Kevin Erdmann argued in a Washington Post column on Thursday that the main problem with U.S. housing policy is over-restrictive lending rules from Fannie Mae and Freddie Mac. While there may be some issues with current policy being overly restrictive, that does not explain the collapse of the housing prices in 2007-2009, nor the current inadequate supply of housing.
The Atlanta example Erdmann uses in his piece is very helpful in making these points. Erdmann says there was no bubble in Atlanta’s house prices and therefore there was nothing to burst. He attributes the sharp decline in house prices in 2007-2009, and especially in the bottom tier of the housing market, to tighter credit requirements from Fannie and Freddie.
However, the data do support the case that there was a housing bubble building in the decade prior to 2007, especially in the lower tier of the housing market. Here’s the inflation-adjusted Case-Schiller index for the lower tier of the housing market (bottom third) from 1992 to the present.
As can be seen, there is a sharp rise in the index from 1996 to the middle of 2005. At that point the index levels off and then starts falling rapidly in 2007. In the price run-up, inflation-adjusted house prices for the bottom third of the market rose by 38.8 percent. This contrasts with rents in Atlanta, which rose at almost exactly the same rate as overall inflation.
This had been the general pattern for house prices in the period before the housing bubble. Nationwide house prices rose roughly in step with the rate of inflation from 1896 to 1996. There were enormous divergences across regions, with prices hugely outpacing inflation in places like New York and San Francisco, while falling far behind inflation in Detroit, St. Louis and many small cities and towns.
Erdmann points out that house prices in the lower tier of housing fell much more than the price of more expensive houses in Atlanta in the crash. This is true, but house prices at the higher end rose by much less in the bubble. Prices in the top tier rose by 27 percent in real terms over the period from 1996 to the peak in 2005.
This was still a bubble, given the trend in rents, but considerably smaller than the one in the lower tier in Atlanta. For that reason it is not surprising that there would have been a sharper fall in house prices in the bottom tier.
The other point worth noting in this graph is that house prices for the bottom tier of housing in Atlanta had largely recovered their bubble peaks just before the pandemic. Since the pandemic, real house prices for the bottom tier have actually exceeded their bubble peaks. This is true for the higher tiers as well.
This suggests that builders have serious incentive to be building lots of housing in Atlanta and elsewhere, but for some reason they are not. The tightening of credit standards by Fannie and Freddie cannot explain this failure to build more housing, since that should be reflected in house prices, which it clearly is not.
There is one other point worth noting about Erdmann’s point on Fannie and Freddie credit standards. The average credit score has risen substantially over the last two decades. This means that using a fixed credit score as a cutoff would imply a smaller share of potential borrowers are being excluded. It also would have been helpful if Erdmann had included data on mortgage issuance in the 1990s before credit standards had been relaxed and the bubble had begun to build.
In any case, this point is secondary. If excessively high credit standards were the factor that was really clogging the housing market, we should not be seeing real house prices at above their bubble peaks. These prices give builders plenty of incentive to build, but for some reason they are not constructing housing at anything like the bubble pace, or even the pre-bubble pace.
Kevin Erdmann argued in a Washington Post column on Thursday that the main problem with U.S. housing policy is over-restrictive lending rules from Fannie Mae and Freddie Mac. While there may be some issues with current policy being overly restrictive, that does not explain the collapse of the housing prices in 2007-2009, nor the current inadequate supply of housing.
The Atlanta example Erdmann uses in his piece is very helpful in making these points. Erdmann says there was no bubble in Atlanta’s house prices and therefore there was nothing to burst. He attributes the sharp decline in house prices in 2007-2009, and especially in the bottom tier of the housing market, to tighter credit requirements from Fannie and Freddie.
However, the data do support the case that there was a housing bubble building in the decade prior to 2007, especially in the lower tier of the housing market. Here’s the inflation-adjusted Case-Schiller index for the lower tier of the housing market (bottom third) from 1992 to the present.
As can be seen, there is a sharp rise in the index from 1996 to the middle of 2005. At that point the index levels off and then starts falling rapidly in 2007. In the price run-up, inflation-adjusted house prices for the bottom third of the market rose by 38.8 percent. This contrasts with rents in Atlanta, which rose at almost exactly the same rate as overall inflation.
This had been the general pattern for house prices in the period before the housing bubble. Nationwide house prices rose roughly in step with the rate of inflation from 1896 to 1996. There were enormous divergences across regions, with prices hugely outpacing inflation in places like New York and San Francisco, while falling far behind inflation in Detroit, St. Louis and many small cities and towns.
Erdmann points out that house prices in the lower tier of housing fell much more than the price of more expensive houses in Atlanta in the crash. This is true, but house prices at the higher end rose by much less in the bubble. Prices in the top tier rose by 27 percent in real terms over the period from 1996 to the peak in 2005.
This was still a bubble, given the trend in rents, but considerably smaller than the one in the lower tier in Atlanta. For that reason it is not surprising that there would have been a sharper fall in house prices in the bottom tier.
