Research Programs
Economic Policy for the 21st Century
Nearly all Levy Institute research focuses not only on economic analysis, but also on the creation of possible strategies through which policymakers may solve the issue at hand. This program includes research on those macroeconomic policy areas most closely associated with public sector activities: monetary policy and financial institutions, federal budget policy, and the labor market. Examples of studies on monetary policy and financial institutions include explorations of the repercussions the euro’s introduction has had on monetary and fiscal policies and monetary institutions within the European Community; the effectiveness of monetary policy; and Minskyan analyses of the current economic problems in the United States, Japan, and Brazil. Examinations of federal budget policies cover such topics as the effects of budget surpluses on the economy, the need for fiscal expansion to combat economic torpor, and analyses of the Social Security and health care systems.
Associated Programs
Federal Budget Policy
Explorations in Theory and Empirical Analysis
INET–Levy Institute Project
Climate Change and Economic Policy
Program Publications
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Policy Note 2024 | November 2024On November 5, 2024, American voters sent Donald Trump back to the White House. In 2020, he lost his bid for reelection to Joe Biden, after winning in 2016 against Hillary Clinton (but only thanks to the electoral college). This time, however, Trump won the popular vote. All the new energy that surrounded the Harris-Walz campaign was outmatched by the turnout from Trump supporters.
All polls—whatever one’s feelings about their reliability—kept pointing to the same defining issue in this (as in every other) election: the economy. Critical issues of democracy, abortion, and immigration filled the airwaves and political speeches, but the economy remained once again more powerful than any one of them.
Economists uniformly failed to grasp what these “concerns with the economy” were all about. They kept celebrating the decline in inflation and kept pointing to the fastest recovery in postwar history. The labor market—almost everyone declared—was now at full employment (a few of us strongly disagreed). Real wages, especially at the bottom, had finally risen for the first time in many decades. Fiscal policy had returned, juicing up economic growth with mega-contracts to firms and generous credits for renewable energy: all developments we hadn’t seen in decades.
This was an economy that most economists hadn’t seen in their professional lives. For 50 years, wages had been stagnating, jobless recoveries were the norm, labor force participation rates were falling. This time was different: the fastest recovery from any postwar recession, growth rates America hadn’t experienced in decades, prime-age employment at its historical peak, record peacetime government spending, and wage increases at the bottom of the income distribution. This time the recovery felt different. But despite the post-COVID splurge to salvage and repaint the old American economic engine, for many families it was the same old clunker under the hood.
And this is exactly what the various ballot measures on election night seemed to tell us. When presented with questions about the economy and their standard of living, voters expressed their displeasure with how things were going and they voted in support of pro-worker measures—especially in red states.
Here are some of the ways in which state ballot measures played out.
Paid Sick Leave
Three states had introduced measures requiring employers to provide paid sick leave to workers (Alaska, Missouri, Nebraska). In all three states, these measures passed. All three states voted for Trump.
The United States is the only advanced country without a federally mandated paid leave policy.
Minimum Wages
When it came to wages, Alaska and Missouri passed measures to increase their minimum wage to $15/hour (in 2027 and 2026, respectively) and adjust them with the cost-of-living thereafter (a similar measure had already passed in Nebraska in 2022). A fourth state (Arizona) rejected a proposed measure to reduce wages of tipped workers.1 Arizona, too, voted for Trump.
In California, a minimum wage ballot measure (Prop 32), which would have raised the minimum wage to $18/hour, was rejected. It is unclear why, but CA voters had already passed a law in 2023 to raise the minimum wage to $16/hour in 2024.2 Massachusetts had proposed an unusual and generous increase in the wages of tipped workers (to reach 100 percent of the MA minimum wage by 2029—while continuing to earn tips), but that ballot measure was also rejected. While none of the existing or proposed minimum wages are living wages, it seems some red states are catching up to increases that have been happening in blue states.
Infrastructure, Climate, Health
In California,3 two infrastructure investment measures passed. Prop 2 authorizes a bond issue to go forward for public school and community college facilities, while Prop 4 is another bond issue for the support of water infrastructure, wildfire protection, and addressing climate risks.
