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.

At this point, a large majority of non-college educated whites (especially white men) are willing to follow Donald Trump off any cliff. They have open contempt for more educated people (a.k.a. the “elites”) and their institutions, such as universities, mainstream media outlets, and science.

There is no justification for the racism, anti-Semitism, homophobia and other forms of bigotry that Trump has cultivated since he entered politics. But there is a reason why it suddenly has so much appeal, and it’s not just that a Black guy (who many of them voted for) became president. I will again make the case here.

Let’s Imagine a World Where the More Educated Screwed the Less-Educated

We know the data on what has happened to income distribution over the last four decades. To take a simple point of reference, in debates on the minimum wage we often talk about how if it had kept pace with inflation since its peak real value in 1968, the national minimum wage would be over $12 an hour at present, compared to its current $7.25.

However, in the three decades prior to 1968 the minimum wage did not just keep pace with inflation, it rose in step with productivity. That meant that the lowest paid workers shared in the gains of economic growth. If the minimum wage had continued to keep pace with productivity growth, it would be almost $26 an hour in 2022.

That’s worth thinking about for a minute. Imagine the lowest paid workers, the people cleaning toilets in office buildings or bussing dishes in restaurants, earned $52,000 a year if they worked a full-time job for the whole year. A two minimum wage earner couple would be pulling down $104,000 a year. That’s a very different world than the one we have.

The minimum wage story is just part of a larger picture where the wages of more educated workers have diverged sharply from the wages of less-educated workers. Workers with college, and especially advanced degrees, have seen wage gains that have largely kept pace with productivity growth.

For men with just a high school degree, real wages fell by 7.0 percent in the 42 years from 1979 to 2021, a period in which productivity increased by roughly 80 percent.[1] By contrast, the real wages of men with college degrees rose by more than 34 percent, while the pay of men with advanced degrees rose by more than 60 percent. For women with just high school degrees real hourly wages rose by 14 percent over this period, compared to gains of 51 percent for women with college degrees and 55 percent for women with advanced degrees.

Just to be clear, there is no reason to feel sorry for men in this story. In 2021, the pay of women with just a high school degree was only 63 percent of the pay with men with high school degrees. The pay for women with college degrees was 68 percent of the pay of men with college degrees. They have seen faster wage growth, but still have a long way to go to achieve equality with men.

These facts about income trends are not really in dispute. These statistics were calculated by the Economic Policy Institute using data from the Bureau of Labor Statistics, but many other economists have come up with the same basic story.

Okay, so the less-educated segment of the workforce clearly has done poorly in the last four decades, even as economic growth has been reasonably healthy. And, just to be clear, this is not a small group of people who have been left behind. Only around 40 percent of the workforce has a college degree, or more, so the left behinds are the majority of the workforce. (The pay of people with associate degrees, or some other post-secondary education, but not a college degree, has largely tracked that of those with just a high school degree.) This means a large majority of the population has grounds to be unhappy about their economic circumstances in recent decades.

Given this reality, suppose that the poor prospects for non-college educated workers was the result of deliberate policies pushed by the people who control debates on economic policy, as in people with college and advanced degrees. The people who are best positioned to steer economic policy consciously structured it in ways to benefit people like themselves and to screw workers with less education. Would that give the losers in this picture reason to be angry?

Now, suppose also that the people who rigged the system to favor themselves at the expense of the less-educated also lied about the fact they rigged it, and ridiculed the less-educated for not being able to compete in the modern economy. Furthermore, since the winners staff all the major media outlets, they insisted that only the false story, of losers being unable to compete, ever got mentioned in discussions of economic policy.

The less-educated might actually have something to be upset about in this story. And, that would be true even if some of the winners were good liberals who were prepared to pay somewhat higher taxes to provide help to the losers in the form of better health care, low cost or free college, and higher Social Security benefits.

This is basically the story of US politics in the era of Trump. The economic losers hate the winners and distrust the institutions they populate: the media, universities, government agencies. There is a rational basis for distrust. The winners really did screw them and they have concocted nonsense stories to conceal that fact. Of course, that doesn’t mean that every university professor or librarian was in on the scheme, but as a class these people have in fact put in place economic structures that redistribute from the less-educated to those with college and advanced degrees.    

How the Working-Class Was Screwed

I won’t go into great detail on the policies that led to the massive upward redistribution of the last four decades. I’ll just highlight some of the more obvious ones. Regular BTP readers know the story, but those who are interested can read Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it’s free) or see the video series I did with the Institute for New Economic Thinking.

To start with the most obvious way that policy was designed to screw ordinary workers is that we quite explicitly worked to remove barriers to imports of manufactured goods from the developing world. This was intended to make it as easy as possible for US corporations to seek out the lowest cost labor anywhere in the world. This cost the country millions of manufacturing jobs, which had the effect of pushing down the pay of the manufacturing jobs that remained. It also reduced the pay of non-college educated workers more generally, since manufacturing had historically been a source of relatively high-paying jobs for workers without college degrees. As a result of the removal of trade barriers in manufacturing, the unionization rate in manufacturing is now almost the same as in the private sector as a whole and the manufacturing pay premium has largely disappeared.

Note that this is not an issue of “free trade.” We did not look to remove the barriers that protect doctors and other highly paid professionals from international competition. As a result, our doctors not only get paid hugely more than their counterparts in the developing world, they get paid roughly twice as much as their counterparts in Canada, Germany, and other wealthy countries. If we reduced the pay of our doctors to the pay level they get in other wealthy countries, we would save roughly $100 billon a year, a bit less than $1,000 per year per family.

So, the folks designing policy were not interested in free trade. They were interested in structuring trade deals in ways that redistributed income from less educated workers to more highly educated workers and corporations.

The second big policy tool in this upward redistribution is government-granted patent and copyright monopolies. We made these monopolies longer and stronger over the past four decades and also worked hard to impose them on other countries around the world.

The result has been much higher prices for drugs and medical equipment, software and many other items. The higher prices ($400 billion a year in the case of prescription drugs alone) have made a small number of people, such as Bill Gates and the Moderna billionaires, very rich, while shifting a huge amount of income from everyone else to the more educated workers in a position to benefit from these monopolies.

To be clear, it is desirable to have a policy to support innovation and creative work, but we could have structured the mechanisms for these purposes a thousand different ways. We chose to structure the mechanisms in a way that redistributes a massive amount of income upward. And, to make matters worse, virtually all polite discussion of the topic ignores the fact that government-granted patent and copyright monopolies are policy choices, and instead says that the resulting upward redistribution was just “technology.”

To take one other major category, we have structured our financial system in a way that allows it to be an enormous drag on the productive economy and major source of inequality. An efficient financial system is a small one. We want to devote as few resources as possible to running the financial system. Instead, it has exploded relative to the size of the economy over the last four decades. It has also allowed many people to become enormously wealthy running hedges funds, private equity funds, or trading at major banks.  

This is also hardly a free market. The financial sector would be much smaller if trades of stocks and other financial assets were subject to a sales tax, just like sales of TVs and clothes. Private equity funds would lose much of their money if it was more difficult for them to prey on public sector pension funds.

And, to take the most dramatic example of the non-free market basis of financial sector fortunes, the political establishment moved heaven and earth to get a massive bailout of the sector back in 2008, when greed and stupidity threatened to send most of the country’s major banks into bankruptcy. Rather than letting the market work its magic, we got a full court press from major media outlets insisting that the failure to rescue the banks would give us a Second Great Depression.

No one ever bothered to explain how that would work. We got out of the first Great Depression by spending lots of money on World War II. It’s not clear why we couldn’t have spent a lot of money the day after all the Wall Street banks went under to get the economy back on its feet, but the Second Great Depression story did the job, and Wall Street banks were all saved.

The list of policies that redistribute upward is of course much longer. We have a totally corrupt corporate governance structure that allows even mediocre CEOs to get tens of millions a year in their paychecks. Second and third tier execs get correspondingly outrageous paychecks.

We have allowed labor management law to be hugely twisted to favor management. Current practices make it extremely difficult to form a union. There is even a court case now being contested that would allow companies to sue unions that strike for damages.

The basic story is that the upward redistribution of the last four decades has nothing to do with a free market, it was the result of a large number of policy choices. In public debates, there is a widespread pretense that this upward redistribution was just the result of leaving things to the market, but that’s a lie, and the losers in this story have every right in the world to be angry about it.

Why Do the Democrats Get Blamed?

It would be entirely accurate to point out that on the key policy choices noted above, Republicans have not been any better, and are quite often worse. They have always been happy to give more money to the financial industry, the pharmaceutical industry, and other beneficiaries of upward redistribution. So why do working class voters, and especially working-class white voters, blame the Democrats?

Here I am largely speculating, but I would give two reasons. First, the Democrats have been associated with some of the most visible measures in this upward redistribution. It was Bill Clinton that pushed NAFTA through Congress and then got China into the WTO. While it’s true that these measures had more support in Congress from Republicans than Democrats, it is not surprising that people would associate the policies with the president who pushed them.

The second reason is simply that the beneficiaries of these policies are disproportionately Democrats. When people look at professionals in the media, universities, and the government, they see people who are overwhelmingly Democrats. The people who benefit from these policies and then directly spread the nonsense that the upward redistribution was just the natural workings of the market are overwhelmingly associated with the Democratic Party.

This can work to effectively discredit both the Democratic Party and these institutions. The Republicans may not offer a positive economic agenda, but they offer a vehicle for the resentment of working-class voters. They can blame Blacks, immigrants, LGBTQ people, and their elite friends for the troubles facing working class voters.  

Can the Democrats Change Course?

That is obviously a long story, which I won’t try to answer here, but I will make a simple point. For some reason whites without college degrees hate Democrats, while whites with college degrees tend to vote Democratic, by at least small margins. It is possible that it is something that people learn in school that causes them to be so much more sympathetic to Democrats, but it may also reflect their much greater economic opportunities.

If that is the case, it is not necessarily specific policies that Democrats offer that cause people to become Democrats if they graduate college, but rather a change in their outlook on the world. This could mean that if we actually implemented policies that drastically improved the economic prospects of people without college degrees, we would see a much larger share of this group prepared to vote Democratic and support the policies currently being pushed by the Democratic Party.

I’ll be the first to admit that this view is very speculative. I certainly wouldn’t guarantee that if we succeeded in reversing the policies that have led to the upward redistribution of the last four decades that we would see a large uptick in white working-class support for Democrats. But, regardless of the political effect, we should seek to reverse these policies because it is the right thing to do.  

[1] This adjusts for differences in price indices and the coverage of the output deflator and Consumer Price Index.

At this point, a large majority of non-college educated whites (especially white men) are willing to follow Donald Trump off any cliff. They have open contempt for more educated people (a.k.a. the “elites”) and their institutions, such as universities, mainstream media outlets, and science.

There is no justification for the racism, anti-Semitism, homophobia and other forms of bigotry that Trump has cultivated since he entered politics. But there is a reason why it suddenly has so much appeal, and it’s not just that a Black guy (who many of them voted for) became president. I will again make the case here.

Let’s Imagine a World Where the More Educated Screwed the Less-Educated

We know the data on what has happened to income distribution over the last four decades. To take a simple point of reference, in debates on the minimum wage we often talk about how if it had kept pace with inflation since its peak real value in 1968, the national minimum wage would be over $12 an hour at present, compared to its current $7.25.

