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.

In his State of the Union Address, President Biden claimed the economy creating over 6.5 million jobs in his first year in office, which he said was the most ever. The New York Times boasted about fact-checking this claim. It rated it “partially true.”

The fact-check said: “Biden is correct on the numbers. But the government only started collecting this [sic] data in 1939.”

Okay folks, at the start of 1939, when the government started publishing this series, we had fewer than 30 million jobs by this measure (non-farm, payroll employment). An increase of more than 6.5 million jobs would have been a rise of more than 20 percent. That would be an increase of more than 30 million jobs in today’s labor market.

Does anyone at the NYT think we ever had a year where employment grew by 20 percent? That’s scary, if true.

In his State of the Union Address, President Biden claimed the economy creating over 6.5 million jobs in his first year in office, which he said was the most ever. The New York Times boasted about fact-checking this claim. It rated it “partially true.”

The fact-check said: “Biden is correct on the numbers. But the government only started collecting this [sic] data in 1939.”

Okay folks, at the start of 1939, when the government started publishing this series, we had fewer than 30 million jobs by this measure (non-farm, payroll employment). An increase of more than 6.5 million jobs would have been a rise of more than 20 percent. That would be an increase of more than 30 million jobs in today’s labor market.

Does anyone at the NYT think we ever had a year where employment grew by 20 percent? That’s scary, if true.

Earlier today, I was on a panel with Jason Furman and Joseph Stiglitz, discussing the recent surge in inflation and the prospects for the future. We took some questions from the audience, but there were a number for which we did not have time. I have picked some of these questions to answer myself, for anyone who may be interested.

Was the decision to go big with the Biden stimulus worth the cost in the form of higher inflation?

We can certainly look at the Biden stimulus and point to areas where we spent more than necessary. I would put the high reach of the $1,400 pandemic payments top on that list. If we had a phase out beginning at say, $50,000 a person, they would still reach the overwhelming majority of people who were hurt financially by the pandemic.

We also could have gotten by giving the states less money. Many now find themselves flush with cash and are giving out tax cuts to their residents.

But, we can’t design our policies retroactively. Also, there were political considerations behind the structuring of the package that can’t just be ignored.

To me, the basic question was whether it was worth the risk of going too big, as Biden did, or risk erring on the side of going too small, as was the case with the Obama stimulus in 2009. To my view, Biden made the right call.

We’ve gotten back the vast majority of jobs we lost during the pandemic. The economy is almost back to its pre-recession growth path. And, we shielded the bulk of the population from financial hardship from the pandemic.

This was really a great accomplishment and well worth the cost of say a 2.0 percentage point rise in the inflation rate. Just to be clear, we would have seen higher inflation with the reopening of the economy from the pandemic in any case. The robust stimulus of the Recovery Act added to this, but even countries without large stimulus packages had large upticks of inflation. So, the question is whether the benefits were worth the additional inflation, say going from 5.5 percent to 7.5 percent; we are not asking about the full increase to 7.5 percent.

How does the war in Ukraine affect your assessment of the prospects for the US economy?

This is hard to say at this point, since there is so much uncertainty about the longer-term effects. We can see the short-term jump in the price of oil and natural gas and many other commodities, which are clearly inflationary, but we don’t know how long these rises will be sustained, or if the prices will go higher.

These rises should push us to be more aggressive in our transition to clean energy. I would like to see us try to be innovative in reducing our reliance on fossil fuels, for example by paying people not to drive and offering free bus travel, but I realize there are serious political obstacles to going this route.

In any case, I think it would be a mistake for the Fed to aggressively raise interest rates to counteract this inflation. We need to move to clean energy as quickly as possible. A recession may slow inflation by throwing people out of work and putting downward pressure on wages, but it doesn’t help the transition to clean energy.

Do you think that the US economy has overheated, and needs to be slowed–even if it means reducing employment–in order to lower inflation?

I think there is a case that the stimulus increased demand at points in 2021 to levels that the economy could not meet. A big part of this story was that demand was so highly tilted towards goods, since people couldn’t buy a number of services due to the pandemic. Nonetheless, it was true that demand exceeded supply in wide areas of the economy.

But putting the past aside, the question is how best to deal with the inflation that resulted. I think there is a good case that inflation will largely fade as the backlogs in supply chains is resolved.

We have already seen this in a few areas. Television prices have fallen 6.3 percent in the last five months after rising 8.7 percent between March and August. Used car prices have fallen 1.5 percent in the first half of February, after rising almost 50 percent since the start of the pandemic. I expect that we will see this in many more areas in the months ahead.

In any case, I don’t think there is a serious case that the economy is overheating at present. The unemployment rate is still somewhat higher than before the pandemic. We have recently seen a modest rise in unemployment insurance claims, indicating that employers are comfortable laying off workers, rather than hoarding labor that they may not need. (I’m not happy to see people laid off, but this is an indication of a modest weakening in the labor market.)

I expect that, with cases of omicron dropping rapidly, we will get back to something closer to a normal economy. This should help to reduce inflationary pressure as businesses don’t have to continually adjust to workers missing days because of the pandemic.  

How is inflation affecting the housing market? Who is winning? Who is losing?

The low mortgage rates during the pandemic, coupled with the various pandemic payments, have given many people the ability to pay more for housing. This has sent house prices soaring.

I expect the pressure on prices to be reduced in the months ahead for several reasons. First, interest rates have risen. The interest rate in 30-year fixed rate mortgages had been under 3.0 percent at various points during the pandemic. It is now near 4.0 percent.

The second reason is that we have seen a huge increase in the number of occupied housing units. The number of occupied housing units has risen by 3.5 million in the last two years. This is a context of very slow population growth. Many people had been living with family or friends now have their own places. But the number of people in that situation, who have the means to start their own household, is clearly declining.

It is also worth mentioning the eviction moratoriums that were in place during the pandemic. During a normal year there are roughly 1 million evictions. The number was almost certainly less than half as large in 2020 and 2021. The prospect of more people getting evicted is not a pretty one, but it does mean that more units will be available.

Third, there has been a sharp upturn in the rate of construction. We were building close to 1.4 million units a year before the pandemic. We are now up to 1.8 million. In addition, many stores and office buildings are being converted to residential housing. This should help to alleviate shortages over time.

It is also worth noting a big shift in population. We are seeing rapid rises in house prices and rents in many low-cost areas like Atlanta and Detroit, with little or no increases in high-prices areas like New York City and San Francisco.

This is a story where people who can now work remotely are taking advantage of lower cost housing. That is a good story for them and a good story for renters in high-priced cities. It also benefits homeowners in lower cost areas, who see a rise in their property values. It also benefits these low-cost areas by bringing in workers whose spending will support a variety of businesses. The losers are renters who will end up paying more for their apartments.  

Is there anything that state and local governments can do or should do to help reduce inflation or the burden on American households?

There is a limit to what can be done at the state or local level. A simple measure would be to make it easier for people to buy lower cost drugs in other countries (assuming there is no action at the federal level). Utah’s public employee retirement program actually pays members to go to Canada or Mexico to buy drugs at lower prices.

Another measure these governments can do is to facilitate the transition of vacant retail and commercial space to residential housing. In many cases, this would just mean sharing best practices and removing regulatory obstacles. In other words, it doesn’t have to cost much money.

With many stores now empty, as a result of the pandemic-induced shift to online shopping, and many offices sitting vacant as people work remotely, we have lots of wasted space across the country. If these can be converted to housing, it could go a long way in alleviating the shortage of affordable housing.

Earlier today, I was on a panel with Jason Furman and Joseph Stiglitz, discussing the recent surge in inflation and the prospects for the future. We took some questions from the audience, but there were a number for which we did not have time. I have picked some of these questions to answer myself, for anyone who may be interested.

Was the decision to go big with the Biden stimulus worth the cost in the form of higher inflation?

We can certainly look at the Biden stimulus and point to areas where we spent more than necessary. I would put the high reach of the $1,400 pandemic payments top on that list. If we had a phase out beginning at say, $50,000 a person, they would still reach the overwhelming majority of people who were hurt financially by the pandemic.

We also could have gotten by giving the states less money. Many now find themselves flush with cash and are giving out tax cuts to their residents.

But, we can’t design our policies retroactively. Also, there were political considerations behind the structuring of the package that can’t just be ignored.

To me, the basic question was whether it was worth the risk of going too big, as Biden did, or risk erring on the side of going too small, as was the case with the Obama stimulus in 2009. To my view, Biden made the right call.

We’ve gotten back the vast majority of jobs we lost during the pandemic. The economy is almost back to its pre-recession growth path. And, we shielded the bulk of the population from financial hardship from the pandemic.

This was really a great accomplishment and well worth the cost of say a 2.0 percentage point rise in the inflation rate. Just to be clear, we would have seen higher inflation with the reopening of the economy from the pandemic in any case. The robust stimulus of the Recovery Act added to this, but even countries without large stimulus packages had large upticks of inflation. So, the question is whether the benefits were worth the additional inflation, say going from 5.5 percent to 7.5 percent; we are not asking about the full increase to 7.5 percent.

How does the war in Ukraine affect your assessment of the prospects for the US economy?

This is hard to say at this point, since there is so much uncertainty about the longer-term effects. We can see the short-term jump in the price of oil and natural gas and many other commodities, which are clearly inflationary, but we don’t know how long these rises will be sustained, or if the prices will go higher.

These rises should push us to be more aggressive in our transition to clean energy. I would like to see us try to be innovative in reducing our reliance on fossil fuels, for example by paying people not to drive and offering free bus travel, but I realize there are serious political obstacles to going this route.

In any case, I think it would be a mistake for the Fed to aggressively raise interest rates to counteract this inflation. We need to move to clean energy as quickly as possible. A recession may slow inflation by throwing people out of work and putting downward pressure on wages, but it doesn’t help the transition to clean energy.

Do you think that the US economy has overheated, and needs to be slowed–even if it means reducing employment–in order to lower inflation?

I think there is a case that the stimulus increased demand at points in 2021 to levels that the economy could not meet. A big part of this story was that demand was so highly tilted towards goods, since people couldn’t buy a number of services due to the pandemic. Nonetheless, it was true that demand exceeded supply in wide areas of the economy.

But putting the past aside, the question is how best to deal with the inflation that resulted. I think there is a good case that inflation will largely fade as the backlogs in supply chains is resolved.

We have already seen this in a few areas. Television prices have fallen 6.3 percent in the last five months after rising 8.7 percent between March and August. Used car prices have fallen 1.5 percent in the first half of February, after rising almost 50 percent since the start of the pandemic. I expect that we will see this in many more areas in the months ahead.

In any case, I don’t think there is a serious case that the economy is overheating at present. The unemployment rate is still somewhat higher than before the pandemic. We have recently seen a modest rise in unemployment insurance claims, indicating that employers are comfortable laying off workers, rather than hoarding labor that they may not need. (I’m not happy to see people laid off, but this is an indication of a modest weakening in the labor market.)

I expect that, with cases of omicron dropping rapidly, we will get back to something closer to a normal economy. This should help to reduce inflationary pressure as businesses don’t have to continually adjust to workers missing days because of the pandemic.  

How is inflation affecting the housing market? Who is winning? Who is losing?

The low mortgage rates during the pandemic, coupled with the various pandemic payments, have given many people the ability to pay more for housing. This has sent house prices soaring.

I expect the pressure on prices to be reduced in the months ahead for several reasons. First, interest rates have risen. The interest rate in 30-year fixed rate mortgages had been under 3.0 percent at various points during the pandemic. It is now near 4.0 percent.

The second reason is that we have seen a huge increase in the number of occupied housing units. The number of occupied housing units has risen by 3.5 million in the last two years. This is a context of very slow population growth. Many people had been living with family or friends now have their own places. But the number of people in that situation, who have the means to start their own household, is clearly declining.

It is also worth mentioning the eviction moratoriums that were in place during the pandemic. During a normal year there are roughly 1 million evictions. The number was almost certainly less than half as large in 2020 and 2021. The prospect of more people getting evicted is not a pretty one, but it does mean that more units will be available.

Third, there has been a sharp upturn in the rate of construction. We were building close to 1.4 million units a year before the pandemic. We are now up to 1.8 million. In addition, many stores and office buildings are being converted to residential housing. This should help to alleviate shortages over time.

It is also worth noting a big shift in population. We are seeing rapid rises in house prices and rents in many low-cost areas like Atlanta and Detroit, with little or no increases in high-prices areas like New York City and San Francisco.

This is a story where people who can now work remotely are taking advantage of lower cost housing. That is a good story for them and a good story for renters in high-priced cities. It also benefits homeowners in lower cost areas, who see a rise in their property values. It also benefits these low-cost areas by bringing in workers whose spending will support a variety of businesses. The losers are renters who will end up paying more for their apartments.  

Is there anything that state and local governments can do or should do to help reduce inflation or the burden on American households?

