• Economic Crisis and RecoveryCrisis económica y recuperación
A popular line on our recent surge of inflation is that an over-tight labor market has led to rapid wage growth, which in turn is forcing companies to raise prices. Higher prices will lead workers to demand higher wages, which will give us a wage-price spiral and soon lead to double-digit inflation.
While this was a story that plausibly fit the data in the 1970s, it is very hard to make the wage-price spiral fit the current situation for a simple reason: the wage share of income has fallen sharply since the pandemic.
Here’s the picture.
Source: Bureau of Economic Analysis.
As can be seen, the wage share of corporate income had been recovering gradually from the troughs it hit following the Great Recession in 2014.[1] However, we see a sharp reversal in 2021, with the wage share falling from 76.1 percent to 73.7 percent, a decline of 2.4 percentage points.
Perhaps some economists can tell a story where rapid wage growth is driving inflation even as the wage share of income is falling, but I’m not that good an economist. This still looks to me like a case where supply-side disruptions, associated with the reopening from the pandemic and the war in Ukraine are driving inflation.
This view is consistent with the fact that year-over-year inflation in the European Union was 7.5 percent as of March. The EU countries did not have as big a stimulus as the United States and by most measures its labor market is not as tight.
[1] Wage share actually refers to all labor compensation, Line 4, NIPA Table 1.14. Corporate income is the sum of labor compensation and net operating surplus (Line 8).
A popular line on our recent surge of inflation is that an over-tight labor market has led to rapid wage growth, which in turn is forcing companies to raise prices. Higher prices will lead workers to demand higher wages, which will give us a wage-price spiral and soon lead to double-digit inflation.
While this was a story that plausibly fit the data in the 1970s, it is very hard to make the wage-price spiral fit the current situation for a simple reason: the wage share of income has fallen sharply since the pandemic.
Here’s the picture.
Source: Bureau of Economic Analysis.
As can be seen, the wage share of corporate income had been recovering gradually from the troughs it hit following the Great Recession in 2014.[1] However, we see a sharp reversal in 2021, with the wage share falling from 76.1 percent to 73.7 percent, a decline of 2.4 percentage points.
Perhaps some economists can tell a story where rapid wage growth is driving inflation even as the wage share of income is falling, but I’m not that good an economist. This still looks to me like a case where supply-side disruptions, associated with the reopening from the pandemic and the war in Ukraine are driving inflation.
This view is consistent with the fact that year-over-year inflation in the European Union was 7.5 percent as of March. The EU countries did not have as big a stimulus as the United States and by most measures its labor market is not as tight.
[1] Wage share actually refers to all labor compensation, Line 4, NIPA Table 1.14. Corporate income is the sum of labor compensation and net operating surplus (Line 8).
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• COVID-19CoronavirusEconomic Crisis and RecoveryCrisis económica y recuperaciónInequalityLa Desigualdad
I rarely disagree with Paul Krugman’s columns, but every now and then he does say something that I have to take issue with. In a column last month, Krugman complained about the enormous costs associated with China’s zero COVID-19 policy. He tied it to its reliance on old-fashioned Chinese vaccines that used dead virus material, instead of using the mRNA vaccines developed by researchers in the United States and Europe.
There are good grounds for criticizing China’s zero COVID-19 policy. It may have been reasonable in the early days of the pandemic when we had neither vaccines nor effective treatment. However, the massive lockdowns required, which also literally threaten lives (people can’t get necessary medications and medical care), are hard to justify in the current situation.
But Krugman, and others (several people, who I respect, have picked up this line on Twitter), err in tying the zero COVID-19 policy to China’s rejection of mRNA vaccines. In fact, with the omicron variant currently hitting China, the dead virus vaccines are actually quite effective in preventing serious illness and death.
The case fatality rate in Hong Kong for people who have gotten three doses of China’s vaccines is 0.03 percent. Even for people over age 80 it is just over 1.0 percent. This compares to a rate of 2.9 percent overall and 15.7 percent for those over age 80, who are unvaccinated. These data imply that China’s vaccines are highly effective in preventing death.
The big problem in Hong Kong, and now for mainland China, is not that its vaccines are ineffective, but rather they have done a poor job in vaccinating the elderly. Before the omicron surge, less than a quarter of Hong Kong residents over age 80 had received at least two doses of a vaccine. This explains their high death rates.
While the Chinese vaccines have not been effective preventing the spread of the omicron variant, neither have the mRNA vaccines. Denmark, which has one of the highest vaccination and booster rates in the world, was seeing over 40,000 cases a day at the peak of the omicron wave in February. This would be equivalent to more than 2.3 million daily cases in the United States. Clearly, breakthrough infections in Denmark were the norm.
The mRNA Mythology
It is striking that so many people are anxious to wrongly blame the costs of China’s zero COVID-19 policy on its rejection of US-made mRNA vaccines. To my view, this reflects an incredibly wrongheaded view of medical technology and the pandemic, that has likely cost millions of lives and also substantially worsened inequality.
As I argued in the early days of the pandemic, the United States should have taken the lead in pooling resources worldwide in order to maximize innovation and the deployment of effective vaccines, tests, and treatments. Instead, it doubled down on government-granted patent monopolies as a mechanism for financing research.
Moderna is the main villain in this story. It was paid $483 million for developing its vaccine, then another $472 million to conduct its phase three clinical trials. It also got advance purchase agreements for hundreds of millions of doses at close to $20 a shot, if the vaccines were approved by the FDA. (The shot cost around $1.50 to manufacture and distribute.) Not surprisingly, with this amount of government support, Moderna had generated at least five new billionaires, as of last summer.
The riches that have gone to Moderna’s billionaires, and other well-placed executives and researchers there and at other drug companies, could have instead gone to items like expanding the child tax credit, or subsidies for day care. Alternatively, if we are worried about inflation from an over-stimulated economy, we could have reduced demand in the economy by not giving so much money to the drug industry.
To be clear, I am very happy that we have the vaccines (I got three myself), but the question is whether the route we went was the most efficient. As I argued more than two years ago, we should have been looking to finance open-source vaccine development, with all results being freely shared around the world.
This would have meant that US and European researchers would be posting their results on the web for researchers around the world to view and examine. The same would be the case for researchers in China, Russia, India, Brazil, and elsewhere.
Researchers need to be paid, and we would do that, exactly as we did with Moderna. If Moderna as a company wasn’t interested in taking part, then we would just pay their researchers directly. Moderna would threaten them with lawsuits over violating non-disclosure agreements, but the government could just agree to cover their legal expenses and any potential damages. These lawsuits (against researchers for sharing their knowledge) would also have the great benefit of showing precisely how much Moderna and other drug companies care about human life.
We would also need some agreement on sharing costs among countries. This need not be worked out in advance, we can always have payments going back and forth after the fact. We would just need a commitment in principle. Of course, moving along this route would not have been possible in 2020 when Donald Trump was in the White House. We would have needed a president who actually cared about limiting the human and economic cost of the pandemic, as opposed to just the crowd sizes at his rallies.
