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.

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.

After a couple of low side surprises, the October job numbers came in somewhat higher than generally expected at 535,000. This went along with large upward revisions of 235,000 to the prior two months’ growth, bringing the three-month average to a very respectable 442,000. The unemployment rate fell to 4.6 percent, a level not reached following the Great Recession until February 2017.

The story looks even better if we just look at the private sector, which added 604,000 jobs in the month. With the revised data, the private sector has now added an average of 491,000 jobs over the last three months.

This raises the obvious question of why the public sector keeps losing jobs? My guess is that we are looking at a supply-side story. Wages have been rising rapidly in the private sector, but not in the public sector. The Employment Cost Index for the third quarter showed private-sector compensation rising 1.4 percent in the quarter. Public sector compensation rose by just 0.8 percent. A restaurant that needs to get more workers can raise pay and offer hiring bonuses, local school boards generally can’t, or at least not without jumping through some bureaucratic hoops.

The average hourly wage for nonsupervisory workers in restaurants rose 12.4 percent over the last year. Imagine what reporting on the economy would look like right now if it were being written by restaurant workers.

Okay, but let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald  Trump and his crew would be touting the comparison in every forum they had. I’m doing this for them. As it now stands President Biden has created 5,583,000 jobs in his first nine months in the White House, compared to a loss of 2,876,000  jobs in the four years of Donald  Trump’s presidency.

After a couple of low side surprises, the October job numbers came in somewhat higher than generally expected at 535,000. This went along with large upward revisions of 235,000 to the prior two months’ growth, bringing the three-month average to a very respectable 442,000. The unemployment rate fell to 4.6 percent, a level not reached following the Great Recession until February 2017.

The story looks even better if we just look at the private sector, which added 604,000 jobs in the month. With the revised data, the private sector has now added an average of 491,000 jobs over the last three months.

This raises the obvious question of why the public sector keeps losing jobs? My guess is that we are looking at a supply-side story. Wages have been rising rapidly in the private sector, but not in the public sector. The Employment Cost Index for the third quarter showed private-sector compensation rising 1.4 percent in the quarter. Public sector compensation rose by just 0.8 percent. A restaurant that needs to get more workers can raise pay and offer hiring bonuses, local school boards generally can’t, or at least not without jumping through some bureaucratic hoops.

The average hourly wage for nonsupervisory workers in restaurants rose 12.4 percent over the last year. Imagine what reporting on the economy would look like right now if it were being written by restaurant workers.

Okay, but let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald  Trump and his crew would be touting the comparison in every forum they had. I’m doing this for them. As it now stands President Biden has created 5,583,000 jobs in his first nine months in the White House, compared to a loss of 2,876,000  jobs in the four years of Donald  Trump’s presidency.

Margot Sanger-Katz had an Upshot piece praising the Democrats for pursuing a path on lowering drug prices, which she argues will have a relatively small impact on innovation. It also will have a relatively small impact in reducing drug prices.

Sanger argues that high drug prices are necessary for innovation, since most important new drugs come from small start-upstarts. These start-ups rely on venture capitalists to put up big money in the hope that they might have a big payoff if a new drug or vaccine proves successful. By reducing the size of the potential payoff, there is a risk that these venture capitalists will be less willing to put up the money these start-ups need.

Incredibly, Sanger-Katz never mentions the possibility that public funding could be a substitute for some or all of the money from venture capitalists. This is bizarre not only because the federal government already spends around $50 billion a year on bio-medical research, but also because we just saw the government make large-scale expenditures to support the development of vaccines, treatments, and tests for Covid through Operation Warp Speed.

If we are seriously concerned that reduced drug prices will lead to less incentive for venture capitalists to finance innovation, we can look to offset any reduction in incentive with more direct funding. (The $50 billion the government now spends compares to roughly $100 billion that the industry currently spends, according to the Commerce Department.) In addition to lowering drug prices, the spending from the government has the advantage that all research can be fully open as a condition of funding. This would mean that researchers all around the world could learn and build on new findings as soon as they are made.

Lower drug prices also have the benefit of reducing the perverse incentives created by government-granted patent monopolies. The high prices resulting from these monopolies give drug companies a huge incentive to lie about the safety and effectiveness of their drugs. This is a widely recognized problem among public health professionals. Deceptive marketing by drug companies happens all the time, with the most dramatic instance being the opioid crisis, where major manufacturers allegedly misled doctors about the addictiveness of the new generation of opioids in order to boost sales.

Margot Sanger-Katz had an Upshot piece praising the Democrats for pursuing a path on lowering drug prices, which she argues will have a relatively small impact on innovation. It also will have a relatively small impact in reducing drug prices.

Sanger argues that high drug prices are necessary for innovation, since most important new drugs come from small start-upstarts. These start-ups rely on venture capitalists to put up big money in the hope that they might have a big payoff if a new drug or vaccine proves successful. By reducing the size of the potential payoff, there is a risk that these venture capitalists will be less willing to put up the money these start-ups need.

Incredibly, Sanger-Katz never mentions the possibility that public funding could be a substitute for some or all of the money from venture capitalists. This is bizarre not only because the federal government already spends around $50 billion a year on bio-medical research, but also because we just saw the government make large-scale expenditures to support the development of vaccines, treatments, and tests for Covid through Operation Warp Speed.

If we are seriously concerned that reduced drug prices will lead to less incentive for venture capitalists to finance innovation, we can look to offset any reduction in incentive with more direct funding. (The $50 billion the government now spends compares to roughly $100 billion that the industry currently spends, according to the Commerce Department.) In addition to lowering drug prices, the spending from the government has the advantage that all research can be fully open as a condition of funding. This would mean that researchers all around the world could learn and build on new findings as soon as they are made.

Lower drug prices also have the benefit of reducing the perverse incentives created by government-granted patent monopolies. The high prices resulting from these monopolies give drug companies a huge incentive to lie about the safety and effectiveness of their drugs. This is a widely recognized problem among public health professionals. Deceptive marketing by drug companies happens all the time, with the most dramatic instance being the opioid crisis, where major manufacturers allegedly misled doctors about the addictiveness of the new generation of opioids in order to boost sales.

There have been numerous news articles in recent years telling us that China faces a demographic crisis. The basic story is that the market reforms put in place in the late 1970s, together with the country’s one-child policy, led to many fewer children being born in the last four decades. As a result, the number of current workers entering retirement exceeds the size of the cohorts entering the workforce, leading to a stagnant or declining workforce. This is supposed to be a crisis.

I used the word “supposed” because it is not in any way obvious that a declining workforce is any sort of crisis. We see shifts of population all the time, which can lead many cities or regions to have a decline in their population or workforce, even if the country as a whole does not. That doesn’t necessarily mean a crisis for the areas losing population unless of course the population decline is due to the loss of a major employer.

