Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

For this Thanksgiving we can be happy that the tight labor is allowing tens of millions of people to have much better pay and working conditions than they had before the pandemic.
For this Thanksgiving we can be happy that the tight labor is allowing tens of millions of people to have much better pay and working conditions than they had before the pandemic.
INFLATION IN THE U.S. ECONOMY IS CLEARLY A PROBLEM. There, I said it in all caps so that everyone can see I recognize it as a problem. The question is how big a problem. After all, we have lots of problems, millions of children in poverty, a huge homeless population, parents without access to affordable […]
INFLATION IN THE U.S. ECONOMY IS CLEARLY A PROBLEM. There, I said it in all caps so that everyone can see I recognize it as a problem. The question is how big a problem. After all, we have lots of problems, millions of children in poverty, a huge homeless population, parents without access to affordable […]
Yesterday I heard a piece on NPR in which they highlighted “skimpflation.” This is where there is a deterioration in service quality, like long waits for service at a restaurant, which are not picked up in our standard measures of inflation. The implication is that the Consumer Price Index (CPI) is understating the true rate […]
Yesterday I heard a piece on NPR in which they highlighted “skimpflation.” This is where there is a deterioration in service quality, like long waits for service at a restaurant, which are not picked up in our standard measures of inflation. The implication is that the Consumer Price Index (CPI) is understating the true rate […]

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That’s what readers of the paper must be asking after seeing this piece on Friday morning. The headline of the piece features her quote, “no one tells me what to do,” when in fact there is ample evidence that the pharmaceutical industry and rich contributors tell her exactly what to do.

Sinema has made herself famous this year by refusing to go along with tax hikes on rich people and corporations or limiting the patent monopolies given to prescription drug companies by negotiating prices. As a result, it is much more difficult for the Democrats to find offsets for the spending increases in the Build Back Better (BBB) bill.

The piece allows Sinema to tell her story on taxing the rich with zero pushback against obviously untrue statements. Sinema had voted against the Trump tax cuts when she was a member of the House in 2017, but now is refusing to go along with Democratic efforts to take back most of these cuts.

The piece tells readers:

“Sinema said her goal had been to ensure that any revenue-raising measures in the bill [BBB] are focused on ‘maintaining American competitiveness and ensuring that businesses of all sizes in America, and particularly in Arizona, have the ability to grow and to compete.’”

It would have been worth mentioning here that there is zero evidence that the Trump tax cuts had any notable effect in boosting the competitiveness and ability for growth of businesses in the United States or Arizona. This means that Senator Sinema is either completely ignorant of recent economic history, or lying. In this context, it might have been worth mentioning that Senator Sinema has been engaged in some recent fundraising efforts from very wealthy donors.

It might have also been worth mentioning Senator Sinema’s contributions from the pharmaceutical industry. Incredibly, the piece does not mention at all Senator Sinema’s successful effect to block negotiations on most drug prices to bring our prices more in line with the rest of the world. Reducing drug prices could have paid for much of the cost of the BBB bill. Senator Sinema had campaigned on reducing drug prices in her 2018 senate race.

The piece also allowed Sinema to make contradictory assertions about her concerns with deficits and inflation. After boasting that she had warned about inflation from the spending in the American Recovery Act, which was approved in February, the piece quotes Sinema:

“When we were drafting the bipartisan infrastructure law, we specifically took care to include shovel-ready projects that would be ready to start moving as quickly as possible.”

If Senator Sinema is actually worried about the current inflation then absolutely the last thing she should want are “shovel-ready” projects. Such projects would mean more spending now, further increasing demand at a time when Sinema is complaining that we have too much demand and that it is causing inflation. To be consistent, Sinema should want spending that will take place several years down the road, when presumably inflationary pressures will have eased.

The piece also noted Sinema’s opposition to ending the filibuster. She argued her case in a Washington Post column earlier this year.  Incredibly, the column never acknowledged the filibuster’s origins as a legislative tool to protect slavery, or its more recent usage to protect Jim Crow laws and to block civil rights measures. Other democracies don’t allow a minority to block measures that are favored by an overwhelming majority of a legislature and an even larger majority of voters, given the structure of the Senate. It would have been reasonable for the Post interviewers to press Senator Sinema on this issue, if this had been a serious interview.

Most members of the Senate cannot get this sort of fluff piece to present themselves as brave political figures standing up to their party and the political winds. It is hard to see a good reason why the Post felt that it should let Senator Sinema present herself this way.

That’s what readers of the paper must be asking after seeing this piece on Friday morning. The headline of the piece features her quote, “no one tells me what to do,” when in fact there is ample evidence that the pharmaceutical industry and rich contributors tell her exactly what to do.

Sinema has made herself famous this year by refusing to go along with tax hikes on rich people and corporations or limiting the patent monopolies given to prescription drug companies by negotiating prices. As a result, it is much more difficult for the Democrats to find offsets for the spending increases in the Build Back Better (BBB) bill.

The piece allows Sinema to tell her story on taxing the rich with zero pushback against obviously untrue statements. Sinema had voted against the Trump tax cuts when she was a member of the House in 2017, but now is refusing to go along with Democratic efforts to take back most of these cuts.

The piece tells readers:

“Sinema said her goal had been to ensure that any revenue-raising measures in the bill [BBB] are focused on ‘maintaining American competitiveness and ensuring that businesses of all sizes in America, and particularly in Arizona, have the ability to grow and to compete.’”

It would have been worth mentioning here that there is zero evidence that the Trump tax cuts had any notable effect in boosting the competitiveness and ability for growth of businesses in the United States or Arizona. This means that Senator Sinema is either completely ignorant of recent economic history, or lying. In this context, it might have been worth mentioning that Senator Sinema has been engaged in some recent fundraising efforts from very wealthy donors.

It might have also been worth mentioning Senator Sinema’s contributions from the pharmaceutical industry. Incredibly, the piece does not mention at all Senator Sinema’s successful effect to block negotiations on most drug prices to bring our prices more in line with the rest of the world. Reducing drug prices could have paid for much of the cost of the BBB bill. Senator Sinema had campaigned on reducing drug prices in her 2018 senate race.

The piece also allowed Sinema to make contradictory assertions about her concerns with deficits and inflation. After boasting that she had warned about inflation from the spending in the American Recovery Act, which was approved in February, the piece quotes Sinema:

“When we were drafting the bipartisan infrastructure law, we specifically took care to include shovel-ready projects that would be ready to start moving as quickly as possible.”

If Senator Sinema is actually worried about the current inflation then absolutely the last thing she should want are “shovel-ready” projects. Such projects would mean more spending now, further increasing demand at a time when Sinema is complaining that we have too much demand and that it is causing inflation. To be consistent, Sinema should want spending that will take place several years down the road, when presumably inflationary pressures will have eased.

The piece also noted Sinema’s opposition to ending the filibuster. She argued her case in a Washington Post column earlier this year.  Incredibly, the column never acknowledged the filibuster’s origins as a legislative tool to protect slavery, or its more recent usage to protect Jim Crow laws and to block civil rights measures. Other democracies don’t allow a minority to block measures that are favored by an overwhelming majority of a legislature and an even larger majority of voters, given the structure of the Senate. It would have been reasonable for the Post interviewers to press Senator Sinema on this issue, if this had been a serious interview.

Most members of the Senate cannot get this sort of fluff piece to present themselves as brave political figures standing up to their party and the political winds. It is hard to see a good reason why the Post felt that it should let Senator Sinema present herself this way.

We’re getting a lot of “I told you so’s” on inflation in recent days. Yesterday, it was Larry Summers in the Washington Post, today we get Steven Rattner in a New York Times column. Their story is that the 6.4 percent year-over-year inflation shown in the October CPI proves that their warnings about Biden’s recovery package being too large were correct.

Before analyzing this claim and Rattner’s takeaways going forward, let me clearly say that I did not anticipate this sort of price jump. While some increase in inflation was inevitable, and even desirable, the rise was considerably more than I expected. I attribute this to supply chain issues, which are almost certain to be temporary (more on this later). But I am happy to acknowledge that this burst of inflation did catch me by surprise.

So, let’s get to Rattner’s story. He and Summers argued that the American Recovery Package (ARP) that Congress passed in February overstimulated the economy, leading to a serious problem with inflation. They want the Fed to raise rates to slow the economy, saying that its wait and see attitude is irresponsible and will lead to more inflation. Rattner also wants the Democrats to cut back their Build Back Better plan to make sure that it does not increase the deficit.

Okay, so starting with the basic claim, clearly the ARP did give a big boost to the recovery. That is why the unemployment rate is down to 4.6 percent, a level that we didn’t reach following the Great Recession until February of 2017, more than nine years after the start of the recession. 

But, it is hard to blame the ARP as the sole cause of the spike in inflation. The UK just reported its year-over-year inflation rate as 4.2 percent, far above its central bank’s 2.0 percent target. The reason this is a big deal is that the UK didn’t have a big stimulus package and its central bank has been far more vigilant in its commitment to low inflation than the Fed. While 4.2 percent is obviously less than 6.4 percent, the jump in the UK shows that there is something more than an over-stimulated economy driving these inflation numbers.