If we had freely pooled technology we could have had massive stockpiles of every promising vaccine available at the time they were first approved by the FDA or other health oversight agencies. If all the drug manufacturers in the world had full access to the mRNA technology as the vaccines were being tested, it is very plausible that we could have had a stockpiles of billions of doses of Pfizer and Moderna’s vaccines at the time they were approved. The cost of having to throw out a billion doses (remember they only a $1-$1.50 to produce) of a vaccine that proved to be ineffective, are trivial compared to the benefits of being able to quickly put 1 billion doses in people’s arms.
And, we also could have had large stockpiles of China’s vaccines. They were less effective than the mRNA vaccines, but hugely more effective than no vaccine. If we had rushed to distribute doses of stockpiles of all the vaccines that proved effective, as quickly as possible, it is very likely we could have prevented the mutation that became the omicron variant, and possibly even the Delta variant. This could have saved millions of lives and prevented the loss of trillions of dollars of economic activity.
Patent Monopolies and Right-Wing Populists
What does this story of open-source research have to do with right-wing populists? The support for right-wing populists from Donald Trump in the United States, Boris Johnson in the United Kingdom, and Marine Le Pen in France comes overwhelmingly from white working-class voters. This is typically attributed to racism.
While racism is undoubtedly a large factor in these politicians’ appeal, the question this explanation leaves unanswered is why did these people suddenly become so racist. Or perhaps better put, why did racism come to dominate their political behavior.
In the United States, many people who voted for Trump in 2016, had voted for Barack Obama four years earlier. It may seem like ancient history, but it was not long ago that Obama carried states like Iowa and Ohio by comfortable margins. These states are now considered out of reach for a Democratic presidential candidate. There is a similar story elsewhere, where working class voters, who used to support socialist, social democratic, or communist candidates, now support right-wing populist politicians.
An alternative explanation is that these working-class voters are being left behind by the course of economic development in recent decades. It is clear that this is true, workers without college degrees have not shared to any substantial extent in the benefits of economic growth over the last four decades, but a key issue is whether they were “left behind,” or pushed behind.
Government-granted patent monopolies, along with their cousin copyright monopolies, are a big part of this story. In this period of rising inequality, these forms of intellectual property have played an enormous role in the growth of inequality.[1] To take my poster child, Bill Gates would likely still be working for a living, instead of one of the richest people in the world, if the government did not threaten to arrest anyone who made copies of Microsoft software without his permission.
One of the great absurdities of current policy debates is that people will instantly say that we wouldn’t have any innovation without patent and copyright monopolies. In the next sentence they will tell us that technology is causing inequality. If the contradiction between those two claims is not immediately apparent, then you could be a leading intellectual pontificating on economic policy.
The point is that patent and copyright monopolies are very explicitly government policies. We can make them longer and stronger, or shorter and weaker, or not have them at all. It is absurd to claim both that we need patent and copyright monopolies and that technology is driving inequality. It is our policy on technology that drives inequality, it is not the technology.
The fact that we never even had a serious policy debate over relying on patent monopolies in the development of vaccines in the pandemic shows the extent to which elite ideology dominates public debate. The policies that might challenge the upward redistribution of income are not even allowed to be discussed, even when they might save millions of lives and trillions of dollars.
Instead, we get Moderna billionaires. The debate on inequality is focused on politically far-fetched proposals like a wealth tax. The debate over these policies may fill many pages in newspapers and magazines, and make for many promising academic careers, but the more obvious route would be to not structure our economy in a way that makes so many billionaires in the first place.
Basically, the people who control major news outlets and other arenas of public debate do not want any discussion of the ways we have structured the economy to redistribute so much income upward. They want the working class to believe that they are just losers. We may feel sorry for them and want to have a better social welfare state, but the fact that they are losers is not supposed to be up for debate.
In that context, it is not surprising that working class people would not feel much affinity for the politicians who see them as losers and support the policies that make them losers. The right-wing populists may not have a serious route for improving the plight of the working class, but they can at least present a villain and tell the working class how their situation was imposed on them, rather than the result of their own failings.
Many had hoped that revulsion against Putin and the Russian invasion of Ukraine would be a death blow to the right-wing populists, who were generally very friendly towards Putin. With Viktor Orban winning reelection in Hungary, Marine Le Pen seriously challenging for the presidency of France, and the stench of Donald Trump still haunting US politics, clearly the right-wing populists are not about to fade away. It would be nice if we could have some more serious thinking about the conditions that created the atmosphere for their political ascendency.
[1] Intellectual property is not the only force driving inequality in recent decades. The weakening of unions, trade policy, a bloated financial sector and other factors have also been important to the rise in inequality. I discuss this issue in more detail in my book Rigged (it’s free).
I rarely disagree with Paul Krugman’s columns, but every now and then he does say something that I have to take issue with. In a column last month, Krugman complained about the enormous costs associated with China’s zero COVID-19 policy. He tied it to its reliance on old-fashioned Chinese vaccines that used dead virus material, instead of using the mRNA vaccines developed by researchers in the United States and Europe.
There are good grounds for criticizing China’s zero COVID-19 policy. It may have been reasonable in the early days of the pandemic when we had neither vaccines nor effective treatment. However, the massive lockdowns required, which also literally threaten lives (people can’t get necessary medications and medical care), are hard to justify in the current situation.
But Krugman, and others (several people, who I respect, have picked up this line on Twitter), err in tying the zero COVID-19 policy to China’s rejection of mRNA vaccines. In fact, with the omicron variant currently hitting China, the dead virus vaccines are actually quite effective in preventing serious illness and death.
The case fatality rate in Hong Kong for people who have gotten three doses of China’s vaccines is 0.03 percent. Even for people over age 80 it is just over 1.0 percent. This compares to a rate of 2.9 percent overall and 15.7 percent for those over age 80, who are unvaccinated. These data imply that China’s vaccines are highly effective in preventing death.
The big problem in Hong Kong, and now for mainland China, is not that its vaccines are ineffective, but rather they have done a poor job in vaccinating the elderly. Before the omicron surge, less than a quarter of Hong Kong residents over age 80 had received at least two doses of a vaccine. This explains their high death rates.
While the Chinese vaccines have not been effective preventing the spread of the omicron variant, neither have the mRNA vaccines. Denmark, which has one of the highest vaccination and booster rates in the world, was seeing over 40,000 cases a day at the peak of the omicron wave in February. This would be equivalent to more than 2.3 million daily cases in the United States. Clearly, breakthrough infections in Denmark were the norm.
The mRNA Mythology
It is striking that so many people are anxious to wrongly blame the costs of China’s zero COVID-19 policy on its rejection of US-made mRNA vaccines. To my view, this reflects an incredibly wrongheaded view of medical technology and the pandemic, that has likely cost millions of lives and also substantially worsened inequality.
As I argued in the early days of the pandemic, the United States should have taken the lead in pooling resources worldwide in order to maximize innovation and the deployment of effective vaccines, tests, and treatments. Instead, it doubled down on government-granted patent monopolies as a mechanism for financing research.