However, in the three decades prior to 1968 the minimum wage did not just keep pace with inflation, it rose in step with productivity. That meant that the lowest paid workers shared in the gains of economic growth. If the minimum wage had continued to keep pace with productivity growth, it would be almost $26 an hour in 2022.

That’s worth thinking about for a minute. Imagine the lowest paid workers, the people cleaning toilets in office buildings or bussing dishes in restaurants, earned $52,000 a year if they worked a full-time job for the whole year. A two minimum wage earner couple would be pulling down $104,000 a year. That’s a very different world than the one we have.

The minimum wage story is just part of a larger picture where the wages of more educated workers have diverged sharply from the wages of less-educated workers. Workers with college, and especially advanced degrees, have seen wage gains that have largely kept pace with productivity growth.

For men with just a high school degree, real wages fell by 7.0 percent in the 42 years from 1979 to 2021, a period in which productivity increased by roughly 80 percent.[1] By contrast, the real wages of men with college degrees rose by more than 34 percent, while the pay of men with advanced degrees rose by more than 60 percent. For women with just high school degrees real hourly wages rose by 14 percent over this period, compared to gains of 51 percent for women with college degrees and 55 percent for women with advanced degrees.

Just to be clear, there is no reason to feel sorry for men in this story. In 2021, the pay of women with just a high school degree was only 63 percent of the pay with men with high school degrees. The pay for women with college degrees was 68 percent of the pay of men with college degrees. They have seen faster wage growth, but still have a long way to go to achieve equality with men.

These facts about income trends are not really in dispute. These statistics were calculated by the Economic Policy Institute using data from the Bureau of Labor Statistics, but many other economists have come up with the same basic story.

Okay, so the less-educated segment of the workforce clearly has done poorly in the last four decades, even as economic growth has been reasonably healthy. And, just to be clear, this is not a small group of people who have been left behind. Only around 40 percent of the workforce has a college degree, or more, so the left behinds are the majority of the workforce. (The pay of people with associate degrees, or some other post-secondary education, but not a college degree, has largely tracked that of those with just a high school degree.) This means a large majority of the population has grounds to be unhappy about their economic circumstances in recent decades.

Given this reality, suppose that the poor prospects for non-college educated workers was the result of deliberate policies pushed by the people who control debates on economic policy, as in people with college and advanced degrees. The people who are best positioned to steer economic policy consciously structured it in ways to benefit people like themselves and to screw workers with less education. Would that give the losers in this picture reason to be angry?

Now, suppose also that the people who rigged the system to favor themselves at the expense of the less-educated also lied about the fact they rigged it, and ridiculed the less-educated for not being able to compete in the modern economy. Furthermore, since the winners staff all the major media outlets, they insisted that only the false story, of losers being unable to compete, ever got mentioned in discussions of economic policy.

The less-educated might actually have something to be upset about in this story. And, that would be true even if some of the winners were good liberals who were prepared to pay somewhat higher taxes to provide help to the losers in the form of better health care, low cost or free college, and higher Social Security benefits.

This is basically the story of US politics in the era of Trump. The economic losers hate the winners and distrust the institutions they populate: the media, universities, government agencies. There is a rational basis for distrust. The winners really did screw them and they have concocted nonsense stories to conceal that fact. Of course, that doesn’t mean that every university professor or librarian was in on the scheme, but as a class these people have in fact put in place economic structures that redistribute from the less-educated to those with college and advanced degrees.    

How the Working-Class Was Screwed

I won’t go into great detail on the policies that led to the massive upward redistribution of the last four decades. I’ll just highlight some of the more obvious ones. Regular BTP readers know the story, but those who are interested can read Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it’s free) or see the video series I did with the Institute for New Economic Thinking.

To start with the most obvious way that policy was designed to screw ordinary workers is that we quite explicitly worked to remove barriers to imports of manufactured goods from the developing world. This was intended to make it as easy as possible for US corporations to seek out the lowest cost labor anywhere in the world. This cost the country millions of manufacturing jobs, which had the effect of pushing down the pay of the manufacturing jobs that remained. It also reduced the pay of non-college educated workers more generally, since manufacturing had historically been a source of relatively high-paying jobs for workers without college degrees. As a result of the removal of trade barriers in manufacturing, the unionization rate in manufacturing is now almost the same as in the private sector as a whole and the manufacturing pay premium has largely disappeared.

Note that this is not an issue of “free trade.” We did not look to remove the barriers that protect doctors and other highly paid professionals from international competition. As a result, our doctors not only get paid hugely more than their counterparts in the developing world, they get paid roughly twice as much as their counterparts in Canada, Germany, and other wealthy countries. If we reduced the pay of our doctors to the pay level they get in other wealthy countries, we would save roughly $100 billon a year, a bit less than $1,000 per year per family.

So, the folks designing policy were not interested in free trade. They were interested in structuring trade deals in ways that redistributed income from less educated workers to more highly educated workers and corporations.

The second big policy tool in this upward redistribution is government-granted patent and copyright monopolies. We made these monopolies longer and stronger over the past four decades and also worked hard to impose them on other countries around the world.

The result has been much higher prices for drugs and medical equipment, software and many other items. The higher prices ($400 billion a year in the case of prescription drugs alone) have made a small number of people, such as Bill Gates and the Moderna billionaires, very rich, while shifting a huge amount of income from everyone else to the more educated workers in a position to benefit from these monopolies.

To be clear, it is desirable to have a policy to support innovation and creative work, but we could have structured the mechanisms for these purposes a thousand different ways. We chose to structure the mechanisms in a way that redistributes a massive amount of income upward. And, to make matters worse, virtually all polite discussion of the topic ignores the fact that government-granted patent and copyright monopolies are policy choices, and instead says that the resulting upward redistribution was just “technology.”

To take one other major category, we have structured our financial system in a way that allows it to be an enormous drag on the productive economy and major source of inequality. An efficient financial system is a small one. We want to devote as few resources as possible to running the financial system. Instead, it has exploded relative to the size of the economy over the last four decades. It has also allowed many people to become enormously wealthy running hedges funds, private equity funds, or trading at major banks.  

This is also hardly a free market. The financial sector would be much smaller if trades of stocks and other financial assets were subject to a sales tax, just like sales of TVs and clothes. Private equity funds would lose much of their money if it was more difficult for them to prey on public sector pension funds.

And, to take the most dramatic example of the non-free market basis of financial sector fortunes, the political establishment moved heaven and earth to get a massive bailout of the sector back in 2008, when greed and stupidity threatened to send most of the country’s major banks into bankruptcy. Rather than letting the market work its magic, we got a full court press from major media outlets insisting that the failure to rescue the banks would give us a Second Great Depression.

No one ever bothered to explain how that would work. We got out of the first Great Depression by spending lots of money on World War II. It’s not clear why we couldn’t have spent a lot of money the day after all the Wall Street banks went under to get the economy back on its feet, but the Second Great Depression story did the job, and Wall Street banks were all saved.

The list of policies that redistribute upward is of course much longer. We have a totally corrupt corporate governance structure that allows even mediocre CEOs to get tens of millions a year in their paychecks. Second and third tier execs get correspondingly outrageous paychecks.

We have allowed labor management law to be hugely twisted to favor management. Current practices make it extremely difficult to form a union. There is even a court case now being contested that would allow companies to sue unions that strike for damages.

The basic story is that the upward redistribution of the last four decades has nothing to do with a free market, it was the result of a large number of policy choices. In public debates, there is a widespread pretense that this upward redistribution was just the result of leaving things to the market, but that’s a lie, and the losers in this story have every right in the world to be angry about it.

Why Do the Democrats Get Blamed?

It would be entirely accurate to point out that on the key policy choices noted above, Republicans have not been any better, and are quite often worse. They have always been happy to give more money to the financial industry, the pharmaceutical industry, and other beneficiaries of upward redistribution. So why do working class voters, and especially working-class white voters, blame the Democrats?

Here I am largely speculating, but I would give two reasons. First, the Democrats have been associated with some of the most visible measures in this upward redistribution. It was Bill Clinton that pushed NAFTA through Congress and then got China into the WTO. While it’s true that these measures had more support in Congress from Republicans than Democrats, it is not surprising that people would associate the policies with the president who pushed them.

The second reason is simply that the beneficiaries of these policies are disproportionately Democrats. When people look at professionals in the media, universities, and the government, they see people who are overwhelmingly Democrats. The people who benefit from these policies and then directly spread the nonsense that the upward redistribution was just the natural workings of the market are overwhelmingly associated with the Democratic Party.

This can work to effectively discredit both the Democratic Party and these institutions. The Republicans may not offer a positive economic agenda, but they offer a vehicle for the resentment of working-class voters. They can blame Blacks, immigrants, LGBTQ people, and their elite friends for the troubles facing working class voters.  

Can the Democrats Change Course?

That is obviously a long story, which I won’t try to answer here, but I will make a simple point. For some reason whites without college degrees hate Democrats, while whites with college degrees tend to vote Democratic, by at least small margins. It is possible that it is something that people learn in school that causes them to be so much more sympathetic to Democrats, but it may also reflect their much greater economic opportunities.

If that is the case, it is not necessarily specific policies that Democrats offer that cause people to become Democrats if they graduate college, but rather a change in their outlook on the world. This could mean that if we actually implemented policies that drastically improved the economic prospects of people without college degrees, we would see a much larger share of this group prepared to vote Democratic and support the policies currently being pushed by the Democratic Party.

I’ll be the first to admit that this view is very speculative. I certainly wouldn’t guarantee that if we succeeded in reversing the policies that have led to the upward redistribution of the last four decades that we would see a large uptick in white working-class support for Democrats. But, regardless of the political effect, we should seek to reverse these policies because it is the right thing to do.  

[1] This adjusts for differences in price indices and the coverage of the output deflator and Consumer Price Index.

Seriously, that is what a story on Bangladesh’s current economic problems told listeners. The piece was touting Bangladesh’s “economic miracle.” It said that the country went from being a very poor country to being richer than Denmark, which everyone recognizes as a very rich country.

If people didn’t realize that Bangladesh was richer than Denmark, they can be forgiven. According to the International Monetary Fund, Denmark’s per capita income (the most basic measure of economic well-being) is almost 10 times as large as Bangladesh’s.

How did NPR get things so badly wrong? Well, Bangladesh’s population is over 166 million. Denmark’s population is less than 6 million. This means that if we ignore the disparity in size, Bangladesh’s economy is in fact larger than Denmark’s.

However, this has nothing to do with being richer. It is difficult to understand what information NPR thought it was giving to its listeners with its assertion that Bangladesh is richer than Denmark.  

Seriously, that is what a story on Bangladesh’s current economic problems told listeners. The piece was touting Bangladesh’s “economic miracle.” It said that the country went from being a very poor country to being richer than Denmark, which everyone recognizes as a very rich country.

If people didn’t realize that Bangladesh was richer than Denmark, they can be forgiven. According to the International Monetary Fund, Denmark’s per capita income (the most basic measure of economic well-being) is almost 10 times as large as Bangladesh’s.

How did NPR get things so badly wrong? Well, Bangladesh’s population is over 166 million. Denmark’s population is less than 6 million. This means that if we ignore the disparity in size, Bangladesh’s economy is in fact larger than Denmark’s.