The other point worth noting in this graph is that house prices for the bottom tier of housing in Atlanta had largely recovered their bubble peaks just before the pandemic. Since the pandemic, real house prices for the bottom tier have actually exceeded their bubble peaks. This is true for the higher tiers as well.
This suggests that builders have serious incentive to be building lots of housing in Atlanta and elsewhere, but for some reason they are not. The tightening of credit standards by Fannie and Freddie cannot explain this failure to build more housing, since that should be reflected in house prices, which it clearly is not.
There is one other point worth noting about Erdmann’s point on Fannie and Freddie credit standards. The average credit score has risen substantially over the last two decades. This means that using a fixed credit score as a cutoff would imply a smaller share of potential borrowers are being excluded. It also would have been helpful if Erdmann had included data on mortgage issuance in the 1990s before credit standards had been relaxed and the bubble had begun to build.
In any case, this point is secondary. If excessively high credit standards were the factor that was really clogging the housing market, we should not be seeing real house prices at above their bubble peaks. These prices give builders plenty of incentive to build, but for some reason they are not constructing housing at anything like the bubble pace, or even the pre-bubble pace.
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In reporting on Donald Trump’s plan to put Elon Musk in charge of a commission to ferret out waste in government, it probably would have been worth noting that there is already an agency dedicated to this purpose. The Government Accountability Office (GAO) has been in existence for over 100 years. It is non-partisan and has extensive experience in uncovering government waste.
It also would have been worth noting that having efforts to uncover massive waste is an old joke in Washington politics. Jimmy Carter claimed he would eliminate waste with his zero-based budgeting when he took office in 1977. It was quickly abandoned as too chaotic.
Bill Clinton had an effort under his administration when he put Vice-President Al Gore in charge of “reinventing government.” It may not have accomplished much but kept Al Gore out of trouble.
In addition to mentioning some of this history, it also is worth noting that there would be an extraordinary conflict of interest created by putting someone with many large government contracts and subsidies in charge of an effort to examine government efficiency. This conflict of interest problem is especially large since Trump is committing to getting rid of most of the top civil service officials, which would presumably include the leadership of the GAO. This means that the non-partisan agency created to prevent government corruption will in effect be blocked from policing Trump and Musk’s efforts to “improve” government efficiency.
In reporting on Donald Trump’s plan to put Elon Musk in charge of a commission to ferret out waste in government, it probably would have been worth noting that there is already an agency dedicated to this purpose. The Government Accountability Office (GAO) has been in existence for over 100 years. It is non-partisan and has extensive experience in uncovering government waste.
It also would have been worth noting that having efforts to uncover massive waste is an old joke in Washington politics. Jimmy Carter claimed he would eliminate waste with his zero-based budgeting when he took office in 1977. It was quickly abandoned as too chaotic.
Bill Clinton had an effort under his administration when he put Vice-President Al Gore in charge of “reinventing government.” It may not have accomplished much but kept Al Gore out of trouble.
In addition to mentioning some of this history, it also is worth noting that there would be an extraordinary conflict of interest created by putting someone with many large government contracts and subsidies in charge of an effort to examine government efficiency. This conflict of interest problem is especially large since Trump is committing to getting rid of most of the top civil service officials, which would presumably include the leadership of the GAO. This means that the non-partisan agency created to prevent government corruption will in effect be blocked from policing Trump and Musk’s efforts to “improve” government efficiency.
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Peter Coy had a somewhat bizarre column in the New York Times yesterday warning us that even though we have gotten rid of most of the pandemic inflation with little rise in unemployment, “any further decline in inflation may not be as painless.” The column highlights a new paper by Gauti Eggertsson, one of the nation’s leading macroeconomists.
Whether or not Eggertsson’s theoretical analysis is correct, it is beside the point in terms of the current economy. We don’t need any further decline in inflation because we have already hit the Fed’s 2.0 percent target.
If it seems I am getting ahead of the game, you have to look at the data more closely. It’s true that the year over year rate in the Personal Consumption Expenditure deflator (PCE) stands a 2.5 percent, which is above the Fed’s 2.0 percent target, but we can look a bit around the corner here.
We know with virtual certainty that the rental indexes (rent proper and owners’ equivalent rent) will be showing much lower inflation in future months. The reason we can be certain of this fact is that the Bureau of Labor Statistics publishes a “New Tenant Rent Index” which tracks rents in units that change hands.
This index leads the overall rent indexes, since they are dominated by leases that could have been signed 1-3 years ago. These leases eventually end and are negotiated in ways that reflect current market conditions.
This New Tenant Rent Index has been showing sharply lower rental inflation. In fact over the last year it actually fell by 1.1 percent. This index is relatively new, so we can’t say with much precision how quickly the overall rental indexes will adjust to it or the extent to which they will adjust, but we can be quite certain that rental inflation will continue to slow, as it has for over a year.
Year over year rental inflation is currently 5.2 percent. Suppose it falls to 2.0 percent. Since these indexes comprise roughly 15 percent of the PCE deflation, this drop of 3.2 percentage points would lower the inflation rate by roughly 0.5 percentage points, bringing us to the Fed’s 2.0 percent inflation target.