Moderna is the main villain in this story. It was paid $483 million for developing its vaccine, then another $472 million to conduct its phase three clinical trials. It also got advance purchase agreements for hundreds of millions of doses at close to $20 a shot, if the vaccines were approved by the FDA. (The shot cost around $1.50 to manufacture and distribute.) Not surprisingly, with this amount of government support, Moderna had generated at least five new billionaires, as of last summer.
The riches that have gone to Moderna’s billionaires, and other well-placed executives and researchers there and at other drug companies, could have instead gone to items like expanding the child tax credit, or subsidies for day care. Alternatively, if we are worried about inflation from an over-stimulated economy, we could have reduced demand in the economy by not giving so much money to the drug industry.
To be clear, I am very happy that we have the vaccines (I got three myself), but the question is whether the route we went was the most efficient. As I argued more than two years ago, we should have been looking to finance open-source vaccine development, with all results being freely shared around the world.
This would have meant that US and European researchers would be posting their results on the web for researchers around the world to view and examine. The same would be the case for researchers in China, Russia, India, Brazil, and elsewhere.
Researchers need to be paid, and we would do that, exactly as we did with Moderna. If Moderna as a company wasn’t interested in taking part, then we would just pay their researchers directly. Moderna would threaten them with lawsuits over violating non-disclosure agreements, but the government could just agree to cover their legal expenses and any potential damages. These lawsuits (against researchers for sharing their knowledge) would also have the great benefit of showing precisely how much Moderna and other drug companies care about human life.
We would also need some agreement on sharing costs among countries. This need not be worked out in advance, we can always have payments going back and forth after the fact. We would just need a commitment in principle. Of course, moving along this route would not have been possible in 2020 when Donald Trump was in the White House. We would have needed a president who actually cared about limiting the human and economic cost of the pandemic, as opposed to just the crowd sizes at his rallies.
If we had freely pooled technology we could have had massive stockpiles of every promising vaccine available at the time they were first approved by the FDA or other health oversight agencies. If all the drug manufacturers in the world had full access to the mRNA technology as the vaccines were being tested, it is very plausible that we could have had a stockpiles of billions of doses of Pfizer and Moderna’s vaccines at the time they were approved. The cost of having to throw out a billion doses (remember they only a $1-$1.50 to produce) of a vaccine that proved to be ineffective, are trivial compared to the benefits of being able to quickly put 1 billion doses in people’s arms.
And, we also could have had large stockpiles of China’s vaccines. They were less effective than the mRNA vaccines, but hugely more effective than no vaccine. If we had rushed to distribute doses of stockpiles of all the vaccines that proved effective, as quickly as possible, it is very likely we could have prevented the mutation that became the omicron variant, and possibly even the Delta variant. This could have saved millions of lives and prevented the loss of trillions of dollars of economic activity.
Patent Monopolies and Right-Wing Populists
What does this story of open-source research have to do with right-wing populists? The support for right-wing populists from Donald Trump in the United States, Boris Johnson in the United Kingdom, and Marine Le Pen in France comes overwhelmingly from white working-class voters. This is typically attributed to racism.
While racism is undoubtedly a large factor in these politicians’ appeal, the question this explanation leaves unanswered is why did these people suddenly become so racist. Or perhaps better put, why did racism come to dominate their political behavior.
In the United States, many people who voted for Trump in 2016, had voted for Barack Obama four years earlier. It may seem like ancient history, but it was not long ago that Obama carried states like Iowa and Ohio by comfortable margins. These states are now considered out of reach for a Democratic presidential candidate. There is a similar story elsewhere, where working class voters, who used to support socialist, social democratic, or communist candidates, now support right-wing populist politicians.
An alternative explanation is that these working-class voters are being left behind by the course of economic development in recent decades. It is clear that this is true, workers without college degrees have not shared to any substantial extent in the benefits of economic growth over the last four decades, but a key issue is whether they were “left behind,” or pushed behind.
Government-granted patent monopolies, along with their cousin copyright monopolies, are a big part of this story. In this period of rising inequality, these forms of intellectual property have played an enormous role in the growth of inequality.[1] To take my poster child, Bill Gates would likely still be working for a living, instead of one of the richest people in the world, if the government did not threaten to arrest anyone who made copies of Microsoft software without his permission.
One of the great absurdities of current policy debates is that people will instantly say that we wouldn’t have any innovation without patent and copyright monopolies. In the next sentence they will tell us that technology is causing inequality. If the contradiction between those two claims is not immediately apparent, then you could be a leading intellectual pontificating on economic policy.
The point is that patent and copyright monopolies are very explicitly government policies. We can make them longer and stronger, or shorter and weaker, or not have them at all. It is absurd to claim both that we need patent and copyright monopolies and that technology is driving inequality. It is our policy on technology that drives inequality, it is not the technology.
The fact that we never even had a serious policy debate over relying on patent monopolies in the development of vaccines in the pandemic shows the extent to which elite ideology dominates public debate. The policies that might challenge the upward redistribution of income are not even allowed to be discussed, even when they might save millions of lives and trillions of dollars.
Instead, we get Moderna billionaires. The debate on inequality is focused on politically far-fetched proposals like a wealth tax. The debate over these policies may fill many pages in newspapers and magazines, and make for many promising academic careers, but the more obvious route would be to not structure our economy in a way that makes so many billionaires in the first place.
Basically, the people who control major news outlets and other arenas of public debate do not want any discussion of the ways we have structured the economy to redistribute so much income upward. They want the working class to believe that they are just losers. We may feel sorry for them and want to have a better social welfare state, but the fact that they are losers is not supposed to be up for debate.
In that context, it is not surprising that working class people would not feel much affinity for the politicians who see them as losers and support the policies that make them losers. The right-wing populists may not have a serious route for improving the plight of the working class, but they can at least present a villain and tell the working class how their situation was imposed on them, rather than the result of their own failings.
Many had hoped that revulsion against Putin and the Russian invasion of Ukraine would be a death blow to the right-wing populists, who were generally very friendly towards Putin. With Viktor Orban winning reelection in Hungary, Marine Le Pen seriously challenging for the presidency of France, and the stench of Donald Trump still haunting US politics, clearly the right-wing populists are not about to fade away. It would be nice if we could have some more serious thinking about the conditions that created the atmosphere for their political ascendency.
[1] Intellectual property is not the only force driving inequality in recent decades. The weakening of unions, trade policy, a bloated financial sector and other factors have also been important to the rise in inequality. I discuss this issue in more detail in my book Rigged (it’s free).
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Megan McArdle had a bizarre column in the Washington Post telling readers “the left learns the limit of corporate power.” The gist of the piece is that Disney wasn’t able to use its power to block Florida Governor Ron DeSantis’ various efforts to beat up LGBTQ children, as well as public school teachers. McArdle interprets this failure as proof that corporations don’t have the power that many on the left attribute to them.
This is a bizarre conclusion based on the evidence here. While we don’t know what is in the heads of Disney executives, the company’s profits are not likely to be threatened in a major way by DeSantis’ election theatrics. This is not like Florida imposing a 5 percent corporate income tax.
