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.

I get why the Right likes to make it seem that the huge upward redistribution of the last four decades was just the result of the market working its magic, but why do so many liberals feel the need to play along? We got yet another example of this bizarre behavior in a column by Washington Post columnist E.J. Dionne, which tells us:

“But the far-right surge [e.g., Donald Trump] also worked in tandem with the pandemic’s challenges to bring to a close the era of austerity and unconstrained globalized capitalism. The way opened for a new wave of government activism.”

The idea that global capitalism in the last four decades has been in any sense “unconstrained” is frankly so laughable that no serious newspaper or magazine should ever print anything making such an absurd claim. In this period, the importance of government-granted patent and copyright monopolies has exploded. They may redistribute more than $1 trillion annually from the rest of us to those in a position to benefit from these monopolies. That comes to almost $8,000 a year for every family in the country. It is close to half of all pre-tax corporate profits. It’s hard to believe that anyone who has been alive and awake over this period could have missed the importance of this massive government intervention in the economy.

Similarly, the push for free trade has been very one-sided. While our trade negotiators worked hard to eliminate barriers to trade in manufactured goods, thereby pushing down the wages of workers in the manufacturing sector and workers without college degrees more generally, they did almost nothing to eliminate the protectionist barriers that allow our doctors and dentists to earn roughly twice as much as their counterparts in other wealthy countries. This transfers roughly $100 billion annually, or $700 per family, from the rest of us to doctors earning an average of $300k a year and dentists earning an average of more than $200k. 

I totally understand why the beneficiaries of this upward redistribution would want to pretend it is just the natural working of the market, but why the hell would people who claim to be opposed to it, like Dionne, go along with this farce? And perhaps even worse, why do media outlets with pretenses of being serious print it?

I get why the Right likes to make it seem that the huge upward redistribution of the last four decades was just the result of the market working its magic, but why do so many liberals feel the need to play along? We got yet another example of this bizarre behavior in a column by Washington Post columnist E.J. Dionne, which tells us:

“But the far-right surge [e.g., Donald Trump] also worked in tandem with the pandemic’s challenges to bring to a close the era of austerity and unconstrained globalized capitalism. The way opened for a new wave of government activism.”

The idea that global capitalism in the last four decades has been in any sense “unconstrained” is frankly so laughable that no serious newspaper or magazine should ever print anything making such an absurd claim. In this period, the importance of government-granted patent and copyright monopolies has exploded. They may redistribute more than $1 trillion annually from the rest of us to those in a position to benefit from these monopolies. That comes to almost $8,000 a year for every family in the country. It is close to half of all pre-tax corporate profits. It’s hard to believe that anyone who has been alive and awake over this period could have missed the importance of this massive government intervention in the economy.

Similarly, the push for free trade has been very one-sided. While our trade negotiators worked hard to eliminate barriers to trade in manufactured goods, thereby pushing down the wages of workers in the manufacturing sector and workers without college degrees more generally, they did almost nothing to eliminate the protectionist barriers that allow our doctors and dentists to earn roughly twice as much as their counterparts in other wealthy countries. This transfers roughly $100 billion annually, or $700 per family, from the rest of us to doctors earning an average of $300k a year and dentists earning an average of more than $200k. 

I totally understand why the beneficiaries of this upward redistribution would want to pretend it is just the natural working of the market, but why the hell would people who claim to be opposed to it, like Dionne, go along with this farce? And perhaps even worse, why do media outlets with pretenses of being serious print it?

We are so fortunate that we have reporters at the Washington Post who can tell us the true motives of politicians. In a piece on the decision by Republican Senators to refuse to go along with increased I.R.S. funding for enforcement, the Post told readers:

“Senators had hoped to raise about $100 billion by empowering the Internal Revenue Service to pursue unpaid federal taxes, but Republicans balked at the idea out of a concern it would give the tax-collection agency too much power to scrutinize families’ and corporations’ finances.”

It’s really great that the Post can tell us that the Republicans concern here was that the I.R.S. would be too powerful. Those of us who are unable to read politicians’ minds might have thought that the Republicans didn’t want to increase I.R.S. enforcement because it would allow it to collect more taxes from rich people who cheat on their taxes. Since many of these rich people contribute to Republican politicians, this would be in effect a service to the people who help to keep them in office.

Thankfully we have the Washington Post to tell us that the Republican effort to block a crackdown on rich tax cheats had nothing to do with serving their campaign contributors. It was all about a principled commitment to an ineffectual tax authority.  

We are so fortunate that we have reporters at the Washington Post who can tell us the true motives of politicians. In a piece on the decision by Republican Senators to refuse to go along with increased I.R.S. funding for enforcement, the Post told readers:

“Senators had hoped to raise about $100 billion by empowering the Internal Revenue Service to pursue unpaid federal taxes, but Republicans balked at the idea out of a concern it would give the tax-collection agency too much power to scrutinize families’ and corporations’ finances.”

It’s really great that the Post can tell us that the Republicans concern here was that the I.R.S. would be too powerful. Those of us who are unable to read politicians’ minds might have thought that the Republicans didn’t want to increase I.R.S. enforcement because it would allow it to collect more taxes from rich people who cheat on their taxes. Since many of these rich people contribute to Republican politicians, this would be in effect a service to the people who help to keep them in office.

Thankfully we have the Washington Post to tell us that the Republican effort to block a crackdown on rich tax cheats had nothing to do with serving their campaign contributors. It was all about a principled commitment to an ineffectual tax authority.  

That data point probably should have been mentioned in a NYT article reporting that relatively few of the jobs created in the clean energy sector are high-paying union jobs. The piece tells readers that this means that the shift to clean energy could end up increasing inequality:

“While Mr. Biden has proposed higher wage floors for such work, the Senate prospects for this approach are murky. And absent such protections — or even with them — there’s a nagging concern among worker advocates that the shift to green jobs may reinforce inequality rather than alleviate it.”

Last year, there were 219,000 union members employed by utilities. Even if these jobs were eliminated over night it would have a small impact on inequality in a workforce of 150 million. As a practical matter, even an aggressive push towards clean energy would likely still mean phasing out these jobs over a 20 year period. That would mean losing an average of 22,000 jobs a year.

