At the Joint Economic Committee, we believe knowledge of social capital is vital to achieving our goal of expanding economic opportunity for all Americans. Join us as we invite hearing witnesses to engage in a deeper social capital conversation on The Social Capitalists Podcast: Post-hearing Discussions with the Joint Economic Committee Republicans.

Listen to Episode 5 or read the full transcript below:

Scott Winship: Hello, I’m Scott Winship, Executive Director of the Joint Economic Committee and Director of the JEC’s Social Capital Project and this is the Social Capitalists Podcast. On the podcast we invite our hearing witnesses to join JEC staff in a post-hearing discussion, so we can get a little more in the weeds and dive more deeply into the issues we’re covering during our hearing. We just finished our hearing on connecting more people to work. I encourage you to check out our website, you can read our witnesses’ opening statements, watch the full hearing, and would encourage you to read our latest paper which is not connected to the hearing but it is a great paper by Vanessa Brown Calder called “Zoned Out: How School and Residential Zoning Limit Educational Opportunity.” Today on our podcast I’m excited to be joined by Dr. Veronique de Rugy, Senior Research Fellow at the Mercatus Center and Oren Cass, Senior Research Fellow at the Manhattan Institute. Thank you for joining us.

Oren Cass: Thank you, this is great! It's like a post-game show

Veronique de Rugy: Yes!

Oren Cass: I think it went well. I felt like the team put out a good effort.

Scott Winship: There's a lot of Monday morning quarterbacking, things you might've done differently, bad calls that you thought were made during the course of the hearings?

Cass: I think the Democrats really struggled throughout. 

Winship: So we're getting a flavor of what this will be all about. It was an interesting hearing, I will say, but we managed to get through it and actually got a number of great questions out there I think. You all were able to provide a lot of really useful insights. 

01:42 

So let's jump in, let's start off first with Oren. The hearing that we had was tied to this policy goal ours, we have these five policy goals and one them is connecting more people to work, where we tried to emphasize that sure working is great because you get a paycheck but being connected to the world of work is useful for all of these other reasons too and I thought your written testimony in particular did a great job at laying some of these out, so how do you think about the importance of work per se beyond just a paycheck.

02:14 

Cass: Well I think it's such an important point because if work is just a paycheck then we know very well how to substitute it, if there's one thing the federal government is good at it's writing checks. The thing about work though is that, as you said, being connected to the workforce ultimately sometimes as simple as having something to do every day but also having a role as a productive contributor, feeling like you're supporting yourself and your family turns out you just have a lot of really important benefits and I break them down into benefits to the individual, that i think the research is quite good on the benefits to self-esteem and mental health and the self-reported life satisfaction. Of course it's incredibly important to economic opportunity, you can't up the ladder if you're not on the ladder, but then also it's important to family and community that work and the self-sufficient household is a huge part of the rationale for marriage in the first place, it contributes to family formation that conversely, especially when men lose work you see huge increases in divorce and then it's important for outcomes for children. Children tend to do better just being raised in households and communities where people are working--it's easy to take for granted, but I think something the research has shown us is if you focus in on what you call a blue collar community generally, especially during the Great Recession we were down to only about half of households having one full time worker and that's not the recipe for success for the next generation either. 

03:42 

de Rugy: I have a question actually, this is not an area I know well so, I remember--I think following you--Scott on twitter saw this study that actually showed maybe the causation between marriage and work, when the other way we have thought about which was, it actually is the collapse of marriages that actually leads to stepping out of the workforce for men--I mean I have no abilities to actually really check or judge this, I haven't even read it, but I was just wondering-- it seems like you touched on this a bit at the hearing-- can you just expand a bit on this?

04:21 

Cass: Yeah, I think there's absolutely a strong case to be made that the causality works both ways; it can be a vicious cycle not just one direction. There is some pretty good evidence that suggests that causation, at least in part, runs economic to formation and the two best theories I've seen on this: One is work that David Autor did relative to China shock where he then looked at how has family formation changed in regions that were versus were no hit by the China shock, so that's a fairly good control that shows that you saw much worse family outcomes in those areas that suffered the economic shock. The other piece that I found interesting was from work that Andrew Cherlin at Johns Hopkins did where he just looked at the availability in different regions of work that he defined as "pays a living wage to people with only a high school degree" and again he found that when you look at geographic changes in the labor market you see the corresponding effect on family formation; so that suggest that at least in part it is when the economics gets worse, the family formation effects follow.

