Heather Boushey on Rebounding From Covid & Biden's Economic Policies

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27:39I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Heather Boucher. She is a senior fellow at the Harvard Kennedy School. Previously, she was an economist for the Joint Economic Committee of U.S. Congress and chief economist to the presidents of Invest in America's Cabinet. So let's talk a little bit about wealth and income inequality. And the first question is, what is the impact of this on sustainable growth? Does wealth and income inequality create a drag to faster, more widespread growth? That is such a fantastic question. And I feel like it's a little bit of a leading question because, as you know, I wrote a book on how economic inequality constricts our economy and what we can do about it.

28:30And a number of the scholars that I've looked to over time actually just got the Nobel Prize last year in 2024, Duran Asimoglu and Simon Johnson and James Robinson for their work, looking at how institutions affect long-term growth. And I start there because part of what economic inequality does, part of what wealth concentration does, is it destroys the institutions that foster broadly shared growth. Explain what you mean by that, because, you know, we've had wealth inequality during the Gilded Age. We have certainly in the 90s, 2000s and beyond increasing wealth inequality, primarily due to publicly traded equity and a lot of concentrated ownership.

29:14How does that destroy institutions? Well, think of it this way. Okay. So one of the things that the United States was an early leader in was making sure that kids had access to free public education, something that U.S. communities started to do early on. They raised taxes to do this. And we were a global leader in the early primary school movement. And that's a really important foundational institution for economic growth because we know that talent and entrepreneurship and skills can be learned, but all of these things are – they're normally distributed. They affect – they're distributed across a population, right?

29:59It isn't just rich children who have access to the best schools that have the best ideas or are the most talented in everything, right? And so if you have a society where you are making sure that children across different income groups, across different racial groups, both girls and boys, have access to learning and skill building, then your society is going to benefit from them being able to find the right fit as they go through life. They're going to find the right role. Oh, I'm really good at this or I'm really good at that. They'll have those opportunities. And our economy, our society will benefit from those productivity gains.

30:36Very famous economic study by Raj Chetting and his colleagues many years ago now, but they had data on third graders here in New York City. And they were able to match this data on the third graders and their test scores on math and English, but we're just going to focus on math. And they were able to then match those third graders to their parents' income and to their future income and whether or not they ever applied for a patent. It's just one measure of, like, it's not the end of it, but just one measure of some kind of, you know, success in the world. And what they found was that the children who did the best in third grade on these standardized math tests, those kids were more likely to grow up and get a patent.

31:24Totally makes sense. But when you looked at those children by the income group that their parents were in, by their race, by their gender, you saw something very strange happen. When you just looked at the top kids in terms of the math scores, so this group that was most likely to go on and get a patent, the children in that group who came from the richest families, who were boys or were white, were far more likely than the children from lower income families than girls or were black children to grow up and get a patent. So what that tells you is that our economy, our society has been denied all of this, these new ideas, these new things we could be buying or new ways that our world could be changing because those children who are highly talented didn't have that opportunity across their life.

32:14So what helps a low income child get that education that gives them that opportunity? Well, it is it's having a good public school system and good public universities that are affordable that give that kid an opportunity. Having equal opportunity laws that allow girls and people of color to have those opportunities, that hinges on having institutions that are fair and that are enforcing anti-discrimination laws. And so that is just one pathway through which inequality or equity or lack thereof affects our potential for economic growth, affects the kind of growth that we have. I want to push back on that slightly in that, so is this an inequality issue or is this a, hey, we have pretty mediocre public schools, especially in cities, and that leads to exaggerating or amplifying some inequalities that are already in existence?

33:18Like, is this a tax issue? Is this a competency and expertise issue? Like, why are suburban schools in wealthy suburbs so much better reputations and higher acceptance rates at Ivy's and all the other usual measures of success? Is it strictly money or is it some of it was just a flight of experts to to hire pay, I guess, which comes back to my how do we explain, hey, the kids are in school. They're just not really learning a whole lot. Well, I mean, there's so many there's so many directions we could take that question. that whether or not you are funding those public institutions that enable a wide range of people to have access to opportunity, that's sort of the first part of that answer, right?

34:11Are they properly resourced? Well, the answer, of course, we know is that they haven't been. And there's a lot of things happening, but two that are really fundamental. Number one, in the United States, public schools are primarily financed by local property taxes, which is inherently unequal, right? That means that people that are living communities with wealthier homes have higher tax bases. And so those school districts have more resources, which is exactly the opposite of what you should be doing to create more equity, more opportunity. Isn't there a chicken and egg situation there in that, like, I'm just thinking of all the bedroom communities 30 minutes outside of Manhattan, they became a destination suburbia because, hey, it was it was quieter, it was cleaner, it was neater.