There are a couple of other things that don’t fit well with the Summers-Rattner line. Contrary to what Summers very explicitly predicted, the dollar has not fallen against other major currencies, it actually has risen substantially since the start of the year. It’s up by more than 6.0 percent against the euro.

This means both that investors are not anxious to dump the dollar as inflation erodes its value, but also that we can buy lots of imported goods more cheaply from Europe and other places, insofar as both our inflation exceeded theirs and also the dollar has risen in value against their currencies. That would be an important check on inflation going forward.

The other point here is that the financial markets clearly are not buying the Summers-Rattner hyperinflation story. The interest rate on the 10-year Treasury bond is currently 1.63 percent. It’s hard to believe investors would accept this sort of interest rate if they anticipated 4-5 percent annual inflation. (By comparison, it never got below 4.0 percent in budget surplus Clinton 1990s.) The breakeven 10-year Treasury rate (comparing the rate on Treasury bonds and inflation-indexed bonds) is 2.7 percent.

As someone who warned about both the stock bubble in the 1990s and the housing bubble in the 00s, I am well aware that financial markets can be seriously wrong. Nonetheless, it is worth noting that they clearly do not accept the Summers-Rattner inflation story.

Demand Pressure Going Forward

While we can debate forever whether the ARP put too much money into the economy in the spring and summer, the relevant question is what the economy looks like going forward. On this front, there are good reasons for thinking that our problem may be too little demand rather than too much demand.

First and most importantly, we ended the special pandemic unemployment insurance (UI) programs and $300 weekly supplements in September. At the time, we had almost 9 million people getting benefits under the pandemic programs, as well as 3 million people getting convention UI in various forms. The loss of these benefits would conservatively amount to roughly $280 billion (1.2 percent of GDP) on an annual basis.

In addition, various other pandemic programs are coming to an end. The funds in the Paycheck Protection Program have mostly been disbursed. The eviction moratorium came to an end in September, which will lead to evictions in some cases and more rent payments in others. The moratorium on student loan payments ends in January, which will also be a drag on the spending of millions of people with debts.

All of these factors will be a drag on the economy moving forward. In addition, there are some inevitable sources of drag due to one-time actions. The pace of mortgage refinancing has slowed sharply, largely because this is the sort of thing people only do once. There is a lot of money generated from these fees. If the costs of refinancing a $250,000 mortgage are 2 percent, that comes to $5,000 in fees and commissions that we won’t be seeing as the pace slows. Also, we won’t be seeing additional money freed up for consumption by families that are able to refinance at lower rates.

There is a similar story with homebuying. There had been a big surge at the start of the pandemic as people took advantage of increased opportunities to work from home and move to new houses. This switch will continue, but at a much slower pace going forward. It is important to remember that people moving to new homes often buy new refrigerators, washers and dryers, and other items currently seeing rapid price increases.  

These factors will be serious drags on the economy going forward. They are not likely to tip us into recession, but they should make us hesitant to accept the inflation hawks’ complaints that the economy is overstimulated.

It is also worth mentioning that the supply chain problems will likely work themselves out in the next several months. Decreased demand for a wide range of household items, coupled with shippers innovating and hiring more workers, should get things back to something like normal some time next year. This will mean falling prices in many areas. We already see this with the price of televisions, which has dropped 2.8 percent in the last two months after rising rapidly over the summer.   

 

Should We Trim Build Back Better?

The bottom line from Rattner is that we need to start worrying about budget deficits big time. If we are not likely to see much inflationary pressure going forward, this is not clear, but it’s also important to get some idea of the magnitude involved. Most of the Build Back Better (BBB) plan is paid for with tax increases, but let’s say that we have a shortfall of $300 billion. That comes to $30 billion a year over the course of a decade, or roughly 0.1 percent of GDP in a $30 trillion economy.

There is no plausible story in which this sort of shortfall will have a noticeable impact on inflation. Furthermore, as has been widely pointed out, many aspects of the program will lower inflation, such as increasing parents’ ability to work with increased childcare, as well as improved access to broadband and better infrastructure.

It is also worth mentioning an inflation-debt issue that the deficit hawks persist in ignoring. The government grants patent and copyright monopolies every year that lead to higher prices for everything from prescription drugs to computer software and video games. These monopolies both stimulate economic activity (that is their point) and effectively create debt in the form of higher prices. In the case of prescription drugs alone, we are likely paying an additional $400 billion a year due to patent monopolies and related protections.   

The insistence on ignoring the impact of these government-granted monopolies in their calculations of deficits and debt shows the lack of seriousness of the deficit hawks. How is it any different from the standpoint of the macroeconomy if we increase the deficit by $50 billion by spending more on biomedical research, as opposed to stimulating another $50 billion in spending by the pharmaceutical industry through more generous patent monopolies?

The fact that they never even consider the issue shows a profound lack of seriousness. Anyhow, we do need to be concerned about the risks that we are overheating the economy and creating real problems of inflation going forward. But, in spite of the victory lap from the deficit hawks, there is good reason to believe that they are not correct and that Congress and the Biden administration should proceed as planned with the BBB.  

We’re getting a lot of “I told you so’s” on inflation in recent days. Yesterday, it was Larry Summers in the Washington Post, today we get Steven Rattner in a New York Times column. Their story is that the 6.4 percent year-over-year inflation shown in the October CPI proves that their warnings about Biden’s recovery package being too large were correct.

Before analyzing this claim and Rattner’s takeaways going forward, let me clearly say that I did not anticipate this sort of price jump. While some increase in inflation was inevitable, and even desirable, the rise was considerably more than I expected. I attribute this to supply chain issues, which are almost certain to be temporary (more on this later). But I am happy to acknowledge that this burst of inflation did catch me by surprise.

So, let’s get to Rattner’s story. He and Summers argued that the American Recovery Package (ARP) that Congress passed in February overstimulated the economy, leading to a serious problem with inflation. They want the Fed to raise rates to slow the economy, saying that its wait and see attitude is irresponsible and will lead to more inflation. Rattner also wants the Democrats to cut back their Build Back Better plan to make sure that it does not increase the deficit.

Okay, so starting with the basic claim, clearly the ARP did give a big boost to the recovery. That is why the unemployment rate is down to 4.6 percent, a level that we didn’t reach following the Great Recession until February of 2017, more than nine years after the start of the recession. 

But, it is hard to blame the ARP as the sole cause of the spike in inflation. The UK just reported its year-over-year inflation rate as 4.2 percent, far above its central bank’s 2.0 percent target. The reason this is a big deal is that the UK didn’t have a big stimulus package and its central bank has been far more vigilant in its commitment to low inflation than the Fed. While 4.2 percent is obviously less than 6.4 percent, the jump in the UK shows that there is something more than an over-stimulated economy driving these inflation numbers.

There are a couple of other things that don’t fit well with the Summers-Rattner line. Contrary to what Summers very explicitly predicted, the dollar has not fallen against other major currencies, it actually has risen substantially since the start of the year. It’s up by more than 6.0 percent against the euro.

This means both that investors are not anxious to dump the dollar as inflation erodes its value, but also that we can buy lots of imported goods more cheaply from Europe and other places, insofar as both our inflation exceeded theirs and also the dollar has risen in value against their currencies. That would be an important check on inflation going forward.

The other point here is that the financial markets clearly are not buying the Summers-Rattner hyperinflation story. The interest rate on the 10-year Treasury bond is currently 1.63 percent. It’s hard to believe investors would accept this sort of interest rate if they anticipated 4-5 percent annual inflation. (By comparison, it never got below 4.0 percent in budget surplus Clinton 1990s.) The breakeven 10-year Treasury rate (comparing the rate on Treasury bonds and inflation-indexed bonds) is 2.7 percent.

As someone who warned about both the stock bubble in the 1990s and the housing bubble in the 00s, I am well aware that financial markets can be seriously wrong. Nonetheless, it is worth noting that they clearly do not accept the Summers-Rattner inflation story.

Demand Pressure Going Forward

While we can debate forever whether the ARP put too much money into the economy in the spring and summer, the relevant question is what the economy looks like going forward. On this front, there are good reasons for thinking that our problem may be too little demand rather than too much demand.

First and most importantly, we ended the special pandemic unemployment insurance (UI) programs and $300 weekly supplements in September. At the time, we had almost 9 million people getting benefits under the pandemic programs, as well as 3 million people getting convention UI in various forms. The loss of these benefits would conservatively amount to roughly $280 billion (1.2 percent of GDP) on an annual basis.

In addition, various other pandemic programs are coming to an end. The funds in the Paycheck Protection Program have mostly been disbursed. The eviction moratorium came to an end in September, which will lead to evictions in some cases and more rent payments in others. The moratorium on student loan payments ends in January, which will also be a drag on the spending of millions of people with debts.

All of these factors will be a drag on the economy moving forward. In addition, there are some inevitable sources of drag due to one-time actions. The pace of mortgage refinancing has slowed sharply, largely because this is the sort of thing people only do once. There is a lot of money generated from these fees. If the costs of refinancing a $250,000 mortgage are 2 percent, that comes to $5,000 in fees and commissions that we won’t be seeing as the pace slows. Also, we won’t be seeing additional money freed up for consumption by families that are able to refinance at lower rates.