Winship: I feel like we always end up plugging Tim Carney's book in all these episodes. Tim does a great job adjudicating between the Autor stuff and the Melissa Kearney stuff about fracking in North Dakota which increased fertility but not marriage, or some result that was surprising--certainly a complicated question. Well, when we talk about the drop in labor force participation, and the project has been mainly concerned with the drop in prime-age male labor force participation, just because it goes back to the 1930s when women's labor force participation has been declining since about the 1990s, which you talked about during the hearing. The two big ways, and certainly an oversimplified way of thinking about it are about what's gone on, well there have been demand-side issues and there have been supply-side issues. The demand-side issues are mainly about the strength of the economy over time the labor market weakening especially for men with weakening skills. Maybe we can jump in to some of the big issues that folks tend to talk about when they talk about changes in the labor market. 

06:58 

What do you think is the respective roles, or how important for the decline for the decline in male labor force participation, would you say things like automation, trade, immigration, those are the three things politically and in terms of economic journalism what you tend to hear about, how do you think about any of those as contributing to the fall in work among men.

06:58 

de Rugy:  I think this Oren and I will probably disagree, 

Winship:  the one place (laughter)

de Rugy: well at least it's one I know of. I actually don’t think there’s a strong case to be made that it contributed very much. It certainly created a lot of distortions. The question is whether on net, people who have actually managed to recover or exited permanently from the labor force, I think some people may have but I don't think it's a big role. When you look at the big drop, at least for men, half of it is explained by people claiming disability. Now, there are different reasons to claim disability and there is substantial evidence that the people who are on disability are those with poor mental health, poor physical health or both. It is interesting to look at the rise of disability roles and track it when the economy goes up and down and to see how they work together and there is no actual reason for it. There's this suspicion that probably there are some men who dropped out entirely of the labor force, not because they can't work but because they're allowed to not work. There is a demand-side role, but the vast majority is a supply side role. 

Winship: I think Oren would agree with you on automation, if I'm reading your stuff correctly. 

Cass: I think the evidence is very poor that automation has had a negative effect. If you look at it in isolation, you can see--look we've introduced new technology that's made it possible to make things with fewer workers in some cases, but that's always been the case, that is in fact the recipe for rising wages and prosperity and it is certainly not happening faster than it used to. What has changed is that we used to introduce technology processes, find better ways to do things, but then also find more things for people to do--and it's that latter half that we've lost and that I think deserves the focus.

09:27

Winship: Talk to us about your views on trade and immigration and the extent to which those contributed to demand-side problems in particular for less skilled workers.

Cass: Well I think there's both a narrow econometric view of it and there, at this point I would say is pretty good that something like the China shock has had some effect (though it is certainly not the dominant effect in the labor market at large) on the immigration side we could do a 20 part podcast series solely on the econometric data.

Winship: Let's not (laughter)

de Rugy: (laughter)

Cass: Which I will not be participating in or listening to, but I do think it's important to step back and think more conceptually over the long run, what having constraints or not having constraints in various parts of the labor market does endogenously to the kinds of training we invest in, the kinds of industries we're strong in, where investment flows, and one thing I highlight just as more of an illustrative example but I think should be taken seriously on the immigration side is if you look, at the experience in the construction industry over the last few decades--McKinsey has done very interesting work on this that shows that productivity has been declining in this industry-- that is exactly what you expect to see in a world where high volume of low-skilled labor was allowed and conversely I would suggest you would have had to see the opposite of if you faced serious labor constraints. On the trade side, I think the easiest thing to talk about is the trade deficit. At the end of the day, if you have a 600 billion dollar trade deficit in goods--coming back to what I was just describing where productivity growth has been what it is but we're making less stuff-- a trade deficit directly represents somebody else making stuff for your market, with not offsetting opportunity for you to make stuff for their market. Again, that's not the entire explanation but I think it's very hard to look at imbalance of that magnitude and come to a conclusion other than that it's contributing to a lack of demand in exactly the segment of the labor force we are most concerned about.

