The Census released new data on median household income today showing a large jump, after adjusting for inflation. The Washington Post wrote about the reported rise, but told readers:
“After inflation, median household income rose to $80,610 last year, up from $77,540 in 2022 but less than the $81,210 families brought home in 2019.”
The problem is with the comparison to 2019, the last year before the pandemic. There was a large problem of non-response to the survey for 2019, which was fielded in the middle of the pandemic shutdown in the spring of 2020. The Census Bureau wrote about this problem when it released the 2019 data in the fall of 2020.
Their analysis found that when correcting for non-response bias, income was 2.8 percent lower than the number reported. If we adjust the reported number for 2019 for this bias, it would put median income for 2019 at $78,936, almost $1,700, or 2.0 percent, below the level reported for 2023.
In other words, the Post’s failure to accurately report on 2019 income numbers by adjusting for a well-known error in the data, led the paper to tell people the economy is worse under Biden than Trump by this measure, when the reality is the opposite. Income is higher, in spite of the impact of the pandemic in 2023 than in 2019.
The Census released new data on median household income today showing a large jump, after adjusting for inflation. The Washington Post wrote about the reported rise, but told readers:
“After inflation, median household income rose to $80,610 last year, up from $77,540 in 2022 but less than the $81,210 families brought home in 2019.”
The problem is with the comparison to 2019, the last year before the pandemic. There was a large problem of non-response to the survey for 2019, which was fielded in the middle of the pandemic shutdown in the spring of 2020. The Census Bureau wrote about this problem when it released the 2019 data in the fall of 2020.
Their analysis found that when correcting for non-response bias, income was 2.8 percent lower than the number reported. If we adjust the reported number for 2019 for this bias, it would put median income for 2019 at $78,936, almost $1,700, or 2.0 percent, below the level reported for 2023.
In other words, the Post’s failure to accurately report on 2019 income numbers by adjusting for a well-known error in the data, led the paper to tell people the economy is worse under Biden than Trump by this measure, when the reality is the opposite. Income is higher, in spite of the impact of the pandemic in 2023 than in 2019.
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Donald Trump seems to get very confused when talking about economics. The U.S. did have respectable growth under his administration, but it was not especially good by any standard metric. We also were very far from being the fastest growing economy in the world.
Contrary to what Trump seems to believe, China’s economic growth hugely outpaced U.S. growth under his watch. China’s economy grew by a cumulative total of 25.4 percent in the years from 2017 to 2021, compared to just 9.3 percent for the United States.
Source: International Monetary Fund.
As a share of world GDP (purchasing power parity), China went from 16.15 percent at the start of the period to 18.42 percent at the end. By contrast, the U.S. share fell slightly from 15.98 percent in 2017 to 15.87 percent in 2021.
Donald Trump seems to get very confused when talking about economics. The U.S. did have respectable growth under his administration, but it was not especially good by any standard metric. We also were very far from being the fastest growing economy in the world.
Contrary to what Trump seems to believe, China’s economic growth hugely outpaced U.S. growth under his watch. China’s economy grew by a cumulative total of 25.4 percent in the years from 2017 to 2021, compared to just 9.3 percent for the United States.
Source: International Monetary Fund.
As a share of world GDP (purchasing power parity), China went from 16.15 percent at the start of the period to 18.42 percent at the end. By contrast, the U.S. share fell slightly from 15.98 percent in 2017 to 15.87 percent in 2021.
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Kevin Erdmann argued in a Washington Post column on Thursday that the main problem with U.S. housing policy is over-restrictive lending rules from Fannie Mae and Freddie Mac. While there may be some issues with current policy being overly restrictive, that does not explain the collapse of the housing prices in 2007-2009, nor the current inadequate supply of housing.
The Atlanta example Erdmann uses in his piece is very helpful in making these points. Erdmann says there was no bubble in Atlanta’s house prices and therefore there was nothing to burst. He attributes the sharp decline in house prices in 2007-2009, and especially in the bottom tier of the housing market, to tighter credit requirements from Fannie and Freddie.
However, the data do support the case that there was a housing bubble building in the decade prior to 2007, especially in the lower tier of the housing market. Here’s the inflation-adjusted Case-Schiller index for the lower tier of the housing market (bottom third) from 1992 to the present.
As can be seen, there is a sharp rise in the index from 1996 to the middle of 2005. At that point the index levels off and then starts falling rapidly in 2007. In the price run-up, inflation-adjusted house prices for the bottom third of the market rose by 38.8 percent. This contrasts with rents in Atlanta, which rose at almost exactly the same rate as overall inflation.
This had been the general pattern for house prices in the period before the housing bubble. Nationwide house prices rose roughly in step with the rate of inflation from 1896 to 1996. There were enormous divergences across regions, with prices hugely outpacing inflation in places like New York and San Francisco, while falling far behind inflation in Detroit, St. Louis and many small cities and towns.
Erdmann points out that house prices in the lower tier of housing fell much more than the price of more expensive houses in Atlanta in the crash. This is true, but house prices at the higher end rose by much less in the bubble. Prices in the top tier rose by 27 percent in real terms over the period from 1996 to the peak in 2005.
