As everyone learns in Econ 101, and immediately forgets, the purpose of the financial sector is to facilitate transactions and allocate capital. This seems like a simple and obvious point, but you would never know it in most discussions of the financial sector.
The point here is that we need finance for these purposes. We don’t need finance to develop elaborate betting games and complex financial instruments. Financial instruments are only useful when they serve the purpose of better facilitating transactions or improving the allocation of capital.
In this context, an efficient financial sector is a small financial sector. We want to use as few resources as possible to serve its function, just as we want to use as few resources as possible in the trucking industry.
Like finance, transporting goods is hugely important to the economy. But if the number of people and the amount of capital involved in the trucking industry doubled relative to the size of the economy, it would look like we had a very inefficient trucking industry, unless there was some obvious benefit, like radically reduced waste.
For some reason, finance is never talked about this way. That comes to mind in reading this NYT piece on the $700 million spent on legal fees in the bankruptcy cases of major crypto companies. Of course, $700 million is not huge relative to the size of the economy, but it is a lot of money to most of us. It’s equivalent to more than 320,000 food stamp person years, to take something people like to complain about.
Anyhow, when we see this $700 million figure for legal fees, it is worth asking exactly how crypto is helping to facilitate transactions or better allocate capital. Are we more quickly able to pay our monthly bills if we use crypto rather than a credit card with automatic withdrawals from our bank account?
Is crypto better allocating capital? Are there innovative startups that are getting capital with Bitcoin that could not raise money through the traditional financial system?
I’ve heard that the FTX folks did lots of drugs before its collapse wiped out their fortunes. It would probably take a lot of drugs for someone to answer “yes” to these questions. The money that went to the crypto gang has been a huge drain on the rest of the economy.
The $700 million in legal fees is just a tiny tip of the iceberg. The fortunes that many have accrued, in effect peddling nothing, is like counterfeit money that they will use to drive up the price of housing, travel, and anything else that is in limited supply in the economy.
This indictment can be directed at the financial sector more generally, which has exploded relative to the rest of the economy over the last half-century. To be fair, some innovations are real. Direct deposit of paychecks and direct payments of bills provide substantial savings in time. But these have been around for four decades.
The proliferation of derivative instruments and complex trading strategies has made some people very rich, but it does nothing to facilitate transactions or improve the allocation of capital. We waste hundreds of billions of dollars (several thousand dollars per family) supporting our bloated financial system.
A small financial transactions tax, similar to the sales tax most of us pay when we buy food, clothes, and most other items, would do wonders for improving the efficiency of the financial system and raise well over a hundred billion dollars annually. And, it would go far towards reducing inequality by eliminating many of the great fortunes made in finance.
But, there is little interest in this point in major media outlets. We can speculate on the reason, but as I said, the purpose of the financial sector is something that is forgotten immediately after leaving Econ 101.
As everyone learns in Econ 101, and immediately forgets, the purpose of the financial sector is to facilitate transactions and allocate capital. This seems like a simple and obvious point, but you would never know it in most discussions of the financial sector.
The point here is that we need finance for these purposes. We don’t need finance to develop elaborate betting games and complex financial instruments. Financial instruments are only useful when they serve the purpose of better facilitating transactions or improving the allocation of capital.
In this context, an efficient financial sector is a small financial sector. We want to use as few resources as possible to serve its function, just as we want to use as few resources as possible in the trucking industry.
Like finance, transporting goods is hugely important to the economy. But if the number of people and the amount of capital involved in the trucking industry doubled relative to the size of the economy, it would look like we had a very inefficient trucking industry, unless there was some obvious benefit, like radically reduced waste.
For some reason, finance is never talked about this way. That comes to mind in reading this NYT piece on the $700 million spent on legal fees in the bankruptcy cases of major crypto companies. Of course, $700 million is not huge relative to the size of the economy, but it is a lot of money to most of us. It’s equivalent to more than 320,000 food stamp person years, to take something people like to complain about.
Anyhow, when we see this $700 million figure for legal fees, it is worth asking exactly how crypto is helping to facilitate transactions or better allocate capital. Are we more quickly able to pay our monthly bills if we use crypto rather than a credit card with automatic withdrawals from our bank account?
Is crypto better allocating capital? Are there innovative startups that are getting capital with Bitcoin that could not raise money through the traditional financial system?
I’ve heard that the FTX folks did lots of drugs before its collapse wiped out their fortunes. It would probably take a lot of drugs for someone to answer “yes” to these questions. The money that went to the crypto gang has been a huge drain on the rest of the economy.
The $700 million in legal fees is just a tiny tip of the iceberg. The fortunes that many have accrued, in effect peddling nothing, is like counterfeit money that they will use to drive up the price of housing, travel, and anything else that is in limited supply in the economy.
This indictment can be directed at the financial sector more generally, which has exploded relative to the rest of the economy over the last half-century. To be fair, some innovations are real. Direct deposit of paychecks and direct payments of bills provide substantial savings in time. But these have been around for four decades.
The proliferation of derivative instruments and complex trading strategies has made some people very rich, but it does nothing to facilitate transactions or improve the allocation of capital. We waste hundreds of billions of dollars (several thousand dollars per family) supporting our bloated financial system.
A small financial transactions tax, similar to the sales tax most of us pay when we buy food, clothes, and most other items, would do wonders for improving the efficiency of the financial system and raise well over a hundred billion dollars annually. And, it would go far towards reducing inequality by eliminating many of the great fortunes made in finance.
But, there is little interest in this point in major media outlets. We can speculate on the reason, but as I said, the purpose of the financial sector is something that is forgotten immediately after leaving Econ 101.
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We constantly see reports in the media that people are unhappy about the economy and they blame President Biden. I, along with many liberal/left colleagues, have been telling people to shut up and enjoy the good times.
Okay, that is not quite what we have been saying, but we have been saying that the economy looks pretty good by most measures. Given the hit from the pandemic and the disruptions created by the war in Ukraine, it is probably about as good as we have a right to expect.
Anyhow, I want to dig a little deeper into that one since I know many people are quite rightly not satisfied with the economy. They are absolutely right not to be satisfied, but I will share a bit of my thinking.
It’s 1935, Is the Economy Good?
I am not picking 1935 randomly. It was the third year of the first Roosevelt administration, the most transformative presidency since the Civil War. If we were discussing the state of the economy in September of 1935, would we be saying the economy was good?
That’s not easy to say. The unemployment rate was around 20.0 percent at that point. That’s hardly something to celebrate, but it was down from peaks of over 25.0 percent in 1933. The economy was growing at a rate of around 9.0 percent, but GDP was still more than 10 percent below its 1929 level. Millions of people were going hungry and homeless.
The best you could really say was that things were going in the right direction. Roosevelt had started the Civilian Conservation Corps at the beginning of his administration, which gave millions of workers jobs on construction projects in National Parks and other public lands. More recently, he had begun the Works Progress Administration, which undertook an even larger set of public works projects. But these were still only employing a fraction of the people looking for work.
Roosevelt had moved aggressively to stabilize the financial system, ordering a weeklong bank holiday immediately after taking office, during which weak banks were closed. He then arranged for the Federal Reserve to provide effective deposit insurance until the Federal Deposit Insurance Corporation existed the following year. He also established the Securities and Exchange Commission to police Wall Street and prevent many abuses that led to the 1929 stock market crash.
These important policies secured the financial system for many decades, but they didn’t get back the money people had lost due to earlier bank failures. And, at the time, people could not possibly know how well they would succeed.
The Wagner Act, which set up the rules that govern most labor-management relations, had just been signed into law in the summer. While this would provide the basis for a massive unionization drive later in the decade, in 1935, it was too early to fully appreciate its importance.
Congress had also approved the Social Security Act in the summer of 1935. This established the Social Security System that now supports tens of millions of workers and their dependents in retirement and provides insurance in the event of disability or early death. But it would be several years before anyone would receive any benefits. Other key measures — like the Fair Labor Standards Act, which established the federal minimum wage and the 40-hour workweek — would have to wait until Roosevelt’s second term.