11:22 

de Rugy: I actually disagree with that we don't make things anymore in the US.

Cass: I didn't say we don't make things anymore

de Rugy: No, like we don't make as much things and also that the trade deficit means that there's basically we buy a lot of their stuff and they don't contribute in increasing demand for ours. There are different ways to do it we can do it by selling things to them or we can also do it when they send their money back--the money that they have gotten by selling us stuff, and that increases the demand for our American products. When Toyota invests in a factory, when BMW invests in a factory, or when the government spends money and then the money comes back to us to actually buy treasury bonds, all of this is actually an increase in the demand of our stuff. I disagree about the trade deficit and I think it's also worth pointing out that the big disruption in terms of trade for us, the one you hear about all the time is NAFTA and the China shock, and it's not to say that they weren't disruptions, but it’s interesting when you actually try to think about the impact it had on the labor force participation so you actually realize that our labor force participation. All of this happened as women entered the labor force and it was starting to flatten already, it's still higher than it was in the 70s, 60s, and 50s, when we didn't have a big trade deficit. I think we have to take this theory with a grain of salt at the very least. 

13:12 

Winship: Great. I think the other big topic that I wanted to get on the table--so we're trying to do this thing when we do these hearings to some extent of curating diverse voices on the center right side we had a hearing on family affordability where we had Ryan Bourne, Cato institute, paired with Lyman Stone; to put the pro-natalists and the libertarian in a room together and see what happens and we very intentionally picked people with very diverse views on policy solutions as well and I think maybe the starkest way to portray that is what the appropriate role of government is in dealing with the problem of declining labor force participation and I think that we've got some pretty diverse views covered here. So ranging from a pure libertarian perspective, where the government can't do much at all, to--I think Oren is emerging as a voice of, I would say national conservatism, reformed conservatism-- a rethinking on the right of what the proper role of government might be. Oren, what do you think the federal government could do in terms of what some people might call industrial policy or strategic policy around different sectors, you've talked a lot about labor reforms that are unusual for folks on the right to talk about, what are some of your ideas for stanching this decline in labor force participation?

14:37 

Cass: Well. I'll briefly say something very abstract then I promise to jump into something more concrete. I think the right way for conservatives to think about these things is not that we can jump in and order the market to come up with better solutions but it is to recognize that markets are processing mechanism. They spit out answers that are a function of the conditions that they are operating in, and it is absolutely the role of policymakers and a function of public policy to establish the conditions that the market operates in. That is the set of questions I'm interested in focusing on and you've mentioned a couple of goods ones. The concept of industrial policy means a lot things to a lot of people. I've learned that to some people it conjures Stalinism and we say no, Reagan had industrial policy, at the end of the day it refers to the idea that we have a preference for investment flowing in certain ways across sectors and it's important to state that black-letter economics, says nothing about markets allocating resources efficiently. across sectors--that is not something that private actors pursuing profit will do or have an interest in doing--we can obviously get into a philosophical debate about whether policy makers can improve on that, but I think it's an important starting point to recognize that it's certainly a problem we could have and if we step back and look at how our economy has evolved and where investment is flowing now, heavily focused areas like finance and technology and the disconnect that has created from what I think is a very important social good of the labor market that is going to support flourishing families in communities up and down the ladder. Then we have a problem. There are lots of policies that can and do currently influence where investment flows and could influence it to flow differently and whether that's what kind of research or development we fund, whether that is what kind of education we subsidize and in my view whether that's even more aggressive things that say "actually we know that something that manufacturing has economic value that markets are not going to recognize" so we can actually put a thumb on the scale and get better outcomes if we do. 