This was still a bubble, given the trend in rents, but considerably smaller than the one in the lower tier in Atlanta. For that reason it is not surprising that there would have been a sharper fall in house prices in the bottom tier.
The other point worth noting in this graph is that house prices for the bottom tier of housing in Atlanta had largely recovered their bubble peaks just before the pandemic. Since the pandemic, real house prices for the bottom tier have actually exceeded their bubble peaks. This is true for the higher tiers as well.
This suggests that builders have serious incentive to be building lots of housing in Atlanta and elsewhere, but for some reason they are not. The tightening of credit standards by Fannie and Freddie cannot explain this failure to build more housing, since that should be reflected in house prices, which it clearly is not.
There is one other point worth noting about Erdmann’s point on Fannie and Freddie credit standards. The average credit score has risen substantially over the last two decades. This means that using a fixed credit score as a cutoff would imply a smaller share of potential borrowers are being excluded. It also would have been helpful if Erdmann had included data on mortgage issuance in the 1990s before credit standards had been relaxed and the bubble had begun to build.
In any case, this point is secondary. If excessively high credit standards were the factor that was really clogging the housing market, we should not be seeing real house prices at above their bubble peaks. These prices give builders plenty of incentive to build, but for some reason they are not constructing housing at anything like the bubble pace, or even the pre-bubble pace.
Kevin Erdmann argued in a Washington Post column on Thursday that the main problem with U.S. housing policy is over-restrictive lending rules from Fannie Mae and Freddie Mac. While there may be some issues with current policy being overly restrictive, that does not explain the collapse of the housing prices in 2007-2009, nor the current inadequate supply of housing.
The Atlanta example Erdmann uses in his piece is very helpful in making these points. Erdmann says there was no bubble in Atlanta’s house prices and therefore there was nothing to burst. He attributes the sharp decline in house prices in 2007-2009, and especially in the bottom tier of the housing market, to tighter credit requirements from Fannie and Freddie.
However, the data do support the case that there was a housing bubble building in the decade prior to 2007, especially in the lower tier of the housing market. Here’s the inflation-adjusted Case-Schiller index for the lower tier of the housing market (bottom third) from 1992 to the present.
As can be seen, there is a sharp rise in the index from 1996 to the middle of 2005. At that point the index levels off and then starts falling rapidly in 2007. In the price run-up, inflation-adjusted house prices for the bottom third of the market rose by 38.8 percent. This contrasts with rents in Atlanta, which rose at almost exactly the same rate as overall inflation.
This had been the general pattern for house prices in the period before the housing bubble. Nationwide house prices rose roughly in step with the rate of inflation from 1896 to 1996. There were enormous divergences across regions, with prices hugely outpacing inflation in places like New York and San Francisco, while falling far behind inflation in Detroit, St. Louis and many small cities and towns.
Erdmann points out that house prices in the lower tier of housing fell much more than the price of more expensive houses in Atlanta in the crash. This is true, but house prices at the higher end rose by much less in the bubble. Prices in the top tier rose by 27 percent in real terms over the period from 1996 to the peak in 2005.
This was still a bubble, given the trend in rents, but considerably smaller than the one in the lower tier in Atlanta. For that reason it is not surprising that there would have been a sharper fall in house prices in the bottom tier.
The other point worth noting in this graph is that house prices for the bottom tier of housing in Atlanta had largely recovered their bubble peaks just before the pandemic. Since the pandemic, real house prices for the bottom tier have actually exceeded their bubble peaks. This is true for the higher tiers as well.
This suggests that builders have serious incentive to be building lots of housing in Atlanta and elsewhere, but for some reason they are not. The tightening of credit standards by Fannie and Freddie cannot explain this failure to build more housing, since that should be reflected in house prices, which it clearly is not.
There is one other point worth noting about Erdmann’s point on Fannie and Freddie credit standards. The average credit score has risen substantially over the last two decades. This means that using a fixed credit score as a cutoff would imply a smaller share of potential borrowers are being excluded. It also would have been helpful if Erdmann had included data on mortgage issuance in the 1990s before credit standards had been relaxed and the bubble had begun to build.
In any case, this point is secondary. If excessively high credit standards were the factor that was really clogging the housing market, we should not be seeing real house prices at above their bubble peaks. These prices give builders plenty of incentive to build, but for some reason they are not constructing housing at anything like the bubble pace, or even the pre-bubble pace.
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In reporting on Donald Trump’s plan to put Elon Musk in charge of a commission to ferret out waste in government, it probably would have been worth noting that there is already an agency dedicated to this purpose. The Government Accountability Office (GAO) has been in existence for over 100 years. It is non-partisan and has extensive experience in uncovering government waste.
It also would have been worth noting that having efforts to uncover massive waste is an old joke in Washington politics. Jimmy Carter claimed he would eliminate waste with his zero-based budgeting when he took office in 1977. It was quickly abandoned as too chaotic.
Bill Clinton had an effort under his administration when he put Vice-President Al Gore in charge of “reinventing government.” It may not have accomplished much but kept Al Gore out of trouble.
