Middle-Class Redistribution: Tax and Transfer Policy for Most Americans

Foreword by HENRY M. PAULSON, JR. and ERSKINE BOWLES Edited by MELISSA S. KEARNEY and AMY GANZ Copyright © 2020 by The Aspen Institute The Aspen Institute 2300 N Street, N.W. Suite 700 Washington, DC 20037 Published in the United States of America in 2020 by The Aspen Institute All rights reserved Printed in the United States of America Publication Number: 20/005 Foreword by HENRY M. PAULSON, JR. and ERSKINE BOWLES Edited by MELISSA S. KEARNEY and AMY GANZ DECEMBER 2020 Acknowledgements We thank the many individuals who were instrumental in the production of this volume. First, the members of the Economic Strategy Group, whose thoughtful suggestions and discussion motivated the topics addressed in this book. We are grateful to the authors of this volume for lending us their expertise and advancing our understanding, and to the individuals and organizations whose generous support makes possible the work of the Economic Strategy Group, including this volume. We also thank to the leadership of The Aspen Institute and especially Board of Trustees Chairman James S. Crown and Board Member Robert K. Steel for their continued support of the Economic Strategy Group. We thank the staff who invested countless hours in producing this volume: Joan Burch and Emily Vincent for superb project management; Kate Wheeling for excellent proofreading and editing assistance; Andy Morimoto and Kelley Folino for their helpful feedback; Noah Flater for excellent research assistance; Sarah Jane Maxted, Suzanne Pinto, and Selena Wallace for their assistance and collaboration; and Krista Martin, Sogand Sepassi, and Steven Johnson for their thorough editing and layout work. Henry M. Paulson, Jr. Erskine Bowles Co-Chair Co-Chair Melissa S. Kearney Amy Ganz Director Deputy Director This volume was produced to provide policy-relevant evidence about current challenges confronting American economic policy. We invite authors to share their views about complex issues regardless of whether or not the co-chairs, staff, or members of the Economic Strategy Group agree with them. The views expressed herein are those of the authors and do not necessarily reflect the views of the The Aspen Institute, Economic Strategy Group members, or the organizations they represent. Table of Contents Foreword .............................................................. 1 Erskine Bowles and Henry M. Paulson, Jr. Introduction ........................................................... 3 Melissa S. Kearney and Amy Ganz Part I: Middle-Class Economics Is the Decline of the Middle Class Greatly Exaggerated? ................. 16 Bruce Sacerdote Middle-Class Redistribution: Tax and Transfer Policy for Most Americans .............................. 50 Adam Looney, Jeff Larrimore, David Splinter Walking the Tightrope: Variable Income and Limited Liquidity Among the U.S. Middle Class ...... 82 Dan Silverman Part II: Geographic Divergence and Place-Based Economic Development The Faltering Escalator of Urban Opportunity ..........................108 David Autor Bringing Jobs to People: Improving Local Economic Development Policies .......................138 Timothy J. Bartik A Renter Safety Net: A Call for Federal Emergency Rental Assistance .........................178 Ingrid Gould Ellen, Amy Ganz, Katherine O'Regan Part III: The Global Climate Challenge and U.S. Policy Response Climate Convexity: The Inequality of a Warming World ...................................206 Trevor Houser Harnessing the Power of Markets to Solve the Climate Problem .........242 Gilbert E. Metcalf Climate Policy Enters Four Dimensions ................................264 David W. Keith and John M. Deutch Author Biographies . 295 1 Foreword By Erskine Bowles and Henry M. Paulson, Jr. The American economy is in the midst of a wrenching crisis, one caused by the COVID-19 pandemic, intensified by the worst social unrest in a generation, and aggravated further by a series of climate-driven natural disasters. The effects of the economic contraction are enormous. Over a ten-week period this spring, some 40 million Americans lost their jobs. Millions remain unemployed and tens of thousands of businesses remain closed. And while the economy has made some steps to recovery, the pandemic has laid bare that too many Americans are unable to meet many of their urgent and basic needs. At the same time, it has become painfully clear that American society is not equipped to deal with the risks emerging from our changing climate. Hundreds of thousands have evacuated their homes in recent months due to raging wildfires on the West Coast and flooding in the South. And while these climate-driven shocks are a short- term certainty, we have not built the infrastructure needed to withstand them, nor have we adapted our