Episode 38: Will US investment in human infrastructure drive economic growth?
28 Sep 2021
The US Congress is entertaining another major spending bill, this time aiming to tackle climate and social policy challenges that comprise the second major component of President Joe Biden’s domestic agenda.
While the bill is evolving in real time, a large part of it is centered on investment in human infrastructure: a major expansion of the social safety net, including increased subsidies for child, health and elder care, as well as expanded access to early childhood and post-secondary education, among others. While conventional wisdom holds that investment in physical infrastructure raises capital stock, there is debate about whether similar investment in human capital yields economic returns.
In episode 38 of The Flip Side, Global Head of Research Jeff Meli and Chief US Economist Michael Gapen debate the potential economic effects of investment in human infrastructure, including whether the proposed programmes are addressing real or overstated problems, the potential effects on labour force participation rates, and possible short- and longer-term economic upsides and downsides.
Jeff Meli: Welcome to the Flip Side. My name is Jeff Meli. I'm the Global Head of Research at Barclays. I'm joined today by Michael Gapen, our Chief US economist. Thanks for joining me, Mike.
Michael Gapen: Thanks for having me on Jeff.
Jeff Meli: Alright, today we're going to discuss a concept that has been called human infrastructure, where government investments and social programmes are meant to improve the capacity of the economy.
It's a companion to hard infrastructure, which I debated with our colleague, Jonathan Millar in Episode 34. Now, early versions of the original US infrastructure bill included some of the provisions we'll talk about today that are meant more for human infrastructure.
But they were dropped in the compromise bill that passed the Senate, and is now sitting with the House. These provisions have been moved into the $3.5 trillion reconciliation bill that's currently being debated in Congress.
Michael Gapen: Right. And there's general agreement that spending on hard infrastructure can lead to positive supply effects through boosting the stock of physical capital in the economy. The conventional wisdom around social or human capital is more mixed.
I think many think that government assistance programmes create disincentives to work, not necessarily incentives to work. In my opinion, though, I think the programmes that are being considered do address real underlying issues like access to child care, elder care, early education, as well as college access.
All of these, in my opinion, are constraining the productive capacity of the US economy. So just as spending on hard infrastructure increases the physical capital stock, I think spending on human infrastructure can increase both labour supply and human capital. Some of these benefits, I think, can be immediate, and I think others may only emerge over time.
But in my view, I think this is spending that can be good for the economy and is good investment.
Jeff Meli: Well, Mike, I disagree, I think the programmes will increase the prices of the services that they're meant to make more affordable, and I think will likely reduce the labour supply in the US economy. Not what we'd expect from something we call an investment.
But before we start, I think we should be clear that we're focused on the economic returns of these programmes, not the human returns. So some of these proposals would clearly benefit the recipients. And those benefits may very well be worth the money spent. But we're asking a different question here, which is whether this spending will generate an economic return.
Michael Gapen: That’s right. That's right. And it's good that we note that and I think I see two main ways that these investments, if I can call them that, drive economic returns. So first, many of these programmes will reduce constraints on prospective employees that keep them from working effectively.
I think these programmes will increase labour supply, which will then of course, have obvious economic benefits. So we can unlock human capital that might otherwise be sidelined, such as a skilled stay-at-home parent.
Looking back at the Affordable Care Act, we found that this is indeed true, or I should say, can be true under well-designed programmes. The second category, is programmes that will better equip our labour force to compete in the modern economy, which also has potential economic benefits, but one that ultimately, may take longer to come to fruition.
Jeff Meli: And in order for these to be considered investments, they really do need to improve the productive capacity of the economy.
Michael Gapen: Yes, that's right. And I'll start with the part of the bill that I think we have the most experience with, the knowledge about, and that's extending coverage under the Affordable Care Act. So if we look back in time, the uninsured rate fell by about eight percentage points in the US from 18 percent to 10 percent, when the Affordable Care Act was passed, that's great.
But it still leaves about 30 million Americans without health care coverage, extending the subsidies that we put in during the pandemic. Altering eligibility requirements could mean several million more Americans have health care coverage, according to studies done by the Kaiser Family Foundation. I think this can support participation in the workforce.
It's exactly what we found in our analysis. When we looked at states that fully adopted the ACA, versus the states that didn’t, the states that adopted the ACA saw higher rates of insurance coverage, as well as higher rates of labour force participation.
It also made participation more cyclical, meaning recoveries might bring you more employment, and perhaps that happens because it weakens the link between employment status and insurance coverage. So I would expect some of the same benefits from extending the ACA to increase rates of health care coverage.