CA also passed a measure regulating how federal money from drug reduction programs would be spent (Prop 34). Voters wanted 98 percent of such funds to go directly to patient care.
Housing and Prison Labor
What CA voters also wanted is to retain oversight over such bond issues, and therefore they defeated Prop 5, which reduced the votes needed to approve bond issues for housing and other public infrastructure from the current two-thirds majority to 55 percent. CA also rejected a measure to expand rent control (Prop 33) and a measure (Prop 6) that would have banned forced servitude (i.e., using prison labor as punishment). Prop 6 would have made prison labor voluntary and would have prioritized rehabilitation.
School Choice
Three states introduced a measure to amend the state constitutions and allow state money to go to private schools. In all three states, the measure failed (KY, CO, NE). Considering that school choice is a signature Republican policy, it is notable that two out of the three states that defeated this measure voted for Trump.
Reproductive Rights
Repealing Roe v. Wade was bad politics. Voters overwhelmingly supported measures to protect reproductive rights and the right to an abortion. Such measures passed in six states (AZ, CO, MD, MO, MT, NV). In some states, the right to an abortion is now a state constitutional right (CO, NV). Other state laws protected that right up to the point of fetal viability (AZ). New York passed a measure (Prop 1), which adds an anti-discrimination provision to the state’s constitution. NY reproductive rights activists argue that the right to an abortion is now subsumed under a wide range of other protections against unequal treatment.
Nebraska had two ballot measures. In the first one, NE voters rejected establishing the right to an abortion until fetal viability, while in the second ballot measure, they voted to enshrine in the constitution the current law prohibiting abortions after the first trimester, unless it is required due to medical emergencies, sexual assault, or incest. In South Dakota and Florida, the proposed constitutional right to an abortion also failed.
Right to Vote
Anti-immigrant rhetoric dominated this election cycle, leading to uniform support for “citizenship requirement to vote” measures wherever they were introduced (IA, ID, KY, MO, NC, OK, SC, WI). In Nevada, voters approved a proposal to amend the state constitution to require voter identification for in-person and by-mail voting. To become law, this measure will need to be approved a second time during the 2026 election.
Economic Signals
While the sample of ballot measures that dealt with economic issues in this election cycle is small, it still makes clear where the electorate’s anxieties lie. Red states voted to protect workers, supporting minimum wage increases and mandated paid sick leave. Voters in CA and MA didn’t go for another round of measures, perhaps because they had supported similar increases in recent history. Still, CA voters supported measures to strengthen healthcare, schools, and public infrastructure.
For those who remember the politics of school vouchers from the Betsy DeVos area, it is notable that red states rejected using public funds for private school vouchers.
While Democrats rightfully singled out abortion and democracy as core issues in this election, and zeroed in on housing affordability and childcare support, they said very little about uniformly popular policies like raising the minimum wage and mandating paid family leave.
We should note that none of the minimum wage increases (in blue or red states) will deliver the living incomes that Americans are calling for. The MIT living wage calculator4 is a quick check for how much one must earn to make ends meet. There is no corner of the country where minimum wages come close. Still, these ballot measures are saying that working families can’t keep up.
When people say that inflation is their top concern, they are also saying that their jobs and paychecks aren’t allowing them to stay afloat. They are telling us that they need a break; they want paid leave, they want government funding to directly support their immediate needs: patient care, public schools, clean water. They don’t want the public’s money to go to already-thriving private schools.
Left Behind
The US saw the fastest recovery in postwar history and an unprecedented level of government spending, but for working families the economy has pretty much returned to its pre-COVID status quo. And that wasn’t pretty. But for a brief moment during the COVID crisis, Americans realized what was possible: they got universal healthcare, no questions asked. They could get student loan relief and a break from other debt and rent payment. Parents received a universal child allowance. All of it was possible and all of it disappeared. Still, Americans wanted and needed more.