policies to meaningfully reduce their likelihood in the future. American policymakers need to tackle these crises head on, but they cannot afford to lose sight of the larger vulnerabilities that today’s crises have exposed. The challenge facing the United States is not simply to recover. We must rebuild an economy that is more secure, equitable, and better insulated from the risks of the 21st century. How can we restore a sense of economic security to American workers and families? What policies will expand opportunities across large geographic, social, economic, and racial disparities? How can we adjust our economic policies to guard against the worst effects of climate change? These are questions that many Americans are asking—to which policy makers will need answers. This book is a contribution toward this end. It was largely written before the pandemic crises beset our country. But the analyses, diagnoses, and prescriptions contained within, all shed new light on the underlying fragilities that have since been exposed. The book is divided into three sections, covering the ‘Economics of the American Middle Class’; the ‘Geographic Disparities in Economic Opportunity and Place-Based Economic Development’; and the ‘Geopolitics of the Climate and Energy Challenge and the US Policy Response.’ Even after the pandemic recedes, the larger forces covered in this book will continue to shape our economy and lives. 2 Securing Our Economic Future As with previous publications, this volume is not intended to represent the consensus view of Economic Strategy Group members. It does, however, bring the best evidence to bear on some of the deep challenges facing the American economy, and does so in the same non-partisan spirit in which the Economic Strategy Group was conceived. 3 Introduction By Melissa S. Kearney and Amy Ganz The United States is currently gripped by deep uncertainty and economic anxiety. At the time of this writing, the United States is six months into the COVID-19 pandemic. More than 190,000 Americans have died from COVID (CDC 2020); more than 13 million Americans remain unemployed (Bureau of Labor Statistics 2020); and tens of thousands of businesses remain closed (Grossman 2020). Meanwhile, protests against racial injustice continue across the country, and in a number of tragic instances, they have been overtaken by violence. Wildfires rage through the northern Pacific states. In Oregon, 40,000 people have been evacuated and more than 1,500 square miles have burned. California has already experienced three of the top four largest wildfires in its history in this year alone. Perhaps more than any time in recent memory, the economic future of our country feels uncertain. The overarching theme of this book “Securing our Economic Future” and the specific topics therein—the economics of the middle class, geographic divergence and place- based economic development, and the global climate challenge and U.S. policy response—were chosen in early 2020, before the COVID pandemic and associated recession had taken hold of the nation. But the acute challenges before us make the goal of securing our economic future even more imperative. Today’s alarming and immediate crises expose deep, structural weaknesses that have been building. The pandemic-induced recession has exposed the economic fragility of so many American households. The wildfires of historic proportion reveal the effects of environmental pressures. Bitter partisan and social divides that characterize the country during this Presidential campaign season reflects—among other things—increased economic divergence that often falls along geographic lines. These divides fall along racial lines as well, but those critical challenges are beyond the scope of this single volume. By the time this volume appears in print, the election will have been decided. We fervently hope that the public health crisis will be abating, the labor market will be recovering, the wildfires will be under control, and that social change will progress peacefully. But without a doubt, the elected administration will face critical economic policy challenges. This volume focuses on three of the most important ones. Part I focuses on the economic wellbeing of the American middle class. The chapters in this section evaluate—and call into question—the prevailing narrative of its decline. Chapter 1 documents facts about middle-class jobs and income. Chapter 2 4 Securing Our Economic Future explores how the middle class fares under the government’s tax and transfer system. Chapter 3 presents new insights about the economic (in)security of the middle class. Part II focuses on geographic disparities in economic opportunity across the United States. Chapter 4 presents evidence that there is no longer an urban

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