Even if we take a much more modest scenario and say rental inflation falls to 3.0 percent, that still gets us to 2.2 percent, which is close enough to 2.0 percent that no serious person would spend a lot of time worrying about the difference.
Still not convinced? The annualized inflation rate over the last three months was 0.9 percent. The annualized inflation rate for the core index was 1.7 percent.
This inflation battle is over and won. Eggertsson’s work may have some useful insights for the next war on inflation, but it’s too late to be of any help in the last one.
Peter Coy had a somewhat bizarre column in the New York Times yesterday warning us that even though we have gotten rid of most of the pandemic inflation with little rise in unemployment, “any further decline in inflation may not be as painless.” The column highlights a new paper by Gauti Eggertsson, one of the nation’s leading macroeconomists.
Whether or not Eggertsson’s theoretical analysis is correct, it is beside the point in terms of the current economy. We don’t need any further decline in inflation because we have already hit the Fed’s 2.0 percent target.
If it seems I am getting ahead of the game, you have to look at the data more closely. It’s true that the year over year rate in the Personal Consumption Expenditure deflator (PCE) stands a 2.5 percent, which is above the Fed’s 2.0 percent target, but we can look a bit around the corner here.
We know with virtual certainty that the rental indexes (rent proper and owners’ equivalent rent) will be showing much lower inflation in future months. The reason we can be certain of this fact is that the Bureau of Labor Statistics publishes a “New Tenant Rent Index” which tracks rents in units that change hands.
This index leads the overall rent indexes, since they are dominated by leases that could have been signed 1-3 years ago. These leases eventually end and are negotiated in ways that reflect current market conditions.
This New Tenant Rent Index has been showing sharply lower rental inflation. In fact over the last year it actually fell by 1.1 percent. This index is relatively new, so we can’t say with much precision how quickly the overall rental indexes will adjust to it or the extent to which they will adjust, but we can be quite certain that rental inflation will continue to slow, as it has for over a year.
Year over year rental inflation is currently 5.2 percent. Suppose it falls to 2.0 percent. Since these indexes comprise roughly 15 percent of the PCE deflation, this drop of 3.2 percentage points would lower the inflation rate by roughly 0.5 percentage points, bringing us to the Fed’s 2.0 percent inflation target.
Even if we take a much more modest scenario and say rental inflation falls to 3.0 percent, that still gets us to 2.2 percent, which is close enough to 2.0 percent that no serious person would spend a lot of time worrying about the difference.
Still not convinced? The annualized inflation rate over the last three months was 0.9 percent. The annualized inflation rate for the core index was 1.7 percent.
This inflation battle is over and won. Eggertsson’s work may have some useful insights for the next war on inflation, but it’s too late to be of any help in the last one.
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There continues to be a debate about the extent to which “price-gouging” or “greedflation” has been responsible for the rise in prices since the pandemic. We can debate the extent to which companies were able to take advantage of monopoly power during the pandemic, but whatever the cause, it is clear that the profit share of corporate income has risen from before the pandemic, as shown in the graph below.
Source: Bureau of Economic Analysis.
In the four quarters before the pandemic, the profit share averaged 22.7 percent of the net income generated in the corporate sector.[1] It rose to 26.6 percent in the second quarter of 2022, and has since fallen back somewhat to 24.3 percent in the second quarter of 2024.
This measure of profits includes the profits earned by the regional Federal Reserve Banks. Since that money is mostly refunded to the Treasury, it arguably should not be included in a measure of corporate profits.[2] In 2019 the profits share averaged 22.0 percent of net income, excluding the profits of the Federal Reserve Banks. This share peaked at 26.2 percent in the fourth quarter of 2022, it has edged down to 25.3 percent in the most recent quarter. (The regional Federal Reserve Banks are currently losing money as a result of higher interest rates, so the profit share is higher when these loses are excluded.)
By either measure the profit share in the most recent quarter is higher than before the pandemic. Using the first measure, the share has increased by 1.6 percentage points from the four quarters before the pandemic. By the measure that excludes the profits of Federal Reserve Banks, the profit share has risen by 3.3 percentage points.
We can argue whether we want to describe this shift from labor to capital as “big” or “small.” It clearly does not explain the bulk of the inflation we have seen since the pandemic. Inflation as measured by the CPI has been 20.9 percent since the start of the pandemic. That means the rise in profit shares, using the measure that excludes profits from the Federal Reserve Banks, explains a bit more than 15 percent of the inflation we saw.
On the other hand, the impact looks considerably more important if we compare it to real wage growth over this period. Real hourly wages have risen just 1.6 percent since the pandemic. If the profit shares had remained constant over the last four and a half years, wages would be roughly 3.3 percent higher than they are now, which would translate into real wages being roughly 3.3 percent higher. That would triple the amount of real wage growth we have seen over this period. (This is a crude calculation, since some items in the consumption basket, most notably rental housing, are not primarily produced by the corporate sector.)
In short, we can debate the dynamics of inflation and the shift from wages to profits in the pandemic. But the fact that there was a substantial shift is difficult to dispute.