Of course, the full menu of New Deal programs is considerably longer, but the point is that people could still find plenty to complain about halfway through the third year of the Roosevelt administration. The country was still in the grips of the Great Depression, and as much as Roosevelt’s policies were turning things around and providing more stability for both the system and individual workers, most people were not likely seeing the benefits yet.
The best that could be said was that they saw a president acting aggressively to do things that were in the interest of ordinary workers. Apparently, that view was widely held, as Roosevelt won re-election in 1936 with more than 60 percent of the vote, carrying all but two small states in the Electoral College.
Joe Biden Is Not Franklin Roosevelt
We all know that, or at least we should know that. Roosevelt was an extraordinarily gifted politician who took over the presidency during a crisis. He also had more than 300 Democratic seats in the House after the 1932 election, as well as 59 seats in a 96-seat Senate. His majorities in both houses actually grew in the 1934 elections, with a nine-seat Senate pick-up giving the Democrats 69 seats in a 96-seat Senate.
That world is different from the Congress President Biden had to deal with. He had literally the barest of majorities in the Senate, with the vote of the vice-president needed on any important piece of legislation passing without Republican support. This meant that his agenda was entirely at the mercy of two center-right Democrats, Joe Manchin and Kyrsten Sinema.
The situation in the House was not much better, with Democrats holding just a four-seat majority. Here also, conservative members were acting as a brake on virtually everything Biden put on the table. And, he lost even this slim majority in the 2022 election, although an additional Senate seat gave him a small amount of extra wiggle room.
But we know that most people don’t follow politics closely. They want to see their lives getting better, and they don’t care that some jerk in the House or Senate is blocking a key piece of legislation.
So, let’s just look at what Biden has delivered. The first and most important item in people’s immediate experience was the American Rescue Plan (ARP), which provided a $1.9 trillion boost to the economy. This guaranteed that we would have a quick recovery, in contrast to the slow painful road back to full employment following the Great Recession.
The unemployment rate, which stood at 6.3 percent when Biden took office, had fallen to 3.9 percent by the end of 2021, and has not gone over 4.0 percent since. This is the longest period where the unemployment rate has been below 4.0 percent in more than half a century.
The specific spending also did much to protect people from the impact of the pandemic. It included $300 a week supplements to people getting unemployment insurance. It enhanced the subsidies in the Affordable Care Act, allowing millions more to get health care insurance. It provided subsidies for child care, and extended a moratorium on evictions, ensuring that people could stay in their home. It also provided substantial funds for health care issues directly related to the pandemic, such as improving ventilation in schools.
In short, the ARP was a really big deal. And it passed with no votes to spare in the Senate and a four-vote margin in the House.
As a result of the ARP, the United States is the only major economy that is largely back to its pre-pandemic growth path. The US also now has the lowest inflation rate of any of the G-7 economies.
In spite of the inflation of 2021 and 2022, real wages for the average worker are higher than they were before the pandemic. And, there have been larger gains for those at the bottom, reversing roughly a quarter of the rise in wage inequality we saw over the last four decades.
People have seen other benefits from the recovery under Biden. There was a massive reshuffling in the labor market in 2021 and 2022 as tens of millions of workers quit jobs they disliked or didn’t pay them enough. As a result, the Conference Board reports that workplace satisfaction is at the highest level in the almost forty years they have conducted their survey.
Tens of millions of people are now working from home, either entirely or partially, saving themselves hundreds of hours a year in commuting time, and thousands of dollars on work-related expenses. These savings in time and money do not show up in our data on real wages.
Roughly 15 million homeowners could refinance their homes, taking advantage of the low mortgage rates we saw before the Fed started raising rates last March. This saved them an average of more than $2,000 a year on interest payments. Homeownership rates also rose under Biden, with larger than average increases for Black, Hispanic, young and moderate-income households.
These are all extraordinarily positive developments for large segments of the population. There is no period since the late 1990s that could even come close to the progress made in the first two and a half years of the Biden administration.
Again, there are plenty of grounds for people being upset about the state of the economy. Tens of millions are still struggling at the edge of poverty. Many pandemic programs under ARP have ended, most notably the childcare subsidies, which will be eliminated this fall. Also, the jump in mortgage rates over the last year and a half has put homeownership out of reach for first-time buyers.
But on the whole, it is pretty hard not to see the overall picture as being overwhelmingly positive, especially considering that Biden had to deal with the disruptions created by multiple waves of COVID-19, as well as Russia’s invasion of Ukraine.
Just as people had plenty of grounds to be unhappy about their circumstances in September of 1935, they have grounds today. But, as in 1935, things are headed in the right direction. And, just as Roosevelt had a longer-term agenda that yielded benefits for many decades to come, Biden also does.
Biden’s Longer-Term Agenda
In addition to the ARP, Biden got three major pieces of legislation through Congress. The first was an infrastructure bill that he managed to pass with a large bi-partisan majority. Apparently, a large number of Republicans couldn’t resist the opportunity to show up at the groundbreakings for roads and bridges, as well as dishing out contracts to campaign contributors in their states and districts. This bill will help to address long-neglected infrastructure needs across the country. It also includes substantial funds that will support a green transition, notably by modernizing the country’s power grid and setting up a system of charging stations for electric cars.
The second piece of legislation Biden got through Congress was the CHIPS Act, which appropriated $280 billion over the next five years (approximately 1.0 percent of the federal budget) for research and support for manufacturing of advanced semiconductors in the United States. A large bi-partisan majority also supported this bill. Part of the story was again Republican politicians wanting to get in on the gravy, but also some jingoistic Cold War sentiment.
The latter has to be grounds for concern for progressives. It probably makes sense in any world to ensure that key components for the economy will be accessible in the event of a conflict with China, and given that Taiwan is our major supplier, this is a real concern. However, insofar as this is part of a process of escalating tensions with China, which could lead to a Cold War-type military buildup, it is definitely bad news. The cost of another Cold War will almost certainly be sacrificing any progressive social agenda, as well as slowing a green transition to a speed that could make it irrelevant.
The money spent on researching advanced chips is almost certainly a positive story from an economic standpoint, although we should be asking more about ownership of this research than seems to be the case now. I’ll get back to this issue in the next section.
While the infrastructure bill and CHIPS Act passed with large bipartisan majorities the Inflation Reduction Act (IRA), passed on a strictly partisan basis. Biden somehow managed to get the support of Joe Manchin on a bill that is jump-starting a green transition.
The IRA includes large subsidies for clean energy and electric cars. As a result, in the relatively short time since its passage, we have seen an explosion in plans for factories producing electric cars and batteries, as well as wind and solar power. While there are many issues with implementation, most notably environmental reviews that create lengthy delays for power plants and transmission lines, we at last seem to be making good progress towards a green transition.
Given the amount of money that industry now has on the line, it is difficult to envision how the transition can be turned back. We are now seeing conservative Republicans stand up for solar energy or electric cars because they mean jobs and tax revenue in their states and districts. The explosion in factory construction related to the green transition is impossible to miss in the GDP data.
The revenue parts of the IRA are also important. The main way it raises revenue is through increased funding of IRS enforcement. For many people, especially rich people, paying taxes has become voluntary. The government is losing hundreds of billions every year because rich people don’t pay the taxes they owe. The increased enforcement capacity created by the IRA will substantially reduce the money lost to tax evasion.
The other revenue raiser in the IRA is a 1.0 percent tax on money paid out to shareholders through share buybacks. As I have written many times, I don’t think buybacks are the horror story that many progressives imagine. It makes little difference whether money is paid out to shareholders as buybacks or dividends. We might prefer they invest the money or raise workers’ wages, but if we completely outlawed buybacks tomorrow, the vast majority of the money would just be paid out as dividends instead. That hardly seems like a great victory.
But there is a reason the buyback tax is a big deal. The corporate income tax is an extremely difficult one for the IRS to collect. The reason is that corporate profits are difficult to monitor. There are all sorts of accounting rules on issues like the treatment of inventories and depreciation, that determine taxable profits. We can’t see corporate profits directly; corporate accountants tell us what corporate profits are. This leaves enormous room for gaming the tax code, which corporations naturally exploit to the fullest extent possible.
However, there is an alternative. We can make returns to shareholders (the money companies pay out in dividends, plus capital gains from the increase in value of their stock price), the basis for the income tax. This has the great advantage that returns to shareholders are completely transparent. We can get this information off any financial website.
