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.

The NYT doesn’t like the Democrats’ economic policies, and they make this very clear in their news section. Their latest salvo referred to President Obama’s 2009 stimulus package as “huge.”

“After Democrats passed a huge economic stimulus bill, other economic measures like legislation to help consumers trade in their ‘clunker’ cars for more efficient models, and a landmark regulation of Wall Street, they could say they had made progress on the economy.”

In retrospect, most economists have argued that the stimulus was too small. (Some of us said that at the time.) As a result, it took us almost a decade to get back to something approaching full employment. The NYT should just have said it didn’t like the stimulus package.

The NYT doesn’t like the Democrats’ economic policies, and they make this very clear in their news section. Their latest salvo referred to President Obama’s 2009 stimulus package as “huge.”

“After Democrats passed a huge economic stimulus bill, other economic measures like legislation to help consumers trade in their ‘clunker’ cars for more efficient models, and a landmark regulation of Wall Street, they could say they had made progress on the economy.”

In retrospect, most economists have argued that the stimulus was too small. (Some of us said that at the time.) As a result, it took us almost a decade to get back to something approaching full employment. The NYT should just have said it didn’t like the stimulus package.

When the Washington Post’s news editors take a position, they are prepared to go to great lengths to follow through. As regular BTP readers know, the paper has decided the economy has been awful ever since President Biden took office.

This means that the paper has downplayed or ignored, the unprecedented pace of job growth, the unemployment rate reaching of a 50-year low, the rise in real wages for workers at the bottom, the sharp drop in the number of uninsured, and savings of thousands of dollars a year in interest costs by tens of millions of homeowners refinancing their mortgages.  Instead, the Post has decided the story would be inflation belting hardworking families, even if it had to play a bit fast and loose with the data to make this case.

The Post went a step further today with a piece that preemptively sought to discredit the positive GDP report that we are likely to see from the Commerce Department on Thursday. The headline of the piece told readers:

“U.S. economy likely grew a lot last quarter. Most people didn’t notice.”

Of course, this is true in a trivial sense. People don’t directly notice GDP unless they happen to be data nerds who regularly read the monthly reports released by the Commerce Department. What they do notice are things like jobs and wage growth.

On these matters, it is a bit hard to understand what the Post can possibly mean by its assertion that “most people didn’t notice.” The economy created 1.1 million jobs in the quarter. People couldn’t notice that?

The unemployment rate hit 3.5 percent, the lowest level since the late 1960s. The Post doesn’t think people could notice that it is relatively easy to find jobs?

They also saw healthy growth in real wages. The average hourly wage rose 1.1 percent over the last three months. That exceeded the 0.4 percent inflation reported by the consumer price index by 0.7 percentage points. That translates into a 2.8 percent annual rate of real wage growth. That’s really good by any standard.

So, what the hell does the Post mean by people won’t notice? I sure can’t think of any real world substance to that assertion.

If the paper is making the point that the economy is not out of the woods, that’s fine, but a totally different issue than how things looked in the third quarter. We have had high inflation and we have a Federal Reserve Board raising rates aggressively to slow inflation down.

The rate hikes are slowing growth and weakening the economy. They will likely raise the unemployment rate in the months ahead and quite possibly could throw the economy into a recession.

This is definitely a risk and could be a really bad story, however the third quarter GDP could be very good news on this front. In the first half of this year productivity growth tanked.  The most recent data show productivity declining at a 7.1 percent annual rate in the first quarter and a 4.1 percent rate in the second quarter. This is the largest two quarter decline ever reported. The reasons for this drop are not clear, the surge in omicron probably explains part of it, as does the rapid turnover in the labor market. Supply chain disruptions were likely also a major factor.

But, regardless of the cause, the decline in productivity in the first half of 2022 was a major source of inflationary pressure. Employers, who were getting less output for each hour of work, were seeing their costs soar.

The healthy GDP growth we are expecting for the third quarter means that productivity will likely again be on a path of at least modest positive growth. This will help alleviate inflationary pressure in the economy by reducing labor costs.

Of course, we should never make too much of one quarter’s productivity data. The numbers are erratic and are subject to large revisions. Nonetheless the data we will be getting for this quarter will be good news and a huge turnaround from the productivity numbers we saw in the first half of 2022.

But Washington Post readers are not likely to hear about this productivity turnaround. It doesn’t fit with the Biden bad economy story it is pushing.

When the Washington Post’s news editors take a position, they are prepared to go to great lengths to follow through. As regular BTP readers know, the paper has decided the economy has been awful ever since President Biden took office.

This means that the paper has downplayed or ignored, the unprecedented pace of job growth, the unemployment rate reaching of a 50-year low, the rise in real wages for workers at the bottom, the sharp drop in the number of uninsured, and savings of thousands of dollars a year in interest costs by tens of millions of homeowners refinancing their mortgages.  Instead, the Post has decided the story would be inflation belting hardworking families, even if it had to play a bit fast and loose with the data to make this case.

The Post went a step further today with a piece that preemptively sought to discredit the positive GDP report that we are likely to see from the Commerce Department on Thursday. The headline of the piece told readers:

“U.S. economy likely grew a lot last quarter. Most people didn’t notice.”

Of course, this is true in a trivial sense. People don’t directly notice GDP unless they happen to be data nerds who regularly read the monthly reports released by the Commerce Department. What they do notice are things like jobs and wage growth.

On these matters, it is a bit hard to understand what the Post can possibly mean by its assertion that “most people didn’t notice.” The economy created 1.1 million jobs in the quarter. People couldn’t notice that?

The unemployment rate hit 3.5 percent, the lowest level since the late 1960s. The Post doesn’t think people could notice that it is relatively easy to find jobs?

They also saw healthy growth in real wages. The average hourly wage rose 1.1 percent over the last three months. That exceeded the 0.4 percent inflation reported by the consumer price index by 0.7 percentage points. That translates into a 2.8 percent annual rate of real wage growth. That’s really good by any standard.

So, what the hell does the Post mean by people won’t notice? I sure can’t think of any real world substance to that assertion.

If the paper is making the point that the economy is not out of the woods, that’s fine, but a totally different issue than how things looked in the third quarter. We have had high inflation and we have a Federal Reserve Board raising rates aggressively to slow inflation down.

The rate hikes are slowing growth and weakening the economy. They will likely raise the unemployment rate in the months ahead and quite possibly could throw the economy into a recession.

This is definitely a risk and could be a really bad story, however the third quarter GDP could be very good news on this front. In the first half of this year productivity growth tanked.  The most recent data show productivity declining at a 7.1 percent annual rate in the first quarter and a 4.1 percent rate in the second quarter. This is the largest two quarter decline ever reported. The reasons for this drop are not clear, the surge in omicron probably explains part of it, as does the rapid turnover in the labor market. Supply chain disruptions were likely also a major factor.

But, regardless of the cause, the decline in productivity in the first half of 2022 was a major source of inflationary pressure. Employers, who were getting less output for each hour of work, were seeing their costs soar.

The healthy GDP growth we are expecting for the third quarter means that productivity will likely again be on a path of at least modest positive growth. This will help alleviate inflationary pressure in the economy by reducing labor costs.

Of course, we should never make too much of one quarter’s productivity data. The numbers are erratic and are subject to large revisions. Nonetheless the data we will be getting for this quarter will be good news and a huge turnaround from the productivity numbers we saw in the first half of 2022.

But Washington Post readers are not likely to hear about this productivity turnaround. It doesn’t fit with the Biden bad economy story it is pushing.

Correction: Okay, this is a big blunder on my part. The full projected cost of the student loan debt forgiveness actually was included in the 2022 budget. I had not considered the possibility that this was the case since it implied the deficit for fiscal 2022 was under $1 trillion, without this accounting. Since there was still considerable pandemic-related spending in this fiscal year, that has not occurred to me as a possibility. This means that apart from this accounting peculiarity, the deficit fell from $2.8 trillion in 2021 to $1.0 trillion in 2022, a decline of 64 percent.

The New York Times continued in its trashing of the economy under President Biden, implying that the 40-year cost of his student loan forgiveness plan will be incurred over a single year.  An article reporting on the sharp drop in the deficit in fiscal year 2022, which just ended at the start of the month, included a quote from a statement by Maya MacGuineas, the president of the Committee for a Responsible Federal Budget:

“In fact, the deficit would have been almost $400 billion lower had the Biden administration not decided to enact an inflationary, costly, and regressive student debt cancellation plan in August, ….”