The impact of this pace of job loss in the utility sector would be dwarfed by other factors, like government-granted patent and copyright monopolies or the overall unemployment rate, in determining the extent of inequality in the country. The impact of the explosion of the trade deficit in the first decade of this century was an order of magnitude larger, yet it received almost no attention from the media at the time it was happening. 

If we are concerned about inequality, we still should try to promote union jobs in the clean energy sector as much as possible. However, union employment in the sector is simply too small to have a major impact on economy-wide measures of inequality. 

 

That data point probably should have been mentioned in a NYT article reporting that relatively few of the jobs created in the clean energy sector are high-paying union jobs. The piece tells readers that this means that the shift to clean energy could end up increasing inequality:

“While Mr. Biden has proposed higher wage floors for such work, the Senate prospects for this approach are murky. And absent such protections — or even with them — there’s a nagging concern among worker advocates that the shift to green jobs may reinforce inequality rather than alleviate it.”

Last year, there were 219,000 union members employed by utilities. Even if these jobs were eliminated over night it would have a small impact on inequality in a workforce of 150 million. As a practical matter, even an aggressive push towards clean energy would likely still mean phasing out these jobs over a 20 year period. That would mean losing an average of 22,000 jobs a year.

The impact of this pace of job loss in the utility sector would be dwarfed by other factors, like government-granted patent and copyright monopolies or the overall unemployment rate, in determining the extent of inequality in the country. The impact of the explosion of the trade deficit in the first decade of this century was an order of magnitude larger, yet it received almost no attention from the media at the time it was happening. 

If we are concerned about inequality, we still should try to promote union jobs in the clean energy sector as much as possible. However, union employment in the sector is simply too small to have a major impact on economy-wide measures of inequality. 

 

The New York Times had a bizarre piece by Karen Petrou attacking the Fed for its low interest rate policy. The column title tells the story, “Only the Rich Could Love This Economic Recovery.”

This is bizarre, because people who read the news section of the NYT would know that workers have more bargaining power in the economy right now than at any point since at least the late 1990s. The quit rate hit a record level in April, and even with a drop in May, it is still at a 20-year peak. Workers, especially at the bottom end of the wage ladder, are seeing substantial wage gains.

The pandemic payments have also allowed many families to pay down debt, leaving their finances in much better shape than before the recession. Also, the expanded subsidies in the health care exchanges have allowed many people to get health care insurance who could not previously afford it. The NYT had a very good column earlier this month by Julia Coronado laying out many of the measures showing the improved economic plight of low and middle class families. 

It’s very hard to understand Petrou’s case. It’s true that low interest rates tend to raise asset prices, and since the rich own a hugely disproportionate share of assets, this means that they will get richer if rates are low, but it is hard to see how low and middle class people would benefit from higher interest rates.

Petrou tells readers in a section headlined “What Is the Fed For”:

“The Fed’s role is spelled out under its statutory charter, which establishes the road map for unraveling the inequality it helped create. 

“The charter’s first goal is “full employment,” meaning pretty much everyone who wants a job has one. This would get a meaningful, immediate boost if the Fed reversed its cheap-debt policies that lead companies to take out debt to fund investor profits, instead of funding new plants or products.

“Another goal is “price stability,” best measured by what it costs for a middle-class household to make ends meet. The measure the Fed uses misses the cost increases obscuring a household-to-debt build-up for all but the wealthiest. The Fed thus misses the long-term risks this debt poses to financial security, home ownership, and a secure retirement.

“The law has a third Fed goal: “moderate” interest rates. Rates below zero after taking inflation into account are anything but moderate, so they must be gradually raised, starting now.”

The first claim basically turns reality on its head. There is no plausible story whereby raising interest rates will lead businesses to increase spending on new plants and products.

How could that possibly work? Ford sees that its borrowing costs have risen by two percentage points so it then says, “let’s build new factories and start new car lines.” This is absurd on its face. It is possible to exaggerate the impact of interest rates on investment, but there is no doubt that lower rates, not higher rates, lead to more investment.

Low rates also make it easier for people to buy homes. We have seen a huge building boom since the early days of the pandemic when the Fed pushed interest rates to new lows. Millions of homeowners also took advantage of low interest rates to refinance their homes, saving thousands of dollars a year in mortgage payments. State and local governments were also able to take advantage of low interest rates to reduce their borrowing costs, freeing up money for other needs.

The second complaint, that low interest rates somehow harm ordinary people’s finances is also 180 degrees at odds with reality. And the third complaint is simply that Petrou would like higher interest rates.

In short, this tirade against the Fed’s low interest rate policy and the dismal state of the economy makes absolutely zero sense. Given the horrors of the pandemic, the economy is remarkably good shape, and the Fed’s interest rate policy has been a big factor in sustaining the economy through the recession and now boosting its recovery. 

The New York Times had a bizarre piece by Karen Petrou attacking the Fed for its low interest rate policy. The column title tells the story, “Only the Rich Could Love This Economic Recovery.”

This is bizarre, because people who read the news section of the NYT would know that workers have more bargaining power in the economy right now than at any point since at least the late 1990s. The quit rate hit a record level in April, and even with a drop in May, it is still at a 20-year peak. Workers, especially at the bottom end of the wage ladder, are seeing substantial wage gains.

The pandemic payments have also allowed many families to pay down debt, leaving their finances in much better shape than before the recession. Also, the expanded subsidies in the health care exchanges have allowed many people to get health care insurance who could not previously afford it. The NYT had a very good column earlier this month by Julia Coronado laying out many of the measures showing the improved economic plight of low and middle class families. 

It’s very hard to understand Petrou’s case. It’s true that low interest rates tend to raise asset prices, and since the rich own a hugely disproportionate share of assets, this means that they will get richer if rates are low, but it is hard to see how low and middle class people would benefit from higher interest rates.

Petrou tells readers in a section headlined “What Is the Fed For”:

“The Fed’s role is spelled out under its statutory charter, which establishes the road map for unraveling the inequality it helped create. 

“The charter’s first goal is “full employment,” meaning pretty much everyone who wants a job has one. This would get a meaningful, immediate boost if the Fed reversed its cheap-debt policies that lead companies to take out debt to fund investor profits, instead of funding new plants or products.

