances led to the large increase in inequality over recent decades.

16. See Bivens and Zipperer 2018 for the importance of sustained high-pressure labor markets.

17. See McNicholas et al. 2019 on the role of employer opposition in driving U.S. deunionization. See Rosenfeld, Denice, and Laird 2016 for evidence on how deunionization has reduced wages for nonunion workers as well.

18. See Cooper, Mokhiber, and Zipperer 2021 for the large effect of an increase in the federal minimum wage to $15.

19. It is of course true that no policy is ever completely neutral across sectors. Tight labor markets, for example, may tend to nudge resources out of sectors with lower profit margins and reliance on cheap labor. Restaurant employment, for example, tends to shrink slightly as a share of overall employment during periods of very low unemployment.

20. See Bivens 2016.

21. See Chodorow-Reich and Wieland 2020.

References

Acemoglu, Daron. 2021. “The Supply Chain Mess.” Project Syndicate, December 2, 2021.

Banerjee, Asha, and Josh Bivens. 2022. Inequality’s Drag on Aggregate Demand: The Macroeconomic and Fiscal Effects of Rising Income Shares of the Rich. Economic Policy Institute, May 2022.

Banerjee, Asha, and Josh Bivens. 2023. Lessons from the Inflation of 2021-202? . Economic Policy Institute, May 2022. 

Bivens, Josh. 2016. Progressive Redistribution Without Guilt: Using Policy to Shift Economic Power and Make U.S. Incomes Grow Faster and Fairer. Economic Policy Institute, June 2016.

Bivens, Josh, and Lawrence Mishel. 2021. Identifying the Policy Levers Generating Wage Suppression and Wage Inequality. Economic Policy Institute, May 2021.

Bivens, Josh, and Ben Zipperer. 2018. The Importance of Locking in Full Employment for the Long Haul. Economic Policy Institute, August 2018.

Cooper, David, Zane Mokhiber, and Ben Zipperer. 2021. Raising the Federal Minimum Wage to $15 by 2025 Would Lift the Pay of 32 Million Workers. Economic Policy Institute, March 2021.

Chodorow-Reich, Gabriel, and Johannes Wieland. 2020. “Secular Labor Reallocation and Business Cycles.” Journal of Political Economy 128, no. 6: 2245–2287.

Cutler, David. 1996. “Why Don’t Markets Insure Long-Term Risk?” Harvard University Working Paper.

Cutler, David, and Richard Zeckhauser. 1998. “Adverse Selection in Health Insurance” in Frontiers in Health Policy Research, Volume I, edited by Alan Garber, 1–32. Cambridge, Mass: MIT Press.

Lynch, Robert, and Kavya Vaghul. 2015. Benefits and Costs of Investing in Early Childhood Education. Washington Center for Equitable Growth, December 2015

McNicholas, Celine, Margaret Poydock, Julia Wolfe, Ben Zipperer, Gordon Lafer, and Lola Loustaunau. 2019. Unlawful: U.S. Employers Are Charged with Violating Federal Law in 41.5% of All Union Election Campaigns. Economic Policy Institute, December 2019.

Rosenfeld, Jake, Patrick Denice, and Jennifer Laird. 2016 Union Decline Lowers Wages of Nonunion Workers. Economic Policy Institute, August 2016.

Stern, Nicholas. 2006. The Economics of Climate Change: The Stern Review. Independent review from Her Majesty’s Treasury, United Kingdom, October 2006.

To minimize human suffering, this transition must occur rapidly, but it must also occur smoothly. Rapidity is necessary because the damaging effects of climate change have already begun, and each year of delay in getting to net zero in GHG emissions will increase the total suffering endured due to climate change in the future. But smoothness is necessary because a climate transition cannot happen in the face of political hostility, and this hostility can be triggered if a push to reduce emissions becomes associated with poor macroeconomic performance.

Concretely, a smooth transition is one that is accomplished with the economy spending most of the time during the transition at full employment and with rising real (inflation-adjusted) incomes. Generally speaking, in the United States this kind of macroeconomic stabilization has been outsourced near-entirely by other policymakers to the Federal Reserve. Recent years have provided plenty of evidence that the Fed at a minimum needs substantial help in meeting these stabilization goals. Further, both the direct effects of climate change and the effects of policy efforts to mitigate GHG emissions will present challenges to macroeconomic stabilization that the Fed almost certainly cannot meet by itself and that it absolutely cannot meet by itself under its current monetary policy framework.

The rest of the paper is organized as follows. Section I highlights some challenges in applying well-known microeconomic basics of externalities (like GHG emissions) to macroeconomic modeling efforts. Section II provides a brief summary on why empirical macroeconomic estimates of the damage stemming from climate change are often extremely hard to interpret and compare across studies and suggests some better practices for reporting and communicating these results. Section III demonstrates how standard assumptions made in macroeconomic climate models about the long-run constraints on growth (demand vs. supply) can hamper understanding about key issues in adaptation and mitigation. It concludes that models with demand-constrained growth should be a much larger portfolio of thinking about the economic fallout of climate change and climate policy. Section IV highlights that adaptation and mitigation efforts are mostly “real” and not simply financial challenges. It then sketches out how this fact should inform our recommendations about what “greening” central bank behavior should include. Section V provides an overview of how focusing only on the financial challenges of adaptation and mitigation will lead to insufficiently broad recommendations for what central banks can do to meet the challenge of climate change. Section VI argues that climate change highlights convincingly that macroeconomic stabilization efforts in coming decades cannot rest solely on the shoulders of central banks—complementary policies (particularly fiscal) will need to be mobilized even for meeting what were once seen solely as central bank mandates (maintaining stable inflation, for example). Section VII concludes.

I. The economics of climate change: From microeconomic intuition to macroeconomic modeling

The most basic economic insight around GHG emissions is the same as it is around any other pollutant: Their production results in unpriced externalities, hence they are overproduced relative to a situation in which their full social cost was accounted for. Externalities simply mean costs (or benefits, if they are positive externalities) incurred from an economic transaction that are borne by parties outside the transaction. So, if I buy electricity to power my home from a power utility that uses coal-fired power plants, the utility and I are the direct parties to the transaction. Some of the costs of the transaction fall on me in the form of fees I have to pay for electricity. But because burning coal to generate electricity results in GHG (and other pollutant) emissions that do damage to people who are not direct parties to the transaction, the cost of the transaction (my electricity bill) is inefficiently low and so I will consume too much coal-fired electricity.

The most obvious solution to unpriced externalities is simply to price them: Calculate a full cost of GHG emissions that includes all social costs (including the contribution to global warming) and then add this (say in the form of an ad valorem tax) to the emissions generated by the coal-fired plant.

However, how these microeconomic basics about unpriced externalities should be applied to macroeconomic debates becomes quite complex pretty quickly. This is not even necessarily a climate-specific issue—there is a robust research literature on the complications involved in trying to model macroeconomic behavior as the simple aggregation of microeconomic behavior.3

I.1 Are there macroeconomic costs to transitioning to lower-emissions production?

Take one example: Most macroeconomic analyses of climate policy frame mitigation policies as a cost that must be borne to forestall climate change. But this is clearly not true. One reason it is not true stems directly from the microeconomic analysis of unpriced externalities: In the example above, if electricity generated by coal-fired plants is overproduced due to the failure to see the correct social cost of its production, then cutting back on production of coal-fired electricity and ramping up production of something else that is not associated with negative externalities should increase economic efficiency. “Getting prices right” increases potential economic output; it does not decrease it.

Of course, part of the problem with translating this broad microeconomic reasoning into macroeconomic terms is that the constructed variables that guide much macroeconomic analysis—like gross domestic product (GDP)—may miss important costs and benefits associated with climate change and mitigation of GHG emissions. For example, in the example above, after correcting the unpriced externality of coal-fired electricity, society may decide to simply consume less electricity and not plough reduced electricity expenditures into some other market good or service that will be reflected in GDP, and instead decide to enjoy more leisure. In this case, climate policy will have reduced GDP. But it will have improved human welfare and the failure of GDP to pick that welfare improvement up is just a statement about GDP’s own limitations as a concept, not a statement about the true economic cost of mitigation policies.

I.2 Must consumption fall to reduce greenhouse gas (GHG) emissions?

Further, the sacrifice often described by economic models of climate policy is often framed in terms of reduced consumption driven by a need to shift resources out of producing consumption goods and into investments in GHG mitigation. But the resources needed to engage in GHG mitigation do not have to be released only by reduced consumption, they can also be released by undertaking less investment in conventional (i.e., nonmitigation) capital. In fact, it is often underestimated how much the current “business as usual” paths of GHG emissions that are so problematic are actually driven by the large inherited stock of conventional capital that will continue to produce in GHG-emitting ways for years to come.4 Rolling over this inherited stock of conventional capital and replacing it with low-emissions capital is a key challenge for the coming decades.

I.3 Scale matters in macroeconomic analysis

Another key difficulty in scaling up microeconomic intuition around GHG emissions and their mitigation is the enormous scale of the issue. In many cost-benefit analyses done around environmental regulation, key parameters like the economywide interest rates used to discount future costs and benefits can be taken as given. But the scale of investment needed to mitigate GHG emissions is so large that it is impossible to assume the investments themselves would not lead to changes in key economywide parameters like interest rates. The Stern Review: The Economics of Climate Change (Stern 2006), for example, argues that nearly a quarter of total global investment in coming decades will have to be reoriented toward green projects. Interest rates are highly influenced in capital markets precisely by the scale of desired investments. Assuming that these rates can be taken as given regardless of how much GHG mitigation investment is undertaken (or how it is financed) is not realistic.

I.4 How do agents in macro models make decisions in the context of climate change?

The construction of long-run macroeconomic forecasting models used to predict the damages of climate change or the effect of climate policies requires “reference paths” of economywide consumption, savings, and investment. It is not trivial at all to decide how to represent the effects of climate change and the unpriced externality of GHG emissions on these reference paths. In many macroeconomic models of climate change, the reality of the unpriced externality of GHG emissions is represented simply by assuming no mitigation investment occurs. But the economic agents in these models do see the marginal cost of emissions and this affects their decisions on savings and investment in conventional capital. As Rezai, Foley, and Taylor (2012) put it:

On the one hand, the representative agent on this type of path correctly estimates the marginal social cost of emissions in making her consumption, investment, and production decisions. On the other hand, she seems to ignore the availability of mitigation technologies, despite this understanding of the marginal social cost of emissions.

This actually leads to overly optimistic reference paths in regard to emissions. To correct this misleadingly optimistic path, Rezai, Foley, and Taylor (2012) offer another approach to constructing the reference paths for “business as usual” in climate models:

We model the business-as-usual case as an equilibrium of the economy in which global warming is a public bad due to a negative externality. A state variable is an externality when it has a real impact on the objective function or constraints, but no institutions exist to enforce the social price on individual agent decisions involving it. Each agent assumes that her decisions will not affect the path of the externality, but when all agents make the same decisions the path of the externality changes.

This approach seems far more relevant to translating the microeconomic intuition of climate change into macroeconomic analyses. But the fact that one must make such subtle distinctions between models based on how they translate the microeconomic intuition of climate change into usable macroeconomic models is often underdiscussed.

I.5 The insurance value of climate change policy

A final slippage between the microeconomic intuition of climate change and how it can be represented in macroeconomic models and analysis is identified in a series of papers by Weitzman (Weitzman 2009 is probably the best overall statement of this issue). Formal microeconomic treatments of an unpriced externality like GHG emissions mostly focus on making decisions at the margin: Ensuring the true social cost of the last dollar of polluting output is set equal to the true social benefit of this output. This sort of reasoning implicitly assumes a relatively smooth and easy-to-identify relationship between an increase in emissions and the social costs imposed. Weitzman (2009), however, highlights that in climate models there are extreme nonlinearities and “tipping point” events that make very large jumps in the social cost of GHG emissions possible at various points along the way to a higher concentration of GHGs in the atmosphere. Obvious examples that have been identified are positive feedback events—such as the thawing of Artic permafrost releasing large amounts of methane gas—which is a powerful GHG and which would cause a large increase in projected warming if this happened.

Because these tipping points and large jumps in potential costs (“climate catastrophes”) are near-impossible to identify beforehand, but carry nearly existential downsides should they occur, this implies that the smooth “on the margin” analysis of most microeconomic treatments of pollutants should play a very small role in how we assess the desirability of aggressive GHG mitigations. Weitzman (2009) argues that the primary economic benefit stemming from GHG mitigation should be seen as its “insurance value” in making climate catastrophes less likely.

II. Estimating the macroeconomic costs of climate change

The macroeconomic costs of climate change have been the focus of intense research for well over a decade now, yet many uncertainties remain in basic findings, and many misunderstandings persist in how these costs are communicated to the broader public.

II.1 The importance of assumptions underlying estimated damages

This is well illustrated in an excellent recent review of the economic literature on climate change undertaken by the White House Council of Economic Advisers (CEA). Figure 2 in the CEA paper shows estimates of the physical economic damages in the United States through 2100. The estimates range from 1% of overall gross domestic product (GDP) to 35% of GDP. These radically different estimates are driven by a range of inputs into their construction, most notably: the assumed path of emissions, the assumed sensitivity of global temperatures to emissions, the mapping of global temperature increase onto economic outcomes, and the scope of damages that are considered “economic.” Below we say a bit about each of these issues.

II.1.a The assumed path of emissions in macroeconomic models

The Intergovernmental Panel on Climate Change (IPCC) creates a number of potential scenarios regarding the future path of GHG emissions and their effects on temperature. These scenarios are called “Representative Concentration Pathways” (RCPs). At the optimistic end, the IPCC analyzes an RCP that sees relatively low emissions and quick decarbonization. In this scenario, the stock of GHG emissions in the atmosphere peaks at under 500 parts per million (PPM). At the pessimistic end, the IPCC analyzes an RCP that sees high emissions and little decarbonization, resulting in a stock of GHG emissions in the atmosphere closer to 1,400 ppm. It also analyzes two intermediate RCPs. The assumed path of emissions rests on estimates about the pace of technological change as well as the pace of policy efforts to shift production toward lower-emissions techniques.

Forecasting the pace of technological change is obviously extraordinarily difficult. For example, a relatively recent meta-analysis of projected changes in solar installation prices was undertaken by Way et al. (2021). A range of industry experts was asked to forecast the average annual price reductions that would occur over the 2010–2020 period. The average forecast was 2.6% and not a single forecast was as high as 3%, yet the actual annual fall in average prices for solar installation was over 15%. Of course, high-emission energy sources also see technological change and rapid price reductions. The rise of hydraulic fracturing (“fracking”) in the United States in the 2010–2020 decade was driven by very large reductions in the cost of this type of extraction.5

Forecasting the pace of policy efforts to transition to lower-emissions production is harder still. Over the same 2010–2020 decade that saw rapid reductions in both solar installation prices and the cost of oil extraction through fracking, U.S. policy on renewables was extremely volatile. The Renewable Energy Electricity Tax Credit, for example, was allowed to legislatively lapse three times in that decade, and for wind projects the credit was substantially reduced twice.6 On the regulatory side, the Clean Power Plan (CPP) announced by the Environmental Protection Agency was set to mandate steep reductions in GHG emissions from power plants but was held up in several legal proceedings and eventually abandoned.7

Forecasting the interaction of policy and technology is even harder. For example, many of the techniques that actually led to price reductions in oil extraction through fracking actually cause more emissions (injecting captured carbon dioxide into wells, for example). If policy at any point in the 2010–2020 period had imposed costs that helped internalize the externality of climate emissions, then these technological developments in fracking would not have been profitable and so would not have been undertaken.

II.1.b The assumed sensitivity of global temperatures to emission growth

After estimating an assumed path of GHG emissions, modelers must then use the scientific literature to map this change in emissions into changes in global temperatures. Because this mapping is generally done by climate scientists and not economists, the main role for economists using this mapping is to ensure consistency across models to ensure results are comparable. That is, if estimated economic damages resulting from a pathway that sees the stock of GHG emissions peak at 550 ppm in 2100 differ across studies solely because of different assumed mappings from GHG emissions to global temperatures, this would impose barriers to sensibly collecting useful economic forecasts. And yet far too few studies highlight just how their findings fit into the broader research ranges in this apples-to-apples way.

Additionally, it should be noted that one key source of uncertainty in climate models is the nonlinear responses of global temperature changes to GHG emissions, which were highlighted earlier. For example, if a given temperature change (say, four degrees Celsius) is driven by an increase in GHG emissions, this temperature change itself could spur further increases (say through mechanisms like the melting of Arctic permafrost).

II.1.c Mapping global temperature changes onto economic damages

Much of the variation in estimated damages we highlight above in the White House CEA literature review is explained by assumptions about the severity of climate change (expressed in the graph as the increase in global mean surface temperature). But variation in estimated damages even at quite similar estimates of temperature change remain large. For example, two studies (Kahn et al. 2021 and Burke, Hsiang, and Miguel 2015) assume global mean temperature changes of roughly five degrees Celsius. Yet Kahn et al. (2021) estimate damages of 10% of GDP by 2100, while Burke, Hsiang, and Miguel (2015) estimate damages of over 35%.

Much of this is due to the vast difficulty in mapping changes in global temperature onto economic damages. The physical risks of climate change that will have potential macroeconomic implications are easy enough to list. For example, climate change could damage productivity and output in agriculture. It could destroy large amounts of productive land, capital, and infrastructure if it results in substantial sea level rise. It could lead to more frequent instances of damaging meteorological events (more and stronger hurricanes, for example). It could make many economic activities (mostly those undertaken outdoors) far harder to undertake and less productive (think of construction workers forced to take much more frequent heat and hydration breaks).

But while easy enough to conceptualize, quantifying the degree of economic damage caused by a given increase in global temperatures is much harder. The attempt to make this quantification has largely followed two paths—“top-down” studies and “bottom-up” studies.

II.2 Top-down and bottom-up estimates

Top-down approaches attempt to directly estimate the effect of past changes in temperature on macroeconomic aggregates like GDP (or employment). These approaches tend to look across countries and examine periods of short-term temperature changes and assess the subsequent behavior of GDP. Bottom-up estimates tend to look at particular economic sectors (agriculture, for example) and examine how output or productivity in the sector is affected by temperature. Sometimes this is done by looking at short-term temperature changes, but often these studies are cross-sectional—relating differences in agricultural productivity between given regions as a function of temperature differences. Often, the results of several bottom-up studies of particular economic sectors are aggregated together to obtain macroeconomic impacts.

Both techniques have their strengths and weaknesses.

The top-down approach is useful because it provides a straightforward mapping of temperature changes onto economic effects. Top-down approaches should also in theory capture “general equilibrium” effects that sector-specific models might miss. For example, economic damage caused by temperature increases in two sectors might not be purely additive and might instead cascade across interconnected systems. For example, rising temperatures and drought might both increase the risk of forest fires and cause stress on water availability. But, in turn, the need to fight increasingly prevalent forest fires might further stress water availability.

However, top-down approaches have substantial weaknesses as well. For one, they rely on short-term weather variations in the recent historical record. But these might be quite misleading guides to the patterns of climate forced by GHG emissions going forward.

Almost surely the biggest weakness of top-down approaches is that by choosing a specific macroeconomic aggregate to track, they by definition cannot capture costs imposed on human welfare by climate change that are not reflected in that aggregate. Take GDP, for example. Two very predictable effects of climate change going forward are that more people will need to spend more money on air conditioning and that health expenditures will rise as tropical diseases have larger areas in which to spread. These are clearly large costs to human welfare, but each serves to actually boost measured GDP. When a useful good or service—like comfortable living conditions or maintenance of good health—is moved from universal free availability in the nonmarket realm to the market realm, this registers simply as an increase in GDP, even if it might be quite damaging to human welfare.

Bottom-up studies have tended to focus more attention on quantifying the full range of economic damage that could be caused by climate change. Many have focused on increased health costs or the costs of increased mortality and sickness, representing them (correctly) as detrimental, not as additions to GDP.

One striking example of the importance of accounting for economic damage that cannot be expressed in most macroeconomic aggregates can be found in the first Stern Review on the Economics of Climate Change. In that review, the authors found that the cost of the “business as usual” path of GHG emissions would reach 5% of global per capita consumption if only market-based measures were examined. But if one accounted for the monetized value of increased mortality and morbidity, then this cost more than doubled to 11% of global per capita consumption.

This last point is crucially important. Besides assessing all of the variable inputs into estimates of the economic damage of climate change, knowing exactly what the output of these estimates is actually measuring is crucial for understanding the proper stakes of climate policy. If one measures the cost of climate change only as the change in market-based measures of GDP estimated in many mainstream models, then these estimates can breed some complacency about the urgency of transitioning to a lower-emissions future.

III. Climate change, demand shocks, and full employment

Most models assessing the economic damage of climate change are focused (appropriately enough) on the long run. An extremely strong convention in long-run economic modeling more generally is to assume the binding constraints on growth are on the economy’s supply side. The supply side is the productive capacity of the economy, essentially consisting of the size and quality of its potential labor force; the size and quality of its stock of productive structures, equipment, and software; and its state of technological progress. These supply-side inputs tend to change smoothly and slowly over time.

The economy’s demand side (or aggregate demand) is the desired spending of households, businesses, and governments. If this desired spending is too low to ensure the elements of the economy’s productive capacity are fully employed, then the economy is said to have productive slack. When this slack becomes too great, economic growth can actually halt or reverse (a recession). However, negative growth is not needed to define the existence of slack—if aggregate demand is below the economy’s productive capacity, then it is the demand side, not the supply side, that is the constraint on overall growth, and this shortfall keeps full employment of resources from being attained.

An overemphasis on the supply side was prevalent in the years before the Great Financial Crisis of 2008–2009. That recession, and the extremely slow recovery following it, was clearly the result of chronically slow growth in aggregate demand relative to potential supply. Further, strong feedback effects whereby large demand shortfalls erode the economy’s potential supply also seem evident.8 For example, if a key driver of firms’ decisions to invest in productive structures and equipment is to obtain labor cost savings, a long period of depressed wage growth caused by excess unemployment will stunt incentives for this investment. This slower investment, in turn, reduces the growth of the economy’s capital stock—a prime contributor to growth in the supply side.9

While there has been a resuscitation of research into the extent and causes of demand shortfalls since the Great Recession, this has largely not filtered into much of the research on the macroeconomics of climate change. Instead, this research mostly highlights how climate change can threaten growth in the supply side of the economy. To the degree that climate change could cause slower growth in aggregate demand, this is often framed as resulting from rational economic actors simply forecasting slower income growth in the future and adjusting their spending behavior accordingly, which basically serves to bring demand and supply into closer alignment. Sometimes the increased uncertainty caused by climate change is mentioned as a channel through which it could affect aggregate demand (especially decisions about business sector investment), but this is almost done as an aside.