There is a similar story with homebuying. There had been a big surge at the start of the pandemic as people took advantage of increased opportunities to work from home and move to new houses. This switch will continue, but at a much slower pace going forward. It is important to remember that people moving to new homes often buy new refrigerators, washers and dryers, and other items currently seeing rapid price increases.  

These factors will be serious drags on the economy going forward. They are not likely to tip us into recession, but they should make us hesitant to accept the inflation hawks’ complaints that the economy is overstimulated.

It is also worth mentioning that the supply chain problems will likely work themselves out in the next several months. Decreased demand for a wide range of household items, coupled with shippers innovating and hiring more workers, should get things back to something like normal some time next year. This will mean falling prices in many areas. We already see this with the price of televisions, which has dropped 2.8 percent in the last two months after rising rapidly over the summer.   

 

Should We Trim Build Back Better?

The bottom line from Rattner is that we need to start worrying about budget deficits big time. If we are not likely to see much inflationary pressure going forward, this is not clear, but it’s also important to get some idea of the magnitude involved. Most of the Build Back Better (BBB) plan is paid for with tax increases, but let’s say that we have a shortfall of $300 billion. That comes to $30 billion a year over the course of a decade, or roughly 0.1 percent of GDP in a $30 trillion economy.

There is no plausible story in which this sort of shortfall will have a noticeable impact on inflation. Furthermore, as has been widely pointed out, many aspects of the program will lower inflation, such as increasing parents’ ability to work with increased childcare, as well as improved access to broadband and better infrastructure.

It is also worth mentioning an inflation-debt issue that the deficit hawks persist in ignoring. The government grants patent and copyright monopolies every year that lead to higher prices for everything from prescription drugs to computer software and video games. These monopolies both stimulate economic activity (that is their point) and effectively create debt in the form of higher prices. In the case of prescription drugs alone, we are likely paying an additional $400 billion a year due to patent monopolies and related protections.   

The insistence on ignoring the impact of these government-granted monopolies in their calculations of deficits and debt shows the lack of seriousness of the deficit hawks. How is it any different from the standpoint of the macroeconomy if we increase the deficit by $50 billion by spending more on biomedical research, as opposed to stimulating another $50 billion in spending by the pharmaceutical industry through more generous patent monopolies?

The fact that they never even consider the issue shows a profound lack of seriousness. Anyhow, we do need to be concerned about the risks that we are overheating the economy and creating real problems of inflation going forward. But, in spite of the victory lap from the deficit hawks, there is good reason to believe that they are not correct and that Congress and the Biden administration should proceed as planned with the BBB.  

We are still getting through a worldwide pandemic that has taken tens of millions of lives. While we did develop effective vaccines, they were not produced and distributed quickly enough to prevent enormous loss of life. This is a tragedy that should force us to ask how we could have done better.

On the other side, some people did manage to get enormously rich from the pandemic. Specifically, those who had patent monopolies on the mRNA vaccines did very well, as the stock prices of both Pfizer and Moderna soared during the pandemic. Back in April, Forbes identified 40 people who became billionaires as a direct result of their ownership of stock in companies that were profiting off the pandemic. Three of these were from Moderna alone. The number has surely grown, as the stock market has gone up further in the last seven months.

The reason why the Moderna billionaires might be especially upsetting is that so much of what they did was with government funding. The development of mRNA technology, beginning in the early 1980s, was accomplished almost entirely on the government’s dime. While Moderna did do further research to develop a foundation for producing vaccines, the money to actually develop and test Moderna’s vaccine came entirely from the government through Operation Warp Speed. The government also signed a large advance purchase agreement, which would have required it to pay for several million Moderna vaccines, even if other vaccines were superior.

In spite of all this government assistance, Moderna was allowed to gain control over key patents and other intellectual property claims. It can therefore restrict the distribution of its vaccine and charge whatever price it chooses.

In short, we structured the relationship with Moderna so that it was able to profit enormously. Its profits come directly at the expense of lives. While we could have insisted that all the work on pandemic vaccines, tests, and treatments be fully open (at least those projects relying on government funding or past government-funded research), we instead had the taxpayers pick up the tab and then give Moderna, Pfizer, Merck, and the rest patent monopolies.

That’s a great plan if the goal is to make some people incredibly rich, as we’ve done. It is a terrible path to follow if the point is to bring the pandemic under control as quickly as possible and minimize death and disease.

If we had gone the open route, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, which would be freely available, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration. Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.  

But curbing the pandemic and saving lives was not on the agenda. The key issue was maintaining a market structure that allowed a small number of people to get incredibly rich. It seems that is again the case with climate change. The U.S and other governments want to maintain a market structure that will allow some people to get rich off of green technology rather than adopting the most efficient mechanisms for saving the planet.

Green Technology, If Saving the Planet Were the Goal

As is the case with the pandemic, we face a situation with global warming where we should want any new technology to be distributed as widely as possible as quickly as possible. Intellectual property claims like patents, copyrights, and industrial secrets are obstacles to this goal. Just as Moderna and other vaccine makers have been able to use their control over technology to limit the production of vaccines, these forms of intellectual property will limit the ability to manufacture solar panels, wind turbines, batteries, and other technologies needed to reduce the emission of greenhouse gases.

We should want all of these items to sell at just their cost of production, without having their prices jacked up by these government-granted monopolies. In the case of drugs and vaccines, the mark-ups associated with these protections are typically several thousand percent. Drugs and vaccines are almost always cheap to manufacture and distribute, they are expensive because the monopolies resulting from intellectual property allow companies to charge prices that vastly exceed the free market price.

The mark-ups from intellectual property associated with green technologies are likely to be lower in percentage terms, because it is considerably more costly to build things like a wind turbine than to manufacture and distribute a bottle of pills. But, we can still assume that the added cost associated with intellectual property claims will be considerable, thereby slowing the adoption of green technology.

The would-be climate billionaires will counter this argument by pointing out that they need incentives to develop the technology needed to save the planet. That point is true, but it tells us nothing about the need for intellectual property.

Patent monopolies and other forms of intellectual property are one way of providing incentives, but economists have discovered an alternative mechanism for providing incentive: money. According to economic theory, many people can be persuaded to work for money.

We got a great model of the use of money to promote innovation in the pandemic, with Operation Warp Speed, which gave billions of dollars to the pharmaceutical industry to speed the development of vaccines, treatments, and tests. There was a huge payoff with this spending, as the industry quickly responded with effective vaccines and treatments.

Applying the same plan with climate change, we would also use public funds, with a couple of differences. First, we would be thinking of longer-term funding. Speed was essential for saving lives with the pandemic. Speed is essential in addressing climate change as well, but no one thinks that we will have developed all the necessary technology for producing and storing clean energy in a year or two. We will need longer-term contracts that finance development of new technologies over three, five, or even ten years.

The other more important point is that this time the research will be open. We aren’t going to pay companies to develop better solar panels or batteries and then give them a patent monopoly that allows them to charge whatever they want. The government pays them once for their innovation, not twice.

If they sign a contract to develop clean technology and storage, then everything they develop is fully open. This means any manufacturer in the country or the world can use the technology at no cost. (I’ll come back to the international issue.)

This story is exactly what we should want to see if the world is going to move away from fossil fuels as quickly as possible. Imagine the price of solar panels, wind turbines, and batteries fall by 30-40 percent because there are no patents or related protections associated with them. They would be hugely more competitive with fossil fuels, leading to far more rapid adoption. Why would we not want this?

The System of Public Funding

Making new technology available at zero cost would be an enormous benefit over the current system, but that may not even be the biggest advantage of a system of open publicly funded research.[1] Under this sort of system, a condition of getting money would be that all findings are fully open, which means that results would be posted on the web as soon as practical. This would allow scientists all over the world to quickly benefit from each other’s successes and failures. As a result, the technology should advance far more quickly.

The companies currently in the industry may resist changing their business model, but it is possible to force the issue. Suppose the government is putting up funding for developing solar panels, with the condition that all the technology would be fully open. If a solar panel manufacturer chose to remain outside the system, they are soon likely to find themselves competing with panels that are sold at much lower prices, since they don’t have to cover the cost of the technology. (We need a provision like “copyleft” developed by the free software movement that prohibits the use of the technology developed through this system by anyone who themselves claim patent or other IP protection.)   

This prospect is likely to lead most of the companies currently involved in producing clean energy to join the system. Since the government payments are meant to be an alternative to patent monopolies, rather than a supplement, they will have to be larger relative to the research spending than we saw under OWL. It will likely be necessary in many cases to compensate companies for intellectual property claims they already possess to persuade them to join the system.

In some cases, this would also include industrial secrets, which are not quite the same as patent or copyright monopolies. Industrial secrets are protected by non-disclosure agreements that the relevant employees are forced to sign. As a condition of receiving public money, these agreements would be made unenforceable. This means that if a company develops some process or technique, which is not directly protected by patents or another form of intellectual property, any employee would have the option to leave and work for another company and share everything they know, which should already be posted on the web in any case.