It’s entirely possible that Disney’s executives really are offended by this attack on a segment of the population that experiences an enormous amount of discrimination, especially children who are struggling with their sexual identity. But they also were clearly responding to pressure from their workers and shareholders.
In any case, losing on this issue will likely not be a major blow to Disney’s profits. In fact, taking a stand that enjoys majority support across the country may actually be good for its finances, even if Disney proves unsuccessful in changing the law.
But few on the left held the naïve view McArdle is attributing to them. It was hardly plausible that even a very powerful corporation could, on its own, force an ambitious politician to give up a signature campaign issue for his re-election campaign, as well as a possible future run for president.
Over time, and with other corporations, along with a large grassroots efforts, DeSantis and other opportunistic Republicans may be forced to beat a retreat, as they did on civil rights many decades ago. But no one thought this was just a question of Disney saying that it didn’t like the bill.
The real story of corporations holding enormous political power is on the obscure issues, that almost no one follows, but nonetheless have an enormous impact on our economy. For example, the pharmaceutical industry has vigorously pushed for longer and stronger patent protection.
As a result, the amount we pay for prescription drugs has risen from 0.4 percent of GDP in 1980 to more than 2.2 percent of GDP at present. The difference comes to $400 billion a year or more than $3,000 a family. It’s unlikely that even 1.0 percent of the population is familiar with measures like the Bayh-Dole bill or the TRIPS provisions of the WTO, which meant a fortune for the drug industry. Needless to say, the pharmaceutical industry’s lobbyists were all over these and other measures which meant transferring tens of billions of dollars from the rest of us to the industry.
This is the typical story with a wide range of legislation. Many of the richest people in the country are able to benefit from the special tax treatment for “carried interest” which allows hedge fund and private equity partners to pay a tax rate of just 20 percent on their millions, tens of millions, or even hundreds of millions in earnings. Less than the marginal tax rate paid by many school teachers and firefighters.
Their lobbyists fight like crazy to preserve their special treatment. The general public is at best faintly aware of this handout to the country’s richest people.
There are endless other tales like this of lobbyists getting special interest legislation through for the financial industry, the oil industry, and every other major special interest group you might name. This is what the left is upset about in complaining about the excessive power of large corporations. They are not wrong.
Megan McArdle had a bizarre column in the Washington Post telling readers “the left learns the limit of corporate power.” The gist of the piece is that Disney wasn’t able to use its power to block Florida Governor Ron DeSantis’ various efforts to beat up LGBTQ children, as well as public school teachers. McArdle interprets this failure as proof that corporations don’t have the power that many on the left attribute to them.
This is a bizarre conclusion based on the evidence here. While we don’t know what is in the heads of Disney executives, the company’s profits are not likely to be threatened in a major way by DeSantis’ election theatrics. This is not like Florida imposing a 5 percent corporate income tax.
It’s entirely possible that Disney’s executives really are offended by this attack on a segment of the population that experiences an enormous amount of discrimination, especially children who are struggling with their sexual identity. But they also were clearly responding to pressure from their workers and shareholders.
In any case, losing on this issue will likely not be a major blow to Disney’s profits. In fact, taking a stand that enjoys majority support across the country may actually be good for its finances, even if Disney proves unsuccessful in changing the law.
But few on the left held the naïve view McArdle is attributing to them. It was hardly plausible that even a very powerful corporation could, on its own, force an ambitious politician to give up a signature campaign issue for his re-election campaign, as well as a possible future run for president.
Over time, and with other corporations, along with a large grassroots efforts, DeSantis and other opportunistic Republicans may be forced to beat a retreat, as they did on civil rights many decades ago. But no one thought this was just a question of Disney saying that it didn’t like the bill.
The real story of corporations holding enormous political power is on the obscure issues, that almost no one follows, but nonetheless have an enormous impact on our economy. For example, the pharmaceutical industry has vigorously pushed for longer and stronger patent protection.
As a result, the amount we pay for prescription drugs has risen from 0.4 percent of GDP in 1980 to more than 2.2 percent of GDP at present. The difference comes to $400 billion a year or more than $3,000 a family. It’s unlikely that even 1.0 percent of the population is familiar with measures like the Bayh-Dole bill or the TRIPS provisions of the WTO, which meant a fortune for the drug industry. Needless to say, the pharmaceutical industry’s lobbyists were all over these and other measures which meant transferring tens of billions of dollars from the rest of us to the industry.
This is the typical story with a wide range of legislation. Many of the richest people in the country are able to benefit from the special tax treatment for “carried interest” which allows hedge fund and private equity partners to pay a tax rate of just 20 percent on their millions, tens of millions, or even hundreds of millions in earnings. Less than the marginal tax rate paid by many school teachers and firefighters.
Their lobbyists fight like crazy to preserve their special treatment. The general public is at best faintly aware of this handout to the country’s richest people.
There are endless other tales like this of lobbyists getting special interest legislation through for the financial industry, the oil industry, and every other major special interest group you might name. This is what the left is upset about in complaining about the excessive power of large corporations. They are not wrong.
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The New York Times has routinely exaggerated the problems faced by France and other European countries with generous welfare states. Given this history, it should not be surprising that it effectively endorsed French President Emmanual Macron for reelection in a news article.
The piece implied that Macron’s presidency, which involved rolling back the welfare state in many areas, has been a great economic success. While it tells stories about start-ups booming, the only piece of economic data it shares is that France’s current 7.4 percent unemployment rate is the lowest in a decade.
This is not evidence of great success. France still had not gotten its unemployment rate down to its pre-recession lows. In the United States, which had a slow recovery from the Great Recession, the unemployment rate had fallen below its pre-recession low by the middle of 2017.
The weakness of France’s recovery can be seen even more clearly by looking at the employment rate for prime age workers (ages 25 to 54). It peaked at 83.2 percent in 2008. It’s currently at 82.4 percent. While there are many factors other than a president’s policies that effect growth and employment, this is not evidence of a strong economic performance by France.
The piece also caricatures François Hollande, Macron’s Socialist Party predecessor. He presents an apparently famous quote from Hollande: “My enemy is the world of finance.” The piece implies that Hollande didn’t appreciate the need for a financial sector.
Hollande surely recognized the need for a financial sector to allow businesses to get the capital they need to grow. He also recognized that the financial industry can also become bloated and corrupt and is a major source of inequality in the economy. An efficient financial sector is a small financial sector, with as few resources as necessary going to allocate capital.
The problems of the financial sector are widely recognized by economists and people who lived through the collapse of the housing bubble in 2007-2009 and the resulting financial crisis. This is the reason that Congress passed the Dodd-Frank financial reform bill. All the proponents of this bill understood the need for a financial industry, as did Mr. Hollande. It is absurd to imply that he somehow did not understand its role in the economy.
The New York Times has routinely exaggerated the problems faced by France and other European countries with generous welfare states. Given this history, it should not be surprising that it effectively endorsed French President Emmanual Macron for reelection in a news article.
The piece implied that Macron’s presidency, which involved rolling back the welfare state in many areas, has been a great economic success. While it tells stories about start-ups booming, the only piece of economic data it shares is that France’s current 7.4 percent unemployment rate is the lowest in a decade.