16:56 

Winship: Veronique, you were asked during the hearing, by Chairman Lee a question, which you gave an admirably honest answer to, which was about what the federal government could do about occupational licenses, and then you said, well it would be great if there was something that the federal government could or should do, but there really isn't. 

de Rugy: I actually think that there are things the federal government could do, and I've learned a lot of this stuff from you, for instance when you look at the largest increase in the drop of the labor force participation is disability. There is evidence that changing the eligibility role is actually keeping stock and not working, some men, there is some value of work that is unquestionably beyond actually getting a paycheck. Doing reforms like this would be essential. The UK has done a lot of these reforms where they actually differentiated between being disabled and being incapacitated and it doesn't necessarily--if you don't want to create a disincentive to claiming you're incapacitated you need to figure out how you transition from allowing people to still have benefits while working and i think that would be a really important first step--but it is true though that where it comes more complicated is to actually save some of the over-sized problem with not being attached to the work force come from not being attached to the workforce come from-- it used to be historically if a region in the US was booming they would create a gigantic amount of housing and then a lot of the people in the country and from other would join and benefit from that economic growth and increase in productivity and wages, but we don't see this anymore that is a real problem that is caused by the local and state level by land and zoning laws. The problem that we have, and I don't have an answer, is these are local and state problems that are actually causing national level employment issues because you have workers who can't tap into these vibrant labor markets and who as a result also stay stuck in areas that don't have much work. It's hard to figure out what the federal government could do. Yeah we can try to convince 50,000 communities I think the federal government has played a role by--I mean culturally we've done too much and actually claiming that home ownership somehow the be all and end all of being an American, when the alternative to not being in the street is renting.

20:10 

Winship: Well I'm glad you brought up SSDI, well because you said a nice thing about me (laughter), and because it allows us to talk a little bit about rather than the demand-side, supply-side explanations. Oren you've written a lot about safety net reforms as well, give us your thoughts on their role in fixing this problem of nonworking men. 

Cass: I think there is definitely a supply-side component to this story. My hesitation in putting too much weight generally is that one thing that has not changed is people, human nature. The human being that we are producing now is roughly similar to the human beings we produced 50 years ago, when 98 percent of prime-aged men were in the workforce. Now, certainly culture can change dramatically, but it strikes me as very unlikely for instance in fact prim-aged men are more likely to be genuinely disabled than in the past, given that work is generally safe and medical technology is generally better. Likewise when you start to dig down and say a lot of these men don't want to work or say they don't want to work; it's not clear to me if that is a supply or demand side problem. In other words, embedded in the question is given the labor market you face, do you want a job--to be slightly pedantic, it is a useful thought exercise, if median wages had grown at the rate of corporate profits over the last forty years, someone with a high school degree would be looking at median wages of 60-70 dollars an hour, I'm not saying that's plausible, all I'm saying is if wages were 60-70 dollars an hour my guess is the share of these men who say they don't want a job would be dramatically lower.

22:54 

In some respects I'm hesitant to believe that a collection of men that in the past did work and now don't and of course we know from very good studies, these men that are not working--it's  not because they're in school or they're caring for those in need-- they are sleeping and watching TV. All of that said, safety net absolutely plays a role in this, I agree entirely with what Vero said regarding disability and join her in saying that your work on SSDI has been fantastic and we would all benefit from it being adopted, I also think as we think more broadly about the safety net, we have a problem that again intersects with the demand-side which is that overtime as a society gets richer, the package of safety net benefits that we establish as a default goes up. If you have wages that are merely stagnant, they lose ground against that package and so even if a wage paid the same as it did at some point in the past, I think it is becoming relatively less attractive as compared to what the package associated with not working might be. Now, all of that said, I don't think that the solution is to say well, we should go back to a 1970 level safety net or if only people had no alternative but to work, they would have to, but I think you can design a safety net that is much more oriented toward work. That is a safety net for people who cannot work and that is an inducement to work for people who can, so that's why I talk about wage subsidies--which is the idea of trying to take all of the benefits we provide to people--i thought it was especially great in the hearing when Dr. Shambaugh talked about this a lot as well--it's not that they never work, they're marginally attached, they come in, they go out and a huge share of what we are paying in safety net benefits in fact foes to exactly that category of households. You said for that group, instead of delivering all of these safety net benefits, we're just going to put money in your paycheck. Low-wage workers, just like we take money out for payroll taxes, we can put money in. That would be a much more effective way of delivering support to people at the low end of people at the low end of the income scale who can work and doing it in a way that is going to encourage them to take jobs and it's going to encourage employers to invest in creating opportunities in that part of the labor market.