It would be possible to calculate the tax liability of all publicly traded companies on a single spreadsheet. Just put up their dividend payouts, the increase in their market capitalization over the course of the year, then plug in the tax rate, and we’ve got it. No muss, no fuss. It’s cheap for the IRS and we can put the whole tax gaming industry out of business.
While I doubt this was the motivation behind the buyback tax, it actually is an important step in this direction. The buyback tax is likely to go down as the most administratively efficient tax ever. We will be able to raise billions of dollars of tax revenue each year, just by monitoring what companies announce they are spending on buybacks. And, we don’t have to worry they will cheat. What will they do, lie to their shareholders?
And, if a tax is cheap to collect, it stands to reason, we would want to increase it at the expense of taxes that are harder to collect, like the current corporate income tax. In short, the buyback tax can be a huge foot in the door towards shifting the basis of the corporate income tax to returns to shareholders.
It’s a long way from a 1.0 percent tax on the portion of profits used to buy back shares, to replacing the corporate income tax, which currently averages around 13 percent of all profits, but this is an incredibly important first step. It will be important to pay attention to the efficiency of the buyback tax which has not so far received much attention.
Administrative Agencies
Before completing the list of Biden administration accomplishments, it is important to mention the impact of the people he has appointed to administrative agencies, most notably the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB). Starting with the former, Biden appointed Lina Khan, a legal scholar who believes in anti-trust law, to head the commission. Since taking office, Khan has challenged a number of mergers that likely would have gone through without question under prior administrations of both parties.
It is important to realize that the importance of an approach that takes competition seriously cannot be measured simply by Khan’s won-loss record in challenging mergers. (Microsoft won the FTC’s biggest action under Khan, an effort to block its merger with the video game company Activision.) When companies know that there is a competition cop on the beat, they may not even try some mergers that they think might have sailed through under prior administrations. And, they may structure mergers to pose less of a threat to industry competition in order to pass muster under the new regime, as happened to some extent with Microsoft and Activision. With a growing body of evidence showing that a lack of competition has been important in raising profits at the expense of wages, this is a big deal.
The other notable area where Biden’s administrative appointees have made a visible difference is at the NLRB. Biden’s appointees are committed to respecting workers’ rights to have a union, if they want one. They have been markedly more pro-union in their rulings since the current chair, Lauren McFarren took over, but they made a qualitative break with the past boards in a ruling two weeks ago.
The workers at the Cemex building materials company had been involved in an organizing drive. They had already submitted cards, signed by a majority of workers, to get an NLRB supervised election. As is standard practice, Cemex engaged in a number of actions designed to delay the election and intimidate pro-union workers. The union complained that these were unfair practices and violated the National Labor Relations Act.
Past NLRBs have generally responded to such violations with what amounted to a slap on the wrist. They would tell the company to stop doing them. And, if they kept violating the law, the NLRB would tell them again to stop, rinse and repeat. Biden’s NLRB told Cemex that it has a union.
One way that workers can organize is by having a majority of workers sign cards requesting recognition, as happened at Cemex. If the company voluntarily accepts recognition, then the workers have a union. If it doesn’t, then the NLRB holds an election. Biden’s NLRB effectively said that by violating the law, Cemex has now accepted that it has a union.
This is potentially a huge deal, since it will remove one of the major roadblocks to workers seeking to organize. There still is a long way to go on this one. Cemex will contest this in the courts, and who knows where the Republican Supreme Court will end up. There is also a second major roadblock in getting first contracts. Companies routinely treat the legal requirement to negotiate in good faith as a forced weekly meeting to talk about the weather and Superbowl prospects. But this NLRB ruling is a big step forward.
Does Biden Have a Vision?
It’s possible to point to the things that Biden has done as both offering immediate benefits and much more important changes done the road, but does he have a clear vision of a better society down the road? I guess my answer is that I don’t know, and I don’t especially care.
Does Biden see that his share buyback tax can lay the basis for switching the basis for the corporate income tax from profits to returns to shareholders? My guess is that he doesn’t, but when we have clear evidence of the much greater efficiency of this sort of tax, we will be able to move quickly down that road. The Republicans, and many Democrats, will do everything they can to prevent corporations from paying more tax, but when we have them defending pure waste, we are fighting them on favorable turf.
I do worry that the administration does not seem to be attentive to who owns the benefits from government-subsidized research. This issue comes up with both the CHIPS Act and the IRA.
This is a huge deal. While it is standard practice in policy circles to attribute the upward redistribution of the last four decades to technology, that is a lie. It was government policy on technology, in the form of longer and stronger patent and copyright protections, that allowed a relatively small group of capitalists and well-placed workers to get a grossly disproportionate share of the benefits from the technologies developed over this period. As I like to point out, if the government did not threaten to arrest people who made copies of Microsoft software without his permission, Bill Gates would likely still be working for a living. (Yes, I’m talking my book, Rigged [it’s free], see also here and here.)
To take a more recent example, we created at least five Moderna billionaires by paying the company to develop a COVID vaccine and then letting it keep control of its distribution. We should worry about how many more billionaires we will create if the government pays for research on semiconductor technology and various types of green technologies and then hands out patent monopolies to private actors. It will need some huge efforts on the tax and transfer side with the left hand to offset the inequality we are directly creating with the right hand.
While I see little appreciation of this problem in the Biden administration, on the plus side here, he is moving to negotiate drug prices in Medicare. This is hitting one end of the problem. Absurdly, the Biden administration’s efforts to restrain prices is being discussed as an interference with the free market. This is absurd because the big interference with the free market was when the government-granted monopolies or related protections in the first place. It was the government that made drug prices high, Biden is just attempting to limit the damage.
Anyhow, we need to have a more critical view of rules on intellectual products. Biden has not expounded one, but his actions do open the door.
And, this has to be seen as the bigger picture on other issues as well. Progressives were endlessly frustrated with Roosevelt as well. He didn’t openly embrace many of the issues that progressives felt were hugely important. However, he did create a framework that allowed for enormous progress in a wide range of areas.
I would say the same about Biden, but he is doing it in a context where he enjoys a far more tentative majority than Roosevelt faced. And he clearly is not the same sort of charismatic figure as Roosevelt. But all in all, he is doing a damn good job.
We constantly see reports in the media that people are unhappy about the economy and they blame President Biden. I, along with many liberal/left colleagues, have been telling people to shut up and enjoy the good times.
Okay, that is not quite what we have been saying, but we have been saying that the economy looks pretty good by most measures. Given the hit from the pandemic and the disruptions created by the war in Ukraine, it is probably about as good as we have a right to expect.
Anyhow, I want to dig a little deeper into that one since I know many people are quite rightly not satisfied with the economy. They are absolutely right not to be satisfied, but I will share a bit of my thinking.
It’s 1935, Is the Economy Good?
I am not picking 1935 randomly. It was the third year of the first Roosevelt administration, the most transformative presidency since the Civil War. If we were discussing the state of the economy in September of 1935, would we be saying the economy was good?
That’s not easy to say. The unemployment rate was around 20.0 percent at that point. That’s hardly something to celebrate, but it was down from peaks of over 25.0 percent in 1933. The economy was growing at a rate of around 9.0 percent, but GDP was still more than 10 percent below its 1929 level. Millions of people were going hungry and homeless.
The best you could really say was that things were going in the right direction. Roosevelt had started the Civilian Conservation Corps at the beginning of his administration, which gave millions of workers jobs on construction projects in National Parks and other public lands. More recently, he had begun the Works Progress Administration, which undertook an even larger set of public works projects. But these were still only employing a fraction of the people looking for work.
Roosevelt had moved aggressively to stabilize the financial system, ordering a weeklong bank holiday immediately after taking office, during which weak banks were closed. He then arranged for the Federal Reserve to provide effective deposit insurance until the Federal Deposit Insurance Corporation existed the following year. He also established the Securities and Exchange Commission to police Wall Street and prevent many abuses that led to the 1929 stock market crash.
These important policies secured the financial system for many decades, but they didn’t get back the money people had lost due to earlier bank failures. And, at the time, people could not possibly know how well they would succeed.