Jeff Meli: Now, Mike, I certainly agree that finding a way to get more people health insurance is a worthwhile goal. But while the analysis that you're referencing of the original ACA is compelling, I'd argue we've already captured the low hanging fruit in terms of the effect on labour supply. So the ACA dramatically improved the affordability of health care.
At this point, at least some of the uninsured are choosing not to buy insurance. And in fact, uninsured tend to be younger, on average, where the cost benefit trade off may make less sense for them. Undocumented immigrants are another big category of the uninsured.
They're not even included in these subsidies probably for some combination of political and logistical reasons. So I think we can temper our expectations for how much ever-larger subsidies will accomplish. Both in terms of more coverage, but certainly in terms of the effect on labour supply.
Michael Gapen: Another program that can have immediate benefits, however, I think, is subsidised childcare. I think we all know that quality childcare is expensive, and helping lower income households with quality childcare could mean fewer days of lost productivity from parents missing work, and greater workforce attachment over time by parents.
Participation, I think we need to remind ourselves, participation adds up over a lifetime. Earnings and career advancement are negatively affected by gaps in employment.
Jeff Meli: Yes, Mike, I think this issue is overstated. So for example, that early evidence suggests that mothers with young children returned to the workforce relatively quickly after the initial COVID disruptions. And that at this point, that's relatively low on the list of constraints that are keeping labour force participation low.
Michael Gapen: So I think that's true, I would agree with you on that point. But I think the COVID experience is a bit misleading, or is not what we should be looking at. I think you’re, in this case, you would be necessarily talking only about women who were already in the workforce before COVID. So they were paid sufficiently to make that choice.
And they were already attached to the workforce prior to the pandemic. I'm arguing here a different point that subsidising childcare could expand the workforce by opening doors to those who were not participating prior to the pandemic. So I think the pandemic experience is a bit misleading. And I think we need to cast our net a little wider.
Jeff Meli: You know, I also point out that only about 10 percent of US households actually have children under the age of five. So we're starting with a relatively small part of the workforce, then a bunch of those folks already have it figured out and have managed somehow to balance work and childcare.
So we're proposing a big widespread programme, it would apply to lots of people where in the best case, it only brings a small number of new workers into the economy.
Michael Gapen: But that’s, I think, that's only one part of the bill and why multiple elements are being proposed. Eldercare is another important component of this bill of this package, the potential benefits of helping families care for older family members or relatives mirror those of helping with childcare.
So that the Pew Research Center, for example, estimates that up to 40 million Americans spend some time providing unpaid care to another adult, and that those people spend less time on average working. And now with an aging population, I think this issue is only going to become more important in the future.
Jeff Meli: Yes, I go back to my earlier comment, which is, the issue is that these proposals are intended to address our challenges for our society. I mean, certainly eldercare is something we will need to confront, given our demographics. But once you move away from health care, I think the connections to labour supply become more tenuous.
Now the way our health insurance system is set up in the US, it's naturally linked to employment. And so there's this there's this natural give and take with working and healthcare that I don't think exists in both of these other areas.
These proposals apply very broadly. But the potential improvements to the labour supply, I think are only at the margins, which is why considering them to be an investment to me, is a bit of a leap.
Michael Gapen: I’m going to shift gears to education, which is an area where I think benefits to the economy are likely to be more obvious. The current version of the bill includes proposals to include both early child education, namely universal pre-K, and more affordable access to college through a programme that would provide free community college, as well as expanding the Pell Grant Award.
Now, the early education programmes really played two roles. One is more of the child care story, and the other is about better equipping kids for later educational successes. I think both of these could have benefits. Although I would argue I think we will only see those benefits over an extended period of time.
Jeff Meli: Now, I think education has a lot more potential as an investment in our human capital. So I think you are starting on much stronger footing with a set of programmes. Now that said, there's a lot of research that suggests the gains on the early education programmes are very speculative.
Michael Gapen: So maybe, but I think childcare is an ongoing need. It's structural, it doesn't go away. I think universal pre-K could provide workers with greater confidence that they can manage working while parenting.
So I'm focused here more on what I think universal pre-K could mean for labour supply of the parent, and less so about trying to estimate returns to early education, which might be difficult to pin down. Turning to education at the higher level, I think the gains from free community college and a more generous Pell Grant are probably more complete, and concrete.
The outcome to the student is more tangible: there's a degree, there's knowledge that they otherwise would not have had, and increasingly the basic skills from a high school education are not enough to succeed.