A drop in the growth rate of the workforce, or an actual decline, will likely mean slower GDP growth, but so what? A country’s standard of living is determined by its income per capita (along with many other factors), not its absolute level of GDP. India’s GDP is almost eight times Denmark’s, but Denmark is the far richer country. The reason is that India has more than two hundred times as many people.

If a country’s growth rate is slower because the growth rate of its workforce slows, that is hardly a disaster. People can still be seeing improvements in their standard of living, and in the case of China, these improvements would still be quite rapid even if its annual growth rate slowed by 2-3 percentage points from its recent pace of more than 6.0 percent annually.

There is a common argument that countries with aging populations, like China, will suffer because each worker will have to support a larger number of retirees. It is easy to show that this view is silly. Even a modest rate of productivity growth will swamp the impact of a declining ratio of workers to retirees. With output per worker increasing, both workers and retirees can enjoy rising living standards even as the ratio of workers to retirees fall.

That should not sound surprising. The ratio of workers to retirees has been falling in the United States for the last two decades, yet we have seen substantial increases in living standards, even if the wealthy have gotten the bulk of these gains. The idea that China’s declining ratio of workers to retirees poses a supply-side problem, where it cannot produce enough goods and services to support its population, is absurd on its face.  

The Problem of Secular Stagnation

It turns out that the major problem of an aging population is not too much demand, but rather too little. Older people tend to spend less money than people in their working years. Also, when a country’s workforce is not growing, companies need to spend less money on investment. Employers need more capital when they hire more workers. This could mean desks and computers, or it could be machinery in a factory, or a truck on the road. The more workers companies hire, the more capital they need, which means more investment.

But if the workforce stagnates, then companies need to spend less on investment. They will still modernize their equipment and replace worn out items, but they don’t have to invest to accommodate the needs of a larger workforce.

With both consumption and investment falling relative to GDP, economies will face the problem of inadequate demand. In principle, the economy is capable of producing more goods and services than households and businesses are prepared to buy. This is the situation that we faced in the Great Depression, and again, on a smaller scale, in the Great Recession. It means mass unemployment. In the Great Depression, unemployment peaked at 25 percent of the workforce.

It is ironic that the economists warning about the implications of an aging population not only got the magnitude of the problem wrong, they even got the direction wrong. With our aging population, we don’t have to worry about too much demand, we have to worry about too little. This is yet another example of the old saying that economists are not very good at economics.

 

Spending Money: The Cure for Secular Stagnation

We discovered the cure for secular stagnation in the 1930s: the government has to spend money to make up for the failure to spend by the private sector. President Roosevelt embraced this strategy to a limited extent with his New Deal programs. These put millions of people back to work while modernizing our housing and infrastructure.

Of course, the government spending program that really got the economy back to full employment was World War II. With the country united behind the need to defeat Germany and Japan, budget deficits ceased being an issue. We saw record low unemployment rates in the war years as tens of millions of workers were either serving in the military or producing the food, clothes, and weapons needed by the military.

The war provided the political support for massive spending (and budget deficits), but it was the spending that got the economy to full employment. Money spent on civilian uses will create jobs every bit as well as money spent on the military.

This brings us back to China’s demographic crisis and global warming. As Paul Krugman wrote in a recent column, China is going to have to make a massive adjustment in its economy in the years ahead. It has been spending an incredible 43 percent of its GDP on capital formation, either investment goods purchased by businesses, or residential housing. By comparison, the figure for Japan is 24 percent and for the United States less than 22 percent.  

This massive spending on capital formation made sense when China was seeing rapid growth in its labor force and also a huge shift in its population from rural to urban. But this process is now reaching an endpoint, both with a decline in its working-age population and the rural to urban shift largely completed.

Currently, over 62 percent of China’s population lives in urban areas. The figure for most wealthy countries is close to 80 percent, but the pace of shift for China will be much slower going forward than in the past. In 1980, less than 20 percent of its population was urban.

This means that China’s big problem going forward is to find a way to spend a very large amount of money. For simplicity, let’s say that their needed spending on capital formation falls to 23 percent of GDP, roughly splitting the difference between Japan and the United States. This would mean that China’s government has to figure out what to do with 20 percent of its GDP.

This is an incredible amount of money. In 2021, 20 percent of China’s GDP would be $5.4 trillion. According to the I.M.F.’s projections, the annual amount would be almost $8 trillion in 2026. Over the next decade, it would be more than $80 trillion, that’s more than 20 times the original $3.5 trillion Build Back Better plan. In short, it’s real money.

It is also important to note that China is already heavily invested in clean energy. China is by far the world leader in solar energy, with more than twice as much as the United States, the second-largest user of solar power. It is also by far the world leader in wind energy, again with more than twice as much installed wind power as the United States.  And, China also has more than twice as many electric cars on the road as any other country.

This means that China has a large domestic clean energy sector which can stand to gain by further spending on reducing greenhouse gas emissions. Of course, no one expects that the country will spend anything like $80 trillion over the next decade reducing greenhouse gas emissions, but it certainly can commit considerable resources to this effort. In addition to the benefits to the environment, this spending will help China’s economy grow and keep its workforce employed.

This is one of the opportunities created by China’s supposed demographic crisis. The issue is that because of the aging of the population it faces the prospect of a huge shortfall of demand in the economy. This is a good problem for a country to have, if its leadership is adept at managing its resources.

There are many grounds on which to criticize China’s government. It severely represses minority populations, most extremely the Uighurs, many of whom have been imprisoned for months or even years. It also does not respect freedom of speech, freedom of the press, or basic labor rights. But there is no doubt that it has done an outstanding job in managing its economy over the last four decades in a way that has led to an enormous improvement in living standards for the overwhelming majority of its population.

If China wants a path through its “demographic crisis,” or, in other words, coping with secular stagnation, devoting substantial resources towards greening its economy would be a great path forward. In the process, they can also give a big hand to the rest of the world, both by sharing the technology and showing how it can be done, as well as reducing the damage they are doing to the planet themselves.

There have been numerous news articles in recent years telling us that China faces a demographic crisis. The basic story is that the market reforms put in place in the late 1970s, together with the country’s one-child policy, led to many fewer children being born in the last four decades. As a result, the number of current workers entering retirement exceeds the size of the cohorts entering the workforce, leading to a stagnant or declining workforce. This is supposed to be a crisis.

I used the word “supposed” because it is not in any way obvious that a declining workforce is any sort of crisis. We see shifts of population all the time, which can lead many cities or regions to have a decline in their population or workforce, even if the country as a whole does not. That doesn’t necessarily mean a crisis for the areas losing population unless of course the population decline is due to the loss of a major employer.

A drop in the growth rate of the workforce, or an actual decline, will likely mean slower GDP growth, but so what? A country’s standard of living is determined by its income per capita (along with many other factors), not its absolute level of GDP. India’s GDP is almost eight times Denmark’s, but Denmark is the far richer country. The reason is that India has more than two hundred times as many people.

