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.

From the way our policy types talk about patents, or refuse to talk about them, they must think that the constitution guarantees life, liberty, and people getting incredibly rich from patents. Even as this pandemic has been needlessly prolonged by patent restrictions on the spread of technology for vaccines, tests, and treatments, resulting in millions of preventable deaths, we are still seeing no real debate as to whether we want to rely on these monopolies as a primary mechanism for financing medical innovation in the future.

At the most basic level, we need an explicit recognition that patent monopolies are just one possible mechanism for financing research. This should have always been obvious, but the pandemic should have hit us over the head with this simple but important fact.

The bulk of the research developing mRNA technology was done on the government’s dime. When it came to developing the Moderna vaccine, the government put up almost a billion dollars for the research and clinical testing. It also provided the company with insurance against failure, with a large advance purchase agreement that would have required it to buy hundreds of millions of doses even if it was not the best available vaccine.

Many people in policy circles somehow maintain a bizarre view that scientists would not have incentive to innovate without patent monopolies. This view is bizarre since there is considerable evidence that money can also provide incentives. The overwhelming majority of people in this country and around the world work for money, not patent monopolies, so it really should not be too hard to understand that we can just pay people to do the work and skip the government-granted patent monopoly.

This is especially important in terms of preparing for future pandemics because we are likely to see a large amount of public money put forward to develop vaccines, as well as tests and treatments.[1]  Our practice in the case of Operation Warp Speed (OWS) was to both pay for research and development costs upfront, and leave the companies with ownership rights for intellectual property, both in the form of patent and copyright monopolies, and also with protection of industrial secrets.

This has created the absurd situation where we have both limited the availability of vaccines, and other items needed to control the pandemic, and made the price far higher than what would exist in a free market. The mRNA vaccines cost less than $1.00 each to manufacture, if we double that to cover the cost of distribution, the companies are still charging markups of close to 2000 percent above their costs. There is a similar story for tests and treatments. In almost all cases, these would be available at very low prices in a market without patent or related monopolies.

If we had gone the open route at the beginning of the pandemic where research was freely shared throughout the world, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, anywhere in the world, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration as well as regulatory agencies in other countries.

Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.

 

Designing a Pandemic Response Focused on Stopping the Pandemic Rather than Making Billionaires

If the Biden administration follows through with its current plans, it will put up funding to develop prototype mRNA vaccines that can be quickly modified to deal with whatever specific virus is causing a pandemic. This is a great plan which can potentially save millions of lives and prevent trillions of dollars in economic losses. But, we need to avoid making the same mistakes as with OWS.

First and foremost, this means that everything is fully open. All results should be posted on the web as soon as practical. Any patents stemming from the research should be in the public domain. If a company already has patents that are related to the work, then the government should buy them out when it arranges the contract. If they don’t want to sell, then they aren’t eligible for a contract. It’s pretty simple.

There also cannot be any industrial secrets related to this work. This is again a very simple provision. Industrial secrets are protected through non-disclosure agreements. Any non-disclosure agreements that employees might sign for work related to the government-funded project are simply non-enforceable. That means that any employee of a future Moderna equivalent can make themselves a nice chunk of money, and help to save a large number of lives, by sharing any engineering information that this Moderna equivalent wants to keep secret.  

I have outlined in chapter 5 of Rigged (it’s free) how a system of contracting like this could work. Briefly, I see military contracting as a useful model. While there is lots of waste in military contracting, the United States does get good weapons systems.

Also, there would be an enormous advantage in this system since everything would be fully open. Work done on military contracts is typically enmeshed in secrecy. This is partly for the valid reason that we don’t want potential enemies to get access to our latest weapons systems. If other countries use technology funded under this system to help protect their own populations, and possibly improve on it to provide better health technologies for the world, that is a great outcome, not something to be feared.[2]

Ideally, we would share research costs internationally. Presumably we would expect countries to contribute in proportion to their GDP, with rich countries paying a higher percentage than poor countries, with the poorest presumably paying little or nothing. The exact formulas would have to be negotiated, and there could major differences in views across countries. But anyone who thinks the current system of enforcing IP rules internationally is simple has not been paying attention to trade negotiations over the last quarter century.

I have been told that no companies would agree to contracts where they have to surrender their intellectual property. That seems like a proposition worth testing. If a Pfizer or Moderna finds these conditions unacceptable then perhaps some of their employees would be willing to make lots of money with a new start-up. And, it’s at least possible that some of the people doing this research give a damn about human life.

It’s also important to remember that this is an international market. If U.S.-based scientists find themselves unable to work for money rather than patent monopolies, then we can look to pay scientists from Europe, India, China, or elsewhere. If our scientists don’t want the government’s money, it’s likely that scientists elsewhere in the world would be happy to take it.

It’s also worth mentioning in this context that the refusers will likely find themselves competing with vaccines and other products that are being sold as cheap generics. That probably will not be very good for their sales.

From Pandemics to Climate

Just as the world has an enormous shared interest in containing pandemics, we also have a common and urgent interest in limiting climate change. Here too, the approach of shared and open research makes an enormous amount of sense.

No one should be scared by the possibility that the Chinese might take advantage of a breakthrough in solar power or energy storage to aggressively install new capacity across China. We desperately want clean technologies to be adopted as quickly as possible. This should mean paying for the research upfront and making it fully open.

There is plenty of room in this story for good old-fashioned capitalist competition in the production and installation of clean energy products and electric cars. There also should be plenty of competition for research contracts.

But the products of this research, in the form of technical information, would be available at its marginal cost – zero. Any producer anywhere in the world would be free to incorporate the latest advances in solar technology in producing solar panels. This process would not only mean technology spreads more quickly, it will also reduce the price of solar panels and other forms of clean energy.

If all the research costs are paid upfront from public funds, and the price is not inflated due to patent monopolies, we can expect the price of many of these items to be 20 to 30 percent less. That should considerably hasten the rate at which the technology is adopted.    

Cooperating with China: An Alternative to a New Cold War

China now has the largest economy in the world. It will likely be more than fifty percent larger than the U.S. economy by the end of the decade. This is worth mentioning because if anyone has the idea that we can spend China into the ground with a Cold War arms race, they are not thinking very clearly.

The Soviet economy at its peak was roughly half the size of the U.S. economy. Matching our spending was a huge economic burden for them. In an arms race with China, we will be the ones facing a huge burden.

China’s government is not a democracy. It does not respect human rights and in fact, is committing atrocities against its Uyghur population, but we lack the ability to change this reality. We have to live with China as it is.

Rather than looking for costly, and potentially deadly, confrontations, we should look to areas of cooperation where we share a clear common interest. Containing pandemics and combatting global warming certainly fit this bill. We should want China to be as successful as possible in preventing, or at least limiting, the spread of pandemics within its borders. And, China has the same interest in terms of preventing spread in the United States.

In the same vein, we both should want to see greenhouse gas emissions reduced as quickly as possible everywhere in the world. If our technology can help China reduce emissions, that is a victory for us, and vice versa. There is no reason we should not be as cooperative as possible in these efforts.

I will also add the possibility that more extensive cooperation could change China’s internal politics. A quarter-century ago, when the standard wisdom in political and academic circles was that we had to open up trade with China as quickly as possible, it was common to claim that this would help to democratize the country. The idea was that somehow having tens of millions of workers producing cheap clothes and shoes for consumers in the United States would make the country a democracy.

That didn’t quite pan out. I would not be so brazen as to claim that greater cooperation with China’s scientists in key areas, like public health and climate technology, will make the country a democracy. However, it does seem plausible that increased contact with a group of people who have children, siblings, and parents among China’s political rulers, is likely to have more impact on China’s politics than having millions of low-paid workers producing clothes for U.S. consumers.     

The Great Choice: Producing Pandemic Billionaires or Combatting Pandemics

Back in April, Forbes identified 40 people who had become billionaires from the pandemic. Moderna alone was responsible for three of these newly minted billionaires. With the continued spread of the pandemic, and the increased sales of vaccines and other pandemic-related items, the numbers would surely be larger today.

Structuring our response to the pandemic in a way that created billionaires was clearly a policy choice. The Trump administration decided at the start of the pandemic, that even in cases where the government was picking up most of the development costs, it will still allow private companies to benefit from patent monopolies and other forms of intellectual property.

The decision to go this route made the pandemic worse and cost millions of lives. In a fully open-sourced system, the whole world could have been vaccinated months ago. Tests and treatments would be readily available and cheap.

We can avoid this mistake in preparing for future pandemics, but we face an important choice: is our priority combatting a pandemic or is it allowing a small number of people to get incredibly rich from a pandemic. Unfortunately, in our political system, this is a tough call.

[1] While most people understand that vaccines are needed to contain a pandemic, tests and treatments are also essential. We need people to be tested, so that infected people will take steps to avoid spreading the disease. But people will be less likely to get tested if there is no affordable treatment available. Therefore, if we want to contain a pandemic it is important that all three, vaccines, tests, and treatments be freely available.

[2] Earlier this year I was debating a representative of the pharmaceutical industry about the proposal before the WTO to suspend IP rights for the duration of the pandemic. He warned that if information about the mRNA vaccines was made freely available, then countries like China could use it to jump ahead of U.S. pharmaceutical companies, and possibly do things like developing a vaccine against cancer. I told him that I would not be scared of the possibility that China might develop a vaccine against cancer.

From the way our policy types talk about patents, or refuse to talk about them, they must think that the constitution guarantees life, liberty, and people getting incredibly rich from patents. Even as this pandemic has been needlessly prolonged by patent restrictions on the spread of technology for vaccines, tests, and treatments, resulting in millions of preventable deaths, we are still seeing no real debate as to whether we want to rely on these monopolies as a primary mechanism for financing medical innovation in the future.

At the most basic level, we need an explicit recognition that patent monopolies are just one possible mechanism for financing research. This should have always been obvious, but the pandemic should have hit us over the head with this simple but important fact.

The bulk of the research developing mRNA technology was done on the government’s dime. When it came to developing the Moderna vaccine, the government put up almost a billion dollars for the research and clinical testing. It also provided the company with insurance against failure, with a large advance purchase agreement that would have required it to buy hundreds of millions of doses even if it was not the best available vaccine.

Many people in policy circles somehow maintain a bizarre view that scientists would not have incentive to innovate without patent monopolies. This view is bizarre since there is considerable evidence that money can also provide incentives. The overwhelming majority of people in this country and around the world work for money, not patent monopolies, so it really should not be too hard to understand that we can just pay people to do the work and skip the government-granted patent monopoly.

This is especially important in terms of preparing for future pandemics because we are likely to see a large amount of public money put forward to develop vaccines, as well as tests and treatments.[1]  Our practice in the case of Operation Warp Speed (OWS) was to both pay for research and development costs upfront, and leave the companies with ownership rights for intellectual property, both in the form of patent and copyright monopolies, and also with protection of industrial secrets.

This has created the absurd situation where we have both limited the availability of vaccines, and other items needed to control the pandemic, and made the price far higher than what would exist in a free market. The mRNA vaccines cost less than $1.00 each to manufacture, if we double that to cover the cost of distribution, the companies are still charging markups of close to 2000 percent above their costs. There is a similar story for tests and treatments. In almost all cases, these would be available at very low prices in a market without patent or related monopolies.

If we had gone the open route at the beginning of the pandemic where research was freely shared throughout the world, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, anywhere in the world, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration as well as regulatory agencies in other countries.

Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.

 

Designing a Pandemic Response Focused on Stopping the Pandemic Rather than Making Billionaires

If the Biden administration follows through with its current plans, it will put up funding to develop prototype mRNA vaccines that can be quickly modified to deal with whatever specific virus is causing a pandemic. This is a great plan which can potentially save millions of lives and prevent trillions of dollars in economic losses. But, we need to avoid making the same mistakes as with OWS.

First and foremost, this means that everything is fully open. All results should be posted on the web as soon as practical. Any patents stemming from the research should be in the public domain. If a company already has patents that are related to the work, then the government should buy them out when it arranges the contract. If they don’t want to sell, then they aren’t eligible for a contract. It’s pretty simple.

There also cannot be any industrial secrets related to this work. This is again a very simple provision. Industrial secrets are protected through non-disclosure agreements. Any non-disclosure agreements that employees might sign for work related to the government-funded project are simply non-enforceable. That means that any employee of a future Moderna equivalent can make themselves a nice chunk of money, and help to save a large number of lives, by sharing any engineering information that this Moderna equivalent wants to keep secret.  

I have outlined in chapter 5 of Rigged (it’s free) how a system of contracting like this could work. Briefly, I see military contracting as a useful model. While there is lots of waste in military contracting, the United States does get good weapons systems.

Also, there would be an enormous advantage in this system since everything would be fully open. Work done on military contracts is typically enmeshed in secrecy. This is partly for the valid reason that we don’t want potential enemies to get access to our latest weapons systems. If other countries use technology funded under this system to help protect their own populations, and possibly improve on it to provide better health technologies for the world, that is a great outcome, not something to be feared.[2]

Ideally, we would share research costs internationally. Presumably we would expect countries to contribute in proportion to their GDP, with rich countries paying a higher percentage than poor countries, with the poorest presumably paying little or nothing. The exact formulas would have to be negotiated, and there could major differences in views across countries. But anyone who thinks the current system of enforcing IP rules internationally is simple has not been paying attention to trade negotiations over the last quarter century.

I have been told that no companies would agree to contracts where they have to surrender their intellectual property. That seems like a proposition worth testing. If a Pfizer or Moderna finds these conditions unacceptable then perhaps some of their employees would be willing to make lots of money with a new start-up. And, it’s at least possible that some of the people doing this research give a damn about human life.

It’s also important to remember that this is an international market. If U.S.-based scientists find themselves unable to work for money rather than patent monopolies, then we can look to pay scientists from Europe, India, China, or elsewhere. If our scientists don’t want the government’s money, it’s likely that scientists elsewhere in the world would be happy to take it.

It’s also worth mentioning in this context that the refusers will likely find themselves competing with vaccines and other products that are being sold as cheap generics. That probably will not be very good for their sales.

From Pandemics to Climate

Just as the world has an enormous shared interest in containing pandemics, we also have a common and urgent interest in limiting climate change. Here too, the approach of shared and open research makes an enormous amount of sense.

No one should be scared by the possibility that the Chinese might take advantage of a breakthrough in solar power or energy storage to aggressively install new capacity across China. We desperately want clean technologies to be adopted as quickly as possible. This should mean paying for the research upfront and making it fully open.

There is plenty of room in this story for good old-fashioned capitalist competition in the production and installation of clean energy products and electric cars. There also should be plenty of competition for research contracts.

But the products of this research, in the form of technical information, would be available at its marginal cost – zero. Any producer anywhere in the world would be free to incorporate the latest advances in solar technology in producing solar panels. This process would not only mean technology spreads more quickly, it will also reduce the price of solar panels and other forms of clean energy.

If all the research costs are paid upfront from public funds, and the price is not inflated due to patent monopolies, we can expect the price of many of these items to be 20 to 30 percent less. That should considerably hasten the rate at which the technology is adopted.    

Cooperating with China: An Alternative to a New Cold War

China now has the largest economy in the world. It will likely be more than fifty percent larger than the U.S. economy by the end of the decade. This is worth mentioning because if anyone has the idea that we can spend China into the ground with a Cold War arms race, they are not thinking very clearly.