However, this has nothing to do with being richer. It is difficult to understand what information NPR thought it was giving to its listeners with its assertion that Bangladesh is richer than Denmark.  

Not much can surprise me these days, but I admit to being somewhat surprised when the near universal reaction to the October jobs report was that the Fed will have to keep raising interest rates. The key issue of course is whether the labor market is so tight that it is creating inflationary pressures in the economy.

The 261,000 job gain reported for the month can be seen as bad news in this respect. It is faster than we can sustain in an economy that is near full employment. But it is not that much faster, and other data indicated a strong, but more normal labor market, like we had in 2019.

The share of unemployment due to voluntary quits fell sharply from the record high reported in September. The 14.6 percent share is lower than in many pre-pandemic months. Average weekly hours remained at a normal pre-pandemic level, after having risen sharply earlier in the recovery. The rise was most likely due to employers having workers put in more hours when they were unable to hire additional staff. Presumably, they are no longer having as much difficulty in hiring.

But the most important argument against further rounds of aggressive rate hikes by the Fed was in the wage data. After seeing moderate growth in the hourly wage in both August and September, we got another moderate number for October. If we take the annualized rate over the last three months, it comes to 3.9 percent, that’s down from an annual rate of more than 6.0 percent last fall.

There are two important points about this wage growth number. The first is that the direction of change is unambiguously downward. Other wage series, like the Employment Cost Index or the unit labor costs from the Bureau of Labor Statistics productivity data show the same story, even if the drop is less dramatic.

The direction of change matters because the path of wage growth is not what would be predicted by either a traditional Phillips Curve model or a Beveridge Curve model. These models imply that we need to either raise the rate of unemployment and/or sharply reduce the number of job openings in order to slow wage growth. Yet wages by pretty much any measure seem to be slowing sharply even with a low unemployment rate and a high ratio of job openings to unemployed workers.

The other point is that the 3.9 percent rate of wage growth we have seen over the last three months is arguably consistent with the Fed’s 2.0 percent inflation target. This is not much higher than the3.4 percent rate we saw in 2019, when inflation was comfortably below this target. Furthermore, there were periods in 2019 where the three-month rate got as high as 3.6 percent.

It is also important to remember that we had a large shift of income shares from wages to profit in the pandemic. We can argue whether this was due to the exploitation of monopoly power or simply an outcome of shortages created by the pandemic and the war, but the shift to profits is undeniable.

Anyhow, as we overcome the disruptions created by the pandemic and Russia’s invasion of Ukraine, we should expect to see some shift back from profits to wages. This is not because businesses are going to happily accept lower margins, but rather because if conditions of competition have not changed from the pre-pandemic period, then we should expect that profit shares will be driven back towards their pre-pandemic level.

Having followed the wage data closely for three decades, I am well aware that the monthly numbers are erratic and also subject to revision. It is entirely possible that when we get the November data, the wage picture will look very different. However, it is also possible that the data we are looking at now accurately reflect the current situation in the labor market.

If that is in fact the case, and wages are growing at a 3.9 percent annual rate, there is a good case that the Fed’s work is done. With prices of imported goods and shipping plunging, and rents due to slow sharply in 2023, we can see inflation close to the Fed’s target in the not distant future.

Given the visible progress in many areas, certainly the Fed can hold off on further rate hikes to see where things currently stand. Everyone recognizes that the full effects of rate hikes are not felt for many months. If the Fed has already raised rates enough to bring inflation down to acceptable levels, further rate hikes will be inflicting needless pain.

The Fed with have another jobs report to look at, as well as two monthly releases of the Consumer Price Index, and much other new data, before making a decision on rates at its December meeting. But the data we got from the October jobs report is certainly consistent with a pause by the Fed.   

Not much can surprise me these days, but I admit to being somewhat surprised when the near universal reaction to the October jobs report was that the Fed will have to keep raising interest rates. The key issue of course is whether the labor market is so tight that it is creating inflationary pressures in the economy.

The 261,000 job gain reported for the month can be seen as bad news in this respect. It is faster than we can sustain in an economy that is near full employment. But it is not that much faster, and other data indicated a strong, but more normal labor market, like we had in 2019.

The share of unemployment due to voluntary quits fell sharply from the record high reported in September. The 14.6 percent share is lower than in many pre-pandemic months. Average weekly hours remained at a normal pre-pandemic level, after having risen sharply earlier in the recovery. The rise was most likely due to employers having workers put in more hours when they were unable to hire additional staff. Presumably, they are no longer having as much difficulty in hiring.

But the most important argument against further rounds of aggressive rate hikes by the Fed was in the wage data. After seeing moderate growth in the hourly wage in both August and September, we got another moderate number for October. If we take the annualized rate over the last three months, it comes to 3.9 percent, that’s down from an annual rate of more than 6.0 percent last fall.

There are two important points about this wage growth number. The first is that the direction of change is unambiguously downward. Other wage series, like the Employment Cost Index or the unit labor costs from the Bureau of Labor Statistics productivity data show the same story, even if the drop is less dramatic.

The direction of change matters because the path of wage growth is not what would be predicted by either a traditional Phillips Curve model or a Beveridge Curve model. These models imply that we need to either raise the rate of unemployment and/or sharply reduce the number of job openings in order to slow wage growth. Yet wages by pretty much any measure seem to be slowing sharply even with a low unemployment rate and a high ratio of job openings to unemployed workers.

The other point is that the 3.9 percent rate of wage growth we have seen over the last three months is arguably consistent with the Fed’s 2.0 percent inflation target. This is not much higher than the3.4 percent rate we saw in 2019, when inflation was comfortably below this target. Furthermore, there were periods in 2019 where the three-month rate got as high as 3.6 percent.

It is also important to remember that we had a large shift of income shares from wages to profit in the pandemic. We can argue whether this was due to the exploitation of monopoly power or simply an outcome of shortages created by the pandemic and the war, but the shift to profits is undeniable.

Anyhow, as we overcome the disruptions created by the pandemic and Russia’s invasion of Ukraine, we should expect to see some shift back from profits to wages. This is not because businesses are going to happily accept lower margins, but rather because if conditions of competition have not changed from the pre-pandemic period, then we should expect that profit shares will be driven back towards their pre-pandemic level.

Having followed the wage data closely for three decades, I am well aware that the monthly numbers are erratic and also subject to revision. It is entirely possible that when we get the November data, the wage picture will look very different. However, it is also possible that the data we are looking at now accurately reflect the current situation in the labor market.

If that is in fact the case, and wages are growing at a 3.9 percent annual rate, there is a good case that the Fed’s work is done. With prices of imported goods and shipping plunging, and rents due to slow sharply in 2023, we can see inflation close to the Fed’s target in the not distant future.

Given the visible progress in many areas, certainly the Fed can hold off on further rate hikes to see where things currently stand. Everyone recognizes that the full effects of rate hikes are not felt for many months. If the Fed has already raised rates enough to bring inflation down to acceptable levels, further rate hikes will be inflicting needless pain.

The Fed with have another jobs report to look at, as well as two monthly releases of the Consumer Price Index, and much other new data, before making a decision on rates at its December meeting. But the data we got from the October jobs report is certainly consistent with a pause by the Fed.   

The Washington Post has been a big supporter of the upward redistribution of the last four decades, openly pushing trade policy, intellectual property policy, and financial policy that give more money to those at the top. Given its general perspective, it should not be surprising that it would use an editorial criticizing China’s zero COVID-19 policy as an opportunity to push mRNA vaccines.

The editorial makes the very reasonable criticism that China’s zero COVID-19 policy has seriously disrupted the lives of hundreds of millions of people. At this point, given the widespread availability of vaccines and treatments, the public health benefits from this policy are limited.

However, it throws in the comment:

“China has also deployed its own vaccines to fight the virus, although the elderly remain undervaccinated, and the shots are not as effective as the mRNA vaccines.”

In its advice section it adds:

“China could purchase doses of mRNA vaccines and get those shots into arms. It was a good sign Friday that China agreed with Germany to allow expats on the mainland to receive the mRNA vaccine made by BioNTech, the partner of Pfizer. The deal should be broadened to include Chinese citizens.”

In fact, research has shown that the differences between the effectiveness in preventing severe illness and death, between the mRNA vaccines and China’s dead virus vaccines is trivial. China does have a real problem in that it has relatively low rates of vaccination among the elderly, the population most vulnerable to COVID-19.

It certainly seems reasonable that the country would make more of an effort to vaccinate and boost this segment of the population. They do not need the mRNA vaccines, however much the Post might like to help its billionaire friends in the pharmaceutical industry.

The Washington Post has been a big supporter of the upward redistribution of the last four decades, openly pushing trade policy, intellectual property policy, and financial policy that give more money to those at the top. Given its general perspective, it should not be surprising that it would use an editorial criticizing China’s zero COVID-19 policy as an opportunity to push mRNA vaccines.

The editorial makes the very reasonable criticism that China’s zero COVID-19 policy has seriously disrupted the lives of hundreds of millions of people. At this point, given the widespread availability of vaccines and treatments, the public health benefits from this policy are limited.

However, it throws in the comment:

“China has also deployed its own vaccines to fight the virus, although the elderly remain undervaccinated, and the shots are not as effective as the mRNA vaccines.”

In its advice section it adds:

“China could purchase doses of mRNA vaccines and get those shots into arms. It was a good sign Friday that China agreed with Germany to allow expats on the mainland to receive the mRNA vaccine made by BioNTech, the partner of Pfizer. The deal should be broadened to include Chinese citizens.”

In fact, research has shown that the differences between the effectiveness in preventing severe illness and death, between the mRNA vaccines and China’s dead virus vaccines is trivial. China does have a real problem in that it has relatively low rates of vaccination among the elderly, the population most vulnerable to COVID-19.

It certainly seems reasonable that the country would make more of an effort to vaccinate and boost this segment of the population. They do not need the mRNA vaccines, however much the Post might like to help its billionaire friends in the pharmaceutical industry.

The New York Times ran a bizarre piece today telling readers that we face a serious threat of wage price spiral:

“Fresh data out on Friday showed that average hourly earnings climbed 4.7 percent over the past year. That is far faster than the 3 percent pace that prevailed before the pandemic, and is so quick that it could make it difficult for inflation to fully fade. Plus, policymakers remain anxious that today’s pressures could yet turn into a spiral in which wages and prices chase each other higher.”

The data really don’t support this story. First, although the year over year rate of wage growth did slow to 3.0 percent just before the pandemic, it was actually considerably higher for much of 2019. For example, in the year from February 2018 to February 2019 the average hourly wage rose by 3.6 percent (from $26.75 to $27.70).

This matters because we know that inflation remained comfortably below the Fed’s 2.0 percent inflation target in 2019, so it is reasonable to use wage growth in that year as a point of reference. And, the fact is that wage growth averaged roughly 3.4 percent over the course of 2019, not 3.0 percent.

The other part of the story missing in this piece is that wage growth has actually slowed sharply over the course of this year, not accelerated as is implied. This is the picture if we take the annual rate of growth in the average hourly earnings series, over three-month periods, dating back to the spring of 2021. (I prefer to compare three-month averages, using the most recent three months with the prior three months, but it seems no one else does this.)