This is not evidence of great success. France still had not gotten its unemployment rate down to its pre-recession lows. In the United States, which had a slow recovery from the Great Recession, the unemployment rate had fallen below its pre-recession low by the middle of 2017.
The weakness of France’s recovery can be seen even more clearly by looking at the employment rate for prime age workers (ages 25 to 54). It peaked at 83.2 percent in 2008. It’s currently at 82.4 percent. While there are many factors other than a president’s policies that effect growth and employment, this is not evidence of a strong economic performance by France.
The piece also caricatures François Hollande, Macron’s Socialist Party predecessor. He presents an apparently famous quote from Hollande: “My enemy is the world of finance.” The piece implies that Hollande didn’t appreciate the need for a financial sector.
Hollande surely recognized the need for a financial sector to allow businesses to get the capital they need to grow. He also recognized that the financial industry can also become bloated and corrupt and is a major source of inequality in the economy. An efficient financial sector is a small financial sector, with as few resources as necessary going to allocate capital.
The problems of the financial sector are widely recognized by economists and people who lived through the collapse of the housing bubble in 2007-2009 and the resulting financial crisis. This is the reason that Congress passed the Dodd-Frank financial reform bill. All the proponents of this bill understood the need for a financial industry, as did Mr. Hollande. It is absurd to imply that he somehow did not understand its role in the economy.
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This week President Biden announced that he would release 1 million barrels per day from the strategic oil reserves. This action was generally derided by politicians and the media, saying that this move would have little effect on the world price of oil. They argued that in a world oil market of just under 100 million barrels per day, Biden’s release would have little impact.
There are a couple of points here worth noting. First, the projected impact of this sort of additional supply would not be all that trivial. The short-term demand elasticity is usually estimated to be quite low, typically around -0.15. That would imply that a 1 percent increase in the supply of oil should lead to a roughly 7 percent decline in oil prices. If we apply that to the current price of gas, that would be a drop of more than 25 cents a gallon.
A price increase of that size would likely be sufficient to prompt a raff of news pieces about how higher gas prices were bankrupting families. A price decline of this size should be equally momentous.
The other point is that it is important to always remember that we have a world oil market, not just when the point is to deride a move by President Biden. Specifically, many Republican politicians are running around saying that if we just produced more oil here, we wouldn’t have to worry about high gas prices.
The numbers indicate otherwise. Let’s say that in the span of a couple of years we could increase domestic production by 2 million barrels per day, an increase of a bit less than 20 percent over current levels. That would be a truly heroic lift, including ignoring a wide range of environmental issues, although perhaps possible in a best-case scenario.
This 2 million barrels per day increment to production, would be a bit more than 2 percent of world production, or twice as large as President Biden’s release from the strategic oil reserves. We should therefore expect that the impact on gas prices would be twice as large as the impact of Biden’s release.
If we view the impact of Biden’s release of oil from the strategic reserve as being trivial, then the impact of a very ambitious increase in domestic oil production is just twice trivial. It will not get us back to $2.50 a gallon gas, or whatever dream Republicans have in their head.
The basic point is that it is hard to have too much impact on world oil prices. Biden’s move will help some. We can do a big push on domestic production, which could also help some, but neither on their own will get us back to pre-pandemic prices.
And of course, burning more fossil fuels will screw our kids as the planet gets warmer, but we know that is not on anyone’s agenda.
This week President Biden announced that he would release 1 million barrels per day from the strategic oil reserves. This action was generally derided by politicians and the media, saying that this move would have little effect on the world price of oil. They argued that in a world oil market of just under 100 million barrels per day, Biden’s release would have little impact.
There are a couple of points here worth noting. First, the projected impact of this sort of additional supply would not be all that trivial. The short-term demand elasticity is usually estimated to be quite low, typically around -0.15. That would imply that a 1 percent increase in the supply of oil should lead to a roughly 7 percent decline in oil prices. If we apply that to the current price of gas, that would be a drop of more than 25 cents a gallon.
A price increase of that size would likely be sufficient to prompt a raff of news pieces about how higher gas prices were bankrupting families. A price decline of this size should be equally momentous.
The other point is that it is important to always remember that we have a world oil market, not just when the point is to deride a move by President Biden. Specifically, many Republican politicians are running around saying that if we just produced more oil here, we wouldn’t have to worry about high gas prices.
The numbers indicate otherwise. Let’s say that in the span of a couple of years we could increase domestic production by 2 million barrels per day, an increase of a bit less than 20 percent over current levels. That would be a truly heroic lift, including ignoring a wide range of environmental issues, although perhaps possible in a best-case scenario.
This 2 million barrels per day increment to production, would be a bit more than 2 percent of world production, or twice as large as President Biden’s release from the strategic oil reserves. We should therefore expect that the impact on gas prices would be twice as large as the impact of Biden’s release.
If we view the impact of Biden’s release of oil from the strategic reserve as being trivial, then the impact of a very ambitious increase in domestic oil production is just twice trivial. It will not get us back to $2.50 a gallon gas, or whatever dream Republicans have in their head.
The basic point is that it is hard to have too much impact on world oil prices. Biden’s move will help some. We can do a big push on domestic production, which could also help some, but neither on their own will get us back to pre-pandemic prices.
And of course, burning more fossil fuels will screw our kids as the planet gets warmer, but we know that is not on anyone’s agenda.
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In the general telling of popular history, the Reagan years were a period of a booming economy and general prosperity. Reagan was of course reelected in a landslide. And, for the only time since Calvin Coolidge, he was succeeded by an elected president of his own party.
In spite of the celebration of the Reagan economy, most workers actually lost ground in the 1980s. Their wages did not keep pace with inflation. And, unlike the current situation, where a war is pushing up the world price of oil and other commodities, in the 1980s world oil prices declined sharply from peaks reached following the Iranian revolution.
Here’s the picture.
Year over Year Change in Average Hourly Wage: 1980-89
The inflation adjusted average hourly wage was 1 cent lower in January 1985, the end of Reagan’s first term, than it had been when he took office in 1981.[1] The rate of decline accelerated in Reagan’s second term so that in January 1989 it was 1.7 percent lower than when Reagan took office. This means that over his two terms in office, rather than sharing in the gains from growth, workers actually lost ground.
This history provides a notable contrast to the current situation. The media were happy to completely ignore the reality of declining real wages throughout the Reagan era. By contrast, they are happy to jump on a drop in real wages in the last year due to the reopening from the pandemic (the jump in inflation is worldwide) and the war in Ukraine.
The focus on inflation in reporting has been so intense that most people tell pollsters that they think we lost jobs last year, even though it was the strongest year for job growth ever. I’m an economist, not a psychologist, I don’t know how people form their views of the economy. But I can say that the media have not been giving an accurate picture of the economy, nor one that is consistent with their reporting during the Reagan era.
[1] This is for production and non-supervisory workers, a group that comprises roughly 80 percent of the workforce.
In the general telling of popular history, the Reagan years were a period of a booming economy and general prosperity. Reagan was of course reelected in a landslide. And, for the only time since Calvin Coolidge, he was succeeded by an elected president of his own party.