The Wagner Act, which set up the rules that govern most labor-management relations, had just been signed into law in the summer. While this would provide the basis for a massive unionization drive later in the decade, in 1935, it was too early to fully appreciate its importance.
Congress had also approved the Social Security Act in the summer of 1935. This established the Social Security System that now supports tens of millions of workers and their dependents in retirement and provides insurance in the event of disability or early death. But it would be several years before anyone would receive any benefits. Other key measures — like the Fair Labor Standards Act, which established the federal minimum wage and the 40-hour workweek — would have to wait until Roosevelt’s second term.
Of course, the full menu of New Deal programs is considerably longer, but the point is that people could still find plenty to complain about halfway through the third year of the Roosevelt administration. The country was still in the grips of the Great Depression, and as much as Roosevelt’s policies were turning things around and providing more stability for both the system and individual workers, most people were not likely seeing the benefits yet.
The best that could be said was that they saw a president acting aggressively to do things that were in the interest of ordinary workers. Apparently, that view was widely held, as Roosevelt won re-election in 1936 with more than 60 percent of the vote, carrying all but two small states in the Electoral College.
Joe Biden Is Not Franklin Roosevelt
We all know that, or at least we should know that. Roosevelt was an extraordinarily gifted politician who took over the presidency during a crisis. He also had more than 300 Democratic seats in the House after the 1932 election, as well as 59 seats in a 96-seat Senate. His majorities in both houses actually grew in the 1934 elections, with a nine-seat Senate pick-up giving the Democrats 69 seats in a 96-seat Senate.
That world is different from the Congress President Biden had to deal with. He had literally the barest of majorities in the Senate, with the vote of the vice-president needed on any important piece of legislation passing without Republican support. This meant that his agenda was entirely at the mercy of two center-right Democrats, Joe Manchin and Kyrsten Sinema.
The situation in the House was not much better, with Democrats holding just a four-seat majority. Here also, conservative members were acting as a brake on virtually everything Biden put on the table. And, he lost even this slim majority in the 2022 election, although an additional Senate seat gave him a small amount of extra wiggle room.
But we know that most people don’t follow politics closely. They want to see their lives getting better, and they don’t care that some jerk in the House or Senate is blocking a key piece of legislation.
So, let’s just look at what Biden has delivered. The first and most important item in people’s immediate experience was the American Rescue Plan (ARP), which provided a $1.9 trillion boost to the economy. This guaranteed that we would have a quick recovery, in contrast to the slow painful road back to full employment following the Great Recession.
The unemployment rate, which stood at 6.3 percent when Biden took office, had fallen to 3.9 percent by the end of 2021, and has not gone over 4.0 percent since. This is the longest period where the unemployment rate has been below 4.0 percent in more than half a century.
The specific spending also did much to protect people from the impact of the pandemic. It included $300 a week supplements to people getting unemployment insurance. It enhanced the subsidies in the Affordable Care Act, allowing millions more to get health care insurance. It provided subsidies for child care, and extended a moratorium on evictions, ensuring that people could stay in their home. It also provided substantial funds for health care issues directly related to the pandemic, such as improving ventilation in schools.
In short, the ARP was a really big deal. And it passed with no votes to spare in the Senate and a four-vote margin in the House.
As a result of the ARP, the United States is the only major economy that is largely back to its pre-pandemic growth path. The US also now has the lowest inflation rate of any of the G-7 economies.
In spite of the inflation of 2021 and 2022, real wages for the average worker are higher than they were before the pandemic. And, there have been larger gains for those at the bottom, reversing roughly a quarter of the rise in wage inequality we saw over the last four decades.
People have seen other benefits from the recovery under Biden. There was a massive reshuffling in the labor market in 2021 and 2022 as tens of millions of workers quit jobs they disliked or didn’t pay them enough. As a result, the Conference Board reports that workplace satisfaction is at the highest level in the almost forty years they have conducted their survey.
Tens of millions of people are now working from home, either entirely or partially, saving themselves hundreds of hours a year in commuting time, and thousands of dollars on work-related expenses. These savings in time and money do not show up in our data on real wages.
Roughly 15 million homeowners could refinance their homes, taking advantage of the low mortgage rates we saw before the Fed started raising rates last March. This saved them an average of more than $2,000 a year on interest payments. Homeownership rates also rose under Biden, with larger than average increases for Black, Hispanic, young and moderate-income households.
These are all extraordinarily positive developments for large segments of the population. There is no period since the late 1990s that could even come close to the progress made in the first two and a half years of the Biden administration.
Again, there are plenty of grounds for people being upset about the state of the economy. Tens of millions are still struggling at the edge of poverty. Many pandemic programs under ARP have ended, most notably the childcare subsidies, which will be eliminated this fall. Also, the jump in mortgage rates over the last year and a half has put homeownership out of reach for first-time buyers.
But on the whole, it is pretty hard not to see the overall picture as being overwhelmingly positive, especially considering that Biden had to deal with the disruptions created by multiple waves of COVID-19, as well as Russia’s invasion of Ukraine.
Just as people had plenty of grounds to be unhappy about their circumstances in September of 1935, they have grounds today. But, as in 1935, things are headed in the right direction. And, just as Roosevelt had a longer-term agenda that yielded benefits for many decades to come, Biden also does.
Biden’s Longer-Term Agenda
In addition to the ARP, Biden got three major pieces of legislation through Congress. The first was an infrastructure bill that he managed to pass with a large bi-partisan majority. Apparently, a large number of Republicans couldn’t resist the opportunity to show up at the groundbreakings for roads and bridges, as well as dishing out contracts to campaign contributors in their states and districts. This bill will help to address long-neglected infrastructure needs across the country. It also includes substantial funds that will support a green transition, notably by modernizing the country’s power grid and setting up a system of charging stations for electric cars.
The second piece of legislation Biden got through Congress was the CHIPS Act, which appropriated $280 billion over the next five years (approximately 1.0 percent of the federal budget) for research and support for manufacturing of advanced semiconductors in the United States. A large bi-partisan majority also supported this bill. Part of the story was again Republican politicians wanting to get in on the gravy, but also some jingoistic Cold War sentiment.
The latter has to be grounds for concern for progressives. It probably makes sense in any world to ensure that key components for the economy will be accessible in the event of a conflict with China, and given that Taiwan is our major supplier, this is a real concern. However, insofar as this is part of a process of escalating tensions with China, which could lead to a Cold War-type military buildup, it is definitely bad news. The cost of another Cold War will almost certainly be sacrificing any progressive social agenda, as well as slowing a green transition to a speed that could make it irrelevant.
The money spent on researching advanced chips is almost certainly a positive story from an economic standpoint, although we should be asking more about ownership of this research than seems to be the case now. I’ll get back to this issue in the next section.
While the infrastructure bill and CHIPS Act passed with large bipartisan majorities the Inflation Reduction Act (IRA), passed on a strictly partisan basis. Biden somehow managed to get the support of Joe Manchin on a bill that is jump-starting a green transition.
The IRA includes large subsidies for clean energy and electric cars. As a result, in the relatively short time since its passage, we have seen an explosion in plans for factories producing electric cars and batteries, as well as wind and solar power. While there are many issues with implementation, most notably environmental reviews that create lengthy delays for power plants and transmission lines, we at last seem to be making good progress towards a green transition.
Given the amount of money that industry now has on the line, it is difficult to envision how the transition can be turned back. We are now seeing conservative Republicans stand up for solar energy or electric cars because they mean jobs and tax revenue in their states and districts. The explosion in factory construction related to the green transition is impossible to miss in the GDP data.
The revenue parts of the IRA are also important. The main way it raises revenue is through increased funding of IRS enforcement. For many people, especially rich people, paying taxes has become voluntary. The government is losing hundreds of billions every year because rich people don’t pay the taxes they owe. The increased enforcement capacity created by the IRA will substantially reduce the money lost to tax evasion.
The other revenue raiser in the IRA is a 1.0 percent tax on money paid out to shareholders through share buybacks. As I have written many times, I don’t think buybacks are the horror story that many progressives imagine. It makes little difference whether money is paid out to shareholders as buybacks or dividends. We might prefer they invest the money or raise workers’ wages, but if we completely outlawed buybacks tomorrow, the vast majority of the money would just be paid out as dividends instead. That hardly seems like a great victory.