“Another goal is “price stability,” best measured by what it costs for a middle-class household to make ends meet. The measure the Fed uses misses the cost increases obscuring a household-to-debt build-up for all but the wealthiest. The Fed thus misses the long-term risks this debt poses to financial security, home ownership, and a secure retirement.

“The law has a third Fed goal: “moderate” interest rates. Rates below zero after taking inflation into account are anything but moderate, so they must be gradually raised, starting now.”

The first claim basically turns reality on its head. There is no plausible story whereby raising interest rates will lead businesses to increase spending on new plants and products.

How could that possibly work? Ford sees that its borrowing costs have risen by two percentage points so it then says, “let’s build new factories and start new car lines.” This is absurd on its face. It is possible to exaggerate the impact of interest rates on investment, but there is no doubt that lower rates, not higher rates, lead to more investment.

Low rates also make it easier for people to buy homes. We have seen a huge building boom since the early days of the pandemic when the Fed pushed interest rates to new lows. Millions of homeowners also took advantage of low interest rates to refinance their homes, saving thousands of dollars a year in mortgage payments. State and local governments were also able to take advantage of low interest rates to reduce their borrowing costs, freeing up money for other needs.

The second complaint, that low interest rates somehow harm ordinary people’s finances is also 180 degrees at odds with reality. And the third complaint is simply that Petrou would like higher interest rates.

In short, this tirade against the Fed’s low interest rate policy and the dismal state of the economy makes absolutely zero sense. Given the horrors of the pandemic, the economy is remarkably good shape, and the Fed’s interest rate policy has been a big factor in sustaining the economy through the recession and now boosting its recovery. 

The Washington Post gave readers the dire warning that the rapid growth this year, and projected growth for next year, is likely to lead to slower growth in 2023. It then tells readers:

“But there’s a catch. Americans don’t typically look at the level of GDP. They look at the change; they compare things to the previous quarter, not the previous decade, or to a counterfactual scenario in which no stimulus packages were passed. And it’s likely that, because the boom of 2021 and 2022 helped GDP reach its potential more rapidly, the rate of growth in 2023 will be slower than it would have been without stimulus.”

Actually, in their direct daily experience, people have no ability to assess GDP growth. They know if they and their family and friends have jobs. They know if they feel secure in those jobs and are getting decent pay raises. On these issues, the projections provide little basis for concern. The Congressional Budget Office projects that unemployment will average 3.7 percent in 2023, the same as the 2019 average and lower than any other year since 1969.

If the unemployment rate is in fact this low, it is likely that workers will feel relatively secure in their jobs and be in a position to demand reasonable pay increases. If the economy is in fact growing slowly in 2023, as currently projected, people will only be aware of this fact because news outlets and politicians choose to highlight it.

The Washington Post gave readers the dire warning that the rapid growth this year, and projected growth for next year, is likely to lead to slower growth in 2023. It then tells readers:

“But there’s a catch. Americans don’t typically look at the level of GDP. They look at the change; they compare things to the previous quarter, not the previous decade, or to a counterfactual scenario in which no stimulus packages were passed. And it’s likely that, because the boom of 2021 and 2022 helped GDP reach its potential more rapidly, the rate of growth in 2023 will be slower than it would have been without stimulus.”

Actually, in their direct daily experience, people have no ability to assess GDP growth. They know if they and their family and friends have jobs. They know if they feel secure in those jobs and are getting decent pay raises. On these issues, the projections provide little basis for concern. The Congressional Budget Office projects that unemployment will average 3.7 percent in 2023, the same as the 2019 average and lower than any other year since 1969.

If the unemployment rate is in fact this low, it is likely that workers will feel relatively secure in their jobs and be in a position to demand reasonable pay increases. If the economy is in fact growing slowly in 2023, as currently projected, people will only be aware of this fact because news outlets and politicians choose to highlight it.

Jeanna Smialek and Ben Casselman had a good piece in the NYT on the inflation of the 1970s and the differences with the current situation.  However, it left out one important part of the story.

In the 1970s, actually in the late 1960s also, the Consumer Price Index (CPI) had an error in its construction that led it to overstate the rate of inflation relative to the current measure. In some years, especially in the late 1970s, the error was especially large, peaking at 2.6 percentage points in 1979. Here’s the picture for the official CPI used at the time, compared with the Bureau of Labor Statistics CPI-U-RS, which calculates the inflation rate using the current methodology.

 

              CPI           CPI-U-RS

1978      9.0%          7.8%

1979     13.3%        10.7%

1980    12.5%         10.7%

This mattered a lot in the 1970s because, as Smialek and Casselman point out, many wage contracts were directly indexed to the CPI. This means that an overstatement in the measured rate of inflation would show up directly in higher wages. Many rental contracts were also indexed to the CPI. This measurement error undoubtedly contributed to the wage-price spiral of the 1970s. Presumably we don’t have to worry about the same sort of measurement error today, and even if there were such an error, many fewer contracts are now indexed to the CPI. ( I wrote about this issue many years ago.)

Jeanna Smialek and Ben Casselman had a good piece in the NYT on the inflation of the 1970s and the differences with the current situation.  However, it left out one important part of the story.

In the 1970s, actually in the late 1960s also, the Consumer Price Index (CPI) had an error in its construction that led it to overstate the rate of inflation relative to the current measure. In some years, especially in the late 1970s, the error was especially large, peaking at 2.6 percentage points in 1979. Here’s the picture for the official CPI used at the time, compared with the Bureau of Labor Statistics CPI-U-RS, which calculates the inflation rate using the current methodology.

 

              CPI           CPI-U-RS

1978      9.0%          7.8%

1979     13.3%        10.7%

1980    12.5%         10.7%

This mattered a lot in the 1970s because, as Smialek and Casselman point out, many wage contracts were directly indexed to the CPI. This means that an overstatement in the measured rate of inflation would show up directly in higher wages. Many rental contracts were also indexed to the CPI. This measurement error undoubtedly contributed to the wage-price spiral of the 1970s. Presumably we don’t have to worry about the same sort of measurement error today, and even if there were such an error, many fewer contracts are now indexed to the CPI. ( I wrote about this issue many years ago.)