There is a limit to what can be done at the state or local level. A simple measure would be to make it easier for people to buy lower cost drugs in other countries (assuming there is no action at the federal level). Utah’s public employee retirement program actually pays members to go to Canada or Mexico to buy drugs at lower prices.

Another measure these governments can do is to facilitate the transition of vacant retail and commercial space to residential housing. In many cases, this would just mean sharing best practices and removing regulatory obstacles. In other words, it doesn’t have to cost much money.

With many stores now empty, as a result of the pandemic-induced shift to online shopping, and many offices sitting vacant as people work remotely, we have lots of wasted space across the country. If these can be converted to housing, it could go a long way in alleviating the shortage of affordable housing.

From my Twitter feed it seems that Sarah Palin has been resurrected. All sorts of centrist-liberal types are yelling “drill baby, drill!” as a response to Russia’s invasion of Ukraine. They have been pushing for ignoring environmental regulations and even directly subsidizing fracking.

While that is no doubt music to the ears of the fossil fuel industry, this is going backwards about as quickly as we can in our effort to reduce greenhouse gas emissions. There is an alternative route, we can pay people not to drive. That one might seem a little silly, but it beats paying people to wreck the environment.  

The way this could work is that ask people to submit a form to the IRS indicating how many miles they drove last year. We also have them submit a picture of their odometer reading as of today. They send in another photograph at the end of the year. Then they are entitled to a payment of 20 cents for each mile that they reduce their driving this year compared to last year. (We adjust the calendar so that it is for a 12-month period.)

If someone drove 15,000 miles last year and can reduce their driving to 10,000 miles this year, we would send them a check for $1,000. This is also approximately what they would be saving on gasoline if the price is $4 a gallon and they get 20 MPG in their car. That should be a pretty good incentive to drive less.

To make the shift to less driving easier, the federal government can also pay to make bus transportation free and vastly expand service. (The way to do this is to have the federal government pick up 90 percent of the cost, with the states having to pay the other 10 percent. The red state governors will of course all refuse to go along, so we just send the money to blue states.)

If we could reduce driving by 20 percent (640 billion miles per year), this plan would cost the government just under $130 billion a year, roughly 2.2 percent of the federal budget. If we add in another $40 billion for bus subsidies, it comes to $170 billion a year or 2.9 percent of the federal budget.

This would save us a bit less than 2 million barrels of oil a day. It would take quite a while to build up to this level of additional production, even with ambitious subsidies to the fossil fuel industry.

I know everyone is jumping up and down that people will cheat. What else is new? We have some ability to put limits on cheating, first and foremost by subjecting people to random audits, just as we do with taxes and did with the Paycheck Protection Program during the pandemic shutdowns. Also, any obviously absurd claims will be inviting inspection. If someone claims they drove 50,000 miles in 2021, they can expect a visit from an auditor asking how they ended up driving that far in a single year.

There undoubtedly will be people who get away with substantial amounts of cheating, but that should not be an excuse for not adopting an environmentally friendly way of reducing the price of oil on world markets. We tolerate massive amounts of cheating in other areas of our tax code, such as the expenses claimed by businesses. It would be ridiculous to get bent out of shape that someone may get $50 or $100 that they shouldn’t on this provision.

The key point here is that we don’t have to wreck the planet to show Vladimir Putin we are tough. We can instead do policies that would make sense even if he hadn’t invaded Ukraine.  

From my Twitter feed it seems that Sarah Palin has been resurrected. All sorts of centrist-liberal types are yelling “drill baby, drill!” as a response to Russia’s invasion of Ukraine. They have been pushing for ignoring environmental regulations and even directly subsidizing fracking.

While that is no doubt music to the ears of the fossil fuel industry, this is going backwards about as quickly as we can in our effort to reduce greenhouse gas emissions. There is an alternative route, we can pay people not to drive. That one might seem a little silly, but it beats paying people to wreck the environment.  

The way this could work is that ask people to submit a form to the IRS indicating how many miles they drove last year. We also have them submit a picture of their odometer reading as of today. They send in another photograph at the end of the year. Then they are entitled to a payment of 20 cents for each mile that they reduce their driving this year compared to last year. (We adjust the calendar so that it is for a 12-month period.)

If someone drove 15,000 miles last year and can reduce their driving to 10,000 miles this year, we would send them a check for $1,000. This is also approximately what they would be saving on gasoline if the price is $4 a gallon and they get 20 MPG in their car. That should be a pretty good incentive to drive less.

To make the shift to less driving easier, the federal government can also pay to make bus transportation free and vastly expand service. (The way to do this is to have the federal government pick up 90 percent of the cost, with the states having to pay the other 10 percent. The red state governors will of course all refuse to go along, so we just send the money to blue states.)

If we could reduce driving by 20 percent (640 billion miles per year), this plan would cost the government just under $130 billion a year, roughly 2.2 percent of the federal budget. If we add in another $40 billion for bus subsidies, it comes to $170 billion a year or 2.9 percent of the federal budget.

This would save us a bit less than 2 million barrels of oil a day. It would take quite a while to build up to this level of additional production, even with ambitious subsidies to the fossil fuel industry.

I know everyone is jumping up and down that people will cheat. What else is new? We have some ability to put limits on cheating, first and foremost by subjecting people to random audits, just as we do with taxes and did with the Paycheck Protection Program during the pandemic shutdowns. Also, any obviously absurd claims will be inviting inspection. If someone claims they drove 50,000 miles in 2021, they can expect a visit from an auditor asking how they ended up driving that far in a single year.

There undoubtedly will be people who get away with substantial amounts of cheating, but that should not be an excuse for not adopting an environmentally friendly way of reducing the price of oil on world markets. We tolerate massive amounts of cheating in other areas of our tax code, such as the expenses claimed by businesses. It would be ridiculous to get bent out of shape that someone may get $50 or $100 that they shouldn’t on this provision.

The key point here is that we don’t have to wreck the planet to show Vladimir Putin we are tough. We can instead do policies that would make sense even if he hadn’t invaded Ukraine.  

I don’t agree with much about Ross Douthat’s politics, but he often makes some interesting points. He did so in his latest column on the Canadian “truckers” protest against vaccine mandates. Douthat argues that support for the protest stems from resentment by people who do various types of manual labor against the professional class. His point is that the latter have largely been setting the rules in ways that disadvantage the group of people who rely on manual labor for their living.

Unfortunately, it seems that no one other than Douthat is given the opportunity by major news outlets to argue that policy, rather than inevitable processes like globalization or technology, is responsible for the relative deterioration in the situation of people who do manual labor. To be clear, there are prominent columnists like, Paul Krugman at the NYT and E.J. Dionne at the WaPo, who argue for welfare state policies to reverse this deterioration, but you won’t see any pieces saying that the deterioration itself was the result of deliberate policy.

This absence is striking, given how the major news outlets are perfectly comfortable giving large amounts of space to pieces based on little evidence, or that sometimes even fly in the face of the evidence that does exist. The NYT gave us an example of this with the Sunday magazine’s cover piece proclaiming “The Age of Anti-Ambition.”

The substantive basis to this piece is the highest recorded quit rate since the Labor Department began its current series in December of 2000 and the drop in labor force participation since the start of the pandemic. As NYT columnist Peter Coy has pointed out, quit rates were likely much higher in the late 1940s, and comparable at many points in the 1960s and 1970s. So, there is not all that much new here.

There also is far less than meets the eye with the decline in labor force participation rates (LFPR), widely touted as “The Great Resignation.” If we look at the prime age workforce (ages 25 to 54), the drop from the pre-pandemic peak to January of 2022, is 1.4 percentage points.

But LFPRs always fall in recessions. Three and half years after the start of the 2000 recession, the prime age LFPR was down by 2.7 percentage points from its pre-recession level. The prime age LFPR was 4.1 percentage points below its pre-recession peak four years after the start of the Great Recession.

Furthermore, more than half of the drop in the LFPR is explained by the 1.8 million people who reported that they were not working or looking for a job in January directly because of COVID-19. The real surprise of the pandemic recession is how little labor force participation has fallen.

The other part of the picture, that people no longer have great career ambitions, is also not exactly new. Those of us old enough to remember the 1960s recall the slogan, “turn on, tune in, drop out.” The story that many young people, who have the option, choose not to pursue a high-prestige, high-paying career path, is not a new one.

But even “The Age of Ambition” story probably contains more validity than another frequent topic in major media publications: the robots taking all the jobs. This one was especially painful because not only was it not supported by the evidence, it was directly contradicted by the evidence.

We actually have a very good measure of how rapidly robots or anything else is taking jobs, it’s called “productivity growth.” Productivity growth measures the increase in the amount of output in an hour of work. From the standpoint of the individual worker, it doesn’t matter whether productivity growth increases because employers have figured out a magical formula that allows them to produce 20 percent more cars, restaurant meals, or haircuts with an hour of a worker’s time, or because they are now working next to a team of robots. In both cases, employers need 20 percent fewer workers to produce the same amount of output.

In the decade from the fourth quarter of 2009 to the fourth quarter of 2019 productivity growth averaged just over 1.0 percent annually. This compares to growth of more than 2.5 percent annually in the quarter century from 1947 to 1972 and almost 3.0 percent annually in the decade from the fourth quarter of 1995 to the fourth quarter of 2005.

In other words, in a period where stories in major media outlets repeatedly warned us that robots were taking all the jobs, we were actually seeing very few jobs lost to robots or any other form of productivity growth. It’s probably also worth mentioning that economists usually see productivity growth as being a great thing, since it can provide a basis for higher living standards in the form of either more goods and services, or more leisure time.

A Piece on Rigging the Market to Redistribute Upward?

I mention the pieces on workers losing ambition and robots taking all the jobs, not just to bash poor editorial choices. Rather, these are examples of cases where major media outlets have been willing to go far out on a limb to tell grand stories, even when they are not well-supported by evidence. So clearly there is a market for big arguments about the shape of the economy.

My question is why does that market literally never include a piece that says that economy was deliberately structured to benefit more highly educated workers at the expense of workers without college degrees? Why is the only place we can hear this line is the occasional comment in a Ross Douthat column?

As my regular readers know, this story is not hard to tell. We have seen many pieces on the pandemic billionaires, with Moderna alone accounting for five of them, as of last July.

This was not just a story of technology. No one at Moderna, or any other pharmaceutical company, would be getting hugely rich without government-granted patent monopolies. We all know the argument that without these government-granted monopolies we wouldn’t have the COVID-19 vaccines and other great medical breakthroughs. But this is a debatable point, since we have seen enormously important breakthroughs in research that was publicly funded and not dependent on patent monopolies.

In any case, patent monopolies are quite explicitly a government policy. They can be longer and stronger or shorter and weaker. And, they may not apply in certain areas at all. (We didn’t have patent monopolies in software until the 1990s.)

The same story applies to copyright monopolies, the cousin of patent monopolies. This is again a government policy designed to foster creative work. It is not simply an outgrowth of technology. Without government-granted patent monopolies, Bill Gates would likely still be working for a living or getting by on his Social Security check, instead of being one of the richest people in the world.

Trade Policy

It is not just intellectual property rules that have been restructured to redistribute a massive amount of income upward. Our trade policy has developed along the same lines. It has been about putting our manufacturing workers in direct competition with low-paid workers in the developing world.

This has the predicted and actual effect of lowering the pay of manufacturing workers. And, since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, this policy has had the effect of putting downward pressure on the wages of less educated workers more generally.

Here too, there was nothing inevitable about our trade policy, which often passes as the impersonal force of “globalization.”  We could have had trade policy that was designed to put our doctors, dentists, and other highly paid professionals in direct competition with their lower paid counterparts in other countries. (We could have created rules that ensured high standards.)

This policy would have had the exact same logic as the conventional economists’ gain from trade story, although in this case the winners would be less-educated workers who would benefit from lower cost medical care, legal services, and other services provided by the most highly-educated workers, which would raise their real wages. But this path for globalization was never on the agenda, perhaps because the people designing and writing on trade policy directly benefited from the course trade policy actually took.

The General Picture: Policy Was Structured to Redistribute Upward

I have written on other ways that policy was structured to redistribute upward in Rigged [it’s free]. (I would add to the list in my book, Section 230 protection, which has allowed Mark Zuckerberg and others to get fabulously rich.) But, my point here is not to argue for my specific take on these policies.

Rather, I am just making the case that there is a plausible story that policy was designed over the last four decades to redistribute income from workers without college degrees (loosely defined as Douthat’s manual laborers) to those with college and advanced degrees (loosely defined as Douthat’s professional class). The basis for this assertion is at least as strong as the case that we are now in the middle of “The Great Resignation,” or that robots are taking all the jobs.