Today we know that the job market is softening even as the unemployment level remains around its pre-COVID lows. Part-time-employment for economic reasons has been on the rise. Job-related anxieties have been clear in sentiment surveys for a while,5 but the problems are deeper and structural. American families’ standard of living has been slipping for a long time: housing, education, and healthcare have been consistently out of reach. The high grocery bill that American families get to see every day has only added insult to injury, even as official measures of inflation have fallen.
Failure
In 2008, the Queen of the United Kingdom asked how professional economists could fail to foresee the 2008 crisis. Well, not everyone failed—for one, we at the Levy Institute saw it—but the mainstream establishment didn’t. Today, we can say that most economists uniformly failed again. They failed in the US, in Europe, and everywhere authoritarianism is on the rise; failed to understand that patching up the economy after each crisis is not enough.
Economists fed this complacency with talk about a booming economy and “full employment” (which it was not), celebrating the increase in real wages at the bottom of the distribution, without sounding the alarm that it is not enough to keep up. They urged us to celebrate this once-in-a lifetime postwar growth, glossing over the clear sense among the electorate that the economy is profoundly broken and folks are fed up with the status quo.
Growth is not enough. This much should have been obvious long ago. Structural economic issues and insecurity still shape voters’ lives and continue to shape every dimension of politics. For those of us reading the economic tea leaves pointing to economic insecurity, the ballot measures corroborated the anxieties voters feel about their standard of living.
As one friend put it to me:
We are two parents with three Master’s degrees between us and three kids. I make $15-23/hour teaching and have a second job. My husband has a full-time job with benefits but he just survived a first round of layoffs and we don’t know what’s next. Groceries are not affordable, childcare is not affordable, our property taxes continue to rise but we can’t even afford basic house maintenance. Our car repairs put us over the edge, while our kids are growing and their financial needs are expanding. Sending them to college is extremely expensive and our own student loans are impossible to pay. Health insurance has been a help but each year we pay more and more out-of-pocket expenses uncovered by Obamacare. Most jobs require advanced degrees but pay miserable wages. The list goes on and on. We live paycheck to paycheck and cannot afford entertainment or “wants” like we used to.
That’s it. That’s the story of downward mobility for a middle-class American working family, with a clear punch list for policy makers. The same punch list we’ve known about for decades.
Notes
1. The Arizona measure (Prop 138) was particularly convoluted but it would have made it more difficult for tipped worker wages to keep up with increases in the state minimum wage. Currently, employers can only pay $3 below the state minimum wage: a gap that will be shrinking as a percentage of the minimum wage as the latter increases. The new proposal would have fixed that gap at 25 percent less than the state minimum wage.
2. https://www.dir.ca.gov/DIRNews/2023/2023-66.html
3. https://voterguide.sos.ca.gov/propositions/index.htm
4. https://livingwage.mit.edu/
5. https://www.cnbc.com/2024/05/29/us-workers-are-less-satisfied-with-nearly-every-aspect-of-their-jobs-survey-finds.htmlDownload:Associated Program(s):Author(s):Related Topic(s):Climate Change and Economic Policy Employment policy Growth Health and society Infrastructure Political economyRegion(s):United States
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Policy Note 2024/1 | October 2024In a New York Times editorial, David Leonhardt recounts Aesop’s apocryphal story about the boy and the wolf, warning that while deficit hawks have so far been wrong, the growing government debt will eventually bite. He reports the economic plans of both presidential candidates would add to the debt that will soon exceed GDP and grow to 130 percent of annual output under a President Harris, or 140 percent with a Trump presidency.