The Soviet economy at its peak was roughly half the size of the U.S. economy. Matching our spending was a huge economic burden for them. In an arms race with China, we will be the ones facing a huge burden.

China’s government is not a democracy. It does not respect human rights and in fact, is committing atrocities against its Uyghur population, but we lack the ability to change this reality. We have to live with China as it is.

Rather than looking for costly, and potentially deadly, confrontations, we should look to areas of cooperation where we share a clear common interest. Containing pandemics and combatting global warming certainly fit this bill. We should want China to be as successful as possible in preventing, or at least limiting, the spread of pandemics within its borders. And, China has the same interest in terms of preventing spread in the United States.

In the same vein, we both should want to see greenhouse gas emissions reduced as quickly as possible everywhere in the world. If our technology can help China reduce emissions, that is a victory for us, and vice versa. There is no reason we should not be as cooperative as possible in these efforts.

I will also add the possibility that more extensive cooperation could change China’s internal politics. A quarter-century ago, when the standard wisdom in political and academic circles was that we had to open up trade with China as quickly as possible, it was common to claim that this would help to democratize the country. The idea was that somehow having tens of millions of workers producing cheap clothes and shoes for consumers in the United States would make the country a democracy.

That didn’t quite pan out. I would not be so brazen as to claim that greater cooperation with China’s scientists in key areas, like public health and climate technology, will make the country a democracy. However, it does seem plausible that increased contact with a group of people who have children, siblings, and parents among China’s political rulers, is likely to have more impact on China’s politics than having millions of low-paid workers producing clothes for U.S. consumers.     

The Great Choice: Producing Pandemic Billionaires or Combatting Pandemics

Back in April, Forbes identified 40 people who had become billionaires from the pandemic. Moderna alone was responsible for three of these newly minted billionaires. With the continued spread of the pandemic, and the increased sales of vaccines and other pandemic-related items, the numbers would surely be larger today.

Structuring our response to the pandemic in a way that created billionaires was clearly a policy choice. The Trump administration decided at the start of the pandemic, that even in cases where the government was picking up most of the development costs, it will still allow private companies to benefit from patent monopolies and other forms of intellectual property.

The decision to go this route made the pandemic worse and cost millions of lives. In a fully open-sourced system, the whole world could have been vaccinated months ago. Tests and treatments would be readily available and cheap.

We can avoid this mistake in preparing for future pandemics, but we face an important choice: is our priority combatting a pandemic or is it allowing a small number of people to get incredibly rich from a pandemic. Unfortunately, in our political system, this is a tough call.

[1] While most people understand that vaccines are needed to contain a pandemic, tests and treatments are also essential. We need people to be tested, so that infected people will take steps to avoid spreading the disease. But people will be less likely to get tested if there is no affordable treatment available. Therefore, if we want to contain a pandemic it is important that all three, vaccines, tests, and treatments be freely available.

[2] Earlier this year I was debating a representative of the pharmaceutical industry about the proposal before the WTO to suspend IP rights for the duration of the pandemic. He warned that if information about the mRNA vaccines was made freely available, then countries like China could use it to jump ahead of U.S. pharmaceutical companies, and possibly do things like developing a vaccine against cancer. I told him that I would not be scared of the possibility that China might develop a vaccine against cancer.

As we all know, local newspapers have been dropping like flies over the last two decades. Even major regional papers like the Chicago Tribune and Cleveland Plain Dealer have fallen on hard times, sharply cutting back their staff and coverage. In many cases, hedge or private equity funds have done the downsizing or closures. They continue to circle like vultures over the ones they have not already bought. It is reasonable to ask whether anything can be done to reverse this decline.

My friends, Robert McChesney and John Nichols, have put forward the “Local Journalism Initiative (LJI)” to answer the call. (A fuller version is available here.) Their proposal would set out a pot of money to be distributed to local newspapers, based on votes at the county level. They propose elections take place every three years, with each person given three votes. The money would be distributed to news organizations in proportion to the votes received, with a cutoff of 1.0 percent required to get any funding, or 0.5 percent in large counties.

They envision the total size of the pot to be equal to 0.21 percent of GDP or roughly $46 billion in the 2021 economy. This is their estimate of the size of the subsidy from the Postal Service to newspapers in the 19th century, when it was required to deliver newspapers at a loss.

The logic of the LJI is that organizations that provide news provide an essential public service in informing the population. There is a need for a public subsidy since the service will be grossly underprovided in the market as currently structured.

They point to the postal subsidy as a recognition of this need. Like the postal subsidy, their proposal leaves the government neutral as to the content of the news. Voters will decide which organizations they believe are worth their support and the money would be divided accordingly.

They do set out criteria for qualifying for eligibility. A news organization must meet the following:

  • Be formally identified and understood as nonprofit;
  • Be functioning for six months prior to the election, so voters can see what the applicant actually does;
  • Be based in the home county with 75 percent of its salaries going to employees based in the home county;
  • Be completely independent; not a subsidiary of a larger nonprofit group;
  • Produce and publish original material at least five days per week on its website;

To my view, this is an interesting proposal that deserves serious consideration. It is also worth noting in this context a proposal that was included at one time in the Build Back Better (BBB) plan, which would give subsidies to local news outlets for employing reporters.

These subsidies would be much smaller, coming to around $340 million a year. They also are intended to go to existing for-profit newspapers, including newspapers that are owned by large chains. Although the sum of the money involved in the BBB proposal is two orders of magnitude smaller than the amount in the LCI, it at least is an explicit recognition of the desirability of subsidizing the provision of local news.

A Tax Credit System: A Third Option

While I think the LJI would be an enormous gain, if we could win it, I continue to prefer the tax credit system that I have been pushing for several decades. This is a proposal for an amount of money to be allotted to every person (e.g. $100) to be given to the creative worker or organization of their choice. This funding would not be restricted to news organizations. It would instead go to whoever the person designated to get the money. (I describe the proposal in chapter 5 of Rigged [it’s free].)

I would have only three conditions for receiving the money. First, that the person (an individual writer, musician, singer, etc.) or organization (publisher, newspaper, recording company, etc.) must register with the IRS saying what it is they do.

Second, whoever registers is ineligible for copyright protection for a substantial period of time, say three to five years after being in the system. This is to prevent people from getting money through the tax credit system and then establishing a name for themselves and earning really big bucks in the copyright system (more on this in a moment). We give people one subsidy for their work, not two. It also follows from this that all material produced in the system is fully open and cannot be subject to any sort of paywall.

Third, a person or organization must get a certain minimum amount, say $3,000, to collect anything. This is to prevent the most obvious type of fraud, where one person gives their friend their $100 credit, and in turn, their friend gives them their $100 credit. It would still be possible to coordinate 30 people giving the same person their $100 and then rebating the payment to each one, but that would be a lot of illegal coordination for very little potential payoff.

Simple, Simple, Simple: The Key to the Tax Credit System

My preference for the tax credit system is both that it applies to a much broader range of material than just news, and that I think it would be far easier to implement and enforce. I would also add that it can, in principle, be sliced and diced so that it can be phased in incrementally at the national level or put in place at the state or even local level.

Before getting into some of the logistics, it is important to make an often overlooked point about copyrights. McChesney and Nichols are right to point out the postal subsidy in the 19th century as an explicit recognition that newspapers filled an important public purpose. In the same vein, copyright monopolies are established by Congress for the public purpose of promoting creative work.

This is stated explicitly in the constitution where the issuance of patents or copyright monopolies is laid out as one of the powers of Congress, in Article 1, Section 8, just like the power to tax or the power to declare war:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;”

It would be difficult to envision clearer wording. Copyright monopolies are given to promote a public purpose, which may not be adequately met without some form of government subsidy. They are not a right of individual creators included in the Bill of Rights.

Issuing copyrights is a power that Congress may or may not choose to exercise, just as it is not obligated to impose taxes or declare war. It can also set whatever terms it deems appropriate for copyright, making the monopoly longer or shorter or stronger or weaker.

This is the context in which it makes sense to exclude recipients of tax credit money from copyright protection. If the government is giving a person one subsidy through the tax credit system, it doesn’t make sense to give them a second subsidy in the form of a copyright monopoly. We also want to ensure that the public gets the full benefit of its tax credit subsidy by requiring that any material produced through the system is fully open and can be freely distributed all around the world.

This also fits with the “simple, simple, simple” requirement. The ban on recipients getting copyright protection is self-enforcing. Anyone can claim a copyright, but if they tried to enforce it for material they produced when they were in the tax credit system, the alleged infringer need only point out that they were in the tax credit system at the time the work was produced. Therefore, there is no valid copyright. The government does not have to do anything in this story.

The model for this tax credit system is the tax deduction for charitable contributions. Under this provision, a wide range of organizations, including churches, charities for the poor, and cultural and scientific organizations, can effectively receive a subsidy from the government by registering with the IRS as a nonprofit organization.

For a person in the top tax bracket, this subsidy comes to almost 40 cents on the dollar. This means that if a wealthy person wants to give $1 million to a particular church or cultural organization, the government reimburses them for $400,000 of this sum.  

The IRS makes no effort to determine whether a particular charity is an efficient way to provide services to the poor, or whether a certain religion is a good religion. The only question is whether the organization does what it claims to do.

The same principle would apply to registering to be eligible for the tax credit system. An individual or organization would have to indicate what it is they claim to do (e.g. write, perform music, report on local news, etc.). The IRS would only have the responsibility to verify that the organization does in fact do what they claim.

From the individual’s standpoint, using the tax credit would be as simple as taking the charitable deduction, with the distinction that the credit would be available to everyone, not just people who had tax liabilities. And, unlike the charitable deduction, the government would be picking up the full amount, not just reducing tax liabilities by some fraction of the amount contributed. (If we wanted to make the use of the credit system very simple, we can have a unique number for each person or organization registered. Taxpayers could then indicate on their tax forms the amount of their credit they want to go to them.)   

Tax Credits vs. Local Journalism Initiative 

This tax credit system is obviously much broader than the LJI, but even though promoting local journalism may not be its primary purpose, it may actually be more effective in meeting this goal. The main point here is that local journalism gets nothing if there is not a measure that can gain political support. By making the target of the tax credit creative work more generally, and not just local journalism, there is potentially a much wider range of supporters.

It is also important to recognize that it is not just newspapers that have suffered in the digital age. The money spent on recorded music has also plummeted over the last quarter-century. In 2000, people spent $19.1 billion on recorded music, an amount equal to 0.18 percent of GDP. This had fallen to $2.3 billion by 2020, just over 0.01 percent of GDP. The bulk of this money goes to a small number of big-name singers and musicians, leaving almost nothing for the vast majority of recording artists.[1] There is a strong argument for creating an alternative mechanism of support in this area as well.

Making a broad target also gets the government out of the business of defining what is a local news organization. In the digital era, we are talking primarily about online news sites, with physical newspapers playing at most a very secondary role. Is the government going to police these sites and disqualify ones that make fiction, cartoons, or music available on their sites in addition to local news? These additions would likely make them more attractive to the people voting on where their money goes, but don’t fit the definition of local news.

To my view, the profit/nonprofit distinction is also not especially valuable. There are plenty of nonprofit organizations where CEOs and other top executives can pocket millions of dollars a year. I can’t see any reason for being okay with an organization that has grossly overpaid top management pocketing money, but being upset if someone is making a profit off the system through owning shares. It seems the main check on abuses has to be that people will be less likely to give their credits or votes to an organization that does not actually provide useful material.

In terms of the money that news organizations actually need to be effective, I am inclined to think that it is likely far less than would have been true sixty or seventy years ago. Part of the reason is that people are less dependent on the news media to get information.

Forty, or even thirty, years ago, if someone wanted to know what their city council or state legislature did, they would be almost totally dependent on the media. Unless they were prepared to physically go to the relevant offices to get the records of meetings and bills that were passed or voted on, they would have no way of knowing what was going on. Today, the vast majority of this material is available on the web.

The same is true for government data in a wide range of areas. For example, if I wanted my state or county budget, three decades ago I would have to go down to the offices where they are kept, or arrange to have copies sent to me.   

We still need reporters to do the legwork and find out what is going behind the scenes. They need to find out which politicians or interest groups were pushing or blocking specific legislature. We also need experienced reporters to explain the significance of various measures whose meaning might not be clear to casual observers, but much of the background information can now be provided by a link to a website.[2]

Also, if we compare the publication process today to what would have existed forty years ago, there have been substantial efficiencies in writing up news that did not exist in the past. Most obviously, no one has a secretary anymore to type up their articles. They also can rely on spellcheck programs to correct most spelling errors and many grammatical mistakes. There is still a need for editors to review articles, but much of the office staff that would have been essential in a newsroom forty years ago would not be necessary today.

In addition, since print copies are likely to be a relatively unimportant part of news operations going forward, the expenses associated with laying out and physically printing and distributing newspapers are no longer a major issue. Of course, newspapers would always be able to sell physical copies to people who wanted them, but presumably the price would roughly cover the cost of print editions.

News outlets could also get some money from advertising, although the amount available in a copyright-free world would be less than what they may be able to take in now.[3] Still, it would be far from zero. People are attached to specific websites, and even if they could find all the material posted at various other sites, if they like what is produced on a news outlet’s site, they will be regular visitors and therefore good targets for advertisers.    

The prohibition on copyright protection for organizations and individuals receiving the tax credit would also mean that most of the largest newspapers in the country would not be eligible. It is unlikely that a profitable paper like the New York Times or Wall Street Journal would opt to give up their copyright protection to be eligible for tax credit money. Nor would their reporters, many of whom expect to make large sums from book contracts, be willing to have the option for copyright protection precluded. This means that tax credit money destined for news outlets would be going to smaller ones and new upstarts.

For these reasons, a reasonable target for money from a tax credit to support news production is considerably smaller than the 0.21 percent of GDP that McChesney and Nichols envision. There are roughly 3,000 counties in the United States. Suppose that we would like an average of between five and ten full-time equivalent (FTE) reporters and editors for each one. If this seems insufficient, consider that many of these counties have just a few thousand people and can likely be well-served with just two or three FTE reporters and editors.

This would imply total staffing of between 15,000 and 30,000 people. The average compensation in the private sector for a FTE worker in 2019 was $66,800.[4] If we raise this 10 percent to cover inflation and pay increases in the last two years, and throw in 20 percent for non-wage compensation, we get an average of $88,200 for a FTE employee. That would imply a total cost of between $1.3 billion and $2.6 billion for staffing up the nation’s newsrooms.

It seems plausible that this much money can be raised from a tax credit of say $100 to $150 per person, designed to support creative workers of all types. The country has roughly 280 million adults. If everyone took advantage of a tax credit of this size it would generate $28 billion to $42 billion annually. Clearly, take-up won’t be 100 percent, but it is likely to be fairly high since it is effectively free money.[5]

Would it be possible to convince the public that five or ten percent of the money designated to support creative work more generally should support local news coverage? That seems unknowable in advance of putting in place this sort of system, but if individuals would not voluntarily cough up this much money from a broader tax credit, it seems like a measure designated to give this much, or more, money to support local news would have a difficult legislative path.

Experimenting at the State and Local Level

Since opportunities for getting major legislation passed at the national level are rare, it is always useful to consider whether proposals can be structured in a way where they can be effectively implemented at the state or local level. (A wealthy person who cared about democracy could also cough up the money.) There actually could be a very interesting story where a state or even city attempts to experiment with a creative worker tax credit.