Yet, for some reason we never see this argument in the New York Times, New York Review of Books, New Yorker, The Atlantic, the Washington Post or other leading media outlets.  (If I missed it, please send me the link.) This matters not only for policy reasons, but also for the shape that the resentment of the losers takes.

When the people who have been on the losing end of policy for four decades only hear that their plight was the unfortunate outcome of trends in technology and globalization, when in fact it was the result of policy deliberately designed by the winners, they are likely to be angry. The direction of their anger is often ugly and irrational, such as when they lash out at racial and ethnic minorities, or blindly follow a billionaire buffoon who has barely concealed contempt for ordinary workers.

I can’t promise that being truthful about the design of policy over the last four decades will redirect populist anger in a more productive direction, but it seems worth a try. In any case, news outlets that are ostensibly committed to the truth, should feel the need to tell it here.  

 

 

 

I don’t agree with much about Ross Douthat’s politics, but he often makes some interesting points. He did so in his latest column on the Canadian “truckers” protest against vaccine mandates. Douthat argues that support for the protest stems from resentment by people who do various types of manual labor against the professional class. His point is that the latter have largely been setting the rules in ways that disadvantage the group of people who rely on manual labor for their living.

Unfortunately, it seems that no one other than Douthat is given the opportunity by major news outlets to argue that policy, rather than inevitable processes like globalization or technology, is responsible for the relative deterioration in the situation of people who do manual labor. To be clear, there are prominent columnists like, Paul Krugman at the NYT and E.J. Dionne at the WaPo, who argue for welfare state policies to reverse this deterioration, but you won’t see any pieces saying that the deterioration itself was the result of deliberate policy.

This absence is striking, given how the major news outlets are perfectly comfortable giving large amounts of space to pieces based on little evidence, or that sometimes even fly in the face of the evidence that does exist. The NYT gave us an example of this with the Sunday magazine’s cover piece proclaiming “The Age of Anti-Ambition.”

The substantive basis to this piece is the highest recorded quit rate since the Labor Department began its current series in December of 2000 and the drop in labor force participation since the start of the pandemic. As NYT columnist Peter Coy has pointed out, quit rates were likely much higher in the late 1940s, and comparable at many points in the 1960s and 1970s. So, there is not all that much new here.

There also is far less than meets the eye with the decline in labor force participation rates (LFPR), widely touted as “The Great Resignation.” If we look at the prime age workforce (ages 25 to 54), the drop from the pre-pandemic peak to January of 2022, is 1.4 percentage points.

But LFPRs always fall in recessions. Three and half years after the start of the 2000 recession, the prime age LFPR was down by 2.7 percentage points from its pre-recession level. The prime age LFPR was 4.1 percentage points below its pre-recession peak four years after the start of the Great Recession.

Furthermore, more than half of the drop in the LFPR is explained by the 1.8 million people who reported that they were not working or looking for a job in January directly because of COVID-19. The real surprise of the pandemic recession is how little labor force participation has fallen.

The other part of the picture, that people no longer have great career ambitions, is also not exactly new. Those of us old enough to remember the 1960s recall the slogan, “turn on, tune in, drop out.” The story that many young people, who have the option, choose not to pursue a high-prestige, high-paying career path, is not a new one.

But even “The Age of Ambition” story probably contains more validity than another frequent topic in major media publications: the robots taking all the jobs. This one was especially painful because not only was it not supported by the evidence, it was directly contradicted by the evidence.

We actually have a very good measure of how rapidly robots or anything else is taking jobs, it’s called “productivity growth.” Productivity growth measures the increase in the amount of output in an hour of work. From the standpoint of the individual worker, it doesn’t matter whether productivity growth increases because employers have figured out a magical formula that allows them to produce 20 percent more cars, restaurant meals, or haircuts with an hour of a worker’s time, or because they are now working next to a team of robots. In both cases, employers need 20 percent fewer workers to produce the same amount of output.

In the decade from the fourth quarter of 2009 to the fourth quarter of 2019 productivity growth averaged just over 1.0 percent annually. This compares to growth of more than 2.5 percent annually in the quarter century from 1947 to 1972 and almost 3.0 percent annually in the decade from the fourth quarter of 1995 to the fourth quarter of 2005.

In other words, in a period where stories in major media outlets repeatedly warned us that robots were taking all the jobs, we were actually seeing very few jobs lost to robots or any other form of productivity growth. It’s probably also worth mentioning that economists usually see productivity growth as being a great thing, since it can provide a basis for higher living standards in the form of either more goods and services, or more leisure time.

A Piece on Rigging the Market to Redistribute Upward?

I mention the pieces on workers losing ambition and robots taking all the jobs, not just to bash poor editorial choices. Rather, these are examples of cases where major media outlets have been willing to go far out on a limb to tell grand stories, even when they are not well-supported by evidence. So clearly there is a market for big arguments about the shape of the economy.

My question is why does that market literally never include a piece that says that economy was deliberately structured to benefit more highly educated workers at the expense of workers without college degrees? Why is the only place we can hear this line is the occasional comment in a Ross Douthat column?

As my regular readers know, this story is not hard to tell. We have seen many pieces on the pandemic billionaires, with Moderna alone accounting for five of them, as of last July.

This was not just a story of technology. No one at Moderna, or any other pharmaceutical company, would be getting hugely rich without government-granted patent monopolies. We all know the argument that without these government-granted monopolies we wouldn’t have the COVID-19 vaccines and other great medical breakthroughs. But this is a debatable point, since we have seen enormously important breakthroughs in research that was publicly funded and not dependent on patent monopolies.

In any case, patent monopolies are quite explicitly a government policy. They can be longer and stronger or shorter and weaker. And, they may not apply in certain areas at all. (We didn’t have patent monopolies in software until the 1990s.)

The same story applies to copyright monopolies, the cousin of patent monopolies. This is again a government policy designed to foster creative work. It is not simply an outgrowth of technology. Without government-granted patent monopolies, Bill Gates would likely still be working for a living or getting by on his Social Security check, instead of being one of the richest people in the world.

Trade Policy

It is not just intellectual property rules that have been restructured to redistribute a massive amount of income upward. Our trade policy has developed along the same lines. It has been about putting our manufacturing workers in direct competition with low-paid workers in the developing world.

This has the predicted and actual effect of lowering the pay of manufacturing workers. And, since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, this policy has had the effect of putting downward pressure on the wages of less educated workers more generally.

Here too, there was nothing inevitable about our trade policy, which often passes as the impersonal force of “globalization.”  We could have had trade policy that was designed to put our doctors, dentists, and other highly paid professionals in direct competition with their lower paid counterparts in other countries. (We could have created rules that ensured high standards.)

This policy would have had the exact same logic as the conventional economists’ gain from trade story, although in this case the winners would be less-educated workers who would benefit from lower cost medical care, legal services, and other services provided by the most highly-educated workers, which would raise their real wages. But this path for globalization was never on the agenda, perhaps because the people designing and writing on trade policy directly benefited from the course trade policy actually took.

The General Picture: Policy Was Structured to Redistribute Upward

I have written on other ways that policy was structured to redistribute upward in Rigged [it’s free]. (I would add to the list in my book, Section 230 protection, which has allowed Mark Zuckerberg and others to get fabulously rich.) But, my point here is not to argue for my specific take on these policies.

Rather, I am just making the case that there is a plausible story that policy was designed over the last four decades to redistribute income from workers without college degrees (loosely defined as Douthat’s manual laborers) to those with college and advanced degrees (loosely defined as Douthat’s professional class). The basis for this assertion is at least as strong as the case that we are now in the middle of “The Great Resignation,” or that robots are taking all the jobs.

Yet, for some reason we never see this argument in the New York Times, New York Review of Books, New Yorker, The Atlantic, the Washington Post or other leading media outlets.  (If I missed it, please send me the link.) This matters not only for policy reasons, but also for the shape that the resentment of the losers takes.

When the people who have been on the losing end of policy for four decades only hear that their plight was the unfortunate outcome of trends in technology and globalization, when in fact it was the result of policy deliberately designed by the winners, they are likely to be angry. The direction of their anger is often ugly and irrational, such as when they lash out at racial and ethnic minorities, or blindly follow a billionaire buffoon who has barely concealed contempt for ordinary workers.

I can’t promise that being truthful about the design of policy over the last four decades will redirect populist anger in a more productive direction, but it seems worth a try. In any case, news outlets that are ostensibly committed to the truth, should feel the need to tell it here.  

 

 

 

When most people are confused about an issue they try to get more information. Steven Rattner writes a New York Times column.

The gist of Rattner’s piece, as told in the title, “Biden Keeps Blaming the Supply Chain for Inflation. That’s Dishonest,” is that the Biden administration is lying when it says the jump in inflation is due to supply chain issues. Rattner tells us instead that the inflation is due to the large budget deficits that have created too much demand in the economy.

The biggest problem with Rattner’s story is that there has been a large jump in inflation rates in other wealthy countries as well, most of which did not have stimulus packages anywhere near the size of the recovery package pushed through by Biden. While the Biden package surely added to inflation in the U.S., the fact that other countries also saw a rise in inflation suggests that the main factor was reopening from pandemic shutdowns, not an overheated economy.

The dividend from the Biden package was that it quickly got the unemployment rate down to almost its pre-pandemic level . It also pushed GDP almost back to its trend path, a feat no other country has accomplished. Also, with GDP more or less on its trend growth path, it is hard to maintain that the economy is now suffering from excess demand, as opposed to an inability to meet current demand due to supply chain issues, as the Biden administration claims. 

When most people are confused about an issue they try to get more information. Steven Rattner writes a New York Times column.

The gist of Rattner’s piece, as told in the title, “Biden Keeps Blaming the Supply Chain for Inflation. That’s Dishonest,” is that the Biden administration is lying when it says the jump in inflation is due to supply chain issues. Rattner tells us instead that the inflation is due to the large budget deficits that have created too much demand in the economy.

The biggest problem with Rattner’s story is that there has been a large jump in inflation rates in other wealthy countries as well, most of which did not have stimulus packages anywhere near the size of the recovery package pushed through by Biden. While the Biden package surely added to inflation in the U.S., the fact that other countries also saw a rise in inflation suggests that the main factor was reopening from pandemic shutdowns, not an overheated economy.

The dividend from the Biden package was that it quickly got the unemployment rate down to almost its pre-pandemic level . It also pushed GDP almost back to its trend path, a feat no other country has accomplished. Also, with GDP more or less on its trend growth path, it is hard to maintain that the economy is now suffering from excess demand, as opposed to an inability to meet current demand due to supply chain issues, as the Biden administration claims. 

As I just noted, given the rise in pay for low wage workers over the last two years, as well as a variety of progressive government benefits, most people in the bottom fifth of the income distribution are almost certainly better off than they were before the pandemic. This doesn’t mean that plenty of families are not struggling, tens of millions are. But that was also true in 2019, before the pandemic hit.

If news outlets, like the Washington Post, are giving more coverage to struggling families today than they did before the pandemic, that is a result of their editorial policy, not a reflection of reality.

As I just noted, given the rise in pay for low wage workers over the last two years, as well as a variety of progressive government benefits, most people in the bottom fifth of the income distribution are almost certainly better off than they were before the pandemic. This doesn’t mean that plenty of families are not struggling, tens of millions are. But that was also true in 2019, before the pandemic hit.

If news outlets, like the Washington Post, are giving more coverage to struggling families today than they did before the pandemic, that is a result of their editorial policy, not a reflection of reality.

I have to say that I was surprised and disappointed by the data in the January Consumer Price Index. I expected to see evidence that some of the sharp runups in the prices of items like cars, clothes, and appliances were starting to be reversed. The idea was that the main factor in these runups was not higher costs of production, but shipping problems, which were being alleviated.

The basis for the belief that shipping problems were being fixed was both anecdotal accounts in the media and also the big increases in retail inventories reported for December. It seems stores had ordered (and received) lots of stuff they couldn’t sell. This is a context in which we might normally expect prices to fall, or at least not rise further.

That turned out not to be the case. The price index for appliances rose 1.5 percent in January and is now 8.5 percent above its year ago level. The index for apparel rose 1.1 percent in the month putting it 5.3 percent above its year ago level. And, used vehicle prices rose 1.5 percent in January, and are now 40.5 percent above year ago levels. So, there is not much of a story of a turnaround there.

There was also a lot of inflation in items not directly connected to the supply chain. Prescription drug prices jumped 1.3 percent, after being pretty much flat the prior year.[1] The health care insurance index, which measures the operating costs and profits of the industry, rose 2.7 percent, the fourth consecutive month with a rise in excess of 1.0 percent. This follows thirteen consecutive months of declines. And rental inflation appears to be accelerating, with the rent proper index rising 0.5 percent and owners’ equivalent rent going up 0.4 percent in the month.