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

As can be seen, the rate of wage growth by this measure peaked at 6.4 percent in July of 2021. It fluctuated some over the next several months and was still 6.3 percent in November of 2021. Since then it has slowed sharply. In the most recent three-month period, wages were rising at a 3.9 percent annual rate. This is still higher than the 3.6 peak year over year rate of wage growth in 2019, but not by much. (There were three-month periods where the rate was 4.0 percent in 2019.)

In short, the reality is the opposite of what this piece implies, wage-inflation has not been persistently high, but rather has slowed sharply. Part of the confusion stems from using year over year rates of wage growth rather than focusing on a more recent period. The Fed’s rate hikes, which began in March, could not slow the inflation that occurred last fall and winter, but this is what we are including, if we look at the year over year rate. While short-term data are erratic, and subject to revision, if we want a sense of where inflation will be going forward, we need to focus on recent data, not what happened nine or ten months ago.

There is an issue of the changing composition of the workforce, which does affect the rate of wage growth in this series, but this just makes slowdown from last fall more rapid. The economy was adding close to 600,000 jobs a month last fall. That is more than 1.0 percent of the workforce over a three month period. If these jobs paid 15 percent less than the average job, which is plausible since these were largely low-paid workers in sectors like hotels and restaurants, then the change in composition would reduce the average wage by 0.15 percentage point. Annualizing this rate, the change in composition would slow the rate of wage growth by 0.6 percentage points.

While this calculation is very crude, it shows that the change in composition could have substantially slowed the measured rate of wage growth by this measure last fall. This is no longer the case in recent months, as both the rate of job growth has slowed sharply and there is no longer a major skewing in job gains towards lower paid workers. (We added just 6,000 restaurant workers in October.) This means that wage growth has slowed even more sharply than is indicated by these data.

We can see this pattern of slower wage growth in other series as well, although the picture is less clear. The rate of growth of compensation in the Employment Cost Index (ECI) peaked at a 5.6 percent annual rate in the first quarter of 2022. It was down to 4.8 percent for the third quarter. Inflation in the wage component of the ECI peaked at 5.6 percent in the second quarter, it was down to 5.2 percent last quarter. (Wage growth in the ECI was 3.6 percent in the first and third quarter of 2019.)

The rate of growth of unit labor costs in the productivity data has also slowed sharply. This peaked at 8.2 percent in the fourth quarter of 2021. It was 3.8 percent in the third quarter of this year.

In short, by a variety of measures, wage growth has slowed considerably since the Fed began raising interest rates. And, by the most commonly used measure, it is now only modestly higher than a rate that would be consistent with the Fed’s inflation target.

The Fed’s focus on wage growth is reasonable, since over a long period, we can’t expect to maintain a moderate rate of inflation if wages are growing at the rates we saw last fall. However, given the large shift to profits in the pandemic, it would be reasonable to expect some larger than usual gap between the rate of wage growth and inflation, as the profit share falls back to something closer to the pre-pandemic level.

We also know that import prices, which had been a major factor contributing to inflation last year and earlier this year, are now falling rapidly. The price of non-fuel imports rose 7.2 percent in the year from April of 2021 to April of 2022. Since April, non-fuel import prices have fallen by 2.0 percent, a 4.7 percent annual rate of decline. Add to this a drop in shipping costs (which are not included in import prices) of more than 70 percent from their peak, and we should be seeing a major source disinflationary pressure.

Also, private indexes of marketed rents are now showing declines in many cities. And used car prices have begun to fall rapidly.

In short, the Fed actually has much to show for its efforts to combat inflation thus far. The full impact of its rate hikes will not be felt until late in 2023, but by some measures it has already accomplished most of what it needs to reach its inflation target. Most importantly, there is no evidence to date that inflation expectations have become unhinged and that we risk a wage-price spiral. There seems little danger at the moment if the Fed decides to get more data before any more large rate hikes.

The New York Times ran a bizarre piece today telling readers that we face a serious threat of wage price spiral:

“Fresh data out on Friday showed that average hourly earnings climbed 4.7 percent over the past year. That is far faster than the 3 percent pace that prevailed before the pandemic, and is so quick that it could make it difficult for inflation to fully fade. Plus, policymakers remain anxious that today’s pressures could yet turn into a spiral in which wages and prices chase each other higher.”

The data really don’t support this story. First, although the year over year rate of wage growth did slow to 3.0 percent just before the pandemic, it was actually considerably higher for much of 2019. For example, in the year from February 2018 to February 2019 the average hourly wage rose by 3.6 percent (from $26.75 to $27.70).

This matters because we know that inflation remained comfortably below the Fed’s 2.0 percent inflation target in 2019, so it is reasonable to use wage growth in that year as a point of reference. And, the fact is that wage growth averaged roughly 3.4 percent over the course of 2019, not 3.0 percent.

The other part of the story missing in this piece is that wage growth has actually slowed sharply over the course of this year, not accelerated as is implied. This is the picture if we take the annual rate of growth in the average hourly earnings series, over three-month periods, dating back to the spring of 2021. (I prefer to compare three-month averages, using the most recent three months with the prior three months, but it seems no one else does this.)

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

As can be seen, the rate of wage growth by this measure peaked at 6.4 percent in July of 2021. It fluctuated some over the next several months and was still 6.3 percent in November of 2021. Since then it has slowed sharply. In the most recent three-month period, wages were rising at a 3.9 percent annual rate. This is still higher than the 3.6 peak year over year rate of wage growth in 2019, but not by much. (There were three-month periods where the rate was 4.0 percent in 2019.)

In short, the reality is the opposite of what this piece implies, wage-inflation has not been persistently high, but rather has slowed sharply. Part of the confusion stems from using year over year rates of wage growth rather than focusing on a more recent period. The Fed’s rate hikes, which began in March, could not slow the inflation that occurred last fall and winter, but this is what we are including, if we look at the year over year rate. While short-term data are erratic, and subject to revision, if we want a sense of where inflation will be going forward, we need to focus on recent data, not what happened nine or ten months ago.

There is an issue of the changing composition of the workforce, which does affect the rate of wage growth in this series, but this just makes slowdown from last fall more rapid. The economy was adding close to 600,000 jobs a month last fall. That is more than 1.0 percent of the workforce over a three month period. If these jobs paid 15 percent less than the average job, which is plausible since these were largely low-paid workers in sectors like hotels and restaurants, then the change in composition would reduce the average wage by 0.15 percentage point. Annualizing this rate, the change in composition would slow the rate of wage growth by 0.6 percentage points.

While this calculation is very crude, it shows that the change in composition could have substantially slowed the measured rate of wage growth by this measure last fall. This is no longer the case in recent months, as both the rate of job growth has slowed sharply and there is no longer a major skewing in job gains towards lower paid workers. (We added just 6,000 restaurant workers in October.) This means that wage growth has slowed even more sharply than is indicated by these data.

We can see this pattern of slower wage growth in other series as well, although the picture is less clear. The rate of growth of compensation in the Employment Cost Index (ECI) peaked at a 5.6 percent annual rate in the first quarter of 2022. It was down to 4.8 percent for the third quarter. Inflation in the wage component of the ECI peaked at 5.6 percent in the second quarter, it was down to 5.2 percent last quarter. (Wage growth in the ECI was 3.6 percent in the first and third quarter of 2019.)

The rate of growth of unit labor costs in the productivity data has also slowed sharply. This peaked at 8.2 percent in the fourth quarter of 2021. It was 3.8 percent in the third quarter of this year.

In short, by a variety of measures, wage growth has slowed considerably since the Fed began raising interest rates. And, by the most commonly used measure, it is now only modestly higher than a rate that would be consistent with the Fed’s inflation target.

The Fed’s focus on wage growth is reasonable, since over a long period, we can’t expect to maintain a moderate rate of inflation if wages are growing at the rates we saw last fall. However, given the large shift to profits in the pandemic, it would be reasonable to expect some larger than usual gap between the rate of wage growth and inflation, as the profit share falls back to something closer to the pre-pandemic level.

We also know that import prices, which had been a major factor contributing to inflation last year and earlier this year, are now falling rapidly. The price of non-fuel imports rose 7.2 percent in the year from April of 2021 to April of 2022. Since April, non-fuel import prices have fallen by 2.0 percent, a 4.7 percent annual rate of decline. Add to this a drop in shipping costs (which are not included in import prices) of more than 70 percent from their peak, and we should be seeing a major source disinflationary pressure.

Also, private indexes of marketed rents are now showing declines in many cities. And used car prices have begun to fall rapidly.

In short, the Fed actually has much to show for its efforts to combat inflation thus far. The full impact of its rate hikes will not be felt until late in 2023, but by some measures it has already accomplished most of what it needs to reach its inflation target. Most importantly, there is no evidence to date that inflation expectations have become unhinged and that we risk a wage-price spiral. There seems little danger at the moment if the Fed decides to get more data before any more large rate hikes.

The second paragraph of a Washington Post article on the Republicans’ economic agenda told readers:

“Some fiscal hawks are pushing dramatic spending reforms and overhauls of entitlement programs including Social Security and Medicare, while others are insisting that simply blocking future Democratic legislation and attempting to repeal some of President Biden’s signature achievements will represent enough of a shift toward fiscal responsibility to appease voters.”

While the paragraph is awkward, it implies that voters are demanding big cuts to spending, which could be met by cutting Social Security and Medicare, but it may be possible to appease them with smaller cuts to some of the programs pushed through by President Biden. The Post does not present any evidence that a substantial segment of the population would be happy with cuts to Social Security and Medicare, which polls consistently show enjoy strong support across the political spectrum.

The piece also does not tell readers how it has determined that cuts to the budget would be a “shift to fiscal responsibility.” At the moment, most economists are quite concerned that the economy is headed towards a recession. It is hard to see how cutting spending as an economy heads into recession is fiscally responsibe. It is obviously bad for the economy, almost certainly making a recession worse.

The piece also does a classic Washington Post “he said, she said” in discussing Republican attacks on the I.R.S. budget, which would increase its ability to crack down on tax cheats.

“Rep. Jason T. Smith (R-Missouri), who’s seeking to lead the Ways and Means Committee, said in a statement that Americans want Congress to use the debt ceiling and every other opportunity to tackle rising prices, secure the border and to “repeal the 87,000 new IRS agents Democrats are hiring to target American families.” (The Inflation Reduction Act does not explicitly direct the hiring of more agents, but Republicans argue that the approximately $80 billion it allocated to the agency to boost enforcement and taxpayer services will result in a massive staffing increase.)”

Since almost none of the Washington Post’s readers have any clue what $80 billion over the next decade means, it would have been useful to provide some context. This comes to $8 billion a year, or a bit less than 0.13 percent of federal spending over this period. (The Post piece does not even bother to tell readers that this is spending over a decade, not a single year.)

To put this in more context, the IRS budget has been cut sharply in real terms since 2010. The projected spending from Inflation Reduction Act would just be restoring the real value of the IRS budget to its 2010 level, until larger projected in the years 2029-2031. It would have been useful if the Post had taken the time to actually provide information to readers instead of just repeating politicians’ rhetoric.

It might also have been worth mentioning that the Congressional Budget Office projected that the increase in the I.R.S. budget would raise $200 billion over the decade, by making people pay more of the taxes they owe. Cutting this item would on net increase the deficit by $120 billion over this period, which is hard to square with being fiscally responsible.