There have been many warnings, most notably from former Treasury Secretary Larry Summers, that President Biden’s robust recovery package would lead to spiraling inflation. I have written several times that I don’t think the inflation hawks are right, but their warnings deserve to be taken seriously. The most recent evidence supports the view that, for the moment, we can put aside our inflation fears.

To add some context to the debate, we all knew that there would be some disruptions as the economy reopened. Large segments of the economy, most visibly hotels and restaurants, were running at a fraction of their capacity until the last few months. Now that most pandemic restrictions have been removed, businesses in these sectors are rushing to add staff and get fully up to speed.

But this is a process that takes time. (That’s why some of us supported measures like work sharing or the paycheck protection program, that kept workers tied to their employers.) During this adjustment process, there will be shortages in various sectors. There also will be problems for many employers trying to attract workers. In many cases they will have to offer higher wages, which is not a bad thing, but may require some adjustment on the part of businesses who are not used to competing for workers.

The difference between the view that the adjustment process will be difficult, and involve some inflation, and the inflation hawks’ view, that we are on a path to spiraling inflation and the return of 1970s stagflation, is whether the inflationary pressures are likely to be enduring. The latest evidence is supporting the temporary disruption story. (See, Preview: What to Look for in the June Consumer Price Index)

To take the most visible case, lumber prices having fallen by roughly 50 percent from the peak hit in early May. They are still high, but the soaring prices of the winter and early spring have proven to be temporary.

There also has been a very visible price surge in used cars. This is the result of both temporary supply problems for new cars (a fire temporarily reduced capacity in the semi-conductor industry) and a huge surge in demand as rental car companies sought to rebuild their fleets. The price surge now appears to be slowing,  if not actually going into reverse. New car production is starting to catch up with demand, but it will likely be several more months, perhaps not until 2022, until the car market returns to something resembling normal.

Oil is another area where we have seen a price surge. As people may recall, the price for oil futures actually turned negative briefly last spring, as people were effectively looking to be paid to store oil. With the economy picking up steam in the U.S. and around the world, oil consumption is bouncing back to more normal levels. However, production has not kept pace.

Part of this is by design, as OPEC moved to restrain production during the pandemic and is still targeting a level of production well below pre-pandemic output. When it failed to reach a deal on higher production quotas earlier this week, the price of oil spiked to over $77 a barrel. While this is at least temporarily bad news on the inflation front (good news on the climate front), the impact of this decision is not likely to be long-lasting.

Historically, it has been difficult for cartels to maintain their limits on output because there is an enormous incentive to cheat. Each producer stands to benefit if they can sell additional oil at near the cartel price, while the other producers stick to their quota. This has been an ongoing problem with OPEC, so it would not be surprising if countries soon begin to exceed the agreed upon quotas. As of July 8th, the price of oil had fallen to $72 a barrel.  

Unfortunately, high oil prices still mean bad news in the short-term for the economy and also politically for the person in the White House. Higher oil prices not only show up directly as higher inflation in gas and heating oil prices, they also show up in items like air fares and rents, which often include the cost of utilities. Surging oil prices would contribute to inflationary pressures, so from that standpoint, moderation of oil prices is a good thing.

 

The Labor Market

We have been seeing strong wage growth the last few months, especially at the bottom end of the labor market. Many of us see this as a good thing. After all, anyone who supported a $15 an hour minimum wage for 2026 has to want to see substantial wage increases in sectors like retail and restaurants, where the average hourly wage for production and non-supervisory workers is $18.57 and $16.21, respectively. Thus far in 2021 the pattern of wage increases has been very progressive with rapid wage growth in sectors with low pay, and much less rapid wage growth in industries with higher average pay. With wages overall increasing at annual rate of just over 4.0 percent, it is not clear that there is much to worry about with inflation.

We got important news today on the labor shortage story. The Labor Department’s Job Openings and Labor Turnover Survey showed a drop in the quit rate from 2.8 percent in April to 2.5 percent in May. This should not be that big a deal, except that when we saw a rise from 2.5 percent in March to 2.8 percent in April, it was treated as a very big deal. This was the highest rate ever reported in this survey, which goes back to 2000. It was taken as evidence that workers were so confident of their labor market prospects, they would freely quit jobs in search of a better one.

The 2.5 percent level reported for May is still high, but it is comparable to what we have seen in prior years. The recovery package was good news for workers, as is the rapid growth in employment that we have been seeing this year, but Biden has not yet created a worker’s paradise.

 

The Bond Market

In a series of tweets this morning, Paul Krugman noted the interest rate on 10-year Treasury bonds had fallen to under 1.3 percent. It had been over 1.7 percent as recently as March. This is interesting from the standpoint of inflation forecasts, since it doesn’t seem likely that many investors would be holding long-term bonds at a 1.3 percent interest rate if they expected inflation in the range of 3-4 percent, and possibly higher. In other words, the bond markets don’t seem to agree with Larry Summers’ view on inflation risks.

Markets are often wrong (just look at the price of Bitcoin), but it is striking that people with lots of money on the line clearly are not acting as though they anticipate a large uptick in the inflation rate. They apparently are not taking the warnings of the inflation hawks very seriously.

There is a great irony in this story. The deficit hawks always told us that the bond market was the big enforcer. Clinton Treasury Secretary Robert Rubin used the term “bond market vigilantes,” for the investors in the bond market who would send interest rates soaring in response to deficits they perceived as too large. We are now looking at far larger deficits, even relative to the size of the economy, than anything we were looking at during the Clinton years. Yet, the bond market vigilantes seem to be asleep at the wheel.

At the end of the day, the bond market may or may not prove to be right on this one, but it sure is nice to see that bond investors are not supporting the people with their actions, who claim to be speaking on their behalf.  

 

There have been many warnings, most notably from former Treasury Secretary Larry Summers, that President Biden’s robust recovery package would lead to spiraling inflation. I have written several times that I don’t think the inflation hawks are right, but their warnings deserve to be taken seriously. The most recent evidence supports the view that, for the moment, we can put aside our inflation fears.