For example, in a 40-plus page review of “Climate Change and the Macro Economy,” Andersson, Baccianti, and Morgan (2020) do include a paragraph on the effect of climate change on demand conditions. But they sum up the research on the macroeconomic effects of climate change by stating: “A significant share of the potentially adverse macroeconomic impacts stems from the effects of climate change on productivity.” When they discuss the effects of climate change on future inflation, they write: “In particular, upward price pressures may emerge from a decline in the supply potential of the economy.”

In a sense, this incomplete treatment of the problems of demand shortfalls replicates the wider field of macroeconomic research pre-Great Recession. In this wider field of research, the existence of demand shortfalls was always acknowledged, but the implicit assumption was that central banks could be tasked with the job of macroeconomic stabilization and so shortfalls (or even the occasional bout of excess demand growth) could be quickly addressed. The issue of long-run growth was generally held to be much more important than issues of stabilization, and a problem that was largely separable from stabilization.

III.1 Climate change and chronic demand shortfalls

Taylor, Rezai, and Foley (2015) provide what is probably the most complete accounting of how standard modeling choices that present long-run growth as driven by the supply side can mask enormous amounts of potential instability caused by climate change. The details of this accounting are daunting, but a rough summary goes as follows. Supply-driven models assume employment growth is fixed and exogenous—determined by demography and the assumption that the economy always gravitates quickly toward full employment—even if a hard nudge from the Federal Reserve is needed. These supply-driven models also assume that investment spending is a residual—all desired savings by households, businesses, and governments are seamlessly translated into productive investment. Outside of the ZLB constraint on interest rates, there can be no investment shortfall or savings glut keeping the economy from reaching full employment.

Demand-driven models, conversely, represent employment as an endogenous variable—it is the residual of output growth and productivity growth. Investment is influenced by the rate of profit, which is not just a function of central bank interest rate policies, but also of expectations about the future, the relative bargaining strength of capital and labor, and the degree of product market competition.

Given these different assumptions, the channels linking GHG emissions and economic outcomes are much richer in the demand-driven model. In the supply-driven model, GHG emissions generally are modeled as reducing productivity, but the system stays pinned at full employment due to the seamless transmission of desired savings into productive investments (outside the ZLB). In demand-driven models, the economic damage done by GHG emissions can affect the distribution of bargaining strength of workers and capital owners, which in turn can cause sharp shifts in desired investments. The sharp shifts in investment, in turn, can push the economy into recession.

III.2 Climate change will severely stress macroeconomic stabilization efforts

Since 2007, the U.S. and global economies have gone through an extended period of stagnation and chronic disinflationary pressures, a pandemic-driven collapse of output, and then a period of the sharpest inflationary pressures experienced in decades. This should make us realize that the pre-2007 macroeconomic consensus positing that the federal funds rate was the only important macroeconomic stabilization tool is completely obsolete.

Macroeconomic stabilization is vitally important, and it is difficult, and it likely requires a whole-of-public-sector approach rather than a simple mandate to the central bank. This recognition needs to find its way into how we think about the challenges of climate change. It’s not likely to cause just a smooth reduction in the economy’s productive capacity (and that would be quite bad on its own), but is instead likely to cause a recurring set of shocks to both the demand and supply sides of the economy that will need constant amelioration. Some of this same logic also applies to climate transition policy.

IV. Climate change is mostly a ‘real,’ not a financial, challenge

Until just a year or two before the COVID-19 pandemic, many of the challenges facing the U.S. economy seemed to point to the power of finance and the primacy of financial constraints. Between 1989 and 2006, household debt as a share of personal income rose by more than 50 percentage points (after rising by less than half of this amount in the 20 years before 1989).10 This debt became a large drag on the economy after the housing bubble burst. By 2006, the share of the financial sector in total corporate profits was at a historic high even as business investment was lower than the past 40 years’ average and mammoth failures in financial sector supervision would soon be revealed.11 After 2010, fiscal austerity took hold in the U.S., strangling the pace of economic recovery even as interest rates hit historic lows.12 In short, the decades before the COVID-19 pandemic really did see many economic problems that were mostly about finance—either the failure to regulate and steer private finance into productive uses at a reasonable cost or the failure to properly use the tools of public finance.

But the COVID-19 pandemic highlighted that many crucial challenges are more about the “real economy” than finance. The United States fiscal response to the COVID-19 pandemic was among the most ambitious in the world. This response led to the stunning fact that child poverty rates hit their lowest levels ever in 2020 and 2021—years that saw huge struggles in the labor market and wider economy in the midst of the COVID-19 pandemic. It turned out that reducing poverty was mostly a public finance challenge—fiscal transfers simply had to be made larger to pull more people out of poverty.

Conversely, the United States’s public health response to the COVID-19 pandemic is widely regarded as one of the most ineffective in the world. Despite our resources, the measures of cases, hospitalizations, and deaths per million in the population are clearly worse in the United States compared with the vast majority of our advanced country peers. This public health failure had clear knock-on effects elsewhere. For example, measured “learning loss” by primary school children in the United States over the past two years has been marked. This learning loss is surely driven in large part by the failure to make the investments needed to ensure students and teachers could safely return to in-person instruction as quickly as possible, to surge resources to those students whose educational circumstances suffered disproportionately during the pandemic (say because a caregiver died or their housing situation changed for the worse), and to boost pay to keep staffing at needed levels in the face of pandemic pressures on labor supply in education.

Most of the failures in the COVID-19 public health response were not due to financial constraints. State and local governments currently have healthy budgets and were given extraordinarily generous fiscal aid from the federal government. The federal government (as noted above) spent generously in many areas. But at some point, constraints often stop being strictly financial and start being about the deployment of real resources. In the context of COVID-19 response, this meant ordering sufficient personal protective equipment for front-line workers, installing high-quality indoor ventilation systems in schools, and blanketing vaccine-resistant communities with outreach to boost their rates of vaccine take-up. The precise answers as to why we were so unable to solve these real economy mobilization problems are surely complex and various. But the simple fact that we were not able to solve them should inform how we think about meeting the challenge of climate change.

Put simply, this raises the obvious question of whether or not meeting the challenge of climate change is more like the problem of budget austerity that kept the economy from reaching full employment, or more like the crisis of public health response to COVID-19. In terms of its complexity, and in the simple terms that climate change’s main damage is physical, not financial, the public health response to COVID-19 seems like the better model. More and better finance is clearly a necessary condition to aid the transition to a lower-emissions economy, but it is also clearly not a sufficient condition.

One quick example of the need to mobilize real resources for climate change should suffice. The Net-Zero America project at Princeton University has estimated that wind and solar generation capacity will need to rise by at least a factor of four by 2050 in order to reach net zero emissions from the power generation sector.13 This would require beating the current historical high-water mark for solar and wind capacity additions every year between now and 2050. This also will require mobilizing enormous amounts of physical capital (equipment like solar panels and windmills), labor (both for constructing the generating units but also maintaining them), and even land. As the experience with PPE, air filters, and generalized supply-chain distress since the COVID-19 pandemic began, mobilizing this scale of real resources in a timely and sustained manner is far more difficult than simply financing it.

IV.1 How can the Federal Reserve foster the needed mobilization of real resources for climate change?

The discussion above about the difference between real and financial constraints to transitioning to a lower-emissions economy relates directly to current debates about the role of the Federal Reserve. In recent years, there has been a growing demand to “green” central banks, meaning roughly that these banks should see the clean economy transition as a policy target.

This general demand is admirable. Climate change is a genuine existential threat that should demand a whole-of-government response, and the Federal Reserve is a powerful public institution. However, many of the demands centered around “greening” central banks have focused on the financial regulatory functions of the Federal Reserve, rather than its functions surrounding macroeconomic stabilization. Further, even when “green” demands have focused on Fed functions related to macroeconomic stabilization, they have emphasized new tools (bond purchases of clean energy firms, for example) rather than new frameworks (how the Fed’s inflation target or full employment mandate is conceptualized).

Part of this focus on the Fed’s financial market tools (regulations and asset purchases) likely reflects the lessons of the decades before the COVID-19 pandemic, when so many of the problems in the U.S. economy really did seem to be mostly financial. This focus also likely reflects the correct perception that the Fed is free of many political constraints in how it chooses to use its policy tools relative to, say, the U.S. Congress. Because the Fed used its policy tools in new and creative ways during the financial crisis, it is often assumed that there are other tools and other creative ways to use them that could solve today’s nonfinancial problems.

But in reality, a change in how the Federal Reserve operationalized its monetary policy framework for balancing maximum employment and price stability would be far more effective in fostering the mobilization of real resources to fight climate change than would different financial regulatory policies or any new asset purchase program.

Put simply, the most useful thing the Federal Reserve could do in the climate change space is to change how its inflation target is implemented, in three key ways:

• It should clarify that its target applies only to core inflation—it excludes inflation stemming from energy and food price changes.
• It should go even further in purging commodity price effects from its inflation target by constructing a “super-core” measure of inflation that also strips out the indirect effect of energy price increases on the cost of other goods and services as well as inflation effects stemming strictly from exchange rate movements.
• Finally, even if the public clarification of its core price inflation target is made, the Fed should signal clearly that it is willing to tolerate larger swings of inflation around (and especially above) its target during the climate transition.

IV.1.a Clarifying that the inflation target applies to core prices only

In 2012, the Federal Reserve made explicit what had been long assumed about its long-run inflation targets by releasing a statement on “longer-run goals and policy strategy” (see FRB 2012). As many had long suspected, the Fed identified an inflation rate of 2% as its long-run target. Also, as many had long suspected, it put more weight on the price deflator for personal consumption expenditures (PCE) than on the consumer price index (CPI). Surprisingly to some, however, this explicit policy statement did not identify “core” prices as constituting its inflation target. The exact statement it made was,

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.

In 2022, after years of consultation with outside researchers, the Federal Reserve released a new statement regarding its monetary policy framework (FRB 2022). The main change was to make explicit that its inflation target should be seen as a long-run average rather than a short-run ceiling. However, the exact target—2% inflation in the price deflator for overall (not core) personal consumption expenditures—was reiterated, stating that,

The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.

It is often assumed—even by quite-informed observers of the Federal Reserve—that the inflation target really only applies to core inflation. In a Fed working paper providing more context to the revised monetary policy framework of 2022, Federal Reserve Vice-Chair Richard Clarida used core and overall inflation measures generally interchangeably as he discussed the implications and rationale for the new framework (Clarida 2022). For example, when discussing the pre-COVID-19 business cycle, he noted:

But, at minimum, the failure of actual PCE (personal consumption expenditures) inflation—core or headline—over the 2012–20 period to reach the 2 percent goal on a sustained basis cannot have contributed favorably to keeping inflation expectations anchored at 2 percent.

Tellingly, when providing an assessment of the inflationary environment in the COVID-19 economic recovery, Clarida switched to looking at core inflation exclusively:

Core PCE inflation since February 2020—a calculation window that smooths out any base effects resulting from ‘round trip’ declines and rebounds in the price levels of COVID-19-sensitive sectors and, coincidentally, also measures the average rate of core PCE inflation since hitting the ZLB in March 2020—was running at a 3 percent annual pace through October 2021, and that reading is well above what I would consider to be a moderate overshoot of our 2 percent longer-run goal for inflation.

Economic commentary frequently describes the core PCE deflator as being the most “closely watched” measure of inflation by the Fed.14 This may be true, but it’s not what its official inflation target is based on.

Further, the Fed’s revealed actions often show that when measures of overall inflation exceed core inflation, it does not simply “look through” the noncore inflation when making policy decisions. The most prominent example of this can be seen in the Fed’s actions during 2008. The U.S. economy entered a recession in January 2008. This recession had been seen coming for quite a while—the unemployment rate, for example, had risen from 4.4% in March 2007 to 5.0% by December 2007. Our own institute wrote a report in May 2008 taking as given that the economy was in recession (Bivens and Irons 2008).15 Yet in September of 2008, after the collapse of Lehman Brothers and with the unemployment rate for August sitting at 6.1%, or nearly two percentage points over its previous trough, the Fed’s Open Market Committee (FOMC) met to decide the stance of interest rates. Despite the sharp rise in unemployment over the previous 18 months, the steep fall in home prices over the previous two years, and the collapse of Lehman, the Fed declined to cut interest rates.

The transcripts of the FOMC meeting—released five years later—make clear that it was worry about inflation that drove this stasis. The word “inflation” was mentioned 129 times during the FOMC discussion, while the word “recession” was mentioned five times.16 In the official FOMC statement released at the end of its meeting, the Fed declared the risks of inflation and recession roughly balanced, judging that ”the downside risks to growth and the upside risks to inflation are both significant concerns.” (FOMC 2008).

This judgement was near-immediately seen universally as a mistake. By early October 2008 the FOMC convened an emergency meeting to cut interest rates. This mistake, in turn, was driven largely by focusing on overall price inflation rather than core prices. In summer 2008, overall inflation in the CPI had risen to over 5% on a year-over-year basis, up from its average of just over 2% throughout the pre-2008 business cycle. This was a pronounced increase. Yet it was driven near-entirely by commodity prices—and oil in particular. Inflation in the core CPI over that same summer was well under 2.5%. Given that the CPI slightly overstates inflation relative to the PCE deflator, this is essentially exactly in line with the Fed’s inflation target.

In short, the Fed’s failure to react to the slowing economy in 2008 was entirely caused by failing to look through commodity price increases and rely on core prices as the correct measure of inflationary pressures building in the economy. Additionally, this is not a new mistake. Bernanke, Gertler, and Watson (1997) found that the Fed in the past consistently responded to rising oil prices with interest rate increases, and that these increases were a primary reason why rising oil prices led to slower economic growth in the U.S.

In short, casting the inflation target in terms of overall, not core, inflation had real and severe consequences. Perhaps it has learned its lesson and this mistake will not be made again even if there is no formal change to Fed frameworks, but given the stakes involved, more clarity on this would be hugely useful.

IV.1.b Creating a ‘super-core’ that purges all effect of commodity price inflation

The low-hanging fruit in changing Federal Reserve frameworks to foster full employment through a period of increasingly volatile energy prices is focusing firmly on core inflation to guide monetary policy. But it is well known that even focusing only on core prices does not completely purge the inflationary effects of commodity price increases from policymakers’ view. Commodities—particularly energy—are used as inputs in goods and services that appear in the core personal consumption expenditures deflator. When the price of inputs rise, this puts upward pressure on these other core goods and services even with no change in the underlying state of macroeconomic balance. The obvious example—seen clearly over the past year—is the strong link between higher oil prices and higher airline fares. Fuel costs are an enormous part of airline operating expenses, so when oil prices spike, there is pronounced upward pressure on these expenses, which airlines often try to pass through to customers.

Given the Fed’s large research capability and the existence of quite detailed input-output tables from the Bureau of Economic Analysis (BEA), it would not be particularly difficult to construct a measure of inflation in core goods and services that was purged of the effect of rising commodity prices. If, say, fuel costs are 20% of total airline expenses, and these costs rise by 40% over a year, this would imply an 8% increase in total expenses. There would be strong pressure to protect profit margins by passing these increases onto customers. The Fed could construct a price index that measured the rise in costs for industries that purged the rise in commodity costs (by assuming they rose at historically average rates, for example).

This kind of “super-core” index would not, obviously, be the only price measure examined by the Fed to make policy decisions, but it could certainly provide useful information. In 2008, for example, airline fare inflation hit 15% and greater in the summer as oil prices spiked. The passthrough of commodity price inflation into core inflation is easy to see in an industry that depends so heavily on fuel as an input, but this general effect was likely replicated all across the economy. It is not hard to imagine that a measure of “super-core” inflation accounting for this bleeding over of commodity price inflation into core inflation would have actually been falling as the Fed met in September 2008 and could have provided valuable information that could have kept it from making its mistake.

The benefit of purging inflation measures used to set monetary policy from commodity price swings is obviously relevant to issues of climate change and the transition to a lower-emissions economy. A key cost that climate change is likely to impose on the global economy in coming years is commodity price volatility. Climate change will make agricultural output more volatile and more steadily expensive over the medium term. Extreme weather events are likely to cause large spikes in fossil fuel prices by destroying the infrastructure of extraction and distribution. For example, a hurricane that hit the Houston shipping canal would have profound consequences for oil and gasoline prices globally for an extended period of time. This canal is a key distribution node from the massive agglomeration of oil refineries. If a hurricane damaged the ability of ships to pass through it, the source of more than a third of oil shipments to the rest of the country would be compromised and the result would be a very sharp spike in oil and gasoline prices.17

None of these climate-related price shocks should necessarily be met by interest rate increases from the Fed. They may well happen when overall measures of overall slack are tame—or even highlighting the need for higher aggregate demand. Ensuring that the Fed does not respond to shocks like these with inappropriate monetary tightening is extremely important.

Similar concerns can be raised about the effects of climate policy seeking to transition the economy to a lower-emissions future. The linchpin of such “decarbonization” strategies is an enormous change in the energy mix used by U.S. households and industry, moving from fossil fuel energy to electricity powered by renewable sources. The scale of this endeavor is large and the time span short. In just the electricity-generating sector, the amount of energy supplied today by coal and natural gas electrical plants (still the majority of the nation’s electricity) needs to be completely replaced by renewable sources by 2050 to meet most climate goals. Then, the entire new renewable electricity grid needs to expand by another 50% to handle the electrification of activities that used to be powered directly by fossil fuels (replacing internal combustion engine vehicles with electric vehicles and replacing natural gas home heating systems with electric heat pumps).

It is highly unlikely that such a large transition will happen seamlessly. Most estimates of what such a transition is likely to mean for energy prices show some manageable increase in prices in the near to medium term followed by a longer-run reduction. The near-term increase in these prices—whether driven by the inherent volatility of energy markets or even by some policy imperatives—should not threaten efforts to maintain full employment by sparking interest rate increases. Moving to a monetary policy framework that explicitly looks through these price increases when assessing the state of inflationary pressures building in the economy would be very helpful.

IV.1.c Accounting for imports in the ‘super-core’

The same logic that calls for strictly ignoring the role of inflation in noncore items when setting the stance of monetary policy actually holds as well for inflation driven by the rising cost of imports. If, for example, the dollar loses value relative to currencies of other trading partners, this should all else equal lead to more expensive imports over time. But these higher import prices do not tell us anything about the state of macroeconomic slack—or how close we are to full employment—in the United States. As such, these higher import prices and the spell of inflation that will lead to them should not necessarily be met by more contractionary monetary policy.

Despite the fact that the United States remains a relatively closed economy compared with its advanced country peers, this concern about the effect of import prices on wider inflation trends is not academic. Taylor and Barbosa-Filho (2021), for example, find that import price changes are highly predictive of U.S. core inflation. Storm (2022) provides further evidence on this relationship. Crucially, this holds even when oil and other energy imports are excluded.

As with the discussion about commodity prices, the importance of this can be seen in a past historical episode that led to a large monetary policy mistake. Following the Volcker shock of the early 1980s, unemployment began falling—rapidly first and then more gradually—throughout the rest of the decade. After peaking at just under 11% at the end of 1982, the unemployment rate stood at just under 6.5% in the first quarter of 1987.18 Inflation in the overall CPI began moving upward in early 1987, and this prompted the FOMC to begin a steady increase in the federal funds rate in that year, a round of increases that continued through the beginning of 1989.19 By early 1990, the economy had entered recession. That recession is not fully explained solely by this monetary tightening, but nearly all accounts of the recession’s origins include these years of steadily rising interest rates.

Unlike the 2008 episode, the inflation that began in 1987 was largely in core measures. But, crucially, the value of the U.S. dollar had fallen by roughly 40% between 1985 and 1987 against our major trading partners.20 Given standard estimates of the lag between exchange rate movements and import price changes, this fall in the dollar’s value surely explained a very large part of the post-1986 uptick in core inflation. This dollar depreciation was hardly an obscure event—it was the outcome of a multilateral negotiated agreement (sometimes known as the “Plaza Accord”).21 Yet even today the episode of the late 1980s and the balancing of rising inflation and low unemployment very rarely mentions the effect of the falling dollar.

A similar effect followed the Fukushima earthquake of 2011 in Japan.22 Fukushima is near a locus of plants deeply important to the supply-chain for Japanese automakers’ global production. The earthquake and associated events (such as the crisis it caused at a nearby nuclear plant) caused huge disruptions to this supply chain. The effects rippled to the United States, leading U.S.-based plants owned by Japanese automakers to sharply cut back production for almost a year. The CPI for new and used cars in the United States saw steady and large declines from 2010 through 2017—except for one year of noticeable inflation increases in 2011, potentially driven by the supply shortages stemming from this Fukushima effect. Given the backdrop of steadily declining new and used car prices and a deeply depressed U.S. macroeconomy, this 2011 effect did not feed through in any meaningful way to the overall CPI, but it shows clearly that traumatic international events can feed through trade flows to U.S. economic outcomes. The Fukushima disruption was not climate-driven—it was an earthquake. But it is hardly a stretch to imagine the same kind of disruption stemming from a hurricane or typhoon, which are forecast to become more common and more intense in the future due to climate change.

It would not be particularly onerous for central banks to construct measures of core inflation that purge effects of import price changes unrelated to the state of domestic demand slack. Input-output models can be used to map what share of the final demand for each industry is satisfied by imports from a given country. The effect of changes in a given country-industry import price can then be estimated and removed from the final goods price. Again, this would not be used as the sole price index for making monetary policy decisions, but if this import-purged index showed substantially different inflation dynamics than other indices, this would be important information for the purposes of macroeconomic stabilization.