All in all, this is not a good story. Still there were some positive signs. New car prices were flat in January, suggesting that supply may finally have caught up with demand in the sector. They are still up 12.2 percent over the year. The index for rental cars fell 7.0 percent in January, following a 2.7 percent drop the prior month. This indicates that rental companies have managed to rebuild their fleets and will not be an outsized source of demand for new cars going forward. The index still has a way to drop, it is 29.3 percent above its year ago level.

Also, television prices, which I have treated as a canary in the coal mine, fell another 1.4 percent, their fifth consecutive monthly decline. This mostly reverses a 12.0 percent run-up in television prices between March and August, although they are still 2.4 percent above year ago levels. My expectation is that the price of cars, and many other items, in the months ahead will look a lot like television prices, dropping back to levels that are comparable to where they were before the pandemic.

I’ve been saying that for several months now and it has not yet happened. I still think it will, but we shall see. In the meantime, I want to make three points about the inflation we have been seeing to date:

  • Most people are almost certainly enjoying better living standards than they did before the pandemic, ignoring of course the pandemic itself. In other words, the tales of serious deprivation being seen in the media, while undoubtedly true for many families, are not worse or more frequent than what they would have found in 2019, if they had chosen to look.
  • This inflation, unlike the 1970s inflation, is clearly profit driven, not wage driven. While we could end up with the sort of wage-price spiral we saw in the 1970s, we are not there presently. Businesses have raised prices in response to temporary (hopefully) shortages, which has led to higher profits. These profits can fall back if workers regain their income share.
  • There has been an uptick in productivity growth in the last few years. This is in contrast to the 1970s which saw a sharp slowing in productivity growth. This can allow for both higher real wages and higher profits.

 

Have Living Standards Improved?

Most people get most of their income through wages. This would seem to imply that we just need to look at the pattern in real wages over the last year to determine whether people are better off. However, the circumstances of the pandemic make this more difficult than would usually be the case.

The data for the last year are distorted by two factors directly attributable to the pandemic. The first is a composition effect. In 2020 millions of people lost their jobs. The job losers were concentrated at the lower end of the pay scale, which meant that average wages rose simply due to a composition effect. The average wage of the people who still had jobs in 2020 was higher than the average wage of people who were working in 2019.

In 2021 this composition effect was reversed, with most lower-paid workers getting their jobs back. This lowered the average wage in 2021.

There was also a pandemic price effect. The price of many items, most notably gasoline, fell in 2020 as the recession led to a drop in demand. This was reversed in 2021 as the U.S. and world economy grew rapidly.

For these reasons, taking real wage growth in 2021 in isolation gives a misleading picture of wage growth. The more honest route would be to combine the two years and compare real wages today to where they were two years ago. (I know this overlaps presidential terms, but such is life.)

The real average hourly wage has risen by 2.1 percent compared to its January, 2020 level. (It fell 1.7 percent in the last year.) This means that a typical worker’s pay will go 2.1 percent further now than it did in 2020. If most workers were not suffering severe deprivation at the start of 2020, it is not reasonable to claim that they are today.

 

Source: Bureau of Labor Statistics.

Furthermore, the wage gains look better at points lower down the wage ladder. If we look at the average hourly wage for production and non-supervisory workers, a group that excludes most professionals and managers, it rose by 2.5 over the last two years, after adjusting for inflation. For production and non-supervisory workers in retail, the gain in real wage was 3.2 percent over the last two years.

If we look at the lowest paying sectors, workers secured real wage gains even in 2021. Production and non-supervisory workers in convenience stores had a 10.6 gain in real wages during 2021. In hotels workers had a real wage increase of 8.2 percent over the year, and in restaurants the gain was 9.0 percent.

In short, workers at the lower end of the pay scale have generally been doing well the last two years, in spite of the uptick in inflation. It is also worth noting that many have seen their income increase over the last two years due to the various government payments over this period.

In 2020 and 2021, the government sent out a total of $3,200 per person in pandemic checks to the vast majority of adults, with additional payments for dependent children. Unemployed workers received $600 supplements to their unemployment checks for the months from April of 2020 to August of 2020. They then got supplements of $300 per week from January of 2021 until September of last year. As a result of these supplements, many lower paid workers were receiving as much or more in unemployment benefits as they did when they were working.

The American Recovery Act also included an increase in the child tax credit to $3,000 per child and $3,500 for children under age six. Also, unlike the prior tax credit, this benefit was fully refundable, so even the lowest income family could receive the full benefit of the tax credit. While this program expired at the end of 2021, it did put additional money in the pockets of the families who most needed it.

The general structure of the pandemic relief programs was quite progressive. A $1,200 check means much more to someone earning $20,000 a year, than to someone earning $100,000. The same is the case for the expansion of the child tax credit. As a result of these benefits, and the sharp rise in real wages for those at the bottom, lower income households had far more money in their bank accounts during the pandemic than they had previously. 

While middle and higher-income households may have benefitted less from these pandemic payments, and seen smaller gains in real wages, they are also likely doing better in most cases than before the pandemic. Close to ten million people have taken advantage in the plunge in mortgage interest rates to refinance their mortgages, saving an average of more than $2,800 a year in interest payments. This is a substantial savings for a family earning $100,000 a year.

In addition, higher income households were much more likely to benefit from increased opportunities to work from home. The increase in remote work has allowed for tens of billions of in savings from lower commuting costs, dry-cleaning bills, and other work-related expenses. These savings do not appear in the data as a decrease in the cost of living, but if a worker saves $100 a month from not having to pay commuting costs, it is same thing to their budget as if the cost of commuting fell by $100, although in the case of working from home, they also save the time spent commuting.

In short, the data indicate that most people are far better off financially today than they were before the pandemic. This doesn’t mean that tens of millions of people are not struggling. If a family was at the poverty line in 2019, they would still be struggling today even if their income was 10 percent higher.

However, what we can say is that the data does not give us any reason to believe that more people are struggling now than was the case before the pandemic hit. If we are hearing more stories of struggling families, it is because the media have chosen to give us more stories of struggling families, not because of an actual increase in the number of families who can’t make ends meet. 

The Return of the Seventies: Is It a Wage Price Spiral?

The big fear of those of us old enough to remember the 1970s inflation is that we are on a path to a wage-price spiral. This is a story where higher inflation leads workers to demand (and receive) higher wages, which in turn get passed on in still higher prices. This would be a real problem, since it implies a story of ever higher inflation that is likely only broken by a recession, and possibly a very severe recession, like the ones we saw in 1980-82.

There are reasons for believing that this is not the situation we are now seeing. First, our labor market is very different today than in the 1970s, most obviously because it is far less unionized. In the 1970s, close to 30 percent of the private sector workforce belonged to a union.[2] Today the private sector unionization rate is just over 6.0 percent. For this reason, it is not clear that workers would have the bargaining power to sustain a wage-price spiral.

Many of us don’t consider the decline in unionization rates a good thing, but it is the reality. And, it has consequences. We cannot assume that the labor market of 2022 will respond to higher inflation in the same way as the labor market of the 1970s.

The second reason for believing that we are not seeing the beginnings of a 1970 wage-price spiral is that the current inflation is clearly not wage driven. In the 1970s, we were arguably seeing a real profit squeeze, with corporations having difficulty maintaining their profit margins.

That is not the problem we are seeing today. The capital share (profits plus interest) of net corporate income rose from 24.1 percent in the fourth quarter of 2019 to 26.7 percent in the third quarter of 2021, the most recent quarter for which we have data.[3]

This means that businesses can absorb higher labor costs, without passing them on in higher prices, by simply allowing their profit share to return to its pre-pandemic level. There are shortages of many items at present, which allow for price increases. If we think that these shortages will be overcome as supply chain conditions return to normal, then we should expect profit shares to return to something close to their pre-pandemic levels.

This would be true, unless we think that the pandemic has changed conditions of competition in the economy in some fundamental way that favors capital. This is of course a possibility, but it would be necessary to present an argument as to why it would be the case. Otherwise, we should assume that profit shares in a post-pandemic world won’t be very different than profit shares in a pre-pandemic world. This would allow for a substantial increase in wages that is not passed on in higher prices.

The Uptick in Productivity Growth

An important aspect to the 1970s wage-price spiral was a sharp slowdown in productivity growth. For more than a quarter century, from 1947 to 1973, productivity growth averaged almost 2.5 percent annually. From 1973 to 1980 it averaged less than 1.3 percent annually.[4] The rapid productivity growth in the earlier period allowed for annual increases in real wages of more than 2.0 percent.

This pace of wage growth could not be sustained in a context where productivity was only rising 1.3 percent annually. This meant that if workers sought to secure real wage gains that were close to what they had been seeing over the prior quarter century, it had to lead to either higher inflation or a profit squeeze, or both.

We are currently seeing the opposite situation. Productivity growth averaged less than 0.8 percent annually from the fourth quarter of 2010 to the fourth quarter of 2018. In the last three years, it averaged almost 2.3 percent. This allows for considerable room for real wage gains, without leading to higher inflation. The pace of productivity growth over the last four years means that real wages can be almost 7.0 percent higher now than in the fourth quarter of 2018, without leading to either a profit squeeze or an inflationary spiral.

Given economists’ track record in forecasting productivity growth (the 1973 slowdown was almost entirely unforeseen, as have been subsequent changes in trend growth), it would be foolish to predict the future pace of productivity growth, but there are reasons for believing that a more rapid pace of productivity growth could be sustained.

Specifically, the pandemic has forced many businesses to adopt more efficient ways of operating to deal with both fears of contagion and also the difficulty of finding workers. For example, many restaurants rely much more on on-line ordering, which requires less staff time to process orders. If pandemic-induced efficiencies become adopted more widely, it can mean further gains in productivity.

There also will be gains that affect living standards, that will not be picked up in productivity. At the top of this list would be the savings, noted earlier, in commuting expenses from the increase in the number of jobs where people can work from home. However, there have been other efficiencies, such as increased use of telemedicine or other ways in which people can substitute Internet exchanges for in-person contacts.

Whether or not the more rapid pace of productivity growth of the last three years can be sustained going forward, the jump in productivity over this period provides substantial room for wage gains that need not result in higher prices. This is the opposite of the situation we saw in the 1970s, when productivity growth was not fast enough to sustain the rate of wage growth workers to which workers had become accustomed. This difference doesn’t guarantee that we won’t see wage-price spiral, but it is a reason for believing it’s less likely.

Conclusion: Keep the Anti-Inflation Powder Dry

The Federal Reserve Board has indicated that it will soon begin to raise interest rates. It has already started to reverse course on its quantitative easing. These policies make sense in an economy that is both seeing rapid inflation and relatively low unemployment. At present, it does not need a strong boost from the Fed to reach something close to full employment.

However, there is little basis for the inflation-panic that some have been pushing. There are good reasons to believe that inflation is more likely heading lower than higher. This means the Fed should be cautious in its moves and wait to get a clearer picture of the problem it is facing.

[1] It is important to note that the CPI index misses most of the source of the increase in drug costs since it tracks the prices of drugs already on the market. If a new treatment for heart disease or cancer comes on the market at a very high price, it is not picked up in the index.

[2] The private sector unionization rate is the most relevant variable for the wage-price spiral story. Public sector unions are more constrained in their ability to negotiate over wages, and in any case, their wage increases don’t get directly passed on into price increases.

[3] This calculation excludes indirect business taxes, so it refers to the capital share of the income divided between labor and capital.

[4] The link between productivity growth and wage growth is somewhat more complicated, but productivity growth for the nonfarm business sector is a useful first approximation.

I have to say that I was surprised and disappointed by the data in the January Consumer Price Index. I expected to see evidence that some of the sharp runups in the prices of items like cars, clothes, and appliances were starting to be reversed. The idea was that the main factor in these runups was not higher costs of production, but shipping problems, which were being alleviated.

The basis for the belief that shipping problems were being fixed was both anecdotal accounts in the media and also the big increases in retail inventories reported for December. It seems stores had ordered (and received) lots of stuff they couldn’t sell. This is a context in which we might normally expect prices to fall, or at least not rise further.

That turned out not to be the case. The price index for appliances rose 1.5 percent in January and is now 8.5 percent above its year ago level. The index for apparel rose 1.1 percent in the month putting it 5.3 percent above its year ago level. And, used vehicle prices rose 1.5 percent in January, and are now 40.5 percent above year ago levels. So, there is not much of a story of a turnaround there.

There was also a lot of inflation in items not directly connected to the supply chain. Prescription drug prices jumped 1.3 percent, after being pretty much flat the prior year.[1] The health care insurance index, which measures the operating costs and profits of the industry, rose 2.7 percent, the fourth consecutive month with a rise in excess of 1.0 percent. This follows thirteen consecutive months of declines. And rental inflation appears to be accelerating, with the rent proper index rising 0.5 percent and owners’ equivalent rent going up 0.4 percent in the month.