If a country’s growth rate is slower because the growth rate of its workforce slows, that is hardly a disaster. People can still be seeing improvements in their standard of living, and in the case of China, these improvements would still be quite rapid even if its annual growth rate slowed by 2-3 percentage points from its recent pace of more than 6.0 percent annually.

There is a common argument that countries with aging populations, like China, will suffer because each worker will have to support a larger number of retirees. It is easy to show that this view is silly. Even a modest rate of productivity growth will swamp the impact of a declining ratio of workers to retirees. With output per worker increasing, both workers and retirees can enjoy rising living standards even as the ratio of workers to retirees fall.

That should not sound surprising. The ratio of workers to retirees has been falling in the United States for the last two decades, yet we have seen substantial increases in living standards, even if the wealthy have gotten the bulk of these gains. The idea that China’s declining ratio of workers to retirees poses a supply-side problem, where it cannot produce enough goods and services to support its population, is absurd on its face.  

The Problem of Secular Stagnation

It turns out that the major problem of an aging population is not too much demand, but rather too little. Older people tend to spend less money than people in their working years. Also, when a country’s workforce is not growing, companies need to spend less money on investment. Employers need more capital when they hire more workers. This could mean desks and computers, or it could be machinery in a factory, or a truck on the road. The more workers companies hire, the more capital they need, which means more investment.

But if the workforce stagnates, then companies need to spend less on investment. They will still modernize their equipment and replace worn out items, but they don’t have to invest to accommodate the needs of a larger workforce.

With both consumption and investment falling relative to GDP, economies will face the problem of inadequate demand. In principle, the economy is capable of producing more goods and services than households and businesses are prepared to buy. This is the situation that we faced in the Great Depression, and again, on a smaller scale, in the Great Recession. It means mass unemployment. In the Great Depression, unemployment peaked at 25 percent of the workforce.

It is ironic that the economists warning about the implications of an aging population not only got the magnitude of the problem wrong, they even got the direction wrong. With our aging population, we don’t have to worry about too much demand, we have to worry about too little. This is yet another example of the old saying that economists are not very good at economics.

 

Spending Money: The Cure for Secular Stagnation

We discovered the cure for secular stagnation in the 1930s: the government has to spend money to make up for the failure to spend by the private sector. President Roosevelt embraced this strategy to a limited extent with his New Deal programs. These put millions of people back to work while modernizing our housing and infrastructure.

Of course, the government spending program that really got the economy back to full employment was World War II. With the country united behind the need to defeat Germany and Japan, budget deficits ceased being an issue. We saw record low unemployment rates in the war years as tens of millions of workers were either serving in the military or producing the food, clothes, and weapons needed by the military.

The war provided the political support for massive spending (and budget deficits), but it was the spending that got the economy to full employment. Money spent on civilian uses will create jobs every bit as well as money spent on the military.

This brings us back to China’s demographic crisis and global warming. As Paul Krugman wrote in a recent column, China is going to have to make a massive adjustment in its economy in the years ahead. It has been spending an incredible 43 percent of its GDP on capital formation, either investment goods purchased by businesses, or residential housing. By comparison, the figure for Japan is 24 percent and for the United States less than 22 percent.  

This massive spending on capital formation made sense when China was seeing rapid growth in its labor force and also a huge shift in its population from rural to urban. But this process is now reaching an endpoint, both with a decline in its working-age population and the rural to urban shift largely completed.

Currently, over 62 percent of China’s population lives in urban areas. The figure for most wealthy countries is close to 80 percent, but the pace of shift for China will be much slower going forward than in the past. In 1980, less than 20 percent of its population was urban.

This means that China’s big problem going forward is to find a way to spend a very large amount of money. For simplicity, let’s say that their needed spending on capital formation falls to 23 percent of GDP, roughly splitting the difference between Japan and the United States. This would mean that China’s government has to figure out what to do with 20 percent of its GDP.

This is an incredible amount of money. In 2021, 20 percent of China’s GDP would be $5.4 trillion. According to the I.M.F.’s projections, the annual amount would be almost $8 trillion in 2026. Over the next decade, it would be more than $80 trillion, that’s more than 20 times the original $3.5 trillion Build Back Better plan. In short, it’s real money.

It is also important to note that China is already heavily invested in clean energy. China is by far the world leader in solar energy, with more than twice as much as the United States, the second-largest user of solar power. It is also by far the world leader in wind energy, again with more than twice as much installed wind power as the United States.  And, China also has more than twice as many electric cars on the road as any other country.

This means that China has a large domestic clean energy sector which can stand to gain by further spending on reducing greenhouse gas emissions. Of course, no one expects that the country will spend anything like $80 trillion over the next decade reducing greenhouse gas emissions, but it certainly can commit considerable resources to this effort. In addition to the benefits to the environment, this spending will help China’s economy grow and keep its workforce employed.

This is one of the opportunities created by China’s supposed demographic crisis. The issue is that because of the aging of the population it faces the prospect of a huge shortfall of demand in the economy. This is a good problem for a country to have, if its leadership is adept at managing its resources.

There are many grounds on which to criticize China’s government. It severely represses minority populations, most extremely the Uighurs, many of whom have been imprisoned for months or even years. It also does not respect freedom of speech, freedom of the press, or basic labor rights. But there is no doubt that it has done an outstanding job in managing its economy over the last four decades in a way that has led to an enormous improvement in living standards for the overwhelming majority of its population.

If China wants a path through its “demographic crisis,” or, in other words, coping with secular stagnation, devoting substantial resources towards greening its economy would be a great path forward. In the process, they can also give a big hand to the rest of the world, both by sharing the technology and showing how it can be done, as well as reducing the damage they are doing to the planet themselves.

An article discussing the future prospects for paid family leave dismissed the claim by Senator Kirsten Gillibrand that almost every country in the world has paid family leave, by saying that most of these countries actually do not expect women to work after they have had children.

“Most of those countries can afford to offer paid leave because they do not actually expect women to work once they begin having children. Long leave plans help couples get started having children, but most countries then do not help with child care because they assume women will stay home.

“The US work force relies on women.”

While it is true that many women in developing countries with paid family leave do not work outside the home, most wealthy countries with paid leave actually have higher rates of women’s labor force participation than the United States. According to data from the OECD, 83.8 percent of women between the ages of 25 and 64 were in the labor force in Finland. In Germany, the figure was 84.4 percent; in France, it was 79.3 percent. By comparison, in the United States, it was just 77.2 percent, a figure that puts it well behind most other wealthy countries.

In short, the story is the exact opposite of what the New York Times told readers. The US workforce relies less on women than most of the wealthy countries that provide paid family leave.

 

An article discussing the future prospects for paid family leave dismissed the claim by Senator Kirsten Gillibrand that almost every country in the world has paid family leave, by saying that most of these countries actually do not expect women to work after they have had children.