In addition to mentioning some of this history, it also is worth noting that there would be an extraordinary conflict of interest created by putting someone with many large government contracts and subsidies in charge of an effort to examine government efficiency. This conflict of interest problem is especially large since Trump is committing to getting rid of most of the top civil service officials, which would presumably include the leadership of the GAO. This means that the non-partisan agency created to prevent government corruption will in effect be blocked from policing Trump and Musk’s efforts to “improve” government efficiency.
In reporting on Donald Trump’s plan to put Elon Musk in charge of a commission to ferret out waste in government, it probably would have been worth noting that there is already an agency dedicated to this purpose. The Government Accountability Office (GAO) has been in existence for over 100 years. It is non-partisan and has extensive experience in uncovering government waste.
It also would have been worth noting that having efforts to uncover massive waste is an old joke in Washington politics. Jimmy Carter claimed he would eliminate waste with his zero-based budgeting when he took office in 1977. It was quickly abandoned as too chaotic.
Bill Clinton had an effort under his administration when he put Vice-President Al Gore in charge of “reinventing government.” It may not have accomplished much but kept Al Gore out of trouble.
In addition to mentioning some of this history, it also is worth noting that there would be an extraordinary conflict of interest created by putting someone with many large government contracts and subsidies in charge of an effort to examine government efficiency. This conflict of interest problem is especially large since Trump is committing to getting rid of most of the top civil service officials, which would presumably include the leadership of the GAO. This means that the non-partisan agency created to prevent government corruption will in effect be blocked from policing Trump and Musk’s efforts to “improve” government efficiency.
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Peter Coy had a somewhat bizarre column in the New York Times yesterday warning us that even though we have gotten rid of most of the pandemic inflation with little rise in unemployment, “any further decline in inflation may not be as painless.” The column highlights a new paper by Gauti Eggertsson, one of the nation’s leading macroeconomists.
Whether or not Eggertsson’s theoretical analysis is correct, it is beside the point in terms of the current economy. We don’t need any further decline in inflation because we have already hit the Fed’s 2.0 percent target.
If it seems I am getting ahead of the game, you have to look at the data more closely. It’s true that the year over year rate in the Personal Consumption Expenditure deflator (PCE) stands a 2.5 percent, which is above the Fed’s 2.0 percent target, but we can look a bit around the corner here.
We know with virtual certainty that the rental indexes (rent proper and owners’ equivalent rent) will be showing much lower inflation in future months. The reason we can be certain of this fact is that the Bureau of Labor Statistics publishes a “New Tenant Rent Index” which tracks rents in units that change hands.
This index leads the overall rent indexes, since they are dominated by leases that could have been signed 1-3 years ago. These leases eventually end and are negotiated in ways that reflect current market conditions.
This New Tenant Rent Index has been showing sharply lower rental inflation. In fact over the last year it actually fell by 1.1 percent. This index is relatively new, so we can’t say with much precision how quickly the overall rental indexes will adjust to it or the extent to which they will adjust, but we can be quite certain that rental inflation will continue to slow, as it has for over a year.
Year over year rental inflation is currently 5.2 percent. Suppose it falls to 2.0 percent. Since these indexes comprise roughly 15 percent of the PCE deflation, this drop of 3.2 percentage points would lower the inflation rate by roughly 0.5 percentage points, bringing us to the Fed’s 2.0 percent inflation target.
Even if we take a much more modest scenario and say rental inflation falls to 3.0 percent, that still gets us to 2.2 percent, which is close enough to 2.0 percent that no serious person would spend a lot of time worrying about the difference.
Still not convinced? The annualized inflation rate over the last three months was 0.9 percent. The annualized inflation rate for the core index was 1.7 percent.
This inflation battle is over and won. Eggertsson’s work may have some useful insights for the next war on inflation, but it’s too late to be of any help in the last one.
Peter Coy had a somewhat bizarre column in the New York Times yesterday warning us that even though we have gotten rid of most of the pandemic inflation with little rise in unemployment, “any further decline in inflation may not be as painless.” The column highlights a new paper by Gauti Eggertsson, one of the nation’s leading macroeconomists.
Whether or not Eggertsson’s theoretical analysis is correct, it is beside the point in terms of the current economy. We don’t need any further decline in inflation because we have already hit the Fed’s 2.0 percent target.
If it seems I am getting ahead of the game, you have to look at the data more closely. It’s true that the year over year rate in the Personal Consumption Expenditure deflator (PCE) stands a 2.5 percent, which is above the Fed’s 2.0 percent target, but we can look a bit around the corner here.
We know with virtual certainty that the rental indexes (rent proper and owners’ equivalent rent) will be showing much lower inflation in future months. The reason we can be certain of this fact is that the Bureau of Labor Statistics publishes a “New Tenant Rent Index” which tracks rents in units that change hands.
This index leads the overall rent indexes, since they are dominated by leases that could have been signed 1-3 years ago. These leases eventually end and are negotiated in ways that reflect current market conditions.
This New Tenant Rent Index has been showing sharply lower rental inflation. In fact over the last year it actually fell by 1.1 percent. This index is relatively new, so we can’t say with much precision how quickly the overall rental indexes will adjust to it or the extent to which they will adjust, but we can be quite certain that rental inflation will continue to slow, as it has for over a year.