All in all, this is not a good story. Still there were some positive signs. New car prices were flat in January, suggesting that supply may finally have caught up with demand in the sector. They are still up 12.2 percent over the year. The index for rental cars fell 7.0 percent in January, following a 2.7 percent drop the prior month. This indicates that rental companies have managed to rebuild their fleets and will not be an outsized source of demand for new cars going forward. The index still has a way to drop, it is 29.3 percent above its year ago level.

Also, television prices, which I have treated as a canary in the coal mine, fell another 1.4 percent, their fifth consecutive monthly decline. This mostly reverses a 12.0 percent run-up in television prices between March and August, although they are still 2.4 percent above year ago levels. My expectation is that the price of cars, and many other items, in the months ahead will look a lot like television prices, dropping back to levels that are comparable to where they were before the pandemic.

I’ve been saying that for several months now and it has not yet happened. I still think it will, but we shall see. In the meantime, I want to make three points about the inflation we have been seeing to date:

  • Most people are almost certainly enjoying better living standards than they did before the pandemic, ignoring of course the pandemic itself. In other words, the tales of serious deprivation being seen in the media, while undoubtedly true for many families, are not worse or more frequent than what they would have found in 2019, if they had chosen to look.
  • This inflation, unlike the 1970s inflation, is clearly profit driven, not wage driven. While we could end up with the sort of wage-price spiral we saw in the 1970s, we are not there presently. Businesses have raised prices in response to temporary (hopefully) shortages, which has led to higher profits. These profits can fall back if workers regain their income share.
  • There has been an uptick in productivity growth in the last few years. This is in contrast to the 1970s which saw a sharp slowing in productivity growth. This can allow for both higher real wages and higher profits.

 

Have Living Standards Improved?

Most people get most of their income through wages. This would seem to imply that we just need to look at the pattern in real wages over the last year to determine whether people are better off. However, the circumstances of the pandemic make this more difficult than would usually be the case.

The data for the last year are distorted by two factors directly attributable to the pandemic. The first is a composition effect. In 2020 millions of people lost their jobs. The job losers were concentrated at the lower end of the pay scale, which meant that average wages rose simply due to a composition effect. The average wage of the people who still had jobs in 2020 was higher than the average wage of people who were working in 2019.

In 2021 this composition effect was reversed, with most lower-paid workers getting their jobs back. This lowered the average wage in 2021.

There was also a pandemic price effect. The price of many items, most notably gasoline, fell in 2020 as the recession led to a drop in demand. This was reversed in 2021 as the U.S. and world economy grew rapidly.

For these reasons, taking real wage growth in 2021 in isolation gives a misleading picture of wage growth. The more honest route would be to combine the two years and compare real wages today to where they were two years ago. (I know this overlaps presidential terms, but such is life.)

The real average hourly wage has risen by 2.1 percent compared to its January, 2020 level. (It fell 1.7 percent in the last year.) This means that a typical worker’s pay will go 2.1 percent further now than it did in 2020. If most workers were not suffering severe deprivation at the start of 2020, it is not reasonable to claim that they are today.

 

Source: Bureau of Labor Statistics.

Furthermore, the wage gains look better at points lower down the wage ladder. If we look at the average hourly wage for production and non-supervisory workers, a group that excludes most professionals and managers, it rose by 2.5 over the last two years, after adjusting for inflation. For production and non-supervisory workers in retail, the gain in real wage was 3.2 percent over the last two years.

If we look at the lowest paying sectors, workers secured real wage gains even in 2021. Production and non-supervisory workers in convenience stores had a 10.6 gain in real wages during 2021. In hotels workers had a real wage increase of 8.2 percent over the year, and in restaurants the gain was 9.0 percent.

In short, workers at the lower end of the pay scale have generally been doing well the last two years, in spite of the uptick in inflation. It is also worth noting that many have seen their income increase over the last two years due to the various government payments over this period.

In 2020 and 2021, the government sent out a total of $3,200 per person in pandemic checks to the vast majority of adults, with additional payments for dependent children. Unemployed workers received $600 supplements to their unemployment checks for the months from April of 2020 to August of 2020. They then got supplements of $300 per week from January of 2021 until September of last year. As a result of these supplements, many lower paid workers were receiving as much or more in unemployment benefits as they did when they were working.

The American Recovery Act also included an increase in the child tax credit to $3,000 per child and $3,500 for children under age six. Also, unlike the prior tax credit, this benefit was fully refundable, so even the lowest income family could receive the full benefit of the tax credit. While this program expired at the end of 2021, it did put additional money in the pockets of the families who most needed it.

The general structure of the pandemic relief programs was quite progressive. A $1,200 check means much more to someone earning $20,000 a year, than to someone earning $100,000. The same is the case for the expansion of the child tax credit. As a result of these benefits, and the sharp rise in real wages for those at the bottom, lower income households had far more money in their bank accounts during the pandemic than they had previously. 

While middle and higher-income households may have benefitted less from these pandemic payments, and seen smaller gains in real wages, they are also likely doing better in most cases than before the pandemic. Close to ten million people have taken advantage in the plunge in mortgage interest rates to refinance their mortgages, saving an average of more than $2,800 a year in interest payments. This is a substantial savings for a family earning $100,000 a year.

In addition, higher income households were much more likely to benefit from increased opportunities to work from home. The increase in remote work has allowed for tens of billions of in savings from lower commuting costs, dry-cleaning bills, and other work-related expenses. These savings do not appear in the data as a decrease in the cost of living, but if a worker saves $100 a month from not having to pay commuting costs, it is same thing to their budget as if the cost of commuting fell by $100, although in the case of working from home, they also save the time spent commuting.

In short, the data indicate that most people are far better off financially today than they were before the pandemic. This doesn’t mean that tens of millions of people are not struggling. If a family was at the poverty line in 2019, they would still be struggling today even if their income was 10 percent higher.

However, what we can say is that the data does not give us any reason to believe that more people are struggling now than was the case before the pandemic hit. If we are hearing more stories of struggling families, it is because the media have chosen to give us more stories of struggling families, not because of an actual increase in the number of families who can’t make ends meet. 

The Return of the Seventies: Is It a Wage Price Spiral?

The big fear of those of us old enough to remember the 1970s inflation is that we are on a path to a wage-price spiral. This is a story where higher inflation leads workers to demand (and receive) higher wages, which in turn get passed on in still higher prices. This would be a real problem, since it implies a story of ever higher inflation that is likely only broken by a recession, and possibly a very severe recession, like the ones we saw in 1980-82.

There are reasons for believing that this is not the situation we are now seeing. First, our labor market is very different today than in the 1970s, most obviously because it is far less unionized. In the 1970s, close to 30 percent of the private sector workforce belonged to a union.[2] Today the private sector unionization rate is just over 6.0 percent. For this reason, it is not clear that workers would have the bargaining power to sustain a wage-price spiral.

Many of us don’t consider the decline in unionization rates a good thing, but it is the reality. And, it has consequences. We cannot assume that the labor market of 2022 will respond to higher inflation in the same way as the labor market of the 1970s.

The second reason for believing that we are not seeing the beginnings of a 1970 wage-price spiral is that the current inflation is clearly not wage driven. In the 1970s, we were arguably seeing a real profit squeeze, with corporations having difficulty maintaining their profit margins.

That is not the problem we are seeing today. The capital share (profits plus interest) of net corporate income rose from 24.1 percent in the fourth quarter of 2019 to 26.7 percent in the third quarter of 2021, the most recent quarter for which we have data.[3]

This means that businesses can absorb higher labor costs, without passing them on in higher prices, by simply allowing their profit share to return to its pre-pandemic level. There are shortages of many items at present, which allow for price increases. If we think that these shortages will be overcome as supply chain conditions return to normal, then we should expect profit shares to return to something close to their pre-pandemic levels.

This would be true, unless we think that the pandemic has changed conditions of competition in the economy in some fundamental way that favors capital. This is of course a possibility, but it would be necessary to present an argument as to why it would be the case. Otherwise, we should assume that profit shares in a post-pandemic world won’t be very different than profit shares in a pre-pandemic world. This would allow for a substantial increase in wages that is not passed on in higher prices.

The Uptick in Productivity Growth

An important aspect to the 1970s wage-price spiral was a sharp slowdown in productivity growth. For more than a quarter century, from 1947 to 1973, productivity growth averaged almost 2.5 percent annually. From 1973 to 1980 it averaged less than 1.3 percent annually.[4] The rapid productivity growth in the earlier period allowed for annual increases in real wages of more than 2.0 percent.

This pace of wage growth could not be sustained in a context where productivity was only rising 1.3 percent annually. This meant that if workers sought to secure real wage gains that were close to what they had been seeing over the prior quarter century, it had to lead to either higher inflation or a profit squeeze, or both.

We are currently seeing the opposite situation. Productivity growth averaged less than 0.8 percent annually from the fourth quarter of 2010 to the fourth quarter of 2018. In the last three years, it averaged almost 2.3 percent. This allows for considerable room for real wage gains, without leading to higher inflation. The pace of productivity growth over the last four years means that real wages can be almost 7.0 percent higher now than in the fourth quarter of 2018, without leading to either a profit squeeze or an inflationary spiral.

Given economists’ track record in forecasting productivity growth (the 1973 slowdown was almost entirely unforeseen, as have been subsequent changes in trend growth), it would be foolish to predict the future pace of productivity growth, but there are reasons for believing that a more rapid pace of productivity growth could be sustained.

Specifically, the pandemic has forced many businesses to adopt more efficient ways of operating to deal with both fears of contagion and also the difficulty of finding workers. For example, many restaurants rely much more on on-line ordering, which requires less staff time to process orders. If pandemic-induced efficiencies become adopted more widely, it can mean further gains in productivity.

There also will be gains that affect living standards, that will not be picked up in productivity. At the top of this list would be the savings, noted earlier, in commuting expenses from the increase in the number of jobs where people can work from home. However, there have been other efficiencies, such as increased use of telemedicine or other ways in which people can substitute Internet exchanges for in-person contacts.

Whether or not the more rapid pace of productivity growth of the last three years can be sustained going forward, the jump in productivity over this period provides substantial room for wage gains that need not result in higher prices. This is the opposite of the situation we saw in the 1970s, when productivity growth was not fast enough to sustain the rate of wage growth workers to which workers had become accustomed. This difference doesn’t guarantee that we won’t see wage-price spiral, but it is a reason for believing it’s less likely.

Conclusion: Keep the Anti-Inflation Powder Dry

The Federal Reserve Board has indicated that it will soon begin to raise interest rates. It has already started to reverse course on its quantitative easing. These policies make sense in an economy that is both seeing rapid inflation and relatively low unemployment. At present, it does not need a strong boost from the Fed to reach something close to full employment.

However, there is little basis for the inflation-panic that some have been pushing. There are good reasons to believe that inflation is more likely heading lower than higher. This means the Fed should be cautious in its moves and wait to get a clearer picture of the problem it is facing.

[1] It is important to note that the CPI index misses most of the source of the increase in drug costs since it tracks the prices of drugs already on the market. If a new treatment for heart disease or cancer comes on the market at a very high price, it is not picked up in the index.

[2] The private sector unionization rate is the most relevant variable for the wage-price spiral story. Public sector unions are more constrained in their ability to negotiate over wages, and in any case, their wage increases don’t get directly passed on into price increases.

[3] This calculation excludes indirect business taxes, so it refers to the capital share of the income divided between labor and capital.

[4] The link between productivity growth and wage growth is somewhat more complicated, but productivity growth for the nonfarm business sector is a useful first approximation.

We all know about the Trumpers’ big lie: somehow millions of votes were stolen from their hero, but the liberals were so smart in their steal that Trump’s team can’t produce any evidence. That one rightly draws contempt from anyone not in the cult, but what about the big lie that the vast majority of intellectuals seem to accept?

Regular readers know what I am talking about. The big lie is that the massive rise in inequality over the last four decades was somehow the result of the natural workings of the market. The standard position among policy types is that the rise in inequality was simply the result of the development of technology and the process of globalization.

We saw this view on full display in a generally interesting column in today’s NYT by Thomas Edsall. The piece looks at the growth in support for Trump, and right-wing populism more generally, among non-college educated white workers. It cites a number of academics who identify this development as a result of being left behind by economic developments, while Blacks and other minorities are perceived as having increased opportunities.

The key point, that is repeatedly misrepresented in this piece, is that the harm to the working-class in the last four decades was the result of deliberate policy, not something that just happened. For example, the first quote from an academic tells readers:

Education has emerged as a clear cleavage in addition to more traditional indicators of social class. The highly educated fare better in a more globalized world that puts a premium on human capital.”

Note that we are told as a matter of fact that a globalized world leads to a larger wage premium for more educated workers. This is undoubtedly true when the people designing the course of globalization deliberately structured it to put less-educated workers in rich countries in direct competition with low-paid workers in the developing world.