The story of the boy and the wolf was a fable, although it was within the realm of possibility. The fable of the debt wolf is not. While there are real world wolves—Leonhardt mentions climate catastrophe and autocratic leaders, and the authors would add rising inequality and the concentration of economic and political power in the hands of billionaires—authors Yeva Nersisyan and L. Randall Wray assert, federal debt is not one of them.Download:Associated Program:Author(s):Related Topic(s):Federal budget policy Federal debt Federal deficit Federal Reserve Modern Money Theory (MMT) Monetary policyRegion(s):United States -
Working Paper No. 1056 | October 2024Against the backdrop of demographic transition in India, the study highlights the necessity of integrating the elderly population as a critical factor in formula-based intergovernmental fiscal transfers. The demographic transition, characterized by an increasing elderly population, imposes unique fiscal challenges on states, necessitating a revision of transfer formulas to ensure equitable and efficient resource distribution. The paper employs a historical analysis of fiscal devolution criteria, and analyzes the impact of incorporating the elderly population into the devolution formula on the share of states in the total tax transfer to states. The findings indicate that integrating the elderly population into the tax devolution formula can significantly alter the distribution of resources among states, with states benefiting more while having a relatively larger elderly population. The study recommends considering demographic changes by incorporating the elderly to working age population ratio as a criterion used by the Sixteenth Finance Commission to promote a more equitable and efficient allocation of resources.
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Working Paper No. 1054 | June 2024Gender budgeting is a public financial management (PFM) tool, used to ensure accountability mechanisms. The analysis of “process” indicators of gender-responsive PFM (GRPFM) reveals that India has been successful in integrating a gender lens within the budget cycle, including in the financial planning and allocation, and in effective implementation. However, a legally mandated GRPFM would be crucial for the sustained impact of gender budgeting on gender equality outcomes. The empirical analysis of the link between GRPFM and gender equality outcomes showed that flexibility of finances is crucial for a government to implement GRPFM. The unconditional fiscal transfers have relatively more impact on gender equality outcomes than conditional transfers. The plausible mechanism through which unconditional tax transfers impact gender equality outcomes lies in the flexibility of use of tax transfers by the subnational governments in prioritizing their gender-related commitments. This inference has policy implications for the 16th Finance Commission.Download:Associated Program(s):Author(s):Related Topic(s):
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Working Paper No. 1045 | March 2024This inquiry examines the role of federal policy in gender inequality using the principles of institutional adjustment (Foster 1981; Bush 1987) in the context of the Veblenian dichotomy of habit formation. Specifically, the authors assert that Social Security, though exclusive at its inception in 1935, has undergone significant institutional adjustment. Today, Social Security plays a determining role in providing the appropriate institutional space for not only increasing economic security for older women, but also for reducing gender inequality overall.Download:Associated Program(s):Author(s):Liudmila Malyshava B. Oak McCoyRelated Topic(s):Economic stability Economics of gender Gender disparities Gender equality Gender inequality Gender studies Social SecurityRegion(s):United States
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Working Paper No. 1042 | February 2024For more than 25 years, the Social Security Trust Fund was projected to run out of money in 2033 (give or take a few years), potentially causing benefits to be severely reduced in the absence of corrective legislative action. Today (February 2024), projections are made by the Social Security Administration that indicate that future benefits will need to be reduced by roughly 25 percent or taxes will need to be increased by about 33 percent, or some combination to avoid benefit curtailment. While Congress will most probably prevent benefits from being reduced for retirees and those nearing retirement, the longer Congress and the president take to address the shortfall, the more politically unpalatable (and possibly draconian) the solutions will be for all others.
Dozens of proposals are being evaluated to address the long-term problem by mainstream benefits experts, economists, think tanks, politicians, and government agencies but, with rare exceptions from a few economists, none address the short-term problem of Trust Fund depletion, provide a workable roadmap for the long-term challenges, or consider fundamental financing differences between the federal government and the private sector.