Suppose a state, or even city, proposed to give all their residents $100 or $150 to support creative workers. This would create a substantial pot of money to attract creative workers of all types. As with the national credit, the rules would require that all the material created during the period the person is receiving money through the system not be subject to copyright protection. This means it would be freely available for the whole world.

There could also be a residency requirement, with recipients required to live in the city or state, say for eight or nine months a year. If musicians, writers, or other creative workers are required to live in an area for much of the year, they are likely to want to perform music or plays, or run writing workshops, or do other activities to increase their income. This would also be a good strategy for them since it would make them better known to the people who are giving out their tax credits.

This sort of concentration of creative workers could make a state or city a mecca for the arts that could attract a large number of visitors each year. The revenue from visitors could plausibly cover much or all of the cost of the credit. Of course, this benefit would be in addition to the material produced for the people in the state or city.   

In any case, it would be a relatively limited commitment for a state or city to put a tax credit system in place for a period of time. This sort of experiment would provide insight into how it could work on a larger scale.

Subsidies Without Selecting Content

The most important characteristic of both the tax credit system and LJI is that they provide public subsidies without any attempt to determine content. This is an essential feature since there would be little public support for a major expansion of government-run news or culture production, nor should there be.

It is important that individuals decide what news and cultural organizations they are prepared to support. This is the beauty of the original public subsidy, the provision for copyright monopolies in the constitution. The ability to claim a copyright monopoly does not depend on the content, only that the work be original.

In the same vein, these proposals do not get the government involved in determining content. This is left to individuals to determine where their money will go. If we hope that news outlets survive, and creative work will thrive, this is the path we should want to follow.

[1] There is also a sharp decline in the money spent at movie theaters, from 0.008 percent of GDP in 2000 to 0.006 percent of GDP in 2019, which is partially offset by increased spending on streaming services. The overall picture will not be clear until after the pandemic is over.

[2] This is also a large part of the story of the decline of major regional newspapers like the Chicago Tribune or the Los Angeles Times. Since almost all papers can be readily viewed on the web, no one is dependent on these papers for their coverage of national or international news

[3] To level the playing field a bit, in my dream world social media companies, like Facebook, would not enjoy Section 230 protection. If a company takes ads or sells personal information, it should be liable for defamatory material that it circulates, as is already the case for newspapers.

[4] This figure comes from the Bureau of Economic Analysis’ National Income and Product Accounts, Table 6.6D, Line 1.

[5] There is an argument that take-up rates would initially be lower, since people would be unfamiliar with the system. If there is reason to believe this would be the case, then the initial sums could be larger, phasing down to the targeted level over time.

As we all know, local newspapers have been dropping like flies over the last two decades. Even major regional papers like the Chicago Tribune and Cleveland Plain Dealer have fallen on hard times, sharply cutting back their staff and coverage. In many cases, hedge or private equity funds have done the downsizing or closures. They continue to circle like vultures over the ones they have not already bought. It is reasonable to ask whether anything can be done to reverse this decline.

My friends, Robert McChesney and John Nichols, have put forward the “Local Journalism Initiative (LJI)” to answer the call. (A fuller version is available here.) Their proposal would set out a pot of money to be distributed to local newspapers, based on votes at the county level. They propose elections take place every three years, with each person given three votes. The money would be distributed to news organizations in proportion to the votes received, with a cutoff of 1.0 percent required to get any funding, or 0.5 percent in large counties.

They envision the total size of the pot to be equal to 0.21 percent of GDP or roughly $46 billion in the 2021 economy. This is their estimate of the size of the subsidy from the Postal Service to newspapers in the 19th century, when it was required to deliver newspapers at a loss.

The logic of the LJI is that organizations that provide news provide an essential public service in informing the population. There is a need for a public subsidy since the service will be grossly underprovided in the market as currently structured.

They point to the postal subsidy as a recognition of this need. Like the postal subsidy, their proposal leaves the government neutral as to the content of the news. Voters will decide which organizations they believe are worth their support and the money would be divided accordingly.

They do set out criteria for qualifying for eligibility. A news organization must meet the following:

  • Be formally identified and understood as nonprofit;
  • Be functioning for six months prior to the election, so voters can see what the applicant actually does;
  • Be based in the home county with 75 percent of its salaries going to employees based in the home county;
  • Be completely independent; not a subsidiary of a larger nonprofit group;
  • Produce and publish original material at least five days per week on its website;

To my view, this is an interesting proposal that deserves serious consideration. It is also worth noting in this context a proposal that was included at one time in the Build Back Better (BBB) plan, which would give subsidies to local news outlets for employing reporters.

These subsidies would be much smaller, coming to around $340 million a year. They also are intended to go to existing for-profit newspapers, including newspapers that are owned by large chains. Although the sum of the money involved in the BBB proposal is two orders of magnitude smaller than the amount in the LCI, it at least is an explicit recognition of the desirability of subsidizing the provision of local news.

A Tax Credit System: A Third Option

While I think the LJI would be an enormous gain, if we could win it, I continue to prefer the tax credit system that I have been pushing for several decades. This is a proposal for an amount of money to be allotted to every person (e.g. $100) to be given to the creative worker or organization of their choice. This funding would not be restricted to news organizations. It would instead go to whoever the person designated to get the money. (I describe the proposal in chapter 5 of Rigged [it’s free].)

I would have only three conditions for receiving the money. First, that the person (an individual writer, musician, singer, etc.) or organization (publisher, newspaper, recording company, etc.) must register with the IRS saying what it is they do.

Second, whoever registers is ineligible for copyright protection for a substantial period of time, say three to five years after being in the system. This is to prevent people from getting money through the tax credit system and then establishing a name for themselves and earning really big bucks in the copyright system (more on this in a moment). We give people one subsidy for their work, not two. It also follows from this that all material produced in the system is fully open and cannot be subject to any sort of paywall.

Third, a person or organization must get a certain minimum amount, say $3,000, to collect anything. This is to prevent the most obvious type of fraud, where one person gives their friend their $100 credit, and in turn, their friend gives them their $100 credit. It would still be possible to coordinate 30 people giving the same person their $100 and then rebating the payment to each one, but that would be a lot of illegal coordination for very little potential payoff.

Simple, Simple, Simple: The Key to the Tax Credit System

My preference for the tax credit system is both that it applies to a much broader range of material than just news, and that I think it would be far easier to implement and enforce. I would also add that it can, in principle, be sliced and diced so that it can be phased in incrementally at the national level or put in place at the state or even local level.

Before getting into some of the logistics, it is important to make an often overlooked point about copyrights. McChesney and Nichols are right to point out the postal subsidy in the 19th century as an explicit recognition that newspapers filled an important public purpose. In the same vein, copyright monopolies are established by Congress for the public purpose of promoting creative work.

This is stated explicitly in the constitution where the issuance of patents or copyright monopolies is laid out as one of the powers of Congress, in Article 1, Section 8, just like the power to tax or the power to declare war:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;”

It would be difficult to envision clearer wording. Copyright monopolies are given to promote a public purpose, which may not be adequately met without some form of government subsidy. They are not a right of individual creators included in the Bill of Rights.

Issuing copyrights is a power that Congress may or may not choose to exercise, just as it is not obligated to impose taxes or declare war. It can also set whatever terms it deems appropriate for copyright, making the monopoly longer or shorter or stronger or weaker.

This is the context in which it makes sense to exclude recipients of tax credit money from copyright protection. If the government is giving a person one subsidy through the tax credit system, it doesn’t make sense to give them a second subsidy in the form of a copyright monopoly. We also want to ensure that the public gets the full benefit of its tax credit subsidy by requiring that any material produced through the system is fully open and can be freely distributed all around the world.

This also fits with the “simple, simple, simple” requirement. The ban on recipients getting copyright protection is self-enforcing. Anyone can claim a copyright, but if they tried to enforce it for material they produced when they were in the tax credit system, the alleged infringer need only point out that they were in the tax credit system at the time the work was produced. Therefore, there is no valid copyright. The government does not have to do anything in this story.

The model for this tax credit system is the tax deduction for charitable contributions. Under this provision, a wide range of organizations, including churches, charities for the poor, and cultural and scientific organizations, can effectively receive a subsidy from the government by registering with the IRS as a nonprofit organization.

For a person in the top tax bracket, this subsidy comes to almost 40 cents on the dollar. This means that if a wealthy person wants to give $1 million to a particular church or cultural organization, the government reimburses them for $400,000 of this sum.  

The IRS makes no effort to determine whether a particular charity is an efficient way to provide services to the poor, or whether a certain religion is a good religion. The only question is whether the organization does what it claims to do.

The same principle would apply to registering to be eligible for the tax credit system. An individual or organization would have to indicate what it is they claim to do (e.g. write, perform music, report on local news, etc.). The IRS would only have the responsibility to verify that the organization does in fact do what they claim.

From the individual’s standpoint, using the tax credit would be as simple as taking the charitable deduction, with the distinction that the credit would be available to everyone, not just people who had tax liabilities. And, unlike the charitable deduction, the government would be picking up the full amount, not just reducing tax liabilities by some fraction of the amount contributed. (If we wanted to make the use of the credit system very simple, we can have a unique number for each person or organization registered. Taxpayers could then indicate on their tax forms the amount of their credit they want to go to them.)   

Tax Credits vs. Local Journalism Initiative 

This tax credit system is obviously much broader than the LJI, but even though promoting local journalism may not be its primary purpose, it may actually be more effective in meeting this goal. The main point here is that local journalism gets nothing if there is not a measure that can gain political support. By making the target of the tax credit creative work more generally, and not just local journalism, there is potentially a much wider range of supporters.

It is also important to recognize that it is not just newspapers that have suffered in the digital age. The money spent on recorded music has also plummeted over the last quarter-century. In 2000, people spent $19.1 billion on recorded music, an amount equal to 0.18 percent of GDP. This had fallen to $2.3 billion by 2020, just over 0.01 percent of GDP. The bulk of this money goes to a small number of big-name singers and musicians, leaving almost nothing for the vast majority of recording artists.[1] There is a strong argument for creating an alternative mechanism of support in this area as well.

Making a broad target also gets the government out of the business of defining what is a local news organization. In the digital era, we are talking primarily about online news sites, with physical newspapers playing at most a very secondary role. Is the government going to police these sites and disqualify ones that make fiction, cartoons, or music available on their sites in addition to local news? These additions would likely make them more attractive to the people voting on where their money goes, but don’t fit the definition of local news.

To my view, the profit/nonprofit distinction is also not especially valuable. There are plenty of nonprofit organizations where CEOs and other top executives can pocket millions of dollars a year. I can’t see any reason for being okay with an organization that has grossly overpaid top management pocketing money, but being upset if someone is making a profit off the system through owning shares. It seems the main check on abuses has to be that people will be less likely to give their credits or votes to an organization that does not actually provide useful material.

In terms of the money that news organizations actually need to be effective, I am inclined to think that it is likely far less than would have been true sixty or seventy years ago. Part of the reason is that people are less dependent on the news media to get information.

Forty, or even thirty, years ago, if someone wanted to know what their city council or state legislature did, they would be almost totally dependent on the media. Unless they were prepared to physically go to the relevant offices to get the records of meetings and bills that were passed or voted on, they would have no way of knowing what was going on. Today, the vast majority of this material is available on the web.

The same is true for government data in a wide range of areas. For example, if I wanted my state or county budget, three decades ago I would have to go down to the offices where they are kept, or arrange to have copies sent to me.   

We still need reporters to do the legwork and find out what is going behind the scenes. They need to find out which politicians or interest groups were pushing or blocking specific legislature. We also need experienced reporters to explain the significance of various measures whose meaning might not be clear to casual observers, but much of the background information can now be provided by a link to a website.[2]

Also, if we compare the publication process today to what would have existed forty years ago, there have been substantial efficiencies in writing up news that did not exist in the past. Most obviously, no one has a secretary anymore to type up their articles. They also can rely on spellcheck programs to correct most spelling errors and many grammatical mistakes. There is still a need for editors to review articles, but much of the office staff that would have been essential in a newsroom forty years ago would not be necessary today.

In addition, since print copies are likely to be a relatively unimportant part of news operations going forward, the expenses associated with laying out and physically printing and distributing newspapers are no longer a major issue. Of course, newspapers would always be able to sell physical copies to people who wanted them, but presumably the price would roughly cover the cost of print editions.

News outlets could also get some money from advertising, although the amount available in a copyright-free world would be less than what they may be able to take in now.[3] Still, it would be far from zero. People are attached to specific websites, and even if they could find all the material posted at various other sites, if they like what is produced on a news outlet’s site, they will be regular visitors and therefore good targets for advertisers.    

The prohibition on copyright protection for organizations and individuals receiving the tax credit would also mean that most of the largest newspapers in the country would not be eligible. It is unlikely that a profitable paper like the New York Times or Wall Street Journal would opt to give up their copyright protection to be eligible for tax credit money. Nor would their reporters, many of whom expect to make large sums from book contracts, be willing to have the option for copyright protection precluded. This means that tax credit money destined for news outlets would be going to smaller ones and new upstarts.

For these reasons, a reasonable target for money from a tax credit to support news production is considerably smaller than the 0.21 percent of GDP that McChesney and Nichols envision. There are roughly 3,000 counties in the United States. Suppose that we would like an average of between five and ten full-time equivalent (FTE) reporters and editors for each one. If this seems insufficient, consider that many of these counties have just a few thousand people and can likely be well-served with just two or three FTE reporters and editors.

This would imply total staffing of between 15,000 and 30,000 people. The average compensation in the private sector for a FTE worker in 2019 was $66,800.[4] If we raise this 10 percent to cover inflation and pay increases in the last two years, and throw in 20 percent for non-wage compensation, we get an average of $88,200 for a FTE employee. That would imply a total cost of between $1.3 billion and $2.6 billion for staffing up the nation’s newsrooms.

It seems plausible that this much money can be raised from a tax credit of say $100 to $150 per person, designed to support creative workers of all types. The country has roughly 280 million adults. If everyone took advantage of a tax credit of this size it would generate $28 billion to $42 billion annually. Clearly, take-up won’t be 100 percent, but it is likely to be fairly high since it is effectively free money.[5]

Would it be possible to convince the public that five or ten percent of the money designated to support creative work more generally should support local news coverage? That seems unknowable in advance of putting in place this sort of system, but if individuals would not voluntarily cough up this much money from a broader tax credit, it seems like a measure designated to give this much, or more, money to support local news would have a difficult legislative path.

Experimenting at the State and Local Level

Since opportunities for getting major legislation passed at the national level are rare, it is always useful to consider whether proposals can be structured in a way where they can be effectively implemented at the state or local level. (A wealthy person who cared about democracy could also cough up the money.) There actually could be a very interesting story where a state or even city attempts to experiment with a creative worker tax credit.

Suppose a state, or even city, proposed to give all their residents $100 or $150 to support creative workers. This would create a substantial pot of money to attract creative workers of all types. As with the national credit, the rules would require that all the material created during the period the person is receiving money through the system not be subject to copyright protection. This means it would be freely available for the whole world.

There could also be a residency requirement, with recipients required to live in the city or state, say for eight or nine months a year. If musicians, writers, or other creative workers are required to live in an area for much of the year, they are likely to want to perform music or plays, or run writing workshops, or do other activities to increase their income. This would also be a good strategy for them since it would make them better known to the people who are giving out their tax credits.