This is not true, as every budget expert knows. The $400 billion figure refers to the Congressional Budget Office’s estimate of the cost of debt forgiveness over the next forty years, not its cost in fiscal year 2022, which was in fact zero.

Since most people probably do not have a good idea of how much $400 billion over forty years is, if the NYT was interested in informing its readers, it could have expressed the sum as a share of GDP. According to the CBO projections, the cost of forgiveness peaks at a bit more than 0.09 percent of GDP in the years 2023-25. That is less than one-thirtieth of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.

The piece also includes the bizarre complaint that “Treasury Department figures released earlier this month revealed that America’s gross national debt exceeded $31 trillion for the first time, a milestone that the Biden administration did not observe with any fanfare.”

First, since debt has almost always risen in the 80 years since the start of World War II, every debt number we hit will be “for the first time.” It’s not clear why the NYT felt the need to include these words.

It is also bizarre that they see $31 trillion as some important milestone that they criticize the Biden administration for not acknowledging. After all, it didn’t acknowledge hitting $30,897,300 million either.

We have a right to expect more serious budget reporting from the country’s leading newspaper.

 

Correction: Okay, this is a big blunder on my part. The full projected cost of the student loan debt forgiveness actually was included in the 2022 budget. I had not considered the possibility that this was the case since it implied the deficit for fiscal 2022 was under $1 trillion, without this accounting. Since there was still considerable pandemic-related spending in this fiscal year, that has not occurred to me as a possibility. This means that apart from this accounting peculiarity, the deficit fell from $2.8 trillion in 2021 to $1.0 trillion in 2022, a decline of 64 percent.

The New York Times continued in its trashing of the economy under President Biden, implying that the 40-year cost of his student loan forgiveness plan will be incurred over a single year.  An article reporting on the sharp drop in the deficit in fiscal year 2022, which just ended at the start of the month, included a quote from a statement by Maya MacGuineas, the president of the Committee for a Responsible Federal Budget:

“In fact, the deficit would have been almost $400 billion lower had the Biden administration not decided to enact an inflationary, costly, and regressive student debt cancellation plan in August, ….”

This is not true, as every budget expert knows. The $400 billion figure refers to the Congressional Budget Office’s estimate of the cost of debt forgiveness over the next forty years, not its cost in fiscal year 2022, which was in fact zero.

Since most people probably do not have a good idea of how much $400 billion over forty years is, if the NYT was interested in informing its readers, it could have expressed the sum as a share of GDP. According to the CBO projections, the cost of forgiveness peaks at a bit more than 0.09 percent of GDP in the years 2023-25. That is less than one-thirtieth of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.

The piece also includes the bizarre complaint that “Treasury Department figures released earlier this month revealed that America’s gross national debt exceeded $31 trillion for the first time, a milestone that the Biden administration did not observe with any fanfare.”

First, since debt has almost always risen in the 80 years since the start of World War II, every debt number we hit will be “for the first time.” It’s not clear why the NYT felt the need to include these words.

It is also bizarre that they see $31 trillion as some important milestone that they criticize the Biden administration for not acknowledging. After all, it didn’t acknowledge hitting $30,897,300 million either.

We have a right to expect more serious budget reporting from the country’s leading newspaper.

 

We know that’s what CNN told people, but that is far from clear from the data. The lowest-paid workers have, on average, been seeing pay increases that exceed inflation. Here’s the picture for production and non-supervisory workers in the hotel and restaurant industry.

Source: Bureau of Labor Statistics.

 

The graph shows the average hourly wage adjusted for inflation. As can be seen, real wages for these workers, who are among the lowest paid in the economy, is just over 3.0 percent higher than it was before the pandemic. This doesn’t mean that these workers have it great, they are still very low-paid, but it would make less sense to say that they are living “paycheck to paycheck” today than it would have in 2019, when most reporting on the economy was positive. There is a similar story in most other low-paying sectors.

It’s true that workers higher up on the wage ladder have not done quite as well. The average real hourly wage for production and non-supervisory workers for the private sector as a whole is just even with where it was at the start of the pandemic. That’s not great, we would like to see wages rise through time, but it is hardly a disaster.

After all, there have been many periods where wages have not kept pace with inflation. For example, real wages fell 3.9 percent from 1980 to 1989, the period often called “the Reagan boom.”

It’s also worth noting that many workers higher up on the pay ladder likely benefited from the opportunity to refinance their homes before mortgage rates rose. Roughly 20 million homeowners did. If a person with a $200,000 mortgage was able to refinance their home, with a 1.0 percentage point drop in interest rates, they would be saving $2,000 a year. This should go far towards keeping them from having to live paycheck to paycheck.

In short, while many people undoubtedly are being squeezed by inflation, it is not clear why there would be more people living paycheck to paycheck today than before the pandemic, when most news outlets were touting the strong economy. The data just don’t fit the story CNN wants its audience to believe.

We know that’s what CNN told people, but that is far from clear from the data. The lowest-paid workers have, on average, been seeing pay increases that exceed inflation. Here’s the picture for production and non-supervisory workers in the hotel and restaurant industry.

Source: Bureau of Labor Statistics.

 

The graph shows the average hourly wage adjusted for inflation. As can be seen, real wages for these workers, who are among the lowest paid in the economy, is just over 3.0 percent higher than it was before the pandemic. This doesn’t mean that these workers have it great, they are still very low-paid, but it would make less sense to say that they are living “paycheck to paycheck” today than it would have in 2019, when most reporting on the economy was positive. There is a similar story in most other low-paying sectors.

It’s true that workers higher up on the wage ladder have not done quite as well. The average real hourly wage for production and non-supervisory workers for the private sector as a whole is just even with where it was at the start of the pandemic. That’s not great, we would like to see wages rise through time, but it is hardly a disaster.

After all, there have been many periods where wages have not kept pace with inflation. For example, real wages fell 3.9 percent from 1980 to 1989, the period often called “the Reagan boom.”

It’s also worth noting that many workers higher up on the pay ladder likely benefited from the opportunity to refinance their homes before mortgage rates rose. Roughly 20 million homeowners did. If a person with a $200,000 mortgage was able to refinance their home, with a 1.0 percentage point drop in interest rates, they would be saving $2,000 a year. This should go far towards keeping them from having to live paycheck to paycheck.

In short, while many people undoubtedly are being squeezed by inflation, it is not clear why there would be more people living paycheck to paycheck today than before the pandemic, when most news outlets were touting the strong economy. The data just don’t fit the story CNN wants its audience to believe.

Last week I made fun of the Washington Post for writing a piece telling readers about the bad news that retailers are finding themselves with excessive inventories and may have to mark down prices to sell them off. The story is that with supply chain problems from the pandemic largely over, stores have been able to restock their inventories, but now see demand trailing off.

The incredible part of the story is that the piece largely ignored the obvious implication, that consumers are likely to see price reductions in a wide range of goods in the near future. Since INFLATION! has been front and center in economic reporting for the last year and half, the likelihood that people will soon be able to get large discounts on everything from furniture and appliances, to clothes and kitchen items, should be good news. But this likely outcome was completely downplayed to the point of being almost ignored.

The New York Times was apparently determined not to be outdone. It wrote a nearly identical piece telling us about the tough holiday season facing retailers, who may have to accept lower profit margins.

“But discounts eat into retailers’ profit margins, and they have been able to employ that strategy only sparingly in recent years. During last year’s holiday season, in particular, retailers recorded bigger margins thanks to supply chain logjams. Inventory was low, and shoppers were clamoring to get their hands on products. The result: fewer discounts.

“’A lot of that is going to reverse, if not more than reverse, across department stores and specialty apparel,’ said David Silverman, a senior director at Fitch Ratings. ‘Consumers are less compelled to buy, and they’re going to need the call to action.’”

Like the Washington Post article, the piece pretty much ignored the fact that large markdowns will be good news for people troubled by inflation. But, the New York Times one-upped the Post on this one.

It ran its troubled retailers piece on its home page just below a piece headlined, “alarmed by rapid price increases, Fed looks at raising rate again.” While making the case for more aggressive rate hikes from the Fed, the piece told readers:

“And there is little evidence, so far, that the Fed’s policy is working to tamp down price increases.”

It seems like the NYT is very committed to having a diversity of viewpoints in its new section. We can either see a piece telling us that inflation is unrelenting or alternatively read a piece just below it telling us that we can expect sharp price declines in a wide range of goods.

Either way, it’s bad news for Biden.