It would likely not be true if globalization had been designed to put doctors, dentists, lawyers, and other highly paid professionals in direct competition with their lower paid counterparts in the developing world. (Yes, we can have testing requirements to ensure they meet rich countries’ standards. Even elites are smart enough to design mechanisms for accomplishing this task.)[1] In other words, we are given as a fact that globalization had to hurt less-educated workers, as opposed to this outcome being a policy choice by the people who crafted trade agreements over the last four decades.

We get another repetition of the big lie a little further down when Edsall discusses the work of Lee Hartwich, Julia C. Becker, and S. Alexander Haslam which finds that neoliberalism can “reduce well-being by promoting a sense of social disconnection, competition, and loneliness.”

It warns of these harms from exposure to neoliberal ideology, which according to Edsall, “they describe as the belief that ‘economies and societies should be organized along the principles of the free market.’”

Edsall is writing this in the middle of a pandemic which has created dozens of billionaires because of government-granted patent monopolies on vaccines, treatments, and other items needed to combat the pandemic, even as millions lost their jobs and struggled with illness.  

These government-granted monopolies are antithetical to a free market. They are a government policy to promote innovation, and arguably a very poor one in the case of the pandemic. But the more basic point is that it is a lie to claim that the neoliberal ideology described by Hartwich, Becker, and Haslam is one that holds that economies and societies should be organized along the principles of the free market. In fact, the ideology is consistent with all sorts of government interventions that have the effect of redistributing income upward.

On the whole, Edsall’s piece does a very good job laying out evidence that US trade policy has been a major factor in breeding the resentments that have led to the rise of Trump and support for racist and authoritarian policies more generally. But a key feature missing from this discussion is the fact that the worsening of the plight of non-college educated workers, to the benefit of more educated workers, was by design. There was nothing inherent to the logic of globalization or development of technology that led to this outcome.

Perhaps one factor in the resentment of white non-college educated workers is that they are repeatedly lied to about the causes of their relative decline in well-being. It might be good if it was more generally acknowledged that they are faring more poorly because we structured policy so that they would fare more poorly. In other words, it was not something that just happened, it was something the elites did to them.

[1] To preempt an obvious complaint, this need not be a brain drain story where the most educated workers leave developing countries. We can design mechanisms where rich countries share their gains by paying to educate two or three professionals for every one that arrives from a developing country. As it stands, many professionals from developing countries already move to rich countries, but there is no compensation.

We all know about the Trumpers’ big lie: somehow millions of votes were stolen from their hero, but the liberals were so smart in their steal that Trump’s team can’t produce any evidence. That one rightly draws contempt from anyone not in the cult, but what about the big lie that the vast majority of intellectuals seem to accept?

Regular readers know what I am talking about. The big lie is that the massive rise in inequality over the last four decades was somehow the result of the natural workings of the market. The standard position among policy types is that the rise in inequality was simply the result of the development of technology and the process of globalization.

We saw this view on full display in a generally interesting column in today’s NYT by Thomas Edsall. The piece looks at the growth in support for Trump, and right-wing populism more generally, among non-college educated white workers. It cites a number of academics who identify this development as a result of being left behind by economic developments, while Blacks and other minorities are perceived as having increased opportunities.

The key point, that is repeatedly misrepresented in this piece, is that the harm to the working-class in the last four decades was the result of deliberate policy, not something that just happened. For example, the first quote from an academic tells readers:

Education has emerged as a clear cleavage in addition to more traditional indicators of social class. The highly educated fare better in a more globalized world that puts a premium on human capital.”

Note that we are told as a matter of fact that a globalized world leads to a larger wage premium for more educated workers. This is undoubtedly true when the people designing the course of globalization deliberately structured it to put less-educated workers in rich countries in direct competition with low-paid workers in the developing world.

It would likely not be true if globalization had been designed to put doctors, dentists, lawyers, and other highly paid professionals in direct competition with their lower paid counterparts in the developing world. (Yes, we can have testing requirements to ensure they meet rich countries’ standards. Even elites are smart enough to design mechanisms for accomplishing this task.)[1] In other words, we are given as a fact that globalization had to hurt less-educated workers, as opposed to this outcome being a policy choice by the people who crafted trade agreements over the last four decades.

We get another repetition of the big lie a little further down when Edsall discusses the work of Lee Hartwich, Julia C. Becker, and S. Alexander Haslam which finds that neoliberalism can “reduce well-being by promoting a sense of social disconnection, competition, and loneliness.”

It warns of these harms from exposure to neoliberal ideology, which according to Edsall, “they describe as the belief that ‘economies and societies should be organized along the principles of the free market.’”

Edsall is writing this in the middle of a pandemic which has created dozens of billionaires because of government-granted patent monopolies on vaccines, treatments, and other items needed to combat the pandemic, even as millions lost their jobs and struggled with illness.  

These government-granted monopolies are antithetical to a free market. They are a government policy to promote innovation, and arguably a very poor one in the case of the pandemic. But the more basic point is that it is a lie to claim that the neoliberal ideology described by Hartwich, Becker, and Haslam is one that holds that economies and societies should be organized along the principles of the free market. In fact, the ideology is consistent with all sorts of government interventions that have the effect of redistributing income upward.

On the whole, Edsall’s piece does a very good job laying out evidence that US trade policy has been a major factor in breeding the resentments that have led to the rise of Trump and support for racist and authoritarian policies more generally. But a key feature missing from this discussion is the fact that the worsening of the plight of non-college educated workers, to the benefit of more educated workers, was by design. There was nothing inherent to the logic of globalization or development of technology that led to this outcome.

Perhaps one factor in the resentment of white non-college educated workers is that they are repeatedly lied to about the causes of their relative decline in well-being. It might be good if it was more generally acknowledged that they are faring more poorly because we structured policy so that they would fare more poorly. In other words, it was not something that just happened, it was something the elites did to them.

[1] To preempt an obvious complaint, this need not be a brain drain story where the most educated workers leave developing countries. We can design mechanisms where rich countries share their gains by paying to educate two or three professionals for every one that arrives from a developing country. As it stands, many professionals from developing countries already move to rich countries, but there is no compensation.

It seems that businesses ordered more goods than they can sell. (Seriously, this is what the piece says.) In the old days, we might have thought that too many goods, with too few buyers, might have meant lower prices. But Marketplace tells us that businesses don’t want to take losses with big price cuts, so they will just store the stuff in warehouses.

Unfortunately, there is a shortage of warehouse space (even with the supply chain problems), so the price of storage is skyrocketing. So, the net effect is further cost pressure, along with higher labor costs.

The bad news just keeps coming.

It seems that businesses ordered more goods than they can sell. (Seriously, this is what the piece says.) In the old days, we might have thought that too many goods, with too few buyers, might have meant lower prices. But Marketplace tells us that businesses don’t want to take losses with big price cuts, so they will just store the stuff in warehouses.

Unfortunately, there is a shortage of warehouse space (even with the supply chain problems), so the price of storage is skyrocketing. So, the net effect is further cost pressure, along with higher labor costs.

The bad news just keeps coming.

With inflation remaining stubbornly high for longer than I, and many others, expected, I want to take another stab at the argument of the inflation hawks. As a jumping off point, I will use the argument put forward by Larry Summers and Jason Furman, probably the two most prominent and coherent economists arguing that we have underestimated the risks of persistently high inflation.[1]

There are three main components to the Summers-Furman (SF) argument. (Their arguments are not identical, so I’m being a bit unfair to both in trying to mash them together.)  The first is that the Biden administration provided excessive stimulus to the economy with the American Recovery Act (ARA) passed by Congress last February. They argue that demand for goods and services far exceeded the economy’s ability to supply them, leading to a sharp uptick in the rate of inflation.

Second, the SF position is that this jump in inflation has unmoored inflationary expectations. While households and businesses had long come to expect low and stable inflation, the surge in inflation we saw in the last year has changed people’s expectations. Just to be clear, this is more Summers’s concern than Furman’s. Also, he views this as a serious risk, but not a necessary outcome from the current situation.

If expectations become unmoored, inflation will be self-perpetuating. Workers will demand higher wages in the expectation that inflation will remain high. Employers who share this expectation will be prepared to pay higher wages, which they will then pass on in higher prices. This will lead to a wage-price spiral like what we saw in the 1970s.

The third key component of the SF argument is that we continue to operate the economy above its potential, adding to inflationary pressures. To prevent further acceleration of inflation we will need to reduce demand in the economy, either with aggressive interest rate hikes from the Fed or contractionary fiscal policy, or some combination.

I’ll take each of these in turn.

Did the ARA Spur Inflation?

The answer to this one is obviously yes. If we had a less ambitious stimulus package, the current inflation rate would almost certainly be lower. But we did get a lot from the ARA, along with the previous CARES Acts passed by Congress in 2020.

These pandemic packages shielded the bulk of the population from the economic effects of the pandemic and the shutdowns. In fact, large portions of the population saw their economic prospects actually improve during the pandemic. J.P. Morgan reports that most households have more money in their bank accounts now than they did before the pandemic, with the lowest income households being the biggest gainers in percentage terms.

The expansion of the child tax credit cut the child poverty rate in half and would likely lead to long-term gains for children in low- and moderate-income families, if left in place. And, the ARA provided a huge boost to the labor market. The 3.9 percent December unemployment rate is close to full employment. The biggest gainers from this tight labor market are lower paid workers who are seeing rapid wage increases. They feel the freedom to quit their jobs and seek out new ones in unprecedented numbers.

While it is undeniable that there were major benefits from the ARA, the question is what price did we pay in higher inflation. The answer is not entirely clear. Inflation has jumped pretty much everywhere in 2021 as the world economy reopened. The 7.0 percent year-over-year rate in the Consumer Price Index (CPI) is higher than for other countries, but not hugely so. The rise in Canada was 4.8 percent, in Germany 5.3 percent, and in the United Kingdom 5.4 percent.

The fact that inflation rose almost everywhere indicates that the United States would have seen a jump in its inflation rate even without the aggressive stimulus in the ARA. The rise is attributable to supply disruptions associated with the rapid reopening from pandemic shutdowns. The price of a wide range of commodities soared in 2021, although in many cases, they have recently fallen back to pre-pandemic levels.

In addition, we have seen a rise in the price of many manufactured products due to supply chain disruptions. This is also partly a result of the worldwide reopening and a massive shift in consumer demand from services to goods. People who couldn’t or wouldn’t go to restaurants or travel because of the pandemic instead bought cars, appliances, and other goods. The flood in demand was more than our supply chains could deliver. (Furman points out this shift to goods was much larger in the US than elsewhere, which he attributes to the size of the stimulus.) As a result, prices of a wide range of products soared.

While this happened everywhere, there seems to have been less of an impact in other countries. Jason Furman compared the core harmonized CPI in the eurozone with the core harmonized CPI over the last two years. He finds a jump of roughly two and a half percentage points in the average annual inflation rate over the last two years in this core index for the United States, compared to roughly half a percentage point for the eurozone. This suggests that the inflation from reopening in the US was far more than in Europe.

This view is complicated somewhat by the issue with new and used vehicles. These two components added 1.5 percentage points to the overall inflation rate in 2021 and 1.9 percentage points to the core rate. (In 2020, the vehicle contribution to inflation was 0.3 percentage points overall and 0.4 percentage points in the core.) This means that if we pulled out vehicles, most of the gap in the rise inflation rates would disappear.

The cause for the huge jump in vehicle prices is primarily a shortage of semiconductors due to a fire in a Japanese factory, not excessive demand. We would likely have seen a sharp jump in vehicle prices even without any major stimulus from the ARA.

Of course, pulling out vehicles does not make for an entirely apples-to-apples comparison. The European Union countries buy cars too, although their weight in the index is likely far lower than in the US. One important item to note is that the CPI uses a gross rather than net measure for used car sales to determine their weight in the index.[2] The difference is the money that is paid to households for selling their used cars.

As a result, the weight of used vehicles is far higher in the CPI than in the personal consumption expenditure deflator (PCE), which uses the net measure. In December of 2021, the CPI weight was 3.42 percent. By contrast, used vehicles had a weight of 1.65 percent in the PCE for November, the most recent month available.

Ordinarily, this difference would not matter much, but when used vehicles are rising at an annual rate of 37.3 percent, it matters. The use of the gross sales weighting added 0.4 percentage point to the overall CPI in 2021 and 0.5 percentage point to the core measure.

The takeaway is that taking out vehicles would pull out some of the difference in the jump in core inflation rates that Furman shows, but not all of it. The rise in vehicle prices added roughly 1.2 percentage points to the average core inflation rate over the last two years. If we say that the weight in the EU index is half as large, then this would explain 0.6 percentage points of the gap, leaving roughly 1.4 percentage points to be explained by other factors. With the core CPI accounting for just under 80 percent of the overall index, this would imply that roughly 1.1 percentage points of the higher inflation rate in the US is attributable to factors that are not common to the EU and the US.