This sort of concentration of creative workers could make a state or city a mecca for the arts that could attract a large number of visitors each year. The revenue from visitors could plausibly cover much or all of the cost of the credit. Of course, this benefit would be in addition to the material produced for the people in the state or city.   

In any case, it would be a relatively limited commitment for a state or city to put a tax credit system in place for a period of time. This sort of experiment would provide insight into how it could work on a larger scale.

Subsidies Without Selecting Content

The most important characteristic of both the tax credit system and LJI is that they provide public subsidies without any attempt to determine content. This is an essential feature since there would be little public support for a major expansion of government-run news or culture production, nor should there be.

It is important that individuals decide what news and cultural organizations they are prepared to support. This is the beauty of the original public subsidy, the provision for copyright monopolies in the constitution. The ability to claim a copyright monopoly does not depend on the content, only that the work be original.

In the same vein, these proposals do not get the government involved in determining content. This is left to individuals to determine where their money will go. If we hope that news outlets survive, and creative work will thrive, this is the path we should want to follow.

[1] There is also a sharp decline in the money spent at movie theaters, from 0.008 percent of GDP in 2000 to 0.006 percent of GDP in 2019, which is partially offset by increased spending on streaming services. The overall picture will not be clear until after the pandemic is over.

[2] This is also a large part of the story of the decline of major regional newspapers like the Chicago Tribune or the Los Angeles Times. Since almost all papers can be readily viewed on the web, no one is dependent on these papers for their coverage of national or international news

[3] To level the playing field a bit, in my dream world social media companies, like Facebook, would not enjoy Section 230 protection. If a company takes ads or sells personal information, it should be liable for defamatory material that it circulates, as is already the case for newspapers.

[4] This figure comes from the Bureau of Economic Analysis’ National Income and Product Accounts, Table 6.6D, Line 1.

[5] There is an argument that take-up rates would initially be lower, since people would be unfamiliar with the system. If there is reason to believe this would be the case, then the initial sums could be larger, phasing down to the targeted level over time.

The Washington Post had an interesting piece that looked at the lives of several people who quit low-paying jobs in a restaurant in Arkansas since the pandemic began. There are three interesting points that come out of this story.

The first is the headline item (actually, subhead) that although the quitters’ mental health improved, their finances were not necessarily better after they left their jobs. There is an obvious point here that people should recognize. It is unlikely that, even in a good labor market, people who leave near minimum wage jobs will suddenly find themselves flush with money.

If someone is earning $10 an hour, even a 20 percent increase (in excess of inflation) only gets them to $12 an hour. That sort of increase likely means a big difference in their standard of living, but still leaves them far short of a comfortable middle-class existence. In some cases, the modest gains from the tighter labor market may give them the ability to get additional education or training that will let them enter a higher paying occupation, but we shouldn’t expect that a tight labor market alone will mean that workers in the lowest paying jobs are now financially secure.

There is an important qualification to the stories of the people discussed in this article. The piece starts with the early days of the pandemic when the restaurant was losing business due to the shutdowns. In 2020, we did not have a tight labor market. Instead, we had very high unemployment.

It has only been in the last half-year that we could say that workers were getting the upper hand and had their choice of jobs. The picture for these workers might look qualitatively better if they were quitting jobs today, and the labor market remains tight.

The second point is that the article portrays the restaurant owners as very sympathetic people. The restaurant is owned by a young couple who are pursuing a dream. They work hard alongside their staff, struggling to keep the restaurant open. While some of the former employees (the restaurant closed) may disagree with the article’s portrayal, the reality is that many low-wage employers are not assholes. They are struggling to make a business work, and that can mean that they can’t afford to pay decent wages to their workers. Of course, this story does not apply to the Walmarts and the McDonalds of the world.

The third point is that the restaurant closed. This means that no one is working there. That is the story of how whatever labor “shortage” we are now seeing gets resolved. Businesses that cannot afford to pay workers the prevailing wage go out of business. In many cases, this may not be pretty. Business owners, like the couple in this story, see their dreams shattered. But that is the way a market economy works.

When uncompetitive businesses shut down, their workers look for employment elsewhere. This process will bring the demand and the supply of workers more into balance. The closing of the restaurant described in the Post article is part of this story.    

The Washington Post had an interesting piece that looked at the lives of several people who quit low-paying jobs in a restaurant in Arkansas since the pandemic began. There are three interesting points that come out of this story.

The first is the headline item (actually, subhead) that although the quitters’ mental health improved, their finances were not necessarily better after they left their jobs. There is an obvious point here that people should recognize. It is unlikely that, even in a good labor market, people who leave near minimum wage jobs will suddenly find themselves flush with money.

If someone is earning $10 an hour, even a 20 percent increase (in excess of inflation) only gets them to $12 an hour. That sort of increase likely means a big difference in their standard of living, but still leaves them far short of a comfortable middle-class existence. In some cases, the modest gains from the tighter labor market may give them the ability to get additional education or training that will let them enter a higher paying occupation, but we shouldn’t expect that a tight labor market alone will mean that workers in the lowest paying jobs are now financially secure.

There is an important qualification to the stories of the people discussed in this article. The piece starts with the early days of the pandemic when the restaurant was losing business due to the shutdowns. In 2020, we did not have a tight labor market. Instead, we had very high unemployment.

It has only been in the last half-year that we could say that workers were getting the upper hand and had their choice of jobs. The picture for these workers might look qualitatively better if they were quitting jobs today, and the labor market remains tight.

The second point is that the article portrays the restaurant owners as very sympathetic people. The restaurant is owned by a young couple who are pursuing a dream. They work hard alongside their staff, struggling to keep the restaurant open. While some of the former employees (the restaurant closed) may disagree with the article’s portrayal, the reality is that many low-wage employers are not assholes. They are struggling to make a business work, and that can mean that they can’t afford to pay decent wages to their workers. Of course, this story does not apply to the Walmarts and the McDonalds of the world.

The third point is that the restaurant closed. This means that no one is working there. That is the story of how whatever labor “shortage” we are now seeing gets resolved. Businesses that cannot afford to pay workers the prevailing wage go out of business. In many cases, this may not be pretty. Business owners, like the couple in this story, see their dreams shattered. But that is the way a market economy works.

When uncompetitive businesses shut down, their workers look for employment elsewhere. This process will bring the demand and the supply of workers more into balance. The closing of the restaurant described in the Post article is part of this story.    

November retail sales were reported yesterday as increasing by 0.3 percent from the October level. This was considerably lower than expected and (predictably) reported as bad news for Biden. But for those of us who don’t get paid to tell people how everything is bad news for Biden, there is actually a very interesting story in the November data.

First, it is important to recognize that the November 0.3 percent growth number follows an extraordinarily rapid 1.8 percent growth number (revised up from 1.7 percent) reported for October. Retail sales data have a large amount of error, so it is entirely possible that the October figure was overstated by 0.4-0.6 percentage points, which would mean that the November growth figure was understated by the same amount. In any case, the November retail sales figure is 2.1 percent higher than the September number, which is strong growth in anyone’s book.

But there is another aspect to this story that has been almost completely overlooked by the media. One of the issues in the debate over whether inflation would be transitory or persistent is whether people would be spending the money they banked during the recession. This money includes the various pandemic payments ($1,200 per person in 2020 and $2,000 per person this year), as well as the money saved from not going to restaurants and movies, or taking vacations.

The folks arguing that inflation would be persistent have insisted that people would spend this money once the economy opened up more. The transitory folks have argued that much of this money would be saved, meaning that we have less reason to fear excess demand pushing inflation higher.

Thus far, the data have supported the transitory argument. The saving rate for October, the most recent month for which data are available, was 7.3 percent. This is just about the average for the three years prior to the pandemic. If people are spending the money banked in the pandemic, we should expect the saving rate to be far below its pre-pandemic level.

The weaker than expected retail sales number for November means that the relatively high savings rate is continuing. In other words, people are still not spending the money banked in the pandemic. This means that we have less reason to fear excess demand driving inflation.

Given how inflation-obsessed the media has been in recent months, it is sort of amazing that this point has largely been missed in discussing the November data. I will add my usual caveats. This is just one month’s data and there is considerable measurement error in the series, but based on what we saw yesterday, Team Transitory scored a big point.

One last item: the weaker than expected November sales were not in any obvious way connected to the spread of the pandemic. Restaurant sales were 1.0 percent higher in November than October and 37.4 percent above their year-ago level. If fear of the pandemic is not having a huge impact on restaurants, it is hard to believe that it is affecting many other sectors in a big way.

November retail sales were reported yesterday as increasing by 0.3 percent from the October level. This was considerably lower than expected and (predictably) reported as bad news for Biden. But for those of us who don’t get paid to tell people how everything is bad news for Biden, there is actually a very interesting story in the November data.

First, it is important to recognize that the November 0.3 percent growth number follows an extraordinarily rapid 1.8 percent growth number (revised up from 1.7 percent) reported for October. Retail sales data have a large amount of error, so it is entirely possible that the October figure was overstated by 0.4-0.6 percentage points, which would mean that the November growth figure was understated by the same amount. In any case, the November retail sales figure is 2.1 percent higher than the September number, which is strong growth in anyone’s book.

But there is another aspect to this story that has been almost completely overlooked by the media. One of the issues in the debate over whether inflation would be transitory or persistent is whether people would be spending the money they banked during the recession. This money includes the various pandemic payments ($1,200 per person in 2020 and $2,000 per person this year), as well as the money saved from not going to restaurants and movies, or taking vacations.

The folks arguing that inflation would be persistent have insisted that people would spend this money once the economy opened up more. The transitory folks have argued that much of this money would be saved, meaning that we have less reason to fear excess demand pushing inflation higher.

Thus far, the data have supported the transitory argument. The saving rate for October, the most recent month for which data are available, was 7.3 percent. This is just about the average for the three years prior to the pandemic. If people are spending the money banked in the pandemic, we should expect the saving rate to be far below its pre-pandemic level.

The weaker than expected retail sales number for November means that the relatively high savings rate is continuing. In other words, people are still not spending the money banked in the pandemic. This means that we have less reason to fear excess demand driving inflation.

Given how inflation-obsessed the media has been in recent months, it is sort of amazing that this point has largely been missed in discussing the November data. I will add my usual caveats. This is just one month’s data and there is considerable measurement error in the series, but based on what we saw yesterday, Team Transitory scored a big point.

One last item: the weaker than expected November sales were not in any obvious way connected to the spread of the pandemic. Restaurant sales were 1.0 percent higher in November than October and 37.4 percent above their year-ago level. If fear of the pandemic is not having a huge impact on restaurants, it is hard to believe that it is affecting many other sectors in a big way.

Many people may remember University of Chicago economist Casey Mulligan for his argument that unemployment in the Great Recession was caused largely by generous food stamp benefits. Well, he’s back, and telling us that the childcare provisions in President Biden’s Build Back Better (BBB) plan could raise the cost of childcare by $27,000 a year.

Mulligan’s basic story is that by raising pay for childcare workers, BBB will make childcare more expensive. While the plan includes generous subsidies for most families with children, Mulligan argues that families with incomes about the cutoff for subsidies will be paying much more for childcare. He predicts fewer parents will be working and that in some cases families will break up as a result of the bill.

Interestingly, Mulligan’s model is the Affordable Care Act (ACA). He tells us that the ACA hugely increased the cost of health care insurance.

What’s interesting about this example is that health care costs actually increased far less than was projected at the time the ACA was debated and passed. In 2009, the Centers for Medicare and Medicaid Services projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.

The health care savings of $700 billion in 2019 are more than three times the size of the latest plans for President Biden’s Build Back Better proposal. The extent to which the ACA was responsible for the reduction in health care costs can be argued, but the fact that costs came in far lower than projected cannot be disputed. This means that if Mulligan wants to hold up the ACA as a horror story to be averted with an expansion of government support for childcare, he has a real uphill battle.

What Mulligan can say is that some people do pay more for health care insurance. Before the ACA, people in good health could sign up with insurers that excluded people with health issues, like heart conditions or cancer survivors.

Getting into a pool with only healthy people meant lower-cost insurance. However, it also meant that people with serious health conditions either paid huge premiums or were prevented from getting insurance altogether.

The ACA was about changing this situation. Some healthy people were certainly losers in this story, although the subsidies in the program, which were made more generous by Biden’s recovery package, ensured that low- and middle-income families were largely protected.

We’re looking at a similar story with the childcare provisions in the BBB. Mulligan is right, there could be some losers. But tens of millions of families with children will have better access to quality childcare. I suspect most parents will be fine with this situation.

Many people may remember University of Chicago economist Casey Mulligan for his argument that unemployment in the Great Recession was caused largely by generous food stamp benefits. Well, he’s back, and telling us that the childcare provisions in President Biden’s Build Back Better (BBB) plan could raise the cost of childcare by $27,000 a year.

Mulligan’s basic story is that by raising pay for childcare workers, BBB will make childcare more expensive. While the plan includes generous subsidies for most families with children, Mulligan argues that families with incomes about the cutoff for subsidies will be paying much more for childcare. He predicts fewer parents will be working and that in some cases families will break up as a result of the bill.

Interestingly, Mulligan’s model is the Affordable Care Act (ACA). He tells us that the ACA hugely increased the cost of health care insurance.

What’s interesting about this example is that health care costs actually increased far less than was projected at the time the ACA was debated and passed. In 2009, the Centers for Medicare and Medicaid Services projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.

The health care savings of $700 billion in 2019 are more than three times the size of the latest plans for President Biden’s Build Back Better proposal. The extent to which the ACA was responsible for the reduction in health care costs can be argued, but the fact that costs came in far lower than projected cannot be disputed. This means that if Mulligan wants to hold up the ACA as a horror story to be averted with an expansion of government support for childcare, he has a real uphill battle.

What Mulligan can say is that some people do pay more for health care insurance. Before the ACA, people in good health could sign up with insurers that excluded people with health issues, like heart conditions or cancer survivors.

Getting into a pool with only healthy people meant lower-cost insurance. However, it also meant that people with serious health conditions either paid huge premiums or were prevented from getting insurance altogether.

The ACA was about changing this situation. Some healthy people were certainly losers in this story, although the subsidies in the program, which were made more generous by Biden’s recovery package, ensured that low- and middle-income families were largely protected.

We’re looking at a similar story with the childcare provisions in the BBB. Mulligan is right, there could be some losers. But tens of millions of families with children will have better access to quality childcare. I suspect most parents will be fine with this situation.

I’m not worried at this point about a deflationary spiral, but I see what, to my view, is a plausible scenario where the CPI actually goes negative in the next twelve months. I go through the categories and my predictions component by component below, but there are four main items driving the story that I’ll mention here.

First, I assume a sharp reversal in new and used car prices. The 11.1 percent increase in the former and 31.4 percent increase in the latter, have added 1.5 percentage points to the inflation rate over the last year. This run-up is due to the well-known shortage of semiconductors. It seems that manufacturers are overcoming this shortage and getting up to normal production levels. This may lead to a situation where they are not only meeting normal demand, but actually could be overproducing and needing to markdown prices.

A second big assumption is a sharp moderation in food prices. The price of store-bought food has risen by 6.4 percent over the last year, adding 0.5 percentage points to the inflation rate (food bought at restaurants added another 0.4 percentage points). This has been driven by a huge surge in demand, where we seem to be eating more of everything. We also see supply chain problems raising shipping costs.