The need to account for commodity price changes in the face of climate change and climate policy is perhaps more intuitive than accounting for import price changes. But while the direct impact of many effects from climate change may be strongly regional, these can then be transmitted to the rest of the global economy through trade flows. For instance, in the example above about a hurricane shutting down transport of refined oil from the Houston refinery complex, the immediate effect of this would mostly be on U.S. prices. But if more expensive domestic oil prices pushed up the costs of production of U.S. exports (like automobile or airplane parts), this would transmit inflation to our trading partners by pushing up the price of their imports (or U.S. exports).

Accounting for sharp movements in import prices is not just generalized good practice for monetary policymakers; it is also likely to be particularly relevant to the coming era when the effects of both climate change and climate policy loom large.

IV.1.d Inflation will be more volatile—and will need to be higher for stretches—due to climate change

Even if the Federal Reserve changes its monetary policy framework to target inflation measures that have been purged of volatile commodity price movements, climate change and many climate policies will require much greater flexibility from the Fed about how its inflation target is maintained. Put briefly, climate change and climate policy will require substantial reallocation of resources across sectors in the U.S. economy—particularly in the next two decades. For the purposes of fighting the worst effects of climate change, it is vital that this reallocation happen quickly. For the purposes of maintaining high levels of welfare, it is vital that this reallocation happen mostly in the context of full employment. To meet both goals, the Fed will need to allow significant periods of time when inflation is exceeding its overall inflation target.

Probably the best statement of this argument comes from Guerrieri et al. (2021). This paper is framed around the structural reallocations caused by COVID-19, but the case that the economy will need permanent reallocations of resources across sectors is actually far more compelling for climate change. Much of the economic fallout of COVID-19—like the switch to durable goods spending as face-to-face services collapsed or the burst of demand for real estate in the wake of a widespread shift to working from home—may well reverse as the virus’s salience falls or will just be a one-time event. But climate change and policy-induced efforts to restructure production to reduce emissions will cause permanent ramping down of some industries and a radical increase in others.

The insight of the Guerrieri et al. (2021) paper is that optimal monetary policy in response to shocks depends on how symmetric the shocks are in their effect on different sectors, and how persistent the demand shock is. When the shock is highly asymmetric and persistent, this means productive resources have to be moved between sectors. In the case of climate change and climate policy, obvious examples could include the need for more resources in construction and engineering jobs and public transit and fewer resources in fossil-fuel-based power generation. A key signal for moving resources between sectors is changing relative wages. To attract resources into expanding sectors, relative wages must rise there.

A key impediment to changing relative wages is downward nominal wage rigidity—the empirical fact that U.S. employers seem highly reluctant to cut nominal wages.23 When nominal wages cannot fall in the contracting sector, a period of above-trend inflation can lead to a change in the relative wages between contracting and expanding sectors without the need for nominal wage cuts. If, instead of tolerating a period of above-trend inflation to facilitate the resource reallocation between sectors, the Federal Reserve tightened monetary policy, this would mute nominal wage growth in the expanding sector and would keep a temporary period of higher inflation from greasing the wheels of labor market adjustment by cutting into real pay in the contracting sector.

IV.1.e Stagnation does not foster reallocation

This finding that more expansionary monetary policy—even to the degree that it raises the optimal inflation target—fosters needed reallocations is vitally important. The history of economics has often seen the precise reverse argument—that recessions and periods of slow growth are “necessary” to foster economic restructuring. This view—sometimes called the “liquidationist” view—is perhaps most strongly associated with Schumpeter and Hayek. For example, Schumpeter (1934) wrote: “[D]epressions are not simply evils, which we might attempt to suppress, but…forms of something that has to be done, namely, adjustment to…change.”

This view that labor market reallocations are stronger during recessionary periods extended into modern times. However, over the past few decades, a growing body of research finds the exact opposite—economic restructuring actually tends to happen more rapidly during periods of faster growth. Caballero and Hammour (2005) find what they label a “reverse-liquidationist” effect of recessions relative to periods of growth: Recessions actually block needed restructuring of the economy.

IV.1.f Reallocation is less painful during periods of more rapid growth

Aside from the question of whether or not reallocation is fostered by rapid growth is the question of whether or not reallocation causes less damage to welfare during periods of rapid growth. Chodorow-Reich and Wieland (2020) look at exogenous measures of labor reallocation in economic history. They find that in local areas undergoing labor reallocation, a strong national economy allows this to happen without causing higher unemployment locally. But if local labor reallocations instead happen during periods of national slumps, then reallocations do cause local labor market distress.

Given that adjustments to climate change will essentially be a cascade of overlapping and nonsynchronized local reallocations, the maintenance of strong aggregate demand nationally will be highly important in ensuring these do not cause local labor market damage.

V. The Fed’s financial market policies cannot be relied upon to aid substantial resource reallocation

Since the financial crisis and Great Recession of 2008–2009, the Federal Reserve has essentially taken on a third unofficial mandate beyond its statutorily granted tasks of maximizing employment and fostering price stability: financial stability. It was widely recognized that the housing-bubble burst and the associated financial crisis were aided by regulatory gridlock stemming from too many agencies having partial jurisdiction over key parts of the financial system, which allowed for regulatory arbitrage on the part of banks looking to take on higher risks. The Dodd–Frank legislation passed in 2010 made the Federal Reserve the linchpin of the financial regulatory system in the United States.

Its role as the key financial regulator means that the Fed will have to confront the fallout of climate change on one important dimension: its effect on the balance sheet health of key financial institutions. Climate change and climate policy will have profound effects on the value of key economic assets, and these assets are often financialized and consist of large parts of the balance sheets of financial intermediaries. One obvious example includes coastal real estate. The value of seafront housing in the United States is enormous, and banks and other financial institutions hold residential mortgages as a key asset on their balance sheets. Absent the effects of climate change, these assets can appear quite safe because they are well collateralized—should mortgage holders be unable to make payments, the banks can take ownership of the underlying real asset. But if the value of the underlying real asset is itself imperiled by rising sea levels, then the financial health of the bank will be clearly damaged.

A similar set of reasoning concerns fossil-fuel-based assets and the prospects for climate policy that will force a reset of these assets’ prices stemming from an internalization of the greenhouse gas externality. If, say, a measure that raises the price of greenhouse gas emissions is ever passed (a carbon tax, for example), this will reduce the demand for goods and services whose production emits GHGs (household heating oil or gasoline for passenger vehicles) and this will in turn reduce the value of assets used in the production of these goods and services (oil fields or refineries, for example). Financial institutions holding either equity or debt in firms that own these fossil-fuel-intensive assets will see their value substantially marked down, and this would affect these institutions’ underlying solvency.

In theory, it is in financial institutions’ own interest to account for the increased risk that climate change and climate policy poses to assets on their balance sheets. In practice, of course, this kind of self-interest has not proved sufficient to keep financial markets stable, for a whole host of reasons.24 Given this, perhaps the single most common demand from those asking for “greener” central banks is regulation forcing financial institutions to assess the sensitivity of their balance sheets’ risks (both assets and liabilities) to climate change and climate policy.25 If a financial institution has a high share of its balance sheet assets in investments that might be severely impacted by climate change and climate policy, the risk weights for these assets should be increased and these institutions ought to be required to hold more safe capital (“safe” both in conventional ways but also remote from climate risks).

This is eminently sensible. Robust financial regulation requires assessing new and emerging threats to the underlying health of assets held by many financial institutions, and it is completely clear that climate change and climate policy may well present such risks. It would be a clear failure of financial regulation to not account for this.

Some have gone further and argued that mandating increased risk weights for climate-sensitive assets—or imposing other mechanisms that discourage financial institutions from holding these assets—might actually be affirmatively helpful in the reallocation of real resources needed to fight climate change. The reasoning is that if it becomes more expensive for financial institutions to hold climate-sensitive assets, then demand for these assets would fall. This fall in demand for climate-safe assets would hence raise user costs of capital for firms engaging in the underlying activity. So if financing a new oil well with debt became more expensive because financial regulation forces banks to charge a premium on the interest rate charged on this debt, then few oil wells might be built.

Some have gone even further still and argued that the user cost of capital for assets backed by fossil-fuel-emitting activities could be raised, and the cost of capital for green activities reduced, by the Federal Reserve’s balance sheet operations even outside its regulatory functions. That is, instead of just raising the cost of capital for assets backed by fossil fuel activities (the debt of oil companies, for example) by forcing banks to hold more safe capital for each increment of climate-sensitive capital, this cost of capital could also be increased by the Federal Reserve refusing to buy fossil-fuel-backed assets when it engages in asset purchases like its so-called “quantitative easing” (QE) programs.26 Further, the cost of capital for assets backed by green activities (construction of solar farms, for example) could be reduced by having the Fed disproportionately buy these assets when undertaking quantitative easing.

The theory behind the recommendation for the Fed to purchase assets backed by green activities and not purchase assets backed for fossil fuel activities makes sense. If real investment in these activities was constrained by the availability of finance, then this pattern of Fed asset purchases could put a thumb on the scale that hastened a transition to a lower-emissions economy. However, the empirical heft of this proposed policy in terms of hastening this transition is likely to be small.

V.1 The limits of Fed financial engineering in driving climate investments

There are three main reasons for pessimism on why “green quantitative easing” is likely to have limited traction. First, it fails to address what is by far the biggest impediment to moving resources out of GHG-emitting activities and into greener ones—the implicit (and enormous) subsidy of unpriced emissions. Second, Fed balance sheet policies have historically only operated on debt. But other forms of firm finance—like equity and internal funds—would likely be sufficient to overcome any disadvantage in debt markets arising from Fed purchases. Third, the empirical research on how earlier rounds of quantitative easing worked to spur economywide aggregate demand seem to show most of the effective transmission channels were not necessarily through narrow market segments. Instead, much of the effect occurred through household wealth effects and bank balance sheet effects. In short, quantitative easing did seem to boost economywide spending over the past decade, but the ability to focus this effect on particular sectors in an attempt to meet narrow industrial policy goals seems potentially limited.

V.1.a Financial engineering does not address the unpriced externality of GHG emissions

Resources for the Future (RFF) has an online tool that allows users to translate the impact of a given carbon tax into fuel cost increases. A $50.00 carbon tax (per metric ton of carbon dioxide) translates into gasoline and home heating fuel increases of between 22% and 46%. More recently, a team of authors (several also affiliated with RFF) found that the “social cost of carbon” was likely around $180.00 per metric ton.27 The “social cost of carbon” is a measure that accounts for the various unpriced external costs of carbon emissions, including both local health effects and also the economic damage associated with climate change. To fully price-in this external cost, an equivalent carbon tax would have to be levied.

What all of this means is that the failure so far to fully price-in the external cost of greenhouse gas emissions constitutes an enormous subsidy to continued fossil fuel usage. The size of this advantage stemming from the unpriced externality would likely dwarf any conceivable cost advantage for greener activities that might stem from even an aggressive Federal Reserve policy aimed at lowering the financial costs of issuing debt for these activities. The size of this subsidy can also be seen in recent analyses of the climate provisions in the Inflation Reduction Act (IRA). The IRA allocates hundreds of billions of dollars in subsidies for nonemitting sources of energy. As welcome as the IRA is, most models show it cuts only about two-thirds of the gap between current trajectories of GHG emissions and international targets for these cuts (as specified, for example, in the Paris commitments) by 2050.

One benchmark example of how effective a program of “green QE” might be in spurring mitigation investments concerns the standard QE programs undertaken in response to the Great Recession and financial crisis of 2008–2009. Most evaluations of these programs since 2008 find the first program—“QE1”—to have had the largest effect of any of the three waves of QE.28 Besides its effect on Treasury interest rates, the biggest effect of QE1 was on mortgage-backed securities (MBS), as the Fed targeted the mortgage market specifically for stabilization. Estimates of the effect of QE1 on the MBS market indicate that interest rates were lowered by roughly 0.5–1 percentage points. In one sense, this is evidence of success—the mortgage market is large enough that this level of interest rate decline has expansionary macroeconomic effects. But the effect of lower interest rates on the actual act of building new homes (residential investment) is just one channel linking mortgage rate declines and real economic activity. Further, it is a weak channel in this sector, with asymmetric effects that mean lower rates do little to spark more investment.29 The small effect of interest rate declines on real investment is a common theme across most studies examining the determinants of macroeconomic investment.

V.1.b Changes in debt market alone can be undone by other forms of finance

Given the huge advantage fossil fuels have currently due to the unpriced externalities associated with their use, financial engineering focused on raising the cost of just one source of investment finance (the debt of either fossil fuel or green companies) is easy for financial markets to undo. The Modigliani–Miller theorem (Modigliani and Miller 1958) in finance argues that the capital structure of a firm (the share of its balance sheet liabilities that are equity vs. debt) cannot affect the firm’s underlying value. There are plenty of reasons why the strict Modigliani–Miller theorem is wrong, but its essential insight that financial engineering cannot turn an otherwise competitive company noncompetitive or vice versa is useful to keep in mind. Eventually, it is the end-product price, not the cost of one form of investment finance, that must change to tilt market share away from GHG-emitting production techniques and toward cleaner ones.

Take the example of two firms competing to supply home heating services in a given area. One sells natural gas systems that emit GHGs and the other sells electric heat pumps that are nonemitting. If the unpriced GHG externality gives natural gas systems a cost advantage in this area, this will be hard to reverse with financial engineering. If Fed policy raises the cost of issuing debt to the natural gas company, this company can then turn to equity financing. As long as this company has the cost advantage in servicing the region, equity investors should be forthcoming—and in fact the cost to the firm of raising equity investments will be lower now than it was before the Fed debt policy began.

Finally, the capacity of many parts of the economy that are the heaviest GHG emitters to self-finance new investment out of internal funds is likely large.

V.1.c How has quantitative easing worked in the past?

The relative success of past rounds of quantitative easing is a contested topic in macroeconomics. The perceived success of it, however, has led many to think it could have substantial power in boosting real investment in needed climate change investments. But even the research literature highlighting the effectiveness of quantitative easing actually has discouraging findings for hopes that it can mobilize new investments.

Probably the best documented piece arguing for the success of quantitative easing is Gagnon (2016). He finds that the large-scale asset purchases of quantitative easing measurably lowered interest rates. In many textbook presentations of how interest rate reductions are supposed to boost aggregate demand, the role of business investment is often stressed. But, in more recent empirical investigations of the role of interest rate reductions in boosting aggregate demand, channels outside of business investment are often more important.

For example, lower mortgage interest rates can spur mortgage refinancing, which boosts the balance sheets and spending power of households. This has real macroeconomic effects, but it does not really target any specific sector.

Christensen and Krogstrup (2016) document that a substantial part of the effect of quantitative easing actually stems not from the asset purchases, but from the creation of reserves that are needed to finance the asset purchases. As they note, “reserve-induced effects are independent of the particular assets the central bank purchases [emphasis added].”

Chodorow-Reich (2014) and Rodnyansky and Darmouni (2017) highlight that quantitative easing has the potential to raise the value of a bank’s assets if the Fed purchases assets already held by the bank. So banks with large amounts of mortgage-backed securities (MBS) on their balance sheets saw the value of these assets rise as QE1 led to large purchases of MBS. This enhanced value of banks’ assets strengthened their balance sheets and allowed them to lend on a larger scale, potentially providing some macroeconomic boost. Crucially, however, this increased lending was not targeted at any particular sector, it simply came about because the entire value of the banks’ balance sheets had been improved by quantitative easing.

VI. Ensuring a smooth transition to a cleaner economy will take more than monetary policy

The debate over the Fed’s role in the transition to a cleaner economy often echoes the debate about the Fed’s role during the too-slow recovery from the Great Recession of 2008. Often in that earlier debate, frustrations over political decisions regarding fiscal policy led many to demand the Fed—seen as far less constrained by politics than fiscal policymakers—undertake more ambitious efforts to restore full employment. But too often, the demands either settled on measures that would be largely ineffective or which the Fed actually had neither the legal authority nor the substantive ability to undertake.

For example, it was widely recognized that austerity from state and local governments following the 2010 elections was a prime reason why economic growth was so slow in the following years.30 This austerity was clearly a political choice, not a situation forced upon state policymakers. In response, many observers and advocates began demanding that the Federal Reserve do something to reverse this state and local fiscal austerity. Often a demand was made that the Fed should extend credit directly to state and local governments.31 Having a generous credit line made available to these governments was a fine idea, but it would not have made a substantial dent in austerity. The point of Fed credit lines or asset purchases is to reduce borrowing costs. But borrowing costs in the 2010–2015 period for state and local governments were already among the lowest in history. It is just not credible that state policymakers like Sam Brownback or Scott Walker would have reversed their austerity policies if the Fed somehow engineered another 50-basis-point reduction in state borrowing costs.

Beyond advocacy of these types of largely ineffective moves, the Fed was also often implicitly criticized for not undertaking policies that it had neither the legal authority nor the substantive ability to undertake. The clearest example were often-vague demands that the Fed engage in “helicopter money” or “quantitative easing for the people.”32 In practice, these are demands for cash transfers made directly to households. Because both “helicopter money” and “quantitative easing” are terms associated with central banking, they sounded to many like policy initiatives the Fed really could undertake. But they are not. The Fed has no legal authority to transfer money directly to households. An objection to this reasoning is that the Fed did not have legal authority to undertake many of its financial rescue operations during the 2007–2009 financial crisis. But this is far from obvious. The Fed went into the crisis with broad legal authority to undertake lender-of-last-resort functions. And far from ignoring any potential legal constraint on its powers, one of the most consequential decisions made by the Fed—the decision in 2008 to not bail out Lehman Brothers—was quite likely driven by the Fed’s judgement that because Lehman was insolvent the Fed was barred from loaning it money.33

But even if an activist Fed decided to ignore potential legal constraints and try to transfer cash directly to households, it has no means of doing this. When the broad cash transfers legislated as a fiscal response to COVID-19 were implemented, they were feasible because the legislation directed the Internal Revenue Service (IRS) to identify taxpayers and send them the checks. But the Fed is not allowed to demand the IRS hand over its list of taxpayers and addresses. In short, “helicopter money” requires fiscal policymakers to act, not just the Fed.34

The real lesson of the anemic recovery from the Great Recession should have been that the Fed has very limited powers to ensure macroeconomic stabilization on its own. This lesson will almost surely be proved again in the coming decades in the context of the climate debate.

VI.1 Climate change will prove that the Fed needs assistance even away from the zero lower bound (ZLB)

During the recovery from the Great Recession, the Fed’s need for assistance from other policymakers—particularly fiscal policymakers—was thought to be asymmetric and driven by the ZLB on interest rates. The common metaphor was that the Fed could not “push on a string”—meaning that it could not force households and businesses to spend more simply by making it cheaper to borrow and spend. The flipside of this thinking was that “pulling on the string” would work just fine; when the economy ever threatened to overheat and generate excess inflation, interest rate increases would reliably restrain spending growth.

There is a lot of wisdom in the pushing/pulling on a string metaphor. Rigorous empirical work demonstrates conclusively that there is a major asymmetry in the effect of monetary policy on aggregate demand: Rate increases quite reliably reduce aggregate demand while rate cuts provide only a very weak boost.35

However, lots of this reasoning starts from an assumption that containing inflation—one of the Fed’s two major planks—is always and everywhere a task of keeping aggregate demand restrained. In this view, restraining inflation can and should be accomplished simply by raising policy interest rates. But as the experience of the past year should signal loudly, this is not necessarily true. The inflation of 2021–2022 has very few of the data signatures of a labor market “overheating.” Real wages have fallen over the much of the period, and the labor share of income has fallen as well.36

The inflation instead looks like a series of exogenous shocks that then set off large ripple effects driven by distributional conflict. When the various pandemic shocks led to skyrocketing prices of goods, for example, this in turn led economic actors to try to protect their real incomes by demanding higher incomes. Workers demanded raises and firms refused to allow profit margins to contract to absorb higher input costs (and even opportunistically fattened these margins).

For most of the post-1979 period, workers’ ability to demand higher nominal wages in the face of sharp inflationary shocks was quite limited. But workers’ bargaining power in the 2021 labor market was buoyed by a number of sui generis factors. Unemployment insurance was temporarily made extraordinarily generous for most of the year, giving workers a much-enhanced fallback position should employers not offer decent pay. Further, huge swaths of the economy that had shut down for much of 2020 were simultaneously reopening. This led to a historically rapid surge of job openings. This historically unprecedented scramble for workers—particularly in low-wage sectors like leisure and hospitality—led to greatly enhanced bargaining power for those willing to work. Finally, virus fears (or inconveniences) kept labor force participation depressed among many swaths of workers—particularly older workers. For those willing to work in the face of degraded working conditions, bargaining power was in long supply.

Between the sui generis aspects of the 2021 labor market and the continuing cascade of shocks, inflation proved far more persistent than many had hoped. But as bad as the shocks were and as unusually large as the ripple effects might have been, the most important ripples never threatened to amplify the shocks’ initial effects. Wage growth, for example, has consistently dampened, not amplified, the initial shocks.37

There is worry that the faster pace of wage growth that has accompanied the shocks might not relent absent a large increase in the unemployment rate. This fear is often expressed with reference to “hot” labor markets. But, again, it seems odd to flatly label the labor market as “hot” or “overheated” when real wage growth is falling and the labor share of income is falling. In reality, it seems like many are arguing that an inflation set off and sustained by a series of shocks and ripple effects can only be reined back in by engineering a rapid drawdown of aggregate demand.

This dynamic becomes obviously problematic when looking at what the next 10–20 years holds for the U.S. and the prospects for undergoing the clean economy transition while spending most of that time at full employment.

If it is true that much of the U.S. inflation problem of the past two years has largely been a problem of shocks and ripple effects, policies that provide buffers against shocks and quickly muffle ripple effects would have been far more useful than across-the-board reductions in aggregate demand (like those engineered by the sharp interest rate increases from the Fed).

Two examples of policy targets to address the types of shocks that led to the 2021–2022 inflationary episode are supply-chain resilience and energy price stability.

V.1.a Supply-chain resilience

It’s hard to imagine that global supply chains in manufacturing goods are likely to be as stressed going forward as they were during the COVID-19 pandemic, but climate change could well put enormous pressure on these networks in the near future. Coastal ports are obviously vulnerable to extreme weather events, and these events will become more numerous and more severe in coming years. Policies to aid supply-chain resilience would include incentives for stockpiling key intermediate goods or for sourcing them from diversified origins. Further, there is likely much room for policies aimed at supply-chain information monitoring to avoid bottlenecks. Many of these policies are included in recent legislation passed in the United States, such as the Infrastructure Investment and Jobs Act (IIJA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.