The second paragraph of a Washington Post article on the Republicans’ economic agenda told readers:

“Some fiscal hawks are pushing dramatic spending reforms and overhauls of entitlement programs including Social Security and Medicare, while others are insisting that simply blocking future Democratic legislation and attempting to repeal some of President Biden’s signature achievements will represent enough of a shift toward fiscal responsibility to appease voters.”

While the paragraph is awkward, it implies that voters are demanding big cuts to spending, which could be met by cutting Social Security and Medicare, but it may be possible to appease them with smaller cuts to some of the programs pushed through by President Biden. The Post does not present any evidence that a substantial segment of the population would be happy with cuts to Social Security and Medicare, which polls consistently show enjoy strong support across the political spectrum.

The piece also does not tell readers how it has determined that cuts to the budget would be a “shift to fiscal responsibility.” At the moment, most economists are quite concerned that the economy is headed towards a recession. It is hard to see how cutting spending as an economy heads into recession is fiscally responsibe. It is obviously bad for the economy, almost certainly making a recession worse.

The piece also does a classic Washington Post “he said, she said” in discussing Republican attacks on the I.R.S. budget, which would increase its ability to crack down on tax cheats.

“Rep. Jason T. Smith (R-Missouri), who’s seeking to lead the Ways and Means Committee, said in a statement that Americans want Congress to use the debt ceiling and every other opportunity to tackle rising prices, secure the border and to “repeal the 87,000 new IRS agents Democrats are hiring to target American families.” (The Inflation Reduction Act does not explicitly direct the hiring of more agents, but Republicans argue that the approximately $80 billion it allocated to the agency to boost enforcement and taxpayer services will result in a massive staffing increase.)”

Since almost none of the Washington Post’s readers have any clue what $80 billion over the next decade means, it would have been useful to provide some context. This comes to $8 billion a year, or a bit less than 0.13 percent of federal spending over this period. (The Post piece does not even bother to tell readers that this is spending over a decade, not a single year.)

To put this in more context, the IRS budget has been cut sharply in real terms since 2010. The projected spending from Inflation Reduction Act would just be restoring the real value of the IRS budget to its 2010 level, until larger projected in the years 2029-2031. It would have been useful if the Post had taken the time to actually provide information to readers instead of just repeating politicians’ rhetoric.

It might also have been worth mentioning that the Congressional Budget Office projected that the increase in the I.R.S. budget would raise $200 billion over the decade, by making people pay more of the taxes they owe. Cutting this item would on net increase the deficit by $120 billion over this period, which is hard to square with being fiscally responsible.

This time, the NYT is telling us how hard it is for young people and minorities to buy homes now that mortgage interest rates have shot through the roof. The timing is interesting, not only because it is five days before the election, but the article comes the day after the Census Bureau released data for the third quarter on homeownership.

The Census Bureau data gives a picture that is 180 degrees at odds with the NYT story. If we look at homeownership rates for young people (under the age of 35), they are up 1.7 percentage points from before the pandemic, rising from 37.6 percent to 39.3 percent.

The Black homeownership rate rose from 44.0 percent, to 45.2 percent, an increase of 1.2 percentage points. The Hispanic homeownership rate rose by 0.6 percentage points from 48.1 percent to 48.7 percent. And, the homeownership rate for households with income below the median rose 1.3 percentage points from 51.4 percent to 52.7 percent.

In short, we have seen an extraordinary rise in homeownership rates for less advantaged groups in the last two and a half years. But the NYT thought it was important to tell us that young people and minorities are having trouble buying homes now, five days before the election.

To be clear, 7.0 percent mortgage rates will make it difficult for many low- and middle-income people to buy homes, there is little doubt about that. But the rise in mortgage interest rates is a relatively recent story and no one knows how long it will persist.

If the NYT wanted to do a piece pointing out that a period of rapidly rising homeownership for disadvantaged group had come to an end, that would have been a useful and informative story. This piece is not.  

This time, the NYT is telling us how hard it is for young people and minorities to buy homes now that mortgage interest rates have shot through the roof. The timing is interesting, not only because it is five days before the election, but the article comes the day after the Census Bureau released data for the third quarter on homeownership.

The Census Bureau data gives a picture that is 180 degrees at odds with the NYT story. If we look at homeownership rates for young people (under the age of 35), they are up 1.7 percentage points from before the pandemic, rising from 37.6 percent to 39.3 percent.

The Black homeownership rate rose from 44.0 percent, to 45.2 percent, an increase of 1.2 percentage points. The Hispanic homeownership rate rose by 0.6 percentage points from 48.1 percent to 48.7 percent. And, the homeownership rate for households with income below the median rose 1.3 percentage points from 51.4 percent to 52.7 percent.

In short, we have seen an extraordinary rise in homeownership rates for less advantaged groups in the last two and a half years. But the NYT thought it was important to tell us that young people and minorities are having trouble buying homes now, five days before the election.

To be clear, 7.0 percent mortgage rates will make it difficult for many low- and middle-income people to buy homes, there is little doubt about that. But the rise in mortgage interest rates is a relatively recent story and no one knows how long it will persist.

If the NYT wanted to do a piece pointing out that a period of rapidly rising homeownership for disadvantaged group had come to an end, that would have been a useful and informative story. This piece is not.  

Thomas Edsall’s latest column tells readers how people in power, including many Democratic type people, have made decisions that have seriously worsened the situation of the 60 percent of the workforce without college degrees. While the basic point in the column is completely true, the column gets one important fact badly wrong, and hugely understates the extent to which the screwing of noncollege educated workers was the result of deliberate government policies.

The fact the column gets badly wrong is the claim that “automation” has somehow sped up in recent years and is rapidly displacing less-educated workers. Automation is not a well-defined concept, economists would more generally talk about productivity growth. This is well-defined and we have good measurements of productivity growth going back to the end of World War II.

From the standpoint of an individual worker, or the economy, it doesn’t matter if their labor is no longer needed due to an assembly line speed-up, greater efficiency in organizing the workplace, or robots. In all three cases, fewer workers are needed. The obsession with automation as something new and different is completely misplaced.

If we look at productivity growth, we get the opposite of the story that Edsall and his sources are telling. In the last decade productivity growth has averaged just 0.9 percent annually. Productivity growth has been slow in the pandemic, but even if we take the decade from the fourth quarter of 2009 to the fourth quarter of 2019, productivity growth averaged just 1.2 percent.

By contrast in the years from 1947 to 1973 productivity growth averaged 2.8 percent. This was a period of rapidly rising wage growth, with pay for workers at the middle and bottom keeping pace with the overall rate of productivity growth.

The picture does not change if we just look at manufacturing. Productivity in manufacturing has actually been flat over the last decade. In the decade from the fourth quarter of 2009 to the fourth quarter of 2019 it rose at a 0.2 percent annual rate.

In short, the story of workers being rapidly displaced by automation, robots, or anything else does not fit the data. Furthermore, rapid displacement is not necessarily bad news for workers, as shown by the strong wage growth that accompanied the strong productivity growth in the decades following the end of World War II.

If we had a story where we were seeing rapid productivity growth, accompanied by rising inequality, then we could say that we face an unfortunate trade-off, with the cost of more rapid growth being higher inequality. But in fact, the opposite is the case. We see very slow productivity growth accompanied by rising inequality. It is not clear what gain we are supposed to be getting for this increase in inequality.

Not Free Trade

The other part of Edsall’s story is 100 percent accurate. We designed trade policies to put our manufacturing workers in direct competition with low-paid workers in developing countries. This cost us millions of manufacturing jobs and put huge downward pressure on the wages of workers who still held their jobs. As a result of the massive job loss due to trade, the wage premium for working in manufacturing has largely disappeared.

But this policy was not “free trade,” as Edsall says. We made a conscious decision to put manufacturing workers in direct competition with much lower paid workers in developing countries, while continuing to protect more highly paid workers. We could have designed trade policies that would have made it much easier for doctors, dentists, and other highly educated professionals in developing countries (and rich countries) to come to the United States and compete with our professionals.

This would have offered large gains to the economy, as we could have saved hundreds of billions of dollars annually paying less money for these professionals. Our trade negotiators never pursued this type of free trade because doctors and lawyers have far more political power than steel workers and textile workers. As a result, we structured trade in a way that redistributed a huge amount of income upward and pretended that it was just the natural course of globalization. But wait, it gets worse.

Government-Granted Patent and Copyright Monopolies

The fact that some people (those with college and advanced degrees) are better positioned than others to benefit from advances in technology is not an accident. It is by design. The reason that these people are able to be winners from technology is because the government grants patent and copyright monopolies for innovations and creative work. Over the last four decades it has made these monopolies longer and stronger, which increases the amount of income going to those in a position to benefit from them. (See my discussion in chapter 5 of Rigged [it’s free] or here.)

As a result, a massive amount of income has been redistributed upward. This has made a small number of people tremendously rich, such as Bill Gates, whose fortune depends on the government’s protection of Microsoft’s patent and copyright monopolies. It has also allowed millions of others to earn far higher paychecks than if these monopolies were weaker, or if we relied on different mechanisms for supporting innovation and creative work.

The recent experience with Moderna and its COVID-19 vaccine illustrates this point perfectly. The government paid Moderna $450 million to develop a vaccine. It then paid another $450 million for its final phase 3 clinical trials that provided the basis for the FDA’s approval. It then allowed Moderna to have control over the vaccine. The result was that we got at least five Moderna billionaires as its stock price rose by tens of billions of dollars. Undoubtedly, many other Moderna employees became millionaires, although probably not the people who serve lunch in its cafeteria or clean its toilets.

Of course, this money comes from somewhere. We pay about $400 billion a year (around $3,000 per family, each year) more for prescription drugs because the government provides patent monopolies and related protections. We pay around $100 billion a year more for medical equipment and several hundred billion more for computer software.

This is all money out of the pockets of noncollege educated workers. And when the big winners in this story decide to spend their money on houses and other items, we get the inflation we are seeing today, which apparently has everyone so upset.

The key point is that this is all by design. We could have told Moderna that we are going to pay them to develop its vaccine, but then everything is in the public domain. Anyone, anywhere in the world can manufacture it. Furthermore, its nondisclosure agreements with its engineers are unenforceable. This means that they could all sell their services to anyone who wants to pay them to set up manufacturing facilities.

In this alternate universe, the key people behind developing the vaccine would almost certainly be well-compensated, but we would be talking millions, not billions. The decision to structure our rules on technology, so that a relatively small segment of the population could benefit hugely at the expense of everyone else, was a political choice. It was not something that technology did.

This is what I refer to as “the Really Big Lie.” The idea that somehow globalization and technology developed in a way to screw workers without college degrees and it just so happened that more educated workers were big winners. And, many of the more educated workers are good liberals, so they would even be willing to pay higher taxes to help out the losers with various social programs.

Given this reality, is it surprising that the people who were screwed would be angry at the “winners?” To be clear, I am sure that almost no one among the angry non-college educated has given any thought to government-granted patent and copyright monopolies or the protection from competition that their doctors enjoy.

Why would they? These points are almost never made in major news outlets and politicians like Trump push racist stories about lazy Black people and immigrants ruining their world.

But these people are absolutely right that they have been screwed by policies pushed by an educated elite. It is tragic that they see an outlet for their anger in going after the most disadvantaged segments of society, but they do have a real basis for their anger and perhaps some day this fact can be discussed in outlets like the New York Times.