I am betting on the surge in demand easing somewhat and the supply chain problems being resolved over the course of the year. In the past, sharp run-ups in food prices have been followed by declines or periods of very slow growth. I’m betting on the latter.  

My third assumption is a sharp reduction in gas and other energy prices, reversing some of the recent run-ups. Gas prices increased 58.1 percent in the last year, adding 2.4 percentage points to the inflation rate.

I assume a partial reversal of this run-up, with a drop in gas prices simply reflecting the recent drop in world oil prices. That would imply an 18 percent decline in prices from the November level, knocking 0.8 percentage points off of the inflation rate for the next twelve months.

Finally, I assume that the prices of many other items, where we have seen a sharp run-up due to supply chain issues, such as appliances and furniture, will level off in the next year as these problems get resolved.

My model here is televisions. The index for televisions had been falling for decades, but it surged by 10.2 percent from March to August (a 26.3 percent annual rate). Since August, the index for televisions has fallen sharply in the last three months, dropping by more than 4.0 percent. I expect that we will see a similar story with many other items in the year ahead. This reversal may come soon if it turns out that many stores over-ordered for the holiday shopping season.

Before going into the item-by-item assessment, I’ll add a point that is worth repeating. The bond markets seem to agree with the view that the inflation we have been seeing is temporary. The interest rate on a 10-year Treasury bond on Friday was under 1.5 percent. That put the breakeven inflation rate for an inflation-indexed bond and the conventional 10-year bond at less than 2.5 percent. (If we allow for the 0.2-0.4 percentage point difference between CPI inflation and inflation as measured by the personal consumption expenditure deflator, this is pretty much in line with the Fed’s 2.0 percent target.) Obviously, investors in the bond market are not expecting anything like 6.8 percent inflation to persist or even 4-5 percent inflation.

This should be somewhat reassuring, but as someone who was warning about both the stock bubble in the 1990s and the housing bubble in the 2000s, I know financial markets can be wrong. But it is still worth paying some attention to what people with money on the line are doing.

Inflation: November 2021 to November 2022

I can’t claim to have a crystal ball that tells me what inflation in the different components will be over the next year, but there is some basis for making reasonable guesses. So here is my story. I welcome corrections/additions by people who are more knowledgeable about specific areas.[1]

          Projected  Contribution
      Inflation   Inflation   of  
  (weights)   Nov 20-Nov 21 Nov 21-Nov 22 Component
                 
All items 100   6.8   -0.54      
Core 78.536   4.9   0.43      
                 
Food at home 7.733   6.4   1   0.08  
Food away from home 6.262   5.8   2   0.13  
Energy commodities 4.207   57.5   -18   -0.76  
Energy services 3.262   10.7   -10   -0.33  
                 
New vehicles 3.856   11.1   -11   -0.42  
Used cars and trucks 3.35   31.4   -33.5   -1.12  
Motor vehicle parts and equipment 0.401   10.2   -1   0.00  
Motor vehicle maintenance and repair(1) 1.085   4.9   4   0.04  
Motor vehicle insurance 1.557   5.7   0.5   0.01  
Airline fares 0.596   -3.7   20.1   0.12  
Other Transportation services 1.774       0   0.00  
                 
Alcoholic beverages 0.997   1.9   1.9   0.02  
Tobacco and smoking products 0.615   8.9   3.9   0.02  
                 
Shelter 32.425   3.8   3.5   1.13  
Household furnishings and supplies 3.774   6   0   0.00  
Household operations 0.89   8.4   5.5   0.05  
Water and sewer and trash collection services 1.074   3.5   3.5   0.04  
Apparel 2.725   5   0   0.00  
Recreation commodities 1.961   3.9   -2.5   -0.05  
Recreation services 3.703   2.8   3.5   0.13  
Medical care commodities 1.493   0.2   0.5   0.01  
Medical care services 7.002   2.1   3   0.21  
Education and communication commodities 0.48   0.9   -3.6   -0.02  
Education and communication services 6.043   1.7   1.7   0.10  
Personal care products 0.643   -0.2   -0.2   0.00  
Miscellaneous personal goods 0.195   6   -1   0.00  
Other personal services 1.632   4.5   4.5   0.07  

Source: Bureau of Labor Statistics and author’s calculations.

Gasoline and Other Energy

Higher gas prices have featured front and center in the story of runaway inflation impoverishing the masses. The good news here is that we can be pretty certain that prices will decline. The price of oil fell to ridiculously low levels in the pandemic (futures prices were actually negative). They then soared to more than $83 a barrel at the start of November as the economy reopened. They have since fallen back to $71 a barrel.

The surge in oil prices led to a huge jump in gasoline prices, which were up 58.1 percent over the last year. I’m betting on an 18.0 percent decline over the next year. This is simply taking where the CPI gas index was back in October of 2018 when the price of oil was roughly at its current level.

I don’t know whether oil prices will go higher or lower from today forward, but there is a good reason to expect the general direction will be downward. We know Biden and the Democrats are doing horrible things to the fossil fuel industry (imposing environmental regulations and restricting where they can drill) but the reality is that demand for fossil fuels is likely to be falling over the next decade.

Electric car sales are growing rapidly here and around the world. Tesla alone projects that it will be selling more than 20 million cars a year by 2030, a number that is almost 20 percent larger than the current U.S. car market. Take that with the appropriate amount of salt, but it seems likely that in the not distant future, most of the cars being sold will be electric.

As this switch takes place, the demand and price of fossil fuels are likely to fall. When producers look out to this future, many are likely to make the bet that it is better to get something for their oil today than risk having it still in the ground twenty or thirty years from now when there may be very little demand. This logic is likely to be especially important for big OPEC producers, like Saudi Arabia, that have very low marginal costs for bringing oil to the market.

Anyhow, that prediction on oil prices is obviously very speculative, but I’ll just put down my -18.0 percent for gas based on the current price. I’m applying this figure to the larger category of energy commodities, since this is mostly gas and the other items have closely tracked gas prices.

For energy services, I’m putting in a projection of a 10.0 percent price decline, largely reversing a 13.3 percent increase since the start of the pandemic. Higher natural gas prices were clearly a big factor in this run-up, and natural gas prices have also been falling sharply in recent weeks. The pattern over the last dozen years has been that sharp increases in this category were quickly followed by sharp declines. The index for energy services was just about 5.0 percent higher before the pandemic than it was a decade earlier.

Food

I can’t say I have a good idea where food prices are going, primarily because I don’t really know what has caused them to go up so much, 6.4 percent over the last year for the food at home category. There is the obvious point that we seem to be eating a lot more food, but the question is why. Purchases of food for home consumption were 11.1 percent higher (adjusted for inflation) in the third quarter of 2021 than in the fourth quarter of 2019. By contrast, food purchases were just 2.8 percent higher in the fourth quarter of 2019 than they had been seven quarters earlier.

Part of this story is that people were buying less food at restaurants, but by the third quarter we were almost back to our pre-pandemic levels of restaurant sales, and by now we are above them, although somewhat below trend. So, are we really eating that much more food than before the pandemic and will that pattern continue?

And, just to be clear, we see the increase in every category. Real purchases of cereal and bakery products are up 14.4 percent, meat consumption 6.4 percent, dairy products 11.7 percent, with consumption of fruits and vegetables rising by the same amount.

I have no idea as to whether people will keep buying so much more food, but it doesn’t seem like a healthy development. Anyhow, for the path of inflation, I’m just going to assume that it follows past patterns. Where we have seen sharp price increases, they have generally been reversed or at least followed by periods of slow price growth.

Food prices rose by 6.6 percent from December 2007 to December 2008. They then fell by 2.4 percent the following year. They rose 6.0 percent from December 2010 to 2011, then rose just 1.3 percent the following year. In the decade before the pandemic began, they rose an average of 1.3 percent annually. After their 6.1 percent rise last year, I’ll put down a 1.0 percent increase over the next twelve months.

Restaurant prices have generally risen by about a percentage point more than food prices, presumably reflecting rising higher labor costs. The opposite has been true over the last year, with restaurant prices going up 5.8 percent, but I’ll assume this pattern resumes over the next year. I’ll put down 2.0 percent for the projected increase in restaurant prices.

Cars and Trucks

New and used cars have been an enormous factor in the inflation we have seen over the last year. Used vehicle prices rose by 31.4 percent and contributed 1.1 percentage points to the inflation rate over the last year. New vehicle prices rose by 11.1 percent and added 0.4 percentage points to the inflation rate.

The reason for these extraordinary price increases is hardly a secret, a fire in a major semiconductor factory in Japan has led to a worldwide shortage of semiconductors. This has led to major reductions in auto production in factories around the world.

While there is still a shortage of semiconductors, several major manufacturers report being back up to capacity. It is reasonable to expect that most factories will be running near capacity within a few months and the auto market will be close to normal by November of next year.

New vehicle prices are up 12.6 percent since the pandemic began. In the seven years from February 2013 to February 2020, they increased by a total of just over 1.0 percent. I’m going to assume that in the next year prices will return to something like their former path. I’m putting down a price drop of 11.0 percent.

Used vehicle prices are up 33.5 percent since the pandemic began. The used vehicle index had actually been falling in the years prior to the pandemic. I will assume that the increase since the pandemic began is reversed over the next year.

Motor Vehicle Equipment and Parts

Prices in this component rose 10.4 percent in the last year after rising less than 1.0 percent annually over the decade prior to the pandemic. This reflects both supply chain issues and also the increased demand for parts as people sought to improve used cars for sale or their own use.

With car production returning to normal, and supply chain issues coming under control, I expect some of this rise to be reversed. I am putting down -1.0 percent for the next year.

Motor Vehicle Repair and Maintenance

Inflation in this component rose to 4.9 percent over the last year, up from 3.5 percent over the prior year. Some of this is undoubtedly due to supply chain disruptions associated with reopening, as well as higher labor costs. I’m assuming that inflation in this component will fall back to 4.0 percent in the next year.

Car Insurance

The index for car insurance had been rising rapidly early in the last decade, but slowed sharply in the years just before the pandemic. In the two years prior to the pandemic, it increased by an average of 0.5 percent. It then fell sharply in the pandemic only to then rise rapidly as the economy reopened, going up 5.7 percent over the last year.

It is important to recognize that the CPI uses a gross measure for auto insurance, counting premiums rather than administrative costs and profits, as it does with health insurance. The sharp rises earlier in the last decade were mostly due to higher payouts. If payments for damages and medical expenses are under control, then the rise in premiums is likely to be limited. I assume that the rise in the next year will be 0.5 percent.

Airline Fares

Airfares plummeted at the start of the pandemic. They have recovered to some extent, but they are still 20.1 percent below their pre-pandemic level. Assuming that the pandemic is under control, it is likely that fares will recover to their pre-pandemic level. I’m putting in a 20.1 percent increase in airfares over the next year.

Other Transportation Services

This is a hodgepodge that includes inner-city and intercity bus travel, state licensing fees, and car rentals. I’m putting down a prediction of no change based on the fact that I expect the 37.2 percent increase in car rental prices to be largely reversed in the next year. This component comprises almost exactly 10 percent of the whole category, so a sharp decline in rental car price should be sufficient to offset increases in the other components.

Alcohol and Tobacco

The index for alcoholic beverages rose 1.9 percent over the last year. This is pretty much in line with its average over the prior five years. I will put down 1.9 percent for next year.

Tobacco prices are driven largely by state and local taxes on tobacco. In the last year, they rose by 8.9 percent. This is considerably more rapid than the 3.9 percent average increase over the prior decade. I am assuming that the rate of increase slows to its prior average.

Rent and Shelter

The two rental components of the CPI, rent proper and owners’ equivalent rent (OER) for owner-occupied housing, are huge factors in determining inflation. Together they account for 31.1 percent of the overall index and 39.6 percent of the core CPI.

The rate of rental inflation slowed in 2020, but has accelerated as the economy reopened. The rent proper index has risen 3.0 percent over the last year, while the OER index has risen by 3.5 percent. 

We have seen an interesting pattern develop since the pandemic began. Rents in high-priced areas are showing lower growth, while low-priced areas are seeing rapid rises. In the New York City metropolitan area, rents rose by 0.1 percent over the last year. In San Francisco, they fell by 0.5 percent. In Boston, rents are up 1.1 percent, and in DC by 0.2 percent. By contrast, Detroit rents were up 5.8 percent, in Atlanta 7.5 percent, and St. Louis 4.8 percent.

My guess is that this divergence continues, as workers with increased opportunities to work from home move to lower-priced parts of the country. That’s likely good news for most of the country – more affordable housing in expensive cities and a boost to growth in cities that had been previously left behind – but it’s not clear how it affects overall rental inflation.

One positive is that the rise in house prices during the pandemic, coupled with extraordinarily low interest rates, has led to a boom in housing construction. We’re on a path to having almost 1.8 million housing starts in 2021, up from less than 1.4 million in 2019. This is a positive development, but in a country with over 140 million housing units, an additional 400,000 is not going to have much impact on rents.

I will assume that both indexes return to roughly their pre-pandemic rates of inflation. I’m putting in 3.5 percent as my projection of inflation. This category also includes hotels. That index is currently 8.9 percent above its pre-pandemic level. This component accounts for less than 3.0 percent of the shelter index. I don’t expect that it will diverge enough from the 3.5 percent figure I’m putting down for rent to substantially alter the shelter projection.

Household Furnishings and Supplies

This component had a big spike in inflation in the last year, rising by 6.0 percent last year after having an average increase of less than 0.5 percent over the five years prior to the pandemic. This is the supply chain story. Many of the items in this category are imported, and even domestically produced items are tied up in transit. (It includes appliances.) As supply chain problems ease, there should be some price reversal. I expect that we will see prices in this category be roughly flat in the next year. I’m putting down no change.

Household Operations

This is a category that includes items like gardening and domestic workers. The index for “domestic services” rose 10.2 percent over the last year. (This is probably one reason why we are hearing so much about inflation in the media.) Overall, the index for household operations rose by 8.4 percent over the last year, presumably reflecting higher pay for workers in this sector. 

It is likely that low-paid workers will continue to receive substantial pay increases in the year ahead. I’m putting down 5.5 percent for this category.

Water and Sewer and Trash Collection Services

Prices in this category rose by 3.5 percent last year. This likely reflects higher wages for many workers. We are likely to see increases of roughly the same size in the year ahead. I’m putting down 3.5 percent.

Apparel

Apparel prices rose by 5.0 percent last year, after falling by 5.1 percent in the prior year. The general direction for apparel prices has been downward, with the February 2020 index about 4.0 percent lower than its level from five years earlier. I will assume the index stays flat, although the sharp rise in the dollar over the last year would be a factor that should lower apparel prices.

Recreation Commodities

This category includes many items caught up in the supply chain. My favorite example is televisions. As noted earlier, the index for televisions had been falling for decades, but then rose 10.2 percent from March to August (a 26.3 percent annual rate). They have fallen sharply the last three months, although are not yet back to their March level.

The index for this category as a whole had been falling consistently for the decade prior to the pandemic at more than a 2.0 percent annual rate. It rose 3.9 percent in the last year. I expect the prior trend to return. Prices should fall by roughly 2.5 percent in the next year.