V.1.b Energy price stability

Besides durable goods price shocks stemming from stressed supply chains, the other large inflationary shocks in the past two years have come from energy prices. It remains the case that much energy consumed in the U.S. today is fossil fuel based, and in the longer run it is vital that we see the relative price of fossil-fuel-based energy rise considerably relative to renewable energy. However, it does not follow from this reasoning that large and sudden spikes in the prices of oil and gas are useful for long-run climate change goals.

For one, large spikes in oil and gas are extremely unpopular politically. Political leaders hoping to foster policies to move the U.S. economy to a lower-emissions path will not survive long in office if the price of oil and gas spike up. More substantively, until the marginal unit of energy in the U.S. economy is produced by renewables, a large spike in oil and gas prices may well lead to a substitution toward energy derived from coal—and coal is far more GHG-intensive than even other fossil fuels.

Finally, while large upward movements in the price of oil and gas are highly damaging politically, large downward movements do not carry much political benefit, but they do lead to great reluctance in the energy sector to invest more resources in oil and gas extraction and refining.

Given these considerations, it seems like it would be highly strategic to orient policy around bringing more stability to the price of oil and gas in the United States. Policymakers can decide the desired path for how much the relative price of oil- and gas-based energy should rise relative to renewables over the long run, and then orient policy to minimize variation around that path. In the recent inflationary episode, drawdowns from the Strategic Petroleum Reserve (SPR) have been associated with putting a brake on upward movements in gasoline prices. But historically, this type of SPR release has been extremely ad hoc, and so has done little to bring long-run stability or predictability to these markets.

Further, a fall in oil and gas prices leads rather quickly to changed U.S. consumer habits around autos—they switch quickly to larger and higher gas-consuming vehicles. Falling prices also sow the seeds for the next sharp rise, as it tends to lead to a sharp contraction in oil and gas investment.

Williams, Datta, and Amarnath (2022) have released a plan calling for the SPR, along with the Treasury Department’s Exchange Stabilization Fund (ESF) and the Defense Production Act (DPA), to target much greater price stability in the oil and gas sector. The broad outlines of the plan are that the SPR should release oil when prices are high to tamp down price pressures but should use the ESF to precommit to purchasing oil for refilling the SPR when prices hit a given floor. Finally, if firms that want to undertake investments in extraction and refining at the new more stabilized price find themselves less able to do so, then the DPA could be used to ensure that key inputs are made available to them.

Such plans will strike many on first blush as inconsistent with climate change goals. But, again, the desired long-run trajectory of rising relative prices of fossil-fuel-based energy can be set with even quite stringent emissions reductions in mind. The point of stabilization is to minimize price volatility around this longer-run trend.

This price volatility has been highly damaging to U.S. households in the past couple of years, and it likely sparked a good part of the rise in nominal wage growth that gave the initial inflationary sparks a bit more persistence than many thought would happen. The job of maintaining full employment with reasonably stable inflation would be much easier to attain if these kinds of sector-specific pressures on inflation could be addressed more directly with a broader toolkit than just interest rate increases.

VII. Macroeconomic stabilization in the face of climate change will be hard and central banks will have to show great flexibility

Climate change and climate policy will add quite a bit of volatility to macroeconomic performance in coming decades. At the same time, the stance of macroeconomic policy is likely to be quite important in determining how rapidly and smoothly the transition to a lower-emissions economy can happen.

By far the biggest contribution monetary policymakers will make to greening the economy will be figuring out the parts of this volatility that should be dampened (keeping real supply shocks from setting off demand shocks through financial market effects) and which parts should be allowed (more frequent above-target inflationary episodes if they allow better reallocation of resources toward greener sectors). This is actually a key part of their current mandate—and it is clarifying the operational specifics of this mandate and implanting them in a flexible and modern way that will be vital to making the climate transition both rapid and smooth.

Strangely, so far, most discussions about the “greening” of central banks spend far less time on these issues and instead focus on new and more exotic tools that central banks should embrace. But these suggested new tools would be quite weak generally, while core issues like how much inflation should be tolerated and how to purge inflation targets of volatility that cannot be addressed through aggregate demand management will be vital. There should be more debates on these kinds of “meat and potatoes” issues about how policymakers in charge of macroeconomic stabilization reply to climate shocks and try to smooth the resource reallocation needed to mitigate the worst of climate change. Hopefully this paper can be a part of starting this debate.

Notes

1. For evidence on the extent of global decoupling, see Hubacek et al. 2021. The supplementary material online accompanying the article provides estimates of national-level decoupling.

2. On the rapidly falling costs of renewable energy, see IRENA 2022.

3. Carroll 2001 is one good example of this literature. He points out that macroeconomic consumption spending will depend not just on the average level of income and wealth, but on its distribution. The reasoning is that households with low wealth will have a “precautionary savings” motive to self-insure against future risks to individual negative income shocks. In the aggregate, negative and positive individual shocks to income might neutralize each other, but because there are limited institutions allowing individuals to insure against negative shocks, savings will be higher if a larger fraction of the population has lower wealth.

4. On the importance of the inherited stock of conventional capital in driving projections of GHG emissions, see Kemp-Benedict 2019.

5. On the rise of shale oil production driven by technologically induced reductions in the cost of hydraulic fracturing, see Killian 2015.

6. See CRS 2021 for an extended overview of the legislative history of renewable energy tax credits.

7. See Jordan 2019 for a discussion of the Clean Power Plan and its eventual demise. Bivens (2015) provides an assessment of the likely employment effects of the CPP, including issues related to demand-constrained growth.

8. For evidence of this feedback from chronic demand shortfalls leading to macroeconomic “scarring,” see Ball 2014.

9. For evidence of these effects, see Bivens 2017.

10. This rise in household debt is often cited as a key hallmark of the “financialization” of the U.S. economy. For trends in household debt as a share of GDP, see https://fred.stlouisfed.org/series/HDTGPDUSQ163N.

11. For the finance sector’s rising economic footprint over time, see Bivens and Blair 2017. For evidence on investment as a share of GDP, see https://fred.stlouisfed.org/graph/?g=UQDq.

12. See Bivens 2016 for evidence on austerity.

13. See the Net-Zero America project (Larsen et al. 2021) for these numbers. Essentially, the report highlights that total electricity demand will more than double across all pathways toward decarbonization. But given that today’s nonemitting electricity generation is under 40% of the total, this implies meeting all electricity demand in 2050 with nonemitting sources requires this base to rise by at least four.

14. Just one example might suffice: A headline from CNBC in July 2022 was “Inflation Figure That the Fed Follows Closely Hits Highest Level Since January 1982” (Cox 2022).

15. In that piece, originally released in May 2008, the very first sentence was: “Evidence is mounting that the U.S. economy is in a recession.”

16. These numbers come from an analysis by Appelbaum (2014).

17. See Holley 2020 for an extended discussion of the vulnerability of the Houston shipping canal to hurricanes, and the large nationwide ripple effects that would result from the canal being struck.

18. For these unemployment trends, see https://fred.stlouisfed.org/graph/?g=USl0.

19. For developments in inflation and the federal funds rate, see https://fred.stlouisfed.org/graph/?g=USlt.

20. For dollar movements, see https://fred.stlouisfed.org/series/TWEXBPA.

21. See Frankel 2015 for a good history of the Plaza Accord.

22. See Carvalho et al. 2021 for a good overview of the economic effects of the Fukushima earthquake’s disruption to global supply chains.

23. See, for example, Fallick, Lettau, and Wascher 2015.

24. See Duffie 2019 for a mainstream view on why underregulated financial markets are prone to crises.

25. See Bolton et al. 2020 for a detailed overview of how this type of green financial regulation might work.

26. See Dafermos, Nikolaidi, and Galanis 2018 for an overview of how a green QE could work.

27. See Rennert et al. 2022 for this updated social cost of carbon calculation.

28. See Gertler and Karadi 2012 for an explicit ranking of various programs of large-scale asset purchases.

29. On the weakness of interest rate cuts in spurring residential investment, see Kohlscheen, Mehrotra, and Mihaljek 2018.

30. See Bivens 2016 for documentation of the role of state and local spending in dragging down aggregate demand growth in that period.

31. See Brown 2011 for an overview of this demand.

32. For an overview of what is meant by “helicopter money” in this regard, see Blyth and Lonergan 2014.

33. See Cline and Gagnon 2013 for the case that Lehman’s insolvency was the primary reason why the Fed did not offer a bailout.

34. Some of those arguing for “helicopter money” explicitly recognize some of the legal and/or logistical challenges to this. But very few go as far as suggesting concrete fixes for these (like the establishment of individual accounts at the Fed, which would allow “helicopter money” to be undertaken). One reason why legal challenges are often glossed over in these accounts is that they are often touting the virtues of “helicopter money” precisely because it could allow the Fed to act and not be hamstrung by dysfunctional congressional politics. But if instituting helicopter money requires legislative action to change the law, this obviously makes the whole argument fall apart.

35. See Angrist, Jorda, and Kuersteiner 2016 for this evidence.

36. See Bivens 2022a for this evidence and how it pertains to claims of economic overheating.

37. See Bivens 2022b for evidence of the dampening effect of wage growth.

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Today’s inflation is a real concern⁠—it is running too high and is reducing households’ purchasing power. But linking fiscal policy decisions about the proper level of taxes and spending in the medium and long run to today’s inflation makes little sense. Even worse, many of these policymakers cast both the tax increases and the spending increases as potentially inflationary. This is not just unwise—it is simply economically innumerate.

In this post, we make the following points:

• The direct effect of tax increases is to slow the pace of aggregate demand growth, not increase it. This means that the tax increases included in proposed fiscal policy packages are disinflationary, full stop.
• In the medium to long run, the investments included in proposed fiscal policy packages will reduce costs that American families face for a number of crucial goods and services, from health insurance premiums and prescription drugs to energy costs and child and elder care.
• A fiscal policy package that expands social insurance and public investments⁠—and finances these by progressive tax increases⁠—is essentially aiming to meet pressing social needs with a moderately larger footprint of the public sector in the economy.
  • Currently, the U.S. public-sector footprint is extremely small compared with other advanced economies, to the detriment of the economic security of U.S. families.
  • There is nothing inflationary about this larger public footprint. Since the pandemic recession began, inflation has actually run more slowly in countries with higher spending as a share of GDP.
• Generally speaking, fiscal policymakers are uniquely ill-suited in the short run to restrain inflation that has been caused by excess growth in aggregate demand⁠—this fact is why the Federal Reserve is generally given primary responsibility for this task.
  • However, the inflation of the past year has largely not been driven simply by excess growth in aggregate demand, meaning there were some tools that fiscal policymakers could have deployed to help restrain price growth, but they were not taken up. A quickly enacted excess profits tax, for example, could have restrained the dominant source of price growth in 2021.

Taxes—even highly progressive ones—are disinflationary

The tax increases that have been proposed as part of various fiscal policy packages in recent months are extraordinarily progressive, raising the vast majority of their revenue from high-income households (or corporations). Because high-income households save so much more out of a marginal dollar of income than they spend, this means economy-wide spending and aggregate demand are affected only slightly by tax changes on these households. But, a slight effect doesn’t mean no effect: Raising taxes on high-income households will unambiguously slow aggregate demand growth.

All else equal, slower aggregate demand growth puts downward pressure on inflation. This is true even if one does not believe that today’s inflation is largely a function of aggregate demand growth rising too fast relative to the economy’s underlying productive capacity (“too much money chasing too few goods”). In short, policymakers arguing against the tax provisions of proposed fiscal policy packages on the basis of today’s too-high inflation are demonstrating extreme economic innumeracy.

Proposed public investments would help reduce costs and future inflationary pressures

While tax increases are disinflationary, it is true that public spending increases are inflationary, all else equal. But context is crucial here. For one, the spending in these proposed packages will hit the economy gradually over time. These packages are not stimulus packages like the American Rescue Plan (ARP), which injected huge amounts of spending into the economy all at once by design to stabilize a sinking economy. Instead, the fiscal packages being debated today are largely about public investments—measures that will expand the economy’s supply side. These capacity expansions will tamp down inflationary pressures as they come to fruition.

An obvious example is the proposed investments in child and elder care. These types of investments have been shown to significantly boost women’s labor force participation rate, and this labor force growth is a key addition to the economy’s capacity. For those who think today’s inflation problem is “too much money chasing too few goods,” expanding the economy’s supply-side capacity enables more goods to be produced, hence tamping down inflationary pressures.

Of course, by far the most pressing investment need facing the U.S. and global economies today is reducing carbon emissions to slow climate change. If climate change proceeds under the “business-as-usual” scenarios wherein emissions are unconstrained by policy decisions, the results for the economy’s supply side are incredibly damaging. Climate-driven supply-side contractions moving forward will be extremely inflationary (not to mention causing huge human misery often quite hidden from macroeconomic aggregates).

Finally, many of the provisions in the fiscal packages under debate will reduce some of the most salient costs harming U.S. households. High-quality child care, for example, is extraordinarily expensive for most families today. Subsidies that cap its cost will provide huge relief to families. In the jargon of economists, this actually is not a reduction in “inflation” per se. But in the minds of the vast majority of the public, reducing the costs that pressure their family budgets is likely every bit as good as a reduction in “inflation.”

Some of these cost reductions can also happen extremely rapidly. For example, increased subsidies for health insurance purchased through the Affordable Care Act (ACA) exchanges, or reductions in prescription drug prices stemming from tougher bargaining with pharmaceutical companies in public insurance programs (like Medicare and Medicaid) can lead to near-instant cost declines.

A larger public sector is not inflationary

Essentially, the fiscal policy packages under debate aim to use a slightly larger public sector footprint in the economy to solve pressing social needs. By modestly boosting both public spending and taxes as a share of the economy, the hope is that the resources can be used in efficient and targeted ways to provide needed economic security the private sector is failing to deliver.

Some make implicit arguments that this public-sector expansion is somehow inflationary by definition. This conflates fiscal stimulus—using tax and spending policy changes to intentionally boost aggregate demand growth to spur a demand-constrained economy—with a balanced increase in the taxes and spending to deliver more public goods and services permanently. The latter does not need to be inflationary. And, while rising inflation in the wake of the COVID-19 economic shock has been universally global, it has not been any faster in those countries with larger public-sector footprints (see figure below).

It’s also worth noting that the U.S. public-sector footprint is extremely small relative to our advanced country peers. There is a lot of room for the U.S. to increase this footprint to provide greater economic security and fairness and yet remain on the low end of this measure internationally.

Congress has the wrong tools to combat too-fast inflation

The main reason Congress should not see itself as responsible for dampening outbreaks of inflation is that they are poorly equipped to do it institutionally. Put simply, fiscal policy is nowhere near nimble enough to respond to relatively sudden bursts in inflation. By the time Congress recognizes the burst, debates the proper response, compromises on a bill, navigates its signing by the President, and then sees the policy effects hit the economy, the inflationary shock is likely to have passed and the policy might well restrain growth just as the economy is already slowing.

These considerable lags are a key reason why the Federal Reserve is given the primary job of restraining inflation through throttling back on demand growth if that’s what’s needed (whether or not that is currently needed is definitely debatable).

It’s also worth noting a deep inconsistency in how too many in Congress see their role in responding to inflation. There is no advantage that Congress has over the Federal Reserve in restraining demand growth to tamp down inflationary pressures. But, there actually is a large advantage that Congress has over the Federal Reserve in boosting demand and spurring faster recovery when interest rates are near-zero. In 2008, for example, the interest rate the Fed directly controls had already hit zero and could not be cut any further even as the economy continued to collapse. This collision with the “zero lower bound” on interest rates argued strongly that fiscal policymakers should have stepped in to help pull the economy out of its depressed state.

A key indicator that such strong fiscal medicine was needed was inflation that was far below the Fed’s preferred target—a shortfall that essentially lasted a full decade. Yet during the time when fiscal policy could have helped solve a pressing problem of macroeconomic stabilization, there was no groundswell in Congress to respond forcefully and restore the inflation rate to its proper target.

Failing to act then and yet demanding action now to restore inflation to its proper rate is the kind of policy asymmetry that has harmed the U.S. economy for decades. For some reason, a surge of inflation above its target is seen as a spur to Congressional action—even when their tools for addressing it are weak and unreliable and the Fed’s tools are strong. And yet a period of extended and damaging excess unemployment was not such a spur—even when fiscal policy tools for addressing it were strong and reliable and the Fed’s tools were weak.

Inflation is no excuse for policymakers to dodge fiscal policy proposals

The fiscal policy changes under debate are not about stimulus to aid a growth-starved economy. Unemployment is low and the economy does not need stimulus. Instead, these measures under debate are about long-run questions about the proper role of the public sector in maximizing growth and fairness in the economy, and in meeting pressing social needs.

As such, the desirability of these changes does not change at all if inflation is 2% or 10%. If inflation is high because aggregate demand growth is too strong (again, a big “if”), then the Federal Reserve has much better tools to quickly tamp down this demand growth. Some in Congress today are acting as if the Fed’s tools for restraining demand-led inflation won’t work as well as fiscal contraction, or as if there’s some reason to never raise interest rates. Both are wrong. Interest rate increases work quite well to restrain aggregate demand growth (so well, in fact, that we currently face a danger of overshooting on rate hikes and causing a recession). And there’s no real reason to want interest rates to remain at near-zero levels. What’s important for U.S. households’ welfare is to ensure very low unemployment, not necessarily very low interest rates. If there comes a time when a bold fiscal policy package is passed, and it’s accompanied by low unemployment, acceptable rates of inflation, and interest rates significantly above zero, that’s not a problem at all.

In short, reining in too-fast inflation is not Congress’s job. And it’s not their job because the tools they have to do it are bad and will cause far too-steep collateral damage if they’re deployed. For example, crucially needed progressive tax increases and vital public investments might be sacrificed.

This chartbook shows that the loss of manufacturing jobs has been particularly devastating for Black and Hispanic workers and other workers of color, who represent a disproportionate share of those without a college degree, and for whom discrimination has limited access to better-paying jobs. It calls for creating millions of good jobs for workers at every level of education by investing in infrastructure and rebalancing trade. When implemented with clearly defined racial and gender equity goals, these investments can help raise living standards for men and women workers of color without a college degree.

This chartbook comes at a crucial time. The bipartisan infrastructure bill signed into law in November, the Infrastructure Investment and Jobs Act (IIJA), invests about $550 billion in new federal funding for roads and bridges, railways, broadband, and other infrastructure. And an even larger social safety net and climate change bill awaiting a vote in the Senate—the Build Back Better Act (BBBA)—would invest roughly $2 trillion in child care, long-term care, universal pre-K, renewable energy, electric cars, and other human and climate infrastructure. But although these job-creating investments are welcome, they constitute just a down payment on a much larger agenda of investments needed over the coming decades to rebuild the American economy and complete the conversion to a zero-carbon, clean-energy future by 2050. And the current investments are already at risk: If steps are not taken to rebalance trade so that more of the goods consumed in the United States are made domestically, much of the new spending and new jobs will leak away to foreign suppliers. The threat is real: We continue as a country to import more than we export, and the surging imports mean that the reported U.S. trade deficit in manufactured goods for 2021 is likely to exceed $1.1 trillion.

Following are some key data points in the chartbook:

• Nearly 7 million jobs would be supported by a four-year, $2 trillion infrastructure and climate change investment program combined with trade and industrial policies that dramatically boost U.S. exports and eliminate the U.S. trade deficit. This includes at least three million good jobs (with high wages and benefits) in manufacturing and construction. If implemented with policies to help ensure that workers of color and women can access these jobs, this program would help reduce racial and gender inequities in the job market.
• Rebalancing trade, investing in infrastructure, and addressing climate change would help rebalance the economy back from lower-paying service- sector jobs to higher-paying jobs in manufacturing and construction. Essentially all of the net new jobs created in the economy over the last two decades were in services. In contrast, 45.7% of jobs supported by investing in climate and infrastructure and 40.8% of the jobs supported by rebalancing trade would be in manufacturing and construction.
• Supporting new manufacturing jobs is important for Black workers, who have been particularly hard hit by globalization and the decline in manufacturing employment. While Black workers’ share of total employment increased from 11.3% to 12.3% between 1998 and 2020, their share of manufacturing employment was essentially unchanged. Meanwhile, they experienced the loss of 646,500 good manufacturing jobs during that time period, a 30.4% decline in total Black manufacturing employment as part of the overall loss of more than 5 million manufacturing jobs between 1998 and 2020.
• Black, Hispanic, Asian American/Pacific Islander (AAPI), and white workers without a college degree all earn substantially more in manufacturing than in nonmanufacturing industries. For median-wage, non-college-educated employees, Black workers in manufacturing earn $5,000 more per year (17.9% more) than in nonmanufacturing industries; Hispanic workers earn $4,800 more per year (+17.8%); AAPI workers earn $4,000 more per year (+14.3%); and white workers earn $10,100 more per year (+29.0%). Manufacturing wage premiums are also substantially larger for all workers at the 10th percentile of the wage distribution.
• Surging imports from China and the resulting growing trade deficit with China have had a key role in manufacturing job loss. Reducing that deficit is critical to bringing jobs back. Between 2001, when China entered the World Trade Organization, and 2018, the growing bilateral trade deficit displaced 3.7 million U.S. jobs, including 2.8 million jobs in manufacturing.
• Historically, growing trade deficits have displaced a disproportionately large number of good jobs for workers of color. Between 2001 and 2011 alone, the growth of the trade deficit with China displaced 958,800 jobs held by workers of color—representing 35.0% of total jobs displaced by the growing trade deficit with China. About three-fourths of jobs displaced were manufacturing jobs, which feature high pay and excellent benefits.
• Growing trade deficits have hit workers of color in the pocketbook. In 2011 alone, workers of color displaced from higher-earning jobs in manufacturing and other traded industries into lower-earning jobs in nontraded industries earned $10,485 less in annual wages because of the growing trade deficit with China. This trade-related average annual wage loss per worker translates into a total loss of $10.4 billion per year for the 958,800 workers of color affected by growing trade deficits with China.