In spite of the celebration of the Reagan economy, most workers actually lost ground in the 1980s. Their wages did not keep pace with inflation. And, unlike the current situation, where a war is pushing up the world price of oil and other commodities, in the 1980s world oil prices declined sharply from peaks reached following the Iranian revolution.
Here’s the picture.
Year over Year Change in Average Hourly Wage: 1980-89
The inflation adjusted average hourly wage was 1 cent lower in January 1985, the end of Reagan’s first term, than it had been when he took office in 1981.[1] The rate of decline accelerated in Reagan’s second term so that in January 1989 it was 1.7 percent lower than when Reagan took office. This means that over his two terms in office, rather than sharing in the gains from growth, workers actually lost ground.
This history provides a notable contrast to the current situation. The media were happy to completely ignore the reality of declining real wages throughout the Reagan era. By contrast, they are happy to jump on a drop in real wages in the last year due to the reopening from the pandemic (the jump in inflation is worldwide) and the war in Ukraine.
The focus on inflation in reporting has been so intense that most people tell pollsters that they think we lost jobs last year, even though it was the strongest year for job growth ever. I’m an economist, not a psychologist, I don’t know how people form their views of the economy. But I can say that the media have not been giving an accurate picture of the economy, nor one that is consistent with their reporting during the Reagan era.
[1] This is for production and non-supervisory workers, a group that comprises roughly 80 percent of the workforce.
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• EnvironmentUnited StatesEE. UU.
The folks who are opposed to actions to slow global warming act like believing in global warming is optional, in the same way that we might think that enjoying baseball is optional. Of course, people can believe whatever they want, but the fact is that the planet is getting warmer, and we stand to get screwed in a thousand different ways if we don’t take steps to stop it.
And, nothing changes in this story by people opting not to believe in global warming. Their beliefs are not going to help the billions of people who will suffer the consequences in the decades ahead, just like it doesn’t help a shooting victim if the guy pulling the trigger doesn’t believe that bullets hurt people.
A great example of nonsense antienvironmental beliefs affecting action is the effort to construct the Lake Powell Pipeline (LPP). This is a pipeline that would transport 83,800 acre-feet of water a year from Lake Powell to Washington County, Utah. Washington County has a rapidly growing population, and the argument is that it will need water from Lake Powell to serve its needs.
Apart from the question of whether the pipeline is really needed, there is also the problem that Lake Powell doesn’t have the water. Even without the pipeline draining more than 80,000 acre-feet of water a year, the lake is already approaching the critical level at which point the Glen Canyon dam will no longer be able to supply power to 5 million people in the Southwest.
While the lake’s level is already below the danger point, where it no longer has the targeted margin, it would have been even closer if we had LPP operating for the last fifteen years. We would already be below the critical level of 3490 feet if the LPP had been operating for the last 30 years.
Source: Bureau of Reclamation and author’s calculations.
Incredibly, our antienvironmentalists are still pushing for the pipeline spending, millions of dollars on planning and studies. It’s hard to imagine a worse use of money, except for actually building the pipeline.
The reality is that because of global warming, we are seeing much less rain and snowfall in the area than in prior decades. There is no reason to think this picture will get better in the years ahead. That means we will have problems maintaining energy production from the dam even without the LPP. If we were to build the LPP, we would very quickly need another energy source for 5 million people in the area.
But, the antienvironmentalists are like little kids. They have to be humored with the idea that we could build the LPP, even though it makes no sense. So, we will spend millions more doing pointless analyses of the LPP’s costs and benefits, even when its obvious that costs swamp the benefits, since the water simply is not there.
It is expensive to have a large segment of the population living in Never-Never Land.
The folks who are opposed to actions to slow global warming act like believing in global warming is optional, in the same way that we might think that enjoying baseball is optional. Of course, people can believe whatever they want, but the fact is that the planet is getting warmer, and we stand to get screwed in a thousand different ways if we don’t take steps to stop it.
And, nothing changes in this story by people opting not to believe in global warming. Their beliefs are not going to help the billions of people who will suffer the consequences in the decades ahead, just like it doesn’t help a shooting victim if the guy pulling the trigger doesn’t believe that bullets hurt people.
A great example of nonsense antienvironmental beliefs affecting action is the effort to construct the Lake Powell Pipeline (LPP). This is a pipeline that would transport 83,800 acre-feet of water a year from Lake Powell to Washington County, Utah. Washington County has a rapidly growing population, and the argument is that it will need water from Lake Powell to serve its needs.
Apart from the question of whether the pipeline is really needed, there is also the problem that Lake Powell doesn’t have the water. Even without the pipeline draining more than 80,000 acre-feet of water a year, the lake is already approaching the critical level at which point the Glen Canyon dam will no longer be able to supply power to 5 million people in the Southwest.
While the lake’s level is already below the danger point, where it no longer has the targeted margin, it would have been even closer if we had LPP operating for the last fifteen years. We would already be below the critical level of 3490 feet if the LPP had been operating for the last 30 years.
Source: Bureau of Reclamation and author’s calculations.
Incredibly, our antienvironmentalists are still pushing for the pipeline spending, millions of dollars on planning and studies. It’s hard to imagine a worse use of money, except for actually building the pipeline.
The reality is that because of global warming, we are seeing much less rain and snowfall in the area than in prior decades. There is no reason to think this picture will get better in the years ahead. That means we will have problems maintaining energy production from the dam even without the LPP. If we were to build the LPP, we would very quickly need another energy source for 5 million people in the area.
But, the antienvironmentalists are like little kids. They have to be humored with the idea that we could build the LPP, even though it makes no sense. So, we will spend millions more doing pointless analyses of the LPP’s costs and benefits, even when its obvious that costs swamp the benefits, since the water simply is not there.
It is expensive to have a large segment of the population living in Never-Never Land.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónInflation
I’m sure everyone remembers the 2014 Ebola crisis. A grand total of 4 people were diagnosed with Ebola in the United States, 11 were treated, and a total of 2 died. Ebola was a serious crisis in West Africa, but not in the United States.
Nonetheless CNN chose to make the threat to people in the United States a major topic of its news coverage, at least until the 2014 midterm elections. CNN ran 355 pieces on Ebola in the four weeks before the election. That number fell to just ten pieces in the two weeks after the election. (There is research showing that people who were fearful about Ebola were more likely to vote Republican.)
This history is worth remembering in the context of CNN’s all inflation, all the time coverage of the economy. On Friday, we got a jobs report for March that was outstanding in just about every respect. Nonetheless, CNN’s coverage of the report quickly turned to inflation. In its more general coverage of the economy, the jobs report — which tells us about the employment and earnings situation for more than 160 million people — was barely a blip.
CNN’s history with Ebola should be kept in mind in considering its endless hyping of inflation. We must remember also remember that CNN is a network whose president prepped a politician (former New York Governor Andrew Cuomo) for interviews on the network. In other words, it does not maintain the commitment to objective reporting that is expected of non-Fox news outlets.