“Most of those countries can afford to offer paid leave because they do not actually expect women to work once they begin having children. Long leave plans help couples get started having children, but most countries then do not help with child care because they assume women will stay home.

“The US work force relies on women.”

While it is true that many women in developing countries with paid family leave do not work outside the home, most wealthy countries with paid leave actually have higher rates of women’s labor force participation than the United States. According to data from the OECD, 83.8 percent of women between the ages of 25 and 64 were in the labor force in Finland. In Germany, the figure was 84.4 percent; in France, it was 79.3 percent. By comparison, in the United States, it was just 77.2 percent, a figure that puts it well behind most other wealthy countries.

In short, the story is the exact opposite of what the New York Times told readers. The US workforce relies less on women than most of the wealthy countries that provide paid family leave.

 

The 2.0 percent growth figure reported for the third quarter was widely viewed as disappointing. It was slower than most analysts had expected and certainly a large falloff from the 6.7 percent rate in the second quarter, but on the whole, it should be viewed as a positive report.

There are two key reasons for why I see the report as largely positive. First, there were extraordinary and temporary factors that prevented the growth from being considerably more rapid. Second, we need to get a fuller picture in assessing growth. In the pre-pandemic period, no one would have considered 2.0 percent growth particularly bad. It averaged 2.5 percent in the three years preceding the pandemic. We are already above the pre-pandemic level of GDP, although somewhat below the trend rate of growth, which means we are through the period where we would ordinarily anticipate extraordinary growth.

The Temporary Factors

The two major temporary factors slowing growth in the third quarter were supply chain problems and the pandemic. The supply chain problems have been widely reported. There are ships sitting offshore at our major ports waiting to unload cargo. The problem is that ports are overloaded as there has been a sharp increase in demand for goods during the pandemic. Since many of these goods are imported, this means more ships need to be unloaded.

The problem is not just one of unloading at the ports. The transportation companies that move the cargo to warehouses across the country are unable to meet the increased demand for their services.

A big part of this story is that they don’t have the truckers to move the freight. Several decades ago, trucking was a relatively high-paying industry for workers without college degrees. This was in large part due to the fact that it was a heavily unionized industry. The Teamsters union was very effective in raising the pay and improving the working conditions for truckers.

However, in the last four decades, trucking deregulation coupled with anti-union policies by employers, which often had the support of the government, substantially weakened the Teamsters. As a result, wages stagnated. The real hourly wage for a trucker, just before the pandemic, was 5.0 percent below its level in 1990. Also, without a strong union to back them up, truckers were often forced to work long and irregular hours and to drive unsafe trucks.

As a result, quit rates in the industry soared, peaking at 3.3 percent in April, 40 percent higher than the prior peak. The sector now reports a job opening rate of 7.8 percent, two and a half times the 3.3 percent peak in 2001, when the economy was still experiencing the Internet boom.

It is worth noting that the bottlenecks due to a lack of trucking capacity have little to do with whether we import our goods or produce them domestically. In either case, they must be moved from the place they are produced to the stores or Internet retailers that will eventually sell them to consumers.

The fact that we now import many of our manufactured goods is not the main source of our problems. The backlog of goods is showing up on our ports because that is where the goods come in. If we instead produced everything domestically, and our trucking sector was in no better shape, then we would see the goods piling up outside of Detroit, Milwaukee, and other major manufacturing hubs.

It is easy to see the impact of the supply chain problems in the third-quarter GDP data. Vehicle sales fell at a 53.9 percent annual rate in the quarter, subtracting 2.4 percentage points from the quarter’s growth. This was not due to people not wanting to buy cars, this was due to the fact that the cars were not there to be sold. This also showed up on the investment side, as transportation equipment sales fell at an 18.6 percent annual rate, subtracting another 0.2 percentage points from third-quarter growth.

Supply chain problems showed up in a number of other areas such as the 7.3 percent annual rate of decline in the sales of recreational goods and vehicles and the 7.7 percent decline in residential construction. The latter was primarily the result of a shortage of building materials, which crimped construction even as homebuilders report being highly optimistic about continuing demand in the market.  

Clearly, third-quarter growth would have looked considerably better if our supply chains had been operating normally. This fact should mean that future quarters will look considerably better. If fourth-quarter growth is exactly the same in all other areas, and fourth-quarter sales of cars and transportation equipment just remains at third-quarter levels, we would see fourth-quarter growth of roughly 4.6 percent. Of course, that scenario is not plausible, but the point is that the supply chain problems we are seeing now, set up a situation in which we can anticipate stronger growth in future quarters.

The other major factor slowing growth in the quarter was the surge in the pandemic due to the delta variant. This hampered growth but not in the ways that many seem to believe. Restaurant sales grew at a very healthy 5.9 percent annual rate. In places where the pandemic hit hardest during this period, people did not stop going to restaurants. Data from Open Table show Florida’s reservation numbers were consistently above their pre-pandemic level.

The pandemic had a much bigger effect on foreign travel to the United States, which fell slightly in the quarter and is running at around 30 percent of pre-pandemic levels. This drop-off is due to both fear of the pandemic and also legal restrictions on entering the United States.

The other way the pandemic affected third-quarter GDP was by preventing people from working. In September, 1.6 million people, just over 1.0 percent of the workforce, reported that they were not working or looking for work in the month because they were caring for someone who was sick or were sick themselves. As caseloads continue to fall, we can expect that these people will return to the labor market.

 

Thinking About Growth: What Are We Missing?

When we look at the categories of output that are most below their pre-pandemic growth path, several obvious ones stand out. First, expenditures on non-residential structures are more than 21.0 percent below their level from the fourth quarter of 2019. This is largely a story of fewer office buildings and stores being built, although factory construction is also down.

The big factor here is that we are seeing a large increase in work from home, which means that less office space is needed. In many major cities, less than half of the pre-pandemic workforce is back in their office. The other issue is that we have seen an explosion in online sales in the pandemic, which means that less retail space is needed.

On the consumption side, real expenditures on services are still 1.6 percent below their pre-pandemic level. There are several items that stand out here. Expenditures on health care services, which had been rising rapidly, are 1.0 percent below their pre-pandemic level. There is a grim, but obvious explanation for this decline, we have seen almost 900,000 people die due to the pandemic. (This is the excess death figure, which includes many people not identified as having died from Covid.)

The people who died were disproportionately the elderly and those with serious health issues. This shows up clearly in expenditures in nursing homes, which are down by 9.1 percent from their pre-pandemic level. On a per-person basis, these people required far more medical care than the average person, so there is now less need for health care.

On a more positive note, there has been an explosion in telemedicine, as many people are able to have consultations with doctors and other health care professionals remotely. This is a great innovation, which likely reduces the cost of medical services and saves the expenses associated with traveling to get health care.

Another major factor in the drop in service consumption is the drop in expenditures associated with going into work. This shows up most clearly with spending on ground transportation, which is down by 31.1 percent from the fourth quarter of 2019. It also shows up with the 26.7 percent drop in expenditures on personal care services, like hair salons and dry cleaning.