International Cooperation

There is obviously a need to share research and development costs internationally rather than having the United States foot the bill alone. We would need an international agreement on this cost-sharing. The basic principle should be straightforward. We would want countries to contribute in proportion to their size and wealth.

There also need to be some criteria for what spending qualifies as being part of a country’s contribution. A million dollars paid to a company or researchers with a well-established track record has to count for more than a million dollars paid to a company controlled by a country’s president’s brother, with no track record whatsoever.  

It would take time to work out an agreement, just as it takes time to work out trade deals like the Trans-Pacific Partnership. But that should not be an excuse not to move forward. The United States and other countries in general agreement on this sort of process could start the process and begin funding research immediately, with the plan that adjustments and payments between nations could be decided later. That is what we would do if, for example, we faced an invasion from space aliens.

More of the Same and a Warming Planet

But, we know that fighting global warming is not really at the top of anyone’s agenda. And no one, including most liberal types, don’t want to do anything that might prevent us from creating more climate change billionaires – after all, they would then have less occasion to complain about inequality. In short, the threat of global warming is not a big enough deal to get our intellectual types to do any serious thinking – not much is.

[1] I give an outline of how this system could work for prescription drugs in chapter 5 of Rigged (it’s free). Our system of military contracting can be seen as a loose model for this system. Military contractors can still take out patents, but they rely on government payments for the vast majority of their revenue. A major difference is that military contractors can keep their work secret for obvious reasons. There is no reason we should want any development in clean technology to be kept secret.

 

We are still getting through a worldwide pandemic that has taken tens of millions of lives. While we did develop effective vaccines, they were not produced and distributed quickly enough to prevent enormous loss of life. This is a tragedy that should force us to ask how we could have done better.

On the other side, some people did manage to get enormously rich from the pandemic. Specifically, those who had patent monopolies on the mRNA vaccines did very well, as the stock prices of both Pfizer and Moderna soared during the pandemic. Back in April, Forbes identified 40 people who became billionaires as a direct result of their ownership of stock in companies that were profiting off the pandemic. Three of these were from Moderna alone. The number has surely grown, as the stock market has gone up further in the last seven months.

The reason why the Moderna billionaires might be especially upsetting is that so much of what they did was with government funding. The development of mRNA technology, beginning in the early 1980s, was accomplished almost entirely on the government’s dime. While Moderna did do further research to develop a foundation for producing vaccines, the money to actually develop and test Moderna’s vaccine came entirely from the government through Operation Warp Speed. The government also signed a large advance purchase agreement, which would have required it to pay for several million Moderna vaccines, even if other vaccines were superior.

In spite of all this government assistance, Moderna was allowed to gain control over key patents and other intellectual property claims. It can therefore restrict the distribution of its vaccine and charge whatever price it chooses.

In short, we structured the relationship with Moderna so that it was able to profit enormously. Its profits come directly at the expense of lives. While we could have insisted that all the work on pandemic vaccines, tests, and treatments be fully open (at least those projects relying on government funding or past government-funded research), we instead had the taxpayers pick up the tab and then give Moderna, Pfizer, Merck, and the rest patent monopolies.

That’s a great plan if the goal is to make some people incredibly rich, as we’ve done. It is a terrible path to follow if the point is to bring the pandemic under control as quickly as possible and minimize death and disease.

If we had gone the open route, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, which would be freely available, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration. Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.  

But curbing the pandemic and saving lives was not on the agenda. The key issue was maintaining a market structure that allowed a small number of people to get incredibly rich. It seems that is again the case with climate change. The U.S and other governments want to maintain a market structure that will allow some people to get rich off of green technology rather than adopting the most efficient mechanisms for saving the planet.

Green Technology, If Saving the Planet Were the Goal

As is the case with the pandemic, we face a situation with global warming where we should want any new technology to be distributed as widely as possible as quickly as possible. Intellectual property claims like patents, copyrights, and industrial secrets are obstacles to this goal. Just as Moderna and other vaccine makers have been able to use their control over technology to limit the production of vaccines, these forms of intellectual property will limit the ability to manufacture solar panels, wind turbines, batteries, and other technologies needed to reduce the emission of greenhouse gases.

We should want all of these items to sell at just their cost of production, without having their prices jacked up by these government-granted monopolies. In the case of drugs and vaccines, the mark-ups associated with these protections are typically several thousand percent. Drugs and vaccines are almost always cheap to manufacture and distribute, they are expensive because the monopolies resulting from intellectual property allow companies to charge prices that vastly exceed the free market price.

The mark-ups from intellectual property associated with green technologies are likely to be lower in percentage terms, because it is considerably more costly to build things like a wind turbine than to manufacture and distribute a bottle of pills. But, we can still assume that the added cost associated with intellectual property claims will be considerable, thereby slowing the adoption of green technology.

The would-be climate billionaires will counter this argument by pointing out that they need incentives to develop the technology needed to save the planet. That point is true, but it tells us nothing about the need for intellectual property.

Patent monopolies and other forms of intellectual property are one way of providing incentives, but economists have discovered an alternative mechanism for providing incentive: money. According to economic theory, many people can be persuaded to work for money.

We got a great model of the use of money to promote innovation in the pandemic, with Operation Warp Speed, which gave billions of dollars to the pharmaceutical industry to speed the development of vaccines, treatments, and tests. There was a huge payoff with this spending, as the industry quickly responded with effective vaccines and treatments.

Applying the same plan with climate change, we would also use public funds, with a couple of differences. First, we would be thinking of longer-term funding. Speed was essential for saving lives with the pandemic. Speed is essential in addressing climate change as well, but no one thinks that we will have developed all the necessary technology for producing and storing clean energy in a year or two. We will need longer-term contracts that finance development of new technologies over three, five, or even ten years.

The other more important point is that this time the research will be open. We aren’t going to pay companies to develop better solar panels or batteries and then give them a patent monopoly that allows them to charge whatever they want. The government pays them once for their innovation, not twice.

If they sign a contract to develop clean technology and storage, then everything they develop is fully open. This means any manufacturer in the country or the world can use the technology at no cost. (I’ll come back to the international issue.)

This story is exactly what we should want to see if the world is going to move away from fossil fuels as quickly as possible. Imagine the price of solar panels, wind turbines, and batteries fall by 30-40 percent because there are no patents or related protections associated with them. They would be hugely more competitive with fossil fuels, leading to far more rapid adoption. Why would we not want this?

The System of Public Funding

Making new technology available at zero cost would be an enormous benefit over the current system, but that may not even be the biggest advantage of a system of open publicly funded research.[1] Under this sort of system, a condition of getting money would be that all findings are fully open, which means that results would be posted on the web as soon as practical. This would allow scientists all over the world to quickly benefit from each other’s successes and failures. As a result, the technology should advance far more quickly.

The companies currently in the industry may resist changing their business model, but it is possible to force the issue. Suppose the government is putting up funding for developing solar panels, with the condition that all the technology would be fully open. If a solar panel manufacturer chose to remain outside the system, they are soon likely to find themselves competing with panels that are sold at much lower prices, since they don’t have to cover the cost of the technology. (We need a provision like “copyleft” developed by the free software movement that prohibits the use of the technology developed through this system by anyone who themselves claim patent or other IP protection.)   

This prospect is likely to lead most of the companies currently involved in producing clean energy to join the system. Since the government payments are meant to be an alternative to patent monopolies, rather than a supplement, they will have to be larger relative to the research spending than we saw under OWL. It will likely be necessary in many cases to compensate companies for intellectual property claims they already possess to persuade them to join the system.

In some cases, this would also include industrial secrets, which are not quite the same as patent or copyright monopolies. Industrial secrets are protected by non-disclosure agreements that the relevant employees are forced to sign. As a condition of receiving public money, these agreements would be made unenforceable. This means that if a company develops some process or technique, which is not directly protected by patents or another form of intellectual property, any employee would have the option to leave and work for another company and share everything they know, which should already be posted on the web in any case.

International Cooperation

There is obviously a need to share research and development costs internationally rather than having the United States foot the bill alone. We would need an international agreement on this cost-sharing. The basic principle should be straightforward. We would want countries to contribute in proportion to their size and wealth.

There also need to be some criteria for what spending qualifies as being part of a country’s contribution. A million dollars paid to a company or researchers with a well-established track record has to count for more than a million dollars paid to a company controlled by a country’s president’s brother, with no track record whatsoever.  

It would take time to work out an agreement, just as it takes time to work out trade deals like the Trans-Pacific Partnership. But that should not be an excuse not to move forward. The United States and other countries in general agreement on this sort of process could start the process and begin funding research immediately, with the plan that adjustments and payments between nations could be decided later. That is what we would do if, for example, we faced an invasion from space aliens.

More of the Same and a Warming Planet

But, we know that fighting global warming is not really at the top of anyone’s agenda. And no one, including most liberal types, don’t want to do anything that might prevent us from creating more climate change billionaires – after all, they would then have less occasion to complain about inequality. In short, the threat of global warming is not a big enough deal to get our intellectual types to do any serious thinking – not much is.