35:02And as it became more and more desirable, the school started doing better. Like you've created we've created a situation where, Of course, these wealthy suburban school districts are going to do better. That's why people pay higher home prices and higher taxes in those districts because they want a higher quality public school. How do you deal with underfunded urban schools when people are voting with their feet and their tax dollars? Well, I mean, so the obvious answer is we should be thinking about how we are financing public schools, right? Should it all be about local? I mean, and this is a local issue.

35:50Obviously, it's different in different places. That is an answer. But when you then zoom up to the federal level and you think about the question of whether or not we are properly resourcing the institutions that we need, the answer is, of course, we've seen a half century now of primarily Republicans selling the American people on the idea that if we lower taxes, particularly on the rich, that's going to benefit them and their communities. And of course, that's not what we've seen. Trickle down economics hasn't worked. It hasn't delivered stronger growth overall. And what it's done is starved our government of the resources that it needs to then address some of these inequities, you know, at the federal level or, you know, or, you know, potentially at the state level, depending on.

36:35So ultimately, it's a tax question of – And it's a question though of why have we decided to starve government in order to give money back to the richest in our society? So you can see time and again these massive tax packages, the most egregious of course being the one that passed this year that Donald Trump signed. Is this one really more egregious than the 2017 Tax and Jobs Act? It is difficult. Because I hear the exact same complaints and it's, you know, what is it? It's eight years later? It is. There is no justification for the kinds of tax cuts that we've just given to the richest people in our society while gutting Medicaid, denying families and children and new parents access to health care, which will make it that much harder for our society to thrive, you know, for decades to come.

37:32People are going to be sicker. They're not going to have access to health care. They're going to go into bankruptcy. All of the hospitals are going to close. So the damage that we are doing to communities because of that tax legislation is truly phenomenally awful. So let's explore that in a minute because you talked about trickle down and I think that's so long ago. I don't know if people voted for that. But the thing that's been – Well, he did say – I mean let's be clear. President Trump did tell people during his campaign that he would not cut Medicaid. That's true. So he did tell people he would raise tariffs but he did not – he said he would not cut Medicaid and he did that.

38:10That was one of the first things that he did. Here's the thing that is the big surprise to me is that we're seeing the impact of the tax package falling in a surprising way on a lot of red states, farmers, rural communities. There have been a number of stories about rural hospitals are closing left and right. There are going to be people that are going to have to drive three, four, five hours to have a baby delivered. And if there's a heart attack, I got some bad news. You ain't going to make that. Well, the baby may not make it to the hospital. To the hospital, for sure. So the question is, and I don't have an answer for this, are people just voting tribally?

38:52They're voting for what their party affiliation is? Because it doesn't seem like a lot of people realize, and this is true on both sides of the aisle, but it's especially true given what we've seen in some of the redder parts of the country. And I keep coming back to all these rural hospitals closing. Are people just not voting in their own interest? Are there other factors driving this? And I know you're not a political economist and that's not your focus. But I think that people – it is my personal view – that people are voting for somebody that they believe is on their side. And when you take the long view and you look at the U.S.

39:36economy, what you see is a half century of rising economic inequality, the top pulling further and further apart from the rest, the middle class being squeezed, harder to go from being low income into that secure economic middle, a rise in economic concentration. And by that meaning, you know, across industries in the United States, there are fewer and fewer businesses. You talk of hospitals, there's been massive consolidation in the hospital sector, right? So in many communities already, there might have been a number of hospitals, but they're all owned by the same company, right? Which creates lower wages for the workers, the nurses and the doctors that work and the janitors that work at those hospitals, creates what we as economists would call monopsony labor market.

40:23And we know that they're less likely to be resilient in situations like this. So these are longstanding brewing crises that this most recent legislation has then just sort of lit the match under and said, well, we're not going to give those communities the money they need for these hospitals. But it is on top of this rising economic inequality that I think has made so many people unclear of who's on their side. And for some reason, they believed that Trump was. He goes out there and he says he's on your side, but his actions really haven't been. And I think that's what's so it's so hard and frustrating to watch.