To add some context to the debate, we all knew that there would be some disruptions as the economy reopened. Large segments of the economy, most visibly hotels and restaurants, were running at a fraction of their capacity until the last few months. Now that most pandemic restrictions have been removed, businesses in these sectors are rushing to add staff and get fully up to speed.

But this is a process that takes time. (That’s why some of us supported measures like work sharing or the paycheck protection program, that kept workers tied to their employers.) During this adjustment process, there will be shortages in various sectors. There also will be problems for many employers trying to attract workers. In many cases they will have to offer higher wages, which is not a bad thing, but may require some adjustment on the part of businesses who are not used to competing for workers.

The difference between the view that the adjustment process will be difficult, and involve some inflation, and the inflation hawks’ view, that we are on a path to spiraling inflation and the return of 1970s stagflation, is whether the inflationary pressures are likely to be enduring. The latest evidence is supporting the temporary disruption story. (See, Preview: What to Look for in the June Consumer Price Index)

To take the most visible case, lumber prices having fallen by roughly 50 percent from the peak hit in early May. They are still high, but the soaring prices of the winter and early spring have proven to be temporary.

There also has been a very visible price surge in used cars. This is the result of both temporary supply problems for new cars (a fire temporarily reduced capacity in the semi-conductor industry) and a huge surge in demand as rental car companies sought to rebuild their fleets. The price surge now appears to be slowing,  if not actually going into reverse. New car production is starting to catch up with demand, but it will likely be several more months, perhaps not until 2022, until the car market returns to something resembling normal.

Oil is another area where we have seen a price surge. As people may recall, the price for oil futures actually turned negative briefly last spring, as people were effectively looking to be paid to store oil. With the economy picking up steam in the U.S. and around the world, oil consumption is bouncing back to more normal levels. However, production has not kept pace.

Part of this is by design, as OPEC moved to restrain production during the pandemic and is still targeting a level of production well below pre-pandemic output. When it failed to reach a deal on higher production quotas earlier this week, the price of oil spiked to over $77 a barrel. While this is at least temporarily bad news on the inflation front (good news on the climate front), the impact of this decision is not likely to be long-lasting.

Historically, it has been difficult for cartels to maintain their limits on output because there is an enormous incentive to cheat. Each producer stands to benefit if they can sell additional oil at near the cartel price, while the other producers stick to their quota. This has been an ongoing problem with OPEC, so it would not be surprising if countries soon begin to exceed the agreed upon quotas. As of July 8th, the price of oil had fallen to $72 a barrel.  

Unfortunately, high oil prices still mean bad news in the short-term for the economy and also politically for the person in the White House. Higher oil prices not only show up directly as higher inflation in gas and heating oil prices, they also show up in items like air fares and rents, which often include the cost of utilities. Surging oil prices would contribute to inflationary pressures, so from that standpoint, moderation of oil prices is a good thing.

 

The Labor Market

We have been seeing strong wage growth the last few months, especially at the bottom end of the labor market. Many of us see this as a good thing. After all, anyone who supported a $15 an hour minimum wage for 2026 has to want to see substantial wage increases in sectors like retail and restaurants, where the average hourly wage for production and non-supervisory workers is $18.57 and $16.21, respectively. Thus far in 2021 the pattern of wage increases has been very progressive with rapid wage growth in sectors with low pay, and much less rapid wage growth in industries with higher average pay. With wages overall increasing at annual rate of just over 4.0 percent, it is not clear that there is much to worry about with inflation.

We got important news today on the labor shortage story. The Labor Department’s Job Openings and Labor Turnover Survey showed a drop in the quit rate from 2.8 percent in April to 2.5 percent in May. This should not be that big a deal, except that when we saw a rise from 2.5 percent in March to 2.8 percent in April, it was treated as a very big deal. This was the highest rate ever reported in this survey, which goes back to 2000. It was taken as evidence that workers were so confident of their labor market prospects, they would freely quit jobs in search of a better one.

The 2.5 percent level reported for May is still high, but it is comparable to what we have seen in prior years. The recovery package was good news for workers, as is the rapid growth in employment that we have been seeing this year, but Biden has not yet created a worker’s paradise.

 

The Bond Market

In a series of tweets this morning, Paul Krugman noted the interest rate on 10-year Treasury bonds had fallen to under 1.3 percent. It had been over 1.7 percent as recently as March. This is interesting from the standpoint of inflation forecasts, since it doesn’t seem likely that many investors would be holding long-term bonds at a 1.3 percent interest rate if they expected inflation in the range of 3-4 percent, and possibly higher. In other words, the bond markets don’t seem to agree with Larry Summers’ view on inflation risks.

Markets are often wrong (just look at the price of Bitcoin), but it is striking that people with lots of money on the line clearly are not acting as though they anticipate a large uptick in the inflation rate. They apparently are not taking the warnings of the inflation hawks very seriously.

There is a great irony in this story. The deficit hawks always told us that the bond market was the big enforcer. Clinton Treasury Secretary Robert Rubin used the term “bond market vigilantes,” for the investors in the bond market who would send interest rates soaring in response to deficits they perceived as too large. We are now looking at far larger deficits, even relative to the size of the economy, than anything we were looking at during the Clinton years. Yet, the bond market vigilantes seem to be asleep at the wheel.

At the end of the day, the bond market may or may not prove to be right on this one, but it sure is nice to see that bond investors are not supporting the people with their actions, who claim to be speaking on their behalf.  

 

Buying Democracy in a Good Way

Brian Beutler tweeted something this week that got me thinking about ways the Democrats can get around a Republican filibuster on voting rights: make it about money. The key problem facing any voting rights measure is that the Republicans are determined to filibuster anything that limits the ability of states to suppress the vote or gerrymander congressional and legislative districts.

At the moment, at least two Democratic senators (Joe Manchin of West Virginia and Kyrsten Sinema of Arizona) seem unwilling to go along with voting to weaken the filibuster to allow voting rights measures to pass with a simple majority. As a result, it is hard to see how anything can pass.

But, the Democrats can pass bills that involve appropriations with a simple majority through the reconciliation process. This is where the point that Brian made comes in, we can make voting rights about money.