[1] I give an outline of how this system could work for prescription drugs in chapter 5 of Rigged (it’s free). Our system of military contracting can be seen as a loose model for this system. Military contractors can still take out patents, but they rely on government payments for the vast majority of their revenue. A major difference is that military contractors can keep their work secret for obvious reasons. There is no reason we should want any development in clean technology to be kept secret.

 

I wanted to say a bit more about the New York Times piece on the shortage of truck drivers and how this is the biggest factor causing the current supply chain problems. In an earlier post, I pointed out that the real hourly wage for truckers has dropped by more than 5 percent since 1990. If we are wondering why there is a shortage of drivers, this would be an obvious place to start.

But the drop in pay is just part of the story. The industry is far less unionized than it was back in the 1970s, when President Carter began to deregulate trucking.

Not having a union means that truckers have far less control over their working conditions. That’s a big deal in trucking. Without a union to stand behind them, truckers can be forced to work irregular shifts and long hours. They can be forced to drive in all sorts of weather. They can also be forced to drive trucks that they don’t think are safe due to bad brakes or other issues.

In addition, there has been an enormous increase in the number of independent truckers who own their trucks. For the most part, these should not be thought of as being small businesses, but rather like Uber or Lyft drivers. The large shipping companies contract with these drivers and control almost everything about their work conditions. This can mean that they require them to wait, often many hours, for a shipment to unload and then be transported to a store or warehouse.

Since a contract will typically pay by the mile, if the time spent waiting is factored into the equation, the hourly pay for these drivers will often be very low, possibly even less than the minimum wage. That doesn’t matter, however, since these truckers are classified as independent contractors, not employees. This means that the minimum wage does not apply to them, nor are they eligible for unemployment benefits if they can’t find work, or workers’ compensation if they are injured on the job.

In short, trucking doesn’t look like a very lucrative occupation these days. It’s not surprising that workers are not lining up for the job.

But this problem comes with an obvious solution. Employers have to pay higher wages and offer better working conditions. (There also is a huge issue with sexism, less than 10 percent of truckers are women.)

For some reason, this solution does not feature prominently in the article. The piece does tell us:

“In response, the companies have raised their wages. The average weekly earnings for long-distance drivers have increased about 21 percent since the start of 2019, according to the Bureau of Labor Statistics. Last year, commercial truck drivers had a median wage of $47,130.”

Real hourly wages for truck drivers have risen somewhat over the last two years but still are well below the level of thirty years ago. It is also important to note that average weekly hours have increased by around 5 percent since 2019. This increase would account for almost a quarter of the increase in the nominal weekly wage over the last two years and more than one-third of the real increase. So even the pay increase over the last two years is not quite as impressive as the article implies.

How Much Should Truckers Be Paid?

Later in the piece, the article tells readers of a trucking company that says it pays an average wage of $70,000 a year. It then describes the situation of a trucker, earning $75, 000 to $85,000 a year, who is unhappy with his work schedule, but probably won’t quit.

These numbers are presumably supposed to tell us that trucking is a high-paying occupation. While these pay figures are certainly far more than workers will earn in most other jobs that do not require a college degree, they are not especially high. These truckers almost certainly work far more than forty hours a week on average. If we assume an average of 50 hours a week for these jobs, a $75,000 annual wage would come to $30 an hour, even assuming no premium for overtime pay.

It is also important to realize that we have seen an enormous upward redistribution of wage income over the last four decades. If the minimum wage had kept pace with productivity growth since its peak value in 1968 (when the unemployment rate was less than 4.0 percent), it would be over $26 an hour today. That would come to $52,000 a year for a fifty-week year, in which workers put in 40 hours a week. In that context, putting in a lot of overtime, and getting $70,000 to $80,000 a year, doesn’t sound especially good.    

But let’s give the question of truckers’ pay a bit more thought. The piece tells us:

“The shortage has alarmed trucking companies, which say there are not enough young people to replace those aging out of the work force. The stereotypes attached with the job, the isolating lifestyle and younger generations’ focus on pursuing four-year college degrees have made it difficult to entice drivers. Trucking companies have also struggled to retain workers: Turnover rates have reached as high as 90 percent for large carriers.”

The idea is that this is not just a short-term problem, but a long-term one that may actually get worse. That is bizarre. There is some training needed to drive a truck, but we’re talking weeks and months, not years.  

Suppose that truckers got $150,000 a year and worked something like regular 40-hour weeks, and weren’t forced to drive unsafe trucks in unsafe conditions? Does anyone think the industry would have a hard time finding enough people to work as truckers? (Actually, if truckers’ pay had kept pace with productivity growth over the last four decades it would be somewhere around $150k a year today.)

The point here is that the trucker shortage is overwhelmingly a problem of inadequate pay. This is what the market is telling us. But rather than listen to the market, we get a grand tour of other possible solutions. Why does the NYT have such a hard time listening to the market?

This seems like just another case of prejudice against workers who do not have college degrees. It’s true that higher pay for truckers would get passed on in the prices of a wide range of goods. But the $300,000 plus average pay of physicians gets passed on to us in the cost of our health care insurance. And the millions of dollars that private equity partners and hedge fund partners get paid to lose pension fund and university endowments money leads to higher prices for houses and other items, as they outbid normal workers. And government-granted patent monopolies cost us hundreds of billions in higher drug prices.

In these, and other areas, we have policies that make a relatively small number of people very wealthy, but that is not supposed to concern us. But the idea that we might have to pay truck drivers something like $150,000 a year, and therefore incur higher costs, is somehow intolerable.

Sorry folks, this is class bias pure and simple. When the market is telling the NYT something it does not want to hear, it just chooses to ignore the market.

The market may not always be right, but we should be clear on where we are willing to listen to market signals (given how we have structured it) and when we are not. When the market is telling us that a particular type of work done by less-educated workers needs to be much more highly compensated, this is a message that NYT editors do not want to hear.

I wanted to say a bit more about the New York Times piece on the shortage of truck drivers and how this is the biggest factor causing the current supply chain problems. In an earlier post, I pointed out that the real hourly wage for truckers has dropped by more than 5 percent since 1990. If we are wondering why there is a shortage of drivers, this would be an obvious place to start.

But the drop in pay is just part of the story. The industry is far less unionized than it was back in the 1970s, when President Carter began to deregulate trucking.

Not having a union means that truckers have far less control over their working conditions. That’s a big deal in trucking. Without a union to stand behind them, truckers can be forced to work irregular shifts and long hours. They can be forced to drive in all sorts of weather. They can also be forced to drive trucks that they don’t think are safe due to bad brakes or other issues.

In addition, there has been an enormous increase in the number of independent truckers who own their trucks. For the most part, these should not be thought of as being small businesses, but rather like Uber or Lyft drivers. The large shipping companies contract with these drivers and control almost everything about their work conditions. This can mean that they require them to wait, often many hours, for a shipment to unload and then be transported to a store or warehouse.

Since a contract will typically pay by the mile, if the time spent waiting is factored into the equation, the hourly pay for these drivers will often be very low, possibly even less than the minimum wage. That doesn’t matter, however, since these truckers are classified as independent contractors, not employees. This means that the minimum wage does not apply to them, nor are they eligible for unemployment benefits if they can’t find work, or workers’ compensation if they are injured on the job.

In short, trucking doesn’t look like a very lucrative occupation these days. It’s not surprising that workers are not lining up for the job.

But this problem comes with an obvious solution. Employers have to pay higher wages and offer better working conditions. (There also is a huge issue with sexism, less than 10 percent of truckers are women.)

For some reason, this solution does not feature prominently in the article. The piece does tell us:

“In response, the companies have raised their wages. The average weekly earnings for long-distance drivers have increased about 21 percent since the start of 2019, according to the Bureau of Labor Statistics. Last year, commercial truck drivers had a median wage of $47,130.”

Real hourly wages for truck drivers have risen somewhat over the last two years but still are well below the level of thirty years ago. It is also important to note that average weekly hours have increased by around 5 percent since 2019. This increase would account for almost a quarter of the increase in the nominal weekly wage over the last two years and more than one-third of the real increase. So even the pay increase over the last two years is not quite as impressive as the article implies.

How Much Should Truckers Be Paid?

Later in the piece, the article tells readers of a trucking company that says it pays an average wage of $70,000 a year. It then describes the situation of a trucker, earning $75, 000 to $85,000 a year, who is unhappy with his work schedule, but probably won’t quit.

These numbers are presumably supposed to tell us that trucking is a high-paying occupation. While these pay figures are certainly far more than workers will earn in most other jobs that do not require a college degree, they are not especially high. These truckers almost certainly work far more than forty hours a week on average. If we assume an average of 50 hours a week for these jobs, a $75,000 annual wage would come to $30 an hour, even assuming no premium for overtime pay.

It is also important to realize that we have seen an enormous upward redistribution of wage income over the last four decades. If the minimum wage had kept pace with productivity growth since its peak value in 1968 (when the unemployment rate was less than 4.0 percent), it would be over $26 an hour today. That would come to $52,000 a year for a fifty-week year, in which workers put in 40 hours a week. In that context, putting in a lot of overtime, and getting $70,000 to $80,000 a year, doesn’t sound especially good.    