Policymakers should heed the data on globalization’s impact and boost investment and rebalance trade

As the charts in this chartbook show, investments in infrastructure, domestic manufacturing capacity, and addressing climate change would create millions of good jobs for workers who have been hardest hit by globalization and the shift toward more low-wage service-sector jobs. The jobs created through these investments would offer better pay and benefits than average service industry jobs, with the potential to improve living standards for a broad group of racially and ethnically diverse, non-college-educated women and men.

At this writing, physical and human infrastructure investments approved or under debate in 2021, while welcome, are down payments on a much larger agenda of investments needed to rebuild the American economy and complete the conversion to a zero-carbon, clean-energy future by 2050. The job of rebuilding the American economy will not be completed in the first year of the Biden administration.

Policymakers must implement smart trade and industrial policies to maximize the jobs and benefits created by the current investments in infrastructure and clean energy and significantly boost those investments to match the scale of the need. These policies include aggressive and expanded use of Buy America programs, which should be applied to as much of new investments as possible. And any investments must be accompanied by substantial investments in research and development, training, and extension services, which will increase the supply of skilled workers for these good jobs and the competitiveness of U.S. manufacturing and construction industries.

These recommendations align with the Alliance for American Manufacturing’s American Manufacturing Plan, a plan calling for measures to increase domestic competitiveness, improve trade enforcement and trade agreements, and carefully shift the value of the dollar so that U.S. goods are competitive (Paul 2020). The recommendations also would operationalize the EPI policy agenda for trade, which states that we should “restore and protect American manufacturing by using policy levers to ensure that American manufacturers’ ability to compete on global markets is not hamstrung by a chronically overvalued dollar, as it has been for decades” (Economic Policy Institute 2018). Ways to realign the dollar and rebalance U.S. trade and capital flows are explained by Scott (2020a, 2020b).

This report shows the employment impact of infrastructure investments at the scale of the need combined with smart trade policies designed to eliminate the U.S. goods trade deficit with the rest of the world. Specifically, we illustrate the employment impacts of investing roughly $500 billion per year in climate and infrastructure over four years (as originally proposed by President Biden during his 2020 election campaign) and eliminating the U.S. goods trade deficit of $854.3 billion (which was projected to likely reach $1.1 trillion in 2021 according to the U.S Census Bureau (2021b)), which would dramatically increase demand for American-made manufactured goods. We draw on Scott, Mokhiber, and Perez (2020), which showed that these investments, and the increased spending on domestic goods, could support at least 6.9 million jobs over four years, including at least three million good direct and indirect jobs in manufacturing and construction. Rebalancing U.S. trade alone could support 3.5 million of those 6.9 million jobs, including 1.4 million good jobs in manufacturing and 44,000 good jobs in construction.

The investments called for are scaled to the need. Every four years, the American Society of Civil Engineers (ASCE) estimates the investment needed in each infrastructure category to maintain a state of good repair and earn a B grade. ASCE’s 2021 Infrastructure Report Card estimates that the U.S. infrastructure investment gap—how much less the U.S. will invest in its infrastructure than it needs to over the next decade—is $2.59 trillion (ASCE 2021). Since the recently enacted IIJA includes only $548 billion in new funding for both infrastructure and climate investments, and the bulk of the investments in the proposed Build Back Better Act (included in the reconciliation bill still being considered at this date) are for safety net and climate expenditures, with relative small and still-indeterminant amounts for infrastructure, it is clear that there will be substantial infrastructure needs remaining to be addressed during the balance of President Biden’s first term. Furthermore, even if President Biden’s full $6 trillion proposal to upgrade America’s physical and social infrastructure, first unveiled in June 2021, were eventually fully funded, much more is needed to meet our infrastructure needs and fully fund the transition to a zero-carbon economy over next 30 years (Tankersley 2021).

Future research should focus on women’s access to manufacturing and construction jobs

As the charts in this chartbook show, manufacturing and construction offer good jobs for women, but women make up a smaller share of total employment in these two industries (29.2% and 10.6%, respectively) than men. Women hold a disproportionately large (56.4%) share of service industry jobs—a notoriously low-paying sector—despite being less than half (48.8%) of the overall workforce (EPI 2021a). Women employed in manufacturing earn $183 more per week (22.2%) than women employed in service industries, on average, and women manufacturing workers earn much more than women workers in rapidly growing service industry subsectors such as restaurants and retail trade, where average weekly earnings are much lower than the overall average for service industries. (Data on average weekly earnings for all workers by industry are reported in Appendix Table 1.) Future research should explore ways in which public policies can help expand employment opportunities for women in high-wage manufacturing and construction industries. Boosting women workers’ share of higher-paying jobs would help close the persistent gender pay gap. Despite some narrowing of the gap, women workers overall are paid a lot less than men with comparable backgrounds. The regression-adjusted wage gap was 22.6% in 2019 (down slightly from 23.9% in 2000), meaning women were making 22.6% less than men with comparable backgrounds (that is, adjusting for differences in education, age, and region) (Gould 2020, Appendix Table 1). 

A quick note about the data and definitions

The data in the charts and tables in this report are drawn from a number of sources, and specific sources are provided for each chart and table. This note provides a general introduction to the data and time periods covered in this analysis. For the broad overview of trends in employment, trade, and compensation by major industry, we use detailed historical data on employment by industry for 1998 to 2019 obtained from the Bureau of Labor Statistics Employment Projections program (BLS-EP 2020). These data were supplemented with monthly data from the BLS’s Current Employment Statistics (BLS-CES various years). Data on overall compensation, including wages and benefits shown in Chart 3, are from the BLS’s Employer Cost for Employee Compensation series (BLS 2021a).

All of the data in this report refer to the number of workers employed (that is, people with a job), so estimates of total employment are a measure of the total workforce. Workforce measures (as used here) are distinct from estimates of the domestic “labor force,” which are derived from the monthly household (CPS) surveys of employment, unemployment, and labor force participation rates. To provide a more comprehensive look at the economy, we did not restrict the sample to only those who are working full time.   

We use industry-based definitions of employment in this study to break the economy into three basic types of jobs: construction, manufacturing, and services. These sectors are responsible for the vast majority (99.2% in 2019) of total nonfarm employment (estimated from Appendix Table 1 at the end of the report) in the United States, and for an even larger (99.8%) share of net job creation or destruction over the 1998–2019 period in the nonfarm economy (also derived from Appendix Table 1). In 2019, the construction industry employed about 7.5 million workers, or about 4.9% of total nonfarm employment of 151.7 million.  While the number of construction workers has increased slightly over the past two decades (as shown in Appendix Table 1), the number and share of manufacturing workers has fallen steadily for the past two decades (Table 2 and Chart 2), to 12.8 million workers in 2019, or 8.5% of total nonfarm employment. The vast majority of all jobs in the economy are then included in the service industries, which employed 130.1 million workers in 2019, or 85.8% of total nonfarm employment. The service sector encompasses a broad set of industries ranging from very low-wage sectors such as retail trade, restaurants, and other segments of the hospitality industry—sectors dominated by minimum wage labor—to high-wage sectors dominated by professionals such as law, accounting, and financial services. But even large, relatively skill-intensive sectors such as health care include vast numbers of workers with less than a college degree (roughly half of total employment in this industry), and these health care workers have average earnings of less than $800 per week. 

Data on average hourly wages and average weekly hours by industry, and head counts for different demographic and ethnic groups—shown in Charts 4 and 13 and Tables 1 through 3—were based on a pooled four-year sample of Current Population Survey (CPS) data covering the years 2017 to 2020 from EPI Microdata Extracts (EPI 2021a). Estimates of average hourly wages in real 2020 dollars (wages only, not including benefits), average weekly hours by industry, and head counts by demographic group were used to compute average weekly earnings. Those data were used to compare average weekly earnings by industry and demographic group in Charts 12 and 15, and Tables 1,2, and 3. Average weekly earnings in construction and manufacturing are higher than in the service industry both because hourly wages are higher and because workers in these industries are employed for more hours per week. Separately, benefits are substantially higher in manufacturing and construction than in services, as shown in Chart 3.

Broad estimates of annual earnings of manufacturing and nonmanufacturing workers by race and ethnicity, shown in Charts 6 and 7, were estimated using the March CPS Annual Earnings estimates file (also known as the Merged Outgoing Rotation Groups or CPS ORG), using a data set compiled by Flood et al. (2021).  Estimates of union wage premiums in Chart 9 also use CPS ORG data but from EPI’s Current Population Survey Extracts (EPI 2021a), while benefit coverage for all workers in manufacturing, construction, and service industries, shown in Charts 10 and 11, were estimated with CPS Annual Social and Economic Supplement (SEC) data compiled by EPI (U.S. Census Bureau CPS-ASEC 2021).

Data on average weekly earnings by industry were combined with estimates of jobs supported by investments in infrastructure and clean energy and by rebalancing trade (Scott, Mokhiber, and Perez 2020) to estimate the average weekly earnings by race and ethnicity associated with these investments shown in Chart 15. The distribution of jobs supported by climate and infrastructure investments and by rebalancing trade are shown in Chart 14.

The demographic groups and breakdowns shown in these charts are broadly inclusive. They cover four major racial and ethnic categories: White, Black, Hispanic (to include Latina, Latino, Latine, and/or LatinX workers), and Asian American/Pacific Islander (abbreviated AAPI, which include indigenous and other Pacific Islanders) workers. These breakdowns are based on the EPI (2021b) Current Population Survey Extracts race/ethnicity variables, drawn from the CPS “wbhao” variable (white, Black, Hispanic, AAPI and other variable). (Results for “other” workers, who make up 1% of the sample, were excluded from these charts because of the small sample size, because this group includes workers from a wide variety of racial and ethnic backgrounds that do not self-identify as white, Black, Hispanic, or AAPI, and because of the high variability and low reliability of the results.)

As trade deficit soared past $1 trillion, the U.S. lost more than five million manufacturing jobs: Manufactured goods trade deficit (billions$) and manufacturing employment (millions), 1998–2021

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From 1998 to 2021, the U.S. lost more than 5 million manufacturing jobs thanks to the growing trade deficit in manufactured goods with China, Japan, Mexico, the European Union, and other countries. Not shown in the chart are the loss of more than 70,000 manufacturing plants over roughly the same period (1998 to 2019). Mismanaged global competition led to rapidly growing imports of manufactured products and the failure to grow foreign demand for U.S. products enough to offset the declining demand for domestic goods. The resulting job losses devastated local economies and workers in the industrial heartlands. The exploding trade deficit is the result of unfair trade practices (by China, South Korea, the European Union, and other foreign governments) and substantial overvaluation of the U.S. dollar, which makes U.S. goods more expensive than our competitors’ products. The dollar needs to fall about 25% to 30% to rebalance trade and rebuild U.S. manufacturing.

Data on plant losses come from Scott 2020c and U.S. Census Bureau 2021a. For more on the causes of growing trade deficits, see Scott, Mokhiber, and Perez 2020; Scott 2020a; and Scott 2020b. See Supplemental chart notes at the end of the charts for more details on the data.

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As manufacturing lost about five million jobs in two decades, the low-wage service sector gained almost 30 million jobs: Change in U.S. employment overall and for construction, manufacturing, and service industries (millions), 1998–2019

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The elimination of nearly five million manufacturing jobs between 1998 and 2019 was accompanied by explosive job growth in service industries—growth that accounted for all U.S. employment growth in the nonfarm economy in this period. Most of the manufacturing jobs were shed between 1998 and 2007, the so-called China Shock period shortly after China entered the World Trade Organization and imports from China grew most rapidly. However, manufacturing job losses continued in the wake of the Great Recession (2007–2019). Meanwhile, jobs increased slightly in construction, a sector that, like manufacturing, has historically offered higher wages to non-college-educated workers than has the service sector.

Prior EPI research has shown that growing trade deficits with China displaced a disproportionately large number of good jobs for workers of color. Between 2001 and 2011 alone, the growth of the trade deficit with China displaced 958,800 jobs held by workers of color—representing 35.0% of total jobs displaced by the growing trade deficit with China. About three-fourths of jobs displaced were manufacturing jobs, which feature high pay and excellent benefits. As a result, in 2011 alone, those 958,800 workers of color displaced from higher-earning jobs in manufacturing and other traded industries into lower-earning jobs in nontraded industries earned $10,485 less in annual wages, which translates into a total loss of $10.1 billion per year.

Also not shown in the graph, the big shift toward service-sector jobs lowered average wages for all workers without a four-year college degree. First there is the composition effect; as the share of lower-wage service-sector work in the U.S. labor market increases, the average wage overall falls. In addition, growing competition with low-wage workers in countries such as China and Mexico also pulled down wages not just in manufacturing but for all workers with a similar skill set. As a result, earnings fall not only for manufacturing workers but for all workers without a college degree—by nearly $2,000 per year, according to one estimate. This wage suppression affected essentially all 100 million non-college-educated workers in the U.S. labor force in this period. As wages for workers without college degrees fall, the gap between their pay and the pay of college-educated workers grows. The college wage premium measures what college-educated workers make relative to those without a college degree. One study of the growth of the college wage premium from 1995 to 2011 found that the rapid growth of imports from China in that period explained more than half of the growth in the college wage premium, as described above.

For more on the China Shock, see Autor, Dorn, and Hanson 2016. For more on manufacturing job losses after the Great Recession, see Scott and Mokhiber 2020. For more on wage suppression of non-college-educated workers and its causes, see Bivens 2017, Scott 2015, and Bivens 2013b, and for the impacts of China trade on Black and Brown workers, see Scott 2013.

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Manufacturing and construction jobs have higher wages and better benefits than jobs in the exploding service sector: Average hourly compensation in construction, manufacturing, and service industries, 2021

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The decline in manufacturing employment and simultaneous rise in service industry employment means good middle-class jobs in America are being replaced by jobs with lower pay and benefits. Average wages and benefits in manufacturing are $40.71 per hour, 13.9% higher than in service industries. Wages and benefits in construction average $41.24 per hour, 15.4% more than in services. The gap is particularly wide in benefits. Relative to service jobs, the dollar value of manufacturing benefits per hour is 41.7% higher and construction benefits are 30.0% higher.

See Appendix Table 1 for employment change from 1998 to 2019 and mean wages for all 52 industries in the United States.

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Manufacturing and construction offer good employment opportunities for the non-college-educated workers who make up nearly two thirds of the workforce: Shares of jobs held by workers with given education level, by industry and overall, 2017–2020

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The shift away from manufacturing and construction employment to more service industry employment has meant lost opportunities for non-college-educated workers. That’s because manufacturing and construction industries employ a significantly larger share of workers with less than a four-year college degree: 84.6% of construction workers and 69.3% of manufacturing workers do not have a four-year college degree or more education, while 62.6% of service workers are non-college-educated workers. The disparities are even greater for workers with a high school diploma or less education, who make up 59.2% of construction, 43.0% of manufacturing, and only 33.3% of service workers. When good jobs with less restrictive educational requirements are readily available, that means more workers and families have an opportunity to attain a higher standard of living. Though not shown in the chart, investments in infrastructure, clean energy, and energy-efficiency improvements totaling $2 trillion combined with policies to rebalance trade could add at least three million good jobs in manufacturing and construction over a four-year period.

For more on the job-creating potential of a combined investment and trade rebalancing initiative, see Scott, Mokhiber, and Perez 2020.

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Black workers were especially hard hit by manufacturing job losses associated with globalization: Black share of workforce, total and manufacturing, 1977–2020

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The overall loss of more than 5 million manufacturing jobs during the past two decades hurt all of the workers who depended on those jobs to support themselves and their families. However, the losses among Black workers were uniquely troubling. The chart shows that until the early 1990s, as Black workers increased their share of the workforce, they were securing a roughly commensurate share of the higher-wage jobs available in manufacturing. The Black share of the manufacturing workforce peaked at 10.6% in 1992, which exactly equaled their share of the workforce. But in the 1990s, Black workers’ share of manufacturing jobs began to flatline and then fall. In 2020, Black workers made up 12.3% of all workers but only 10.2% of manufacturing workers. In raw numbers of jobs lost, the data behind the graph are startling: Black workers lost 646,500 manufacturing jobs between 1998 and 2020, a 30.4% decline in Black manufacturing employment.

Though not shown in the graph, the increasing underrepresentation of Black workers in manufacturing jobs relative to their share of the workforce since the 1990s occurred alongside the shift of a substantial share of U.S. manufacturing employment to Southern states, where black workers accounted for a much larger share of the population relative to other regions of the country.

Given the workforce-share declines Black workers suffered in the 2001 recession, the Great Recession that began in 2007, and the COVID-19 recession, it is important that the rebuilding underway today include a focus on Black workers, who experienced disproportionately large job losses in the last three U.S. recessions.

Also not shown here but available in Appendix Table 3: The number and share of Hispanic and Asian American/Pacific Islander (AAPI) workers in manufacturing both rose rapidly over the past 20 years, in line with their dramatic rise in overall shares of the workforce. However, Hispanic workers make up a disproportionately large share (30.0%) of workers in the low-wage and high-risk meatpacking and other food manufacturing industries.

For more on the substantial share of U.S. manufacturing employment moving to Southern states, see BLS 2021c.

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The lowest-earning workers without a college degree make twice as much in manufacturing as in other industries: Average annual earnings of manufacturing and nonmanufacturing workers without a four-year college degree and in the 10th percentile of earnings, by race and ethnicity, 2019

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Manufacturing provides good, steady employment, even for some of the lowest earners in the workforce. If you are a non-college-educated worker at the 10th percentile of earnings in manufacturing, you are making at least twice as much as your peers working outside manufacturing. This manufacturing pay advantage—which holds true for Black, Hispanic, Asian American/Pacific Islander, and white workers—is in part because average weekly hours are much higher in manufacturing and in part because unionization rates for these groups are higher in manufacturing. The advantage is substantial. Among the lowest paid Black and Hispanic workers, average annual earnings in manufacturing are twice as high as earnings in other industries, while white manufacturing workers’ annual earnings are 2.5 times as high and AAPI manufacturing workers’ annual earnings are three times as high as earnings in other industries. Note that in both manufacturing and nonmanufacturing industries, earnings of Black, Hispanic, and AAPI workers at the 10th percentile are lower than those of white workers at the 10th percentile. These racial and ethnic earnings differentials may reflect disparities in average weekly hours, occupations, or job responsibilities. While we cannot conclude discrimination from this data, it can be reflected in differences in hours, job assignments, opportunities for overtime, etc.

For more on how discrimination may appear in earnings differentials, see Wilson 2020.

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Typical non-college-educated workers in manufacturing are paid much more than noncollege workers in other industries: Annual earnings of workers without a four-year degree at the 50th percentile of earnings, by race and ethnicity, 2019

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A typical non-college-educated worker—i.e., a worker without a bachelor’s degree whose annual earnings fall at the 50th percentile or median—earns much more employed in manufacturing than in other industries, no matter what major racial or ethnic groups the worker belongs to. Among workers with less than a bachelor’s degree, median AAPI, Hispanic, and Black workers earn an additional $4,000 to $5,000 per year in the manufacturing industry compared with noncollege median workers in other industries. White noncollege median workers earn over $10,000 more. These dollar differences translate to a manufacturing pay advantage (how much more manufacturing workers make in percentage terms) of 14.3% for typical noncollege AAPI workers, 17.8% for typical noncollege Hispanic workers, 17.9% for typical noncollege Black workers, and 29.0% for typical noncollege white workers.

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Workers in construction and manufacturing are much more likely to be unionized (thus enjoying higher wages and better benefits): Share of workers represented by a union, by industry, 2019

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Manufacturing and construction provide excellent jobs, in part because more of these jobs are unionized. As much research shows, unions give workers more power to bargain for higher pay, better benefits and working conditions, training, and promotional opportunities, as well as protections against discrimination and harassment. Unions also help reduce racial- and gender-based economic disparities, and they support families with better benefits and job protections as well as better retirement security. Historically, unions have disproportionately benefited low- and moderate-income workers, as well as those with lower levels of education and workers of color.

For more on how unions raise pay and improve benefits and reduce disparities, see EPI 2021c. For more on the benefits of unionization for workers of color and workers with lower incomes and less education, see Mishel 2021.

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Unionized manufacturing and construction workers get a bigger pay boost from union representation than their unionized peers in service industries: Union hourly wage premium, by select industries

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Unionized workers in construction and manufacturing earn much higher hourly wages than nonunionized workers with similar characteristics in these industries. These union wage premium estimates control for the effects of education, occupation, experience, race, ethnicity, and other factors that help explain individual wage differences. The union wage premium in construction was 35.6%, more than four times as large as the union wage premium in service industry jobs (8.0%). The union premium in manufacturing (17.9%) is more than twice as large as the union wage premium in services jobs.

If the chart showed the overall union pay premium including benefits, the manufacturing and construction premiums would settle a little bit closer together because manufacturing workers get more in benefits than construction workers (as shown in Chart 3). But the gap would still be substantial.

Does unionization really offer a much bigger boost to construction workers than manufacturing workers? Yes, but the reason has little to do with unionization per se and much to do with globalization.

First, manufacturing workers must compete with low-wage workers in countries such as China, Mexico, South Korea, and Vietnam, meaning that even when in unions, they have much less bargaining power than construction workers, who do not face the competitive pressures from offshoring and unfair trade that make foreign goods and workers artificially cheap. Second, manufacturing work has been increasingly outsourced to less unionized staffing and temporary help services, which also puts substantial downward pressure on wages of U.S. manufacturing workers.

In short, the excess union wage premium in construction relative to manufacturing is another data point in support of the argument for investments and trade policies that bring manufacturing jobs back to the United States.

For more on the causes of unfair trade and how it artificially depresses wages of U.S. workers, see EPI 2018, Scott 2020a and 2020b, and Bivens 2013b and 2017. For more on the union status of the manufacturing temp help and staffing agencies, see BLS 2021b, and for more on increasing domestic outsourcing of manufacturing jobs to staffing firms, see Mishel 2018 and 2021. See Supplemental chart notes at the end of the charts for more details on the data.

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Manufacturing workers are much more likely to have health insurance than service workers, unionized or not: Share of workers with health insurance by select industry and union status

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Manufacturing workers, both union and nonunion, have higher rates of health insurance than comparable workers in services or construction. More than three-quarters (76.7%) of unionized manufacturing workers, 73.8% of unionized construction workers, and 73.7% of unionized service workers have employer-provided health insurance. Among nonunion workers, 66.6% of those in manufacturing have health insurance coverage compared with 53.6% of service industry workers and 44.9% of construction workers.