41:04But I think the truth of that, the truth in there that we need to be very thoughtful about is if you want people to vote for you, if you want people to vote for people that are actually going to support and grow America's middle class, how are we showing that? How are we demonstrating that actually our goal isn't just more elites making more money, but is actually making sure that communities thrive, that there are good jobs, that there is the kinds of institutions, good schools and health care and all the things that communities need. Are we actually delivering that? So if we look at the 2010s, the post-financial crisis era, not a lot of fiscal stimulus, almost all monetary policy, quantitative easing, zero interest rate policy, rates were super low, inflation was under 2%.

41:54We look at the post-pandemic era, the 2020s, they've been pretty much all fiscally driven. We had CARES Act I and II under President Trump, CARES Act III under President Biden, the infrastructure bill, the semiconductor bill, the Build Back Better bill, the most recent big, beautiful bill and all the tax cuts there. The 2020s really feels like it's fiscally driven, whereas the previous, I don't know, 15, 20 years was all monetary. What does that do to the issue of wealth and income inequality in the entire 2010s and 2020s, stocks, bonds, real estate, businesses all seem to have done pretty well.

42:44Doesn't matter if it's monetary or fiscal. If you own capital-based assets, any sort of stimulus seems to work. Well, it's a really interesting question. I think it, to my mind, the answer goes back a little bit to something I said earlier about the importance of having good leadership. Fiscal policy requires that you actually have people that are thinking about what is it that you want government to do? What is government spending money on? How are we thinking about setting rules of the road for businesses so that they are encouraged to behave in ways that's going to benefit communities, not strip them of their value or create bad jobs or create negative implications for the environment.

43:30And monetary policy, on the other hand, is very hands-off. It's, you know, we set the interest rate, there is financial regulation, of course, and that's a big piece of it. But often when we're talking about addressing the business cycle, it is about the, you know, the interest rate policy. And I think what you've seen, especially post-global financial crisis, has been a sense that that hands-off policy, and again, I would kind of put that a little bit in my brain that goes into the trickle-down mentality, that markets, we're kind of going to take our hands off because we believe that markets are perfect.

44:01So if we get out of the way, then everything will just work out hunky-dory. And that hasn't worked out. It certainly did not work out in the recovery post-global financial crisis, which left Americans languishing in high unemployment, massive labor market scarring for so many young people that never really found that good start, the loss of wealth for millions of Americans, and it took so long for us to work its way through the system, the fiscal policy option allows policymakers to step in and be more active and to say, actually, this is the direction we need to go. So the bipartisan infrastructure law that invested money in communities in every part of America in creating roads and bridges that standard infrastructure, but also taking steps to bring broadband to every family, taking steps to make sure that schools that wanted to put in electric school buses to reduce the pollution and the noise for kids riding that school bus every day, that they had resources to do that.

45:02So infrastructure, as we traditionally thought about it, and these new forms of infrastructure that are really important, government really stepping in and saying, hey, there are certain sectors that we need as a country to be investing in, high technology, like semiconductors, clean energy, that these are the industries of the future that we want America to be and we need American businesses to be competitive in. That was why we were making those investments. And we believe that if we encourage businesses in the right way, that can create good jobs and economic security for communities all across the country.

45:38So that active policy that is saying, here's what really matters to us as a society, I think is a part of this trend because we can all see with our own eyes that 50 years of saying, we'll let markets take it, you know, that we don't really need to intervene has left too many main streets devastated, has left too many families without economic security and hasn't delivered the kind of economy that Americans want, need and deserve. Coming up, we continue our conversation with Heather Boucher, Senior Research Fellow at the Harvard Kennedy School, discussing what we can do to help narrow the gap between the haves and the have-nots.

46:19I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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47:34I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Heather Boucher. She was the economist for the Joint Economic Committee of U.S. Congress, as well as a member of the Council of Economic Advisors under President Biden. She's currently senior research fellow at the Harvard Kennedy School. So we've been talking about how the past 40 or 50 years has seen both wealth inequality expand and income inequality. So much dates back to the 80s and 90s, which younger folks may not really remember. I want to start by asking you about unintended consequences.

48:21And I have a recollection of legislation passed under the Clinton administration that said, hey, you can't pay your CEOs tens of millions of dollars. It just seems ridiculous. Instead, we're going to cap the pay and allow you to pay them in stock and stock options. And as the stock market has gone higher and higher over the past, you know, 30 years, it seems like a well-intentioned attempt to reduce wealth inequality helped create more. How can we respond to those sorts of things when it seems the private sector is clever enough to kind of figure its way around whatever legislative challenges are put in their way?