The drop in the provision of these services does not really represent a decline in well-being. If people don’t have to commute to go to work, they are not worse off as a result of not having the car or train trip to work. Similarly, if they don’t have to clean their business clothes because they are not wearing them, this is not likely to be viewed as a loss by most people.

People can argue that it’s fine if we don’t need some of the goods and services associated with our pre-pandemic lifestyles, but these resources should be redeployed elsewhere. This is true, but it is also an adjustment that takes time. We can’t reasonably expect that large shifts in the economy can be accomplished overnight, especially when we are still feeling the effects of the pandemic.

We also should recognize the reduction in work-related expenses as effectively an increase in our standard of living. If we can have the same amount of goods and services that we value, without having to pay costs associated with going to work in an office (including our time), this is a gain in well-being. It doesn’t get picked up in our national income accounts because we treat these expenses as final consumption, instead of the intermediate goods that they in fact are.

 

The Great Reshuffling

The third-quarter GDP numbers should be seen as evidence of an economy in the middle of a major transition. A 2.0 percent growth figure is not bad for an economy that has fully recovered the ground lost in the recession, but we are virtually certain to see stronger numbers in the quarters ahead. We will work through the backlog of goods sitting in our ports, which will not only mean more consumer goods, but also more intermediate goods needed in a wide range of production processes.

This will not only mean more output, but it will also likely mean sharply lower prices for many items, especially cars.  There is nothing about the production process that would lead the price of a car to be far higher in 2021 than in 2019. Once something resembling normal production has resumed, we should see prices fall back to their pre-pandemic level. The Fed of course is fully aware of this fact, which is why it is not anxious to start jacking up interest rates, in spite of the rants of the inflation hawks.

We will also see a major reshuffling in the labor market. Businesses that are having a hard time attracting workers will raise wages enough to get the workers they need. This will inevitably mean that some businesses will fail since they aren’t able to pay higher wages. This is unfortunate, but that is the way capitalism works. This is the reason half of our workforce is not still employed in agriculture; workers got higher pay in factories and the farms went under.

It is also important to recognize the dynamics involved here. A restaurant that is struggling to stay open, when only half-staffed, eventually goes under, which means that its former employees will be looking for jobs elsewhere. This process is likely to lead to fewer workers employed in many low-paying sectors, like restaurants, but likely at higher wages.

Finally, it is also important to mention how the bills before Congress will affect this picture. Assuming that both the reconciliation and infrastructure bills eventually get signed into law, they will provide a basis for further re-orienting the economy away from its pre-pandemic course. The infrastructure package will pull workers into the repair and improvement of the infrastructure. The incentives in both bills should create millions of jobs producing clean energy and electric cars. And, the additional money for pre-kindergarten and childcare should allow these sectors to offer more competitive wages.

In short, the third-quarter GDP may not have been as strong as we might have hoped, but it was very far from the disaster some have painted. The future is still looking good, if we can ignore global warming and the fascist threat.  

The 2.0 percent growth figure reported for the third quarter was widely viewed as disappointing. It was slower than most analysts had expected and certainly a large falloff from the 6.7 percent rate in the second quarter, but on the whole, it should be viewed as a positive report.

There are two key reasons for why I see the report as largely positive. First, there were extraordinary and temporary factors that prevented the growth from being considerably more rapid. Second, we need to get a fuller picture in assessing growth. In the pre-pandemic period, no one would have considered 2.0 percent growth particularly bad. It averaged 2.5 percent in the three years preceding the pandemic. We are already above the pre-pandemic level of GDP, although somewhat below the trend rate of growth, which means we are through the period where we would ordinarily anticipate extraordinary growth.

The Temporary Factors

The two major temporary factors slowing growth in the third quarter were supply chain problems and the pandemic. The supply chain problems have been widely reported. There are ships sitting offshore at our major ports waiting to unload cargo. The problem is that ports are overloaded as there has been a sharp increase in demand for goods during the pandemic. Since many of these goods are imported, this means more ships need to be unloaded.

The problem is not just one of unloading at the ports. The transportation companies that move the cargo to warehouses across the country are unable to meet the increased demand for their services.

A big part of this story is that they don’t have the truckers to move the freight. Several decades ago, trucking was a relatively high-paying industry for workers without college degrees. This was in large part due to the fact that it was a heavily unionized industry. The Teamsters union was very effective in raising the pay and improving the working conditions for truckers.

However, in the last four decades, trucking deregulation coupled with anti-union policies by employers, which often had the support of the government, substantially weakened the Teamsters. As a result, wages stagnated. The real hourly wage for a trucker, just before the pandemic, was 5.0 percent below its level in 1990. Also, without a strong union to back them up, truckers were often forced to work long and irregular hours and to drive unsafe trucks.

As a result, quit rates in the industry soared, peaking at 3.3 percent in April, 40 percent higher than the prior peak. The sector now reports a job opening rate of 7.8 percent, two and a half times the 3.3 percent peak in 2001, when the economy was still experiencing the Internet boom.

It is worth noting that the bottlenecks due to a lack of trucking capacity have little to do with whether we import our goods or produce them domestically. In either case, they must be moved from the place they are produced to the stores or Internet retailers that will eventually sell them to consumers.

The fact that we now import many of our manufactured goods is not the main source of our problems. The backlog of goods is showing up on our ports because that is where the goods come in. If we instead produced everything domestically, and our trucking sector was in no better shape, then we would see the goods piling up outside of Detroit, Milwaukee, and other major manufacturing hubs.

It is easy to see the impact of the supply chain problems in the third-quarter GDP data. Vehicle sales fell at a 53.9 percent annual rate in the quarter, subtracting 2.4 percentage points from the quarter’s growth. This was not due to people not wanting to buy cars, this was due to the fact that the cars were not there to be sold. This also showed up on the investment side, as transportation equipment sales fell at an 18.6 percent annual rate, subtracting another 0.2 percentage points from third-quarter growth.

Supply chain problems showed up in a number of other areas such as the 7.3 percent annual rate of decline in the sales of recreational goods and vehicles and the 7.7 percent decline in residential construction. The latter was primarily the result of a shortage of building materials, which crimped construction even as homebuilders report being highly optimistic about continuing demand in the market.  

Clearly, third-quarter growth would have looked considerably better if our supply chains had been operating normally. This fact should mean that future quarters will look considerably better. If fourth-quarter growth is exactly the same in all other areas, and fourth-quarter sales of cars and transportation equipment just remains at third-quarter levels, we would see fourth-quarter growth of roughly 4.6 percent. Of course, that scenario is not plausible, but the point is that the supply chain problems we are seeing now, set up a situation in which we can anticipate stronger growth in future quarters.