But it's the high cost of college that is likely keeping too many people away. We have record numbers of job openings in the US at the moment, about 11 million according to the recent data. And at least some of that is likely due to a skills gap.
Employers simply can't find workers with the right skills and training. So I think the economy will benefit from closing that skills gap and better equipping American workers to compete.
Jeff Meli: Again, I'd say we're zeroing in on a real and important constraint on the US economy. And certainly, I'm all for finding programmes to help close the skills gap. And that job openings statistic is really a shocking one, considering that we still haven't recovered from the unemployment shocks.
There's plenty of unemployed workers, but yet, they don't seem to be a great match to the open jobs. The question I have is whether this is the right programme to close it. So let's think about what happens when you subsidise college. Subsidise college tuition, guess what happens, the price of college goes up. As it is, the cost of college has been rising too fast. On average, college tuition costs are rising 8 percent a year over the past several decades.
That's way above the rate of inflation. I suspect that further subsidies just add fuel to the fire and we'll see college costs continue to rise.
Michael Gapen: Look, I think that's exactly the issue we need we need to solve Community college I think is a good place to start. Costs at the community college level are rising more slowly than your average private 4-year institution.
And the percentage of first generation college students is relatively high at the community college level. And some have argued that this type of programme, free community college should also be paired with caps on the rate of increase in community college tuition.
Jeff Meli: Right, so now we're talking about implementing both subsidies and price controls! It’s getting to be very heavily managed. I think that regardless of the sort of pricing issue, I think that we have public primary and secondary education for very specific reasons. It's because, left to themselves, people under invest in their own education.
There are societal benefits from having an educated population that don't accrue to the individual. Those include things like less crime, higher taxes, or more commitment to children's education. But the primary benefits of college really go to the individual in the form of higher wages. That means that we really shouldn't need to subsidise demand.
Michael Gapen: Yes, but I don't think we can seriously argue that in 2021, the externalities from education stop at the high school level and that there aren't externalities at the college or the higher education level.
I think maybe that yes, that's probably true 50-100 years ago, but the world has advanced quite a bit from that point, and I still think there's value to these types of these programmes.
Jeff Meli: Well, it's a fair point that the world has moved on from when we first set up public secondary schools. I still believe that the costs of college reflect already an excess of demand over supply. And so subsidising demand is really a fool's errand. I think we'd be better off increasing the supply of higher education.
So we learned a lot through the pandemic, maybe there's ways to improve access through the use of more online learning, for example. Plus, if you look at the demographics, they suggest that the college age population is actually going to shrink over the next couple of decades, which will already naturally reduce the tensions here that we're talking about.
But actually want to turn to some bigger picture objections to the notion that these sorts of proposals are a form of investment in the economy. So first, I think the issue that I raised around prices going up for college tuition actually applies more broadly.
And these are what we call general equilibrium effects. So the prices of these goods react to the subsidies as to the prices of other goods more generally. So if you give families more money, for example, for childcare, then price of childcare goes up.
Michael Gapen: So that can be true. And there is evidence to support that. I just say that there are constraints built into the programme: the proposals cap the amount of spending per family, so it's likely going to limit the overall price effect on the cost of childcare.
I'd argue in some cases, really, there are measures to increase supply, which could be beneficial, like raising the minimum wage for childcare providers could induce more workers to move into that sector and increase the amount of childcare offered.
Jeff Meli: Well, the cap that you're referencing, definitely would help families that qualify for the programme. And so who's spending would be capped? But that means in my mind that the price increases just affect all the other families, and in particular, the families who are just over the hurdle, would feel that the most.
Also, in terms of the supply, where are these extra workers going to come from? We have a massive labour shortage right now. Restaurants can't find workers, schools can't find bus drivers, we have a shortage of construction workers. All that is built into those JOLTS numbers that you mentioned.
Michael Gapen: Right. But again, I think that's likely an artifact of COVID. And it's likely to be temporary, it may take a few years to work out. But from the long term perspective, the economy and addressing say structural shortcomings in the labour force and participation in the supply side of the economy, I think we can again cast our net a bit wider.
We still have – even considering the pandemic – we still have a large number of people who have yet to return to the workforce. And the Delta variant has probably slowed our progress on that front. I think over time, they will return and these labour shortages are going to ease.
Jeff Meli: Alright, now let's think about the other general equilibrium effects that can absorb the value of this benefit. So if we subsidise childcare, then all of a sudden you have more disposable income, so your landlord can raise your rent. So the other prices of goods that you're purchasing can rise in response to this.