But let’s give the question of truckers’ pay a bit more thought. The piece tells us:

“The shortage has alarmed trucking companies, which say there are not enough young people to replace those aging out of the work force. The stereotypes attached with the job, the isolating lifestyle and younger generations’ focus on pursuing four-year college degrees have made it difficult to entice drivers. Trucking companies have also struggled to retain workers: Turnover rates have reached as high as 90 percent for large carriers.”

The idea is that this is not just a short-term problem, but a long-term one that may actually get worse. That is bizarre. There is some training needed to drive a truck, but we’re talking weeks and months, not years.  

Suppose that truckers got $150,000 a year and worked something like regular 40-hour weeks, and weren’t forced to drive unsafe trucks in unsafe conditions? Does anyone think the industry would have a hard time finding enough people to work as truckers? (Actually, if truckers’ pay had kept pace with productivity growth over the last four decades it would be somewhere around $150k a year today.)

The point here is that the trucker shortage is overwhelmingly a problem of inadequate pay. This is what the market is telling us. But rather than listen to the market, we get a grand tour of other possible solutions. Why does the NYT have such a hard time listening to the market?

This seems like just another case of prejudice against workers who do not have college degrees. It’s true that higher pay for truckers would get passed on in the prices of a wide range of goods. But the $300,000 plus average pay of physicians gets passed on to us in the cost of our health care insurance. And the millions of dollars that private equity partners and hedge fund partners get paid to lose pension fund and university endowments money leads to higher prices for houses and other items, as they outbid normal workers. And government-granted patent monopolies cost us hundreds of billions in higher drug prices.

In these, and other areas, we have policies that make a relatively small number of people very wealthy, but that is not supposed to concern us. But the idea that we might have to pay truck drivers something like $150,000 a year, and therefore incur higher costs, is somehow intolerable.

Sorry folks, this is class bias pure and simple. When the market is telling the NYT something it does not want to hear, it just chooses to ignore the market.

The market may not always be right, but we should be clear on where we are willing to listen to market signals (given how we have structured it) and when we are not. When the market is telling us that a particular type of work done by less-educated workers needs to be much more highly compensated, this is a message that NYT editors do not want to hear.

Those of us who have spent decades trying to call attention to the situation of ordinary workers, and their stagnant wages over the last four decades, are glad to see the media’s newfound interest in real wages (the difference between wage growth and price growth). They have been anxious to highlight the fact that inflation has exceeded the rate of wage growth over the last year.

While that is unfortunate, it is also the case that this is not unusual. Here’s the picture over the last four decades.

 

Source: Bureau of Labor Statistics.

As can be seen, there are many periods in which wage growth has not kept up with inflation. Starting in the 1980s, wages lagged inflation through most of the decade. This is the period that was known in the media as the “Reagan Boom,” or “morning in America.” Wages did exceed inflation from the mid-1990s to the early 2000s. They then fell behind inflation just before President Bush’s reelection campaign, although the media generally didn’t prominently highlight falling real wages in that election.

Wages again fell behind inflation in the weak recovery from the Great Recession. As the unemployment rate fell, workers again began to see real wage gains in the middle and last part of the decade. There was a surge in real wage growth at the start of the pandemic. This was a composition effect. Many of the lower-paid workers lost their jobs, which raised the average wage for people who were still working.

This year we are seeing this composition effect in reverse. The lower-paid workers are getting rehired, bringing down average pay.  This is why the year-over-year change in the real wage was -3.4 percent in April. This was not a story of workers taking massive pay cuts, it was a story of lower-paid workers getting rehired and bringing down the average.

We are still seeing this story. The wage in October of 2020 was boosted by the fact that many lower-paid workers had not yet gotten back their jobs. Now, most of those lower-paid workers are back on the job.

If we look at wage growth over the last two years, it comes out to 2.1 percent, or an average of 1.05 percent annually. That’s not great, but that’s much better than workers did through most of the last four decades, especially the years when Republicans were in the White House.

Just to be clear, we absolutely should be concerned about inflation and real wage growth. Workers should be sharing in the benefits of the economy’s growth, and if wages are not keeping pace with inflation, then most likely they are not. (Benefits like the child tax credit do change the picture somewhat.)

But, we should try to look at these numbers carefully. One year-over-year comparison does not tell us much. If we are still looking at 6.0 percent year-over-year inflation in the spring, and there has been no uptick in wage growth, then we should be asking seriously about how workers are faring. But given the media’s decades of ignoring the plight of ordinary workers, it is hard to take the newfound concern very seriously. 

Those of us who have spent decades trying to call attention to the situation of ordinary workers, and their stagnant wages over the last four decades, are glad to see the media’s newfound interest in real wages (the difference between wage growth and price growth). They have been anxious to highlight the fact that inflation has exceeded the rate of wage growth over the last year.

While that is unfortunate, it is also the case that this is not unusual. Here’s the picture over the last four decades.

 

Source: Bureau of Labor Statistics.

As can be seen, there are many periods in which wage growth has not kept up with inflation. Starting in the 1980s, wages lagged inflation through most of the decade. This is the period that was known in the media as the “Reagan Boom,” or “morning in America.” Wages did exceed inflation from the mid-1990s to the early 2000s. They then fell behind inflation just before President Bush’s reelection campaign, although the media generally didn’t prominently highlight falling real wages in that election.

Wages again fell behind inflation in the weak recovery from the Great Recession. As the unemployment rate fell, workers again began to see real wage gains in the middle and last part of the decade. There was a surge in real wage growth at the start of the pandemic. This was a composition effect. Many of the lower-paid workers lost their jobs, which raised the average wage for people who were still working.

This year we are seeing this composition effect in reverse. The lower-paid workers are getting rehired, bringing down average pay.  This is why the year-over-year change in the real wage was -3.4 percent in April. This was not a story of workers taking massive pay cuts, it was a story of lower-paid workers getting rehired and bringing down the average.

We are still seeing this story. The wage in October of 2020 was boosted by the fact that many lower-paid workers had not yet gotten back their jobs. Now, most of those lower-paid workers are back on the job.

If we look at wage growth over the last two years, it comes out to 2.1 percent, or an average of 1.05 percent annually. That’s not great, but that’s much better than workers did through most of the last four decades, especially the years when Republicans were in the White House.

Just to be clear, we absolutely should be concerned about inflation and real wage growth. Workers should be sharing in the benefits of the economy’s growth, and if wages are not keeping pace with inflation, then most likely they are not. (Benefits like the child tax credit do change the picture somewhat.)

But, we should try to look at these numbers carefully. One year-over-year comparison does not tell us much. If we are still looking at 6.0 percent year-over-year inflation in the spring, and there has been no uptick in wage growth, then we should be asking seriously about how workers are faring. But given the media’s decades of ignoring the plight of ordinary workers, it is hard to take the newfound concern very seriously. 

Common Dreams, November 11, 2021
Eurasia Review, November 11, 2021

The October Consumer Price Index data has gotten the inflation hawks into a frenzy. And, there is no doubt it is bad news. The overall index was up 0.9 percent in the month, while the core index, which excludes food and energy, rose by 0.6 percent. Over the last year, they are up 6.2 percent and 4.6 percent, respectively. This eats into purchasing power, leaving people able to buy less with their paychecks or Social Security benefits.

There is no argument about what the numbers show, but the key questions are what caused this rise in inflation and what can be done to bring it down. There are four important points to recognize:

  • Inflation has risen sharply in many wealthy countries, so this isn’t something that can be laid entirely on the policies of the Trump and Biden administrations.
  • There are good reasons for believing that many of the factors driving this inflation are temporary and will be reversed in the not too distant future.
  • Conventional remedies for inflation, like raising interest rates to increase unemployment, and thereby putting downward pressure on wages, are likely to prove counterproductive; and
  • Many people have seen increases in wages and benefits that far outweigh the impact of higher prices.

Inflation Has Risen Sharply in Many Countries, not Just the United States

On the first point, most wealthy countries have seen a substantial increase in their inflation rate in the last year, even if the current pace may not be as high as in the United States. The OECD puts Canada’s inflation rate at 4.4 percent over the last year. In Norway and Germany, the inflation rate was 4.1 percent. Some countries do have lower inflation rates. In France, the inflation rate over the last year was 2.6 percent, in Italy 2.5 percent, and in Japan, the debt king of the world, just 0.2 percent. (These data only run through September, a period in which the inflation rate for the U.S. was 5.3 percent over the prior year.)

While there are differences in inflation rates across countries, the sharp increases in places like Canada, and especially European countries like Norway and Germany, can’t be blamed in any plausible way on U.S. policies to get through and recover from the pandemic. There is also no clear relationship between the size of the rescue and recovery packages and current inflation. For example, the size of the packages in France and Japan were considerably larger than the packages put in place in Germany, yet both countries have considerably lower inflation.

The Case for This Inflation Being Temporary

In many of the areas seeing the sharpest price increases, the inflation is clearly due to factors associated with the pandemic and the reopening of the economy which are not likely to persist long into the future. The most obvious example here is new and used vehicles, the prices of which have risen over the last year by 9.8 percent and 26.4 percent, respectively.