But there is a reason the buyback tax is a big deal. The corporate income tax is an extremely difficult one for the IRS to collect. The reason is that corporate profits are difficult to monitor. There are all sorts of accounting rules on issues like the treatment of inventories and depreciation, that determine taxable profits. We can’t see corporate profits directly; corporate accountants tell us what corporate profits are. This leaves enormous room for gaming the tax code, which corporations naturally exploit to the fullest extent possible.
However, there is an alternative. We can make returns to shareholders (the money companies pay out in dividends, plus capital gains from the increase in value of their stock price), the basis for the income tax. This has the great advantage that returns to shareholders are completely transparent. We can get this information off any financial website.
It would be possible to calculate the tax liability of all publicly traded companies on a single spreadsheet. Just put up their dividend payouts, the increase in their market capitalization over the course of the year, then plug in the tax rate, and we’ve got it. No muss, no fuss. It’s cheap for the IRS and we can put the whole tax gaming industry out of business.
While I doubt this was the motivation behind the buyback tax, it actually is an important step in this direction. The buyback tax is likely to go down as the most administratively efficient tax ever. We will be able to raise billions of dollars of tax revenue each year, just by monitoring what companies announce they are spending on buybacks. And, we don’t have to worry they will cheat. What will they do, lie to their shareholders?
And, if a tax is cheap to collect, it stands to reason, we would want to increase it at the expense of taxes that are harder to collect, like the current corporate income tax. In short, the buyback tax can be a huge foot in the door towards shifting the basis of the corporate income tax to returns to shareholders.
It’s a long way from a 1.0 percent tax on the portion of profits used to buy back shares, to replacing the corporate income tax, which currently averages around 13 percent of all profits, but this is an incredibly important first step. It will be important to pay attention to the efficiency of the buyback tax which has not so far received much attention.
Administrative Agencies
Before completing the list of Biden administration accomplishments, it is important to mention the impact of the people he has appointed to administrative agencies, most notably the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB). Starting with the former, Biden appointed Lina Khan, a legal scholar who believes in anti-trust law, to head the commission. Since taking office, Khan has challenged a number of mergers that likely would have gone through without question under prior administrations of both parties.
It is important to realize that the importance of an approach that takes competition seriously cannot be measured simply by Khan’s won-loss record in challenging mergers. (Microsoft won the FTC’s biggest action under Khan, an effort to block its merger with the video game company Activision.) When companies know that there is a competition cop on the beat, they may not even try some mergers that they think might have sailed through under prior administrations. And, they may structure mergers to pose less of a threat to industry competition in order to pass muster under the new regime, as happened to some extent with Microsoft and Activision. With a growing body of evidence showing that a lack of competition has been important in raising profits at the expense of wages, this is a big deal.
The other notable area where Biden’s administrative appointees have made a visible difference is at the NLRB. Biden’s appointees are committed to respecting workers’ rights to have a union, if they want one. They have been markedly more pro-union in their rulings since the current chair, Lauren McFarren took over, but they made a qualitative break with the past boards in a ruling two weeks ago.
The workers at the Cemex building materials company had been involved in an organizing drive. They had already submitted cards, signed by a majority of workers, to get an NLRB supervised election. As is standard practice, Cemex engaged in a number of actions designed to delay the election and intimidate pro-union workers. The union complained that these were unfair practices and violated the National Labor Relations Act.
Past NLRBs have generally responded to such violations with what amounted to a slap on the wrist. They would tell the company to stop doing them. And, if they kept violating the law, the NLRB would tell them again to stop, rinse and repeat. Biden’s NLRB told Cemex that it has a union.
One way that workers can organize is by having a majority of workers sign cards requesting recognition, as happened at Cemex. If the company voluntarily accepts recognition, then the workers have a union. If it doesn’t, then the NLRB holds an election. Biden’s NLRB effectively said that by violating the law, Cemex has now accepted that it has a union.
This is potentially a huge deal, since it will remove one of the major roadblocks to workers seeking to organize. There still is a long way to go on this one. Cemex will contest this in the courts, and who knows where the Republican Supreme Court will end up. There is also a second major roadblock in getting first contracts. Companies routinely treat the legal requirement to negotiate in good faith as a forced weekly meeting to talk about the weather and Superbowl prospects. But this NLRB ruling is a big step forward.
Does Biden Have a Vision?
It’s possible to point to the things that Biden has done as both offering immediate benefits and much more important changes done the road, but does he have a clear vision of a better society down the road? I guess my answer is that I don’t know, and I don’t especially care.
Does Biden see that his share buyback tax can lay the basis for switching the basis for the corporate income tax from profits to returns to shareholders? My guess is that he doesn’t, but when we have clear evidence of the much greater efficiency of this sort of tax, we will be able to move quickly down that road. The Republicans, and many Democrats, will do everything they can to prevent corporations from paying more tax, but when we have them defending pure waste, we are fighting them on favorable turf.
I do worry that the administration does not seem to be attentive to who owns the benefits from government-subsidized research. This issue comes up with both the CHIPS Act and the IRA.
This is a huge deal. While it is standard practice in policy circles to attribute the upward redistribution of the last four decades to technology, that is a lie. It was government policy on technology, in the form of longer and stronger patent and copyright protections, that allowed a relatively small group of capitalists and well-placed workers to get a grossly disproportionate share of the benefits from the technologies developed over this period. As I like to point out, if the government did not threaten to arrest people who made copies of Microsoft software without his permission, Bill Gates would likely still be working for a living. (Yes, I’m talking my book, Rigged [it’s free], see also here and here.)
To take a more recent example, we created at least five Moderna billionaires by paying the company to develop a COVID vaccine and then letting it keep control of its distribution. We should worry about how many more billionaires we will create if the government pays for research on semiconductor technology and various types of green technologies and then hands out patent monopolies to private actors. It will need some huge efforts on the tax and transfer side with the left hand to offset the inequality we are directly creating with the right hand.
While I see little appreciation of this problem in the Biden administration, on the plus side here, he is moving to negotiate drug prices in Medicare. This is hitting one end of the problem. Absurdly, the Biden administration’s efforts to restrain prices is being discussed as an interference with the free market. This is absurd because the big interference with the free market was when the government-granted monopolies or related protections in the first place. It was the government that made drug prices high, Biden is just attempting to limit the damage.
Anyhow, we need to have a more critical view of rules on intellectual products. Biden has not expounded one, but his actions do open the door.
And, this has to be seen as the bigger picture on other issues as well. Progressives were endlessly frustrated with Roosevelt as well. He didn’t openly embrace many of the issues that progressives felt were hugely important. However, he did create a framework that allowed for enormous progress in a wide range of areas.
I would say the same about Biden, but he is doing it in a context where he enjoys a far more tentative majority than Roosevelt faced. And he clearly is not the same sort of charismatic figure as Roosevelt. But all in all, he is doing a damn good job.
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The August jobs numbers were mostly good with one big exception, a 0.3 percentage point rise in the unemployment rate to 3.8 percent. This is still a relatively low rate. Coming out of the Great Recession, many economists argued that the unemployment rate could not get below 5.0 percent without triggering spiraling inflation, so an unemployment rate below 4.0 percent looks pretty good by comparison. In fact, this is our 19th consecutive month with unemployment below 4.0 percent, a record unmatched since the end of the 1960s.
While it’s hard to get too upset about the level of unemployment, a 0.3 pp jump in a single month is disconcerting. However, on closer look, the story may not be that bad. The jump in unemployment was due to a big jump in people in the labor force, not a spike in layoffs.
The labor force reportedly grew by 736,000 in August, which would come to 8.8 million at an annual rate. Needless to say, this did not really happen. There was no event in the world that would have plausibly led to this sort of leap in labor force participation, so we have to recognize that the differences in the household survey data between July and August were largely driven by errors in the data.
If we ignore the July to August change and just compare August levels with prior months, there does not look to be much cause for concern. There were 2,914,000 workers who reported being unemployed in August as a result of losing a job. That is up by almost 300,000 from the July level, but only 14,000 from the June level. In fact, it is actually 46,000 below the May level. Clearly, there is no evidence of a surge in layoffs driving the unemployment rate higher.