Michael Gapen: So Jeff, I think you're getting at what I call a design point there. The legislation, of course, has to be well-designed and well-targeted. But sometimes maybe it's better to do it in a more general sense.
So rather than provide a tax credit for childcare, maybe what we should do is just provide a childcare credit in and of itself, and the household can decide how to use those funds as they see fit. This is what was included in the most recent COVID relief bill.
So maybe designing, designing it in a more general way is better. Families can spend it where they have the most need. If it is childcare, then that would reduce that important constraint for them. And maybe by spreading it out, it doesn't lead to a targeted price increase.
But like I said, no bill is perfect. This could be adjusted over time, a little less worried about the details of this right now.
Jeff Meli: My second issue is that I think you kind of cherry picked some specific proposals in a really large bill that has a lot of different proposals built into it. And you cherry pick the ones that you think will benefit labour supply, largely because they're similar to the ACA, where you've done a lot of analysis on how that mechanism worked.
I could pick other proposals that I think have the opposite effect. So I'll give you one example. The drafts being discussed now contain a provision guaranteeing workers 12 weeks of paid family leave every year. 12 weeks. That's a quarter of the year.
Michael Gapen: Yes, OK, but I think we need to be careful. Normally, these types of benefits – paid family leave – get phased in over many years, so it wouldn't be an immediate change. They're also intended to be used in only certain circumstance. The answer is it's not three months of paid vacation every year.
And the intent of this is really to help workers manage important life events, while avoiding financial hardships, and having to choose whether or not to work. So I think reducing uncertainty from big life events could keep workforce attachment elevated.
Jeff Meli: Look, some versions of this bill actually have quite expansive sets of circumstances under which you would qualify for this benefit. You were making a good point that the details are still not finalised. And the final bill could be a bit more limited. But let's just, let's think even a limited uptake of this would mean that the total amount of labour lost through people taking paid family leave, would swamp all of these gains on the margin from the programmes that you were talking about.
In fact, I would actually argue that a programme like paid family leave is actually specifically designed to reduce our productive capacity. It's actually about creating a more humane version of capitalism, where it's less necessarily to be working and producing all of the time.
And at the expense of all of the other issues that are coming up in your life. Now, again, this may be a great idea. It may be a more humane version of capitalism. But that's very different from saying that it's good for the economy.
I feel like there's a trade off here that's represented in a bill like this, which is that we're explicitly taking some of our money and spending it on these sorts of benefits, rather than suggesting that these benefits will somehow generate a return in the form of more activity.
Michael Gapen: Yes, I disagree. And I think this is this is obviously a point that we have disagreement on. I think paid leave is critical for parents and I also think paid medical leave will allow employees to attack healthcare problems earlier and improve health outcomes.
I actually see it as a compliment to expanding health care coverage and the efforts that have been made under the Affordable Care Act.
Jeff Meli: Well, I guess we'll see how this bill works its way through Congress and, and I suspect it will provide plenty of opportunity for further discussion.
Thanks for joining this episode of the Flip Side. Clients can read our analysis of the Affordable Care Act and labour force participation in “Reinvigorating US labour force participation” from our 2020 Equity Gilt Study, and our latest forecast for the US economy in our Q4 Global Outlook entitled, “Looking Past the V.”
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This podcast series features lively debates between Barclays’ Research analysts on important topics facing economies and businesses around the globe.
About the analysts
Jeff Meli is Global Head of Research at Barclays, based in New York. Jeff joined Barclays in 2005 as the Head of US Structured Credit Strategy and has held a number of other senior positions in the research department, including Head of Credit Research and co-Head of FICC Research. Jeff spearheaded the firm’s response to regulatory changes in Research, including MiFID II, and has revamped the department’s approach to content monetisation. Jeff leads the development of the Research Data Science Platform, tasked with integrating new data sets and modern data techniques into investment research. He writes regularly about special topics in credit markets, liquidity, and financial market regulation, and hosts The Flip Side, a podcast covering current events in finance and macroeconomics. Previously, he worked at Deutsche Bank and J.P. Morgan, with a focus on structured credit. Jeff has a PhD in Finance from the University of Chicago and an AB in Mathematics from Princeton.
Michael Gapen is Head of US Economics Research at Barclays. Based in New York, he is responsible for the firm's outlook for the US economy, in particular, US monetary policy and the effect of financial markets on the economy. Prior to taking on this role, Michael was a Senior US Economist and, following his appointment as Asset Allocation Strategist in January 2012, he took on additional responsibility for forming the firm's asset allocation views. Michael holds a PhD in Economics from Indiana University.