These two sectors, which added more than 1.2 percentage points to the overall inflation rate over the last year, have seen sharp rises in prices due to production snags associated with a worldwide shortage of semiconductors. The latter shortage in turn results from a major semiconductor producer in Japan being temporarily sidelined by a fire. This supply reduction coincided with a big upturn in worldwide demand. Because of the pandemic, consumers in the United States and other countries shifted their consumption from services, like restaurants and movies, to goods like cars, television sets, and smartphones.

This surge in demand for goods created the backlog of containers and container ships that we are now seeing at major ports. However, we will likely work through this backlog, both because supply issues will eventually be resolved as companies arrange to hire more truck drivers and trucks, and because demand for goods will wane for the simple reason that people don’t make these purchases every month. If someone bought a car in May of 2021, they are not likely to buy another one in May of 2022.

It is not hard to find an example of this sort of price reversal. Television prices rose by 10.2 percent in the five months from March to August, a 26.3 percent annual rate of increase. In the last two months, they have fallen by 2.8 percent.

We can see similar stories in other areas.  The price of a bushel of corn rose by more than 100 percent from its low in August of 2020 to its high in May of this year. It has since fallen back by almost 20 percent, to a price that is well below what we were seeing back in 2013. Lumber is an even more striking case. The price more than quadrupled from its low point in April of 2020 to its peak in May of this year. It has now fallen back by more than 50 percent to a price that is about 10 percent higher than a peak hit in June of 2018.

It’s not easy to determine how quickly supply chain issues will be resolved, but when they are, we are likely to see the price of a wide range of goods, starting with cars and trucks, reverse itself and start falling. This will be true not only for consumer goods but many intermediate goods that have been in short supply in recent months. The end of the backlogs is also likely to mean a reversal in shipping costs, which have risen by 11.2 percent in the last year, adding to the price of a wide range of products.

It is also worth noting some prices that have not risen much. The cost of medical care has risen by just 1.3 percent over the last year. The cost of college tuition is up 1.8 percent. Inflation in these former problem sectors has remained well under control through the pandemic and recovery.

Finally, it is worth mentioning the situation with rent, which accounts for almost a third of the overall CPI. We are seeing a sharp divergence in rental inflation across cities. The rent proper index was up 1.5 percent year-over-year in Boston and Los Angeles, 1.7 percent in Seattle and 0.2 percent in NYC. It was down 0.3 percent in Washington, DC and 0.4 percent in San Francisco over the last year. By contrast, it is up 6.3 percent in Detroit and 7.5 percent in Atlanta. This is consistent with people moving from high-priced cities to lower-priced ones.

The low rental inflation, or falling rents, in high-priced metro areas is obviously good news for renters there. However, the rising rents in previously low-priced areas are bad news for prior residents who may be looking at large rent increases. Even with 6.3 percent rental inflation, rents will still look cheap in Detroit for someone moving from Boston or New York.

It’s also important to remember that almost two-thirds of households are homeowners (only 44 percent for Blacks and 48 percent for Hispanics). For people who own their home, higher implicit rents are not a problem, and if the sale price goes up, as it has been doing, this is good news.

Anyhow, we may see some further increases in rental inflation in the months ahead. We have seen a large rise in home sales prices since the pandemic, which has far exceeded the rise in rents. The vacancy rate has also fallen somewhat, although the pace of new construction did pick up sharply, which should help to lower rents over time.

Will Slamming on the Brakes Cure Inflation?

The standard remedy for inflation is to deliberately slow the economy with higher interest rates from the Fed and possibly cuts in government spending and/or tax increases. The idea is that by slowing the economy and throwing people out of work, we can put downward pressure on wages, which will then mean lower prices.

There is no doubt that if we force workers to take large enough pay cuts, it will alleviate inflationary pressures, but this is a rather perverse way to accomplish the goal. With low interest rates and high demand, companies have large incentives to innovate to get around bottlenecks. It’s much better to allow the economy to work its way through a stretch of high inflation in ways that could lead to lasting productivity gains than to squeeze workers so as to alleviate cost pressures.

It’s also worth noting that many of the proposals being put forward by the Biden administration will help to alleviate inflationary pressures in both the long term and the short term. In the latter category, universal pre-K and increased access to childcare will make it easier for many parents, primarily women, to enter the labor force or to work more hours.

In the longer-term category, increased access to broadband and improving our transportation infrastructure will increase our capacity in many areas. Also, money spent to protect against the effects of climate change will reduce the disruptions caused by extreme weather events in the future.

This is a much more promising path for dealing with inflation than forcing workers to take pay cuts.

Keeping Score on Inflation

There have been several pieces in major news outlets in the last week telling people how inflation has been devastating for low- and moderate-income families. While it is undoubtedly hard for many families to pay more for food and other necessities, it is important to keep an eye on the income side of the equation.

In the case of families who have children, the vast majority are receiving the expanded child tax credit. Before the American Recovery Act (ARA), the credit was $2,000, but only partially refundable. This meant that many low- and moderate-income families only received $1,400 per child. Under the ARA, these families are receiving $3,000 per child and $3,600 for every child under the age of six. This is a big gain in income for a family with an income of $20,000 or $30,000. (There are families that don’t get the credit. This includes undocumented workers who are not eligible and others who are excluded because of bureaucratic obstacles. These are important issues, but unrelated to the problem of inflation.)

There also have been sharp increases in wages for workers at the bottom end of the pay ladder. Restaurant workers have seen their pay rise by $1.84 an hour over the last year. This would come to an increase of $3,680 for a full-year, full-time worker.

These increases in income would dwarf the rise in food costs that have featured prominently in news accounts on inflation. The Bureau of Labor Statistics puts the weight of food in a household’s budget at 7.4 percent. Suppose we double this for moderate-income families and make it 15 percent. For a family that spends $30,000 a year, that comes to $4,500 a year. If we apply the estimated 4.5 percent rate of food inflation over the last year, the higher prices will take a bit more than $200 out of this family’s pockets.

That is less than 10 percent of the pay increases that we expect low-paid workers to be receiving or the gains from the child tax credit for families with kids. If we’re going to talk about the well-being of these families it is incredibly irresponsible to only talk about the spending side of the ledger and ignore the income side.       

Conclusion: Team Transitory Is Not Throwing in the Towel

While the stretch of high inflation has gone on much longer than many of us anticipated, there are still good reasons for thinking that inflation will slow sharply in the months ahead. We have seen the prices of many items, like television sets and lumber, reverse and fall sharply after prior run-ups. It is likely that many other items, like cars and meat, will be in this category in the near future.

For what it’s worth, it seems that financial markets also agree with this assessment. The interest rate on 10-year Treasury bonds is only 1.56 percent, well below the pre-pandemic level. That is not consistent with a story where markets expect 4 or 5 percent inflation in coming years.

Also, contrary to gloom and doom predictions, the dollar has been rising in value against the euro and other currencies. That is also not consistent with a belief that the U.S. is facing a wage-price spiral.

Financial markets can be wrong, as those of us who predicted the collapse of the stock and housing bubbles know well. But for now at least, they seem to be in agreement with the analysis from Team Transitory.  

Common Dreams, November 11, 2021
Eurasia Review, November 11, 2021

The October Consumer Price Index data has gotten the inflation hawks into a frenzy. And, there is no doubt it is bad news. The overall index was up 0.9 percent in the month, while the core index, which excludes food and energy, rose by 0.6 percent. Over the last year, they are up 6.2 percent and 4.6 percent, respectively. This eats into purchasing power, leaving people able to buy less with their paychecks or Social Security benefits.

There is no argument about what the numbers show, but the key questions are what caused this rise in inflation and what can be done to bring it down. There are four important points to recognize:

  • Inflation has risen sharply in many wealthy countries, so this isn’t something that can be laid entirely on the policies of the Trump and Biden administrations.
  • There are good reasons for believing that many of the factors driving this inflation are temporary and will be reversed in the not too distant future.
  • Conventional remedies for inflation, like raising interest rates to increase unemployment, and thereby putting downward pressure on wages, are likely to prove counterproductive; and
  • Many people have seen increases in wages and benefits that far outweigh the impact of higher prices.

Inflation Has Risen Sharply in Many Countries, not Just the United States

On the first point, most wealthy countries have seen a substantial increase in their inflation rate in the last year, even if the current pace may not be as high as in the United States. The OECD puts Canada’s inflation rate at 4.4 percent over the last year. In Norway and Germany, the inflation rate was 4.1 percent. Some countries do have lower inflation rates. In France, the inflation rate over the last year was 2.6 percent, in Italy 2.5 percent, and in Japan, the debt king of the world, just 0.2 percent. (These data only run through September, a period in which the inflation rate for the U.S. was 5.3 percent over the prior year.)

While there are differences in inflation rates across countries, the sharp increases in places like Canada, and especially European countries like Norway and Germany, can’t be blamed in any plausible way on U.S. policies to get through and recover from the pandemic. There is also no clear relationship between the size of the rescue and recovery packages and current inflation. For example, the size of the packages in France and Japan were considerably larger than the packages put in place in Germany, yet both countries have considerably lower inflation.