Recreation Services

Inflation in this category has been very contained, in large part because the pandemic has hugely depressed demand. The index rose by just 2.7 percent over the last year, roughly the average increase over the prior five years. It is reasonable to expect some pick-up in this measure over the next year, both because demand will increase as pandemic fears ease, and because many of the low-paid workers in the sector will get higher wages. I’m putting down 3.5 percent.

Medical Care Commodities

This category is primarily prescription drugs. After rising rapidly earlier in the century, it has slowed sharply in recent years. The index rose by just 0.2 percent over the last year. This likely had more to do with political pressures than the pandemic.

Medical Services

Inflation in medical services has been very limited in the last year, with the index rising just 2.1 percent. This is a sharp slowing from its immediate pre-pandemic pace (it had risen 5.5 percent in the prior year), but from 2015 to 2020, it had risen by an average of just 3.4 percent. 

There are factors pushing inflation in medical service prices in both directions going forward. On the one hand, many people put off care during the pandemic and will likely be making appointments when they feel more comfortable going to a medical facility. On the other hand, to be somewhat morbid, many of the people who were most in need of services died during the pandemic.

There is also the spread of telemedicine, which was far more widely adopted as a result of the pandemic. This should help to put downward pressure on prices. It is also likely that there will be considerable political pressure from the Biden administration and Congress to contain costs.

I am going to assume that, on net, this leaves us with a somewhat lower rate of inflation in health care services than we saw the prior five pre-pandemic years. I’m putting down 3.0 percent.

It is important to realize that most of the growth in prescription drug prices is not captured in the CPI index, since it only measures the prices of drugs currently on the market. If a new drug comes out carrying a price of $55,000 for a year’s dosage (like Aduhelm, the new Alzheimer’s drug), it does not affect the CPI. However, if the price declines in years down the road, due to new competition or going off-patent, this drop will show up in the index.

I will assume that this index rises by 0.5 percent over the next year.

Education and Communication Commodities

This includes a variety of items such as textbooks, computers, and smartphones. The index rose 0.9 percent last year, after falling at an average annual rate of 3.6 percent over the prior decade. I am assuming that this rate of decline resumes in the next year. I’m putting down -3.6 percent.

Education and Communication Services

This component combines college tuition and child care with telephone and Internet service. The former categories have seen modest price increases in the years before the pandemic, while communication services have generally been declining in price. College tuition growth is likely to be restrained in the near future as many schools will still rely to a large extent on remote learning and feel a need to restrain tuition increases. Phone and Internet providers may also feel some need to restrain price increases in response to political pressure.

Inflation in this component was 1.7 percent over the last year. I have assumed that it will be 1.7 percent again in the year going forward.

Personal Care Products

This category includes items like shaving cream, toothpaste, and shampoo. The index fell by 0.2 percent last year, roughly in line with past patterns. I will put down a decline of 0.2 percent for the next year.

Other Personal Services

This category includes a wide range of items like haircuts, legal services, and tax preparation. It rose by 4.5 percent last year, up from an average close to 2.5 percent in prior years. This presumably reflects more rapid pay growth for many of the lower-paid workers in this category. I am putting down 4.5 percent for next year.

Miscellaneous Personal Goods

I don’t know what these are. The index rose by 6.0 percent last year. Prices had been falling by an average of a bit more than 1.0 percent annually in the decade before the pandemic. I will assume that the rise last year was due to supply chain problems and that the decline will resume next year. I’m putting down -1.0 percent for this category.

Are We Good on Inflation?

I tried to use a critical eye in putting down these numbers. Some, like gas prices, clearly have a more solid foundation than others. I’m sure someone could justify different and higher numbers in each category, but these are my best guesses with the information I have. I welcome comments and criticisms.

 

 

 

 

 

 

 

[1] Careful observers will note that my weights only add up to 99.735. (They are actually “relative importance,” but we’ll leave that for another day.) I’m obviously missing some component that has a weight of 0.265 in the index. Suggestions welcome.

I’m not worried at this point about a deflationary spiral, but I see what, to my view, is a plausible scenario where the CPI actually goes negative in the next twelve months. I go through the categories and my predictions component by component below, but there are four main items driving the story that I’ll mention here.

First, I assume a sharp reversal in new and used car prices. The 11.1 percent increase in the former and 31.4 percent increase in the latter, have added 1.5 percentage points to the inflation rate over the last year. This run-up is due to the well-known shortage of semiconductors. It seems that manufacturers are overcoming this shortage and getting up to normal production levels. This may lead to a situation where they are not only meeting normal demand, but actually could be overproducing and needing to markdown prices.

A second big assumption is a sharp moderation in food prices. The price of store-bought food has risen by 6.4 percent over the last year, adding 0.5 percentage points to the inflation rate (food bought at restaurants added another 0.4 percentage points). This has been driven by a huge surge in demand, where we seem to be eating more of everything. We also see supply chain problems raising shipping costs.

I am betting on the surge in demand easing somewhat and the supply chain problems being resolved over the course of the year. In the past, sharp run-ups in food prices have been followed by declines or periods of very slow growth. I’m betting on the latter.  

My third assumption is a sharp reduction in gas and other energy prices, reversing some of the recent run-ups. Gas prices increased 58.1 percent in the last year, adding 2.4 percentage points to the inflation rate.

I assume a partial reversal of this run-up, with a drop in gas prices simply reflecting the recent drop in world oil prices. That would imply an 18 percent decline in prices from the November level, knocking 0.8 percentage points off of the inflation rate for the next twelve months.

Finally, I assume that the prices of many other items, where we have seen a sharp run-up due to supply chain issues, such as appliances and furniture, will level off in the next year as these problems get resolved.

My model here is televisions. The index for televisions had been falling for decades, but it surged by 10.2 percent from March to August (a 26.3 percent annual rate). Since August, the index for televisions has fallen sharply in the last three months, dropping by more than 4.0 percent. I expect that we will see a similar story with many other items in the year ahead. This reversal may come soon if it turns out that many stores over-ordered for the holiday shopping season.

Before going into the item-by-item assessment, I’ll add a point that is worth repeating. The bond markets seem to agree with the view that the inflation we have been seeing is temporary. The interest rate on a 10-year Treasury bond on Friday was under 1.5 percent. That put the breakeven inflation rate for an inflation-indexed bond and the conventional 10-year bond at less than 2.5 percent. (If we allow for the 0.2-0.4 percentage point difference between CPI inflation and inflation as measured by the personal consumption expenditure deflator, this is pretty much in line with the Fed’s 2.0 percent target.) Obviously, investors in the bond market are not expecting anything like 6.8 percent inflation to persist or even 4-5 percent inflation.

This should be somewhat reassuring, but as someone who was warning about both the stock bubble in the 1990s and the housing bubble in the 2000s, I know financial markets can be wrong. But it is still worth paying some attention to what people with money on the line are doing.

Inflation: November 2021 to November 2022

I can’t claim to have a crystal ball that tells me what inflation in the different components will be over the next year, but there is some basis for making reasonable guesses. So here is my story. I welcome corrections/additions by people who are more knowledgeable about specific areas.[1]

          Projected  Contribution
      Inflation   Inflation   of  
  (weights)   Nov 20-Nov 21 Nov 21-Nov 22 Component
                 
All items 100   6.8   -0.54      
Core 78.536   4.9   0.43      
                 
Food at home 7.733   6.4   1   0.08  
Food away from home 6.262   5.8   2   0.13  
Energy commodities 4.207   57.5   -18   -0.76  
Energy services 3.262   10.7   -10   -0.33  
                 
New vehicles 3.856   11.1   -11   -0.42  
Used cars and trucks 3.35   31.4   -33.5   -1.12  
Motor vehicle parts and equipment 0.401   10.2   -1   0.00  
Motor vehicle maintenance and repair(1) 1.085   4.9   4   0.04  
Motor vehicle insurance 1.557   5.7   0.5   0.01  
Airline fares 0.596   -3.7   20.1   0.12  
Other Transportation services 1.774       0   0.00  
                 
Alcoholic beverages 0.997   1.9   1.9   0.02  
Tobacco and smoking products 0.615   8.9   3.9   0.02  
                 
Shelter 32.425   3.8   3.5   1.13  
Household furnishings and supplies 3.774   6   0   0.00  
Household operations 0.89   8.4   5.5   0.05  
Water and sewer and trash collection services 1.074   3.5   3.5   0.04  
Apparel 2.725   5   0   0.00  
Recreation commodities 1.961   3.9   -2.5   -0.05  
Recreation services 3.703   2.8   3.5   0.13  
Medical care commodities 1.493   0.2   0.5   0.01  
Medical care services 7.002   2.1   3   0.21  
Education and communication commodities 0.48   0.9   -3.6   -0.02  
Education and communication services 6.043   1.7   1.7   0.10  
Personal care products 0.643   -0.2   -0.2   0.00  
Miscellaneous personal goods 0.195   6   -1   0.00  
Other personal services 1.632   4.5   4.5   0.07  

Source: Bureau of Labor Statistics and author’s calculations.

Gasoline and Other Energy

Higher gas prices have featured front and center in the story of runaway inflation impoverishing the masses. The good news here is that we can be pretty certain that prices will decline. The price of oil fell to ridiculously low levels in the pandemic (futures prices were actually negative). They then soared to more than $83 a barrel at the start of November as the economy reopened. They have since fallen back to $71 a barrel.

The surge in oil prices led to a huge jump in gasoline prices, which were up 58.1 percent over the last year. I’m betting on an 18.0 percent decline over the next year. This is simply taking where the CPI gas index was back in October of 2018 when the price of oil was roughly at its current level.

I don’t know whether oil prices will go higher or lower from today forward, but there is a good reason to expect the general direction will be downward. We know Biden and the Democrats are doing horrible things to the fossil fuel industry (imposing environmental regulations and restricting where they can drill) but the reality is that demand for fossil fuels is likely to be falling over the next decade.

Electric car sales are growing rapidly here and around the world. Tesla alone projects that it will be selling more than 20 million cars a year by 2030, a number that is almost 20 percent larger than the current U.S. car market. Take that with the appropriate amount of salt, but it seems likely that in the not distant future, most of the cars being sold will be electric.

As this switch takes place, the demand and price of fossil fuels are likely to fall. When producers look out to this future, many are likely to make the bet that it is better to get something for their oil today than risk having it still in the ground twenty or thirty years from now when there may be very little demand. This logic is likely to be especially important for big OPEC producers, like Saudi Arabia, that have very low marginal costs for bringing oil to the market.

Anyhow, that prediction on oil prices is obviously very speculative, but I’ll just put down my -18.0 percent for gas based on the current price. I’m applying this figure to the larger category of energy commodities, since this is mostly gas and the other items have closely tracked gas prices.

For energy services, I’m putting in a projection of a 10.0 percent price decline, largely reversing a 13.3 percent increase since the start of the pandemic. Higher natural gas prices were clearly a big factor in this run-up, and natural gas prices have also been falling sharply in recent weeks. The pattern over the last dozen years has been that sharp increases in this category were quickly followed by sharp declines. The index for energy services was just about 5.0 percent higher before the pandemic than it was a decade earlier.

Food

I can’t say I have a good idea where food prices are going, primarily because I don’t really know what has caused them to go up so much, 6.4 percent over the last year for the food at home category. There is the obvious point that we seem to be eating a lot more food, but the question is why. Purchases of food for home consumption were 11.1 percent higher (adjusted for inflation) in the third quarter of 2021 than in the fourth quarter of 2019. By contrast, food purchases were just 2.8 percent higher in the fourth quarter of 2019 than they had been seven quarters earlier.

Part of this story is that people were buying less food at restaurants, but by the third quarter we were almost back to our pre-pandemic levels of restaurant sales, and by now we are above them, although somewhat below trend. So, are we really eating that much more food than before the pandemic and will that pattern continue?

And, just to be clear, we see the increase in every category. Real purchases of cereal and bakery products are up 14.4 percent, meat consumption 6.4 percent, dairy products 11.7 percent, with consumption of fruits and vegetables rising by the same amount.

I have no idea as to whether people will keep buying so much more food, but it doesn’t seem like a healthy development. Anyhow, for the path of inflation, I’m just going to assume that it follows past patterns. Where we have seen sharp price increases, they have generally been reversed or at least followed by periods of slow price growth.

Food prices rose by 6.6 percent from December 2007 to December 2008. They then fell by 2.4 percent the following year. They rose 6.0 percent from December 2010 to 2011, then rose just 1.3 percent the following year. In the decade before the pandemic began, they rose an average of 1.3 percent annually. After their 6.1 percent rise last year, I’ll put down a 1.0 percent increase over the next twelve months.

Restaurant prices have generally risen by about a percentage point more than food prices, presumably reflecting rising higher labor costs. The opposite has been true over the last year, with restaurant prices going up 5.8 percent, but I’ll assume this pattern resumes over the next year. I’ll put down 2.0 percent for the projected increase in restaurant prices.

Cars and Trucks

New and used cars have been an enormous factor in the inflation we have seen over the last year. Used vehicle prices rose by 31.4 percent and contributed 1.1 percentage points to the inflation rate over the last year. New vehicle prices rose by 11.1 percent and added 0.4 percentage points to the inflation rate.

The reason for these extraordinary price increases is hardly a secret, a fire in a major semiconductor factory in Japan has led to a worldwide shortage of semiconductors. This has led to major reductions in auto production in factories around the world.

While there is still a shortage of semiconductors, several major manufacturers report being back up to capacity. It is reasonable to expect that most factories will be running near capacity within a few months and the auto market will be close to normal by November of next year.

New vehicle prices are up 12.6 percent since the pandemic began. In the seven years from February 2013 to February 2020, they increased by a total of just over 1.0 percent. I’m going to assume that in the next year prices will return to something like their former path. I’m putting down a price drop of 11.0 percent.

Used vehicle prices are up 33.5 percent since the pandemic began. The used vehicle index had actually been falling in the years prior to the pandemic. I will assume that the increase since the pandemic began is reversed over the next year.

Motor Vehicle Equipment and Parts

Prices in this component rose 10.4 percent in the last year after rising less than 1.0 percent annually over the decade prior to the pandemic. This reflects both supply chain issues and also the increased demand for parts as people sought to improve used cars for sale or their own use.

With car production returning to normal, and supply chain issues coming under control, I expect some of this rise to be reversed. I am putting down -1.0 percent for the next year.

Motor Vehicle Repair and Maintenance

Inflation in this component rose to 4.9 percent over the last year, up from 3.5 percent over the prior year. Some of this is undoubtedly due to supply chain disruptions associated with reopening, as well as higher labor costs. I’m assuming that inflation in this component will fall back to 4.0 percent in the next year.

Car Insurance

The index for car insurance had been rising rapidly early in the last decade, but slowed sharply in the years just before the pandemic. In the two years prior to the pandemic, it increased by an average of 0.5 percent. It then fell sharply in the pandemic only to then rise rapidly as the economy reopened, going up 5.7 percent over the last year.

It is important to recognize that the CPI uses a gross measure for auto insurance, counting premiums rather than administrative costs and profits, as it does with health insurance. The sharp rises earlier in the last decade were mostly due to higher payouts. If payments for damages and medical expenses are under control, then the rise in premiums is likely to be limited. I assume that the rise in the next year will be 0.5 percent.