Year over year rental inflation is currently 5.2 percent. Suppose it falls to 2.0 percent. Since these indexes comprise roughly 15 percent of the PCE deflation, this drop of 3.2 percentage points would lower the inflation rate by roughly 0.5 percentage points, bringing us to the Fed’s 2.0 percent inflation target.
Even if we take a much more modest scenario and say rental inflation falls to 3.0 percent, that still gets us to 2.2 percent, which is close enough to 2.0 percent that no serious person would spend a lot of time worrying about the difference.
Still not convinced? The annualized inflation rate over the last three months was 0.9 percent. The annualized inflation rate for the core index was 1.7 percent.
This inflation battle is over and won. Eggertsson’s work may have some useful insights for the next war on inflation, but it’s too late to be of any help in the last one.
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There continues to be a debate about the extent to which “price-gouging” or “greedflation” has been responsible for the rise in prices since the pandemic. We can debate the extent to which companies were able to take advantage of monopoly power during the pandemic, but whatever the cause, it is clear that the profit share of corporate income has risen from before the pandemic, as shown in the graph below.
Source: Bureau of Economic Analysis.
In the four quarters before the pandemic, the profit share averaged 22.7 percent of the net income generated in the corporate sector.[1] It rose to 26.6 percent in the second quarter of 2022, and has since fallen back somewhat to 24.3 percent in the second quarter of 2024.
This measure of profits includes the profits earned by the regional Federal Reserve Banks. Since that money is mostly refunded to the Treasury, it arguably should not be included in a measure of corporate profits.[2] In 2019 the profits share averaged 22.0 percent of net income, excluding the profits of the Federal Reserve Banks. This share peaked at 26.2 percent in the fourth quarter of 2022, it has edged down to 25.3 percent in the most recent quarter. (The regional Federal Reserve Banks are currently losing money as a result of higher interest rates, so the profit share is higher when these loses are excluded.)
By either measure the profit share in the most recent quarter is higher than before the pandemic. Using the first measure, the share has increased by 1.6 percentage points from the four quarters before the pandemic. By the measure that excludes the profits of Federal Reserve Banks, the profit share has risen by 3.3 percentage points.
We can argue whether we want to describe this shift from labor to capital as “big” or “small.” It clearly does not explain the bulk of the inflation we have seen since the pandemic. Inflation as measured by the CPI has been 20.9 percent since the start of the pandemic. That means the rise in profit shares, using the measure that excludes profits from the Federal Reserve Banks, explains a bit more than 15 percent of the inflation we saw.
On the other hand, the impact looks considerably more important if we compare it to real wage growth over this period. Real hourly wages have risen just 1.6 percent since the pandemic. If the profit shares had remained constant over the last four and a half years, wages would be roughly 3.3 percent higher than they are now, which would translate into real wages being roughly 3.3 percent higher. That would triple the amount of real wage growth we have seen over this period. (This is a crude calculation, since some items in the consumption basket, most notably rental housing, are not primarily produced by the corporate sector.)
In short, we can debate the dynamics of inflation and the shift from wages to profits in the pandemic. But the fact that there was a substantial shift is difficult to dispute.
There is one important qualification to this story. There has been an unusually large statistical discrepancy in the GDP accounts in recent quarters, rising to 2.7 percent of GDP in the second quarter of 2024 (NIPA Table 1.7.5., Line 34). The statistical discrepancy is the gap between GDP as measured on the output side and GDP as measured on the income side.
In principle, these two numbers should be equal, in the same way that if we counted people starting from the left side of the room we should end up with the same number as if we counted people starting from the right side of the room. As a practical matter, in a $27 trillion economy, they will never come out exactly the same.
As it stands, the output side measure is considerably higher than the income side measure. It may turn out that with future revisions, the output side measure is revised down, and the income side measure proves to be closer to the mark.
However, it may also turn out to be the case that the income side measure is seriously under-estimated and revised up to a level close to the output measure. In that case, the balance between profits and labor compensation could be affected by future revisions. To take an extreme case, if the full statistical discrepancy was found to be an undercount of labor income, then the reported rise in the profit share would largely disappear.
To be clear, assuming that all the gap was an undercount on the income side, and this was in turn entirely an undercounting of labor compensation, would be very extreme and unlikely. But it is important to note that the picture may look different when we get revisions to the data, both this month and in subsequent years.
In the meantime, we have to work with the data we have. And these data show there was a substantial redistribution from labor to capital in the period since the pandemic hit.
Addendum: After posting this note, I realized I should have deducted the profits of Federal Reserve Banks from the denominator. This would have raised the profit share in 2019 by 0.1 pp to 22.1 percent and lowered in the most recent quarter by 0.2 pp to 25.1 percent. That would make the rise in profit shares 3.0 percentage points instead of 3.3 percentage points.
[1] This calculation takes net operating surplus (profits, interest, and business transfers), NIPA Table 1.14, Line 24 over the sum of net operating surplus and labor compensation, NIPA Table 1.14, Line 20.