49:13Always vigilant, right? Right. I mean, I think that it starts by – I mean, it starts with taxation, right? So what we have done over decades is lower tax rates at the top. We've made it – For corporations or for individuals? Both. Because corporations as a percentage of total tax paid and the actual corporate tax rate, they both seem to have drifted down over the past few decades. All of the above. And we've done that while not doing the things that we need to do to fix the transfer of wealth across generations. So we haven't imposed the kinds of inheritance taxes that I think would be really important to make sure that that wealth isn't calcified over time in families.

50:00And that has really made it so much easier for those who worked really hard, did good, not having to give back through not having to pay those taxes on their highest income. But it also has allowed wealth to calcify. You know, there's this really important book that came out a number of years ago that I feel like we don't talk about anymore by Thomas Piketty called Capital in the 21st Century. Huge. That book was headlines for weeks. It was for weeks, for weeks. And one of the things that really was so important about that book was the way that he showed through all of this data, the way that income, high income inequality, calcifies into high wealth inequality.

50:45And that once wealth becomes congealed, right, once a smaller and smaller number of people have access to that, it becomes very difficult to unpack that, to share that, and for society as a whole to benefit from it. So let me push back a little bit and say, hey, we have 50 % estate tax. And the way you could get around that is by donating it to a philanthropy, a foundation, what have you. Yeah, there are various trusts and things you can set up to avoid paying some of the taxes. But the taxman gets his due eventually. We're not like the UK that has this esconced, gentrified nobility. Still, the upper class there is just generations of landowners.

51:34Isn't the United States different from other countries or do we have landed gentry here the way the UK does? I would – I mean, so first off on the data, we have so much higher economic inequality than our European – other European countries. And we don't see the kind of movement across income groups that – We used to. We used to have pretty good post-World War II economic mobility. It was pretty high in the United States. Right. So if you were born in the 1940s, your chance about earning your parents was about 90 percent. Right. But if you were born in the 1980s, yeah, only one in two of us has grown up to out-earn their parents.

52:18So that is a remarkable shift, a remarkable constraint on upward mobility over time. And it is because you've seen these high incomes calcify into wealth inequality that's sticky. We talked earlier about people moving into wealthier enclaves with better schools. Well, that is a way of – it's one way that it works its way through society that those kids will have more opportunities. You are able to keep that wealth in that family. And then you don't see those economic benefits kind of flowing throughout your society and you don't see that economic opportunity flowing through. So we talked a little bit about what the pandemic revealed with fragile supply chains and how many crucial things like just the masks and gowns and gloves that aren't made in the United States.

53:15What's the genesis of this? How much of this can we blame on Walmart and how much of this can we blame on just, hey, technology and transportation allowed manufacturing to go to the lowest cost provider? That's a big question with a lot of answers, but I think there's a few really important points there, right? So once you had the capacity for an idea to happen in one place, the innovation, the engineers, the plans happen in one place, and the production of something to happen someplace else because you could send those plans via the internet or to a different place, it made it possible for us, for companies all across the United States around the world to outsource that production.

54:04And we did that at a time when we were making those rules easier, right? We had decades of trade agreements that made it easier for firms to have overseas production, to become multinational companies. We wanted to trade. We wanted to have more trade. We believed that would make it safer. It would, you know, you're not going to go to war with somebody if you're trading with them, right? You're going to create these positive benefits for our geopolitics. And yet what we've seen is that what that's done is it's really stripped production from the ideas and the innovation. And so I've left the United States with kind of assuming that we could be the ideas people, but that the production of things could happen in places where wages were lower and where we didn't have to worry about messy things like the environmental consequences.

54:56So you took the hard stuff out of all the things that we make and use, and yet you outsource that. And that's left our economy very fragile because, as it turns out, when things get rough, when there's a pandemic, and I'm spending a lot of time these days thinking about, well, one of the crises coming down the pipeline at us is climate change and the energy transition that that will require. That's going to create these ongoing challenges for our economies and our societies. If you have this global production, where's the resiliency? What is that going to do? Are we literally going to be safe as a nation, let alone the economic consequences that we've seen for decades, that that kind of global production system has hollowed out American communities?

55:43And I'm not saying that it was caused by policy, but it was facilitated. There was this very important role for technology, but we didn't step in and sort of say, not enough policymakers stepped in and said, hey, this might not be good for us. We may want to make sure that we have the capacity to make the most important things, because if you can't make them, then you're going to be vulnerable in a geopolitical sense. And now we're kind of, quite frankly, stuck behind the eight ball a little bit, where some of the most important things we don't have the capacity to make. And again, we saw that in the pandemic with the simple things with the mask.