Last week I made fun of the Washington Post for writing a piece telling readers about the bad news that retailers are finding themselves with excessive inventories and may have to mark down prices to sell them off. The story is that with supply chain problems from the pandemic largely over, stores have been able to restock their inventories, but now see demand trailing off.

The incredible part of the story is that the piece largely ignored the obvious implication, that consumers are likely to see price reductions in a wide range of goods in the near future. Since INFLATION! has been front and center in economic reporting for the last year and half, the likelihood that people will soon be able to get large discounts on everything from furniture and appliances, to clothes and kitchen items, should be good news. But this likely outcome was completely downplayed to the point of being almost ignored.

The New York Times was apparently determined not to be outdone. It wrote a nearly identical piece telling us about the tough holiday season facing retailers, who may have to accept lower profit margins.

“But discounts eat into retailers’ profit margins, and they have been able to employ that strategy only sparingly in recent years. During last year’s holiday season, in particular, retailers recorded bigger margins thanks to supply chain logjams. Inventory was low, and shoppers were clamoring to get their hands on products. The result: fewer discounts.

“’A lot of that is going to reverse, if not more than reverse, across department stores and specialty apparel,’ said David Silverman, a senior director at Fitch Ratings. ‘Consumers are less compelled to buy, and they’re going to need the call to action.’”

Like the Washington Post article, the piece pretty much ignored the fact that large markdowns will be good news for people troubled by inflation. But, the New York Times one-upped the Post on this one.

It ran its troubled retailers piece on its home page just below a piece headlined, “alarmed by rapid price increases, Fed looks at raising rate again.” While making the case for more aggressive rate hikes from the Fed, the piece told readers:

“And there is little evidence, so far, that the Fed’s policy is working to tamp down price increases.”

It seems like the NYT is very committed to having a diversity of viewpoints in its new section. We can either see a piece telling us that inflation is unrelenting or alternatively read a piece just below it telling us that we can expect sharp price declines in a wide range of goods.

Either way, it’s bad news for Biden.

The media have been hyping inflation pretty much non-stop for the last year and a half. They tell us that this the only thing people care about. They don’t care about whether they have a job, how much the job pays, whether they have health care, or any other economic issue. People care about inflation: full stop.

And, what do you know, this is bad news for Joe Biden and the Democrats. Yeah, it’s true that pretty much every other wealthy country in the world is facing a comparable rate of inflation, but that doesn’t matter. We have high inflation and it’s Joe Biden’s fault. The Democrats just have to accept this.

The insistence, that inflation is the only economic issue voters care about, reminds me of the situation a quarter century ago when there was a big push by Republicans, and many Democrats, to cut and/or privatize Social Security. The story at the time was that Social Security faced a crisis and something had to be done.

The “liberal” position was that it was best to get out front and propose more modest cuts, which would hit the middle class, while protecting the poor. The concern for the poor was nice, but the fact is that most middle-income people rely on Social Security for most of their retirement income. It is hard to say that the benefits that now average just over $1,600 a month are all that generous. There is not much room for cutting without serious hardship.

At the time, my friend and longtime colleague, Mark Weisbrot and I questioned whether people really saw Social Security as being in crisis. We knew that’s what all the political experts said. I even remember being in a meeting with one of the leading Democratic pollsters, who was very adamant on this point. He recounted his experiences in focus groups, where if you told people that Social Security was not in crisis, they got angry to the point they wanted to throw things at you.

This all struck Mark and me as very strange. After all, how could people become convinced Social Security was in a crisis? Were tens of millions of people reading through the Social Security Trustees Report and studying other long-range projections of demographics and economic growth?

That didn’t strike us as very likely. It seemed more plausible that people thought Social Security was in a crisis because everyone they heard talk about it on TV or the radio said Social Security was in crisis. If that is all you ever hear about Social Security, then you might come to believe the program is in a crisis.

Thankfully, we got through this period without any cuts to Social Security. Mark and I made a minor contribution to preserving the program with our book, Social Security: The Phony Crisis.

What Does This Have to Do with Inflation?

The reason for bringing up this history with Social Security is that the political dynamics around the inflation debate are very similar to the dynamics around Social Security in the 1990s. The media constantly assert that inflation is the only economic issue that people care about. Republicans are happy to go along with this assertion and Democrats are intimidated into silence.

But, just as it was hard to believe that people had studied demographic and economic trends to determine that Social Security faced a crisis, it is also hard to believe that people only care about inflation.  After all, it was not ancient history when we had more than 10 million people unemployed. In fact, that was true in January of 2021, the month president Biden took office. The unemployment rate is now down to 3.5 percent, a half-century low. Doesn’t the opportunity to have a job mean anything to people? After all, most people who are working do need a job to pay the bills.

There is also the issue of job quality. While many people are still in low-paying jobs doing unpleasant work, the tight labor market has meant that millions of workers have been able to quit jobs that they don’t like. In the last year, there were 51.5 million voluntary quits from jobs. (This number is for total quits, some people quit more than once, so the actual number of people who quit jobs would be somewhat lower.)

The new opportunities for workers in low-paying jobs has meant that wages have outpaced inflation for workers at the bottom end of the wage ladder. Real average hour earnings for production and non-supervisory workers in the leisure and hospitality industry (hotels and restaurants), rose by 3.9 percent from February 2020 to September of this year.

To be clear, these workers are not doing well. A worker supporting a family on $20,000 a year before the pandemic, will still be struggling if their real earnings increased to $20,800, but they are better off than they were in 2019. The media have largely ignored the story of workers quitting bad jobs for ones that pay better and/or offer better working conditions.

It’s not just workers at the bottom who are doing better today than they were before the pandemic, tens of millions of homeowners were able to take advantage of the low mortgage interest rates that we had until the Fed rate hikes started. They refinanced their homes at rates that were often a percentage point or more below the rate they paid before the pandemic.

This could mean $2000-$3000 a year in interest savings for a typical homeowner. Are we really supposed to believe that these interest savings won’t cover paying $1 more for a gallon of milk at the supermarket? Obviously, no one is happy about paying higher prices for food and other items, but the families that were able to refinance are almost certainly better off today, even with the higher prices, than they were before the pandemic.

There is a similar story with the tens of millions of people who are now able to work from home as a result of changes workplaces implemented in the pandemic. These people are saving thousands of dollars a year in commuting costs. Are we really supposed to believe that these people are all worse off due to inflation, in spite of these savings?

It is worth noting that the average hourly wage has almost kept pace with inflation since the start of the pandemic. It’s down by just 0.7 percent (it dropped 3.9 percent during the “Reagan Boom”), so there is not that much ground that workers need to make up through paying lower mortgage interest or savings on commuting costs.

So, given the economic reality, is it plausible that everyone feels they are being devastated by inflation? That one doesn’t seem to fit, just like the story that everyone believed Social Security was in a crisis back in the 1990s didn’t make sense.

We know politicians can’t stick their necks out and say that inflation isn’t that bad, the media will mercilessly trash them for being out of touch. But people whose jobs don’t prevent them from telling the truth can point out what the data show. Most families are not being devasted by inflation, and that fact will not change no matter how many times the media and Republican politicians assert the opposite.  

The media have been hyping inflation pretty much non-stop for the last year and a half. They tell us that this the only thing people care about. They don’t care about whether they have a job, how much the job pays, whether they have health care, or any other economic issue. People care about inflation: full stop.

And, what do you know, this is bad news for Joe Biden and the Democrats. Yeah, it’s true that pretty much every other wealthy country in the world is facing a comparable rate of inflation, but that doesn’t matter. We have high inflation and it’s Joe Biden’s fault. The Democrats just have to accept this.

The insistence, that inflation is the only economic issue voters care about, reminds me of the situation a quarter century ago when there was a big push by Republicans, and many Democrats, to cut and/or privatize Social Security. The story at the time was that Social Security faced a crisis and something had to be done.

The “liberal” position was that it was best to get out front and propose more modest cuts, which would hit the middle class, while protecting the poor. The concern for the poor was nice, but the fact is that most middle-income people rely on Social Security for most of their retirement income. It is hard to say that the benefits that now average just over $1,600 a month are all that generous. There is not much room for cutting without serious hardship.

At the time, my friend and longtime colleague, Mark Weisbrot and I questioned whether people really saw Social Security as being in crisis. We knew that’s what all the political experts said. I even remember being in a meeting with one of the leading Democratic pollsters, who was very adamant on this point. He recounted his experiences in focus groups, where if you told people that Social Security was not in crisis, they got angry to the point they wanted to throw things at you.