[2] The Federal Reserve Bank profits are taken from NIPA Table 6.16D, Line 11.
There continues to be a debate about the extent to which “price-gouging” or “greedflation” has been responsible for the rise in prices since the pandemic. We can debate the extent to which companies were able to take advantage of monopoly power during the pandemic, but whatever the cause, it is clear that the profit share of corporate income has risen from before the pandemic, as shown in the graph below.
Source: Bureau of Economic Analysis.
In the four quarters before the pandemic, the profit share averaged 22.7 percent of the net income generated in the corporate sector.[1] It rose to 26.6 percent in the second quarter of 2022, and has since fallen back somewhat to 24.3 percent in the second quarter of 2024.
This measure of profits includes the profits earned by the regional Federal Reserve Banks. Since that money is mostly refunded to the Treasury, it arguably should not be included in a measure of corporate profits.[2] In 2019 the profits share averaged 22.0 percent of net income, excluding the profits of the Federal Reserve Banks. This share peaked at 26.2 percent in the fourth quarter of 2022, it has edged down to 25.3 percent in the most recent quarter. (The regional Federal Reserve Banks are currently losing money as a result of higher interest rates, so the profit share is higher when these loses are excluded.)
By either measure the profit share in the most recent quarter is higher than before the pandemic. Using the first measure, the share has increased by 1.6 percentage points from the four quarters before the pandemic. By the measure that excludes the profits of Federal Reserve Banks, the profit share has risen by 3.3 percentage points.
We can argue whether we want to describe this shift from labor to capital as “big” or “small.” It clearly does not explain the bulk of the inflation we have seen since the pandemic. Inflation as measured by the CPI has been 20.9 percent since the start of the pandemic. That means the rise in profit shares, using the measure that excludes profits from the Federal Reserve Banks, explains a bit more than 15 percent of the inflation we saw.
On the other hand, the impact looks considerably more important if we compare it to real wage growth over this period. Real hourly wages have risen just 1.6 percent since the pandemic. If the profit shares had remained constant over the last four and a half years, wages would be roughly 3.3 percent higher than they are now, which would translate into real wages being roughly 3.3 percent higher. That would triple the amount of real wage growth we have seen over this period. (This is a crude calculation, since some items in the consumption basket, most notably rental housing, are not primarily produced by the corporate sector.)
In short, we can debate the dynamics of inflation and the shift from wages to profits in the pandemic. But the fact that there was a substantial shift is difficult to dispute.
There is one important qualification to this story. There has been an unusually large statistical discrepancy in the GDP accounts in recent quarters, rising to 2.7 percent of GDP in the second quarter of 2024 (NIPA Table 1.7.5., Line 34). The statistical discrepancy is the gap between GDP as measured on the output side and GDP as measured on the income side.
In principle, these two numbers should be equal, in the same way that if we counted people starting from the left side of the room we should end up with the same number as if we counted people starting from the right side of the room. As a practical matter, in a $27 trillion economy, they will never come out exactly the same.
As it stands, the output side measure is considerably higher than the income side measure. It may turn out that with future revisions, the output side measure is revised down, and the income side measure proves to be closer to the mark.
However, it may also turn out to be the case that the income side measure is seriously under-estimated and revised up to a level close to the output measure. In that case, the balance between profits and labor compensation could be affected by future revisions. To take an extreme case, if the full statistical discrepancy was found to be an undercount of labor income, then the reported rise in the profit share would largely disappear.
To be clear, assuming that all the gap was an undercount on the income side, and this was in turn entirely an undercounting of labor compensation, would be very extreme and unlikely. But it is important to note that the picture may look different when we get revisions to the data, both this month and in subsequent years.
In the meantime, we have to work with the data we have. And these data show there was a substantial redistribution from labor to capital in the period since the pandemic hit.
Addendum: After posting this note, I realized I should have deducted the profits of Federal Reserve Banks from the denominator. This would have raised the profit share in 2019 by 0.1 pp to 22.1 percent and lowered in the most recent quarter by 0.2 pp to 25.1 percent. That would make the rise in profit shares 3.0 percentage points instead of 3.3 percentage points.
[1] This calculation takes net operating surplus (profits, interest, and business transfers), NIPA Table 1.14, Line 24 over the sum of net operating surplus and labor compensation, NIPA Table 1.14, Line 20.
[2] The Federal Reserve Bank profits are taken from NIPA Table 6.16D, Line 11.
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Edward Glaeser had an interesting column in the NYT this morning which offered some useful suggestions for increasing housing construction and reducing rents. However, in making his case he does get the recent course of rental inflation seriously wrong.
The piece tells readers:
“It will take a forceful solution to address such a big problem. Nominal rents have risen by 6.5 percent a year since the start of the Biden administration and continue to surge even while overall inflation is dropping.”
Rents rose rapidly in 2021-2023 as tens of millions of workers, who previously had to go to an office five days a week, suddenly had the option to work from home. These people both needed more space for a home office and had the money to pay for it, since they were saving thousands of dollars a year on commuting costs, as well as hundreds of hours of commuting time.