This doesn’t mean that the network doesn’t have many outstanding reporters. Its coverage of the war in Ukraine has generally been outstanding, with many reporters stationed in war zones at great personal risk. Nonetheless, the network obviously feels comfortable pushing a political agenda, rather than trying to inform its audience about the economy.
I’m sure everyone remembers the 2014 Ebola crisis. A grand total of 4 people were diagnosed with Ebola in the United States, 11 were treated, and a total of 2 died. Ebola was a serious crisis in West Africa, but not in the United States.
Nonetheless CNN chose to make the threat to people in the United States a major topic of its news coverage, at least until the 2014 midterm elections. CNN ran 355 pieces on Ebola in the four weeks before the election. That number fell to just ten pieces in the two weeks after the election. (There is research showing that people who were fearful about Ebola were more likely to vote Republican.)
This history is worth remembering in the context of CNN’s all inflation, all the time coverage of the economy. On Friday, we got a jobs report for March that was outstanding in just about every respect. Nonetheless, CNN’s coverage of the report quickly turned to inflation. In its more general coverage of the economy, the jobs report — which tells us about the employment and earnings situation for more than 160 million people — was barely a blip.
CNN’s history with Ebola should be kept in mind in considering its endless hyping of inflation. We must remember also remember that CNN is a network whose president prepped a politician (former New York Governor Andrew Cuomo) for interviews on the network. In other words, it does not maintain the commitment to objective reporting that is expected of non-Fox news outlets.
This doesn’t mean that the network doesn’t have many outstanding reporters. Its coverage of the war in Ukraine has generally been outstanding, with many reporters stationed in war zones at great personal risk. Nonetheless, the network obviously feels comfortable pushing a political agenda, rather than trying to inform its audience about the economy.
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• Economic Crisis and RecoveryCrisis económica y recuperación
Many of us have highlighted both the strong pace of job growth and the drop in unemployment in March. This is great news. We are now looking at a labor market that is as strong as at any point in the last fifty years.
This should be cause for celebration, but all the Republicans have said they don’t give a damn about people getting jobs, the issue is inflation. And, most media commentators seem to agree. Hey, what difference does it make if someone can find a job, what about the price of gas?
I’m not sure how much gas people who don’t have jobs can buy, but in any case, there was some good news about inflation in this report as well. The scary story about inflation being pushed by inflation hawks like Larry Summers, is that we are facing a wage-price spiral.
In this story, we are not concerned about just a one-time increase in the inflation rate. The real problem is that the inflation rate will continue to increase unless the Fed raises interest rates enough to give us a severe recession. So, the choice is either an inflation rate that spirals ever upward or a stretch of high, maybe even double-digit, unemployment.
On this front, the March data did indeed have good news. First and most importantly, there is some evidence that wage growth is slowing.
The average hourly rose by 5.6 percent over the last year, but it increased at a just a 5.1 percent annual rate comparing last three months (Jan-Mar) with the prior three months (Oct-Dec). There is a similar story with the pay of production and non-supervisory workers. Their average hourly wage increased 6.7 percent year over year, but rose at just a 6.0 percent annual rate comparing last three months with the prior three months. Pay for production workers in leisure and hospitality, which had been soaring, slowed from a 14.9 percent year over year increase, to an 8.3 percent annual rate comparing last three months, with the prior three months.
The wage data are erratic, and the picture may look very different next month, but the evidence in the March report is that wage growth is slowing, not accelerating. That is not consistent with the wage-price spiral story we keep hearing.
Other data in the report also suggest some weakening of the labor market. The length of the average workweek fell by 0.1 hour in March. This left the index of aggregate hours unchanged, in spite of the 431,000 jobs created in the month. This is consistent with the labor shortage becoming less severe.
The length of the average workweek has been consistently higher than the pre-pandemic level over the last year. This is consistent with a story where employers, facing difficulty getting new workers, have their existing workforce put in more hours. The shortening of the workweek in the March data could indicate that employers are facing fewer difficulties in hiring.
The other item in this report suggesting some weakening of the labor market is the drop in the share of unemployment due to people who voluntarily quit their jobs. This percentage dropped from 15.1 percent in February to 13.0 percent. This is an important measure of labor market strength, since it indicates the extent to which workers are sufficiently confident of their labor market prospects that they are willing to quit a job before they have another job lined up.
As I always note, these monthly data are erratic, and April may tell a different story, but the March data are consistent with some weakening of the labor market. To be clear, a labor market where workers cannot count on pay increases and quit a job they dislike is not good news. But the concern that the labor market was too strong, and would lead to serious problems with inflation, was real. The March report suggests this is less likely to be the case.
I will also add two points that are often overlooked in the inflation discussion. There has been a big shift from wages to profits in the last two years. The profit share of national income has risen by 1.1 percentage points between 2019 and 2021. This is not consistent with the wage-price spiral story told by inflation hawks. If the profit share is increasing, then wages clearly are not driving higher prices.
The other point, is that productivity growth has actually sped up over the last three years, compared to the prior decade. It has average 2.3 percent annually from the fourth quarter of 2018 to the fourth quarter of 2021. It averaged less than 0.8 percent annually from the fourth quarter of 2010 to the fourth quarter of 2018.
This is the opposite of the story we saw with the 1970s inflation. In the 1970s, productivity growth slowed to just over 1.0 percent annually after rising at a 2.5 percent annual rate in the prior quarter century. Workers had long become accustomed to substantial real wage gains year by year. That was no longer possible in the 1970s, with productivity growth slowing to a crawl.
Anyhow, I continue to stress the shift to profits in the pandemic and the uptick in productivity growth as two important differences between the current situation and the 1970s. We’ll see how things play out in the quarters and years ahead, however the key point here is that the March jobs report not only had very good news on employment, it also had encouraging news on inflation. The latter point has gone mostly unnoticed.
Many of us have highlighted both the strong pace of job growth and the drop in unemployment in March. This is great news. We are now looking at a labor market that is as strong as at any point in the last fifty years.
This should be cause for celebration, but all the Republicans have said they don’t give a damn about people getting jobs, the issue is inflation. And, most media commentators seem to agree. Hey, what difference does it make if someone can find a job, what about the price of gas?
I’m not sure how much gas people who don’t have jobs can buy, but in any case, there was some good news about inflation in this report as well. The scary story about inflation being pushed by inflation hawks like Larry Summers, is that we are facing a wage-price spiral.
In this story, we are not concerned about just a one-time increase in the inflation rate. The real problem is that the inflation rate will continue to increase unless the Fed raises interest rates enough to give us a severe recession. So, the choice is either an inflation rate that spirals ever upward or a stretch of high, maybe even double-digit, unemployment.
On this front, the March data did indeed have good news. First and most importantly, there is some evidence that wage growth is slowing.
The average hourly rose by 5.6 percent over the last year, but it increased at a just a 5.1 percent annual rate comparing last three months (Jan-Mar) with the prior three months (Oct-Dec). There is a similar story with the pay of production and non-supervisory workers. Their average hourly wage increased 6.7 percent year over year, but rose at just a 6.0 percent annual rate comparing last three months with the prior three months. Pay for production workers in leisure and hospitality, which had been soaring, slowed from a 14.9 percent year over year increase, to an 8.3 percent annual rate comparing last three months, with the prior three months.