The main reason why unemployment is higher than earlier in the year is that more people report being unemployed who are reentrants to the workforce or new entrants. The number of unemployed reentrants in August was 150k above the average for the first seven months of the year, while the number of unemployed new entrants was 80k higher. Insofar as there is a story of higher unemployment in August it is one where the economy is not generating enough jobs to employ all the people entering the workforce.
But, other data don’t square with that story. Most notably, the establishment survey showed the economy generating 187,000 jobs in August. The numbers from the prior two months were revised down, so that the three-month average stood at just 150k, but even this figure implies a considerably faster pace than most projections of potential labor force growth.
The Congressional Budget Office (CBO) puts the potential growth in the labor force at less than 1 million a year over the next three years, which implies a rate of employment growth of less than 90,000 a month. So, if CBO is anywhere close to the mark, 150k jobs a month should be more than enough to keep the unemployment rate from rising. It’s also worth noting that the household survey showed employment rising by 220k in August.
The weekly data on new and continuing unemployment claims are also inconsistent with any appreciable rise in unemployment. The four-week moving average for new unemployment claims stood at 231k for the most recent week, which is lower than its been for most of the last five months. The number of continuing claims stood at 1,692k, the lowest level since the start of February. There is no evidence here of any uptick in the number of people having difficulty finding jobs.
Wage Growth, Productivity, and Inflation
The other big issue of concern with this month’s jobs report was whether there was evidence of faster wage growth, which could trigger a reacceleration of inflation. The news was clearly good on this front. Wage growth slowed modestly, with the three-month annual rate dropping from 4.9 percent in the three months ending in July to 4.5 percent in the three months ending in August.
This is probably still somewhat faster than would be consistent with the Fed’s 2.0 percent inflation target, but not by much. There were several periods in 2018-19 when the rate of wage growth approached 4.0 percent. There also is still some room for the profit share to shrink back to its pre-pandemic level, which means that we could have more rapid wage growth, without seeing it passed on in prices. And, we have even further to go with profit shares if we target the pre-Great Recession shares.
The only serious basis for Fed concern would be if wage growth seemed to accelerating. That is clearly not the case with the data in the Average Hourly Earnings series in the jobs report. Since this was the only wage series that had shown any evidence of acceleration, the Fed should be reasonably comfortable that accelerating wage growth will not reignite inflation.
The other piece of good news on the inflation front is that it seems that the strong productivity growth number we saw in the second quarter will be repeated in the current quarter. The index of aggregate weekly hours rose 0.4 percent in August, but that was after dropping 0.2 percent in July. It is on course to show a gain of 0.3-0.4 percent for the quarter, translating into an annualized rate of 1.2 to 1.6 percent.
GDP to date has come in very strong with the GDPNow model putting growth for the quarter at over 5.0 percent, as of August 31. That will surely come down with data from August and September, but if the quarter’s growth ends up over 3.0 percent, it will translate into another very good productivity number.
These data are erratic and subject to large revisions, but it is always good to have another quarter where productivity goes in the right direction. In any case, it is one more item arguing that the Fed can hold tight on any further rate hikes. All the data suggest that inflation is continuing to slow, with a drop in rental inflation, the biggest single component in the index, a virtual certainty given the slowdown of inflation in marketed units. Inflation may still be above the Fed’s 2.0 percent target by the end of the year, but it should be close enough that the Fed can declare victory.
Recession Fears?
There were many predictions of recession earlier in the year, given the Fed’s extraordinary pace of tightening. While it was certainly reasonable to worry about the impact of these hikes, it was difficult to see the path through which they would cause a recession.
The main channels through which rate hikes led to recessions in the past were a slowing of construction, especially residential construction, and a drop in net exports due to a rise in the value of the dollar. We have seen relatively little impact on either channel to date.
The rise in interest rates has reduced housing starts, which peaked at an annual rate of more than 1.8 million last April, and then fell to less than 1.4 million this spring. However, due to the huge backlog of unfinished homes created by supply chain problems, the number of units under construction is still larger than it was back in March of 2022 when the Fed started its rate hikes.
There is a similar story with non-residential construction. There had already been a big falloff in office and retail construction at the start of the pandemic, so these sectors had little room to fall further. On the other hand, the CHIPS Act and the Inflation Reduction Act provided a huge boost to factory construction. As a result, non-residential construction has been rising rapidly this year. In August, construction added 22,000 jobs.
Rate hikes have also not had the normal effect on the dollar for two reasons. First, the dollar had already risen considerably against other major currencies following the passage of the American Rescue Plan at the start of the Biden administration and then again following the Russian invasion of Ukraine. This meant that the dollar did not have as much room to rise further as would ordinarily be the case.
The other factor was the rise in interest rates by other major central banks. Since all rates were going up more or less together, the higher rates in the U.S. did not have much impact.
Without a rise in the dollar, there was no reason to expect the sort of fall in net exports that might ordinarily follow a sharp rise in interest rates by the Fed. Since there has been no major drop in net exports, there has not been a fall in manufacturing output and employment. The number of jobs in the sector rose by 16,000 in August.
With construction and manufacturing, the two most cyclical sectors in the economy, still adding jobs, it is difficult to see how we can get a recession. This doesn’t mean the Fed’s rate hikes have had no impact on the economy. They brought an end to the refinancing boom that had taken place in 2020-21. This directly had an impact on jobs by reducing employment in the financial sector. Jobs in credit intermediation and related activities are down by almost 70,000 from where it was in March of 2022.
The loss of this source of credit also likely had some impact on slowing consumption, as many people did cash-out refinancing, where they borrowed against their home equity to undertake a major purchase, such as buying a car or remodeling their house. In addition, some of the money people saved from lower interest payments would have gone into consumption.
However, this impact has been fairly limited, as consumption has continued to grow at a healthy pace based on real wage growth. In any case, it’s hard to see a recession in the cards.
Probably the biggest cause for concern would be further problems in the financial sector due to losses that banks have on their books from government bonds and other long-term loans. Write-downs on loans to commercial real estate will also be a problem.
For this reason, it would be great if the Fed could signal that it is at the end of its round of rate hikes. They obviously are concerned about declaring a premature victory in their battle against inflation, after being slow to recognize the problem, but they don’t somehow even the score by making a mistake in the opposite direction.
At the very least, Chair Powell should more explicitly acknowledge the progress made to date, as other FOMC members have done, most notably Raphael Bostic. Anything that can produce a modest reduction in long-term rates will reduce the risk of a financial meltdown that could pose a series problem for the economy next year.
The August jobs numbers were mostly good with one big exception, a 0.3 percentage point rise in the unemployment rate to 3.8 percent. This is still a relatively low rate. Coming out of the Great Recession, many economists argued that the unemployment rate could not get below 5.0 percent without triggering spiraling inflation, so an unemployment rate below 4.0 percent looks pretty good by comparison. In fact, this is our 19th consecutive month with unemployment below 4.0 percent, a record unmatched since the end of the 1960s.
While it’s hard to get too upset about the level of unemployment, a 0.3 pp jump in a single month is disconcerting. However, on closer look, the story may not be that bad. The jump in unemployment was due to a big jump in people in the labor force, not a spike in layoffs.
The labor force reportedly grew by 736,000 in August, which would come to 8.8 million at an annual rate. Needless to say, this did not really happen. There was no event in the world that would have plausibly led to this sort of leap in labor force participation, so we have to recognize that the differences in the household survey data between July and August were largely driven by errors in the data.
If we ignore the July to August change and just compare August levels with prior months, there does not look to be much cause for concern. There were 2,914,000 workers who reported being unemployed in August as a result of losing a job. That is up by almost 300,000 from the July level, but only 14,000 from the June level. In fact, it is actually 46,000 below the May level. Clearly, there is no evidence of a surge in layoffs driving the unemployment rate higher.
The main reason why unemployment is higher than earlier in the year is that more people report being unemployed who are reentrants to the workforce or new entrants. The number of unemployed reentrants in August was 150k above the average for the first seven months of the year, while the number of unemployed new entrants was 80k higher. Insofar as there is a story of higher unemployment in August it is one where the economy is not generating enough jobs to employ all the people entering the workforce.