Thomas Edsall’s latest column tells readers how people in power, including many Democratic type people, have made decisions that have seriously worsened the situation of the 60 percent of the workforce without college degrees. While the basic point in the column is completely true, the column gets one important fact badly wrong, and hugely understates the extent to which the screwing of noncollege educated workers was the result of deliberate government policies.

The fact the column gets badly wrong is the claim that “automation” has somehow sped up in recent years and is rapidly displacing less-educated workers. Automation is not a well-defined concept, economists would more generally talk about productivity growth. This is well-defined and we have good measurements of productivity growth going back to the end of World War II.

From the standpoint of an individual worker, or the economy, it doesn’t matter if their labor is no longer needed due to an assembly line speed-up, greater efficiency in organizing the workplace, or robots. In all three cases, fewer workers are needed. The obsession with automation as something new and different is completely misplaced.

If we look at productivity growth, we get the opposite of the story that Edsall and his sources are telling. In the last decade productivity growth has averaged just 0.9 percent annually. Productivity growth has been slow in the pandemic, but even if we take the decade from the fourth quarter of 2009 to the fourth quarter of 2019, productivity growth averaged just 1.2 percent.

By contrast in the years from 1947 to 1973 productivity growth averaged 2.8 percent. This was a period of rapidly rising wage growth, with pay for workers at the middle and bottom keeping pace with the overall rate of productivity growth.

The picture does not change if we just look at manufacturing. Productivity in manufacturing has actually been flat over the last decade. In the decade from the fourth quarter of 2009 to the fourth quarter of 2019 it rose at a 0.2 percent annual rate.

In short, the story of workers being rapidly displaced by automation, robots, or anything else does not fit the data. Furthermore, rapid displacement is not necessarily bad news for workers, as shown by the strong wage growth that accompanied the strong productivity growth in the decades following the end of World War II.

If we had a story where we were seeing rapid productivity growth, accompanied by rising inequality, then we could say that we face an unfortunate trade-off, with the cost of more rapid growth being higher inequality. But in fact, the opposite is the case. We see very slow productivity growth accompanied by rising inequality. It is not clear what gain we are supposed to be getting for this increase in inequality.

Not Free Trade

The other part of Edsall’s story is 100 percent accurate. We designed trade policies to put our manufacturing workers in direct competition with low-paid workers in developing countries. This cost us millions of manufacturing jobs and put huge downward pressure on the wages of workers who still held their jobs. As a result of the massive job loss due to trade, the wage premium for working in manufacturing has largely disappeared.

But this policy was not “free trade,” as Edsall says. We made a conscious decision to put manufacturing workers in direct competition with much lower paid workers in developing countries, while continuing to protect more highly paid workers. We could have designed trade policies that would have made it much easier for doctors, dentists, and other highly educated professionals in developing countries (and rich countries) to come to the United States and compete with our professionals.

This would have offered large gains to the economy, as we could have saved hundreds of billions of dollars annually paying less money for these professionals. Our trade negotiators never pursued this type of free trade because doctors and lawyers have far more political power than steel workers and textile workers. As a result, we structured trade in a way that redistributed a huge amount of income upward and pretended that it was just the natural course of globalization. But wait, it gets worse.

Government-Granted Patent and Copyright Monopolies

The fact that some people (those with college and advanced degrees) are better positioned than others to benefit from advances in technology is not an accident. It is by design. The reason that these people are able to be winners from technology is because the government grants patent and copyright monopolies for innovations and creative work. Over the last four decades it has made these monopolies longer and stronger, which increases the amount of income going to those in a position to benefit from them. (See my discussion in chapter 5 of Rigged [it’s free] or here.)

As a result, a massive amount of income has been redistributed upward. This has made a small number of people tremendously rich, such as Bill Gates, whose fortune depends on the government’s protection of Microsoft’s patent and copyright monopolies. It has also allowed millions of others to earn far higher paychecks than if these monopolies were weaker, or if we relied on different mechanisms for supporting innovation and creative work.

The recent experience with Moderna and its COVID-19 vaccine illustrates this point perfectly. The government paid Moderna $450 million to develop a vaccine. It then paid another $450 million for its final phase 3 clinical trials that provided the basis for the FDA’s approval. It then allowed Moderna to have control over the vaccine. The result was that we got at least five Moderna billionaires as its stock price rose by tens of billions of dollars. Undoubtedly, many other Moderna employees became millionaires, although probably not the people who serve lunch in its cafeteria or clean its toilets.

Of course, this money comes from somewhere. We pay about $400 billion a year (around $3,000 per family, each year) more for prescription drugs because the government provides patent monopolies and related protections. We pay around $100 billion a year more for medical equipment and several hundred billion more for computer software.

This is all money out of the pockets of noncollege educated workers. And when the big winners in this story decide to spend their money on houses and other items, we get the inflation we are seeing today, which apparently has everyone so upset.

The key point is that this is all by design. We could have told Moderna that we are going to pay them to develop its vaccine, but then everything is in the public domain. Anyone, anywhere in the world can manufacture it. Furthermore, its nondisclosure agreements with its engineers are unenforceable. This means that they could all sell their services to anyone who wants to pay them to set up manufacturing facilities.

In this alternate universe, the key people behind developing the vaccine would almost certainly be well-compensated, but we would be talking millions, not billions. The decision to structure our rules on technology, so that a relatively small segment of the population could benefit hugely at the expense of everyone else, was a political choice. It was not something that technology did.

This is what I refer to as “the Really Big Lie.” The idea that somehow globalization and technology developed in a way to screw workers without college degrees and it just so happened that more educated workers were big winners. And, many of the more educated workers are good liberals, so they would even be willing to pay higher taxes to help out the losers with various social programs.

Given this reality, is it surprising that the people who were screwed would be angry at the “winners?” To be clear, I am sure that almost no one among the angry non-college educated has given any thought to government-granted patent and copyright monopolies or the protection from competition that their doctors enjoy.

Why would they? These points are almost never made in major news outlets and politicians like Trump push racist stories about lazy Black people and immigrants ruining their world.

But these people are absolutely right that they have been screwed by policies pushed by an educated elite. It is tragic that they see an outlet for their anger in going after the most disadvantaged segments of society, but they do have a real basis for their anger and perhaps some day this fact can be discussed in outlets like the New York Times.

We got a lot of new data on the economy last week and we will get more this week. Most of what we saw was pretty good from the standpoint of stable growth and slowing inflation, but there is still much ambiguity and serious grounds for concerns about the future.

First, the most important release from last week was the third quarter GDP data. It showed the economy growing at a 2.6 percent annual rate. This is a very healthy rate of growth and follows small declines reported in the prior two quarters.

The growth also should mean that we are again seeing positive productivity growth after seeing a record pace of decline reported in the first half of 2022. Productivity data are always erratic, and the numbers from the first half should not be accepted at face value (reported growth in the fourth quarter of 2021 was an impossibly high 6.3 percent), but there can be little doubt that productivity in the first half of this year was very bad.

The 2.6 percent growth in third quarter GDP was roughly equal to reported growth in hours in the payroll data, but there was sharp fall in the number of people who reported being self-employed. This should imply productivity growth in the neighborhood of 1.0 percent. We will get the actual figure this week when the Bureau of Labor Statistics reports third quarter productivity data.

A 1.0 percent rate of productivity growth is not great, but hugely better than the declines reported in the first half of the year. Productivity was likely weakened in the first half by supply chain problems, huge turnover, and possibly some labor hoarding. These problems should have been less of an issue in the third quarter, and even more so going forward, as the economy is operating closer to normal in most sectors.

Weak productivity would be a major factor raising costs for businesses and thereby creating inflationary pressure in the economy. If we are back on a normal productivity path, this would be a big positive for inflation prospects going forward.

Inflation Data

We also got the release last week of the September data on the Personal Consumption Expenditure Deflator (PCE). This was a mixed picture. The overall PCE rose 0.3 percent, while the core PCE rose 0.5 percent. Both numbers were the same as the August figures, and clearly well above the Federal Reserve Board’s 2.0 percent inflation target.

However, there is some cause for hope that the direction will be downward in the months ahead. First, we know a major factor pushing up current inflation, and especially core inflation is rent. Rent’s weight in the PCE is less than in the CPI, but nonetheless it is a huge factor.

The positive story here is that several private indexes that measure rents on marketed units show rental inflation slowing sharply in recent months. Research from the Bureau Labor Statistics shows that these indexes lead the CPI and PCE by close to a year. This means that we will continue to see rapid increases in rent in the official indices through the rest of this year and into 2023, but can be fairly certain that rental inflation will slow sharply to more normal rates over the course of the year.[1]

We are still seeing a mixed picture in the core goods indexes, with some important items, like vehicles, still showing substantial price increases. However, there is good reason to believe that this will turn around in the not distant future as well.

The price of imported goods has been falling rapidly in recent months. Since April, the index for non-fuel imports has fallen by 2.0 percent. This translates into a 4.7 percent annual rate of decline. By contrast, non-fuel imports prices rose at a 7.2 percent annual rate. Imports are almost 16 percent of our economy, and a much larger share of the goods sector. A huge shift in import prices from rapid increases to rapid declines has to impact the pace of inflation in the goods sector.

This switch will be amplified by the sharp reduction in shipping costs in recent months. After soaring due to supply chain issues last year, shipping costs have declined almost 70 percent from their pandemic peaks. This means that we are likely to see the inflation rate in goods fall sharply in the months ahead and quite likely turn negative.  

The other big question mark in the course of inflation is non-shelter services. Here too we are likely to see a good picture. Outside of shelter, inflation in core services is relatively moderate and seems to be headed downward.

Here’s the picture.

As can be seen, the inflation rate in these non-shelter core services is relatively modest. The quarter over quarter rate was 3.07 percent. The rate for the last three months was even lower at 2.7 percent. Perhaps more important than the levels here is the direction of change. Inflation in these services seems to be heading lower, not higher, as many inflation hawks have warned.

If we envision a scenario where inflation in non-shelter services remain more or less at its current pace, where the official shelter indexes follow the private indexes for marketed units, and we see low or falling prices for goods, we will be close to the Fed’s 2.0 percent inflation target.

Wage Growth

The most important news on inflation in the next week will be the job growth and wage growth in the October employment report released on Friday. Job growth has been slowing, which was inevitable as the economy approached full employment.

It is likely that job growth will slow further from the 265,000 gain reported for September. The October number is likely to be close to 200,000, which is near a pace that would be sustainable with an economy that is near full employment.

However, the most important number in the October report will be wage growth. There is no plausible story where the economy sustains a high rate of inflation, if wages are only growing at a moderate pace.

We already got some evidence of slowing wage growth in the Employment Cost Index (ECI) for the third quarter that was released last week. That showed private sector compensation increasing at a 4.4 percent annual rate in the third quarter, down from a 6.0 percent annual rate in the second quarter. This pace is still too high to be consistent with the Fed’s 2.0 percent inflation target, but the direction of change is important. The rate of wage growth is clearly slowing even with unemployment rates at very low levels and vacancy rates at historic highs.

The other major wage series that we rely upon is the average hourly earnings (AHE) series, which will be part of Friday’s report. This series differs from the ECI by looking at average wages for all workers. The ECI holds the mix of industry and occupations constant. The change in mix generally does not have much impact, but the two indices have often differed a great deal in the pandemic recession and recovery.