56:17We also saw that with the ventilators. We couldn't get enough of those. And we saw that. Another example that I've thought a lot about recently, I talked to a lot of people when I was in Cambridge this year, drones, which virtually all of those are made in China. So when China started partnering with Russia, that made it hard for the Ukrainians to get the drone parts and to get the drones they need to fight their war. That was a technology problem that very quickly became a very important national security issue. And are we getting ahead of those kinds of questions? So Nassim Taleb wrote a book called Anti-Fragile, all about resiliency and how to make sure that you're not merely relying on just one element, that you're diversified and broadly exposed.

57:10How can government policy drive that? If it's in the shareholders' interest to reduce costs, a maximum amount, increase profits, maximum amount, who's responsible for creating this anti-fragility? How does government build resilience into the economy? Well, it's a tough question, but there are some tools. I mean, so first off, you have to define it. And what do you mean by resiliency is that you want to have domestic production, production with, you know, during the Biden years, we called it friend shoring or, you know, production within allies that you feel really comfortable with. But fundamentally, it comes down to do you have various options?

57:57If something happens with this part of your supply chain, are there other ways that you can get what you need? We live in a continent-spanning economy. And with 330, 340 million people, there is a lot of opportunity to create resiliency domestically. But also there's a lot of benefits to global trade. So how do we think about making rules that encourage that? And the thing and the nut of this is that that's going to be a little bit costlier in the short term. But what are the costs over the long term? What are the costs during a crisis? How much money did the federal government had to spend during the pandemic to help companies get over their supply chain challenges?

58:37How much extra money did Americans pay because firms were able to charge higher prices than even perhaps they needed to because of the crisis? So there are – and we know that there will be future crises coming. So it's government's job to make sure that we're protecting the welfare of the nation. This certainly needs to be a part of the question. So what are all the tools in our toolbox? So maybe some of those tools are about how we think about our trade policy, how we think about our antitrust policy. Maybe we're using procurement policy. But there's a wider range of tools that government should be using.

59:12So I wouldn't get too wrapped up in the one solution, but that this is the question that we need to be asking ourselves. So I was fascinated by some research you did. At the time, there was this concept that highly educated women were dropping out of labor force because of the motherhood movement. I think the news media picked that up and ran with it. Turns out the data really didn't support it. Tell us about your research into what was going on with the she session that people had been talking about. Well, this comes up time and again where you see and it's happening now, actually, and it happened in the early 2000s.

59:56You'll see these moments where women, their labor supply goes down or they don't recover from a recession. And people start saying, oh, well, it's definitely because women don't want to be in the labor market. They'd prefer to not be working, and so this is good or this is women's preferences. And then when you start scratching the surface and you look at the data, you see that actually it tends to be more about demand-side issues, that those jobs weren't available or they weren't providing the supports that families need to deal with care issues. So that was the research that I did on opting out in the early 2000s.

1:00:34And I've been hearing a lot about this more recently with what's happened post-pandemic and as a lot of businesses are demanding return to office, but with the paring back of the American Rescue Plan and the inability of the Biden administration to get all of the care pieces of our agenda across the finish line. Senator Manchin stopped the investments in home health care for the aged. He stopped those investments that we wanted to do for child care. So a lot of those businesses have really struggled in the past couple of years. You're now seeing that have an effect on women's labor force participation.

1:01:12And people are, again, talking about this as voluntary when I think we need to really be looking what kinds of supports are we making sure that families can address their care issues and still participate in the labor market. Thank you, Heather, for being so generous with your time. We have been speaking with Heather Boucher, Senior Research Fellow at the Harvard Kennedy School and her most recent book, Unbound, How Economic Inequality Constricts Our Economy and What We Can Do About That. If you enjoy this conversation, well, be sure and check out any of the previous 550 we've done over the past 11 years.

1:01:48You can find those at iTunes, Spotify, Bloomberg, YouTube, or wherever you find your favorite podcast. Check out my new book, How Not to Invest. The ideas, numbers, and behavior that destroy wealth and how to avoid them. How Not to Invest at your favorite bookstore. I would be remiss if I did not thank our crack team that helps put these conversations together each week. Alexis Noriega and Anna Luke are my producers. Sean Russo is my researcher. Justin Milner is my audio engineer. Sage Bauman is the head of podcasts at Bloomberg. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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