There is one important qualification to this story. There has been an unusually large statistical discrepancy in the GDP accounts in recent quarters, rising to 2.7 percent of GDP in the second quarter of 2024 (NIPA Table 1.7.5., Line 34). The statistical discrepancy is the gap between GDP as measured on the output side and GDP as measured on the income side.
In principle, these two numbers should be equal, in the same way that if we counted people starting from the left side of the room we should end up with the same number as if we counted people starting from the right side of the room. As a practical matter, in a $27 trillion economy, they will never come out exactly the same.
As it stands, the output side measure is considerably higher than the income side measure. It may turn out that with future revisions, the output side measure is revised down, and the income side measure proves to be closer to the mark.
However, it may also turn out to be the case that the income side measure is seriously under-estimated and revised up to a level close to the output measure. In that case, the balance between profits and labor compensation could be affected by future revisions. To take an extreme case, if the full statistical discrepancy was found to be an undercount of labor income, then the reported rise in the profit share would largely disappear.
To be clear, assuming that all the gap was an undercount on the income side, and this was in turn entirely an undercounting of labor compensation, would be very extreme and unlikely. But it is important to note that the picture may look different when we get revisions to the data, both this month and in subsequent years.
In the meantime, we have to work with the data we have. And these data show there was a substantial redistribution from labor to capital in the period since the pandemic hit.
Addendum: After posting this note, I realized I should have deducted the profits of Federal Reserve Banks from the denominator. This would have raised the profit share in 2019 by 0.1 pp to 22.1 percent and lowered in the most recent quarter by 0.2 pp to 25.1 percent. That would make the rise in profit shares 3.0 percentage points instead of 3.3 percentage points.
[1] This calculation takes net operating surplus (profits, interest, and business transfers), NIPA Table 1.14, Line 24 over the sum of net operating surplus and labor compensation, NIPA Table 1.14, Line 20.
[2] The Federal Reserve Bank profits are taken from NIPA Table 6.16D, Line 11.
There continues to be a debate about the extent to which “price-gouging” or “greedflation” has been responsible for the rise in prices since the pandemic. We can debate the extent to which companies were able to take advantage of monopoly power during the pandemic, but whatever the cause, it is clear that the profit share of corporate income has risen from before the pandemic, as shown in the graph below.
Source: Bureau of Economic Analysis.
In the four quarters before the pandemic, the profit share averaged 22.7 percent of the net income generated in the corporate sector.[1] It rose to 26.6 percent in the second quarter of 2022, and has since fallen back somewhat to 24.3 percent in the second quarter of 2024.
This measure of profits includes the profits earned by the regional Federal Reserve Banks. Since that money is mostly refunded to the Treasury, it arguably should not be included in a measure of corporate profits.[2] In 2019 the profits share averaged 22.0 percent of net income, excluding the profits of the Federal Reserve Banks. This share peaked at 26.2 percent in the fourth quarter of 2022, it has edged down to 25.3 percent in the most recent quarter. (The regional Federal Reserve Banks are currently losing money as a result of higher interest rates, so the profit share is higher when these loses are excluded.)
By either measure the profit share in the most recent quarter is higher than before the pandemic. Using the first measure, the share has increased by 1.6 percentage points from the four quarters before the pandemic. By the measure that excludes the profits of Federal Reserve Banks, the profit share has risen by 3.3 percentage points.
We can argue whether we want to describe this shift from labor to capital as “big” or “small.” It clearly does not explain the bulk of the inflation we have seen since the pandemic. Inflation as measured by the CPI has been 20.9 percent since the start of the pandemic. That means the rise in profit shares, using the measure that excludes profits from the Federal Reserve Banks, explains a bit more than 15 percent of the inflation we saw.
On the other hand, the impact looks considerably more important if we compare it to real wage growth over this period. Real hourly wages have risen just 1.6 percent since the pandemic. If the profit shares had remained constant over the last four and a half years, wages would be roughly 3.3 percent higher than they are now, which would translate into real wages being roughly 3.3 percent higher. That would triple the amount of real wage growth we have seen over this period. (This is a crude calculation, since some items in the consumption basket, most notably rental housing, are not primarily produced by the corporate sector.)
In short, we can debate the dynamics of inflation and the shift from wages to profits in the pandemic. But the fact that there was a substantial shift is difficult to dispute.
There is one important qualification to this story. There has been an unusually large statistical discrepancy in the GDP accounts in recent quarters, rising to 2.7 percent of GDP in the second quarter of 2024 (NIPA Table 1.7.5., Line 34). The statistical discrepancy is the gap between GDP as measured on the output side and GDP as measured on the income side.
In principle, these two numbers should be equal, in the same way that if we counted people starting from the left side of the room we should end up with the same number as if we counted people starting from the right side of the room. As a practical matter, in a $27 trillion economy, they will never come out exactly the same.
As it stands, the output side measure is considerably higher than the income side measure. It may turn out that with future revisions, the output side measure is revised down, and the income side measure proves to be closer to the mark.
However, it may also turn out to be the case that the income side measure is seriously under-estimated and revised up to a level close to the output measure. In that case, the balance between profits and labor compensation could be affected by future revisions. To take an extreme case, if the full statistical discrepancy was found to be an undercount of labor income, then the reported rise in the profit share would largely disappear.
