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Karen Dynan on Key Economic Challenges Facing U.S. Policymakers

November 10, 2016

On Thursday, November 10th, Penn Wharton PPI hosted a lecture by Karen Dynan, PhD, Assistant Secretary for Economic Policy and Chief Economist at the U.S. Treasury.

She began her talk by remarking on the role of the economist in “aiding the administration to evaluate, refine, and define economic policy, serving as a bridge to the academic world, and providing the data, summaries of research, and new analysis to build on already existing research.” Dynan framed her lecture around four main economic challenges facing U.S. policymakers that economists are trying to address: boosting labor productivity, combating rising income inequality, addressing falling prime age labor force participation, and bolstering household economic security.

Boosting Labor Productivity

Labor productivity is defined as the output produced during an hour of work and is considered a key driver of the standard of living. Since 2004, productivity, and thus the standard of living, has been growing relatively slowly. Factors related to the low rate of productivity growth include a low level of business investment in equipment, software, and structures; a slower pace of technological advance; and a decades-long downtrend in the dynamism of the economy. To combat these issues, Dynan discussed ways that policy can be deployed to boost productivity growth. For instance, because productivity is a function of capital, technology, and skills, it is important to invest in infrastructure, support research and development, as well as promote access to education and worker training initiatives.

Combating Rising Inequality

The second challenge of combating rising income inequality is critical, since productivity gains must be shared across the income distribution. Market income inequality has been on the rise since the 1970s, with middle class incomes showing far less growth than the economy as a whole. “A rise in income inequality is not just a story about the bottom of the distribution,” Dynan emphasized. “The fact that productivity gains are only being captured by the top has hurt the bottom 80 or 90 percent of the income distribution.” This phenomenon is driven by the evolution of production technology, which has changed in ways that favor education and skill, (i.e., skill-biased technical change), while globalization has increased competition from low wage markets and shifted manufacturing jobs overseas. To combat income inequality and wage stagnation, Dynan notes that policymakers need to invest in worker skills, especially in the lower part of the income distribution, as well as reduce barriers to labor force entry. Investments in Pre-K education particularly improve educational outcomes, but investments in K-12 and community college are necessary to reduce the skills gap across incomes. Additionally, barriers to participation in labor markets – such as occupational licensing requirements – can be reduced.

Prime-age Labor Force Participation

Falling prime-age (individuals between the ages 25-54) labor force participation among both men and women is also a major cause of income inequality. Dynan went on to point out ways policy can address this decline. For example, an expanded earned income tax credit, a subsidy for lower wage workers, could provide a greater incentive to join the work force and target one of the groups that Treasury most worries about: low skilled young men. Decreasing the cost of childcare and providing more paid leave policies could also reduce major deterrents for many parents to work.  Additionally, reforms to the criminal justice system could enable more young, low skilled workers to participate in the labor force.

Bolstering Household Economic Security

Finally, Dynan expanded on the challenge of bolstering household economic security. Income volatility is rising, compounded by a lack of on-the-job training and the weakening of traditional firm-employee relationships. The rise of the gig economy has added new opportunities, but also raises questions about the difficulty of gaining access to traditional employment, and with it, access to worker benefits. Keeping expanded healthcare subsidies of the Affordable Care Act is critical, said Dynan, as is providing insurance for laid-off workers.

She concluded the discussion by emphasizing the importance of having young, innovative minds working in government, to address the important economic problems facing individuals and families, and encouraged the audience to consider spending time in public service.

About the Speaker:

Dr. Karen Dynan serves as the U.S. Department of the Treasury’s Assistant Secretary for Economic Policy and Chief Economist.  Dr. Dynan leads the Office of Economic Policy, which is responsible for analyzing and reporting on current and prospective economic developments and helping develop policies to address economic challenges.

Dr. Dynan came to Treasury from the Brookings Institution, where she was vice president and co-director of the Economic Studies program. Prior to joining Brookings, she served on the staff of the Federal Reserve Board for 17 years. While at the Fed, she played a leadership role in a number of areas, including macroeconomic forecasting, tracking household finances, and the Fed’s response to the financial crisis. She has also served as a senior economist at the White House Council of Economic Advisers and as a visiting assistant professor at Johns Hopkins University in 1998.

Dr. Dynan is an expert on macroeconomic policy and household financial issues who has published widely in leading economics journals.  She received her Ph.D. in economics from Harvard University and her A.B. from Brown University.

PENN WHARTON PPI
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