These data show another reason why an investment in and trade policies that support revitalizing manufacturing are critical to improving the lives of U.S. workers. By supporting the creation of more manufacturing jobs, more workers will have access to high-quality, company-provided health insurance, which will also reduce the demand for Medicaid and other forms of publicly subsidized health insurance, including American Care Act plans.

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Unionized workers are much more likely to have employer-provided pensions in all sectors: Share of workers with pension coverage, by union status

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Unionized workers are also much more likely to have employer-provided pensions than non-union workers—more than twice as likely in construction, 39% more likely in manufacturing (59.8%/43.0%), and 74.3% more likely in services (65.0%/37.3%). As is the case for health insurance, even nonunion manufacturing workers are much more likely to receive employer-provided pensions than nonunion construction or service industry workers. This is likely a spillover effect from higher rates of union membership among manufacturing workers (as shown in Chart 8). Employer-provided pensions and health insurance are valuable benefits that contribute significantly to workers’ total compensation and family economic security.

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Construction and manufacturing jobs offer higher wages for women as well as men: Average weekly earnings in three selected industries, by gender, 2017–2020

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Women employed in manufacturing earn $183 more per week (22.1%) than women employed in service industries, on average. And, though not shown, women working in manufacturing are paid much higher wages than women in rapidly growing service subsectors such as accommodations and food services and retail trade, where average weekly earnings for all workers are $480 and $715 respectively, compared with $1,215 in manufacturing, according to Appendix Table 1). Women in construction earn $105 more per week (12.7%) on average than women in service industry jobs. Men in manufacturing also earn more than men in services, while male construction workers make about the same a male service workers. (Data on average weekly earnings for all workers by industry are reported in Appendix Table 1.)

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Women are much less likely to be in the higher-wage jobs found in manufacturing and construction: Shares of employment in select industries, by gender, 2017–2020

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While women employed in the construction and manufacturing industries earn more than women employed in services, they are severely underrepresented in these higher-paying sectors. Women make up only 10.6% of workers in construction and 29.2% of manufacturing employment. The underrepresentation of women in construction and manufacturing industries is a missed opportunity for women without a college degree to earn a middle-class income comparable to that of similarly educated men.

Women’s limited access to good jobs in manufacturing and construction contributes to the gender pay gap. Though not shown in the chart, past EPI research shows that on average, in 2019 women were paid 22.6% less than men with comparable backgrounds (that is, adjusting for differences in education, age/experience, and region of the country). Given the gender pay gap and the potential of manufacturing and construction employment to close that gap, gender equity should be considered alongside racial equity when developing and implementing public policies to create more good jobs in manufacturing and construction.

For more on the gender pay gap, see Appendix Table 1 in Gould 2020.

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Nearly half of the jobs supported by climate and infrastructure investment and rebalancing trade would be good middle-class jobs in manufacturing and construction: Industry shares of jobs supported by trade rebalancing and by infrastructure and climate investments

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Low-wage service industry employment replaced good manufacturing jobs over the last two decades, accounting for all of net jobs added to the U.S. economy from 1998 to 2019, as shown in Chart 2. In contrast, investing in climate and infrastructure at the scale of the need, coupled with trade and financial policies that make U.S. goods competitive on global markets, and thereby eliminating U.S. goods trade deficits, would support a much higher share of good jobs in manufacturing and construction, helping reverse two decades of declining job quality. Nearly half (45.7%) of the jobs supported by investing in climate and infrastructure and 40.8% of the jobs supported by rebalancing trade would be in manufacturing and construction.

These estimates are based on EPI analysis in Scott, Mokhiber, and Perez 2020 of the job-creation potential of a two-pronged strategy for rebuilding the economy that includes $2 trillion of investments in infrastructure, clean energy, and energy-efficiency improvements over four years combined with trade and industrial policies that eliminate the U.S. trade deficit.

See Appendix Table 2 for an industry breakdown of jobs that would be supported by climate and infrastructure investments and rebalancing trade and average wages in those jobs.

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Jobs created by rebuilding the U.S. economy around high-wage jobs and manufacturing support much higher pay than service sector work: Average weekly earnings in jobs supported by trade rebalancing and by infrastructure and climate investments compared with services jobs, by race and ethnicity

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Jobs gained through rebalancing trade and expanding public investments in infrastructure, clean energy, and energy efficiency would offer higher average earnings than average service-sector jobs for workers in all major racial and ethnic groups. The average earnings shown in each bar are weighted average earnings for rebalancing trade and for infrastructure and climate investments versus weighted average earnings in service industries only, as shown on the services bar for each group.

Black workers in the new jobs supported by trade rebalancing and infrastructure and climate investment would earn roughly $100 per week more than in the service industry jobs, an earnings gain of 12.2% in jobs from new investments and 13.4% in trade rebalancing jobs. Hispanic workers would earn $145 to $149 more per week (from 19.9% to 20.4% more). Asian American/Pacific Islander workers would earn $93 to $166 per week more (from 8.3% to 14.7% more), and white workers would earn $146 to $212 more per week (from 14.4% to 20.8% more). Though not shown in the chart, gains in could push wages up throughout the economy. That’s because the types of jobs created by infrastructure and clean-energy investments and boosting U.S. exports include higher-paying manufacturing and construction jobs historically open to non-college-educated workers. Raising demand for these workers raises their pay. When combined with a strong emphasis on ensuring that Black, Hispanic, and other workers of color can access these jobs, the rebuilding plan would contribute to greater racial equity in the economy.

See Appendix Table 3 for an industry breakdown of the potential jobs gained, average earnings in those jobs, and the shares of jobs held by workers in different ethnic and racial groups. Detailed sectors that employ above-average shares of Black workers and/or other workers of color are bolded in the table.

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Supplemental chart notes

Chart 1

As shown in Chart 2, the U.S. lost 4.7 million manufacturing jobs between 1998 and December 2019. Chart 1 extends the data through the first quarter of 2021, an additional 388,000 manufacturing jobs were lost, for a total loss of 5.1 million jobs (BLS-CES various years). 

For readers familiar with our previous factory-loss estimates (more than 91,000 manufacturing establishments lost between 1997 and 2018, as reported in Scott 2020c), it is important to note that those estimates were based on earlier data from the U.S. Census Bureau’s Business Dynamic Statistics (BDS) through 2016, supplemented with County Business Patterns data on manufacturing establishment counts. Updated BDS statistics were released in September 2021 (U.S. Census Bureau 2021), which used NAICS-based industry definitions for the 1978–2019 period. The new NAICS-based establishment data reduced the total number of manufacturing plants by 23,2019 establishments in the base year of 1997 (a decline of 6.4%). The earlier BDS statistical series was based on a combination of Standing Industrial Classification (SIC) and NAICS (or census industry codes). In addition, the peak year in the number of manufacturing establishments in the 2021 BDS data occurred in 1998 (rather than 1997, as in the earlier data series). As a result of these changes and adjustments in industry coverage, the overall loss of manufacturing establishments between 1998 and 2019 declines to slightly less than 70,000 total establishments (from 91,000 in our earlier estimates). The switch from SIC- to NAICS-based industry definitions moved about 500,000 workers (and an unknown number of establishments) from manufacturing into service industries, in part through reclassification of contract manufacturing into the service sector. 

Our colleague Josh Bivens points out that failure by U.S. policymakers to ensure U.S. competitiveness abroad was not the only thing that suppressed demand for U.S. exports over the past two decades. Japan and the European Union did too little to support their own economic growth in the early 2000s and in the wake of the Great Recession, and their resulting slow aggregate demand growth suppressed potential demand for U.S. exports (see Bivens 2013a).

Finally, it is important to note that workers employed by staffing agencies, which subcontract workers to manufacturing establishments, are not counted as part of manufacturing employment in the BLS establishment surveys. Thus, about 11% of the decline in manufacturing employment shown in Chart 1 is explained by the rising numbers of workers paid by staffing and other temporary-help agencies that work in manufacturing establishments. These workers typically receive much lower pay and benefits than workers directly employed by manufacturing firms (Mishel 2018, Table 6). 

Chart 9

The chart reports the coefficient on union status from a regression of the log of the hourly wage on union status and a quintic polynomial in age (used as a measure of experience), and it uses dummies for race and ethnicity, education, citizenship, major industry, major occupation, state, and year. We exclude observations with imputed wages because the imputation process does not take union status into account and therefore biases the union premium toward zero. This analysis does not account for nonwage benefits.

To understand why wage premiums are larger in construction than in manufacturing, several factors should be considered. First, the charts only reports hourly wage premiums (excluding benefits). As shown in Chart 3, the average hourly value of employer-provided benefits in manufacturing ($10.78) is greater than those in construction ($9.89). The higher dollar value of nonwage benefits would compensate manufacturing workers for relatively lower wage premiums in manufacturing.

On the other hand, the construction industry employs a much larger share of workers with a high school diploma or less than the manufacturing industry (59.2% versus 43.0%, respectively) as shown in Chart 4, and yet the union wage premium in construction is clearly higher than in manufacturing, as shown in Chart 9. Thus, the fact that the wage premium for construction workers is larger than in manufacturing is particularly remarkable, since the wage premium for workers with a high school diploma or less would otherwise tend to be much smaller than that of a more educated pool of workers, such as manufacturing workers. Thus, something else is clearly sheltering construction workers from the competitive pressures felt by workers in manufacturing. Workers with a high school diploma or less would earn much less in service industry jobs, where two thirds of workers have higher levels of education (Chart 4, above), than they do in either manufacturing or construction.   

Exposure to international competition is clearly the most important factor exerting downward pressure on manufacturing wages. While construction workers are largely insulated from competition with low-wage workers in other countries, manufacturing workers are directly exposed to international competition, via massive and rapidly growing imports of manufactured goods from low-wage countries such as China, Vietnam, and Mexico. Total goods imports, which are dominated by trade in manufacturers, will reach nearly $2.9 trillion in 2021, an increase of 21.9% over import levels in 2020. Unfair foreign trade policies—along with currency manipulation and excessive foreign capital inflows, which together are responsible for the 25% to 30% overvaluation of the U.S. dollar—are the most important causes of soaring imports and U.S. goods trade deficits. In addition to boosting the cost of U.S. exports, an overvalued dollar makes the wages of foreign workers artificially cheap and increases the cost of U.S. labor relative to workers in countries with undervalued currencies. See EPI 2018, Scott 2020a, and Scott 2020b for more; this section is based on EPI analysis of U.S. Census Bureau 2021b.  

Acknowledgments

The authors thank Josh Bivens, and Riley Olson for comments, and Lora Engdahl for editing assistance. This research was made possible by support from the Alliance for American Manufacturing.

Appendix Table 1

Appendix Table 2

Appendix Table 3

References

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Autor, David H., David Dorn, and Gordon H. Hanson. 2016. “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.” National Bureau of Economic Research Working Paper w21906, January 2016.

Bivens, Josh. 2013a. “Europe’s Self-Defeating Austerity” (commentary). Economic Policy Institute, June 5, 2013.

Bivens, Josh. 2013b. Using Standard Models to Benchmark the Costs of Globalization for American Workers Without a College Degree. Economic Policy Institute, March 2013.

Bivens, Josh. 2017. Adding Insult to Injury: How Bad Policy Decisions Have Amplified Globalization’s Costs for American Workers. Economic Policy Institute, July 2017.

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Economic Policy Institute (EPI). 2018. Policy Agenda: Fair Globalization and Balanced Trade. Economic Policy Institute, December 2018.

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Economic Policy Institute (EPI). 2021b. EPI Microdata Extracts, Methodology: race/ethnicity variables.

Economic Policy Institute (EPI). 2021c. Unions Help Reduce Disparities and Strengthen Our Democracy. Economic Policy Institute, April 2021.

Flood, Sarah, Miriam King, Renae Rodgers, Steven Ruggles, and J. Robert Warren. 2021. Integrated Public Use Microdata Series, Current Population Survey: Version 9.0 [data set]. Minneapolis, Minn.: IPUMS, 2020. https://doi.org/10.18128/D030.V7.0.

Gould, Elise. 2020. State of Working America Wages 2019: A Story of Slow, Uneven, and Unequal Wage Growth over the Last 40 Years. Economic Policy Institute, February 2020.

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Scott, Robert E. 2020c. We Can Reshore Manufacturing Jobs, but Trump Hasn’t Done It: Trade Rebalancing, Infrastructure, and Climate Investments Could Create 17 Million Good Jobs and Rebuild the American Economy. Economic Policy Institute, August 2020.

Scott, Robert E., and Zane Mokhiber. 2020. Growing China Trade Deficit Cost 3.7 Million American jobs Between 2001 and 2018: Jobs Lost in Every U.S. State and Congressional District. Economic Policy Institute, January 2020.

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The proposal also calls on Congress to develop comprehensive legislation to strengthen and extend protections against the abusive practice of misclassifying employees as independent contractors and uses federal housing grants to incentivize inclusionary zoning practices to alleviate the nation’s housing shortage.

On the tax side, it raises taxes on realized capital gains and on corporate income, and it closes loopholes and tightens enforcement in an effort to raise revenue through greater tax compliance.

About 18 months ago, we at EPI released a blueprint for guiding fiscal policymakers. In this blueprint, we identified the main targets of fiscal policy as: ensuring high-pressure labor markets and low unemployment, reducing inequality, and then (and only then) reducing the economic obligations incurred by the public debt.

The Biden administration’s budget (particularly given the passage of the American Rescue Plan earlier this year) scores extremely high on these marks. Specifically:

• The mix of spending and progressive tax increases would provide a large expansionary boost to aggregate demand in coming years. This provides a powerful backstop for efforts to push unemployment to very low levels and to generate high-pressure labor markets that boost wages, with the goal of eventually reaching full employment. For example, the budget forecasts an unemployment rate at 4.1% or below as soon as 2022 and persisting for the rest of the 10-year budget window.
• The budget would unambiguously reduce inequality, mostly through its taxes on capital income—income accruing to households simply by virtue of them owning wealth. However, the spending side of the budget also ensures a more equitable distribution of the benefits of economic growth, even if many of them would not show up directly in measures of household income. The care investments included in the budget, for example, may not boost household income directly, but it would remove a large cost item from the household budgets of families.
• The budget’s debt targets focus on a much more sensible measure than previous budgets: the inflation-adjusted interest payments on public debt (or, the real debt service ratio). This indicator is a far better metric for measuring the burden of public debt. It should replace the ratio of public debt to gross domestic product (GDP) as the standard measure used in fiscal debates. This real debt service ratio shows historically low burdens from public debt today.
  • This ratio tells us something clear about upcoming fiscal debates: As useful as the tax increases in the Biden budget are, if the legislative process does not allow the full amount of these tax increases to become law, this does not mean that the spending proposals should be scaled back. Instead, they should simply be financed with debt.

Below, we expand a bit on each of these points.

A budget that will support high-pressure labor markets

As we noted in our fiscal policy blueprint from 2019, achieving high-pressure labor markets with very low rates of unemployment should be the first priority of fiscal policymakers. This doesn’t just mean bumping up spending when recessions hit (though it does mean that)—it means that these spending boosts should be reeled back in very slowly so long as the economy is operating below potential. There may have been a time in recent decades when the fiscal support needed to generate recovery from recessions could be relatively short-lived, but The Great Recession and its prolonged recovery should have alerted policymakers that this is not the case today (if it ever was).

For example, in the last business cycle before the COVID-19 shock, the pre-recession unemployment rate low (achieved in 2007) was only reattained a full decade later in 2017. This was despite the fact that monetary policymakers—the Federal Reserve—tried throughout this entire period to generate a more rapid recovery with unprecedented policy maneuvers to spur recovery. The lessons of this episode should be clear: The Fed’s ability to generate rapid recoveries has always been a bit overstated by policymakers, and it has been especially constrained in recent years as interest rates have hovered barely above zero (providing very little potential room to cut them). This implies that fiscal policy will have to shoulder much more of the burden of bringing the economy all the way back to full recovery following negative shocks.

People often equate fiscal stimulus with larger deficits. This does not always have to be the case. During the recessionary phases of business cycles, both discretionary rescue packages and automatic stabilizers should be debt-financed. But a budget that includes spending increases and progressive tax increases can be expansionary. Because rich households save more than they spend of each extra increment of income, taxing some of this income away does not reduce economywide spending dollar-for-dollar. Financing public spending with tax increases from these rich households hence provides a “balanced budget multiplier” that can support growth.

The Biden administration budget does even better than a “balanced budget multiplier” on this score—it staggers the spending increases ahead of the tax increases, making the budget deficit-reducing in the long run but allowing deficits to rise in the near term. This is near-optimal for supporting high-pressure labor markets.

A budget that will reduce inequality

The Biden administration calls for large tax hikes on capital income. Currently, such income is taxed far more lightly than income generated through work. This gap in tax rates between income accrued from wealth versus work is the greatest failure of our tax code to keep inequality in check. The Biden budget includes both increases in corporate tax rates and increases in the tax rates on capital gains. Both of these taxes fall overwhelmingly on owners of corporate stock—and this ownership is highly concentrated among the very wealthy. In the latest data from the Federal Reserve, for example, the wealthiest 1% of households alone own more than half of corporate equity, while the wealthiest 10% own more than 85%.

Further, the Biden budget includes traditional infrastructure, green, child, and elder care investments. Such investments will not show up mechanically as income in the pockets of typical U.S. families (aside from the millions of workers directly providing these investments), but they will provide public goods and services that are at least as good as income. Transit investments will reduce costs of commuting; school facilities investments will increase the quality of schooling; child and elder care investments will provide huge cost relief for household budgets, and they will additionally free up parents and unpaid care providers to provide more work to paid labor markets if they choose. In short, these investments will not only make us richer as a country, but they will also produce economic growth that is by its nature more broadly shared across U.S. families.

A budget that is clear-eyed about fiscal burdens

Traditionally, the most common metric summarizing the nation’s fiscal burden has been the ratio of public debt to GDP. But this measure never made a lot of sense. For one thing, it is purely backward-looking—it tells us nothing about the current policy stance or future prospects; instead, it tells us what past budget deficits accumulated to. Further, the measure is inherently an apples-to-oranges measure, dividing a static stock measure (the value of the public debt at a single point in time) with an income flow (GDP—national income generated over a year).

The Biden administration budget introduces a much more useful metric to inform these debates: the real (inflation-adjusted) cost of interest payments on the public debt, divided by GDP. This is known as the real debt service ratio. You can see this on the last line of Table S-1 (page 37) here.

This measure does tell us about the current policy stance and future prospects. Interest rates are informed not by today’s budget deficits (or those of a decade ago), but by projected future deficits—which are driven by the current policy stance. Further, this measure compares a flow of income (interest payments to holders of U.S. debt) with another flow of income (GDP). It hence avoids the apples-to-oranges conceptual problem of the debt-to-GDP ratio.

These measures can tell us dramatically different things about the state of the public debt burden. In 2020, the debt-to-GDP ratio is at its highest level since the 1940s or 1950s (depending on the precise measure used). Yet the real debt-service-to-GDP ratio for the current year is negative, meaning that today’s borrowers in financial markets are effectively paying the U.S. government for the privilege of financing the public debt. In short, there is less than zero burden today. This real debt service ratio is forecast to stay negative for most of the next decade.

This more sensible measure of the debt burden tells us something very clearly in the coming debate over the Biden administration’s spending and tax plans: As useful as the tax increases are in these plans, they should not cap the ambition on the spending side. If not enough senators can be convinced to raise taxes as much as the Biden budget calls for, this should not mean compromises need to be made on the spending side. Instead, the real debt service ratio tells us there’s plenty of room to borrow to do this spending—particularly the parts that are temporary investments.

In this post, we highlight—in very broad strokes—what is needed to build an economy that generates faster, more sustainable, and more equitably distributed growth. We then identify where the administration has made progress in the first 100 days and where more forceful action is needed.

Building an economy that works for everyone requires the following:

• Pursuing a “go-for-growth” approach to macroeconomics that aims for labor markets where jobs are plentiful and employers have to work hard (including offering higher wages) to attract workers, so-called “high-pressure” labor markets.
• Crafting and enforcing fairer rules for markets, particularly through labor market institutions and standards that provide workers a more level playing field when bargaining with employers for better pay and working conditions.
• Constructing deeper and more protective social insurance systems that use a larger public role in providing unemployment benefits, health coverage, and retirement income security— including long-term care for older adults and people with disabilities.
• Undertaking ambitious public investments in both people and physical capital, including physical infrastructure, early child care and education, higher education, and green investments.
• Reforming taxes in a way that helps finance the needed fiscal spending in this program, curbs growing inequality, and discourages the economic “bads” of greenhouse gas emissions and financial speculation.

Below, we expand on these points and assess the Biden-Harris administration’s progress in the first 100 days. The brief summary is:

• A comprehensive $1.9 trillion relief and recovery bill—the American Rescue Plan (ARP)—has passed that will secure a go-for-growth approach to macroeconomics for most of its first term—a very large accomplishment.
• One proposed plan—the American Jobs Plan (AJP)—calls for investments in traditional infrastructure, green investments, and long-term care—all financed with progressive taxes. But this plan has not yet passed, and the labor standards included in it have no real enforceable mechanism yet.
• Another plan just released today—the American Families Plan (AFP)—proposes large investments in children and higher education and is financed by progressive taxes on capital incomes accruing to the richest households.
• Decent first steps in improving administration of unemployment insurance (UI) and affordability of health care have been made in the ARP and AFP, but concrete plans for permanently deepening crucial social insurance programs are yet to be done.
• Tough-minded but realistic strategies to pass transformative policies like the Protecting the Right to Organize (PRO) Act and Raise the Wage (RTW) Act remain to be formulated.

“Go-for-growth” macroeconomics

The first 100 days of the Biden-Harris administration deserve very high marks on this front. In the face of loud voices declaring that their plans for macroeconomic rescue would lead to economic “overheating” (inflation and interest rate spikes), the administration held firm and secured passage of the American Rescue Plan (ARP). If measures to suppress the coronavirus work and it is safe to return much closer to economic normality in coming months, the ARP will drive rapid and large reductions in unemployment. This is in stark contrast with the too-small efforts at fiscal rescue following the Great Recession of 2008.