This all struck Mark and me as very strange. After all, how could people become convinced Social Security was in a crisis? Were tens of millions of people reading through the Social Security Trustees Report and studying other long-range projections of demographics and economic growth?

That didn’t strike us as very likely. It seemed more plausible that people thought Social Security was in a crisis because everyone they heard talk about it on TV or the radio said Social Security was in crisis. If that is all you ever hear about Social Security, then you might come to believe the program is in a crisis.

Thankfully, we got through this period without any cuts to Social Security. Mark and I made a minor contribution to preserving the program with our book, Social Security: The Phony Crisis.

What Does This Have to Do with Inflation?

The reason for bringing up this history with Social Security is that the political dynamics around the inflation debate are very similar to the dynamics around Social Security in the 1990s. The media constantly assert that inflation is the only economic issue that people care about. Republicans are happy to go along with this assertion and Democrats are intimidated into silence.

But, just as it was hard to believe that people had studied demographic and economic trends to determine that Social Security faced a crisis, it is also hard to believe that people only care about inflation.  After all, it was not ancient history when we had more than 10 million people unemployed. In fact, that was true in January of 2021, the month president Biden took office. The unemployment rate is now down to 3.5 percent, a half-century low. Doesn’t the opportunity to have a job mean anything to people? After all, most people who are working do need a job to pay the bills.

There is also the issue of job quality. While many people are still in low-paying jobs doing unpleasant work, the tight labor market has meant that millions of workers have been able to quit jobs that they don’t like. In the last year, there were 51.5 million voluntary quits from jobs. (This number is for total quits, some people quit more than once, so the actual number of people who quit jobs would be somewhat lower.)

The new opportunities for workers in low-paying jobs has meant that wages have outpaced inflation for workers at the bottom end of the wage ladder. Real average hour earnings for production and non-supervisory workers in the leisure and hospitality industry (hotels and restaurants), rose by 3.9 percent from February 2020 to September of this year.

To be clear, these workers are not doing well. A worker supporting a family on $20,000 a year before the pandemic, will still be struggling if their real earnings increased to $20,800, but they are better off than they were in 2019. The media have largely ignored the story of workers quitting bad jobs for ones that pay better and/or offer better working conditions.

It’s not just workers at the bottom who are doing better today than they were before the pandemic, tens of millions of homeowners were able to take advantage of the low mortgage interest rates that we had until the Fed rate hikes started. They refinanced their homes at rates that were often a percentage point or more below the rate they paid before the pandemic.

This could mean $2000-$3000 a year in interest savings for a typical homeowner. Are we really supposed to believe that these interest savings won’t cover paying $1 more for a gallon of milk at the supermarket? Obviously, no one is happy about paying higher prices for food and other items, but the families that were able to refinance are almost certainly better off today, even with the higher prices, than they were before the pandemic.

There is a similar story with the tens of millions of people who are now able to work from home as a result of changes workplaces implemented in the pandemic. These people are saving thousands of dollars a year in commuting costs. Are we really supposed to believe that these people are all worse off due to inflation, in spite of these savings?

It is worth noting that the average hourly wage has almost kept pace with inflation since the start of the pandemic. It’s down by just 0.7 percent (it dropped 3.9 percent during the “Reagan Boom”), so there is not that much ground that workers need to make up through paying lower mortgage interest or savings on commuting costs.

So, given the economic reality, is it plausible that everyone feels they are being devastated by inflation? That one doesn’t seem to fit, just like the story that everyone believed Social Security was in a crisis back in the 1990s didn’t make sense.

We know politicians can’t stick their necks out and say that inflation isn’t that bad, the media will mercilessly trash them for being out of touch. But people whose jobs don’t prevent them from telling the truth can point out what the data show. Most families are not being devasted by inflation, and that fact will not change no matter how many times the media and Republican politicians assert the opposite.  

Okay, I have not become an evangelical Christian, but I am still not ready to throw in the towel on the likelihood of sustained inflation. To be clear, there is no doubt that the September CPI was bad news.

You have to dig pretty deep in that report to find much evidence of inflation slowing. We knew some of the numbers would be bad by construction. BLS has done very good research showing how its rental indexes lag private indexes of marketed units. This means that even if rental inflation was slowing in September (this is what the private indexes show), the CPI index would still be reflecting the rapid increases we saw in the market indexes this spring.

Similarly, the health insurance index, which rose 2.1 percent in September, and has risen 28.2 percent over the last year, is based on the gap between insurers’ premiums and what they spend on care. This also lags considerably. The sharp rise in the index reflects a large drop in health care spending during the pandemic. This will likely be reversed in the months ahead, but in the meantime, this component is a big contributor to inflation in the CPI.

But having an explanation for the bad news doesn’t make it good news. We can reasonably expect inflation in the rental indexes to moderate and the health insurance index to turn negative, but for now they are still telling pretty bad stories.

The real disappointment in the September data is that we still have not seen much improvement in the areas where supply chain problems were big factors in pushing up inflation over the last year and a half. There were some good signs, but not much.

Used car prices fell 1.1 percent, but they are still up by more than 50 percent from the start of the pandemic. The appliance index fell 0.3 percent in September, its third consecutive decline. However, appliance prices were still up 13.3 percent from the pre-pandemic level. They had been falling before the pandemic. Apparel prices, which had also been trending downward before the pandemic, fell 0.3 percent, which left them up by 5.5 percent year-over-year (YOY).

Prices continued to rise in other areas where we had seen supply chain issues. Most notably, new vehicle prices rose 0.7 percent, putting their YOY increase at 9.4 percent. The index for car parts and equipment was up 0.8 percent in September, bringing its YOY rise to 13.4 percent year-over-year. And, the price of store-bought food increased 0.7 percent, putting the YOY rise at 13.0 percent.

In short, there was not much evidence of slowing inflation here. The picture looked pretty bad in most major sectors and also most of the minor ones.

Nonetheless, there are still reasons for thinking that inflation will not remain high going forward. My big three are:

  • Expectations
  • Import prices
  • Productivity

Expectations

Taking these in turn, the point on expectations is straightforward. The story of the 1970s inflation was that people came to expect inflation. This led workers to push for higher pay increases. Businesses were more likely to grant them, since they believed that they could quickly recover higher costs with higher prices. This made it harder to push inflation back down to more acceptable levels, since high rates of expected inflation effectively became self-perpetuating.

We have a very different story at present. Expectations of inflation, whether measured by surveys like the University of Michigan’s Consumer Sentiment Index or financial markets through breakeven inflation rates on indexed Treasury bonds, have come back down to pre-pandemic levels, after rising at the end of 2021 and start of this year. (It is worth noting that the even at their peak, inflation expectations were only up by around a percentage point from pre-pandemic levels. This was nothing like what we saw in the 1970s.)

The reasons for the drop can be debated. Perhaps the decline is a vote of confidence in the inflation-fighting commitment of the Fed. In the case of consumer sentiments, it’s likely that three months of falling gas prices played an important role. Whatever the cause, of the drop, the fact that people are not expecting high inflation to persist is undeniable.   

 

Related to this issue, we never saw a pattern of wage growth acceleration remotely comparable to what we saw in the 1970s. The pace of wage growth did increase sharply in 2021, even if we control for issues raised by changes in the composition of employment. However, since peaking at the end of the year, it has slowed sharply in 2022.

Taking my preferred measure, of annualizing the growth in wages from one three-month period to the next three-month period, wage growth peaked at a 6.1 percent annual rate at the start of this year. In the most recent three-month period (July, August, September) compared with the prior three months (April, May, June), wages grew at a 4.8 percent annual rate. That is too fast to be consistent with the Fed’s 2.0 percent inflation target, but the direction of change is clear, wage growth is slowing, not accelerating.

In fact, if we just look at the last two months, the average hourly wage has increased at a 3.6 percent annual rate. As I always point out, the monthly data are erratic and subject to revisions, so we surely would not want to put a lot of weight on these data just yet. Nonetheless, there is at least a possibility that they are accurate. A 3.6 percent pace of wage growth is in fact consistent with the Fed’s inflation target. Wages grew at a 3.4 percent rate in 2019, when inflation was comfortably below 2.0 percent.

In any case, it is clear that we are not seeing the pattern of accelerating wage growth, pushing inflation higher, that we saw in the 1970s. This should mean there is less urgency in pushing inflation down.

Import Prices

The Bureau of Labor Statistics released its report on September import and export prices the day after the CPI. It received almost no attention. This is unfortunate, because it does tell us a great deal about inflationary pressures facing the economy.

