How has COVID-19 affected our economy and what policies will foster a recovery for all Americans? And what are the potential implications of this new research on real estate investing? Dr. Raj Chetty, William A. Ackman Professor of Economics and Director of Opportunity Insights at Harvard University, joined a discussion with PGIM Real Estate to share his unique insights into the barriers that prevent lower-income families' upward mobility and how investment and policy choices could lead to greater prosperity and economic mobility.
Setting the stage from a historical perspective
Dr. Chetty and his Opportunity Insights team at Harvard University have a deep history identifying barriers to economic opportunity and developing solutions to address these barriers. Their research has focused on the “American Dream” – the aspiration that all children have a chance at economic success, no matter their background – and the recent decline in children’s chances of earning more than their parents. 90% of children born in 1940 grew up to earn more than their parents while, today, only half of all children earn more than their parents did.
Using anonymous data to follow 20 million Americans from childhood into their mid-30s, Dr. Chetty’s work demonstrates that the zip code has a profound effect on life outcomes and the ability to move up the economic ladder. Growing up in a higher mobility area has a causal relationship on children’s outcomes in adulthood, so much so that each year a child stays in a high poverty, low mobility neighborhood decreases outcomes such as lifespan and income. The research further connects certain place-based characteristics, such as school quality, civic engagement and racial segregation, to mobility, giving us evidence that addressing these issues can help improve mobility in low-income places. The optimism of Opportunity Insights’ work is that the question is not whether we can have higher levels of mobility, but rather how we can replicate high rates of mobility that exist in some communities for all communities.
What impact has the COVID-19 pandemic had on economic disparities?
Through their real-time tracking of the economic impacts of COVID-19 on people, businesses, and communities across the U.S., Dr. Chetty and his team are connecting the dots between what’s been happening for the past few decades with uneven, and eroding, access to opportunity and how the COVID-19 pandemic is playing out. Spending has plunged on average since the first shutdowns began in mid-March, but the impacts and recovery have not been like most prior recessions.
They have found that for high-income households, the recession ended over the summer. Their employment levels and incomes are already back to pre-pandemic levels. Middle-income households have not fared as well but have clawed back some of their losses. Lower-income households, by contrast, have barely benefitted at all from this recovery, and—of most concern—there is little reason to think that they will for at least the near future.
What’s driving this inequitable recovery?
According to Dr. Chetty’s research, in this recession, high-income households have reduced spending on services like dining out, neighborhood grocers, hair salons and traveling less, if at all. This is not because they are worried about their finances, but because they fear the disease itself and are staying home. They generally have the means to keep spending on these services, but not the will to do so which is devastating small businesses, particularly retail businesses in high affluent areas that rely on the patronage of those living and working in the area.
On average, these small businesses have lost about half of their revenue. Many people who work at those businesses are from lower income households so they are out of jobs, many of which may not come back due to changes in consumer behavior as more people shift to online shopping and delivery services.
Meanwhile, small businesses in less affluent areas are doing better, says Dr. Chetty. Not well necessarily, but better. Economic activity is higher in these areas because, while the people who live in them are financially stretched because many of them are out of work, they still need to spend on essential items like food.
A notable difference in this recession from all those that came before is the composition of spending. Typically, spending on services like haircuts and restaurants holds up well, even during a downturn as steep as the global financial crisis, and the cutbacks are usually on purchases of durable goods like cars and electronics. This time the opposite is true. Because of the health concern and loss of confidence by high income earners, spending on retail services has barely recovered from the depths of the shutdowns last Spring. Meanwhile, purchases of durable goods have already risen above pre-pandemic levels. Much of that is due to a substitution by high-income households who, instead of frequenting restaurants, are getting multiple deliveries each day, typically from large corporations like Amazon and Walmart or traveling by car rather than plane.
What impact has government stimulus had on the economy recovery?
Dr. Chetty’s research shows unequivocally that targeted aid is far more effective than broad-based programs. The Paycheck Protection Program, which injected a lot of money into the economy this past summer, was less effective at its primary goal of preventing job losses. In most cases, the businesses that took the forgivable loans were not going to lay their workers off regardless. Dr. Chetty also believes that sending checks to all Americans is not the most effective approach, since people that need the checks, in most cases, need more than what the government is providing. And those who don’t need the checks are not likely to spend them.
How can we, in the real estate industry, facilitate greater economic opportunity and mobility in the communities we invest in?
Despite the inequities that have come further to light in the wake of the pandemic and resulting recession, Dr. Chetty remains optimistic about our ability to create positive change by leveraging the research and new evidence that’s become available from Opportunity Insights and other organizations.
Dr. Chetty emphasized the critical role of “place” in addressing inequality and decreased economic mobility, including investments in affordable housing in higher mobility neighborhoods and other community investments into low- and moderate-income neighborhoods. Such investments decrease areas of concentrated poverty, thereby allowing for greater access to opportunity for low-income families over the long term. These investments can help to facilitate the creation of new “high-mobility” neighborhoods, which are characterized by lower poverty rates, greater social capital, better quality schools, and more stable family structures.
This research and evidence aligns with the goal of real estate impact investing platforms which seek to make investments in affordable housing that increase access to opportunity for low income people and investments in mixed-income communities that decrease concentrated poverty. But more broadly, real estate investors can and should incorporate principles like providing access to affordable housing in high mobility places, and improving low-opportunity neighborhoods, into their investment platforms. Dr. Chetty’s research and data can help us make better investment decisions by being more granular from a research perspective—looking not only at the market or submarket level, but much more closely evaluating the needs of neighborhoods where we build and acquire properties Just as ESG is being integrated into real estate investing, considering how to further incorporate improvement in economic mobility into real estate investments could help improve value and NOI over time. The idea is that if we can increase prosperity and mobility for people at all income levels, our real estate will also have better financial stability and performance.