A go-for-growth approach to macroeconomics can never be secured forever with one piece of legislation—it requires consistent monitoring of macroeconomic trends and requires an evidence-based Federal Reserve to buy into it. But the ARP is a great start, and the Fed has so far been admirably supportive. The benefits of high-pressure labor markets are large, and they accrue disproportionately to workers facing historic discrimination in labor markets, making them a powerful tool for fostering both economic and racial equality. This solid macroeconomic approach is a superb first achievement for the administration.

Crafting and enforcing fairer markets—especially through labor standards and institutions

The two most important changes to labor standards and institutions currently being proposed are the Protecting the Right to Organize (PRO) Act and the Raise the Wage Act (RTW). The PRO Act is a comprehensive reform of labor law which would significantly improve the prospects of U.S. workers trying to organize unions in the face of growing employer hostility and abusive union-busting tactics. The RTW Act would raise the federal minimum wage to $15 per hour by 2025 and index it thereafter to growth in typical workers’ wages. Combined, these two pieces of legislation would rebuild two of the most important bulwarks to wage growth for the large majority of U.S. workers. Further, collective bargaining and large expansions of the federal minimum wage have in the past been two of the most powerful measures we’ve ever seen for fostering greater equality by both race and income class.

The Biden administration has admirably expressed support for both measures. The fact that the Biden administration has issued an executive order establishing a White House Task Force on Worker Organizing and Empowerment is particularly welcome, as is their Statement of Administration Policy (SAP) in support of the PRO Act. (In contrast, the Obama administration never issued a SAP in support of the labor law reform effort made in its first term.)

But the U.S. Senate remains the principal roadblock to both the PRO Act and the RTW Act. A serious strategy is needed to move these vital pieces of legislation past this roadblock, and the White House is the most obvious place for such a strategy to originate. In particular, the Senate filibuster imposing an implicit 60-vote threshold on most legislation means that a significant modification of Senate norms is likely needed to pass these bills. Either filibuster reform is needed, or the budget reconciliation process (which provides an end run around the filibuster for budget-related legislation) needs to be stretched further than it has been in the past, even in the face of unfriendly opinions from the Senate parliamentarian.

Much of the progressive agenda can pass through budget reconciliation if 50 votes can be found in the Senate. Under current Senate norms (and that’s all they are—norms—which have been broken repeatedly by Republican-run Senates), the PRO and RTW Acts could not be passed with 50 votes. If the current Biden administration ends with no progress on these fronts, the upward march of inequality in the U.S. is near guaranteed to continue. Rhetorical support from the administration is a good first start on these vital bills—but more is needed, and soon.

While labor standards that apply economywide, like the PRO and RTW Acts, are the really transformational changes to the economy’s rules, there are smaller measures in the labor standards space that could still help groups of workers in nontrivial ways that remain to be secured. For example, in a following section, we discuss the administration’s proposals for ambitious public investments which, if enacted, would be important steps down a path toward broadly shared prosperity. One key way to make these investments even more impactful in supporting high-quality jobs would be to make sure that the labor standards associated with them are strong. Much like their rhetorical support of the PRO and RTW Acts, the Biden administration has called for strong project-specific labor standards to accompany the investments in the American Jobs Plan (AJP), but a legislative and regulatory strategy to ensure they do is yet to come forth and is crucial.

The administration also yesterday issued an executive order requiring federal contractors to pay a minimum wage of $15 per hour. This is a very welcome step and will increase the earnings of up to 390,000 low-wage workers on federal contracts. We encourage the administration to go further to help ensure that the estimated two million total jobs held by federal contract workers are good jobs. This would include steps like ending practices that allow low-road contractors to win bids that are so low they are inconsistent with decent pay and working conditions, and banning federal government contractors from requiring contract workers to sign forced arbitration and class action waivers.

More generous and accessible social insurance

During the COVID-19 pandemic, huge but temporary changes were made to the U.S. unemployment insurance (UI) system to make it more protective and generous to jobless workers. But decades of disinvestment in state-run UI systems meant that this aid was fraught with administrative problems and took too long to reach millions. Worse, the more generous aid “turned off” for months due to congressional inaction. While the ARP extended the more generous pandemic UI provisions through September of this year, no structural reform has happened yet. Going forward, a comprehensive reform of UI that makes it more generous, more automatically responsive to economic conditions, and easier to access should be a key priority. The American Family Plan (AFP) provides money for states to invest in their delivery systems and calls for more fundamental reform, but it does not contain policy specifics, so more work on this front is needed.

The job losses spurred by the pandemic also cost millions access to health insurance they received through their employer-based plans. Moving to a U.S. health system with a much larger public role is needed to provide real economic security to jobless Americans. A larger public role would also greatly increase economic flexibility and opportunities for workers and for aspiring business owners. The ARP included a welcome and large increase in subsidies provided for health insurance purchased in the marketplace exchanges created by the Affordable Care Act (ACA), and the proposed American Family Plan (AFP) would make more generous subsidies permanent. Encouraging Medicaid expansion into states that have not yet adopted the ACA provisions on this and allowing a lower age of eligibility for Medicare (including perhaps a “buy-in”) are other key priorities that the administration and Congress should take up in coming months.

Finally, the pandemic has highlighted that the primary constraint keeping people who would otherwise like to work out of paid labor markets is caregiving responsibilities. Public investment in early child care and education (which we discuss below) could help families meet many of these caregiving responsibilities, but expansions of public caregiving for older adults and those with disabilities that is proposed in the administration’s American Jobs Plan (AJP) could also help many. These investments would allow everybody—not just the rich—to afford decent care for loved ones who are elderly or have disabilities and would improve the job quality of caregiving jobs.

Both the vital services provided by the increased caregiving spending as well as the boosts to job quality of caregiving employment will provide disproportionate benefits to women. In particular, women bear a hugely disproportionate burden in providing unpaid eldercare, and women (and particularly women of color) make up a very large majority of paid care workers. Given the large and progressive benefits of this expansion of public caregiving spending, it is encouraging to see these investments included in the AJP proposal.

Ambitious public investments

The U.S. clearly could benefit from large public investments in traditional infrastructure, but large investments in decarbonization strategies and in people are also needed.

The case for traditional infrastructure is well understood. The case for a large public role in financing and directing green investments is even more vital. Until the price of emitting greenhouse gases (GHGs) is raised significantly by policy (like a carbon tax or direct regulations), private investment in GHG mitigation (like building weatherization or installing solar panels) will remain far below efficient levels.

This green investment is optimally financed directly through the public sector, and most of it should be financed with debt, even if the economy has largely recovered. After all, our children and grandchildren will be far better off inheriting an economy with a higher debt ratio but lower stock of GHGs in the atmosphere than inheriting an economy with low debt but higher temperatures.

With regards to investment in people, besides the expansions in care investments for older adults and those with disabilities highlighted above, early child care and education and higher education could be made much more affordable and higher quality for U.S. families. This would not only benefit the receiving families directly, but would also have large spillover effects in building a more productive economy overall. Further, anything that improves the resources available to poorer families with children has been shown to have large effects down the road in boosting their productivity as adults. This includes direct provision of health and nutrition assistance, but also cash. Finally, since these investments also call for higher pay and better training for the early child care and education workforce, they will provide disproportionate benefits to women (and disproportionately women of color), who make up the large majority of workers in this sector currently.

The American Jobs Plan (AJP) includes many of the investments in traditional infrastructure and green investments, while the American Family Plan (AFP) has excellent provisions to make both early child care and education as well as higher education more affordable for families. The AFP also extends the large increases in the Child Tax Credit included in the ARP until 2025. These are big steps in the right direction.

Tax reform for the common good

Much of the spending proposed so far by the Biden administration—particularly those meant for macroeconomic stabilization and one-time investments—can and should be financed with debt, not taxes. But expansions of permanent programs should be mostly financed with more revenue. The U.S. can certainly afford this—we are among the most lightly taxed rich nations in the world. The first tranches of increased tax revenue to finance permanent spending expansions should be raised from high-income households, either through increases in the progressivity of the tax code or through greater and more progressively targeted tax enforcement. Other areas of tax reform should aim to correct economic “bads” like GHG emissions and financial speculation.

So far, the Biden administration’s proposed taxes are clearly progressive. The AJP includes increases in taxes paid out of corporate income (essentially repealing large chunks of the most egregious bits of the Tax Cuts and Jobs Act (TCJA) from 2017), and the AFP is said to include tax increases on capital gains accruing to the highest-income households. This includes the elimination of an egregious loophole (“step-up basis”) that allows large intergenerational transfers of wealth to happen untaxed. All these taxes affect high-income households while barely touching low- and middle-income households.

The administration has also made several welcome and concrete steps in moving toward greater tax enforcement, particularly on high-income households and corporations. This includes a multilateral effort to crack down on abusive tax havens.

Taxes on economic “bads” like GHG emissions and financial speculation have not yet been mentioned. We hope further progress on these fronts is made.

Conclusion

The administration deserves praise for what has happened so far and much of what they have proposed. And normally one would want to cut a little slack for strategies yet formed on passing key bills. After all, it has only been 100 days. But the economic challenges facing U.S. families are huge and time is ticking. As hard as it is to believe, every 100 days going forward into 2022 need to be just as productive as the first in meeting these challenges.

The essential elements of this two-pronged strategy for rebuilding the domestic economy are detailed in this report and summarized here:

• Trade and industrial policies that dramatically boost U.S. exports and eliminate the U.S. trade deficit—now roughly $850 billion—within four years. At the heart of these policies are measures to end the overvaluation of the U.S. dollar and rebuild the competitiveness of U.S. manufacturing industries.
• A four-year, $2 trillion program of investments in infrastructure, clean energy, and energy efficiency improvements. This would include investments of $70.2 billion per year in schools and broadband, which would have substantial social benefits. Note also that virtually all (91.6%) of clean energy and energy efficiency investments are for manufactured products.

Following are the key findings of this report:

• Surging exports and major investment in infrastructure, clean energy, and energy efficiency would support between 6.9 and 12.9 million U.S. jobs annually by 2024. The lower-bound estimate includes direct and indirect jobs but not “respending” jobs created as consumers spend more in the economy.
• Of the 6.9 million direct and indirect jobs, at least 471,200 would be construction jobs and 2.5 million would be U.S. manufacturing jobs. Because the jobs supported would be concentrated in high-wage manufacturing (36.4% of jobs supported) and construction industries (6.8% of jobs supported), this strategy would help rebuild U.S. manufacturing and restructure the domestic economy away from low-wage service-sector work.
• Projections of rapid export expansion are not wishful thinking: they are based on the actual export performance in prior periods when the real value of the U.S. dollar was substantially reduced. And there is much room for the dollar to fall: its value has gained 21.4% since July 2014, stagnating U.S. exports and depressing domestic commodity prices, including farm products and incomes.
• Rapidly growing exports in this forecast—especially for U.S. durable goods—along with substantial demand for manufactured products arising from infrastructure and clean energy and energy efficiency investments would support rapid growth in output and employment in a wide range of industries. Rapidly rising demands for fabricated metal products, industrial machinery, computer and electrical products, and transportation equipment (including both motor vehicles and parts, and aerospace products), would generate substantial increases in demand for primary metals (ferrous and nonferrous) and other industrial materials. Production of U.S. energy-based products (crude oil, refined petroleum, and chemicals) also would increase rapidly.
• Within manufacturing, jobs supported would be in both durable and nondurable goods categories. Under the 6.9 million jobs scenario, rapidly growing sectors would include nondurable goods (367,600 jobs), and durable goods (2.1 million jobs). Within durable goods industries, the most jobs will be supported in nonelectrical machinery (436,700 jobs), fabricated metal products (383,700 jobs), transportation equipment (343,800 jobs), electrical equipment (302,700 jobs), and primary metals (248,000 jobs). Within primary metals, 69,900 jobs would be supported in the steel industry. Within transportation equipment will be substantial growth in motor vehicles and parts (188,800 jobs) and aerospace products (127,600 jobs).
• Many sectors outside of manufacturing would experience substantial job growth: transportation (603,400 jobs); agriculture, forestry, and fisheries (588,600 jobs); administrative and support services (454,900 jobs); professional, scientific, and support services (375,300 jobs); wholesale trade (337,100 jobs); and mining (201,400 jobs).
• Rapidly growing exports supported by trade and industrial polices combined with major public investments in infrastructure, clean energy, and energy efficiency would support rapid job creation in all 50 states and the District of Columbia. Jobs supported would be concentrated in regions that have been hardest hit by globalization and outsourcing. Six of the top 10 states in terms of jobs supported as a share of state employment are among the top 10 manufacturing states (as a share of total state employment),  including Wisconsin (6.16%, 181,000 jobs), Indiana (5.95%, 185,900 jobs), Iowa (5.91%, 94,500 jobs), Michigan (5.55%, 251,200 jobs), Ohio (5.51%, 302,400 jobs), and Kentucky (5.37%, 104,100 jobs). Other top-10 job gainers are in energy and resource-intensive states, including North Dakota (6.07%, 24,300 jobs), Wyoming (5.69%, 16,700 jobs), Oklahoma (5.62%, 98,200 jobs), and South Dakota (5.61%, 24,600 jobs).
• Our lower-bound estimate of 6.9 million jobs supported is conservative. The Congressional Budget Office projects that it will take more than five years for employment to return to its pre-recession levels (CBO 2020). In this kind of environment, increases in exports and deficit-financed public investments would generate additional rounds of respending and job creation in the domestic economy (Bivens 2014). Thus our upper-bound estimate of 12.9 million jobs, which includes about 6.0 million respending jobs, is plausible. It is important also to note that these jobs supported are jobs, not job years.2

Introduction: Policy proposals and modeling assumptions

This report evaluates a set of trade and manufacturing policy proposals developed by the Alliance for American Manufacturing (Paul et al. 2020). It also estimates the impacts of a package of infrastructure and clean energy proposals that is based on investments made under a detailed plan developed by the Sierra Club and other civil society groups but at a slightly smaller scale, and for fewer years. That plan, which was analyzed by the University of Massachusetts Amherst’s Political Economy Research Institute (PERI) (Pollin and Chakraborty 2020), is a 10-year plan that would invest $683 billion per year in the elements considered here.3 The plan analyzed here is a four-year, $2 trillion plan.

Trade flows and investment allocations for these activities were prepared in order to project output and employment changes over the 2019–2024 period and thus estimate the increased annual output and jobs supported by 2024, as described below.4

Trade (export promotion and currency rebalancing) projections

Trade projections in this study assume that currency realignment and an aggressive program of industrial policies for recovery result in elimination of U.S. trade deficits in 2024. Currency overvaluation makes U.S. exports more expensive (and suppresses prices of domestic commodities, including gains), while also acting like a subsidy to the cost of all imports (Scott 2020). The policies proposed here are based, in part, on proposals to prioritize industrial policy in the post-COVID-19 world (Paul 2020), which emphasize substantial investment in American-made infrastructure, the reshoring of critical supply chains, enhanced enforcement of Buy America laws, and aggressive enforcement of fair trade policies and the pursuit of high-standard trade agreements. The trade projections are based on actual market behavior in earlier periods of dollar realignment.

For exports supported by currency rebalancing and industrial policies, we examined prior periods of substantial dollar devaluation, including 1985 to 1991 (following the Plaza Accord of 1985) and 2002 to 2008 (the previous period of substantial dollar overvaluation).5 Total U.S. exports increased between 80% and 90% following each of those dollar realignments (Scott 2009 and 2017a). It is important to note that the real value of the U.S. dollar has gained 21.4% since July 2014, stagnating U.S. exports and depressing domestic commodity prices, including farm products and incomes (Federal Reserve Board 2020).

For the projections in this report, we first assumed that exports in each of the individual industries that make up the traded goods portion of the U.S. economy—technically, the detailed, four-digit North American Industry Classification System (NAICS) traded goods industries—would grow at the rate experienced in the 2002–2008 period, with two exceptions, noted here.6 We assume that imports would grow at their actual rate in the 2014–2019 period.7 The initial projections would have resulted in a substantial trade surplus.8 To bring projected trade flows into balance, initial projected exports were then reduced in each sector by 15.5%, resulting in overall trade balance in 2024, as shown in the tables in this report.9

Investment and clean energy projections

The allocation of the four-year, $2 trillion package of investments in infrastructure, clean energy, and efficiency improvement programs was based on allocations developed by Pollin and Chakraborty 2020.10 That report assumes levels of public investment that are about 36% higher than is assumed here (here we look at overall spending of $500 billion a year versus overall spending of $683 billion per year in Pollin and Chakraborty 2020). But the allocations assumed here are in roughly the same proportions as in Pollin and Chakraborty 2020.11 Details of these allocations are summarized in Table 1. (Table 3 shows the allocation of infrastructure and clean energy and efficiency spending by industry.) It is important to note that schools and broadband investments represent $70.2 billion (28.1%), or more than one-quarter of proposed infrastructure investments, which would generate substantial social benefits.

Table 1

Overall economic and employment impacts of trade and investment proposals

Table 2 summarizes the overall impacts of all three components of the program proposed in this report. The top panel of the table shows the economic impact in billions of dollars, and the bottom panel shows the employment impact. The first set of rows in the top panel shows changes in trade flows from 2019 to 2024 resulting from the policies to end overvaluation of the U.S. dollar and rebalance trade. It is assumed that the real value of the U.S. dollar is reduced by approximately 25%, as discussed in the methodology appendix toward the end of this report. Total exports expand by 64.6% between 2019 (actual) and 2024 (projected), while imports increase by only 8.3%. As a result, goods trade balance is achieved in 2024, completely eliminating the U.S. goods trade deficit, which reached $854.3 billion in 2019.

Table 2

The second set of rows in the top panel shows the economic impacts of the fourth year of the new $2 trillion in infrastructure, clean energy, and energy efficiency spending in 2024, reflecting the assumption that public spending on infrastructure and clean energy and energy efficiency investments increases by $500 billion per year in 2021, 2022, 2023, and 2024 ($250 billion per year for each of these purposes). In 2024, the $854.3 billion in increased economic output from rebalancing trade combined with the additional $500 billion yearly spending on infrastructure and clean energy/energy efficiency yields an additional $1.354 trillion in total spending on domestic goods and services (some of which will include imported components). This represents an increase of approximately 6.8% of GDP. It is worth repeating that this increase in spending will only require $500 billion per year in new federal spending; the rest results from increased foreign purchases of U.S. products. The final element of increased demand shown in the top panel of Table 2 is $812.6 billion in induced respending: roughly, how much additional spending happens as the $1.354 trillion in spending makes its way to workers and consumers’ pockets and is respent on consumer goods and services. This figure assumes that there will be a macroeconomic multiplier of 1.6, i.e., a 60% boost to spending in the form of respending. Bivens (2014) reviews the economic literature on multipliers, and notes that infrastructure spending is found to have very high levels of economic multipliers.12 A multiplier of 1.6 is used for that study. Spending on clean energy products, and output from additional U.S. exports, also are likely to have very high multipliers, for similar reasons. Note that multipliers depend in part on the level of excess capacity (economic distress) in the economy. Thus we do not include the multiplier (induced or respending) effects in our main results (jobs supported by industry and by state), but we do include them for informative purposes in our upper-bound estimate of jobs supported and in Table 2 and Table 4.

The employment impacts of these policies are summarized in the bottom panel of Table 2. Note that the employment effects include direct jobs supported or created by a given level of output (an aggregate of all industries) and the aggregate indirect jobs in industries that supply goods to directly affected industries (think auto assembly jobs and the jobs held by those who make auto parts, steel, and rubber, or who provide accounting, finance, staffing, or other services to auto manufacturers).

The U.S. goods trade deficit in 2019 displaced 5.1 million jobs. If trade is balanced, the number of jobs displaced by trade flows is reduced to 1.6 million jobs, for a net gain of 3.5 million direct and indirect jobs supported, as shown in column 3 (see the text box, “Defining jobs: supported vs. created vs. job years”). The reason that there still are jobs displaced under balanced trade is that U.S. imports are more labor intensive, on average, than U.S. exports, as predicted by trade theory, so the U.S. experiences a net loss of jobs.

Infrastructure investments of $250 billion in 2024 would support 2.1 million direct and indirect jobs, and clean energy and energy efficiency investments would support an additional 1.3 million direct and indirect jobs. Overall, the combination of export promotion (balanced goods trade), and expanded public investments will support a total of 6.9 million direct and indirect jobs. In addition, to the extent that multiplier effects are generated by these activities as workers spend their incomes in the economy, up to 6.0 million additional jobs could be supported by these activities. (As noted earlier, multiplier effects are stronger when the economy is struggling than when it is at full employment.)

The fourth and last data column in panel two of the table shows the results of jobs supported or created per category if we break down the additional 6.0 million induced respending jobs by each of the three program areas: export promotion, infrastructure investment, and clean energy/energy efficiency investment. If induced (multiplier) effects are included, trade rebalancing could support an additional 3.1 million jobs, meaning trade rebalancing has the potential to support between 3.5 million jobs (column three) and 6.6 million total jobs (column four). If the overall adjustment in the trade balance is less, then total jobs supported would be smaller. For example, if the trade deficit falls by half, then net export growth will support between 1.8 and 3.3 million additional net jobs.

Similarly, a $250 billion annual increase in infrastructure spending could support an additional 1.8 million respending jobs, meaning the infrastructure spending has the potential to support between 2.1 million jobs (column three) and 3.9 million jobs (column four) when direct, indirect, and induced (respending) jobs are included. Finally, spending on clean energy and energy efficiency could support between 1.3 million and 2.5 million net new jobs. The overall results —roughly 6.3 million direct, indirect, and respending jobs supported—are comparable with Pollin and Chakraborty 2020, when multiplier effects are included.13

Overall, the programs summarized in Table 2 will support a grand total of between 6.9 million and 12.9 million new jobs (depending on the overall level of macroeconomic multipliers in 2024 and thus respending jobs) if the U.S. trade deficit is eliminated in that year.

Economic impacts by industry

Overall economic impacts of the three trade and investment proposals by industry are summarized in Tables 3 and 4. Table 3 reports changes in imports, exports, and the trade balance from implementing export promotion policies that eliminate the trade deficit by 2024, and Table 4 reports how the $500 billion in new spending on infrastructure, clean energy, and energy efficiency in 2024 breaks down by industry.