To be clear, assuming that all the gap was an undercount on the income side, and this was in turn entirely an undercounting of labor compensation, would be very extreme and unlikely. But it is important to note that the picture may look different when we get revisions to the data, both this month and in subsequent years.
In the meantime, we have to work with the data we have. And these data show there was a substantial redistribution from labor to capital in the period since the pandemic hit.
Addendum: After posting this note, I realized I should have deducted the profits of Federal Reserve Banks from the denominator. This would have raised the profit share in 2019 by 0.1 pp to 22.1 percent and lowered in the most recent quarter by 0.2 pp to 25.1 percent. That would make the rise in profit shares 3.0 percentage points instead of 3.3 percentage points.
[1] This calculation takes net operating surplus (profits, interest, and business transfers), NIPA Table 1.14, Line 24 over the sum of net operating surplus and labor compensation, NIPA Table 1.14, Line 20.
[2] The Federal Reserve Bank profits are taken from NIPA Table 6.16D, Line 11.
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Edward Glaeser had an interesting column in the NYT this morning which offered some useful suggestions for increasing housing construction and reducing rents. However, in making his case he does get the recent course of rental inflation seriously wrong.
The piece tells readers:
“It will take a forceful solution to address such a big problem. Nominal rents have risen by 6.5 percent a year since the start of the Biden administration and continue to surge even while overall inflation is dropping.”
Rents rose rapidly in 2021-2023 as tens of millions of workers, who previously had to go to an office five days a week, suddenly had the option to work from home. These people both needed more space for a home office and had the money to pay for it, since they were saving thousands of dollars a year on commuting costs, as well as hundreds of hours of commuting time.
But this surge ended in 2022. With demand leveling off, and housing supply increasing as supply chain problems eased, the rental market stabilized. This is missed in the Consumer Price Index’s (CPI) rental indexes, since it is largely driven by leases that might have been signed a year or two in the past.
The Bureau of Labor Statistics has a separate index that measures inflation in rental units that change hands. This index is a better measure of current market conditions. It leads the overall CPI rental indexes since eventually leases roll over and reflect the current market rents.
Source: Bureau of Labor Statistics.
As can be seen, the new tenant rent index rose sharply in 2021 and peaked at almost 13.0 percent in the second quarter of 2022. Rental inflation in this index then declined rapidly and actually turned negative in the most recent quarter.
While rents may not actually decline in the overall CPI rental indexes, it is clear that rental inflation will be falling sharply and could get close to zero in the quarters ahead. That does not change the underlying issue raised by Glaeser. Housing costs are too high, and the main culprit is an inadequate supply of housing. But we should be clear that in the near-term future we will get some good news on rents, even if will not be good enough to solve our housing problems.
Edward Glaeser had an interesting column in the NYT this morning which offered some useful suggestions for increasing housing construction and reducing rents. However, in making his case he does get the recent course of rental inflation seriously wrong.
The piece tells readers:
“It will take a forceful solution to address such a big problem. Nominal rents have risen by 6.5 percent a year since the start of the Biden administration and continue to surge even while overall inflation is dropping.”
Rents rose rapidly in 2021-2023 as tens of millions of workers, who previously had to go to an office five days a week, suddenly had the option to work from home. These people both needed more space for a home office and had the money to pay for it, since they were saving thousands of dollars a year on commuting costs, as well as hundreds of hours of commuting time.
But this surge ended in 2022. With demand leveling off, and housing supply increasing as supply chain problems eased, the rental market stabilized. This is missed in the Consumer Price Index’s (CPI) rental indexes, since it is largely driven by leases that might have been signed a year or two in the past.
The Bureau of Labor Statistics has a separate index that measures inflation in rental units that change hands. This index is a better measure of current market conditions. It leads the overall CPI rental indexes since eventually leases roll over and reflect the current market rents.
Source: Bureau of Labor Statistics.
As can be seen, the new tenant rent index rose sharply in 2021 and peaked at almost 13.0 percent in the second quarter of 2022. Rental inflation in this index then declined rapidly and actually turned negative in the most recent quarter.
While rents may not actually decline in the overall CPI rental indexes, it is clear that rental inflation will be falling sharply and could get close to zero in the quarters ahead. That does not change the underlying issue raised by Glaeser. Housing costs are too high, and the main culprit is an inadequate supply of housing. But we should be clear that in the near-term future we will get some good news on rents, even if will not be good enough to solve our housing problems.
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In the last-half century, productivity has outpaced the growth of real compensation for the median worker by more than 40 percent. This means that if workers’ pay had kept pace with productivity, as it did in the three decades after World War II, it would be roughly 40 percent higher than it is today.
This would mean that instead of a typical worker earning $34 an hour, they would be earning close to $48 an hour. That implies an annual wage of $96,000 a year for a worker putting in 40 hours a week for 50 weeks a year.
Getting workers their fair share should be, and to some extent has been, a central issue in political debates. However, there is a continual effort by the media to pull the focus away from within generation inequality, and instead tell young people that their problems stem from their parents and grandparents getting too much money from Social Security, Medicare, and other government programs.