But this surge ended in 2022. With demand leveling off, and housing supply increasing as supply chain problems eased, the rental market stabilized. This is missed in the Consumer Price Index’s (CPI) rental indexes, since it is largely driven by leases that might have been signed a year or two in the past.
The Bureau of Labor Statistics has a separate index that measures inflation in rental units that change hands. This index is a better measure of current market conditions. It leads the overall CPI rental indexes since eventually leases roll over and reflect the current market rents.
Source: Bureau of Labor Statistics.
As can be seen, the new tenant rent index rose sharply in 2021 and peaked at almost 13.0 percent in the second quarter of 2022. Rental inflation in this index then declined rapidly and actually turned negative in the most recent quarter.
While rents may not actually decline in the overall CPI rental indexes, it is clear that rental inflation will be falling sharply and could get close to zero in the quarters ahead. That does not change the underlying issue raised by Glaeser. Housing costs are too high, and the main culprit is an inadequate supply of housing. But we should be clear that in the near-term future we will get some good news on rents, even if will not be good enough to solve our housing problems.
Edward Glaeser had an interesting column in the NYT this morning which offered some useful suggestions for increasing housing construction and reducing rents. However, in making his case he does get the recent course of rental inflation seriously wrong.
The piece tells readers:
“It will take a forceful solution to address such a big problem. Nominal rents have risen by 6.5 percent a year since the start of the Biden administration and continue to surge even while overall inflation is dropping.”
Rents rose rapidly in 2021-2023 as tens of millions of workers, who previously had to go to an office five days a week, suddenly had the option to work from home. These people both needed more space for a home office and had the money to pay for it, since they were saving thousands of dollars a year on commuting costs, as well as hundreds of hours of commuting time.
But this surge ended in 2022. With demand leveling off, and housing supply increasing as supply chain problems eased, the rental market stabilized. This is missed in the Consumer Price Index’s (CPI) rental indexes, since it is largely driven by leases that might have been signed a year or two in the past.
The Bureau of Labor Statistics has a separate index that measures inflation in rental units that change hands. This index is a better measure of current market conditions. It leads the overall CPI rental indexes since eventually leases roll over and reflect the current market rents.
Source: Bureau of Labor Statistics.
As can be seen, the new tenant rent index rose sharply in 2021 and peaked at almost 13.0 percent in the second quarter of 2022. Rental inflation in this index then declined rapidly and actually turned negative in the most recent quarter.
While rents may not actually decline in the overall CPI rental indexes, it is clear that rental inflation will be falling sharply and could get close to zero in the quarters ahead. That does not change the underlying issue raised by Glaeser. Housing costs are too high, and the main culprit is an inadequate supply of housing. But we should be clear that in the near-term future we will get some good news on rents, even if will not be good enough to solve our housing problems.
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In the last-half century, productivity has outpaced the growth of real compensation for the median worker by more than 40 percent. This means that if workers’ pay had kept pace with productivity, as it did in the three decades after World War II, it would be roughly 40 percent higher than it is today.
This would mean that instead of a typical worker earning $34 an hour, they would be earning close to $48 an hour. That implies an annual wage of $96,000 a year for a worker putting in 40 hours a week for 50 weeks a year.
Getting workers their fair share should be, and to some extent has been, a central issue in political debates. However, there is a continual effort by the media to pull the focus away from within generation inequality, and instead tell young people that their problems stem from their parents and grandparents getting too much money from Social Security, Medicare, and other government programs.
The major media outlets love to highlight absurd stories of generational inequality, with baby boomers ripping off their children and grandchildren through Social Security and Medicare. A New York Times column by Gene Steurele and Glenn Kramon is the latest effort.
Their basic story here is that baby boomers are getting far more back from Social Security and Medicare than they paid into these programs. It turns out that this is not especially true, even by Steurele’s own calculation.
If we look at a lifetime average wage earner who turns 65 in 2025, Steurele and his co-author Karen Smith, calculate they will have paid Social Security taxes with a present value of $391,000 and will be getting back benefits with a present value of $394,000. If we move up the income scale to someone who earned the Social Security maximum (currently $160,000), the present value of taxes would be $953,000, compared to benefits of $634,000.
If we look at couples the story looks better for beneficiaries, especially one-earner couples (a rarity) and also for moderate-income workers. However, in a world where raising taxes on people earning less than $400k seems to be beyond the pale, I’m not sure too many politicians will be anxious to take away benefits from low-earning retirees.
Steurele and Smith find a much larger subsidy from Medicare. There are some technical issues here but the most important point is that the supposed “subsidy” is primarily due to the fact that we pay twice as much per person for our health care as people in other wealthy countries without having much to show in terms of better outcomes.
The reason is that we pay drug companies, medical equipment suppliers, doctors and other providers twice as much as in other wealthy countries. The subsidies really are for these actors in the healthcare industry, not for retirees.
Insofar as young people are having difficulty getting ahead the problem is all the money going to people at the top end of the income distribution. The money going to retirees for Social Security and Medicare is a trivial part of this story, regardless of how much the NYT wants to tell us otherwise.