In the downturn, the AHE series showed much more rapid wage gains because many of the lowest paid workers lost their jobs. This raised the average wage by changing the composition of the workforce, even if the pay of people in each occupation and industry did not change. During the recovery this composition effect went the other way, as low-paid workers got their jobs back.

There was also an issue where many workers may have gotten a pay increase by changing their job title. If a worker at a fast food restaurant was promoted to assistant night manager, but their work did not change at all, the associated pay increase would be picked up in the AHE series, but not in the ECI.

Anyhow, the AHE does show evidence of rapidly slowing wage growth. In the last two months, the AHE has grown at just a 0.3 percent rate. This translates into a 3.6 percent rate of annual wage growth. The monthly data are erratic and subject to large revisions, so these numbers must be treated as provisional.

However, if they hold up through the revisions in the October report, and wage growth in the October data is consistent with the prior two months, then we will have pretty solid evidence that wage growth has slowed sharply. In fact, a 3.6 percent annual rate is only slightly higher than the 3.4 percent rate we saw in 2019, when the inflation rate was comfortably under the Fed’s 2.0 percent target.

If the rate of wage growth is in fact 3.6 percent, it is almost impossible to envision a scenario in which inflation remains uncomfortably high. We would need to see a sustained redistribution of income from wages to profits that has never happened before. In short, if wage growth is now near a 3.6 percent annual rate, the Fed has done its job.

Is a Recession Coming?

While the headline GDP growth figure was very positive, many analysts pointed to the fact that it was entirely driven by trade. Rising exports and falling imports added 2.77 percentage points to the quarter’s growth. No one expects that the trade deficit will continue to decline, as a rising dollar makes our goods less competitive internationally. Also, the economies of our trading partners are likely to sink into recession in the next year, due to rising interest rates and the impact of the war in Ukraine. This will seriously dampen demand for our exports.

This means the main source of strength in the third quarter data will not be present in future quarters, however that does not mean the economy’s prospects are entirely negative. First, inventory accumulation, the other major erratic component in GDP, subtracted 0.7 percentage points from the quarter’s growth. We had been seeing extraordinarily rapid inventory accumulation in the prior three quarters, so some drop in the pace of accumulation was not a surprise.

The rate of accumulation in the third quarter was pretty much normal for an economy growing at a moderate pace. Since overall inventory to sales ratios are now close to normal (high in some areas, still very low for vehicles), we may expect comparable rates of accumulation going forward, unless the economy sinks into recession.

The big risk here is the impact of the Fed’s rate hikes. These rate hikes are a major factor in the dollar’s rise, which will be pushing net exports lower. The other area that has been clearly impacted by rate hikes is residential construction. It has fallen at double digit rates the last two quarters and is now 15.1 percent below its peak for the pandemic recovery in the first quarter of 2021.

There are two factors behind this fall. One is the plunge in mortgage refinancing. The fees associated with mortgage issuance are included in residential investment. While purchase mortgages have fallen due to the rise in interest rates, refinancing has virtually stopped after a huge boom in 2020 and 2021. This falloff has been a big factor in the decline in residential investment, but now that refinancing has basically stopped, it can’t fall further.

The other factor is a drop in housing starts. Housing starts are down by almost 20 percent from their peak last year. This will eventually depress construction, but it has not had much impact to date. There is a huge backlog of unfinished houses due to supply chain issues that delayed construction. The number of homes under construction in September was actually higher than at any point in the recovery.

At some point the decline in starts will result in a fall in residential construction, but that will not be in the current quarter, and quite possibly not until the second quarter of 2023. This means that we may see little further decline in residential construction for the next two quarters. The decline in this component in the third quarter subtracted 1.37 percentage points from the quarter’s growth. It is very unlikely residential construction will have a comparable negative impact in the next two quarters.

There is a similar story with investment in non-residential structures. Investment in non-residential structures fell at a 15.3 percent annual rate, subtracting 0.41 percentage points from the third quarter’s growth. Investment in non-residential structures has been falling sharply since the start of the pandemic.

The issue here is that the huge increase in remote work has reduced demand for office space and the increase in online shopping has reduced demand for retail space. While these changes are likely to be permanent, there is a floor as to how far construction will fall.

Investment in non-residential structures is now almost 27.0 percent below its pre-pandemic level. Office construction is down 35.2 percent from its peak, which was in the first quarter of 2020. Construction of shopping centers is down almost 40 percent. And construction of power generation facilities, a very large category in structures, is down almost 43 percent. I’m not sure of the reason for this drop (the plunge began when Trump was still in the White House), but it seems unlikely to continue.

In short, we are likely to see the drag on growth from this sector lesson in the quarters ahead. Even if non-residential construction continues to fall, it is not likely to have anywhere near as large an impact in future quarters.

This leaves consumption and government spending. Consumption grew at a modest 1.4 percent rate in third quarter. A 2.8 percent rise in consumption of services offset a 1.2 percent decline in goods purchases. High interest rates, and reduced home purchases, will dampen demand for vehicles and household appliances and furniture. However, it may not be enough to slow demand much further. This is especially the case with vehicles where a backlog of orders may keep sales up for the next two quarters.

Government spending grew at a 2.4 percent rate in the third quarter. It grew sharply at the peak of the pandemic and then fell back to more normal levels in recent quarters. It presumably will grow at roughly a 2.0 percent rate in the quarters ahead.

In short, there is a real risk of recession, especially if interest rates continue to rise, however it hardly seems like a done deal at this point. Construction, both residential and non-residential, may be less of a drag on growth in the quarters ahead. However, net exports will almost certainly be a large negative. The big risk is that the deterioration in the trade deficit will be so large as to offset positive growth in the domestic economy.

Can the Fed Pause?

The economy is definitely seeing a large impact from the Fed’s rate hikes to date. However, these hikes may not be sufficient to throw it back into recession. If it continues an aggressive path of hikes, then the risk of recession and high unemployment become far more likely.

A large rate hike at the November meeting is all but certain, however if the October employment report again shows a modest pace of wage growth, there will be solid evidence that the Fed has done its job. If the pace of wage growth remains moderate, then the Fed does not need to fear a story of a wage-price spiral, like we saw in the 1970s. In short, the October employment report may provide a very solid basis for the Fed pausing its plans for future rate hikes.

[1] I should note that several economists, most notably Jason Furman, made this point last year in arguing that inflation would rise in 2022. I had thought the rise indicated by the private indexes would be offset by the impact of large-scale evictions when the federal pandemic moratorium ended. The Census Bureau’s Pulse Survey indicated that an extraordinarily high percentage of renters believed they faced an immediate threat of eviction. There was in fact no huge surge in evictions after the moratoriums ended. The gap between the survey and the actual outcome likely reflects a huge skewing in responses in a survey with a response rate near 5.0 percent.     

 

We got a lot of new data on the economy last week and we will get more this week. Most of what we saw was pretty good from the standpoint of stable growth and slowing inflation, but there is still much ambiguity and serious grounds for concerns about the future.

First, the most important release from last week was the third quarter GDP data. It showed the economy growing at a 2.6 percent annual rate. This is a very healthy rate of growth and follows small declines reported in the prior two quarters.

The growth also should mean that we are again seeing positive productivity growth after seeing a record pace of decline reported in the first half of 2022. Productivity data are always erratic, and the numbers from the first half should not be accepted at face value (reported growth in the fourth quarter of 2021 was an impossibly high 6.3 percent), but there can be little doubt that productivity in the first half of this year was very bad.

The 2.6 percent growth in third quarter GDP was roughly equal to reported growth in hours in the payroll data, but there was sharp fall in the number of people who reported being self-employed. This should imply productivity growth in the neighborhood of 1.0 percent. We will get the actual figure this week when the Bureau of Labor Statistics reports third quarter productivity data.

A 1.0 percent rate of productivity growth is not great, but hugely better than the declines reported in the first half of the year. Productivity was likely weakened in the first half by supply chain problems, huge turnover, and possibly some labor hoarding. These problems should have been less of an issue in the third quarter, and even more so going forward, as the economy is operating closer to normal in most sectors.

Weak productivity would be a major factor raising costs for businesses and thereby creating inflationary pressure in the economy. If we are back on a normal productivity path, this would be a big positive for inflation prospects going forward.

Inflation Data

We also got the release last week of the September data on the Personal Consumption Expenditure Deflator (PCE). This was a mixed picture. The overall PCE rose 0.3 percent, while the core PCE rose 0.5 percent. Both numbers were the same as the August figures, and clearly well above the Federal Reserve Board’s 2.0 percent inflation target.

However, there is some cause for hope that the direction will be downward in the months ahead. First, we know a major factor pushing up current inflation, and especially core inflation is rent. Rent’s weight in the PCE is less than in the CPI, but nonetheless it is a huge factor.

The positive story here is that several private indexes that measure rents on marketed units show rental inflation slowing sharply in recent months. Research from the Bureau Labor Statistics shows that these indexes lead the CPI and PCE by close to a year. This means that we will continue to see rapid increases in rent in the official indices through the rest of this year and into 2023, but can be fairly certain that rental inflation will slow sharply to more normal rates over the course of the year.[1]

We are still seeing a mixed picture in the core goods indexes, with some important items, like vehicles, still showing substantial price increases. However, there is good reason to believe that this will turn around in the not distant future as well.

The price of imported goods has been falling rapidly in recent months. Since April, the index for non-fuel imports has fallen by 2.0 percent. This translates into a 4.7 percent annual rate of decline. By contrast, non-fuel imports prices rose at a 7.2 percent annual rate. Imports are almost 16 percent of our economy, and a much larger share of the goods sector. A huge shift in import prices from rapid increases to rapid declines has to impact the pace of inflation in the goods sector.

This switch will be amplified by the sharp reduction in shipping costs in recent months. After soaring due to supply chain issues last year, shipping costs have declined almost 70 percent from their pandemic peaks. This means that we are likely to see the inflation rate in goods fall sharply in the months ahead and quite likely turn negative.  

The other big question mark in the course of inflation is non-shelter services. Here too we are likely to see a good picture. Outside of shelter, inflation in core services is relatively moderate and seems to be headed downward.

Here’s the picture.

As can be seen, the inflation rate in these non-shelter core services is relatively modest. The quarter over quarter rate was 3.07 percent. The rate for the last three months was even lower at 2.7 percent. Perhaps more important than the levels here is the direction of change. Inflation in these services seems to be heading lower, not higher, as many inflation hawks have warned.

If we envision a scenario where inflation in non-shelter services remain more or less at its current pace, where the official shelter indexes follow the private indexes for marketed units, and we see low or falling prices for goods, we will be close to the Fed’s 2.0 percent inflation target.

Wage Growth

The most important news on inflation in the next week will be the job growth and wage growth in the October employment report released on Friday. Job growth has been slowing, which was inevitable as the economy approached full employment.

It is likely that job growth will slow further from the 265,000 gain reported for September. The October number is likely to be close to 200,000, which is near a pace that would be sustainable with an economy that is near full employment.

However, the most important number in the October report will be wage growth. There is no plausible story where the economy sustains a high rate of inflation, if wages are only growing at a moderate pace.

