Hoover Institution (Stanford, CA) — To chart a path forward for the US economy as it contends with long-standing challenges such as the federal debt and emerging ones such as the rise of AI, the Hoover Prosperity Program gathered leading economists and other scholars from a wide range of disciplines for a one-day solutions-oriented conference.
Hoover Institution director Condoleezza Rice welcomed attendees on January 21, 2025, by pointing out that not only does the US economy face headwinds, its governing institutions that have underpinned the nation’s prosperity are confronted by unique and specific threats as well.
“This project, the Hoover Prosperity Program, turns the lens on how we think about challenges facing the US economy,” she said. “It is important because it confirms something about our history, that our nation’s founders had deep insights about the sources of prosperity, not just their outcomes.”
Hoover Prosperity Program director Stephen Haber said Americans want the economy to keep growing but don’t agree on what that may involve.
“There’s broad agreement that Americans want a future characterized by prosperity and human dignity, but there is not broad agreement about the policies, institutions, and laws that will get us there,” he said.
Is Inequality Growing in America?
To discuss inequality in America, Emmanuel Saez, director of the Stone Center on Wealth and Income Inequality at the University of California–Berkeley, joined Bruce Meyer, professor at the Harris School of Public Policy at the University of Chicago, alongside Senior Fellow Ross Levine, Hoover Prosperity Program contributor.
While Saez focused on rising inequality, Meyer demonstrated that existing data doesn’t tell the whole story and clouds the fact that poorer Americans have seen their living standards rise dramatically in recent decades.
Saez said that statistically, income and wealth inequality is rising in America. Since 1980, he explained, the share of pretax income going to the top 1 percent of earners has doubled from 10 percent then to 20 percent today. Meanwhile, income growth for the bottom 50 percent of earners has fallen below the average rate of growth for the economy as a whole in recent years.
“It’s hard for the economy to grow if the lowest 50 percent struggle to grow their pretax income,” Saez said.
Meyer pointed out that existing measures of income in the US often fail to take into account the value of various social programs, ranging from unemployment insurance to the Supplemental Nutrition Assistance Program (SNAP) or housing transfers.
In one study, he noted, Meyer and coauthors found that between 1995 and 2016, poverty among single-parent households fell by 62 percent in the United States but only by 45 percent if you excluded social programs and other credits made available to working-class families, showing the value of these programs in alleviating poverty.
Compounding this, average living standards measured in terms of average home size, transportation access, and connectivity via phone, television, and internet have all increased in recent decades.
Meyer said any discussion of inequality in America needs to include an accurate measurement of how folks are doing in the bottom part of the income distribution.
“The focus on inequality is divisive and tears down a system that works pretty well,” Meyer said.
Is US Fiscal Policy Sustainable?
In this panel, Hoover fellows Valerie Ramey, Daniel P. Kessler, Kevin Warsh, and Ross Levine, joined by Hanno Lustig, economist at the Stanford Graduate School of Business, all agreed that the course of US fiscal policy is unsustainable.
Even if one assumes the 2017 Tax Cuts and Jobs Act will expire, raising personal and corporate income tax rates to pre-2017 levels, Ramey said that America’s debt-to-GDP ratio would hit 166 percent of GDP by 2050, up from 98 percent of GDP today, if nothing else changes. It’s a projection supported by the nonpartisan Congressional Budget Office.
To get this ratio moving in a downward path, the US government has four options, panelists said.
It can grow its way out of it, but achieving fiscal balance would require annual productivity growth that is five times higher than the average of recent history, something even the promise of generative AI is not likely to deliver.
It can raise revenue, but taxes are already quite high when viewed as a combined rate in many of the most productive parts of the United States.
It can raise inflation to shrink the relative value of outstanding debt, but that is a regressive move that harms those at the bottom of the income distribution more than anyone else.
Or it can cut spending, but even by eliminating everything except entitlements such as Medicare and Social Security, as well as defense spending, the federal government would not reach balance.
“The moment which we’re in is the biggest inflection point in the conduct of economic policy since 1980,” Warsh said. “And there was a similar malaise then.” The panelists agreed that the best solution would comprise targeted spending cuts, increased productivity, and growing the labor force.
How Does the United States Adapt to the AI Revolution?
Understanding how artificial intelligence will affect the economy over the long term is still an open-ended question, with final outcomes very much still in progress. Economist and Stanford University president Jonathan Levin joined Hoover fellows Amit Seru, Steven J. Davis, and Justin Grimmer to make predictions about AI and how the US will adapt to its widespread use.
Levin asserted that the promise of AI’s rise has convinced investors to place vast sums of money in tech firms to the point where the values of these investments now appear gigantic when compared to other US economic figures.
“Nvidia’s market capitalization is 12 percent of [US] GDP as of this morning,” Levin said of the company that makes graphics processing units, a critical component of AI. “Even in the 1920s, we didn’t have companies that were this big a slice of US GDP.”
Meanwhile, Davis said, that even though there is scant evidence today that AI will lead to widespread job loss, even if it accelerated job loss in the future, America is not made up of factory-style, one-employer towns anymore.
The rise of remote work and even workers commuting in from other states in a hybrid model means that workforces are vastly more geographically dispersed than they were before. Layoffs of the future will not be focused in one geographic area like they were in the past.
“And if you have to lose your job, you’d prefer to be in a place where few others are losing their job at the same time,” Davis said.
Policy Challenges Facing the US Economy
In the day’s final discussion, senior fellows Jonathan Rodden, Paola Sapienza, and Brandice Canes-Wrone spoke with Haber about specific concerns they have related to issues mentioned in earlier panels, including immigration, innovation, and government paralysis due to gridlock.
For her part, Sapienza pointed out that the recently intensified emphasis on removing undocumented people from the United States will deprive the US economy of a main provider of new labor. She said that over 95 percent of the growth in prime-age labor force in the US since the mid-1990s has come from immigration, and that includes illegal migration.
Canes-Wrone emphasized the work of Hoover’s Center for Revitalizing American Institutions, which she directs, saying that if low trust in the federal government continues, it would hamper the ability for the United States to respond to many of the challenges discussed during the day.
Meanwhile, Rodden sought to highlight the tiny sliver of America that generates much of the nation’s innovations. He said that of the three thousand counties in the United States, just ten of them account for up to 35 percent of all patents filed in a given year.
This uneven innovation leads to a wide disparity in economic output, and therefore in tax revenue.
“Santa Clara County [population: 1.9 million] pays as much in federal taxes as the entire state of Michigan, which has 10 million residents,” Rodden said, adding that something must be done to encourage innovation in other US regions.
“A lot of America has been left behind.”