The other major factor slowing growth in the quarter was the surge in the pandemic due to the delta variant. This hampered growth but not in the ways that many seem to believe. Restaurant sales grew at a very healthy 5.9 percent annual rate. In places where the pandemic hit hardest during this period, people did not stop going to restaurants. Data from Open Table show Florida’s reservation numbers were consistently above their pre-pandemic level.

The pandemic had a much bigger effect on foreign travel to the United States, which fell slightly in the quarter and is running at around 30 percent of pre-pandemic levels. This drop-off is due to both fear of the pandemic and also legal restrictions on entering the United States.

The other way the pandemic affected third-quarter GDP was by preventing people from working. In September, 1.6 million people, just over 1.0 percent of the workforce, reported that they were not working or looking for work in the month because they were caring for someone who was sick or were sick themselves. As caseloads continue to fall, we can expect that these people will return to the labor market.

 

Thinking About Growth: What Are We Missing?

When we look at the categories of output that are most below their pre-pandemic growth path, several obvious ones stand out. First, expenditures on non-residential structures are more than 21.0 percent below their level from the fourth quarter of 2019. This is largely a story of fewer office buildings and stores being built, although factory construction is also down.

The big factor here is that we are seeing a large increase in work from home, which means that less office space is needed. In many major cities, less than half of the pre-pandemic workforce is back in their office. The other issue is that we have seen an explosion in online sales in the pandemic, which means that less retail space is needed.

On the consumption side, real expenditures on services are still 1.6 percent below their pre-pandemic level. There are several items that stand out here. Expenditures on health care services, which had been rising rapidly, are 1.0 percent below their pre-pandemic level. There is a grim, but obvious explanation for this decline, we have seen almost 900,000 people die due to the pandemic. (This is the excess death figure, which includes many people not identified as having died from Covid.)

The people who died were disproportionately the elderly and those with serious health issues. This shows up clearly in expenditures in nursing homes, which are down by 9.1 percent from their pre-pandemic level. On a per-person basis, these people required far more medical care than the average person, so there is now less need for health care.

On a more positive note, there has been an explosion in telemedicine, as many people are able to have consultations with doctors and other health care professionals remotely. This is a great innovation, which likely reduces the cost of medical services and saves the expenses associated with traveling to get health care.

Another major factor in the drop in service consumption is the drop in expenditures associated with going into work. This shows up most clearly with spending on ground transportation, which is down by 31.1 percent from the fourth quarter of 2019. It also shows up with the 26.7 percent drop in expenditures on personal care services, like hair salons and dry cleaning.

The drop in the provision of these services does not really represent a decline in well-being. If people don’t have to commute to go to work, they are not worse off as a result of not having the car or train trip to work. Similarly, if they don’t have to clean their business clothes because they are not wearing them, this is not likely to be viewed as a loss by most people.

People can argue that it’s fine if we don’t need some of the goods and services associated with our pre-pandemic lifestyles, but these resources should be redeployed elsewhere. This is true, but it is also an adjustment that takes time. We can’t reasonably expect that large shifts in the economy can be accomplished overnight, especially when we are still feeling the effects of the pandemic.

We also should recognize the reduction in work-related expenses as effectively an increase in our standard of living. If we can have the same amount of goods and services that we value, without having to pay costs associated with going to work in an office (including our time), this is a gain in well-being. It doesn’t get picked up in our national income accounts because we treat these expenses as final consumption, instead of the intermediate goods that they in fact are.

 

The Great Reshuffling

The third-quarter GDP numbers should be seen as evidence of an economy in the middle of a major transition. A 2.0 percent growth figure is not bad for an economy that has fully recovered the ground lost in the recession, but we are virtually certain to see stronger numbers in the quarters ahead. We will work through the backlog of goods sitting in our ports, which will not only mean more consumer goods, but also more intermediate goods needed in a wide range of production processes.

This will not only mean more output, but it will also likely mean sharply lower prices for many items, especially cars.  There is nothing about the production process that would lead the price of a car to be far higher in 2021 than in 2019. Once something resembling normal production has resumed, we should see prices fall back to their pre-pandemic level. The Fed of course is fully aware of this fact, which is why it is not anxious to start jacking up interest rates, in spite of the rants of the inflation hawks.

We will also see a major reshuffling in the labor market. Businesses that are having a hard time attracting workers will raise wages enough to get the workers they need. This will inevitably mean that some businesses will fail since they aren’t able to pay higher wages. This is unfortunate, but that is the way capitalism works. This is the reason half of our workforce is not still employed in agriculture; workers got higher pay in factories and the farms went under.

It is also important to recognize the dynamics involved here. A restaurant that is struggling to stay open, when only half-staffed, eventually goes under, which means that its former employees will be looking for jobs elsewhere. This process is likely to lead to fewer workers employed in many low-paying sectors, like restaurants, but likely at higher wages.

Finally, it is also important to mention how the bills before Congress will affect this picture. Assuming that both the reconciliation and infrastructure bills eventually get signed into law, they will provide a basis for further re-orienting the economy away from its pre-pandemic course. The infrastructure package will pull workers into the repair and improvement of the infrastructure. The incentives in both bills should create millions of jobs producing clean energy and electric cars. And, the additional money for pre-kindergarten and childcare should allow these sectors to offer more competitive wages.

In short, the third-quarter GDP may not have been as strong as we might have hoped, but it was very far from the disaster some have painted. The future is still looking good, if we can ignore global warming and the fascist threat.  

That simple point might have been worth mentioning in an article reporting on efforts by Democrats to rein in prescription drug costs since 1989. The current level of spending of roughly $500 billion a year comes to more than $1,500 for every person in the country. Annual spending on prescription drugs is roughly one and a half times as much as the proposed spending in President Biden’s Build Back Better proposal.

It’s also worth noting that this piece repeatedly refers to Democrats’ efforts to “control” drug prices. This is inaccurate. The government already controls drug prices by granting companies patent monopolies and related protections. As a result, drug companies can charge prices that are often several thousand percent above the free market price. In the absence of these protections, we would likely be spending less than $100 billion a year on drugs, for a saving of $400 billion annually.

The point is that it is not necessary to have the government intervene to bring prices down. We could have the government not intervene, or intervene less, to avoid allowing drug companies to charge such high prices.

That simple point might have been worth mentioning in an article reporting on efforts by Democrats to rein in prescription drug costs since 1989. The current level of spending of roughly $500 billion a year comes to more than $1,500 for every person in the country. Annual spending on prescription drugs is roughly one and a half times as much as the proposed spending in President Biden’s Build Back Better proposal.

It’s also worth noting that this piece repeatedly refers to Democrats’ efforts to “control” drug prices. This is inaccurate. The government already controls drug prices by granting companies patent monopolies and related protections. As a result, drug companies can charge prices that are often several thousand percent above the free market price. In the absence of these protections, we would likely be spending less than $100 billion a year on drugs, for a saving of $400 billion annually.