To sum up, it’s clear that we would have seen a jump in the inflation rate in 2021 due to the economy reopening, even without the boost from the ARA. The data from the EU, where most countries did not have a comparable stimulus package, implies that the increase in the inflation rate would have been 1.0 to 2.0 percentage points less if we did not have a major stimulus/recovery package in 2021.

Expectations

Far more important than the causes of the inflation in 2021 is the question of its impact on expectations of future inflation. If the economy is to see a 1970s wage-price spiral, it would mean that people had come to expect that high inflation will persist, rather than being just a one-time jump. This does not seem to be the case.

The breakeven inflation rates for inflation-indexed bonds and standard Treasury bonds have risen only modestly. As of January 26, the breakeven inflation rate for the 10-year Treasury bonds was 2.4 percent. This is roughly 0.2 percentage points higher than the peaks in 2018, a period when few people were worried about runaway inflation. Given the differences between the CPI and core PCE that the Federal Reserve Board targets, it is also roughly consistent with the Fed’s long-run 2.0 percent average inflation target.

The breakeven rate for 5-year Treasury bonds was 2.78 percent, this compares to 2018 peaks of 2.15 percent. The higher breakeven rate for the 5-year Treasury bonds is primarily due to the high current inflation rate. However, it is very much consistent with the expectation that inflation will quickly be falling back to the rates we had been seeing prior to the pandemic.

These breakeven rates are very important for the argument that expectations of inflation have become unmoored since the financial markets are daily giving us a measure of what investors expect. Financial markets can, of course, be wrong, as was the case with the stock bubble in the 1990s and the housing bubbles in the 2000s, but the question here is what is expected, not what the future will actually hold.

It is hard to believe that the people investing in financial markets hold qualitatively different views about inflation than the people running businesses, who are making decisions on wage increases and prices. There is a huge amount of overlap in these groups, and they are in constant contact. If expectations of inflation had become unmoored, we should be seeing more evidence of this fact in the bond market.

In this respect, it’s worth noting that the breakeven rates are not even moving in the right direction for this view. The 5-year breakeven rate peaked at almost 3.2 percent in mid-November and has since then trended downward. The breakeven rate on the 10-year Treasury peaked at over 2.7 percent at roughly the same time. This means that the additional data on inflation over the last two months has not contributed to rising expectations of inflation.

There is an important qualification to this trend in inflation expectations. The Fed has begun to take a notably more aggressive stance towards inflation over this period, with a high probability of multiple interest rates hikes in 2022. This change in stance likely helped to reduce inflationary expectations, but it still implies that financial markets are confident that, with the expected course of Fed actions, inflation will remain contained.  

There is one other point worth noting on the expectations issue. In the 1970s, the dollar fell in value against the currencies of our trading partners. In a simple story, where everything else is held equal, we would expect the value of the dollar to fall if our inflation rate exceeds the inflation rate of our trading partners.

The idea is that if inflation is 10 percentage points higher in the US over the next five years than in the eurozone, then we would expect the dollar to fall by roughly 10 percent against the euro to maintain the relative price differentials between goods produced in the US and Europe. The real world is, of course, much more complicated, and there are large divergences in currency values from what would be needed to maintain this sort of purchasing power parity.

However, it is worth noting that the value of the dollar has risen sharply over the last year, rising more than 6.0 percent against the euro. This rise is hardly conclusive, but it does not indicate investors expect inflation in the US to far exceed inflation in the eurozone over the near-term future.

Are We Above Potential GDP?

The final key issue is whether the economy is currently operating above its potential and therefore, likely to be subject to additional inflationary pressures going forward, rather than just facing the risk that the inflation from 2021 is being locked in due to expectations. The basic argument for being above potential is that GDP in the fourth quarter was 3.1 percent above the level in the fourth quarter of 2019, even though we have 2.9 million fewer people working. If we were producing near the economy’s potential in 2019, then we must be above it now.

A closer look shows a more ambiguous picture. While employment is down by 1.8 percent from the fourth quarter of 2019, hours worked have fallen much less. The index of aggregate hours from the establishment survey was down just 0.7 percent from its level in the fourth quarter of 2019. The reason for the difference is an increase in the length of the average workweek from 34.3 hours in the fourth quarter of 2019 to 34.7 hours in the fourth quarter of last year.

It could be argued that this increase in average hours is not sustainable, that people will come to resent working extra hours and stop doing it. However, there is a big factor arguing in the opposite direction. Spencer Hill, in an analysis for Goldman Sachs, calculates that the increase in people working from home is saving 600 million hours a month in commuting time.[3] This translates into an average per worker savings in commuting time of 3.8 hours a month, or 0.9 hours per week. The rise of 0.4 hours in the length of the average workweek comes to less than half of this savings.

There are huge differences in hours and work experiences across the workforce, but it hardly seems implausible that a worker who formerly spent 8 to 10 hours a week commuting would be entirely comfortable putting in 4 to 5 more hours each week working at home than they did previously at the office. The extent to which time saved commuting translates into increased hours of work remains to be seen (as opposed to more leisure), but presumably it is not zero.

We also need to make an adjustment to the hours index for the increase in the number of people who report being self-employed and therefore are not counted in the establishment data. This figure was almost 400,000 higher (combining incorporated and non-incorporated self-employed) in the fourth quarter of 2021 than the fourth quarter of 2019. If we assume the self-employed put in the same number of hours on average as payroll employees, this reduces the drop in total hours over these two years to just 0.4 percent.

With GDP 3.1 percent higher than in the fourth quarter of 2019 and hours worked 0.4 percent lower, the implied increase in productivity is 3.5 percent. That implies annual productivity growth of a bit less than 1.8 percent. This is higher than the 1.5 percent annual rate in the three years prior to the pandemic, but not hugely so.

It is also possible to identify efficiency gains associated with the pandemic that could account for more rapid productivity growth in the last two years. At the top of this list is business travel. The money spent on business travel in the United States fell from $291 billion in 2019 to $131 billion in 2020, and then rebounded slightly to $157 billion in 2021.   

Business travel is, in effect, an expense of doing business, like the steel used to construct an office building or the energy used to power a factory. If companies can produce the same output with less business travel, it is effectively an increase in productivity, just as if they needed less steel to put up a building or less energy to operate their factories.

While it may be the case that businesses are actually less productive as a result of the decline in business travel, it is reasonable to believe that this is not the case. As it stands, we are producing a slightly higher level of GDP with much less business travel. (It’s possible there will be some long-term effect where we see smaller productivity gains in future years because of less person-to-person contact, but we’ll have to hold off in assessing that one.)

Anyhow, it might go against our economist instincts to think that companies would needlessly waste money sending their employees flying around the country and the world, but it is at least possible that this is the case. If we treat the reduction in travel as eliminating waste, then we went from spending 1.5 percent of GDP on business travel to 0.8 percent of GDP in 2021, implying a gain in productivity from this pandemic induced innovation of 0.7 percentage points, equivalent to 0.4 percentage points of annual growth over the last two years. This change alone could fill the gap between the implied productivity growth of the last two years and the average rate for the three years prior to the pandemic.[4]

While there are big question marks here on the extent to which longer hours can be maintained and the impact of reduced business travel on longer term productivity, it is at least plausible that these factors can allow for the increase in output we have seen over the last two years without overburdening the economy.

It is also worth mentioning that we will likely see further gains in labor supply if we can bring the pandemic under control. In December, 1.1 million people reported that they were not working or looking for work because of the pandemic. They were either sick with COVID-19, caring for a family member who was sick, or worried about catching the disease. If the pandemic is brought under control, most of these people will presumably come back into the labor market. We also see many people unable to work for part of the month, because they had COVID-19 or had to care for family members who were sick.

If we can bring the pandemic under control in the months ahead, it should lead to a substantial expansion in the labor supply. It will also be good for people’s health and lives.

The Path Forward: Back to Normal

While it is difficult to know when the supply chain problems will ease, it is not hard to identify their impact. The Bureau of Labor Statistics reports that the price index for final demand for transportation and warehousing services rose 16.6 percent last year. This is a cost that gets factored into the price of just about everything.

One example that shows the impact clearly is apparel. The index for apparel prices in the CPI rose 5.8 percent last year. The overwhelming majority of our apparel is imported, most of it from developing countries like China and Bangladesh. The index for the price of imports of apparel rose by 1.5 percent over the last year.

Presumably, most of the 4.3 percentage gap between the CPI index and the import price index is explained by higher transportation costs. If we can expect that at some point in 2022 that these supply chain problems will be overcome, then not only will apparel prices stop rising, but much of their increase in the last year will be reversed.

That should not sound far-fetched. We already have a great example where we saw exactly this sort of story. Television prices fell 6.5 percent from August to December after rising 10.2 percent from March to August. Prior to their run-up in the spring and summer, the index for television prices had been consistently falling for decades.

It seems plausible that there will be many other items, most notably new and used vehicles, where we will see a similar price trajectory to what we saw with televisions. The price increases of the last year may not be fully reversed, but it is more likely that the price of many of these items will be going down in 2022 rather than rising further.

Clearly, much hinges on getting this story right. No one would want to see the sort of wage-price spiral that we saw in the 1970s. But, we also don’t want to see anything like the surge in unemployment from the 1981–82 recession, especially if it’s intended to combat an inflation problem that does not exist.

[1] Jason Furman and Larry Summers gave me very useful comments on an earlier draft of this post.

[2] The Bureau of Labor Statistics article on the harmonized index just gives an aggregate weight for transportation. It appears that the harmonized index applies the gross measure for the United States, although it is not clear from the article which weight is used since the transportation index doesn’t match up with the category in the CPI news release.

[3] Goldman Sachs, 2022. “U.S. Economics Analyst: Productivity Gains Will Outlast the Pandemic,” January 16,2022.

[4] To make this entirely comparable, we would need to also take account of increased spending on Zoom and other services that were needed as a result of the increase in people working from home.

With inflation remaining stubbornly high for longer than I, and many others, expected, I want to take another stab at the argument of the inflation hawks. As a jumping off point, I will use the argument put forward by Larry Summers and Jason Furman, probably the two most prominent and coherent economists arguing that we have underestimated the risks of persistently high inflation.[1]

There are three main components to the Summers-Furman (SF) argument. (Their arguments are not identical, so I’m being a bit unfair to both in trying to mash them together.)  The first is that the Biden administration provided excessive stimulus to the economy with the American Recovery Act (ARA) passed by Congress last February. They argue that demand for goods and services far exceeded the economy’s ability to supply them, leading to a sharp uptick in the rate of inflation.

Second, the SF position is that this jump in inflation has unmoored inflationary expectations. While households and businesses had long come to expect low and stable inflation, the surge in inflation we saw in the last year has changed people’s expectations. Just to be clear, this is more Summers’s concern than Furman’s. Also, he views this as a serious risk, but not a necessary outcome from the current situation.

If expectations become unmoored, inflation will be self-perpetuating. Workers will demand higher wages in the expectation that inflation will remain high. Employers who share this expectation will be prepared to pay higher wages, which they will then pass on in higher prices. This will lead to a wage-price spiral like what we saw in the 1970s.

The third key component of the SF argument is that we continue to operate the economy above its potential, adding to inflationary pressures. To prevent further acceleration of inflation we will need to reduce demand in the economy, either with aggressive interest rate hikes from the Fed or contractionary fiscal policy, or some combination.

I’ll take each of these in turn.

Did the ARA Spur Inflation?

The answer to this one is obviously yes. If we had a less ambitious stimulus package, the current inflation rate would almost certainly be lower. But we did get a lot from the ARA, along with the previous CARES Acts passed by Congress in 2020.

These pandemic packages shielded the bulk of the population from the economic effects of the pandemic and the shutdowns. In fact, large portions of the population saw their economic prospects actually improve during the pandemic. J.P. Morgan reports that most households have more money in their bank accounts now than they did before the pandemic, with the lowest income households being the biggest gainers in percentage terms.

The expansion of the child tax credit cut the child poverty rate in half and would likely lead to long-term gains for children in low- and moderate-income families, if left in place. And, the ARA provided a huge boost to the labor market. The 3.9 percent December unemployment rate is close to full employment. The biggest gainers from this tight labor market are lower paid workers who are seeing rapid wage increases. They feel the freedom to quit their jobs and seek out new ones in unprecedented numbers.

While it is undeniable that there were major benefits from the ARA, the question is what price did we pay in higher inflation. The answer is not entirely clear. Inflation has jumped pretty much everywhere in 2021 as the world economy reopened. The 7.0 percent year-over-year rate in the Consumer Price Index (CPI) is higher than for other countries, but not hugely so. The rise in Canada was 4.8 percent, in Germany 5.3 percent, and in the United Kingdom 5.4 percent.