The major media outlets love to highlight absurd stories of generational inequality, with baby boomers ripping off their children and grandchildren through Social Security and Medicare. A New York Times column by Gene Steurele and Glenn Kramon is the latest effort.
Their basic story here is that baby boomers are getting far more back from Social Security and Medicare than they paid into these programs. It turns out that this is not especially true, even by Steurele’s own calculation.
If we look at a lifetime average wage earner who turns 65 in 2025, Steurele and his co-author Karen Smith, calculate they will have paid Social Security taxes with a present value of $391,000 and will be getting back benefits with a present value of $394,000. If we move up the income scale to someone who earned the Social Security maximum (currently $160,000), the present value of taxes would be $953,000, compared to benefits of $634,000.
If we look at couples the story looks better for beneficiaries, especially one-earner couples (a rarity) and also for moderate-income workers. However, in a world where raising taxes on people earning less than $400k seems to be beyond the pale, I’m not sure too many politicians will be anxious to take away benefits from low-earning retirees.
Steurele and Smith find a much larger subsidy from Medicare. There are some technical issues here but the most important point is that the supposed “subsidy” is primarily due to the fact that we pay twice as much per person for our health care as people in other wealthy countries without having much to show in terms of better outcomes.
The reason is that we pay drug companies, medical equipment suppliers, doctors and other providers twice as much as in other wealthy countries. The subsidies really are for these actors in the healthcare industry, not for retirees.
Insofar as young people are having difficulty getting ahead the problem is all the money going to people at the top end of the income distribution. The money going to retirees for Social Security and Medicare is a trivial part of this story, regardless of how much the NYT wants to tell us otherwise.
In the last-half century, productivity has outpaced the growth of real compensation for the median worker by more than 40 percent. This means that if workers’ pay had kept pace with productivity, as it did in the three decades after World War II, it would be roughly 40 percent higher than it is today.
This would mean that instead of a typical worker earning $34 an hour, they would be earning close to $48 an hour. That implies an annual wage of $96,000 a year for a worker putting in 40 hours a week for 50 weeks a year.
Getting workers their fair share should be, and to some extent has been, a central issue in political debates. However, there is a continual effort by the media to pull the focus away from within generation inequality, and instead tell young people that their problems stem from their parents and grandparents getting too much money from Social Security, Medicare, and other government programs.
The major media outlets love to highlight absurd stories of generational inequality, with baby boomers ripping off their children and grandchildren through Social Security and Medicare. A New York Times column by Gene Steurele and Glenn Kramon is the latest effort.
Their basic story here is that baby boomers are getting far more back from Social Security and Medicare than they paid into these programs. It turns out that this is not especially true, even by Steurele’s own calculation.
If we look at a lifetime average wage earner who turns 65 in 2025, Steurele and his co-author Karen Smith, calculate they will have paid Social Security taxes with a present value of $391,000 and will be getting back benefits with a present value of $394,000. If we move up the income scale to someone who earned the Social Security maximum (currently $160,000), the present value of taxes would be $953,000, compared to benefits of $634,000.
If we look at couples the story looks better for beneficiaries, especially one-earner couples (a rarity) and also for moderate-income workers. However, in a world where raising taxes on people earning less than $400k seems to be beyond the pale, I’m not sure too many politicians will be anxious to take away benefits from low-earning retirees.
Steurele and Smith find a much larger subsidy from Medicare. There are some technical issues here but the most important point is that the supposed “subsidy” is primarily due to the fact that we pay twice as much per person for our health care as people in other wealthy countries without having much to show in terms of better outcomes.
The reason is that we pay drug companies, medical equipment suppliers, doctors and other providers twice as much as in other wealthy countries. The subsidies really are for these actors in the healthcare industry, not for retirees.
Insofar as young people are having difficulty getting ahead the problem is all the money going to people at the top end of the income distribution. The money going to retirees for Social Security and Medicare is a trivial part of this story, regardless of how much the NYT wants to tell us otherwise.
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Yes, I am serious. The media have no intention of allowing the data to get in the way of their bad economy stories. So now that food prices have pretty much stopped rising, the Guardian is coming to the rescue to tell readers how they can cope with rising food prices.
Here’s the picture on food prices over the last five years.
As can be seen, food prices did rise rapidly in 2021 and 2022, but then slowed sharply. In the last year and a half, they have risen by a total of just over one percent. This might have been a reasonable piece for the Guardian to have run in January of 2023, it does not make sense to run it now.
Yes, I am serious. The media have no intention of allowing the data to get in the way of their bad economy stories. So now that food prices have pretty much stopped rising, the Guardian is coming to the rescue to tell readers how they can cope with rising food prices.
Here’s the picture on food prices over the last five years.
As can be seen, food prices did rise rapidly in 2021 and 2022, but then slowed sharply. In the last year and a half, they have risen by a total of just over one percent. This might have been a reasonable piece for the Guardian to have run in January of 2023, it does not make sense to run it now.