While the CPI was worse than expected, the import price data for September was better than expected. The overall import price index fell by 1.2 percent in September. This was driven largely by a 7.5 percent drop in the index for imported fuels, but even pulling this out, import prices dropped by 0.4 percent in September, the fifth straight monthly decline. This means that the prices for a wide range of items that we import, like clothes, cars, appliances, and thousands of other goods and services, are now falling.

This is a big deal. Since May, the non-fuel import price index has fallen by 2.0 percent. This is a 4.7 percent annual rate of decline. By contrast, in the years from May 2020 to May 2021, this index rose by 6.1 percent, and by 5.9 between May 2021 and May 2022. The story here is that the prices of a wide range of imported goods had been putting upward pressure on inflation until the spring of this year. With these prices now falling, imports should be an important factor restraining inflation in the near-term future.

It is also important to realize how important imports are to the economy. Non-oil imports came to $3,734 billion at an annualized rate in the second quarter of this year. This is equal to 14.8 percent of GDP. If the prices of items comprising 14.8 percent of GDP are now falling at a 4.7 percent annual rate, instead of rising at a 6.0 percent annual rate, that has to drastically improve the inflation picture. To be clear, we can’t assume that import prices will keep declining, and certainly not at their recent rate, but the inflationary pressure from rapidly rising import prices seems to be behind us. (The import price index prior to the pandemic had a slight downward trend.)

Even this switch from rapidly rising import prices to rapidly falling ones understates the impact on inflation. Shipping costs soared during the pandemic, as we tried to move a vastly increased quantity of goods, even as Covid was forcing shutdowns of ports and forcing many workers to stay home due to illness. One commonly used index increased almost ten-fold at its peak in September of 2021. It has now fallen back almost 70 percent from that peak, and it seems likely it will fall further.

Shipping costs are not included in the import price index. This means that the prices we pay for the goods we are importing are falling even more sharply than is indicated by the import price index. This should go far towards alleviating inflationary pressures.

Productivity

At least implicitly, productivity growth is a huge part of the inflation story. To simplify a bit, inflation will be equal to the rate of wage growth minus the rate of productivity growth. (This assumes profit shares remain constant, among other things.) This means that if we have wage growth of 3.5 percent, and productivity grows at a 1.5 percent annual rate, inflation will be 2.0 percent.

Higher rates of productivity growth mean that we can have more rapid wage growth without higher inflation. I had been noting an uptick in productivity growth through the fourth quarter of 2021, and argued that workplace innovations associated with the pandemic may have put us on a faster productivity growth path.

That hope vanished with the release of the productivity data from the first and second quarter of 2022. They showed annual rates of decline in productivity of 7.4 percent and 4.1 percent, respectively. Productivity data are notoriously erratic, so single quarter surges or declines are best ignored. I have also been skeptical of the drop in GDP reported for the first half of this year, believing that subsequent revisions may show the economy grew during this period.

But that aside, there can be little doubt that productivity growth in the first half of 2022 was terrible. There are two plausible explanations as to why productivity would suddenly decline. One is labor hoarding. The idea here is that companies are finding it difficult to hire and keep workers, so they in effect hire everyone they can and keep them on the payroll whether they need them or not. This is common behavior in a recession, especially with large companies and highly skilled workers.

I am skeptical of this labor hoarding explanation because it typically would be associated with a decline in the length of the average workweek. The idea would be that you keep workers on the payroll, but maybe you have them work 35 hours a week rather than 40, because you don’t need them for 40 hours. You may not need them for 35 hours either, but since you want to keep the worker, it’s necessary to give them something close to normal hours. (Presumably the employer is also paying for health insurance and other benefits.)

Anyhow, there is not much of a case for a big drop in the length of the workweek in the first half of 2022. There had been some decline in the average workweek in 2021. The length peaked at 35.0 hours in January of 2021 and then fell back to 34.8 hours by the fourth quarter. This would be consistent with a story where employers, unable to hire the workers they needed, worked their existing workforce more hours.

There is a somewhat further decline in the first half of 2022, but the average was 34.6 hours, which is still higher than the 34.4 hour average for 2019, before the pandemic. There is a similar story in most major sectors. This doesn’t rule out the possibility of labor hoarding, but it does seem odd that there would not be some decline in the length of the workweek.

The explanation that strikes me as more likely is that supply chain disruptions are proving to be major obstacles to normal production. This story can be best told with the construction sector.    

The combined categories in the National Income and Product Accounts of non-residential construction and residential construction (Table 1.1.6, Lines 10 and 13) fell 6.8 percent between the fourth quarter of 2019 and the second quarter of 2022. By contrast, the Bureau of Labor Statistics (BLS) index of aggregate hours for the construction sector rose 1.0 percent over this period. This would imply roughly a 7.8 percent decline in productivity over this ten-quarter period.[1]

It doesn’t seem plausible that either construction technology or the quality of labor in the industry could have deteriorated so much in such a short period of time. The more obvious explanation for a decline in productivity in construction is that many workers were effectively wasting their time waiting for parts or materials that were needed for them to do their jobs. If there is a comparable picture in many other workplaces, where supply chain issues keep workers from doing their jobs, then the decline in productivity in the first half of 2022 can make some sense.

The positive side of this story is that, if either the labor hoarding or supply chain explanation proves correct, then the drop in productivity reported for the first of 2022 is temporary and should be reversed in future quarters. Data available for the third quarter indicate that we should get some modest positive rate of productivity growth for the quarter.

This brings us back to the costs and inflation picture. The weak productivity performance in the first half of 2022 meant that businesses were seeing sharply higher costs. The data from the Bureau of Labor Statistics show that unit labor costs rose at annual rates of 12.7 percent and 10.2 percent, in the first and second quarters, respectively. Since the profit share was also above its pre-pandemic level, it seems businesses were having no problem passing on these costs in higher prices, but the data imply that they really were seeing sharply rising costs.

However, with productivity growth returning to a more normal pace, the pressure on costs will be far lower than it was in the first half of 2022. This means that a major source of inflationary pressure will have been removed.

Are We Out of the Woods on Inflation?

As a card-carrying member of Team Transitory, I know that my prognostications on inflation have to be viewed with some serious skepticism at this point, but I would urge people to just look at the data. The story on inflation expectations is clear, investors and consumers both anticipate that inflation will come down to pre-pandemic rates. In addition, wage growth has clearly slowed, not accelerated as the bad story would predict. Whether it has slowed to levels consistent with an acceptable rate of inflation remains to be seen.

Higher import prices had been a major factor pushing inflation higher in 2021 and the first five months of this year. Since May, they have been falling rapidly. The impact of this drop in prices is amplified by a huge reduction in shipping costs over this period. Instead of putting upward pressure on prices, these factors should allow for price declines on many items. (We already see evidence of this on items like appliances, with have been falling in price in recent months.)

Finally, we had a horrible story on productivity in the first half of 2022. The reported decline in productivity during the first two quarters meant enormous increases in costs for businesses, most or all of which seems to have been passed on in prices. The good news here is that we seem to be on at least a normal productivity growth path again in the third quarter. Whether it ends up being faster or slower than the pre-pandemic pace remains to be seen, but at least it will be positive.

For these reasons, we can anticipate that inflation will be much less of a problem in the rest of this year and in 2023 than it has been. Does this story mean the Fed should stop raising rates?

Given the September CPI, it would be difficult for the Fed to declare victory and end its hikes. But it can certainly slow the pace. We all know that the full impact of rate hikes takes time and we are just beginning to see the effect of the most recent hikes. It seems there is much more risk at this point of going too far than going too slow. It is also reasonable for the Fed to at least consider the impact of its hikes on the rest of the world, even though we all understand that it is basing its monetary policy on the needs of the U.S. economy.

A small hike in November can show its determination to restrain inflation, while allowing itself more time to assess the data. If the October employment report shows another month of modest of wage growth, it will provide solid evidence that it has brought wage growth down to a non-inflationary sustainable pace.

Unfortunately, the Fed will not have this report until after its meeting. There seems little risk in going with a smaller hike in November, and then take into account the October employment data, along with other data, in determining its course at future meetings.

 

[1] This is a very crude productivity measure. On the output side, the residential construction data includes some services related to mortgage issuance, which would not be produced by construction workers. The BLS measure of hours only counts payroll employment, excluding self-employed and likely also many workers who might work off the books.

Okay, I have not become an evangelical Christian, but I am still not ready to throw in the towel on the likelihood of sustained inflation. To be clear, there is no doubt that the September CPI was bad news.