26:08 

de Rugy: I do have a question about this though. If people keep going in and out of the labor force, could it be that it's not a question of low wages, necessarily, it's just a question of work disruption? It's like they're taking short term job where they're just deciding to stop working and I don't know exactly why and in that sense, it could be that wage subsidies wouldn't actually address this problem, but I want to go back to the zoning and lending thing, it’s like one of the reasons why I've come to actually realize, this is such an incredibly important problem and at the national level and I don't know how to resolve it and it would be great if we could, is precisely because I actually think all the measures we can come up with like wage subsidies and all other things that I would agree with or not, that's not even the issue, they may not even work if we don't figure out a way to have people exit places where there are no jobs or very few job opportunities or the only job opportunities are at very low wages and where it's impossible to actually go and join a labor market where wages are higher because of the housing which is significant, actually would eat up the gain. This is what I have come to realize these issues, these local and state issues are so important because in a sense they cause a problem, and they also diminish tremendously the ability of the federal government to actually address some of these issues with wage subsidies or even fiscal policy or monetary policy or what have you, I think that is really the challenge that we face today.   

26:10

Cass: I disagree strongly with that for two reasons, one is: it is certainly the case that moving to opportunity and gold rushes have been a part of American history, it is equally true that staying put and doing well where you are is part of American history--you look at the Oklahoma Dust Bowl, the classic example the population of Oklahoma fell less than three percent in the 1930s it was actually mostly because fewer people moved in because people were moving out. Iowa, population grew every decade through industrialization and mechanization of agriculture and if you look at what people really care about and funnily again for less cosmopolitan and less educated folks, staying close to home is a huge part of the value proposition. First of all, I don't think we should underrate the fact that people don't want to move and I think it is also incredibly shortsighted in that even if you could get the rate of mobility up massively, so now we get what 20-30% of folks out of these communities and we've probably managed to move exactly the most ambitious 20-30%. We're not actually going to empty out the country on the scale of even a generation or two, so now as we have done historically, I think part of the solution has to be one that actually ensure that prosperity and again from the demand-side economic opportunity, remains geographically wide-spread. The second piece that economic research and really fascinating and counter-intuitive is the wage premium for working in a big city has vanished for people with less than a college degree. Obviously college educated workers have always earned more than less educated workers, but if you looked at earnings as markets got denser you always saw upward sloping curves for both, what has happened in this same period where we've seen stagnation overall is a downward flattening in what that looks like for workers without a college degree and you don't actually earn more, again on average, as someone with only a high school degree in a big dense city. First of all, that is only partly an explanation why we are not seeing people move, and again that is before we even take into account that it's more expensive to live in a city and will be even with zoning reform, and so I agree that zoning policy is horrible and we could be doing a lot better but I don't think we should be doing it better in pursuit of this vision of getting people out of depressed places as a solution to our problems because I don't think it addresses what is important to them and I don't think it actually solves the problem.

28:54 

Winship: Well if we had another three hours I think I'd forgo immigration discussions and can imagine provoking Vero on how great the EITC and opportunity zones are and provoking Oren on wage trends but that's going to have to wait for a sequel down the road because we're going to have to wrap up. Thank you both for joining us today it's always exhausting to testify before congress and then to do a little podcast after, greatly appreciated. So that's going to wrap it up for this episode of the Social Capitalists, we'll be back after our next hearing. Until then, you can follow our work at jec.senate.gov/republicans. Also subscribe to this podcast on Apple Podcasts or wherever you're listening today and be sure to rate this episode and leave us a review. This is Scott Winship, Executive Director of the Joint Economic Committee, you don't have to go home but you can't stay here.