Airline Fares

Airfares plummeted at the start of the pandemic. They have recovered to some extent, but they are still 20.1 percent below their pre-pandemic level. Assuming that the pandemic is under control, it is likely that fares will recover to their pre-pandemic level. I’m putting in a 20.1 percent increase in airfares over the next year.

Other Transportation Services

This is a hodgepodge that includes inner-city and intercity bus travel, state licensing fees, and car rentals. I’m putting down a prediction of no change based on the fact that I expect the 37.2 percent increase in car rental prices to be largely reversed in the next year. This component comprises almost exactly 10 percent of the whole category, so a sharp decline in rental car price should be sufficient to offset increases in the other components.

Alcohol and Tobacco

The index for alcoholic beverages rose 1.9 percent over the last year. This is pretty much in line with its average over the prior five years. I will put down 1.9 percent for next year.

Tobacco prices are driven largely by state and local taxes on tobacco. In the last year, they rose by 8.9 percent. This is considerably more rapid than the 3.9 percent average increase over the prior decade. I am assuming that the rate of increase slows to its prior average.

Rent and Shelter

The two rental components of the CPI, rent proper and owners’ equivalent rent (OER) for owner-occupied housing, are huge factors in determining inflation. Together they account for 31.1 percent of the overall index and 39.6 percent of the core CPI.

The rate of rental inflation slowed in 2020, but has accelerated as the economy reopened. The rent proper index has risen 3.0 percent over the last year, while the OER index has risen by 3.5 percent. 

We have seen an interesting pattern develop since the pandemic began. Rents in high-priced areas are showing lower growth, while low-priced areas are seeing rapid rises. In the New York City metropolitan area, rents rose by 0.1 percent over the last year. In San Francisco, they fell by 0.5 percent. In Boston, rents are up 1.1 percent, and in DC by 0.2 percent. By contrast, Detroit rents were up 5.8 percent, in Atlanta 7.5 percent, and St. Louis 4.8 percent.

My guess is that this divergence continues, as workers with increased opportunities to work from home move to lower-priced parts of the country. That’s likely good news for most of the country – more affordable housing in expensive cities and a boost to growth in cities that had been previously left behind – but it’s not clear how it affects overall rental inflation.

One positive is that the rise in house prices during the pandemic, coupled with extraordinarily low interest rates, has led to a boom in housing construction. We’re on a path to having almost 1.8 million housing starts in 2021, up from less than 1.4 million in 2019. This is a positive development, but in a country with over 140 million housing units, an additional 400,000 is not going to have much impact on rents.

I will assume that both indexes return to roughly their pre-pandemic rates of inflation. I’m putting in 3.5 percent as my projection of inflation. This category also includes hotels. That index is currently 8.9 percent above its pre-pandemic level. This component accounts for less than 3.0 percent of the shelter index. I don’t expect that it will diverge enough from the 3.5 percent figure I’m putting down for rent to substantially alter the shelter projection.

Household Furnishings and Supplies

This component had a big spike in inflation in the last year, rising by 6.0 percent last year after having an average increase of less than 0.5 percent over the five years prior to the pandemic. This is the supply chain story. Many of the items in this category are imported, and even domestically produced items are tied up in transit. (It includes appliances.) As supply chain problems ease, there should be some price reversal. I expect that we will see prices in this category be roughly flat in the next year. I’m putting down no change.

Household Operations

This is a category that includes items like gardening and domestic workers. The index for “domestic services” rose 10.2 percent over the last year. (This is probably one reason why we are hearing so much about inflation in the media.) Overall, the index for household operations rose by 8.4 percent over the last year, presumably reflecting higher pay for workers in this sector. 

It is likely that low-paid workers will continue to receive substantial pay increases in the year ahead. I’m putting down 5.5 percent for this category.

Water and Sewer and Trash Collection Services

Prices in this category rose by 3.5 percent last year. This likely reflects higher wages for many workers. We are likely to see increases of roughly the same size in the year ahead. I’m putting down 3.5 percent.

Apparel

Apparel prices rose by 5.0 percent last year, after falling by 5.1 percent in the prior year. The general direction for apparel prices has been downward, with the February 2020 index about 4.0 percent lower than its level from five years earlier. I will assume the index stays flat, although the sharp rise in the dollar over the last year would be a factor that should lower apparel prices.

Recreation Commodities

This category includes many items caught up in the supply chain. My favorite example is televisions. As noted earlier, the index for televisions had been falling for decades, but then rose 10.2 percent from March to August (a 26.3 percent annual rate). They have fallen sharply the last three months, although are not yet back to their March level.

The index for this category as a whole had been falling consistently for the decade prior to the pandemic at more than a 2.0 percent annual rate. It rose 3.9 percent in the last year. I expect the prior trend to return. Prices should fall by roughly 2.5 percent in the next year.

Recreation Services

Inflation in this category has been very contained, in large part because the pandemic has hugely depressed demand. The index rose by just 2.7 percent over the last year, roughly the average increase over the prior five years. It is reasonable to expect some pick-up in this measure over the next year, both because demand will increase as pandemic fears ease, and because many of the low-paid workers in the sector will get higher wages. I’m putting down 3.5 percent.

Medical Care Commodities

This category is primarily prescription drugs. After rising rapidly earlier in the century, it has slowed sharply in recent years. The index rose by just 0.2 percent over the last year. This likely had more to do with political pressures than the pandemic.

Medical Services

Inflation in medical services has been very limited in the last year, with the index rising just 2.1 percent. This is a sharp slowing from its immediate pre-pandemic pace (it had risen 5.5 percent in the prior year), but from 2015 to 2020, it had risen by an average of just 3.4 percent. 

There are factors pushing inflation in medical service prices in both directions going forward. On the one hand, many people put off care during the pandemic and will likely be making appointments when they feel more comfortable going to a medical facility. On the other hand, to be somewhat morbid, many of the people who were most in need of services died during the pandemic.

There is also the spread of telemedicine, which was far more widely adopted as a result of the pandemic. This should help to put downward pressure on prices. It is also likely that there will be considerable political pressure from the Biden administration and Congress to contain costs.

I am going to assume that, on net, this leaves us with a somewhat lower rate of inflation in health care services than we saw the prior five pre-pandemic years. I’m putting down 3.0 percent.

It is important to realize that most of the growth in prescription drug prices is not captured in the CPI index, since it only measures the prices of drugs currently on the market. If a new drug comes out carrying a price of $55,000 for a year’s dosage (like Aduhelm, the new Alzheimer’s drug), it does not affect the CPI. However, if the price declines in years down the road, due to new competition or going off-patent, this drop will show up in the index.

I will assume that this index rises by 0.5 percent over the next year.

Education and Communication Commodities

This includes a variety of items such as textbooks, computers, and smartphones. The index rose 0.9 percent last year, after falling at an average annual rate of 3.6 percent over the prior decade. I am assuming that this rate of decline resumes in the next year. I’m putting down -3.6 percent.

Education and Communication Services

This component combines college tuition and child care with telephone and Internet service. The former categories have seen modest price increases in the years before the pandemic, while communication services have generally been declining in price. College tuition growth is likely to be restrained in the near future as many schools will still rely to a large extent on remote learning and feel a need to restrain tuition increases. Phone and Internet providers may also feel some need to restrain price increases in response to political pressure.

Inflation in this component was 1.7 percent over the last year. I have assumed that it will be 1.7 percent again in the year going forward.

Personal Care Products

This category includes items like shaving cream, toothpaste, and shampoo. The index fell by 0.2 percent last year, roughly in line with past patterns. I will put down a decline of 0.2 percent for the next year.

Other Personal Services

This category includes a wide range of items like haircuts, legal services, and tax preparation. It rose by 4.5 percent last year, up from an average close to 2.5 percent in prior years. This presumably reflects more rapid pay growth for many of the lower-paid workers in this category. I am putting down 4.5 percent for next year.

Miscellaneous Personal Goods

I don’t know what these are. The index rose by 6.0 percent last year. Prices had been falling by an average of a bit more than 1.0 percent annually in the decade before the pandemic. I will assume that the rise last year was due to supply chain problems and that the decline will resume next year. I’m putting down -1.0 percent for this category.

Are We Good on Inflation?

I tried to use a critical eye in putting down these numbers. Some, like gas prices, clearly have a more solid foundation than others. I’m sure someone could justify different and higher numbers in each category, but these are my best guesses with the information I have. I welcome comments and criticisms.

 

 

 

 

 

 

 

[1] Careful observers will note that my weights only add up to 99.735. (They are actually “relative importance,” but we’ll leave that for another day.) I’m obviously missing some component that has a weight of 0.265 in the index. Suggestions welcome.

At this point, we still don’t know very much about the omicron variant, except that it spreads far more quickly than the delta variant. The data show a sharp upsurge in COVID-19 cases in South Africa, most of which seem to be omicron. There have also been several instances of what turned out to be super-spreader events in Norway, Denmark, and the UK where a ridiculously high percentage of the attendees became infected with omicron. (At a Christmas party in Norway, 70 of 120 guests tested positive.)

The variant also seems to be able to get around the immunity built up from vaccines or prior infections. In principle, all the people infected at the super-spreader event in Norway had been fully vaccinated, since this was a precondition for admission. In South Africa, many of the people who have been hospitalized with infections already should have had some immunity from prior infections. In short, we can be pretty confident that omicron spreads much more quickly than delta or earlier variants.

That is the bad news with omicron. The good news is that the evidence to date indicates that it is far less severe than delta. Most of our evidence on severity comes from South Africa, where it was first detected. The reports from hospitals there indicate that a much smaller percentage of the people who get infected need oxygen and end up in intensive care units. It also seems that a much smaller percentage are dying.

The country has an upsurge in reported cases that began two weeks ago. Yet, there is no clear uptick in COVID-19-related deaths. The figure for the most recent day (December 10th) was 20 deaths, which would be the equivalent of 110 deaths a day in the United States, less than one-tenth of our current number.

It is possible that we will have to wait longer to see the effect of omicron on serious illness and death. There is typically a substantial gap between when people are infected and when they get seriously ill or die. Also, the case numbers have continued to grow rapidly, so two weeks out from the current levels we may be looking at many more people in intensive care units or dying.

It is also pointed out that most of the cases in South Africa are younger people, who presumably are at less risk from COVID-19. This is an important caution, but it’s worth thinking about this issue more closely. Younger people are generally not isolated from the rest of the population. People in their twenties or thirties who got infected two or three weeks ago surely came in contact with parents, friends, and coworkers who are older.

If these older people either did not get infected or are not showing up at hospitals with serious symptoms, then it would seem to imply that omicron does not pose an especially serious threat to older people. There may well be more to the story that will become apparent further down the road, but it isn’t plausible that, at this point, only younger people in South Africa have been exposed to the Omicron Variant.

The Spread of a Less Harmful Variant

Recognizing that we still have little basis for assessing virulence, it’s worth considering what it would mean if omicron does spread widely throughout the world, which seems likely, and it is considerably less harmful than delta. Of course, the big issue is how much less harmful. If three times as many people get infected, and omicron is half as likely to lead to hospitalization and death, we would still be looking at a pretty awful story.

One thing that is very encouraging on this front is the experience of the people at the super-spreader Norwegian Christmas party. These were all vaccinated people and apparently in relatively good health, but it seems that none of them developed serious symptoms and needed to be hospitalized. If this is a general pattern, then we can expect that fully vaccinated people, without serious health conditions, have little to fear from omicron, perhaps even less than they did from delta.

While that is a good chunk of the population in the US and other wealthy countries, this still leaves the elderly, people with health issues, and the unvaccinated. We will probably have to see how things play out in South Africa and elsewhere to get a better sense of what to expect in the United States, but from what we have seen to date, they may not face a bad story either, or at least no worse than the one they faced with the delta variant.

Here also the limited information from South Africa is encouraging. Just 30 percent of its population is vaccinated and less than 26 percent is fully vaccinated. This means that a large number of unvaccinated people must be getting infected with the omicron variant. Yet, we are not seeing its hospitals fill up with seriously ill patients, and its death figures are still relatively low. Again, this could change in the days ahead as the disease has had more opportunity to progress in people recently infected, but it is at least plausible that even people who are not vaccinated have less to fear from omicron than delta.

 

What Happens if a Mild Omicron Variant Displaces Delta?

If it proves to be the case that omicron poses substantially less risk of serious illness or death than delta, and the difference more than offsets the increase in the number of infections, then the spread of omicron in the United States may be very good news. It will almost certainly mean an increase in the number of infections since it will spread more quickly, but it would mean a reduction in the number of hospitalizations and deaths.

There will be a huge question of timing. Even if the risk of hospitalization and death is only a fifth as great as with delta (a number pulled out of the air), if it spreads ten times as quickly, it will mean twice as many people ending up in hospitals and ICUs. This means that it would still be necessary to take steps to limit the rate at which it spreads.

However, if it turns out that the difference in the severity with delta is larger than the difference in spread, the omicron variant may prove to be very good news. It can lead to a situation where we do achieve something close to herd immunity, with most of the population either being vaccinated or having an infection with omicron. (The evidence from South Africa is that prior infections with other variants do not provide much protection from omicron.) Getting to that point would be a huge victory.

Of course, we are quite far from anything like herd immunity at present. The delta variant is still by far the dominant strain in the United States. We are averaging more than 120,000 cases a day and more than 1,200 deaths. Hospitals and ICUs are packed in many parts of the country.

The story continues to be overwhelmingly one of unvaccinated people getting seriously ill and dying. For whatever reason, we continue to see large numbers of people who refuse to take the pandemic seriously. Their risk affects not only their own lives, but also the health of their family and communities, as many hospitals can no longer provide normal care to non-COVID-19 patients. This is a very unpretty picture, but there is at least a possibility that the spread of omicron will make the situation better rather than worse.

At this point, we still don’t know very much about the omicron variant, except that it spreads far more quickly than the delta variant. The data show a sharp upsurge in COVID-19 cases in South Africa, most of which seem to be omicron. There have also been several instances of what turned out to be super-spreader events in Norway, Denmark, and the UK where a ridiculously high percentage of the attendees became infected with omicron. (At a Christmas party in Norway, 70 of 120 guests tested positive.)

The variant also seems to be able to get around the immunity built up from vaccines or prior infections. In principle, all the people infected at the super-spreader event in Norway had been fully vaccinated, since this was a precondition for admission. In South Africa, many of the people who have been hospitalized with infections already should have had some immunity from prior infections. In short, we can be pretty confident that omicron spreads much more quickly than delta or earlier variants.

That is the bad news with omicron. The good news is that the evidence to date indicates that it is far less severe than delta. Most of our evidence on severity comes from South Africa, where it was first detected. The reports from hospitals there indicate that a much smaller percentage of the people who get infected need oxygen and end up in intensive care units. It also seems that a much smaller percentage are dying.

The country has an upsurge in reported cases that began two weeks ago. Yet, there is no clear uptick in COVID-19-related deaths. The figure for the most recent day (December 10th) was 20 deaths, which would be the equivalent of 110 deaths a day in the United States, less than one-tenth of our current number.

It is possible that we will have to wait longer to see the effect of omicron on serious illness and death. There is typically a substantial gap between when people are infected and when they get seriously ill or die. Also, the case numbers have continued to grow rapidly, so two weeks out from the current levels we may be looking at many more people in intensive care units or dying.