We already got some evidence of slowing wage growth in the Employment Cost Index (ECI) for the third quarter that was released last week. That showed private sector compensation increasing at a 4.4 percent annual rate in the third quarter, down from a 6.0 percent annual rate in the second quarter. This pace is still too high to be consistent with the Fed’s 2.0 percent inflation target, but the direction of change is important. The rate of wage growth is clearly slowing even with unemployment rates at very low levels and vacancy rates at historic highs.

The other major wage series that we rely upon is the average hourly earnings (AHE) series, which will be part of Friday’s report. This series differs from the ECI by looking at average wages for all workers. The ECI holds the mix of industry and occupations constant. The change in mix generally does not have much impact, but the two indices have often differed a great deal in the pandemic recession and recovery.

In the downturn, the AHE series showed much more rapid wage gains because many of the lowest paid workers lost their jobs. This raised the average wage by changing the composition of the workforce, even if the pay of people in each occupation and industry did not change. During the recovery this composition effect went the other way, as low-paid workers got their jobs back.

There was also an issue where many workers may have gotten a pay increase by changing their job title. If a worker at a fast food restaurant was promoted to assistant night manager, but their work did not change at all, the associated pay increase would be picked up in the AHE series, but not in the ECI.

Anyhow, the AHE does show evidence of rapidly slowing wage growth. In the last two months, the AHE has grown at just a 0.3 percent rate. This translates into a 3.6 percent rate of annual wage growth. The monthly data are erratic and subject to large revisions, so these numbers must be treated as provisional.

However, if they hold up through the revisions in the October report, and wage growth in the October data is consistent with the prior two months, then we will have pretty solid evidence that wage growth has slowed sharply. In fact, a 3.6 percent annual rate is only slightly higher than the 3.4 percent rate we saw in 2019, when the inflation rate was comfortably under the Fed’s 2.0 percent target.

If the rate of wage growth is in fact 3.6 percent, it is almost impossible to envision a scenario in which inflation remains uncomfortably high. We would need to see a sustained redistribution of income from wages to profits that has never happened before. In short, if wage growth is now near a 3.6 percent annual rate, the Fed has done its job.

Is a Recession Coming?

While the headline GDP growth figure was very positive, many analysts pointed to the fact that it was entirely driven by trade. Rising exports and falling imports added 2.77 percentage points to the quarter’s growth. No one expects that the trade deficit will continue to decline, as a rising dollar makes our goods less competitive internationally. Also, the economies of our trading partners are likely to sink into recession in the next year, due to rising interest rates and the impact of the war in Ukraine. This will seriously dampen demand for our exports.

This means the main source of strength in the third quarter data will not be present in future quarters, however that does not mean the economy’s prospects are entirely negative. First, inventory accumulation, the other major erratic component in GDP, subtracted 0.7 percentage points from the quarter’s growth. We had been seeing extraordinarily rapid inventory accumulation in the prior three quarters, so some drop in the pace of accumulation was not a surprise.

The rate of accumulation in the third quarter was pretty much normal for an economy growing at a moderate pace. Since overall inventory to sales ratios are now close to normal (high in some areas, still very low for vehicles), we may expect comparable rates of accumulation going forward, unless the economy sinks into recession.

The big risk here is the impact of the Fed’s rate hikes. These rate hikes are a major factor in the dollar’s rise, which will be pushing net exports lower. The other area that has been clearly impacted by rate hikes is residential construction. It has fallen at double digit rates the last two quarters and is now 15.1 percent below its peak for the pandemic recovery in the first quarter of 2021.

There are two factors behind this fall. One is the plunge in mortgage refinancing. The fees associated with mortgage issuance are included in residential investment. While purchase mortgages have fallen due to the rise in interest rates, refinancing has virtually stopped after a huge boom in 2020 and 2021. This falloff has been a big factor in the decline in residential investment, but now that refinancing has basically stopped, it can’t fall further.

The other factor is a drop in housing starts. Housing starts are down by almost 20 percent from their peak last year. This will eventually depress construction, but it has not had much impact to date. There is a huge backlog of unfinished houses due to supply chain issues that delayed construction. The number of homes under construction in September was actually higher than at any point in the recovery.

At some point the decline in starts will result in a fall in residential construction, but that will not be in the current quarter, and quite possibly not until the second quarter of 2023. This means that we may see little further decline in residential construction for the next two quarters. The decline in this component in the third quarter subtracted 1.37 percentage points from the quarter’s growth. It is very unlikely residential construction will have a comparable negative impact in the next two quarters.

There is a similar story with investment in non-residential structures. Investment in non-residential structures fell at a 15.3 percent annual rate, subtracting 0.41 percentage points from the third quarter’s growth. Investment in non-residential structures has been falling sharply since the start of the pandemic.

The issue here is that the huge increase in remote work has reduced demand for office space and the increase in online shopping has reduced demand for retail space. While these changes are likely to be permanent, there is a floor as to how far construction will fall.

Investment in non-residential structures is now almost 27.0 percent below its pre-pandemic level. Office construction is down 35.2 percent from its peak, which was in the first quarter of 2020. Construction of shopping centers is down almost 40 percent. And construction of power generation facilities, a very large category in structures, is down almost 43 percent. I’m not sure of the reason for this drop (the plunge began when Trump was still in the White House), but it seems unlikely to continue.

In short, we are likely to see the drag on growth from this sector lesson in the quarters ahead. Even if non-residential construction continues to fall, it is not likely to have anywhere near as large an impact in future quarters.

This leaves consumption and government spending. Consumption grew at a modest 1.4 percent rate in third quarter. A 2.8 percent rise in consumption of services offset a 1.2 percent decline in goods purchases. High interest rates, and reduced home purchases, will dampen demand for vehicles and household appliances and furniture. However, it may not be enough to slow demand much further. This is especially the case with vehicles where a backlog of orders may keep sales up for the next two quarters.

Government spending grew at a 2.4 percent rate in the third quarter. It grew sharply at the peak of the pandemic and then fell back to more normal levels in recent quarters. It presumably will grow at roughly a 2.0 percent rate in the quarters ahead.

In short, there is a real risk of recession, especially if interest rates continue to rise, however it hardly seems like a done deal at this point. Construction, both residential and non-residential, may be less of a drag on growth in the quarters ahead. However, net exports will almost certainly be a large negative. The big risk is that the deterioration in the trade deficit will be so large as to offset positive growth in the domestic economy.

Can the Fed Pause?

The economy is definitely seeing a large impact from the Fed’s rate hikes to date. However, these hikes may not be sufficient to throw it back into recession. If it continues an aggressive path of hikes, then the risk of recession and high unemployment become far more likely.

A large rate hike at the November meeting is all but certain, however if the October employment report again shows a modest pace of wage growth, there will be solid evidence that the Fed has done its job. If the pace of wage growth remains moderate, then the Fed does not need to fear a story of a wage-price spiral, like we saw in the 1970s. In short, the October employment report may provide a very solid basis for the Fed pausing its plans for future rate hikes.

[1] I should note that several economists, most notably Jason Furman, made this point last year in arguing that inflation would rise in 2022. I had thought the rise indicated by the private indexes would be offset by the impact of large-scale evictions when the federal pandemic moratorium ended. The Census Bureau’s Pulse Survey indicated that an extraordinarily high percentage of renters believed they faced an immediate threat of eviction. There was in fact no huge surge in evictions after the moratoriums ended. The gap between the survey and the actual outcome likely reflects a huge skewing in responses in a survey with a response rate near 5.0 percent.     

 

Unlike Republicans of today, former House Speaker Paul Ryan used PowerPoints and pretended to believe in arithmetic. This led many centrist pundit types to say that he was a serious policy wonk.

Ezra Klein and Mark Leibovich apparently are still pushing this line. On one of Ezra’s shows this week, both warmly agreed:

“MARK LEIBOVICH: You might be challenging me, but I basically agree with you 100 percent. So I mean, I would agree. I mean, I think Paul Ryan was criticized a great deal. He was dismissed as a lightweight. I’ve been criticized over the years for taking him, I think, more seriously than many people in the media did.

“At least there was a policy framework around then.”

As some of us argued at the time, Paul Ryan desperately did not want his proposals to be taken seriously because they were a joke. Here’s the picture from the Congressional Budget Office’s analysis of his budget proposal, which Ryan directed. (This means he was telling them what to put into it.)

Note that in 2050 Ryan’s budget projected that total government spending would be 14.25 percent of GDP. At that time he was saying he wanted to leave Social Security alone. (Earlier he had pushed a proposal for privatizing the program.) The Social Security Trustees projected that Social Security in 2050 would cost just under 6.0 percent of GDP. The Congressional Budget Office projected that Ryan’s plans for Medicare and other federal health care programs would leave spending at just under 5.0 percent of GDP.

This means that Ryan’s budget left around 3.5 percent of GDP for the military and all other government programs. Since Ryan was not an advocate of big cuts from the military’s budget, which is around 3.0 percent of GDP, this left 0.5 percent of GDP for everything else in the federal budget.

This means all spending on the Justice Department, education, SNAP, infrastructure, research, the environment, and everything else in the federal budget would come to just 0.5 percent of GDP or roughly $130 billion a year in today’s economy (roughly 40 percent more than the current SNAP budget).

Ryan effectively was proposing shutting down the federal government, apart from Social Security, pared back health care programs, and the military. If Ryan was serious about this plan, he never made a big point of defending it in public. In short, Ryan was a lightweight who did not want his proposals to be taken seriously, and thankfully, most people other than centrist pundits did not.

Unlike Republicans of today, former House Speaker Paul Ryan used PowerPoints and pretended to believe in arithmetic. This led many centrist pundit types to say that he was a serious policy wonk.

Ezra Klein and Mark Leibovich apparently are still pushing this line. On one of Ezra’s shows this week, both warmly agreed:

“MARK LEIBOVICH: You might be challenging me, but I basically agree with you 100 percent. So I mean, I would agree. I mean, I think Paul Ryan was criticized a great deal. He was dismissed as a lightweight. I’ve been criticized over the years for taking him, I think, more seriously than many people in the media did.

“At least there was a policy framework around then.”

As some of us argued at the time, Paul Ryan desperately did not want his proposals to be taken seriously because they were a joke. Here’s the picture from the Congressional Budget Office’s analysis of his budget proposal, which Ryan directed. (This means he was telling them what to put into it.)

Note that in 2050 Ryan’s budget projected that total government spending would be 14.25 percent of GDP. At that time he was saying he wanted to leave Social Security alone. (Earlier he had pushed a proposal for privatizing the program.) The Social Security Trustees projected that Social Security in 2050 would cost just under 6.0 percent of GDP. The Congressional Budget Office projected that Ryan’s plans for Medicare and other federal health care programs would leave spending at just under 5.0 percent of GDP.

This means that Ryan’s budget left around 3.5 percent of GDP for the military and all other government programs. Since Ryan was not an advocate of big cuts from the military’s budget, which is around 3.0 percent of GDP, this left 0.5 percent of GDP for everything else in the federal budget.

This means all spending on the Justice Department, education, SNAP, infrastructure, research, the environment, and everything else in the federal budget would come to just 0.5 percent of GDP or roughly $130 billion a year in today’s economy (roughly 40 percent more than the current SNAP budget).

Ryan effectively was proposing shutting down the federal government, apart from Social Security, pared back health care programs, and the military. If Ryan was serious about this plan, he never made a big point of defending it in public. In short, Ryan was a lightweight who did not want his proposals to be taken seriously, and thankfully, most people other than centrist pundits did not.

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