Suppose the next reconciliation bill included a provision that gave $1,000 per person to every adult living in a state where the districts are drawn by an independent commission, where basic provisions of access are guaranteed (e.g. two weeks of early voting, no excuse absentee voting), and where elections are run by career civil servants and cannot be overturned by elected officials. We should probably throw in some provisions about mandatory five-year prison terms for harassing or threatening election officials.

This is a straight up appropriation bill, it’s not telling states what they have to do, so it should pass muster for reconciliation. It may be the case that Republican states will still insist on their voter suppression measures and rigged districts, and look to blow off the money, as they did with Medicaid expansion, but this would be a very different story.

Medicaid expansion was largely seen as benefitting poor people and people of color. In this case, the issue is $1,000 that would go directly into the pocket of real Americans. It should be a great election issue that Republican governors and legislators pulled $1,000 out of their pockets so that they could rig the elections and keep their friends in office.

I suppose the Republicans can argue that voter suppression and gerrymandered districts are a matter of basic rights that are more important than money, but I’m not sure that would be a winning position. In any case, I really would love to find out.  

Brian Beutler tweeted something this week that got me thinking about ways the Democrats can get around a Republican filibuster on voting rights: make it about money. The key problem facing any voting rights measure is that the Republicans are determined to filibuster anything that limits the ability of states to suppress the vote or gerrymander congressional and legislative districts.

At the moment, at least two Democratic senators (Joe Manchin of West Virginia and Kyrsten Sinema of Arizona) seem unwilling to go along with voting to weaken the filibuster to allow voting rights measures to pass with a simple majority. As a result, it is hard to see how anything can pass.

But, the Democrats can pass bills that involve appropriations with a simple majority through the reconciliation process. This is where the point that Brian made comes in, we can make voting rights about money.

Suppose the next reconciliation bill included a provision that gave $1,000 per person to every adult living in a state where the districts are drawn by an independent commission, where basic provisions of access are guaranteed (e.g. two weeks of early voting, no excuse absentee voting), and where elections are run by career civil servants and cannot be overturned by elected officials. We should probably throw in some provisions about mandatory five-year prison terms for harassing or threatening election officials.

This is a straight up appropriation bill, it’s not telling states what they have to do, so it should pass muster for reconciliation. It may be the case that Republican states will still insist on their voter suppression measures and rigged districts, and look to blow off the money, as they did with Medicaid expansion, but this would be a very different story.

Medicaid expansion was largely seen as benefitting poor people and people of color. In this case, the issue is $1,000 that would go directly into the pocket of real Americans. It should be a great election issue that Republican governors and legislators pulled $1,000 out of their pockets so that they could rig the elections and keep their friends in office.

I suppose the Republicans can argue that voter suppression and gerrymandered districts are a matter of basic rights that are more important than money, but I’m not sure that would be a winning position. In any case, I really would love to find out.  

The June jobs report was damn good news. The 850,000 new jobs created was at the high end of what I imagined to be possible. There is a limit to how rapidly businesses can hire. It is easiest when it’s just a matter of recalling workers who are laid off. But the vast pool of people on temporary layoffs has dwindled. As I pointed out, the share of the unemployment due to temporary layoffs had fallen to a level that was normal for a recession. It was 19.0 percent in June, down from a peak of 77.9 percent last April.

We also are looking at a situation in which an extraordinarily large share of the unemployed are long-term unemployed (more than twenty-six weeks). Historically, it has been harder for this group of workers to find new jobs.

For these reasons, it didn’t seem likely that we could have the sort of million plus monthly job growth that we saw last summer. In that context, adding 850,000 jobs in a month is probably about as good as we could hope for.

The strong job growth was associated with strong wage growth, especially for workers in lower-paying sectors. This is consistent with the hard to get good help story that we are constantly hearing about in the business press. Of course, it is not really impossible in most cases to get more workers, restaurants added 195,000 jobs in June, employers just have to pay more money.

The story in the June data is that workers are getting pay increases, and this is especially the case for workers at the bottom of the wage ladder. The data from the Bureau of Labor Statistics’ establishment survey are not ideal for measuring wage growth for different groups (the Current Population Survey is much better, but the monthly and even quarterly data are very noisy) but we can get a general picture.

The data for the last year are somewhat skewed by composition effects (the lowest paid workers lost their jobs, thereby raising average pay), but if we take the averages for the last two years, with most workers now rehired, the impact of composition changes is more limited. What we see is that average wage growth has been strong over this period, but it has been strongest for the lowest paid workers.

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

As the chart shows, the average hourly wage for all workers increased at an average annual rate of 4.3 percent. If we look at the average for all production and non-supervisory workers, a category which excludes most higher paid workers, the average annual increase has been 4.6 percent. It has been even higher in the industries with the lowest pay. Average annual increases in retail has been 5.8 percent, while in the category that includes hotel and restaurant workers it was 6.0 percent.   

This is a big deal for these workers. In the case of hotel and restaurant workers, the increases over the last two years come to $1.77 an hour. For someone working a full-time full-year job (many of these workers only work 20-30 hours a week), this would mean a pay increase of more than $3,500 a year.

Of course, how much this translates into higher living standards will depend on inflation. Inflation over the last two years has averaged 2.6 percent annually. This means that the lowest paid workers still got large pay increases, even after adjusting for the rise in prices. After adjusting for inflation, the average hourly wage for retail workers still rose by more 6.4 percent over the last two years. For restaurant workers the increase a bit less than 7.0 percent.

We will likely see a somewhat slower pace of wage growth once the surge of reopening hiring is over. As pandemic restrictions have ended over the last few months, many businesses rushed to staff up to accommodate more customers. This led to a record number of job openings reported for April. The story is likely to be similar in the May data released this week, but we will probably be through this stretch by the end of the summer.

Also, the normal rise in seasonal demand has added to difficulty for employers in finding workers. Many hotels and restaurants always add to their staff in summer months. This is a seasonal effect that is accounted for in our seasonal adjustments. But when this additional hiring coincides with the ending of the pandemic, it makes hiring considerably more difficult. However, when we get to September. The situation is reversed, with seasonal workers being laid off.

On the negative side, this means that the bargaining power that many lower paid workers enjoy at the moment is likely to be eroded quickly. On the plus side, there is less reason to fear that we are seeing the beginning of an inflationary spiral, with higher wages forcing price increases, which then lead to higher wage demands.