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E.J. Dionne is a decent person and offers reasonable takes on most policy issues, but he really is enmeshed in the right’s view of the world. In the middle of a piece praising Vice-President Harris’ coalition building and economic agenda, Dionne tells readers:
“She champions the new economic consensus that President Joe Biden began to bring to life, replacing the view that markets alone, spurred by low taxes and deregulation, can save us.”
It is totally understandable that the right wants people to believe that “markets alone” were responsible for the massive upward redistribution of income of the last half century. But it happens to be total crap.
Starting with my favorite, government-granted patent and copyright monopolies are not “markets alone.” This concept is apparently hard for people who write in elite media outlets to understand.
The market alone does not threaten to arrest people who make copies of Pfizer’s Covid boosters without its permission or Ozempic without the permission of Novo Nordisk. Nor does the market alone threaten to arrest people who make copies of Microsoft’s software without Bill Gates’ permission.
Patent and copyright monopolies are the GOVERNMENT. Again, it’s understandable that the rich people who benefit from these government-granted monopolies like to pretend this is just the free market. It sounds much better to say “I’m rich and you’re poor because my skills are more valued by the market,” than “I’m rich and you’re poor because I rigged the market to give me all the money.” But why does an ostensibly liberal columnist go along with this blatant lie?
And there is huge money at stake here. In the case of prescription drugs and other pharmaceutical products alone we will pay over $650 billion a year for items that would likely cost us less than $100 billion in a FREE MARKET (see Line 121). If we add in the higher prices we pay for medical equipment, computers, software, and other items where these government-granted monopolies are a large share of the price, we are almost certainly well over $1 trillion a year and possibly close to $1.5 trillion. This would be roughly half of after-tax corporate profits. (See chapter 5 of Rigged [it’s free].)
These inflation-causing monopolies are far from the only way the government intervenes in the economy to make the rich richer. The supposed “free trade” deals of the last four decades all included provisions that required our trading partners to make these monopolies longer and stronger in their own countries.
The “free trade” deals also did little or nothing to reduce barriers to trade in highly paid professional services like physicians’ services or dentists’ services. As a result, these professionals get paid more than twice as much as their counterparts in other wealthy countries, even though our manufacturing workers get paid less. Again, we get why the winners want to call it “free trade,” but that is a lie.
Bailing out the big financial institutions when they did themselves in by their own greed and incompetence in the housing crash and more recently with the run-up in interest rates was also not “the market.” Many of the very rich got their hundreds of millions or billions as a result of the government’s coddling of the financial industry. Why don’t we call out the government assistance instead of pretending it is the free market?
Similarly, our CEOs get paid many times more than their counterparts in Europe or Japan. That’s not because they are smarter or harder working, it’s because we have a corrupt corporate government structure that largely allows top management to set their own pay and rip-off the companies they work for. If it’s too complicated for our great intellectuals, the market did not write the rules of corporate governance.
To take one more example, the market did not give us Section 230 which protects Mark Zuckerberg and Elon Musk from being held liable for spreading defamatory material in the same way that the New York Times or CNN is held liable.
I could go on, but the point should be obvious to anyone who does not write columns for a leading news outlet, the government has rigged the deck. Extreme inequality is not the result of a free market, it is a result of how the government has structured the market.
The market is just a tool, like the wheel. It makes as much sense to rant against the free market as to complain about the wheel. Unfortunately, the right has managed to get the bulk of the left in this country screaming at the wheel. As long as that remains the case, it will be difficult to make much progress in reducing inequality.
E.J. Dionne is a decent person and offers reasonable takes on most policy issues, but he really is enmeshed in the right’s view of the world. In the middle of a piece praising Vice-President Harris’ coalition building and economic agenda, Dionne tells readers:
“She champions the new economic consensus that President Joe Biden began to bring to life, replacing the view that markets alone, spurred by low taxes and deregulation, can save us.”
It is totally understandable that the right wants people to believe that “markets alone” were responsible for the massive upward redistribution of income of the last half century. But it happens to be total crap.
Starting with my favorite, government-granted patent and copyright monopolies are not “markets alone.” This concept is apparently hard for people who write in elite media outlets to understand.
The market alone does not threaten to arrest people who make copies of Pfizer’s Covid boosters without its permission or Ozempic without the permission of Novo Nordisk. Nor does the market alone threaten to arrest people who make copies of Microsoft’s software without Bill Gates’ permission.
Patent and copyright monopolies are the GOVERNMENT. Again, it’s understandable that the rich people who benefit from these government-granted monopolies like to pretend this is just the free market. It sounds much better to say “I’m rich and you’re poor because my skills are more valued by the market,” than “I’m rich and you’re poor because I rigged the market to give me all the money.” But why does an ostensibly liberal columnist go along with this blatant lie?
And there is huge money at stake here. In the case of prescription drugs and other pharmaceutical products alone we will pay over $650 billion a year for items that would likely cost us less than $100 billion in a FREE MARKET (see Line 121). If we add in the higher prices we pay for medical equipment, computers, software, and other items where these government-granted monopolies are a large share of the price, we are almost certainly well over $1 trillion a year and possibly close to $1.5 trillion. This would be roughly half of after-tax corporate profits. (See chapter 5 of Rigged [it’s free].)