In the last-half century, productivity has outpaced the growth of real compensation for the median worker by more than 40 percent. This means that if workers’ pay had kept pace with productivity, as it did in the three decades after World War II, it would be roughly 40 percent higher than it is today.
This would mean that instead of a typical worker earning $34 an hour, they would be earning close to $48 an hour. That implies an annual wage of $96,000 a year for a worker putting in 40 hours a week for 50 weeks a year.
Getting workers their fair share should be, and to some extent has been, a central issue in political debates. However, there is a continual effort by the media to pull the focus away from within generation inequality, and instead tell young people that their problems stem from their parents and grandparents getting too much money from Social Security, Medicare, and other government programs.
The major media outlets love to highlight absurd stories of generational inequality, with baby boomers ripping off their children and grandchildren through Social Security and Medicare. A New York Times column by Gene Steurele and Glenn Kramon is the latest effort.
Their basic story here is that baby boomers are getting far more back from Social Security and Medicare than they paid into these programs. It turns out that this is not especially true, even by Steurele’s own calculation.
If we look at a lifetime average wage earner who turns 65 in 2025, Steurele and his co-author Karen Smith, calculate they will have paid Social Security taxes with a present value of $391,000 and will be getting back benefits with a present value of $394,000. If we move up the income scale to someone who earned the Social Security maximum (currently $160,000), the present value of taxes would be $953,000, compared to benefits of $634,000.
If we look at couples the story looks better for beneficiaries, especially one-earner couples (a rarity) and also for moderate-income workers. However, in a world where raising taxes on people earning less than $400k seems to be beyond the pale, I’m not sure too many politicians will be anxious to take away benefits from low-earning retirees.
Steurele and Smith find a much larger subsidy from Medicare. There are some technical issues here but the most important point is that the supposed “subsidy” is primarily due to the fact that we pay twice as much per person for our health care as people in other wealthy countries without having much to show in terms of better outcomes.
The reason is that we pay drug companies, medical equipment suppliers, doctors and other providers twice as much as in other wealthy countries. The subsidies really are for these actors in the healthcare industry, not for retirees.
Insofar as young people are having difficulty getting ahead the problem is all the money going to people at the top end of the income distribution. The money going to retirees for Social Security and Medicare is a trivial part of this story, regardless of how much the NYT wants to tell us otherwise.
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Yes, I am serious. The media have no intention of allowing the data to get in the way of their bad economy stories. So now that food prices have pretty much stopped rising, the Guardian is coming to the rescue to tell readers how they can cope with rising food prices.
Here’s the picture on food prices over the last five years.
As can be seen, food prices did rise rapidly in 2021 and 2022, but then slowed sharply. In the last year and a half, they have risen by a total of just over one percent. This might have been a reasonable piece for the Guardian to have run in January of 2023, it does not make sense to run it now.
Yes, I am serious. The media have no intention of allowing the data to get in the way of their bad economy stories. So now that food prices have pretty much stopped rising, the Guardian is coming to the rescue to tell readers how they can cope with rising food prices.
Here’s the picture on food prices over the last five years.
As can be seen, food prices did rise rapidly in 2021 and 2022, but then slowed sharply. In the last year and a half, they have risen by a total of just over one percent. This might have been a reasonable piece for the Guardian to have run in January of 2023, it does not make sense to run it now.
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E.J. Dionne is a decent person and offers reasonable takes on most policy issues, but he really is enmeshed in the right’s view of the world. In the middle of a piece praising Vice-President Harris’ coalition building and economic agenda, Dionne tells readers:
“She champions the new economic consensus that President Joe Biden began to bring to life, replacing the view that markets alone, spurred by low taxes and deregulation, can save us.”
It is totally understandable that the right wants people to believe that “markets alone” were responsible for the massive upward redistribution of income of the last half century. But it happens to be total crap.
Starting with my favorite, government-granted patent and copyright monopolies are not “markets alone.” This concept is apparently hard for people who write in elite media outlets to understand.
The market alone does not threaten to arrest people who make copies of Pfizer’s Covid boosters without its permission or Ozempic without the permission of Novo Nordisk. Nor does the market alone threaten to arrest people who make copies of Microsoft’s software without Bill Gates’ permission.
Patent and copyright monopolies are the GOVERNMENT. Again, it’s understandable that the rich people who benefit from these government-granted monopolies like to pretend this is just the free market. It sounds much better to say “I’m rich and you’re poor because my skills are more valued by the market,” than “I’m rich and you’re poor because I rigged the market to give me all the money.” But why does an ostensibly liberal columnist go along with this blatant lie?
And there is huge money at stake here. In the case of prescription drugs and other pharmaceutical products alone we will pay over $650 billion a year for items that would likely cost us less than $100 billion in a FREE MARKET (see Line 121). If we add in the higher prices we pay for medical equipment, computers, software, and other items where these government-granted monopolies are a large share of the price, we are almost certainly well over $1 trillion a year and possibly close to $1.5 trillion. This would be roughly half of after-tax corporate profits. (See chapter 5 of Rigged [it’s free].)
These inflation-causing monopolies are far from the only way the government intervenes in the economy to make the rich richer. The supposed “free trade” deals of the last four decades all included provisions that required our trading partners to make these monopolies longer and stronger in their own countries.