Table 3

The trade model is based on actual trade behavior during the 2002–2008 period, the last time the dollar experienced a sustained declined of about 25%. During this period, total U.S. goods exports increased 87.5%. The forecast assumes that exports at the industry level increased at the rate that prevailed in the 2002–2008 period (with few exceptions, explained in the notes and methodology appendix), and that imports in each sector increase at the rate that prevailed in the most recent 2014–2019 period (8.3%, in total, as shown in Table 2).14 Finally, assumed export growth in each sector is further reduced by 15.5% so as to achieve overall balance in goods trade in 2024. In other words, the model assumes that overall U.S. goods exports increase 64.6% between 2019 and 2024, as shown in the last column of Table 2.

Table 3 also reports each industry’s share of the overall import growth, export growth, and trade balance change between 2019 and 2024. In terms of net changes in the trade balance, 70.9% of the improvement in the goods trade balance (i.e, the decrease in the goods trade deficit) takes place in the manufacturing sector, 7.2% is in agricultural products, and 19.8% is in mining (oil and gas is a big contributor, alone responsible for 12.6% of the increase in goods trade). Within manufacturing, petroleum and coal products, and chemicals—both essentially “refined energy products”—are together responsible for 21.5% of the total improvement in the trade balance. Finally, 44.0% of the improvement in the trade balance occurs in durable goods industries, which support many good, high-wage jobs, as discussed in the next section.

Table 4 reports the industry breakdown of the $500 billion in spending for infrastructure, clean energy, and energy efficiency in 2024, as noted above, as well as the economic output generated by the $812.6 billion in respending induced by the $1.354 trillion in spending from the trade rebalancing and infrastructure and clean energy/energy efficiency investments. Spending allocations for infrastructure, clean energy, and energy efficiency are scaled to proposals outlined in Pollin and Chakraborty 2020. Overall, 32.5% of planned spending for infrastructure is for construction services, as shown in the addendum at the bottom of Table 4. Less than one quarter (22.8%) of infrastructure spending is for manufactured products. On the other hand, virtually all (91.6%) of clean energy and energy efficiency investments are for manufactured products.

Table 4

The respending allocations assigned to each industry in the last data column are based on personal consumption expenditure data from the Bureau of Labor Statistics input–output tables (BLS-EP 2020b).15 Respending is heavily weighted toward service industry purchases, and manufactured products account for just 12.4% of respending. These differences between the industry composition of investment spending and the industry composition of respending have important implications for the patterns of job creation in the model results, as discussed in the next section.

Job impacts by industry

Table 5 provides the industry breakdown of direct and indirect jobs supported by export promotion (rebalancing trade), infrastructure investments, and clean energy/energy efficiency investments.16 The last two data columns in the table report the total direct and indirect jobs from all three categories combined and the total jobs supported in each industry as a share of the overall total jobs supported (it excludes jobs from respending).17

Table 5

Overall, 6,895,200 jobs would be supported between 2019 and 2024 as a result of these three activities. More than one-third (36.4%) of the jobs supported would be in manufacturing, or 2,508,000 total jobs. In addition, 471,200 jobs (6.8% of the total) would be in construction. An overwhelming share (87.4%) of the 471,200 construction jobs supported are jobs supported by infrastructure investments (411,900).

Manufacturing and construction offer high wages with excellent benefits (Scott 2017b). Nearly half (43.2%) of the direct and indirect jobs supported by the programs outlined in this study would be in these high-wage industries (supporting a combined 2,979,200 jobs). Manufacturing and construction employed a total of 20,491,000 workers, or 13.4% of total nonfarm employment, in February 2020 (BLS 2020a). Thus, these programs, if enacted, would create a threefold increase in the rate at which the U.S. economy is generating good jobs for non-college-educated workers. This would help restructure the labor market toward more high-wage jobs for these workers.18 Competition for these workers also would help pull up wages for all workers with similar characteristics in other industries, by tightening the labor market for non-college-educated workers.

The addendum at the bottom of Table 5 illustrates some of the differences and relative strengths of these three proposals for rebuilding the economy. Nearly two-fifths (39.5%, or 1,386,400 jobs) of the jobs supported by rebalancing trade would be in manufacturing. Roughly one-fifth of jobs supported by infrastructure investment will be in construction. And among the three programs considered here, infrastructure investment supports the smallest share of manufacturing jobs (14.4%, or 298,800 jobs). Clean energy and energy efficiency investments would support 1,315,400 jobs, nearly two-thirds of which (62.6%, or 822,800 jobs) would be in manufacturing. This is an important result for those concerned that clean energy proposals will hurt employment. Clean energy proposals substitute capital, and especially manufactured goods, as inputs instead of energy; these proposals also substitute wages for profits—traditional energy industries such as oil are among the most profitable in the United States.19 To understand the potential benefits of clean energy job creation, consider that the coal mining industry in the United States employed only 50,400 workers, in total, in February 2020 (BLS 2020a). While targeted policies that help workers transition to new industries are clearly a necessary complement to these investment proposals, many of these workers displaced by shifting energy production easily could be absorbed by growing manufacturing industries in the United States if the clean energy proposal were implemented. Overall, 2.5 million manufacturing jobs would be created by these three proposals over the next four years, more than enough to absorb all workers displaced by reduced energy consumption.

A state-by-state breakdown of job creation

Rebalancing trade, rebuilding U.S. infrastructure, and investing in clean energy and energy efficiency would generate significant job growth in all 50 states and in the District of Columbia, as shown in Table 6 and the interactive map in Figure A. Job gains would range from 6.16 % of total employment (or 181,000 jobs supported) in Wisconsin down to 2.85% of employment (or 10,200 jobs supported) in Washington, D.C., as shown in Table 6, which ranks states by jobs supported, as a share of total state employment. In general, job growth would be concentrated in the manufacturing-intensive areas of the country in the upper Midwest and the South which have been hardest hit by globalization and outsourcing, and especially by growing imports from China (Scott and Mokhiber 2020). Certain energy-producing states (i.e., North Dakota, South Dakota, Wyoming, and Oklahoma) are also in the top 10 job-gaining states.

Table 6

Figure A

The model used in this study assumes that construction spending, which is prominent in the infrastructure proposal, will be proportional to current distributions of construction and manufacturing employment by state. Actual results could vary if infrastructure and clean energy spending are allocated based on need, and if spending programs are used to redress existing patterns of racial and gender discrimination. The past is not prologue, in these cases, despite the structure of the model revealed in Table 2. Policy can change the distribution of jobs shown.

Supplemental Table A at the end of this report provides total jobs supported per state ranked by the total number of jobs supported. Jobs supported are in general proportional to total employment, so the states with the largest populations (California, Texas, New York, Florida, and Illinois) make up the top five on this list. Supplemental Table B ranks states alphabetically, and reports the same results shown in Table 6.

Conclusion

Rebalancing trade by expanding exports, and expanding public investments in infrastructure, clean energy, and energy efficiency, are the keys to generating at least 6.9 million good jobs, rebuilding American manufacturing and the U.S. economy.

Acknowledgments

The author thanks Josh Bivens, Scott Boos, Riley Olson, Scott Paul, and Michael Wessel for comments, and Lora Engdahl for editing assistance. We also thank Robert Polin and Shouvik Chakraborter of the Political Economy Research Institute at the University of Massachusetts, Amherst, for additional details about their modeling assumptions. This research was made possible by support from the Alliance for American Manufacturing.

About the authors

Robert E. Scott joined the Economic Policy Institute in 1996 and is currently director of trade and manufacturing policy research. His areas of research include international economics, trade, and manufacturing policies and their impacts on working people in the United States and other countries, the economic impacts of foreign investment, and the macroeconomic effects of trade and capital flows. He has published widely in academic journals and the popular press, including the Journal of Policy Analysis and Management, the International Review of Applied Economics, and the Stanford Law and Policy Review, as well as the The Hill, Los Angeles Times, Morning Consult, Newsday, The New York Times, USA Today, The Baltimore Sun, and other newspapers. He also has provided economic commentary for a range of electronic media, including NPR, CNN, Bloomberg, and the BBC. He has a Ph.D. in economics from the University of California, Berkeley.

Zane Mokhiber joined EPI in 2016. As a data analyst, he supports the research of EPI’s economists on such topics as wages, labor markets, inequality, trade and manufacturing, and economic growth. Prior to joining EPI, Mokhiber worked for the Worker Institute at Cornell University as an undergraduate research fellow.

Daniel Perez is a research assistant at the Economic Policy Institute. He joined EPI in December 2019 and supports the work of EPI economists on trade, inequality, worker power, and more. As a research assistant, he compiles and analyzes economic data for media briefings, research reports, and policy proposals. Prior to joining EPI, Perez served as a research assistant for The University of California, Santa Cruz’s Income Dynamics Lab, studying development and political economy, and worked as programmatic assistant for ROC United, where he worked to improve labor market outcomes for low-wage and tipped workers. Perez also has worked in other industries, including food, wholesale, and education.

Appendix: Methodology

The trade, investment, and employment analyses in this report are based on a detailed, industry-based study of the relationships between changes in trade and investment flows and employment for each of approximately 205 individual industries of the U.S. economy, specially grouped into 44 custom sectors, and using the North American Industry Classification System (NAICS) with data obtained from the U.S. Census Bureau (2019) and the U.S. International Trade Commission (USITC 2020).

This model was developed to analyze the employment impacts of trade flows on the domestic economy by Scott and Mokhiber (2020). It is adapted and extended here to examine the impacts of other types of spending, including infrastructure, clean energy, and induced respending (personal consumption expenditures or PCE) and multiplier effects. The underlying input-output and employment requirements models used to study trade effects are perfectly well suited to the study of domestic investment changes as well.

The number of jobs supported or displaced by $1 million of exports, imports, or other spending for each of 205 different U.S. industries is estimated using a labor requirements model derived from an input–output table developed by the BLS-EP (2020a).20 This model includes both the direct effects of changes in output (for example, the number of jobs supported by $1 million worth of auto assembly output) and the indirect effects on industries that supply goods (for example, goods used in the manufacture of cars). So, in the auto industry for example, the indirect impacts include jobs in auto parts, steel, and rubber, as well as service industries such as accounting, finance, computer programming, and staffing and temporary help agencies that provide inputs to the motor vehicle manufacturing companies. This model estimates the labor content of trade or other spending using empirical estimates of labor content and goods flows between U.S. industries in a given base year (an input–output table for the year 2019 was used in this study) that were developed by the U.S. Department of Commerce and the BLS-EP. It is not a statistical survey of actual jobs gained or lost in individual companies, or the opening or closing of particular production facilities (Bronfenbrenner and Luce 2004 is one of the few studies based on news reports of individual plant closings).

Only nominal trade and expenditure data and nominal employment requirements tables are used in this analysis. Inflation and productivity growth were ignored, in the absence of complete price and productivity projections.

The steps followed to estimate the economic and employment impacts of investments in infrastructure, and in clean energy and energy efficiency, are similar to the steps followed to estimate the economic and employment impacts of trade.

Data requirements for trade and for investments

The text below follows the step-by-step process for developing the data for analyzing all three proposals, with Steps 1 through 3 applying only to trade flows.

Step 1. U.S. trade data are obtained from the U.S. International Trade Commission DataWeb (USITC 2020) in four-digit NAICS formats. General imports and total exports are downloaded for each year.

Step 2. Trade projections are developed based on actual market behavior in earlier periods, as described in the text, above.

Step 3. To conform to the BLS Employment Requirements tables (BLS-EP 2020a), trade data must be converted into the BLS industry classifications system. For NAICS-based data, there are 205 BLS industries. The data then are mapped from NAICS industries onto their respective BLS sectors.

Step 4. Data on expenditures for investments in infrastructure, clean energy, and energy efficiency improvements and for respending were collected as described in the text and in tables 1 and 4, above. Expenditure data were translated into four-digit NAICS industries and then mapped onto their respective BLS sectors.

Step 5. Nominal domestic employment requirements tables are downloaded from the BLS-EP (2020a). These matrices are input–output industry-by-industry tables that show the employment requirements for $1 million in outputs in nominal 2019 dollars. So, for industry i the aij entry is the employment indirectly supported in industry i by final sales in industry j and, where i=j, the employment directly supported.

Analysis of trade and investment impacts

Step 1. Job equivalents. For the trade analysis, BLS trade data are compiled into matrices. Let [T₂₀₁₉] be the 205×2 matrix made up of a column of imports and a column of exports for 2019. [T₂₀₂₄] is defined as the 205×2 matrix of 2024 trade estimates. Define [E₂₀₁₉] as the 205×205 matrix consisting of the nominal 2019 domestic employment requirements tables. To estimate the jobs supported or displaced by trade, perform the following matrix operations:

[J₂₀₁₉] = [T₂₀₁₉] × [E₂₀₁₉]

[J₂₀₂₄] = [T₂₀₂₄] × [E₂₀₁₉ ]

[J₂₀₁₉] is a 205×2 matrix of job displacement by imports and jobs supported by exports for each of 205 industries in 2019. Similarly, [J₂₀₂₄] is a 205×2 matrix of jobs displaced or supported by imports and exports (respectively) for each of 205 industries in 2024.

A similar analysis is performed for infrastructure, clean energy, and energy efficiency investments, and for respending (PCE) as described above. The investments are all assumed to result in net increases in jobs supported by domestic spending.

To estimate jobs supported/displaced over certain time periods, we perform the following operations:

[J_nx19-24] = [J₂₀₁₉] − [J₂₀₂₄]

Step 2. State-by-state analysis. For states, pooled (five-year) estimates of employment-by-industry data are obtained from the Census Bureau’s American Community Survey (ACS) data for the 2013–2017 period (U.S. Census Bureau 2019) and are mapped into 44 unique census industries and seven aggregated total and subtotals, for a total of 52 sectors (including scrap, not part of the census analysis) (Data Planet 2019).21

Previous reports examining employment impacts of trade flows (Kimball and Scott 2014; Scott and Mokhiber 2018) relied on single-year estimates, based on ACS 2011 data, of employment by industry, state, and congressional district. This model has been completely reestimated in this version of the report with the newer ACS five-year data referenced above. These data provide substantially better detail, and greatly improved accuracy, in the form of much lower levels of variance for employment estimates at every level of detail in the model. The new estimates also reflect congressional district boundaries for the 115th Congress for most districts in the country. Boundaries changed in only a few districts in Pennsylvania and Colorado between the 115th Congress and the current 116th Congress.22

We look at net jobs supported from 2019 to 2024, so from this point, we use [J_nx19-24]. In order to work with 44 sectors, we group the 205 BLS industries into a new matrix, defined as [Jnew_19-24], a 44×2 matrix of job support numbers.

Jobs supported by infrastructure and clean energy/energy efficiency investments are added to net jobs supported by trade for the state analysis and combined into the separate vectors shown in Table 6 and Supplemental Tables A and B.

We define [St_2013-2017] as the 44×51 matrix of state employment shares (with the addition of the District of Columbia) of employment in each industry calculated from the ACS five-year employment estimates. We calculate:

[Stj_nx19-24] = [St_2013-2017]T [Jnew_19-24]

where [Stj_nx19-24] is the 44×51 matrix of job displacement/support by state and by industry. To get state total jobs supported, we add up the subsectors in each state.

Jobs supported by infrastructure and clean energy investments are added to net jobs supported by trade for the state analysis, shown separately in Table 6 and Supplemental Tables A and B, and then combined into one final vector for the calculation of total jobs gained as a share of total state employment.

Supplemental Table A

Supplemental Table B

Endnotes

1. The plans examined in this report have long been needed, but would be especially effective at the present time, due to the depressed state of the U.S. labor market (BLS 2020b).

2. See text box, “Defining jobs: Supported vs. created vs. job years,” and discussion there of jobs supported versus job years.

3. The PERI group has published a number of detailed studies of the impacts of clean energy programs at the state, national, and global levels, including Green Growth (Pollin, Garrett-Peltier, Heintz, and Hendriks 2014), and Climate Crisis and the Global Green New Deal (Chomsky and Pollin 2020).

4. The year 2019 is chosen as the base period for this study because that is the last year for which we have complete trade data.

5. See Scott 2009, especially Figure A, for further review of the history of the Plaza Accord and currency realignment in the 2002–2008 period. See Bergsten and Gagnon 2012 for an analysis of the impacts of currency manipulation on the U.S. economy and global trade flows. There are several tools available to combat currency manipulation and offset dollar misalignment (Scott 2017a). One of the most effective and direct methods is to tax foreign investment. Recently, Sens. Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.) introduced bipartisan legislation to address the twin problems of an overvalued dollar and growing trade imbalances. Their bill would empower the Federal Reserve to tax new foreign purchases of U.S. stocks, bonds, and other assets—which could return the dollar to a competitive, trade-balancing level (Hansen 2017; Scott 2019).

6. See Methodology Appendix for discussion of NAICs industries and trade data sources. Actual exports of energy products increased extremely rapidly between 2002 and 2008, from a very tiny base, including crude oil (which increased 395%) and refined petroleum products (which increased 632%). By 2019, exports of these products had increased very substantially, to $95.7 billion and $93.8 billion, respectively. Use of historical growth rates for these sectors would have overwhelmed the forecast. Therefore, the initial forecast is that exports of each of these products would double between 2019 and 2024, and then adjust downward by 15.5% in 2024, as described in the text.

7. Total U.S. goods imports increased only 6.0% between 2014 and 2019. Currency realignment will increase the prices of imports, limiting additional consumption of imported products to at most recent trend growth in imports. Note that imports increased rapidly in the 2002–2008 period due to currency manipulation by China and other Asian countries, and extensive unfair trade policies, which limited the decline of the U.S. trade deficit in that period. We assume in this forecast that the dollar falls against all major surplus currencies here, including the Chinese yuan, Japanese yen, Korean won, and the euro, and that fair-trade enforcement otherwise prevents and unwinds unfair import trade. (Authors’ analysis of USITC 2020).

8. The initial projection resulted in a 94.8% increase in total exports between 2019 and 2024, using the weighted average of actual 2002–2008 growth rates, and an 8.3% increase in imports, resulting in an initial projected surplus of $496.7 billion.

9. It should be noted that the 2019–2024 period is one year shorter than the 2002–2008 period mentioned above, so it is reasonable to assume that future export growth will be less than in the reference period.

10. The Sierra Club (2020) plan is detailed but is at a higher spending level and for a longer period of time than the plan considered here, which is based on a four-year, $2 trillion climate and infrastructure investment proposal.

11. The authors thanks Robert Pollin and Shouvik Chakraborty for additional details about model assumptions (Chakraborty 2020). The final version of that report also evaluates a proposed investment of $186 billion per year in agricultural and land restoration investments that are not included here. The program considered here includes a much smaller component of agricultural programs, for energy conservation, as noted below. Individual modeling elements were converted from the IMPLAN 546 modeling format to the Bureau of Labor Statistics formal modeling of 205 individual industries of the U.S. economy; this conversion was implemented using IMPLAN to NAICS crosswalks.

12. The actual level of respending achieved could be higher or lower than shown in Table 2 and elsewhere in this report. The actual size of the multiplier will depend on the level economic activity when the spending takes place. See the text box, “Defining jobs: Supported vs. created vs. job years,” for discussion of the role of labor market tightness or slack on overall job creation. See also Bivens (2014) for a review of the literature on economic multipliers.

13. Pollin and Chakraborty (2020, Tables 1b and 2b) estimate that $683.1 billion in infrastructure and clean energy spending would support a total of 9.3 million new jobs, including direct, indirect, and induced spending. Our report estimates that $500 billion in infrastructure and clean energy and energy efficiency could support a total of 6.34 million jobs (including respending, Table 2, above). Adjusting for the 36.6% higher spending levels in Pollin and Chakraborty relative to this report’s $500 billion spending package, overall projections shown in Table 2 are about 7.6% lower, in terms of jobs per billion dollars of spending, which is likely explained by small differences in multipliers (induced spending) in the two models. In addition, the BLS model used here is based on 2019 input–output tables, and the IMPLAN model used by Pollin and Chakraborty is based on 2018 input–output data. See the methodology appendix for further details.

14. The model is based on trade flows at the NAICS 4-digit level, which are aggregated into the 205-industry BLS model used for this study, as described in the appendix. These data are further aggregated into 52 sectors for presentation in Tables 2–4 (some of which with no data are omitted from Tables 2 and 3).

15. The personal consumer expenditures vector is one of the components of the Aggregate Final Demand data set that is included with the BLS input–output matrix files, as a component of “Nominal dollar input–output data for 1997–2019” (BLS-EP 2020b).

16. The table provides detailed information on jobs supported by industry and within industries. An additional fact not provided in the table but rather from unpublished analysis of the data is that within primary metals, 69,900 new jobs would be supported in the steel industry (NAICS 3311 and 3312).

17. Four industries show net jobs displaced by trade, and in three of those industries that translates into jobs displaced in the trade plus investments total.

18. Manufacturing and construction employ a substantially higher share of non-college-educated workers than other sectors of the economy. For example, in 2009–2011, 47.7% of manufacturing workers had a high school diploma or less education, compared with 37.6% of workers in all industries (Scott 2013, Table 1).

19. Profits are much lower in manufacturing industries, which produce 91.6% of products in this study. Hence, substitution of clean energy equipment for energy products will increase the labor share of energy expenditures.

20. The model includes 205 NAICS industries. The trade data include only goods trade. Goods trade data are available for 85 commodity-based industries, plus information (publishing and software, NAICS industry 51), waste and scrap, used or secondhand merchandise, and goods traded under special classification provisions (e.g., goods imported from and returned to Canada; small, unclassified shipments). Trade in scrap, used, and secondhand goods has no impact on employment in the BLS model. Some special classification provision goods are assigned to miscellaneous manufacturing. Most trade in the special classifications provisions is small package trade that enters duty free, and involves products that are not classified.

21. The U.S. Census Bureau uses its own table of definitions of industries. These are similar to NAICS-based industry definitions, but at a somewhat higher level of aggregation. For this study, we develop a crosswalk from NAICS to Census industries, and we use population estimates from the ACS for each cell in this matrix. The ACS data we obtain from the Census Bureau for this project includes 44 unique sectors, plus subtotals for manufacturing, and for total employment. Trade and job loss coefficients are estimated using data only for the 44 unique sectors, across states and congressional districts.

22. According to the U.S. Census Bureau, only Colorado and Pennsylvania had congressional district boundary changes for the 116th Congress.

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