You have to dig pretty deep in that report to find much evidence of inflation slowing. We knew some of the numbers would be bad by construction. BLS has done very good research showing how its rental indexes lag private indexes of marketed units. This means that even if rental inflation was slowing in September (this is what the private indexes show), the CPI index would still be reflecting the rapid increases we saw in the market indexes this spring.

Similarly, the health insurance index, which rose 2.1 percent in September, and has risen 28.2 percent over the last year, is based on the gap between insurers’ premiums and what they spend on care. This also lags considerably. The sharp rise in the index reflects a large drop in health care spending during the pandemic. This will likely be reversed in the months ahead, but in the meantime, this component is a big contributor to inflation in the CPI.

But having an explanation for the bad news doesn’t make it good news. We can reasonably expect inflation in the rental indexes to moderate and the health insurance index to turn negative, but for now they are still telling pretty bad stories.

The real disappointment in the September data is that we still have not seen much improvement in the areas where supply chain problems were big factors in pushing up inflation over the last year and a half. There were some good signs, but not much.

Used car prices fell 1.1 percent, but they are still up by more than 50 percent from the start of the pandemic. The appliance index fell 0.3 percent in September, its third consecutive decline. However, appliance prices were still up 13.3 percent from the pre-pandemic level. They had been falling before the pandemic. Apparel prices, which had also been trending downward before the pandemic, fell 0.3 percent, which left them up by 5.5 percent year-over-year (YOY).

Prices continued to rise in other areas where we had seen supply chain issues. Most notably, new vehicle prices rose 0.7 percent, putting their YOY increase at 9.4 percent. The index for car parts and equipment was up 0.8 percent in September, bringing its YOY rise to 13.4 percent year-over-year. And, the price of store-bought food increased 0.7 percent, putting the YOY rise at 13.0 percent.

In short, there was not much evidence of slowing inflation here. The picture looked pretty bad in most major sectors and also most of the minor ones.

Nonetheless, there are still reasons for thinking that inflation will not remain high going forward. My big three are:

  • Expectations
  • Import prices
  • Productivity

Expectations

Taking these in turn, the point on expectations is straightforward. The story of the 1970s inflation was that people came to expect inflation. This led workers to push for higher pay increases. Businesses were more likely to grant them, since they believed that they could quickly recover higher costs with higher prices. This made it harder to push inflation back down to more acceptable levels, since high rates of expected inflation effectively became self-perpetuating.

We have a very different story at present. Expectations of inflation, whether measured by surveys like the University of Michigan’s Consumer Sentiment Index or financial markets through breakeven inflation rates on indexed Treasury bonds, have come back down to pre-pandemic levels, after rising at the end of 2021 and start of this year. (It is worth noting that the even at their peak, inflation expectations were only up by around a percentage point from pre-pandemic levels. This was nothing like what we saw in the 1970s.)

The reasons for the drop can be debated. Perhaps the decline is a vote of confidence in the inflation-fighting commitment of the Fed. In the case of consumer sentiments, it’s likely that three months of falling gas prices played an important role. Whatever the cause, of the drop, the fact that people are not expecting high inflation to persist is undeniable.   

 

Related to this issue, we never saw a pattern of wage growth acceleration remotely comparable to what we saw in the 1970s. The pace of wage growth did increase sharply in 2021, even if we control for issues raised by changes in the composition of employment. However, since peaking at the end of the year, it has slowed sharply in 2022.

Taking my preferred measure, of annualizing the growth in wages from one three-month period to the next three-month period, wage growth peaked at a 6.1 percent annual rate at the start of this year. In the most recent three-month period (July, August, September) compared with the prior three months (April, May, June), wages grew at a 4.8 percent annual rate. That is too fast to be consistent with the Fed’s 2.0 percent inflation target, but the direction of change is clear, wage growth is slowing, not accelerating.

In fact, if we just look at the last two months, the average hourly wage has increased at a 3.6 percent annual rate. As I always point out, the monthly data are erratic and subject to revisions, so we surely would not want to put a lot of weight on these data just yet. Nonetheless, there is at least a possibility that they are accurate. A 3.6 percent pace of wage growth is in fact consistent with the Fed’s inflation target. Wages grew at a 3.4 percent rate in 2019, when inflation was comfortably below 2.0 percent.

In any case, it is clear that we are not seeing the pattern of accelerating wage growth, pushing inflation higher, that we saw in the 1970s. This should mean there is less urgency in pushing inflation down.

Import Prices

The Bureau of Labor Statistics released its report on September import and export prices the day after the CPI. It received almost no attention. This is unfortunate, because it does tell us a great deal about inflationary pressures facing the economy.

While the CPI was worse than expected, the import price data for September was better than expected. The overall import price index fell by 1.2 percent in September. This was driven largely by a 7.5 percent drop in the index for imported fuels, but even pulling this out, import prices dropped by 0.4 percent in September, the fifth straight monthly decline. This means that the prices for a wide range of items that we import, like clothes, cars, appliances, and thousands of other goods and services, are now falling.

This is a big deal. Since May, the non-fuel import price index has fallen by 2.0 percent. This is a 4.7 percent annual rate of decline. By contrast, in the years from May 2020 to May 2021, this index rose by 6.1 percent, and by 5.9 between May 2021 and May 2022. The story here is that the prices of a wide range of imported goods had been putting upward pressure on inflation until the spring of this year. With these prices now falling, imports should be an important factor restraining inflation in the near-term future.

It is also important to realize how important imports are to the economy. Non-oil imports came to $3,734 billion at an annualized rate in the second quarter of this year. This is equal to 14.8 percent of GDP. If the prices of items comprising 14.8 percent of GDP are now falling at a 4.7 percent annual rate, instead of rising at a 6.0 percent annual rate, that has to drastically improve the inflation picture. To be clear, we can’t assume that import prices will keep declining, and certainly not at their recent rate, but the inflationary pressure from rapidly rising import prices seems to be behind us. (The import price index prior to the pandemic had a slight downward trend.)

Even this switch from rapidly rising import prices to rapidly falling ones understates the impact on inflation. Shipping costs soared during the pandemic, as we tried to move a vastly increased quantity of goods, even as Covid was forcing shutdowns of ports and forcing many workers to stay home due to illness. One commonly used index increased almost ten-fold at its peak in September of 2021. It has now fallen back almost 70 percent from that peak, and it seems likely it will fall further.

Shipping costs are not included in the import price index. This means that the prices we pay for the goods we are importing are falling even more sharply than is indicated by the import price index. This should go far towards alleviating inflationary pressures.

Productivity

At least implicitly, productivity growth is a huge part of the inflation story. To simplify a bit, inflation will be equal to the rate of wage growth minus the rate of productivity growth. (This assumes profit shares remain constant, among other things.) This means that if we have wage growth of 3.5 percent, and productivity grows at a 1.5 percent annual rate, inflation will be 2.0 percent.

Higher rates of productivity growth mean that we can have more rapid wage growth without higher inflation. I had been noting an uptick in productivity growth through the fourth quarter of 2021, and argued that workplace innovations associated with the pandemic may have put us on a faster productivity growth path.

That hope vanished with the release of the productivity data from the first and second quarter of 2022. They showed annual rates of decline in productivity of 7.4 percent and 4.1 percent, respectively. Productivity data are notoriously erratic, so single quarter surges or declines are best ignored. I have also been skeptical of the drop in GDP reported for the first half of this year, believing that subsequent revisions may show the economy grew during this period.

But that aside, there can be little doubt that productivity growth in the first half of 2022 was terrible. There are two plausible explanations as to why productivity would suddenly decline. One is labor hoarding. The idea here is that companies are finding it difficult to hire and keep workers, so they in effect hire everyone they can and keep them on the payroll whether they need them or not. This is common behavior in a recession, especially with large companies and highly skilled workers.

I am skeptical of this labor hoarding explanation because it typically would be associated with a decline in the length of the average workweek. The idea would be that you keep workers on the payroll, but maybe you have them work 35 hours a week rather than 40, because you don’t need them for 40 hours. You may not need them for 35 hours either, but since you want to keep the worker, it’s necessary to give them something close to normal hours. (Presumably the employer is also paying for health insurance and other benefits.)

Anyhow, there is not much of a case for a big drop in the length of the workweek in the first half of 2022. There had been some decline in the average workweek in 2021. The length peaked at 35.0 hours in January of 2021 and then fell back to 34.8 hours by the fourth quarter. This would be consistent with a story where employers, unable to hire the workers they needed, worked their existing workforce more hours.