But, other data don’t square with that story. Most notably, the establishment survey showed the economy generating 187,000 jobs in August. The numbers from the prior two months were revised down, so that the three-month average stood at just 150k, but even this figure implies a considerably faster pace than most projections of potential labor force growth.
The Congressional Budget Office (CBO) puts the potential growth in the labor force at less than 1 million a year over the next three years, which implies a rate of employment growth of less than 90,000 a month. So, if CBO is anywhere close to the mark, 150k jobs a month should be more than enough to keep the unemployment rate from rising. It’s also worth noting that the household survey showed employment rising by 220k in August.
The weekly data on new and continuing unemployment claims are also inconsistent with any appreciable rise in unemployment. The four-week moving average for new unemployment claims stood at 231k for the most recent week, which is lower than its been for most of the last five months. The number of continuing claims stood at 1,692k, the lowest level since the start of February. There is no evidence here of any uptick in the number of people having difficulty finding jobs.
Wage Growth, Productivity, and Inflation
The other big issue of concern with this month’s jobs report was whether there was evidence of faster wage growth, which could trigger a reacceleration of inflation. The news was clearly good on this front. Wage growth slowed modestly, with the three-month annual rate dropping from 4.9 percent in the three months ending in July to 4.5 percent in the three months ending in August.
This is probably still somewhat faster than would be consistent with the Fed’s 2.0 percent inflation target, but not by much. There were several periods in 2018-19 when the rate of wage growth approached 4.0 percent. There also is still some room for the profit share to shrink back to its pre-pandemic level, which means that we could have more rapid wage growth, without seeing it passed on in prices. And, we have even further to go with profit shares if we target the pre-Great Recession shares.
The only serious basis for Fed concern would be if wage growth seemed to accelerating. That is clearly not the case with the data in the Average Hourly Earnings series in the jobs report. Since this was the only wage series that had shown any evidence of acceleration, the Fed should be reasonably comfortable that accelerating wage growth will not reignite inflation.
The other piece of good news on the inflation front is that it seems that the strong productivity growth number we saw in the second quarter will be repeated in the current quarter. The index of aggregate weekly hours rose 0.4 percent in August, but that was after dropping 0.2 percent in July. It is on course to show a gain of 0.3-0.4 percent for the quarter, translating into an annualized rate of 1.2 to 1.6 percent.
GDP to date has come in very strong with the GDPNow model putting growth for the quarter at over 5.0 percent, as of August 31. That will surely come down with data from August and September, but if the quarter’s growth ends up over 3.0 percent, it will translate into another very good productivity number.
These data are erratic and subject to large revisions, but it is always good to have another quarter where productivity goes in the right direction. In any case, it is one more item arguing that the Fed can hold tight on any further rate hikes. All the data suggest that inflation is continuing to slow, with a drop in rental inflation, the biggest single component in the index, a virtual certainty given the slowdown of inflation in marketed units. Inflation may still be above the Fed’s 2.0 percent target by the end of the year, but it should be close enough that the Fed can declare victory.
Recession Fears?
There were many predictions of recession earlier in the year, given the Fed’s extraordinary pace of tightening. While it was certainly reasonable to worry about the impact of these hikes, it was difficult to see the path through which they would cause a recession.
The main channels through which rate hikes led to recessions in the past were a slowing of construction, especially residential construction, and a drop in net exports due to a rise in the value of the dollar. We have seen relatively little impact on either channel to date.
The rise in interest rates has reduced housing starts, which peaked at an annual rate of more than 1.8 million last April, and then fell to less than 1.4 million this spring. However, due to the huge backlog of unfinished homes created by supply chain problems, the number of units under construction is still larger than it was back in March of 2022 when the Fed started its rate hikes.
There is a similar story with non-residential construction. There had already been a big falloff in office and retail construction at the start of the pandemic, so these sectors had little room to fall further. On the other hand, the CHIPS Act and the Inflation Reduction Act provided a huge boost to factory construction. As a result, non-residential construction has been rising rapidly this year. In August, construction added 22,000 jobs.
Rate hikes have also not had the normal effect on the dollar for two reasons. First, the dollar had already risen considerably against other major currencies following the passage of the American Rescue Plan at the start of the Biden administration and then again following the Russian invasion of Ukraine. This meant that the dollar did not have as much room to rise further as would ordinarily be the case.
The other factor was the rise in interest rates by other major central banks. Since all rates were going up more or less together, the higher rates in the U.S. did not have much impact.
Without a rise in the dollar, there was no reason to expect the sort of fall in net exports that might ordinarily follow a sharp rise in interest rates by the Fed. Since there has been no major drop in net exports, there has not been a fall in manufacturing output and employment. The number of jobs in the sector rose by 16,000 in August.
With construction and manufacturing, the two most cyclical sectors in the economy, still adding jobs, it is difficult to see how we can get a recession. This doesn’t mean the Fed’s rate hikes have had no impact on the economy. They brought an end to the refinancing boom that had taken place in 2020-21. This directly had an impact on jobs by reducing employment in the financial sector. Jobs in credit intermediation and related activities are down by almost 70,000 from where it was in March of 2022.
The loss of this source of credit also likely had some impact on slowing consumption, as many people did cash-out refinancing, where they borrowed against their home equity to undertake a major purchase, such as buying a car or remodeling their house. In addition, some of the money people saved from lower interest payments would have gone into consumption.
However, this impact has been fairly limited, as consumption has continued to grow at a healthy pace based on real wage growth. In any case, it’s hard to see a recession in the cards.
Probably the biggest cause for concern would be further problems in the financial sector due to losses that banks have on their books from government bonds and other long-term loans. Write-downs on loans to commercial real estate will also be a problem.
For this reason, it would be great if the Fed could signal that it is at the end of its round of rate hikes. They obviously are concerned about declaring a premature victory in their battle against inflation, after being slow to recognize the problem, but they don’t somehow even the score by making a mistake in the opposite direction.
At the very least, Chair Powell should more explicitly acknowledge the progress made to date, as other FOMC members have done, most notably Raphael Bostic. Anything that can produce a modest reduction in long-term rates will reduce the risk of a financial meltdown that could pose a series problem for the economy next year.
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There are lengthy articles in all the major news outlets on the list of drugs whose prices will be subject to negotiation by Medicare. Many of these pieces discuss negotiation as a form of government interference with the market. This is a case where we really need to step back a second and get a clearer picture of what is going on.
The reason drugs are expensive in the first place is that they have government-granted patent monopolies or related protections. There are few drugs that are actually expensive to manufacture and distribute. This means that without government-imposed barriers, most drugs would be cheap. Prices of patented drugs fall by 90 percent or more after enough generics have time to enter the market.
In short, the drug companies and politicians who are angry about Medicare negotiating drug prices are not upset about government interference in the market. They are angry about an interference that will lower drug prices and reduce the industry’s profits.
There is an argument that we need high drug prices to give the industry an incentive to develop new drugs. This is true, but we can ask how high prices have to be. There is also the option to substitute public money for patent monopoly-supported research, as we did when we paid Moderna to develop a Covid vaccine.
We could look to apply this approach more widely, paying for the research upfront and then having the drugs developed available as generics from the day they are approved. The pharmaceutical industry probably would not like this approach, but it is a way that we can get drugs at reasonable prices.
There are lengthy articles in all the major news outlets on the list of drugs whose prices will be subject to negotiation by Medicare. Many of these pieces discuss negotiation as a form of government interference with the market. This is a case where we really need to step back a second and get a clearer picture of what is going on.
The reason drugs are expensive in the first place is that they have government-granted patent monopolies or related protections. There are few drugs that are actually expensive to manufacture and distribute. This means that without government-imposed barriers, most drugs would be cheap. Prices of patented drugs fall by 90 percent or more after enough generics have time to enter the market.
In short, the drug companies and politicians who are angry about Medicare negotiating drug prices are not upset about government interference in the market. They are angry about an interference that will lower drug prices and reduce the industry’s profits.
There is an argument that we need high drug prices to give the industry an incentive to develop new drugs. This is true, but we can ask how high prices have to be. There is also the option to substitute public money for patent monopoly-supported research, as we did when we paid Moderna to develop a Covid vaccine.