The wage data are erratic, and the picture may look very different next month, but the evidence in the March report is that wage growth is slowing, not accelerating. That is not consistent with the wage-price spiral story we keep hearing.
Other data in the report also suggest some weakening of the labor market. The length of the average workweek fell by 0.1 hour in March. This left the index of aggregate hours unchanged, in spite of the 431,000 jobs created in the month. This is consistent with the labor shortage becoming less severe.
The length of the average workweek has been consistently higher than the pre-pandemic level over the last year. This is consistent with a story where employers, facing difficulty getting new workers, have their existing workforce put in more hours. The shortening of the workweek in the March data could indicate that employers are facing fewer difficulties in hiring.
The other item in this report suggesting some weakening of the labor market is the drop in the share of unemployment due to people who voluntarily quit their jobs. This percentage dropped from 15.1 percent in February to 13.0 percent. This is an important measure of labor market strength, since it indicates the extent to which workers are sufficiently confident of their labor market prospects that they are willing to quit a job before they have another job lined up.
As I always note, these monthly data are erratic, and April may tell a different story, but the March data are consistent with some weakening of the labor market. To be clear, a labor market where workers cannot count on pay increases and quit a job they dislike is not good news. But the concern that the labor market was too strong, and would lead to serious problems with inflation, was real. The March report suggests this is less likely to be the case.
I will also add two points that are often overlooked in the inflation discussion. There has been a big shift from wages to profits in the last two years. The profit share of national income has risen by 1.1 percentage points between 2019 and 2021. This is not consistent with the wage-price spiral story told by inflation hawks. If the profit share is increasing, then wages clearly are not driving higher prices.
The other point, is that productivity growth has actually sped up over the last three years, compared to the prior decade. It has average 2.3 percent annually from the fourth quarter of 2018 to the fourth quarter of 2021. It averaged less than 0.8 percent annually from the fourth quarter of 2010 to the fourth quarter of 2018.
This is the opposite of the story we saw with the 1970s inflation. In the 1970s, productivity growth slowed to just over 1.0 percent annually after rising at a 2.5 percent annual rate in the prior quarter century. Workers had long become accustomed to substantial real wage gains year by year. That was no longer possible in the 1970s, with productivity growth slowing to a crawl.
Anyhow, I continue to stress the shift to profits in the pandemic and the uptick in productivity growth as two important differences between the current situation and the 1970s. We’ll see how things play out in the quarters and years ahead, however the key point here is that the March jobs report not only had very good news on employment, it also had encouraging news on inflation. The latter point has gone mostly unnoticed.
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• Economic Crisis and RecoveryCrisis económica y recuperación
Okay, this is not 100 percent kosher, but since we seem to have entered the political silly season, and the media have jumped in with both feet, these are real numbers from the Commerce Department. The $1.2 trillion increase refers to all labor income, which counts employer provided health care insurance, pensions, and other benefits. More importantly, these data are not adjusted for inflation, but even when price increases are factored in, labor income is still up by 1.6 percent from when President Biden took office.
This is worth noting, because the news media have filled their pages and broadcasts with stories of workers who are suffering because of the rise in gas prices and inflation more generally. There are undoubtedly many workers who are seriously suffering, but this is always true. Since labor income is higher today than it was before the pandemic, we can reasonably infer that many more workers were having trouble making ends meet in 2019 than today. If we hear more stories of hardship now, it is because of the decision by the media to give us more stories of hardship, not because more stories exist in the world.
For those who want a picture of how labor income growth since Biden took office compares with prior years, here’s the picture since 2010.
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, and author’s calculations.
As can be seen, labor income generally rises. The one exception was 2011, when austerity measures slowed job growth and high unemployment dampened wage growth.
The other item that jumps out in this picture is that in 2014 and 2015, which were the second and third strongest year for labor income growth, oil prices fell sharply. Since wage growth and job growth don’t usually change much year by year, changes in the rate of inflation are a major determinant of the pace of real labor income growth. Oil and energy prices in turn, are major factors in the rate of inflation.
The jump in oil prices since the pandemic ended, which has been aggravated by disruptions, and the threat of disruptions, associated with the Russian invasion of Ukraine, has been a major factor depressing real labor income growth since President Biden took office. The impact of higher oil prices, and other supply chain issues associated with the pandemic, have led to a big jump in inflation rates everywhere. For example, in the United Kingdom inflation has risen by 6.2 percent over the last year. In Germany, inflation has been 7.6 percent.
It is understandable that Republicans don’t like to call attention to the extent that the pandemic is responsible for higher inflation and its negative impact on living standards. It is a bit harder to understand why ostensibly neutral reporters don’t like to call attention to this fact. It’s a bit like reporting on a rise in homelessness in an area, without mentioning that much of the housing stock had been wiped out by a hurricane. But such is the state of reporting in the United States today.
Okay, this is not 100 percent kosher, but since we seem to have entered the political silly season, and the media have jumped in with both feet, these are real numbers from the Commerce Department. The $1.2 trillion increase refers to all labor income, which counts employer provided health care insurance, pensions, and other benefits. More importantly, these data are not adjusted for inflation, but even when price increases are factored in, labor income is still up by 1.6 percent from when President Biden took office.
This is worth noting, because the news media have filled their pages and broadcasts with stories of workers who are suffering because of the rise in gas prices and inflation more generally. There are undoubtedly many workers who are seriously suffering, but this is always true. Since labor income is higher today than it was before the pandemic, we can reasonably infer that many more workers were having trouble making ends meet in 2019 than today. If we hear more stories of hardship now, it is because of the decision by the media to give us more stories of hardship, not because more stories exist in the world.
For those who want a picture of how labor income growth since Biden took office compares with prior years, here’s the picture since 2010.
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, and author’s calculations.
As can be seen, labor income generally rises. The one exception was 2011, when austerity measures slowed job growth and high unemployment dampened wage growth.
The other item that jumps out in this picture is that in 2014 and 2015, which were the second and third strongest year for labor income growth, oil prices fell sharply. Since wage growth and job growth don’t usually change much year by year, changes in the rate of inflation are a major determinant of the pace of real labor income growth. Oil and energy prices in turn, are major factors in the rate of inflation.
The jump in oil prices since the pandemic ended, which has been aggravated by disruptions, and the threat of disruptions, associated with the Russian invasion of Ukraine, has been a major factor depressing real labor income growth since President Biden took office. The impact of higher oil prices, and other supply chain issues associated with the pandemic, have led to a big jump in inflation rates everywhere. For example, in the United Kingdom inflation has risen by 6.2 percent over the last year. In Germany, inflation has been 7.6 percent.
It is understandable that Republicans don’t like to call attention to the extent that the pandemic is responsible for higher inflation and its negative impact on living standards. It is a bit harder to understand why ostensibly neutral reporters don’t like to call attention to this fact. It’s a bit like reporting on a rise in homelessness in an area, without mentioning that much of the housing stock had been wiped out by a hurricane. But such is the state of reporting in the United States today.
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