There is a somewhat further decline in the first half of 2022, but the average was 34.6 hours, which is still higher than the 34.4 hour average for 2019, before the pandemic. There is a similar story in most major sectors. This doesn’t rule out the possibility of labor hoarding, but it does seem odd that there would not be some decline in the length of the workweek.

The explanation that strikes me as more likely is that supply chain disruptions are proving to be major obstacles to normal production. This story can be best told with the construction sector.    

The combined categories in the National Income and Product Accounts of non-residential construction and residential construction (Table 1.1.6, Lines 10 and 13) fell 6.8 percent between the fourth quarter of 2019 and the second quarter of 2022. By contrast, the Bureau of Labor Statistics (BLS) index of aggregate hours for the construction sector rose 1.0 percent over this period. This would imply roughly a 7.8 percent decline in productivity over this ten-quarter period.[1]

It doesn’t seem plausible that either construction technology or the quality of labor in the industry could have deteriorated so much in such a short period of time. The more obvious explanation for a decline in productivity in construction is that many workers were effectively wasting their time waiting for parts or materials that were needed for them to do their jobs. If there is a comparable picture in many other workplaces, where supply chain issues keep workers from doing their jobs, then the decline in productivity in the first half of 2022 can make some sense.

The positive side of this story is that, if either the labor hoarding or supply chain explanation proves correct, then the drop in productivity reported for the first of 2022 is temporary and should be reversed in future quarters. Data available for the third quarter indicate that we should get some modest positive rate of productivity growth for the quarter.

This brings us back to the costs and inflation picture. The weak productivity performance in the first half of 2022 meant that businesses were seeing sharply higher costs. The data from the Bureau of Labor Statistics show that unit labor costs rose at annual rates of 12.7 percent and 10.2 percent, in the first and second quarters, respectively. Since the profit share was also above its pre-pandemic level, it seems businesses were having no problem passing on these costs in higher prices, but the data imply that they really were seeing sharply rising costs.

However, with productivity growth returning to a more normal pace, the pressure on costs will be far lower than it was in the first half of 2022. This means that a major source of inflationary pressure will have been removed.

Are We Out of the Woods on Inflation?

As a card-carrying member of Team Transitory, I know that my prognostications on inflation have to be viewed with some serious skepticism at this point, but I would urge people to just look at the data. The story on inflation expectations is clear, investors and consumers both anticipate that inflation will come down to pre-pandemic rates. In addition, wage growth has clearly slowed, not accelerated as the bad story would predict. Whether it has slowed to levels consistent with an acceptable rate of inflation remains to be seen.

Higher import prices had been a major factor pushing inflation higher in 2021 and the first five months of this year. Since May, they have been falling rapidly. The impact of this drop in prices is amplified by a huge reduction in shipping costs over this period. Instead of putting upward pressure on prices, these factors should allow for price declines on many items. (We already see evidence of this on items like appliances, with have been falling in price in recent months.)

Finally, we had a horrible story on productivity in the first half of 2022. The reported decline in productivity during the first two quarters meant enormous increases in costs for businesses, most or all of which seems to have been passed on in prices. The good news here is that we seem to be on at least a normal productivity growth path again in the third quarter. Whether it ends up being faster or slower than the pre-pandemic pace remains to be seen, but at least it will be positive.

For these reasons, we can anticipate that inflation will be much less of a problem in the rest of this year and in 2023 than it has been. Does this story mean the Fed should stop raising rates?

Given the September CPI, it would be difficult for the Fed to declare victory and end its hikes. But it can certainly slow the pace. We all know that the full impact of rate hikes takes time and we are just beginning to see the effect of the most recent hikes. It seems there is much more risk at this point of going too far than going too slow. It is also reasonable for the Fed to at least consider the impact of its hikes on the rest of the world, even though we all understand that it is basing its monetary policy on the needs of the U.S. economy.

A small hike in November can show its determination to restrain inflation, while allowing itself more time to assess the data. If the October employment report shows another month of modest of wage growth, it will provide solid evidence that it has brought wage growth down to a non-inflationary sustainable pace.

Unfortunately, the Fed will not have this report until after its meeting. There seems little risk in going with a smaller hike in November, and then take into account the October employment data, along with other data, in determining its course at future meetings.

 

[1] This is a very crude productivity measure. On the output side, the residential construction data includes some services related to mortgage issuance, which would not be produced by construction workers. The BLS measure of hours only counts payroll employment, excluding self-employed and likely also many workers who might work off the books.

There was not much positive news in the September CPI report that came out yesterday. So, since I don’t have anything good to say on inflation, let’s change the topic to health care. (Actually, there is some basis for optimism on inflation, which I will get to in the next couple of days.)

Anyhow, apart from the issues with inflation, there is an important story with health care that has gotten little attention. Health care spending has slowed sharply from its pre-pandemic path. In fact, measured as a share of GDP it was actually lower in the second quarter of 2022 than in 2019, as shown below.[1]

 

Source: Bureau of Economic Analysis and author’s calculations, see text.

By my calculations, health care spending as share of GDP was 0.7 percent of GDP less in the second quarter of 2022 than it had been in 2019. This is especially impressive because the Centers for Medicare and Medicaid Services (CMS) had projected that the health care spending share of GDP would rise by roughly 0.2 percentage points a year. That puts current spending roughly 1.3 percentage points below what CMS had projected before the pandemic.

This is a big deal. This falloff in spending corresponds to $325 billion annually in the current economy. That comes to roughly $1,000 a year per person, or $4,000 for a family of four, that is freed up for other purposes.

Of course, not all this money will show up in family budgets. Some of this is savings to the government on health care programs like Medicare and Medicaid. Some of this will be savings to employers, who presumably are paying somewhat less to insure their workers than they would have if health care spending had followed its projected path. But, some of this translates into savings to households who are paying less for medical services and insurance than would have been the case if health care costs had stayed on its pre-pandemic course.

It is important to recognize that the savings on health care is not all a positive story. One major source of savings is the million plus people who have died from COVID-19. The people who died from COVID-19 were on average older and less healthy than the population as a whole, and therefore likely received more medical care than most people. Their deaths meant less demand for medical services, but this is not how we want to save money.

It may also be the case that people are still getting fewer services than they might have before the pandemic. For example, spending on visits to dentists fell sharply during the pandemic for obvious reasons, but it seems to be largely on track at present.

There may be some efficiencies in the provision of services, which allow people to get the same quality care at a lower cost. For example, the use of telemedicine has exploded since the pandemic. A survey conducted by the Department of Health and Human Services found that one-in-four people reported having a remote visit with a health care provider in the prior four weeks. Since most people will not visit any health care provider in a random four-week period, this figure indicates that a very large share of the people needing health care are now taking advantage of remote visits. Home therapeutic devices may also substitute for visits to doctors or other health care professionals.

There is a possibility that these substitutions are jeopardizing the quality of care. We will only find this out after more time, if we discover a deterioration in health status. But, it is important to remember that what we value is health, not visits to the doctor or various medical tests and procedures. If we can have fewer services, and not have a deterioration in the public’s health, that is a positive for society.

This is not the first time that a sharp slowing in health care spending has passed unnoticed. The growth of health care spending slowed sharply after the passage of “Obamacare” in 2010. In 2009, the CMS projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.

For some reason, the Democrats never took credit for this slowing in health care cost growth. While Obamacare surely was not the only factor leading to slower spending growth, it almost certainly played a role. And, there is no doubt that if spending growth had accelerated, even for reasons that had nothing to do with Obamacare, the Republicans and the media would have hyped this fact endlessly.

Anyhow, the reduction in the share of GDP going to health care spending since the start of the pandemic is a big deal. It deserves more attention than it has received.

[1] I know these numbers are slightly higher than what the CMS report for health care spending as a share of GDP. I assume this is due to some double counting, where I may have some government health care spending, which also shows up as consumption. For those wanting to check, I added lines 64, 119, 170, and 273 from NIPA Table 2.4.5U and line 32 from NIPA Table 3.12U. These are therapeutic equipment, pharmaceuticals and other medical products, health care services, and net health care insurance. Line 32 is the government spending on Medicaid and other health care provision. While my sum for this spending is obviously somewhat higher than the share CMS shows, which was 17.6 percent of GDP for 2019, presumably the changes since 2019 are following medical spending as defined by CMS reasonably closely.  

 

There was not much positive news in the September CPI report that came out yesterday. So, since I don’t have anything good to say on inflation, let’s change the topic to health care. (Actually, there is some basis for optimism on inflation, which I will get to in the next couple of days.)