Wage Growth and Inflation

It is also important to remember that lower paid workers account for a relatively small portion of the total wage bill. If all workers were seeing 6.0 percent annual pay increases, it almost certainly would lead to higher inflation. But these sorts of pay hikes in the restaurant and retail sector have little impact on overall inflation.

The 4.3 percent average rate of wage growth overall is roughly a percentage point higher than the rates we were seeing before the pandemic, but this can be largely absorbed in a lower profit share and more rapid pace of productivity growth. A decline in profit shares would just be reversing the rise we saw following the Great Recession. It may be bad news for the stock market, but good news for just about everyone who didn’t own large amounts of stock.

Productivity growth has been extraordinary since the recession. In the year from the first quarter of 2020 to the first quarter of 2021 productivity rose 4.1 percent. This compares to average annual rate of just over 1.0 percent in the prior decade. With GDP likely to show an increase of close to 8.0 percent in the second quarter, the rate of productivity growth will again be close to 4.0 percent in the current quarter.

Productivity growth is always erratic, especially around recessions. No one expects the economy to sustain anything like a 4.0 percent rate of productivity growth, but businesses were forced to find new ways of operating in the pandemic. Many of these changes led to more efficient ways of doing business. As innovations diffuse more widely, it is very plausible that we will see substantially more rapid productivity growth for at least the next few years. This will allow for more rapid wage growth without inflation.

Trends in Oil

Oil prices are an area that provide some basis for concern in the overall inflation picture. While oil is far less important to the economy than it was in the 1970s, it is still important, and rising oil prices show up as higher inflation in not obvious places like rent (which often includes utilities) and airfares, which are highly responsive to the price of jet fuel. Of course, higher gas prices are highly visible and likely to be an issue raised in elections.

Oil prices had plummeted during the pandemic, with future prices actually turning negative, meaning that it was necessary to pay people to commit to taking delivery of oil. Crude prices have been rising consistently since last fall, with the current price hovering near $75 a barrel, roughly the same as the peak levels in the years just before the pandemic.

It’s not clear if this sort of price can be sustained long. There are many places in the world where oil can be profitably produced at $75 aa barrel, but not at $50 or even $60 a barrel. Production was shut down in these areas in the pandemic, but we can expect many to be coming back on line in the next few months.

There is also another factor that could put serious downward pressure on oil prices. If oil producers take seriously the commitments to electric cars and clean energy by the United States and other major consuming nations, then they will realize that they have an asset whose value is likely to plummet in coming years. In that context, it makes sense to try to produce as much as possible while the price is still reasonably high.

Clearly this is not happening now, and most projections show oil demand continuing to rise modestly throughout the decade. But it is possible to imagine that aggressive moves towards clean energy could change this picture and create a climate of fear among oil producers.

Progress, But Not Home Yet

Given the depths to which the economy sank last spring, and the huge surge in coronavirus cases and deaths this winter, you have to be pretty happy with the way things stand now with the economy and the pandemic. In the case of the latter, the daily rate of both cases and deaths is down by far more than 90 percent from the winter peaks. In the states with the highest vaccination rates, the number of cases reported daily is down by more than 99 percent.

We may not see more months of 850,000 job growth, but it certainly is reasonable to believe that we can stay in a range between 500,000 and 700,000 at least through the rest of the year. Since we are still down 6.5 million jobs from before the pandemic started, this means we won’t make up the jobs lost until the winter. It will be even longer until we can get back to the pre-pandemic trend and get back jobs that should have been created over the last year and a half.[1]

Still, the picture looks hugely better than it did six months ago. If Congress can use the summer to pass legislation dealing with longer term problems, like addressing global warming, improving child care and home health care, fixing Medicare, and making health care more affordable generally, the picture will be even better.

[1] We may end up a somewhat lower trend growth path if, for example, some older workers choose to retire earlier than they had planned before the pandemic. More early retirements is not a bad thing, if it is voluntary, but it does reduce the size of the workforce.

The June jobs report was damn good news. The 850,000 new jobs created was at the high end of what I imagined to be possible. There is a limit to how rapidly businesses can hire. It is easiest when it’s just a matter of recalling workers who are laid off. But the vast pool of people on temporary layoffs has dwindled. As I pointed out, the share of the unemployment due to temporary layoffs had fallen to a level that was normal for a recession. It was 19.0 percent in June, down from a peak of 77.9 percent last April.

We also are looking at a situation in which an extraordinarily large share of the unemployed are long-term unemployed (more than twenty-six weeks). Historically, it has been harder for this group of workers to find new jobs.

For these reasons, it didn’t seem likely that we could have the sort of million plus monthly job growth that we saw last summer. In that context, adding 850,000 jobs in a month is probably about as good as we could hope for.

The strong job growth was associated with strong wage growth, especially for workers in lower-paying sectors. This is consistent with the hard to get good help story that we are constantly hearing about in the business press. Of course, it is not really impossible in most cases to get more workers, restaurants added 195,000 jobs in June, employers just have to pay more money.

The story in the June data is that workers are getting pay increases, and this is especially the case for workers at the bottom of the wage ladder. The data from the Bureau of Labor Statistics’ establishment survey are not ideal for measuring wage growth for different groups (the Current Population Survey is much better, but the monthly and even quarterly data are very noisy) but we can get a general picture.

The data for the last year are somewhat skewed by composition effects (the lowest paid workers lost their jobs, thereby raising average pay), but if we take the averages for the last two years, with most workers now rehired, the impact of composition changes is more limited. What we see is that average wage growth has been strong over this period, but it has been strongest for the lowest paid workers.

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

As the chart shows, the average hourly wage for all workers increased at an average annual rate of 4.3 percent. If we look at the average for all production and non-supervisory workers, a category which excludes most higher paid workers, the average annual increase has been 4.6 percent. It has been even higher in the industries with the lowest pay. Average annual increases in retail has been 5.8 percent, while in the category that includes hotel and restaurant workers it was 6.0 percent.   

This is a big deal for these workers. In the case of hotel and restaurant workers, the increases over the last two years come to $1.77 an hour. For someone working a full-time full-year job (many of these workers only work 20-30 hours a week), this would mean a pay increase of more than $3,500 a year.