This paper aims to address these issues by suggesting legislative changes that will protect the Social Security system indefinitely, help ensure the adequacy of benefits for retirees and their survivors and dependents, and remove confusing and misleading legislative and administrative complexity. In making recommendations, this paper will demonstrate that the Social Security Trust Funds, while legally distinct, are essentially an artificial accounting contrivance within the US Treasury that have become a tool to force program changes that, for ideological reasons, will likely shift an increasing financial burden onto those who can least bear it. Finally, while the focus of this paper is on the Social Security system, it would be incomplete without also addressing, albeit in a limited way, the larger political issue of the nation’s debt and deficit along with the implications for inflation.Download:Associated Program(s):Author(s):Edward LaneRelated Topic(s):Deficit financing Deficits Inflation Social Security Tax policy Treasury Welfare economics Welfare policy Welfare stateRegion(s):United States -
Working Paper No. 1038 | January 2024This paper revisits Keynes’s (1930) essay titled “The economic possibilities for our grandchildren.” We discuss the three broader trends identified by Keynes that he expected would come to characterize the socio-economic evolution of advanced countries under individualistic capitalism: first, continued technological progress and capital accumulation as the main drivers of exponential growth in economic possibilities; second, a gradual general rebalancing of life choices away from work; and third, a change in the code of morals in societies approaching an envisioned stationary state of zero net capital accumulation in which mankind has solved its economic problem and enjoys a lifestyle predominantly framed by leisure rather than disutility-yielding work. We assess actual outcomes by 2023 and attempt to peek into the future economic possibilities for this generation’s grandchildren.Download:Associated Program(s):Author(s):Related Topic(s):
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Working Paper No. 1037 | January 2024The post-pandemic surge in inflation was accompanied by a surge in the corporate share of profits. As a result, several economists and policy makers have given to it names such as “profit-led inflation” or “sellers’ inflation.” The present paper discusses the extent to which profit-led inflation, as an explanation for the recent surge in inflation, is compatible with what we know about the price-setting behavior of firms, income distribution, and inflation. We do that in juxtaposition to two recent critiques: that the increase in the profit share is the result of cyclical factors, and that the increase in import prices leads to higher profit shares even under constant markups. We show that there is little evidence that the recent surge in profitability is cyclical in nature. Moreover, after outlining the Structuralist/Kaleckian theories of prices and inflation we argue that profit-led inflation does not require an increase in the markup of the firms and is consistent with these theories. In the face of large import and other price shocks even under constant markups, firms are able to pass the burden of adjustment to real wages. Thus, the term profit-led emphasizes the distributional source and consequences of inflation. We also provide an empirical examination of the markups in the post-pandemic period using data from the Compustat database. We show that, on average, firms were able to increase or maintain their markups, although there is significant heterogeneity across sectors or the position of the firms in the distribution of markups.Download:Associated Program(s):Author(s):Related Topic(s):
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One-Pager No. 71 | December 2023In comparison to the policy responses in the aftermath of the 2008–9 global financial crisis, the reactions of EU policymakers to the combined shocks of the COVID-19 crisis and Ukraine-Russia conflict reveal a greater willingness to deploy public finance in support of the population. Yet, while this display of renewed solidarity is commendable, policymakers have a long way to go in building a more resilient and sustainable EU. A confrontation with long-standing “business as usual” EU rules and policies is necessary, and it is in this context that the job guarantee deserves serious consideration. Acting for the common purpose of reducing and eventually eliminating long-term unemployment would send a clear message that a Social Europe is possible.Download:Associated Program:Author(s):Related Topic(s):Region(s):Europe
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Working Paper No. 1033 | November 2023The research leverages yearly variations in climate variables, such as rainfall and temperature, across the West Bank from 1999 to 2018 to assess their influence on individuals' decisions to stay in the agricultural sector. The main findings suggest that an increase in rainfall in the previous year is associated with a higher proportion of workers in the agricultural sector, especially in regions where agriculture is the primary economic activity. Temperature variation is also an important factor. An increase in the maximum temperature will generally have a negative effect on the supply of labor in the agricultural sector, while an increase in the minimum temperature may have a positive effect. However, this effect varies across different regions of the West Bank, reflecting the diverse agricultural practices and irrigation methods employed. The study also examines two potential mechanisms through which climate change affects labor decisions: agricultural labor migration to the Israeli labor market and how climate shocks affect agricultural wages.Download:Associated Program(s):Author(s):Sameh Hallaq Yousuf DaasRelated Topic(s):Region(s):Middle East
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