It is also pointed out that most of the cases in South Africa are younger people, who presumably are at less risk from COVID-19. This is an important caution, but it’s worth thinking about this issue more closely. Younger people are generally not isolated from the rest of the population. People in their twenties or thirties who got infected two or three weeks ago surely came in contact with parents, friends, and coworkers who are older.

If these older people either did not get infected or are not showing up at hospitals with serious symptoms, then it would seem to imply that omicron does not pose an especially serious threat to older people. There may well be more to the story that will become apparent further down the road, but it isn’t plausible that, at this point, only younger people in South Africa have been exposed to the Omicron Variant.

The Spread of a Less Harmful Variant

Recognizing that we still have little basis for assessing virulence, it’s worth considering what it would mean if omicron does spread widely throughout the world, which seems likely, and it is considerably less harmful than delta. Of course, the big issue is how much less harmful. If three times as many people get infected, and omicron is half as likely to lead to hospitalization and death, we would still be looking at a pretty awful story.

One thing that is very encouraging on this front is the experience of the people at the super-spreader Norwegian Christmas party. These were all vaccinated people and apparently in relatively good health, but it seems that none of them developed serious symptoms and needed to be hospitalized. If this is a general pattern, then we can expect that fully vaccinated people, without serious health conditions, have little to fear from omicron, perhaps even less than they did from delta.

While that is a good chunk of the population in the US and other wealthy countries, this still leaves the elderly, people with health issues, and the unvaccinated. We will probably have to see how things play out in South Africa and elsewhere to get a better sense of what to expect in the United States, but from what we have seen to date, they may not face a bad story either, or at least no worse than the one they faced with the delta variant.

Here also the limited information from South Africa is encouraging. Just 30 percent of its population is vaccinated and less than 26 percent is fully vaccinated. This means that a large number of unvaccinated people must be getting infected with the omicron variant. Yet, we are not seeing its hospitals fill up with seriously ill patients, and its death figures are still relatively low. Again, this could change in the days ahead as the disease has had more opportunity to progress in people recently infected, but it is at least plausible that even people who are not vaccinated have less to fear from omicron than delta.

 

What Happens if a Mild Omicron Variant Displaces Delta?

If it proves to be the case that omicron poses substantially less risk of serious illness or death than delta, and the difference more than offsets the increase in the number of infections, then the spread of omicron in the United States may be very good news. It will almost certainly mean an increase in the number of infections since it will spread more quickly, but it would mean a reduction in the number of hospitalizations and deaths.

There will be a huge question of timing. Even if the risk of hospitalization and death is only a fifth as great as with delta (a number pulled out of the air), if it spreads ten times as quickly, it will mean twice as many people ending up in hospitals and ICUs. This means that it would still be necessary to take steps to limit the rate at which it spreads.

However, if it turns out that the difference in the severity with delta is larger than the difference in spread, the omicron variant may prove to be very good news. It can lead to a situation where we do achieve something close to herd immunity, with most of the population either being vaccinated or having an infection with omicron. (The evidence from South Africa is that prior infections with other variants do not provide much protection from omicron.) Getting to that point would be a huge victory.

Of course, we are quite far from anything like herd immunity at present. The delta variant is still by far the dominant strain in the United States. We are averaging more than 120,000 cases a day and more than 1,200 deaths. Hospitals and ICUs are packed in many parts of the country.

The story continues to be overwhelmingly one of unvaccinated people getting seriously ill and dying. For whatever reason, we continue to see large numbers of people who refuse to take the pandemic seriously. Their risk affects not only their own lives, but also the health of their family and communities, as many hospitals can no longer provide normal care to non-COVID-19 patients. This is a very unpretty picture, but there is at least a possibility that the spread of omicron will make the situation better rather than worse.

Actually, the Washington Post forgot to make this point in an article that told readers that 496 employees in Los Angeles public schools are going to be fired for failing to comply with a vaccine mandate. The article cites the school district as saying that nearly 99 percent of its employees complied with the mandate.

In assessing the importance of losing 496 employees over the mandate, it would have been useful to tell readers that 1.4 percent of employees in state and local education lose or leave their job in a typical month, according to the Bureau of Labor Statistics Job Opening and Labor Turnover Survey. This means that the number of employees who stand to be fired over the mandate is less than the number who would be fired or quit their job in a typical month.

Actually, the Washington Post forgot to make this point in an article that told readers that 496 employees in Los Angeles public schools are going to be fired for failing to comply with a vaccine mandate. The article cites the school district as saying that nearly 99 percent of its employees complied with the mandate.

In assessing the importance of losing 496 employees over the mandate, it would have been useful to tell readers that 1.4 percent of employees in state and local education lose or leave their job in a typical month, according to the Bureau of Labor Statistics Job Opening and Labor Turnover Survey. This means that the number of employees who stand to be fired over the mandate is less than the number who would be fired or quit their job in a typical month.

The New York Times told readers that the United Mine Workers are a major force in opposing Biden’s measures on climate change. While it noted that there are less than 50,000 unionized mine workers in the country: “miners have long punched above their weight thanks to their concentration in election battleground states like Pennsylvania or states with powerful senators, like Joe Manchin III of West Virginia.”

While the importance of Senator Manchin to Biden’s plans is undeniable, the rest of the story makes no sense.

According to the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages, there were less than 5,100 coal miners in Pennsylvania in 2019. (It doesn’t have data for 2020 or 2021.) Pennsylvania has a population of more than 12.8 million.

In an incredibly optimistic scenario Biden, or any other Democrat, might lose these mineworkers by a margin of 60-40, meaning that he is down by roughly 1,000 votes among these workers. In a very bad scenario, they may lose this group by a 90-10 margin, meaning that the margin is 4,000 votes.

The difference between the very optimistic and very pessimistic scenario is 3,000 votes. This is less than 0.05 percent of 6.8 million votes cast in the 2020 presidential election in Pennsylvania. (Yeah, they have friends and family, but let’s be serious.) Rather than being located in battleground states, the vast majority of the country’s 42,000 coal miners are located in solidly Republican states like Wyoming, West Virginia, and Alabama.

It is also worth noting how few unionized coal miners are left in the country. The Bureau of Labor Statistics reports that there were 37,000 union members employed in all forms of mining in 2020. This includes unionized miners in industries like copper, silver, and gold mining. Coal miners account for less than 7.0 percent of this larger category. Even if coal miners are unionized at twice the rate as the sector as a whole, it would still mean there are less than 10,000 unionized miners in the country.

It is also striking that the concern over job loss only seems to come up with reference to environmental issues. The coal industry lost tens of thousands of jobs in the last two decades as natural gas from fracking operations displaced coal as the preferred fuel for power plants across the country. For some reason, losing jobs to fracked natural gas apparently was not an issue for the coal miners’ union. The industry also lost more than 100,000 jobs in the 1980s and 1990s as strip mining replaced underground mining.

The piece also makes an absurd comparison of the potential loss of coal mining jobs to the loss of manufacturing jobs due to trade. We lost almost 4 million manufacturing jobs due to the explosion of the trade deficit between 1997 and 2007 (before the Great Recession).

While it is stylish in elite circles to blame this job loss on technology, the geniuses who make this claim have yet to explain why technology seemed to cost so many manufacturing jobs in a decade where the trade deficit exploded, but not in the prior quarter-century or in the years since the trade deficit stabilized. (We have added back more than 1.2 million manufacturing jobs between the trough of the Great Recession and the pre-pandemic peak.)

The number of jobs at risk in coal mining due to climate measures is less than 1.0 percent of the number of manufacturing jobs actually lost due to trade. The impact of these risks to jobs does not deserve to be put in the same category.

The fact is the jobs impact in the coal industry from climate measures is relatively small in a national context and even in pretty much every state, except West Virginia. It is understandable that the mining industry would like to highlight the jobs issue because the public is likely to have far more sympathy with mine workers than mine owners. The NYT should not be assisting the industry in its efforts to inflate jobs concerns in order to block action on global warming.

The New York Times told readers that the United Mine Workers are a major force in opposing Biden’s measures on climate change. While it noted that there are less than 50,000 unionized mine workers in the country: “miners have long punched above their weight thanks to their concentration in election battleground states like Pennsylvania or states with powerful senators, like Joe Manchin III of West Virginia.”

While the importance of Senator Manchin to Biden’s plans is undeniable, the rest of the story makes no sense.

According to the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages, there were less than 5,100 coal miners in Pennsylvania in 2019. (It doesn’t have data for 2020 or 2021.) Pennsylvania has a population of more than 12.8 million.

In an incredibly optimistic scenario Biden, or any other Democrat, might lose these mineworkers by a margin of 60-40, meaning that he is down by roughly 1,000 votes among these workers. In a very bad scenario, they may lose this group by a 90-10 margin, meaning that the margin is 4,000 votes.

The difference between the very optimistic and very pessimistic scenario is 3,000 votes. This is less than 0.05 percent of 6.8 million votes cast in the 2020 presidential election in Pennsylvania. (Yeah, they have friends and family, but let’s be serious.) Rather than being located in battleground states, the vast majority of the country’s 42,000 coal miners are located in solidly Republican states like Wyoming, West Virginia, and Alabama.

It is also worth noting how few unionized coal miners are left in the country. The Bureau of Labor Statistics reports that there were 37,000 union members employed in all forms of mining in 2020. This includes unionized miners in industries like copper, silver, and gold mining. Coal miners account for less than 7.0 percent of this larger category. Even if coal miners are unionized at twice the rate as the sector as a whole, it would still mean there are less than 10,000 unionized miners in the country.

It is also striking that the concern over job loss only seems to come up with reference to environmental issues. The coal industry lost tens of thousands of jobs in the last two decades as natural gas from fracking operations displaced coal as the preferred fuel for power plants across the country. For some reason, losing jobs to fracked natural gas apparently was not an issue for the coal miners’ union. The industry also lost more than 100,000 jobs in the 1980s and 1990s as strip mining replaced underground mining.

The piece also makes an absurd comparison of the potential loss of coal mining jobs to the loss of manufacturing jobs due to trade. We lost almost 4 million manufacturing jobs due to the explosion of the trade deficit between 1997 and 2007 (before the Great Recession).

While it is stylish in elite circles to blame this job loss on technology, the geniuses who make this claim have yet to explain why technology seemed to cost so many manufacturing jobs in a decade where the trade deficit exploded, but not in the prior quarter-century or in the years since the trade deficit stabilized. (We have added back more than 1.2 million manufacturing jobs between the trough of the Great Recession and the pre-pandemic peak.)

The number of jobs at risk in coal mining due to climate measures is less than 1.0 percent of the number of manufacturing jobs actually lost due to trade. The impact of these risks to jobs does not deserve to be put in the same category.

The fact is the jobs impact in the coal industry from climate measures is relatively small in a national context and even in pretty much every state, except West Virginia. It is understandable that the mining industry would like to highlight the jobs issue because the public is likely to have far more sympathy with mine workers than mine owners. The NYT should not be assisting the industry in its efforts to inflate jobs concerns in order to block action on global warming.

The November jobs report left a number of people, including me, somewhat confused. The data from the survey of households was great. The unemployment rate fell by 0.4 percentage points to 4.2 percent, with over 1.1 million more people reporting that they were employed. This was far better than the consensus forecast, which put the drop at 0.1-0.2 percentage points. (My number was 4.3 percent.)

It’s worth noting that 4.2 percent is a very low rate of unemployment by historical standards. The unemployment rate did not get this low from 1970 until 1999. Then, after the recession in 2001, it didn’t again fall to 4.2 percent until September of 2017. The unemployment rate for Blacks fell by 1.2 percentage points to 6.7 percent, a level not reached following the Great Recession until March 2018 and never prior to that time.

While the data in the household survey were much better than expected, the 210,000 jobs reported by the establishment survey was well below expectations, and the focus of most media coverage. There are several points to consider in assessing this number.

First, the prior two months’ data were revised up by a total of 82,000 jobs. This means the story on where we stand in November in regaining jobs is somewhat better than the 210,000 figure indicates. Also, the prior months’ data have all been subject to large upward revisions. This could mean we are looking at a much higher jobs growth figure for November when these data are revised.

The second point is that the public sector is continuing to lose jobs, shedding another 25,000 in November. This puts private sector job growth at 235,000. If the public sector had instead say gained back 50,000 of the more than 900,000 jobs it lost in the pandemic, we would have been looking at job growth of 285,000. (I have explained before that the issue holding back public sector hiring is that it is difficult for state and local governments to offer higher pay and hiring bonuses to compete with private employers.)

But the most important item missed in the coverage of the jobs report was the increase in the length of the average workweek. As a result of this increase, the index of aggregate hours increased by 0.5 percent. This would be equivalent to an increase of more than 630,000 private sector jobs if there had been no increase in the length of the workweek.

My assumption is that employers who are unable to attract workers are responding by increasing the hours of their current workforce. This fits with the story of rapid wage increases for lower-end workers and also the high number of quits and job openings being reported in recent months.

Okay, but enough with the data, let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald Trump and his crew would be touting the comparison in every forum they had. I’m doing this for them. As it now stands President Biden has created 5,875,000 jobs in his first ten months in the White House, compared to a loss of 2,876,000 jobs in the four years of Donald Trump’s presidency.

 

 

The November jobs report left a number of people, including me, somewhat confused. The data from the survey of households was great. The unemployment rate fell by 0.4 percentage points to 4.2 percent, with over 1.1 million more people reporting that they were employed. This was far better than the consensus forecast, which put the drop at 0.1-0.2 percentage points. (My number was 4.3 percent.)

It’s worth noting that 4.2 percent is a very low rate of unemployment by historical standards. The unemployment rate did not get this low from 1970 until 1999. Then, after the recession in 2001, it didn’t again fall to 4.2 percent until September of 2017. The unemployment rate for Blacks fell by 1.2 percentage points to 6.7 percent, a level not reached following the Great Recession until March 2018 and never prior to that time.

While the data in the household survey were much better than expected, the 210,000 jobs reported by the establishment survey was well below expectations, and the focus of most media coverage. There are several points to consider in assessing this number.

First, the prior two months’ data were revised up by a total of 82,000 jobs. This means the story on where we stand in November in regaining jobs is somewhat better than the 210,000 figure indicates. Also, the prior months’ data have all been subject to large upward revisions. This could mean we are looking at a much higher jobs growth figure for November when these data are revised.

The second point is that the public sector is continuing to lose jobs, shedding another 25,000 in November. This puts private sector job growth at 235,000. If the public sector had instead say gained back 50,000 of the more than 900,000 jobs it lost in the pandemic, we would have been looking at job growth of 285,000. (I have explained before that the issue holding back public sector hiring is that it is difficult for state and local governments to offer higher pay and hiring bonuses to compete with private employers.)

But the most important item missed in the coverage of the jobs report was the increase in the length of the average workweek. As a result of this increase, the index of aggregate hours increased by 0.5 percent. This would be equivalent to an increase of more than 630,000 private sector jobs if there had been no increase in the length of the workweek.

My assumption is that employers who are unable to attract workers are responding by increasing the hours of their current workforce. This fits with the story of rapid wage increases for lower-end workers and also the high number of quits and job openings being reported in recent months.

Okay, but enough with the data, let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald Trump and his crew would be touting the comparison in every forum they had. I’m doing this for them. As it now stands President Biden has created 5,875,000 jobs in his first ten months in the White House, compared to a loss of 2,876,000 jobs in the four years of Donald Trump’s presidency.

 

 

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