Of course, how much this translates into higher living standards will depend on inflation. Inflation over the last two years has averaged 2.6 percent annually. This means that the lowest paid workers still got large pay increases, even after adjusting for the rise in prices. After adjusting for inflation, the average hourly wage for retail workers still rose by more 6.4 percent over the last two years. For restaurant workers the increase a bit less than 7.0 percent.

We will likely see a somewhat slower pace of wage growth once the surge of reopening hiring is over. As pandemic restrictions have ended over the last few months, many businesses rushed to staff up to accommodate more customers. This led to a record number of job openings reported for April. The story is likely to be similar in the May data released this week, but we will probably be through this stretch by the end of the summer.

Also, the normal rise in seasonal demand has added to difficulty for employers in finding workers. Many hotels and restaurants always add to their staff in summer months. This is a seasonal effect that is accounted for in our seasonal adjustments. But when this additional hiring coincides with the ending of the pandemic, it makes hiring considerably more difficult. However, when we get to September. The situation is reversed, with seasonal workers being laid off.

On the negative side, this means that the bargaining power that many lower paid workers enjoy at the moment is likely to be eroded quickly. On the plus side, there is less reason to fear that we are seeing the beginning of an inflationary spiral, with higher wages forcing price increases, which then lead to higher wage demands.

Wage Growth and Inflation

It is also important to remember that lower paid workers account for a relatively small portion of the total wage bill. If all workers were seeing 6.0 percent annual pay increases, it almost certainly would lead to higher inflation. But these sorts of pay hikes in the restaurant and retail sector have little impact on overall inflation.

The 4.3 percent average rate of wage growth overall is roughly a percentage point higher than the rates we were seeing before the pandemic, but this can be largely absorbed in a lower profit share and more rapid pace of productivity growth. A decline in profit shares would just be reversing the rise we saw following the Great Recession. It may be bad news for the stock market, but good news for just about everyone who didn’t own large amounts of stock.

Productivity growth has been extraordinary since the recession. In the year from the first quarter of 2020 to the first quarter of 2021 productivity rose 4.1 percent. This compares to average annual rate of just over 1.0 percent in the prior decade. With GDP likely to show an increase of close to 8.0 percent in the second quarter, the rate of productivity growth will again be close to 4.0 percent in the current quarter.

Productivity growth is always erratic, especially around recessions. No one expects the economy to sustain anything like a 4.0 percent rate of productivity growth, but businesses were forced to find new ways of operating in the pandemic. Many of these changes led to more efficient ways of doing business. As innovations diffuse more widely, it is very plausible that we will see substantially more rapid productivity growth for at least the next few years. This will allow for more rapid wage growth without inflation.

Trends in Oil

Oil prices are an area that provide some basis for concern in the overall inflation picture. While oil is far less important to the economy than it was in the 1970s, it is still important, and rising oil prices show up as higher inflation in not obvious places like rent (which often includes utilities) and airfares, which are highly responsive to the price of jet fuel. Of course, higher gas prices are highly visible and likely to be an issue raised in elections.

Oil prices had plummeted during the pandemic, with future prices actually turning negative, meaning that it was necessary to pay people to commit to taking delivery of oil. Crude prices have been rising consistently since last fall, with the current price hovering near $75 a barrel, roughly the same as the peak levels in the years just before the pandemic.

It’s not clear if this sort of price can be sustained long. There are many places in the world where oil can be profitably produced at $75 aa barrel, but not at $50 or even $60 a barrel. Production was shut down in these areas in the pandemic, but we can expect many to be coming back on line in the next few months.

There is also another factor that could put serious downward pressure on oil prices. If oil producers take seriously the commitments to electric cars and clean energy by the United States and other major consuming nations, then they will realize that they have an asset whose value is likely to plummet in coming years. In that context, it makes sense to try to produce as much as possible while the price is still reasonably high.

Clearly this is not happening now, and most projections show oil demand continuing to rise modestly throughout the decade. But it is possible to imagine that aggressive moves towards clean energy could change this picture and create a climate of fear among oil producers.

Progress, But Not Home Yet

Given the depths to which the economy sank last spring, and the huge surge in coronavirus cases and deaths this winter, you have to be pretty happy with the way things stand now with the economy and the pandemic. In the case of the latter, the daily rate of both cases and deaths is down by far more than 90 percent from the winter peaks. In the states with the highest vaccination rates, the number of cases reported daily is down by more than 99 percent.

We may not see more months of 850,000 job growth, but it certainly is reasonable to believe that we can stay in a range between 500,000 and 700,000 at least through the rest of the year. Since we are still down 6.5 million jobs from before the pandemic started, this means we won’t make up the jobs lost until the winter. It will be even longer until we can get back to the pre-pandemic trend and get back jobs that should have been created over the last year and a half.[1]

Still, the picture looks hugely better than it did six months ago. If Congress can use the summer to pass legislation dealing with longer term problems, like addressing global warming, improving child care and home health care, fixing Medicare, and making health care more affordable generally, the picture will be even better.

[1] We may end up a somewhat lower trend growth path if, for example, some older workers choose to retire earlier than they had planned before the pandemic. More early retirements is not a bad thing, if it is voluntary, but it does reduce the size of the workforce.

Yes, it is that time of month again. As I always say, this sort of comparison is silly, since there are so many factors determining job growth that have nothing to do with the person in the White House. But, we all know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot.

So, here’s the latest, the economy has created more than 3 million jobs in the first five months of the Biden administration. It lost almost 2.9 million jobs in the four years of the Trump administration. Biden has now created more jobs than Trump lost.

Source: Bureau of Labor Statistics.

Yes, it is that time of month again. As I always say, this sort of comparison is silly, since there are so many factors determining job growth that have nothing to do with the person in the White House. But, we all know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot.

So, here’s the latest, the economy has created more than 3 million jobs in the first five months of the Biden administration. It lost almost 2.9 million jobs in the four years of the Trump administration. Biden has now created more jobs than Trump lost.

Source: Bureau of Labor Statistics.

Want to search in the archives?

¿Quieres buscar en los archivos?

Click Here Haga clic aquí