The point is that it is not necessary to have the government intervene to bring prices down. We could have the government not intervene, or intervene less, to avoid allowing drug companies to charge such high prices.

As a big fan of the original Star Trek, I have to confess that it was kind of neat to see Captain Kirk actually go into space. But there is a real issue here about the silly games of the super-rich that is worth some thought.

There have been numerous stories and papers about the huge increase in the wealth of the super-rich since the pandemic began. Virtually all of this is due to the run-up in the stock market during this period. Part of that is bounce back, the S&P 500 lost almost one-third of its value between its pre-pandemic peak in February of 2020 and its pandemic trough a month later. If we want to tell a really dramatic story we can start at the pandemic trough and take the rise in the stock market from March 20th.

But even if we are being serious, there has been an extraordinary runup in the stock market in the last twenty months. The S&P 500 is more than one-third higher than its pre-pandemic peak.

There are several different explanations for this increase. One is simply that low-interest rates generally boost stock prices. Interest rates did plummet during the pandemic shutdown, with the 10-year Treasury rate falling from a bit over 1.8 percent in February of 2020 to lows of under 0.6 percent last summer. As a general rule, lower interest rates will mean higher stock prices.

But this explanation will not go too far: the interest rate on 10-year Treasury bonds is currently over 1.6 percent. The gap between a 1.8 percent pre-pandemic Treasury yield and the current 1.6 percent yield could only explain a small portion of the rise in the stock market.

A second possibility is that stock investors are genuinely optimistic about the outlook for future profits. People are often confused about what the stock market is supposed to measure. Stock investors don’t give a damn about the future of the economy, they are asking about the future profits of Amazon, Facebook, and other stocks that they hold. If they think that their profit picture looks good, then they are willing to pay more for their shares.

This could be because they think that the economy will do well and that all the doomsayers in the media don’t have a clue. If the economy has strong growth in 2022 and 2023 and corporations get their share in higher profits, then high stock prices might be justified.

An alternative story would be that they expect the recent shift from wages to profits to continue. In this case, profit growth could be strong even if economic growth is not. This would again mean that all the people whining in the media, about companies being squeezed by rising labor costs, are clueless. But, what else is new?

And, there is the third possibility that we are just seeing another case of irrational exuberance. The possibility that there is no rational basis for stock prices should not seem strange to anyone who saw the collapse of the stock bubble at the end of the 1990s and the collapse of the housing bubble from 2007 to 2009. Investors are often ignorant of economic fundamentals, so it is certainly possible that there was no economic basis for the run-up in stock prices over the last 20 months.

But, whatever the rationale, there is no dispute that the run-up in stock prices has made the super-rich much wealthier. The question is how much should we worry about this.

I have always said that I am not very concerned about wealth inequality. It is poorly measured and highly volatile. I am far more concerned about income inequality.

I recognize the political power that is associated with extreme wealth, but I don’t believe the people who make this argument have given it serious thought. Suppose we cut the wealth of the super-rich by 50 percent or even 75 percent. Will Jeff Bezos lack the resources to push his political agenda if he only had $50 billion at his disposal? If we want to address the enormous gap in political power created by extremes of wealth, we have to look for ways to build the power of those at the middle and bottom. The idea that we will do it by reducing the wealth of those at the top is hardly plausible.

What About Space?

Okay, so what does all this have to with Captain Kirk going into space? If we think about how the extremes of wealth can hurt the rest of us, it gets back to their command over resources in the economy. This is the story of the clogged supply chain and overloaded ports. We are demanding more goods and services than the economy can deliver just now.

The space flights being promoted by Jeff Bezos, Richard Branson, and presumably Elon Musk, involve an enormous use of resources. It takes large numbers of often highly skilled people to plan and monitor these space flights. With the enormous amount of free advertising the media has given these ventures, we can expect that many more very rich people will be getting in line to take their trips into space.[1]

This will mean pulling many workers away from areas where they could be doing more productive work, like designing better solar and wind energy systems, better batteries for storing energy, and better ways to produce vaccines and drugs. This will be a real cost to the economy.

The frivolous use of large amounts of resources by the very rich is a problem for the economy and society. This is distinct from their wealth as a bookkeeping entry. For example, Warren Buffet is one of the richest people in the world, but by all accounts, he lives a very modest lifestyle. If his wealth doubled it is hard to see why it would create any major economic issues. On the other hand, if the billionaire gang manage to make space travel a major form of recreation for the very rich, this is a real problem.

I don’t have any great plans for stopping the latest space race. I have always argued that the best way to prevent extreme inequality is to stop structuring the market in ways that generate extreme inequality. This means less reliance on patents and copyrights as mechanisms for financing innovation and creative work. It means downsizing the financial sector by structuring it in ways that promote efficiency, not extreme wealth for the few. And, having a corporate governance structure that doesn’t make it so easy for CEOs and top management to rip off the companies they work for.

These, and other issues, are addressed in Rigged, but the main point here is that we should try to keep our eyes on the ball.  Wealth as a bookkeeping entry should be largely a matter of indifference to the rest of us. When the super-rich pull away large amounts of resources for their fun and games, that is a big problem.

[1] I’ll skip the obvious joke that the problem isn’t sending rich people into space, it is bringing them back.

As a big fan of the original Star Trek, I have to confess that it was kind of neat to see Captain Kirk actually go into space. But there is a real issue here about the silly games of the super-rich that is worth some thought.

There have been numerous stories and papers about the huge increase in the wealth of the super-rich since the pandemic began. Virtually all of this is due to the run-up in the stock market during this period. Part of that is bounce back, the S&P 500 lost almost one-third of its value between its pre-pandemic peak in February of 2020 and its pandemic trough a month later. If we want to tell a really dramatic story we can start at the pandemic trough and take the rise in the stock market from March 20th.

But even if we are being serious, there has been an extraordinary runup in the stock market in the last twenty months. The S&P 500 is more than one-third higher than its pre-pandemic peak.

There are several different explanations for this increase. One is simply that low-interest rates generally boost stock prices. Interest rates did plummet during the pandemic shutdown, with the 10-year Treasury rate falling from a bit over 1.8 percent in February of 2020 to lows of under 0.6 percent last summer. As a general rule, lower interest rates will mean higher stock prices.

But this explanation will not go too far: the interest rate on 10-year Treasury bonds is currently over 1.6 percent. The gap between a 1.8 percent pre-pandemic Treasury yield and the current 1.6 percent yield could only explain a small portion of the rise in the stock market.

A second possibility is that stock investors are genuinely optimistic about the outlook for future profits. People are often confused about what the stock market is supposed to measure. Stock investors don’t give a damn about the future of the economy, they are asking about the future profits of Amazon, Facebook, and other stocks that they hold. If they think that their profit picture looks good, then they are willing to pay more for their shares.

This could be because they think that the economy will do well and that all the doomsayers in the media don’t have a clue. If the economy has strong growth in 2022 and 2023 and corporations get their share in higher profits, then high stock prices might be justified.