The fact that inflation rose almost everywhere indicates that the United States would have seen a jump in its inflation rate even without the aggressive stimulus in the ARA. The rise is attributable to supply disruptions associated with the rapid reopening from pandemic shutdowns. The price of a wide range of commodities soared in 2021, although in many cases, they have recently fallen back to pre-pandemic levels.

In addition, we have seen a rise in the price of many manufactured products due to supply chain disruptions. This is also partly a result of the worldwide reopening and a massive shift in consumer demand from services to goods. People who couldn’t or wouldn’t go to restaurants or travel because of the pandemic instead bought cars, appliances, and other goods. The flood in demand was more than our supply chains could deliver. (Furman points out this shift to goods was much larger in the US than elsewhere, which he attributes to the size of the stimulus.) As a result, prices of a wide range of products soared.

While this happened everywhere, there seems to have been less of an impact in other countries. Jason Furman compared the core harmonized CPI in the eurozone with the core harmonized CPI over the last two years. He finds a jump of roughly two and a half percentage points in the average annual inflation rate over the last two years in this core index for the United States, compared to roughly half a percentage point for the eurozone. This suggests that the inflation from reopening in the US was far more than in Europe.

This view is complicated somewhat by the issue with new and used vehicles. These two components added 1.5 percentage points to the overall inflation rate in 2021 and 1.9 percentage points to the core rate. (In 2020, the vehicle contribution to inflation was 0.3 percentage points overall and 0.4 percentage points in the core.) This means that if we pulled out vehicles, most of the gap in the rise inflation rates would disappear.

The cause for the huge jump in vehicle prices is primarily a shortage of semiconductors due to a fire in a Japanese factory, not excessive demand. We would likely have seen a sharp jump in vehicle prices even without any major stimulus from the ARA.

Of course, pulling out vehicles does not make for an entirely apples-to-apples comparison. The European Union countries buy cars too, although their weight in the index is likely far lower than in the US. One important item to note is that the CPI uses a gross rather than net measure for used car sales to determine their weight in the index.[2] The difference is the money that is paid to households for selling their used cars.

As a result, the weight of used vehicles is far higher in the CPI than in the personal consumption expenditure deflator (PCE), which uses the net measure. In December of 2021, the CPI weight was 3.42 percent. By contrast, used vehicles had a weight of 1.65 percent in the PCE for November, the most recent month available.

Ordinarily, this difference would not matter much, but when used vehicles are rising at an annual rate of 37.3 percent, it matters. The use of the gross sales weighting added 0.4 percentage point to the overall CPI in 2021 and 0.5 percentage point to the core measure.

The takeaway is that taking out vehicles would pull out some of the difference in the jump in core inflation rates that Furman shows, but not all of it. The rise in vehicle prices added roughly 1.2 percentage points to the average core inflation rate over the last two years. If we say that the weight in the EU index is half as large, then this would explain 0.6 percentage points of the gap, leaving roughly 1.4 percentage points to be explained by other factors. With the core CPI accounting for just under 80 percent of the overall index, this would imply that roughly 1.1 percentage points of the higher inflation rate in the US is attributable to factors that are not common to the EU and the US.

To sum up, it’s clear that we would have seen a jump in the inflation rate in 2021 due to the economy reopening, even without the boost from the ARA. The data from the EU, where most countries did not have a comparable stimulus package, implies that the increase in the inflation rate would have been 1.0 to 2.0 percentage points less if we did not have a major stimulus/recovery package in 2021.

Expectations

Far more important than the causes of the inflation in 2021 is the question of its impact on expectations of future inflation. If the economy is to see a 1970s wage-price spiral, it would mean that people had come to expect that high inflation will persist, rather than being just a one-time jump. This does not seem to be the case.

The breakeven inflation rates for inflation-indexed bonds and standard Treasury bonds have risen only modestly. As of January 26, the breakeven inflation rate for the 10-year Treasury bonds was 2.4 percent. This is roughly 0.2 percentage points higher than the peaks in 2018, a period when few people were worried about runaway inflation. Given the differences between the CPI and core PCE that the Federal Reserve Board targets, it is also roughly consistent with the Fed’s long-run 2.0 percent average inflation target.

The breakeven rate for 5-year Treasury bonds was 2.78 percent, this compares to 2018 peaks of 2.15 percent. The higher breakeven rate for the 5-year Treasury bonds is primarily due to the high current inflation rate. However, it is very much consistent with the expectation that inflation will quickly be falling back to the rates we had been seeing prior to the pandemic.

These breakeven rates are very important for the argument that expectations of inflation have become unmoored since the financial markets are daily giving us a measure of what investors expect. Financial markets can, of course, be wrong, as was the case with the stock bubble in the 1990s and the housing bubbles in the 2000s, but the question here is what is expected, not what the future will actually hold.

It is hard to believe that the people investing in financial markets hold qualitatively different views about inflation than the people running businesses, who are making decisions on wage increases and prices. There is a huge amount of overlap in these groups, and they are in constant contact. If expectations of inflation had become unmoored, we should be seeing more evidence of this fact in the bond market.

In this respect, it’s worth noting that the breakeven rates are not even moving in the right direction for this view. The 5-year breakeven rate peaked at almost 3.2 percent in mid-November and has since then trended downward. The breakeven rate on the 10-year Treasury peaked at over 2.7 percent at roughly the same time. This means that the additional data on inflation over the last two months has not contributed to rising expectations of inflation.

There is an important qualification to this trend in inflation expectations. The Fed has begun to take a notably more aggressive stance towards inflation over this period, with a high probability of multiple interest rates hikes in 2022. This change in stance likely helped to reduce inflationary expectations, but it still implies that financial markets are confident that, with the expected course of Fed actions, inflation will remain contained.  

There is one other point worth noting on the expectations issue. In the 1970s, the dollar fell in value against the currencies of our trading partners. In a simple story, where everything else is held equal, we would expect the value of the dollar to fall if our inflation rate exceeds the inflation rate of our trading partners.

The idea is that if inflation is 10 percentage points higher in the US over the next five years than in the eurozone, then we would expect the dollar to fall by roughly 10 percent against the euro to maintain the relative price differentials between goods produced in the US and Europe. The real world is, of course, much more complicated, and there are large divergences in currency values from what would be needed to maintain this sort of purchasing power parity.

However, it is worth noting that the value of the dollar has risen sharply over the last year, rising more than 6.0 percent against the euro. This rise is hardly conclusive, but it does not indicate investors expect inflation in the US to far exceed inflation in the eurozone over the near-term future.

Are We Above Potential GDP?

The final key issue is whether the economy is currently operating above its potential and therefore, likely to be subject to additional inflationary pressures going forward, rather than just facing the risk that the inflation from 2021 is being locked in due to expectations. The basic argument for being above potential is that GDP in the fourth quarter was 3.1 percent above the level in the fourth quarter of 2019, even though we have 2.9 million fewer people working. If we were producing near the economy’s potential in 2019, then we must be above it now.

A closer look shows a more ambiguous picture. While employment is down by 1.8 percent from the fourth quarter of 2019, hours worked have fallen much less. The index of aggregate hours from the establishment survey was down just 0.7 percent from its level in the fourth quarter of 2019. The reason for the difference is an increase in the length of the average workweek from 34.3 hours in the fourth quarter of 2019 to 34.7 hours in the fourth quarter of last year.

It could be argued that this increase in average hours is not sustainable, that people will come to resent working extra hours and stop doing it. However, there is a big factor arguing in the opposite direction. Spencer Hill, in an analysis for Goldman Sachs, calculates that the increase in people working from home is saving 600 million hours a month in commuting time.[3] This translates into an average per worker savings in commuting time of 3.8 hours a month, or 0.9 hours per week. The rise of 0.4 hours in the length of the average workweek comes to less than half of this savings.

There are huge differences in hours and work experiences across the workforce, but it hardly seems implausible that a worker who formerly spent 8 to 10 hours a week commuting would be entirely comfortable putting in 4 to 5 more hours each week working at home than they did previously at the office. The extent to which time saved commuting translates into increased hours of work remains to be seen (as opposed to more leisure), but presumably it is not zero.

We also need to make an adjustment to the hours index for the increase in the number of people who report being self-employed and therefore are not counted in the establishment data. This figure was almost 400,000 higher (combining incorporated and non-incorporated self-employed) in the fourth quarter of 2021 than the fourth quarter of 2019. If we assume the self-employed put in the same number of hours on average as payroll employees, this reduces the drop in total hours over these two years to just 0.4 percent.

With GDP 3.1 percent higher than in the fourth quarter of 2019 and hours worked 0.4 percent lower, the implied increase in productivity is 3.5 percent. That implies annual productivity growth of a bit less than 1.8 percent. This is higher than the 1.5 percent annual rate in the three years prior to the pandemic, but not hugely so.

It is also possible to identify efficiency gains associated with the pandemic that could account for more rapid productivity growth in the last two years. At the top of this list is business travel. The money spent on business travel in the United States fell from $291 billion in 2019 to $131 billion in 2020, and then rebounded slightly to $157 billion in 2021.   

Business travel is, in effect, an expense of doing business, like the steel used to construct an office building or the energy used to power a factory. If companies can produce the same output with less business travel, it is effectively an increase in productivity, just as if they needed less steel to put up a building or less energy to operate their factories.

While it may be the case that businesses are actually less productive as a result of the decline in business travel, it is reasonable to believe that this is not the case. As it stands, we are producing a slightly higher level of GDP with much less business travel. (It’s possible there will be some long-term effect where we see smaller productivity gains in future years because of less person-to-person contact, but we’ll have to hold off in assessing that one.)

Anyhow, it might go against our economist instincts to think that companies would needlessly waste money sending their employees flying around the country and the world, but it is at least possible that this is the case. If we treat the reduction in travel as eliminating waste, then we went from spending 1.5 percent of GDP on business travel to 0.8 percent of GDP in 2021, implying a gain in productivity from this pandemic induced innovation of 0.7 percentage points, equivalent to 0.4 percentage points of annual growth over the last two years. This change alone could fill the gap between the implied productivity growth of the last two years and the average rate for the three years prior to the pandemic.[4]

While there are big question marks here on the extent to which longer hours can be maintained and the impact of reduced business travel on longer term productivity, it is at least plausible that these factors can allow for the increase in output we have seen over the last two years without overburdening the economy.

It is also worth mentioning that we will likely see further gains in labor supply if we can bring the pandemic under control. In December, 1.1 million people reported that they were not working or looking for work because of the pandemic. They were either sick with COVID-19, caring for a family member who was sick, or worried about catching the disease. If the pandemic is brought under control, most of these people will presumably come back into the labor market. We also see many people unable to work for part of the month, because they had COVID-19 or had to care for family members who were sick.

If we can bring the pandemic under control in the months ahead, it should lead to a substantial expansion in the labor supply. It will also be good for people’s health and lives.

The Path Forward: Back to Normal

While it is difficult to know when the supply chain problems will ease, it is not hard to identify their impact. The Bureau of Labor Statistics reports that the price index for final demand for transportation and warehousing services rose 16.6 percent last year. This is a cost that gets factored into the price of just about everything.

One example that shows the impact clearly is apparel. The index for apparel prices in the CPI rose 5.8 percent last year. The overwhelming majority of our apparel is imported, most of it from developing countries like China and Bangladesh. The index for the price of imports of apparel rose by 1.5 percent over the last year.

Presumably, most of the 4.3 percentage gap between the CPI index and the import price index is explained by higher transportation costs. If we can expect that at some point in 2022 that these supply chain problems will be overcome, then not only will apparel prices stop rising, but much of their increase in the last year will be reversed.

That should not sound far-fetched. We already have a great example where we saw exactly this sort of story. Television prices fell 6.5 percent from August to December after rising 10.2 percent from March to August. Prior to their run-up in the spring and summer, the index for television prices had been consistently falling for decades.

It seems plausible that there will be many other items, most notably new and used vehicles, where we will see a similar price trajectory to what we saw with televisions. The price increases of the last year may not be fully reversed, but it is more likely that the price of many of these items will be going down in 2022 rather than rising further.

Clearly, much hinges on getting this story right. No one would want to see the sort of wage-price spiral that we saw in the 1970s. But, we also don’t want to see anything like the surge in unemployment from the 1981–82 recession, especially if it’s intended to combat an inflation problem that does not exist.

[1] Jason Furman and Larry Summers gave me very useful comments on an earlier draft of this post.

[2] The Bureau of Labor Statistics article on the harmonized index just gives an aggregate weight for transportation. It appears that the harmonized index applies the gross measure for the United States, although it is not clear from the article which weight is used since the transportation index doesn’t match up with the category in the CPI news release.

[3] Goldman Sachs, 2022. “U.S. Economics Analyst: Productivity Gains Will Outlast the Pandemic,” January 16,2022.

[4] To make this entirely comparable, we would need to also take account of increased spending on Zoom and other services that were needed as a result of the increase in people working from home.

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