The Case for This Inflation Being Temporary

In many of the areas seeing the sharpest price increases, the inflation is clearly due to factors associated with the pandemic and the reopening of the economy which are not likely to persist long into the future. The most obvious example here is new and used vehicles, the prices of which have risen over the last year by 9.8 percent and 26.4 percent, respectively.

These two sectors, which added more than 1.2 percentage points to the overall inflation rate over the last year, have seen sharp rises in prices due to production snags associated with a worldwide shortage of semiconductors. The latter shortage in turn results from a major semiconductor producer in Japan being temporarily sidelined by a fire. This supply reduction coincided with a big upturn in worldwide demand. Because of the pandemic, consumers in the United States and other countries shifted their consumption from services, like restaurants and movies, to goods like cars, television sets, and smartphones.

This surge in demand for goods created the backlog of containers and container ships that we are now seeing at major ports. However, we will likely work through this backlog, both because supply issues will eventually be resolved as companies arrange to hire more truck drivers and trucks, and because demand for goods will wane for the simple reason that people don’t make these purchases every month. If someone bought a car in May of 2021, they are not likely to buy another one in May of 2022.

It is not hard to find an example of this sort of price reversal. Television prices rose by 10.2 percent in the five months from March to August, a 26.3 percent annual rate of increase. In the last two months, they have fallen by 2.8 percent.

We can see similar stories in other areas.  The price of a bushel of corn rose by more than 100 percent from its low in August of 2020 to its high in May of this year. It has since fallen back by almost 20 percent, to a price that is well below what we were seeing back in 2013. Lumber is an even more striking case. The price more than quadrupled from its low point in April of 2020 to its peak in May of this year. It has now fallen back by more than 50 percent to a price that is about 10 percent higher than a peak hit in June of 2018.

It’s not easy to determine how quickly supply chain issues will be resolved, but when they are, we are likely to see the price of a wide range of goods, starting with cars and trucks, reverse itself and start falling. This will be true not only for consumer goods but many intermediate goods that have been in short supply in recent months. The end of the backlogs is also likely to mean a reversal in shipping costs, which have risen by 11.2 percent in the last year, adding to the price of a wide range of products.

It is also worth noting some prices that have not risen much. The cost of medical care has risen by just 1.3 percent over the last year. The cost of college tuition is up 1.8 percent. Inflation in these former problem sectors has remained well under control through the pandemic and recovery.

Finally, it is worth mentioning the situation with rent, which accounts for almost a third of the overall CPI. We are seeing a sharp divergence in rental inflation across cities. The rent proper index was up 1.5 percent year-over-year in Boston and Los Angeles, 1.7 percent in Seattle and 0.2 percent in NYC. It was down 0.3 percent in Washington, DC and 0.4 percent in San Francisco over the last year. By contrast, it is up 6.3 percent in Detroit and 7.5 percent in Atlanta. This is consistent with people moving from high-priced cities to lower-priced ones.

The low rental inflation, or falling rents, in high-priced metro areas is obviously good news for renters there. However, the rising rents in previously low-priced areas are bad news for prior residents who may be looking at large rent increases. Even with 6.3 percent rental inflation, rents will still look cheap in Detroit for someone moving from Boston or New York.

It’s also important to remember that almost two-thirds of households are homeowners (only 44 percent for Blacks and 48 percent for Hispanics). For people who own their home, higher implicit rents are not a problem, and if the sale price goes up, as it has been doing, this is good news.

Anyhow, we may see some further increases in rental inflation in the months ahead. We have seen a large rise in home sales prices since the pandemic, which has far exceeded the rise in rents. The vacancy rate has also fallen somewhat, although the pace of new construction did pick up sharply, which should help to lower rents over time.

Will Slamming on the Brakes Cure Inflation?

The standard remedy for inflation is to deliberately slow the economy with higher interest rates from the Fed and possibly cuts in government spending and/or tax increases. The idea is that by slowing the economy and throwing people out of work, we can put downward pressure on wages, which will then mean lower prices.

There is no doubt that if we force workers to take large enough pay cuts, it will alleviate inflationary pressures, but this is a rather perverse way to accomplish the goal. With low interest rates and high demand, companies have large incentives to innovate to get around bottlenecks. It’s much better to allow the economy to work its way through a stretch of high inflation in ways that could lead to lasting productivity gains than to squeeze workers so as to alleviate cost pressures.

It’s also worth noting that many of the proposals being put forward by the Biden administration will help to alleviate inflationary pressures in both the long term and the short term. In the latter category, universal pre-K and increased access to childcare will make it easier for many parents, primarily women, to enter the labor force or to work more hours.

In the longer-term category, increased access to broadband and improving our transportation infrastructure will increase our capacity in many areas. Also, money spent to protect against the effects of climate change will reduce the disruptions caused by extreme weather events in the future.

This is a much more promising path for dealing with inflation than forcing workers to take pay cuts.

Keeping Score on Inflation

There have been several pieces in major news outlets in the last week telling people how inflation has been devastating for low- and moderate-income families. While it is undoubtedly hard for many families to pay more for food and other necessities, it is important to keep an eye on the income side of the equation.

In the case of families who have children, the vast majority are receiving the expanded child tax credit. Before the American Recovery Act (ARA), the credit was $2,000, but only partially refundable. This meant that many low- and moderate-income families only received $1,400 per child. Under the ARA, these families are receiving $3,000 per child and $3,600 for every child under the age of six. This is a big gain in income for a family with an income of $20,000 or $30,000. (There are families that don’t get the credit. This includes undocumented workers who are not eligible and others who are excluded because of bureaucratic obstacles. These are important issues, but unrelated to the problem of inflation.)

There also have been sharp increases in wages for workers at the bottom end of the pay ladder. Restaurant workers have seen their pay rise by $1.84 an hour over the last year. This would come to an increase of $3,680 for a full-year, full-time worker.

These increases in income would dwarf the rise in food costs that have featured prominently in news accounts on inflation. The Bureau of Labor Statistics puts the weight of food in a household’s budget at 7.4 percent. Suppose we double this for moderate-income families and make it 15 percent. For a family that spends $30,000 a year, that comes to $4,500 a year. If we apply the estimated 4.5 percent rate of food inflation over the last year, the higher prices will take a bit more than $200 out of this family’s pockets.

That is less than 10 percent of the pay increases that we expect low-paid workers to be receiving or the gains from the child tax credit for families with kids. If we’re going to talk about the well-being of these families it is incredibly irresponsible to only talk about the spending side of the ledger and ignore the income side.       

Conclusion: Team Transitory Is Not Throwing in the Towel

While the stretch of high inflation has gone on much longer than many of us anticipated, there are still good reasons for thinking that inflation will slow sharply in the months ahead. We have seen the prices of many items, like television sets and lumber, reverse and fall sharply after prior run-ups. It is likely that many other items, like cars and meat, will be in this category in the near future.

For what it’s worth, it seems that financial markets also agree with this assessment. The interest rate on 10-year Treasury bonds is only 1.56 percent, well below the pre-pandemic level. That is not consistent with a story where markets expect 4 or 5 percent inflation in coming years.

Also, contrary to gloom and doom predictions, the dollar has been rising in value against the euro and other currencies. That is also not consistent with a belief that the U.S. is facing a wage-price spiral.

Financial markets can be wrong, as those of us who predicted the collapse of the stock and housing bubbles know well. But for now at least, they seem to be in agreement with the analysis from Team Transitory.  

We know that it is hard for trucking companies to get good help when it comes to their managers, but New York Times reporters might be expected to be a bit more on the ball. In an article on supply chain problems, the NYT completely accepts the industry line that there is a huge shortage of truckers. Furthermore, it tells us that it would get worse over the decade.

According to new developments in economic theory, it is believed that workers respond to incentives. It turns out that pay for truckers has fallen by more than five percent over the last three decades, according to the Bureau of Labor Statistics.

 

Source: Bureau of Labor Statistics.

Based on this theory, it is possible that the reason we don’t have enough truckers is that the industry is not willing to pay high enough wages. Furthermore, if we are looking out over a decade, they would have plenty of opportunity over this period to attract more truckers by raising wages.

The article should have investigated why trucking companies are not raising wages enough to attract the needed amount of drivers rather than repeating transparent self-serving nonsense from company managers.

We know that it is hard for trucking companies to get good help when it comes to their managers, but New York Times reporters might be expected to be a bit more on the ball. In an article on supply chain problems, the NYT completely accepts the industry line that there is a huge shortage of truckers. Furthermore, it tells us that it would get worse over the decade.

According to new developments in economic theory, it is believed that workers respond to incentives. It turns out that pay for truckers has fallen by more than five percent over the last three decades, according to the Bureau of Labor Statistics.

 

Source: Bureau of Labor Statistics.

Based on this theory, it is possible that the reason we don’t have enough truckers is that the industry is not willing to pay high enough wages. Furthermore, if we are looking out over a decade, they would have plenty of opportunity over this period to attract more truckers by raising wages.

The article should have investigated why trucking companies are not raising wages enough to attract the needed amount of drivers rather than repeating transparent self-serving nonsense from company managers.

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