An alternative story would be that they expect the recent shift from wages to profits to continue. In this case, profit growth could be strong even if economic growth is not. This would again mean that all the people whining in the media, about companies being squeezed by rising labor costs, are clueless. But, what else is new?

And, there is the third possibility that we are just seeing another case of irrational exuberance. The possibility that there is no rational basis for stock prices should not seem strange to anyone who saw the collapse of the stock bubble at the end of the 1990s and the collapse of the housing bubble from 2007 to 2009. Investors are often ignorant of economic fundamentals, so it is certainly possible that there was no economic basis for the run-up in stock prices over the last 20 months.

But, whatever the rationale, there is no dispute that the run-up in stock prices has made the super-rich much wealthier. The question is how much should we worry about this.

I have always said that I am not very concerned about wealth inequality. It is poorly measured and highly volatile. I am far more concerned about income inequality.

I recognize the political power that is associated with extreme wealth, but I don’t believe the people who make this argument have given it serious thought. Suppose we cut the wealth of the super-rich by 50 percent or even 75 percent. Will Jeff Bezos lack the resources to push his political agenda if he only had $50 billion at his disposal? If we want to address the enormous gap in political power created by extremes of wealth, we have to look for ways to build the power of those at the middle and bottom. The idea that we will do it by reducing the wealth of those at the top is hardly plausible.

What About Space?

Okay, so what does all this have to with Captain Kirk going into space? If we think about how the extremes of wealth can hurt the rest of us, it gets back to their command over resources in the economy. This is the story of the clogged supply chain and overloaded ports. We are demanding more goods and services than the economy can deliver just now.

The space flights being promoted by Jeff Bezos, Richard Branson, and presumably Elon Musk, involve an enormous use of resources. It takes large numbers of often highly skilled people to plan and monitor these space flights. With the enormous amount of free advertising the media has given these ventures, we can expect that many more very rich people will be getting in line to take their trips into space.[1]

This will mean pulling many workers away from areas where they could be doing more productive work, like designing better solar and wind energy systems, better batteries for storing energy, and better ways to produce vaccines and drugs. This will be a real cost to the economy.

The frivolous use of large amounts of resources by the very rich is a problem for the economy and society. This is distinct from their wealth as a bookkeeping entry. For example, Warren Buffet is one of the richest people in the world, but by all accounts, he lives a very modest lifestyle. If his wealth doubled it is hard to see why it would create any major economic issues. On the other hand, if the billionaire gang manage to make space travel a major form of recreation for the very rich, this is a real problem.

I don’t have any great plans for stopping the latest space race. I have always argued that the best way to prevent extreme inequality is to stop structuring the market in ways that generate extreme inequality. This means less reliance on patents and copyrights as mechanisms for financing innovation and creative work. It means downsizing the financial sector by structuring it in ways that promote efficiency, not extreme wealth for the few. And, having a corporate governance structure that doesn’t make it so easy for CEOs and top management to rip off the companies they work for.

These, and other issues, are addressed in Rigged, but the main point here is that we should try to keep our eyes on the ball.  Wealth as a bookkeeping entry should be largely a matter of indifference to the rest of us. When the super-rich pull away large amounts of resources for their fun and games, that is a big problem.

[1] I’ll skip the obvious joke that the problem isn’t sending rich people into space, it is bringing them back.

Yeah, I know it’s getting boring that I keep repeating this, but when there are many trillions of dollars at stake, it seems worth killing a few electrons. Any serious discussion of the burden of the debt must also talk about the trillions of dollars of patent and copyright rents that the government is committing the country to when it grants these monopolies.

The government grants these monopolies as a way of paying for innovation and creative work. It is an alternative to direct spending. That is an arguable point. Anyone who only wants to consider the debt burden created by government spending, but not the burden of the higher prices that we will pay for items like drugs, medical equipment, and software because of these monopolies, is either a sleazy hack or too ignorant of economics to be discussing these issues.

Here’s a slightly longer diatribe making the case.

Yeah, I know it’s getting boring that I keep repeating this, but when there are many trillions of dollars at stake, it seems worth killing a few electrons. Any serious discussion of the burden of the debt must also talk about the trillions of dollars of patent and copyright rents that the government is committing the country to when it grants these monopolies.

The government grants these monopolies as a way of paying for innovation and creative work. It is an alternative to direct spending. That is an arguable point. Anyone who only wants to consider the debt burden created by government spending, but not the burden of the higher prices that we will pay for items like drugs, medical equipment, and software because of these monopolies, is either a sleazy hack or too ignorant of economics to be discussing these issues.

Here’s a slightly longer diatribe making the case.

That’s the question millions are asking, even if economic reporters are not. The classic story of a wage-price spiral is that workers demand higher pay, employers are then forced to pass on higher wages in higher prices, which then leads workers to demand higher pay, repeat.

We are seeing many stories telling us that this is the world we now face. A big problem with that story is the profit share of GDP has actually risen sharply in the last two quarters from already high levels.

 

The 12.4 percent profit share we saw in the second quarter is above the 12.2 percent peak share we saw in the 00s, and far above the 10.4 percent peak share in the 1990s. In other words, it hardly seems as though businesses are being forced by costs to push up prices. It instead looks like they are taking advantage of presumably temporary shortages to increase their profit margins.

This doesn’t mean that some businesses are not in fact being squeezed. We are seeing rapidly rising wages for low-paid workers. That is putting a strain on many restaurants and other businesses that pay low wages.

That is unfortunate for them, but this is the way capitalism works. The reason we don’t still have half our population working on farms is that workers had the opportunity to work at higher-paying jobs in manufacturing. If workers now have the option to work at better-paying jobs, the restaurants that can adapt to higher pay will stay in business, but some obviously will not.

That’s the question millions are asking, even if economic reporters are not. The classic story of a wage-price spiral is that workers demand higher pay, employers are then forced to pass on higher wages in higher prices, which then leads workers to demand higher pay, repeat.

We are seeing many stories telling us that this is the world we now face. A big problem with that story is the profit share of GDP has actually risen sharply in the last two quarters from already high levels.

 

The 12.4 percent profit share we saw in the second quarter is above the 12.2 percent peak share we saw in the 00s, and far above the 10.4 percent peak share in the 1990s. In other words, it hardly seems as though businesses are being forced by costs to push up prices. It instead looks like they are taking advantage of presumably temporary shortages to increase their profit margins.

This doesn’t mean that some businesses are not in fact being squeezed. We are seeing rapidly rising wages for low-paid workers. That is putting a strain on many restaurants and other businesses that pay low wages.

That is unfortunate for them, but this is the way capitalism works. The reason we don’t still have half our population working on farms is that workers had the opportunity to work at higher-paying jobs in manufacturing. If workers now have the option to work at better-paying jobs, the restaurants that can adapt to higher pay will stay in business, but some obviously will not.

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