We could look to apply this approach more widely, paying for the research upfront and then having the drugs developed available as generics from the day they are approved. The pharmaceutical industry probably would not like this approach, but it is a way that we can get drugs at reasonable prices.
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That would be the implication of a claim about China’s population reported in Peter Coy’s NYT column. Coy cites the views of Yi Fuxian, an expert on China’s demography. According to Yi, China’s published statistics overstate birthrates and population. Yi puts China’s current population at 1.28 billion, almost 10.0 percent less than the official figure of 1.41 billion.
If Yi is correct about China’s population, and China’s GDP has been measured accurately, then it would mean that its per capita GDP would be roughly 10.0 percent higher than current estimates. The I.M.F. puts China’s per capita for 2023 GDP at $19,073 in international dollars. That is a bit less than Mexico’s figure of $19,430.
But if Yi is right about China’s population, then its per capita GDP would be almost $21,000 this year, roughly $1,500 higher than Mexico’s. This is pretty striking, since at the start of the century, China’s per capita GDP was $3,430, less than one-fifth of Mexico’s. (These are in constant international dollars, so they are adjusted for the effects of inflation.)
Yi and others have argued that China is facing a period of stagnation where its per capita income will grow slowly in the years ahead. That could be right, but the immediate implication of his claims for the present is that China’s growth has been even more spectacular than the official data indicate.
That would be the implication of a claim about China’s population reported in Peter Coy’s NYT column. Coy cites the views of Yi Fuxian, an expert on China’s demography. According to Yi, China’s published statistics overstate birthrates and population. Yi puts China’s current population at 1.28 billion, almost 10.0 percent less than the official figure of 1.41 billion.
If Yi is correct about China’s population, and China’s GDP has been measured accurately, then it would mean that its per capita GDP would be roughly 10.0 percent higher than current estimates. The I.M.F. puts China’s per capita for 2023 GDP at $19,073 in international dollars. That is a bit less than Mexico’s figure of $19,430.
But if Yi is right about China’s population, then its per capita GDP would be almost $21,000 this year, roughly $1,500 higher than Mexico’s. This is pretty striking, since at the start of the century, China’s per capita GDP was $3,430, less than one-fifth of Mexico’s. (These are in constant international dollars, so they are adjusted for the effects of inflation.)
Yi and others have argued that China is facing a period of stagnation where its per capita income will grow slowly in the years ahead. That could be right, but the immediate implication of his claims for the present is that China’s growth has been even more spectacular than the official data indicate.
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• Globalization and TradeGlobalización y comercio
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The discussion of AI continues to be almost otherworldly. We often see a contrast between the idea that AI will “assist” workers in doing their job and that AI will replace them. Pro tip: When AI assists workers, it is replacing them.
The story here is actually pretty simple. Suppose we can get AI to write legal briefs. As many people are quick to point out, AI programs make mistakes. This means that someone would likely not want a brief written by an AI program turned into a judge on their behalf.
However, an AI program can save a lawyer an enormous amount of time. It can write a brief, citing all the relevant cases. A lawyer can then look it over, check that the cases are cited correctly, and make sure that the arguments are sound, and then turn it into the judge. This will likely save a lawyer many hours compared to the situation where they have to write the brief from scratch.
So, AI is assisting lawyers, sounds great! But think this one through for a moment. Suppose having the use of an AI program allows the typical lawyer to double their output. With AI, they can produce briefs, write contracts, or do other legal tasks in half the time it took them without AI.
If each lawyer can do twice as much work in an hour or a day, then we need many fewer lawyers. If they can literally double their output, then it would cut the need for lawyers in half.
The real world is of course never that simple. Lawyers doing twice as much work could require more people to hire lawyers, since people might sue for things they would not have sued for otherwise, and then the person being sued has to hire a lawyer. But, as a general rule, if each lawyer can do twice as much work in an hour, we will need fewer lawyers.
The same story applies to anywhere else we might want to use AI. If an AI program can calculate a company’s taxes, then we will likely need fewer accountants, even if we still want an accountant to check the work. Same for engineers, architects, and workers in a wide range of other occupations. In all of these cases, “assisting” means replacing. If we can increase the productivity of workers in these occupations, we can reduce the need for these professional workers.
To my view, this is great. Government policy has been designed to depress the pay of less-educated workers for decades. We have made it as easy as possible to import manufactured goods, produced by low-paid workers in the developing world. This has the predicted and actual effect of reducing employment in manufacturing in the United States and reducing the pay for the jobs that remain.
We have also made patent and copyright monopolies longer and stronger over the last half-century. This increases the pay for those in a position to benefit from these government-granted monopolies. People in policy positions like to say that the big paychecks enjoyed by folks like Bill Gates, the Moderna billionaires, and others are due to technology, but that is just a fairy tale they tell to make themselves feel good. It was due to the rigging of the market.
Anyhow, it will be great if AI allows those lower down the educational ladder to capture more of the benefits of technology. The professionals who take a hit won’t be happy, but neither were the millions of manufacturing workers who lost their jobs due to our trade policies or the tens of millions who had to accept lower pay.
By the way, one last piece of silliness that comes up with AI. We don’t have to worry that no one will have jobs. We can always work fewer hours, which is an important way that people in Western Europe have taken the benefits of productivity growth, with an average work year now roughly 20 percent shorter than in the United States. Also, hasn’t anyone heard about the demographic crisis of falling populations?
The discussion of AI continues to be almost otherworldly. We often see a contrast between the idea that AI will “assist” workers in doing their job and that AI will replace them. Pro tip: When AI assists workers, it is replacing them.
The story here is actually pretty simple. Suppose we can get AI to write legal briefs. As many people are quick to point out, AI programs make mistakes. This means that someone would likely not want a brief written by an AI program turned into a judge on their behalf.
However, an AI program can save a lawyer an enormous amount of time. It can write a brief, citing all the relevant cases. A lawyer can then look it over, check that the cases are cited correctly, and make sure that the arguments are sound, and then turn it into the judge. This will likely save a lawyer many hours compared to the situation where they have to write the brief from scratch.
So, AI is assisting lawyers, sounds great! But think this one through for a moment. Suppose having the use of an AI program allows the typical lawyer to double their output. With AI, they can produce briefs, write contracts, or do other legal tasks in half the time it took them without AI.
If each lawyer can do twice as much work in an hour or a day, then we need many fewer lawyers. If they can literally double their output, then it would cut the need for lawyers in half.
The real world is of course never that simple. Lawyers doing twice as much work could require more people to hire lawyers, since people might sue for things they would not have sued for otherwise, and then the person being sued has to hire a lawyer. But, as a general rule, if each lawyer can do twice as much work in an hour, we will need fewer lawyers.
The same story applies to anywhere else we might want to use AI. If an AI program can calculate a company’s taxes, then we will likely need fewer accountants, even if we still want an accountant to check the work. Same for engineers, architects, and workers in a wide range of other occupations. In all of these cases, “assisting” means replacing. If we can increase the productivity of workers in these occupations, we can reduce the need for these professional workers.
To my view, this is great. Government policy has been designed to depress the pay of less-educated workers for decades. We have made it as easy as possible to import manufactured goods, produced by low-paid workers in the developing world. This has the predicted and actual effect of reducing employment in manufacturing in the United States and reducing the pay for the jobs that remain.
We have also made patent and copyright monopolies longer and stronger over the last half-century. This increases the pay for those in a position to benefit from these government-granted monopolies. People in policy positions like to say that the big paychecks enjoyed by folks like Bill Gates, the Moderna billionaires, and others are due to technology, but that is just a fairy tale they tell to make themselves feel good. It was due to the rigging of the market.
Anyhow, it will be great if AI allows those lower down the educational ladder to capture more of the benefits of technology. The professionals who take a hit won’t be happy, but neither were the millions of manufacturing workers who lost their jobs due to our trade policies or the tens of millions who had to accept lower pay.
By the way, one last piece of silliness that comes up with AI. We don’t have to worry that no one will have jobs. We can always work fewer hours, which is an important way that people in Western Europe have taken the benefits of productivity growth, with an average work year now roughly 20 percent shorter than in the United States. Also, hasn’t anyone heard about the demographic crisis of falling populations?
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