Anyhow, apart from the issues with inflation, there is an important story with health care that has gotten little attention. Health care spending has slowed sharply from its pre-pandemic path. In fact, measured as a share of GDP it was actually lower in the second quarter of 2022 than in 2019, as shown below.[1]

 

Source: Bureau of Economic Analysis and author’s calculations, see text.

By my calculations, health care spending as share of GDP was 0.7 percent of GDP less in the second quarter of 2022 than it had been in 2019. This is especially impressive because the Centers for Medicare and Medicaid Services (CMS) had projected that the health care spending share of GDP would rise by roughly 0.2 percentage points a year. That puts current spending roughly 1.3 percentage points below what CMS had projected before the pandemic.

This is a big deal. This falloff in spending corresponds to $325 billion annually in the current economy. That comes to roughly $1,000 a year per person, or $4,000 for a family of four, that is freed up for other purposes.

Of course, not all this money will show up in family budgets. Some of this is savings to the government on health care programs like Medicare and Medicaid. Some of this will be savings to employers, who presumably are paying somewhat less to insure their workers than they would have if health care spending had followed its projected path. But, some of this translates into savings to households who are paying less for medical services and insurance than would have been the case if health care costs had stayed on its pre-pandemic course.

It is important to recognize that the savings on health care is not all a positive story. One major source of savings is the million plus people who have died from COVID-19. The people who died from COVID-19 were on average older and less healthy than the population as a whole, and therefore likely received more medical care than most people. Their deaths meant less demand for medical services, but this is not how we want to save money.

It may also be the case that people are still getting fewer services than they might have before the pandemic. For example, spending on visits to dentists fell sharply during the pandemic for obvious reasons, but it seems to be largely on track at present.

There may be some efficiencies in the provision of services, which allow people to get the same quality care at a lower cost. For example, the use of telemedicine has exploded since the pandemic. A survey conducted by the Department of Health and Human Services found that one-in-four people reported having a remote visit with a health care provider in the prior four weeks. Since most people will not visit any health care provider in a random four-week period, this figure indicates that a very large share of the people needing health care are now taking advantage of remote visits. Home therapeutic devices may also substitute for visits to doctors or other health care professionals.

There is a possibility that these substitutions are jeopardizing the quality of care. We will only find this out after more time, if we discover a deterioration in health status. But, it is important to remember that what we value is health, not visits to the doctor or various medical tests and procedures. If we can have fewer services, and not have a deterioration in the public’s health, that is a positive for society.

This is not the first time that a sharp slowing in health care spending has passed unnoticed. The growth of health care spending slowed sharply after the passage of “Obamacare” in 2010. In 2009, the CMS projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.

For some reason, the Democrats never took credit for this slowing in health care cost growth. While Obamacare surely was not the only factor leading to slower spending growth, it almost certainly played a role. And, there is no doubt that if spending growth had accelerated, even for reasons that had nothing to do with Obamacare, the Republicans and the media would have hyped this fact endlessly.

Anyhow, the reduction in the share of GDP going to health care spending since the start of the pandemic is a big deal. It deserves more attention than it has received.

[1] I know these numbers are slightly higher than what the CMS report for health care spending as a share of GDP. I assume this is due to some double counting, where I may have some government health care spending, which also shows up as consumption. For those wanting to check, I added lines 64, 119, 170, and 273 from NIPA Table 2.4.5U and line 32 from NIPA Table 3.12U. These are therapeutic equipment, pharmaceuticals and other medical products, health care services, and net health care insurance. Line 32 is the government spending on Medicaid and other health care provision. While my sum for this spending is obviously somewhat higher than the share CMS shows, which was 17.6 percent of GDP for 2019, presumably the changes since 2019 are following medical spending as defined by CMS reasonably closely.  

 

No, that’s not what the NYT told us. Its mind-reading reporters instead told readers:

“To date, Mr. Macron has been loath to tax the oil giants’ windfall profits, worrying it would tarnish the country’s investment appeal, and preferring instead that companies make what he termed a ‘contribution.'”

The NYT, of course, does not know if Macron is really “worrying” about damaging France’s appeal to investors. This may be what Macron says, but [pro tip here] politicians are not always truthful about their motives.

There are undoubtedly many people in France who would claim that Macron is beholden to the rich and does not want to tax the oil companies’ windfall profits because he doesn’t want to hurt his friends. The NYT would never consider attributing that motive to Macron as an objective fact, although it may quote a political opponent making this complaint.

In the same vein, the paper should not attribute Macron’s alleged concerns about hurting France’s investment climate as an objective fact. It can simply report his or others’ statements to this effect.

No, that’s not what the NYT told us. Its mind-reading reporters instead told readers:

“To date, Mr. Macron has been loath to tax the oil giants’ windfall profits, worrying it would tarnish the country’s investment appeal, and preferring instead that companies make what he termed a ‘contribution.'”

The NYT, of course, does not know if Macron is really “worrying” about damaging France’s appeal to investors. This may be what Macron says, but [pro tip here] politicians are not always truthful about their motives.

There are undoubtedly many people in France who would claim that Macron is beholden to the rich and does not want to tax the oil companies’ windfall profits because he doesn’t want to hurt his friends. The NYT would never consider attributing that motive to Macron as an objective fact, although it may quote a political opponent making this complaint.

In the same vein, the paper should not attribute Macron’s alleged concerns about hurting France’s investment climate as an objective fact. It can simply report his or others’ statements to this effect.

What the Cluck Are You Doing on October 25th?

Dear Beat the Press Readers,

This is Dawn, Dean’s colleague at the Center for Economic and Policy Research, hijacking Dean’s blog to invite you to a special event on Tuesday, October 25, 2022, at 7 PM ET that we’re calling “Winner Winner Chicken Dinner.”

Dean and the Institute for New Economic Thinking partnered to produce a video series outlining how we can “Uncluck” America. Well, except they didn’t use the term “Uncluck” – we’re sure you can use your imagination to figure out what flagged them as NSFW and prevented us from sharing these videos widely. Yep, they were that smoking hot. And finger-lickin good.

Dean is hosting a live virtual screening of Episode 1: “How to Unf★ck Intellectual Property.” Afterward, he will answer your questions and explain further how, if everyone listened to Dean, there would be a chicken in every pot.

This event is a fundraiser to support Dean’s great work. You can sponsor this event at whatever level you choose (dinner provided by you):

  • The Inflation Special: Can of Chicken Noodle Soup – $10
  • The Happy Hour Deal: Basket of Hot Wings – $25
  • The Family Meal: Large Fried Chicken Bucket- $50
  • The Chicken Dinner: Chicken Cordon Bleu – $100
  • The Fat Cat: Champagne, Caviar, and Duck Confit – $1000

And the good news? All are vegan-friendly!

Click HERE to register

Thanks for your support of Dean’s work over the years. We all know that America has been “clucked” for a long time. It’s time we unrig the economy so that people, and chickens, get a fair deal.

Now, back to your regularly scheduled program…

Dear Beat the Press Readers,

This is Dawn, Dean’s colleague at the Center for Economic and Policy Research, hijacking Dean’s blog to invite you to a special event on Tuesday, October 25, 2022, at 7 PM ET that we’re calling “Winner Winner Chicken Dinner.”

Dean and the Institute for New Economic Thinking partnered to produce a video series outlining how we can “Uncluck” America. Well, except they didn’t use the term “Uncluck” – we’re sure you can use your imagination to figure out what flagged them as NSFW and prevented us from sharing these videos widely. Yep, they were that smoking hot. And finger-lickin good.

Dean is hosting a live virtual screening of Episode 1: “How to Unf★ck Intellectual Property.” Afterward, he will answer your questions and explain further how, if everyone listened to Dean, there would be a chicken in every pot.

This event is a fundraiser to support Dean’s great work. You can sponsor this event at whatever level you choose (dinner provided by you):

  • The Inflation Special: Can of Chicken Noodle Soup – $10
  • The Happy Hour Deal: Basket of Hot Wings – $25
  • The Family Meal: Large Fried Chicken Bucket- $50
  • The Chicken Dinner: Chicken Cordon Bleu – $100
  • The Fat Cat: Champagne, Caviar, and Duck Confit – $1000

And the good news? All are vegan-friendly!

Click HERE to register

Thanks for your support of Dean’s work over the years. We all know that America has been “clucked” for a long time. It’s time we unrig the economy so that people, and chickens, get a fair deal.

Now, back to your regularly scheduled program…

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