The “free trade” deals also did little or nothing to reduce barriers to trade in highly paid professional services like physicians’ services or dentists’ services. As a result, these professionals get paid more than twice as much as their counterparts in other wealthy countries, even though our manufacturing workers get paid less. Again, we get why the winners want to call it “free trade,” but that is a lie.
Bailing out the big financial institutions when they did themselves in by their own greed and incompetence in the housing crash and more recently with the run-up in interest rates was also not “the market.” Many of the very rich got their hundreds of millions or billions as a result of the government’s coddling of the financial industry. Why don’t we call out the government assistance instead of pretending it is the free market?
Similarly, our CEOs get paid many times more than their counterparts in Europe or Japan. That’s not because they are smarter or harder working, it’s because we have a corrupt corporate government structure that largely allows top management to set their own pay and rip-off the companies they work for. If it’s too complicated for our great intellectuals, the market did not write the rules of corporate governance.
To take one more example, the market did not give us Section 230 which protects Mark Zuckerberg and Elon Musk from being held liable for spreading defamatory material in the same way that the New York Times or CNN is held liable.
I could go on, but the point should be obvious to anyone who does not write columns for a leading news outlet, the government has rigged the deck. Extreme inequality is not the result of a free market, it is a result of how the government has structured the market.
The market is just a tool, like the wheel. It makes as much sense to rant against the free market as to complain about the wheel. Unfortunately, the right has managed to get the bulk of the left in this country screaming at the wheel. As long as that remains the case, it will be difficult to make much progress in reducing inequality.
E.J. Dionne is a decent person and offers reasonable takes on most policy issues, but he really is enmeshed in the right’s view of the world. In the middle of a piece praising Vice-President Harris’ coalition building and economic agenda, Dionne tells readers:
“She champions the new economic consensus that President Joe Biden began to bring to life, replacing the view that markets alone, spurred by low taxes and deregulation, can save us.”
It is totally understandable that the right wants people to believe that “markets alone” were responsible for the massive upward redistribution of income of the last half century. But it happens to be total crap.
Starting with my favorite, government-granted patent and copyright monopolies are not “markets alone.” This concept is apparently hard for people who write in elite media outlets to understand.
The market alone does not threaten to arrest people who make copies of Pfizer’s Covid boosters without its permission or Ozempic without the permission of Novo Nordisk. Nor does the market alone threaten to arrest people who make copies of Microsoft’s software without Bill Gates’ permission.
Patent and copyright monopolies are the GOVERNMENT. Again, it’s understandable that the rich people who benefit from these government-granted monopolies like to pretend this is just the free market. It sounds much better to say “I’m rich and you’re poor because my skills are more valued by the market,” than “I’m rich and you’re poor because I rigged the market to give me all the money.” But why does an ostensibly liberal columnist go along with this blatant lie?
And there is huge money at stake here. In the case of prescription drugs and other pharmaceutical products alone we will pay over $650 billion a year for items that would likely cost us less than $100 billion in a FREE MARKET (see Line 121). If we add in the higher prices we pay for medical equipment, computers, software, and other items where these government-granted monopolies are a large share of the price, we are almost certainly well over $1 trillion a year and possibly close to $1.5 trillion. This would be roughly half of after-tax corporate profits. (See chapter 5 of Rigged [it’s free].)
These inflation-causing monopolies are far from the only way the government intervenes in the economy to make the rich richer. The supposed “free trade” deals of the last four decades all included provisions that required our trading partners to make these monopolies longer and stronger in their own countries.
The “free trade” deals also did little or nothing to reduce barriers to trade in highly paid professional services like physicians’ services or dentists’ services. As a result, these professionals get paid more than twice as much as their counterparts in other wealthy countries, even though our manufacturing workers get paid less. Again, we get why the winners want to call it “free trade,” but that is a lie.
Bailing out the big financial institutions when they did themselves in by their own greed and incompetence in the housing crash and more recently with the run-up in interest rates was also not “the market.” Many of the very rich got their hundreds of millions or billions as a result of the government’s coddling of the financial industry. Why don’t we call out the government assistance instead of pretending it is the free market?
Similarly, our CEOs get paid many times more than their counterparts in Europe or Japan. That’s not because they are smarter or harder working, it’s because we have a corrupt corporate government structure that largely allows top management to set their own pay and rip-off the companies they work for. If it’s too complicated for our great intellectuals, the market did not write the rules of corporate governance.
To take one more example, the market did not give us Section 230 which protects Mark Zuckerberg and Elon Musk from being held liable for spreading defamatory material in the same way that the New York Times or CNN is held liable.
I could go on, but the point should be obvious to anyone who does not write columns for a leading news outlet, the government has rigged the deck. Extreme inequality is not the result of a free market, it is a result of how the government has structured the market.
The market is just a tool, like the wheel. It makes as much sense to rant against the free market as to complain about the wheel. Unfortunately, the right has managed to get the bulk of the left in this country screaming at the wheel. As long as that remains the case, it will be difficult to make much progress in reducing inequality.
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