These inflation-causing monopolies are far from the only way the government intervenes in the economy to make the rich richer. The supposed “free trade” deals of the last four decades all included provisions that required our trading partners to make these monopolies longer and stronger in their own countries.
The “free trade” deals also did little or nothing to reduce barriers to trade in highly paid professional services like physicians’ services or dentists’ services. As a result, these professionals get paid more than twice as much as their counterparts in other wealthy countries, even though our manufacturing workers get paid less. Again, we get why the winners want to call it “free trade,” but that is a lie.
Bailing out the big financial institutions when they did themselves in by their own greed and incompetence in the housing crash and more recently with the run-up in interest rates was also not “the market.” Many of the very rich got their hundreds of millions or billions as a result of the government’s coddling of the financial industry. Why don’t we call out the government assistance instead of pretending it is the free market?
Similarly, our CEOs get paid many times more than their counterparts in Europe or Japan. That’s not because they are smarter or harder working, it’s because we have a corrupt corporate government structure that largely allows top management to set their own pay and rip-off the companies they work for. If it’s too complicated for our great intellectuals, the market did not write the rules of corporate governance.
To take one more example, the market did not give us Section 230 which protects Mark Zuckerberg and Elon Musk from being held liable for spreading defamatory material in the same way that the New York Times or CNN is held liable.
I could go on, but the point should be obvious to anyone who does not write columns for a leading news outlet, the government has rigged the deck. Extreme inequality is not the result of a free market, it is a result of how the government has structured the market.
The market is just a tool, like the wheel. It makes as much sense to rant against the free market as to complain about the wheel. Unfortunately, the right has managed to get the bulk of the left in this country screaming at the wheel. As long as that remains the case, it will be difficult to make much progress in reducing inequality.
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Yes folks, like other major news outlets the Washington Post is perfectly happy to ignore the data to tell you the economy is bad under Biden. Past entries in this series included the many pieces telling us young people have given up ever being able to own a home, even though the number of young people who are homeowners is considerably higher than before the pandemic, the CNN classic telling us about the retirement crisis even though the net worth of near retirees is up almost 50 percent from 2019, and the Washington Post and New York Times pieces telling us new college grads couldn’t find jobs even though their unemployment rate is near a twenty year low.
The media are absolutely determined to tell everyone the economy is awful in spite of the longest stretch of low unemployment in more than 70 years, healthy real wage growth, especially at the bottom, in spite of the pandemic, and record levels of job satisfaction. The media will not be deterred by good news in its effort to tell its audience that the Biden-Harris economy is awful.
Today’s entry in the data be damned awful Biden economy saga is an opinion piece that tells us in its title, “A big problem for young workers: 70- and 80-year-olds who won’t retire.” The story is that younger workers are being blocked in their career paths by old-timers who refuse to retire. (The observant ones out there might recall that we were supposed to be bothered by the flood of retirees who had to be supported by younger people still in the workforce. Oh well, both situations are awful.)
Anyhow, the punch line in the piece is a graph that purportedly shows an increase in the ratio of the wages of older workers to younger workers. The problem is the graph actually doesn’t show a continual increase in the ratio of the pay of older workers to younger workers.
It does show a rise from the 1970s until around 2010. It then levels off and then has trended down slightly from 2012 until 2018, which is the last year in graph. At that point, it was roughly back to its 2000 level.
There may have been a story in these data, but that was a decade ago when the ratio was peaking. It is more than a bit bizarre that the Washington Post would choose to highlight this trend now. But when you have an economy that is doing great by almost every standard measure, I guess it’s necessary to dig deep to tell the bad economy story. The Washington Post deserves a big hand MAGA for this one!
Yes folks, like other major news outlets the Washington Post is perfectly happy to ignore the data to tell you the economy is bad under Biden. Past entries in this series included the many pieces telling us young people have given up ever being able to own a home, even though the number of young people who are homeowners is considerably higher than before the pandemic, the CNN classic telling us about the retirement crisis even though the net worth of near retirees is up almost 50 percent from 2019, and the Washington Post and New York Times pieces telling us new college grads couldn’t find jobs even though their unemployment rate is near a twenty year low.
The media are absolutely determined to tell everyone the economy is awful in spite of the longest stretch of low unemployment in more than 70 years, healthy real wage growth, especially at the bottom, in spite of the pandemic, and record levels of job satisfaction. The media will not be deterred by good news in its effort to tell its audience that the Biden-Harris economy is awful.
Today’s entry in the data be damned awful Biden economy saga is an opinion piece that tells us in its title, “A big problem for young workers: 70- and 80-year-olds who won’t retire.” The story is that younger workers are being blocked in their career paths by old-timers who refuse to retire. (The observant ones out there might recall that we were supposed to be bothered by the flood of retirees who had to be supported by younger people still in the workforce. Oh well, both situations are awful.)
Anyhow, the punch line in the piece is a graph that purportedly shows an increase in the ratio of the wages of older workers to younger workers. The problem is the graph actually doesn’t show a continual increase in the ratio of the pay of older workers to younger workers.
It does show a rise from the 1970s until around 2010. It then levels off and then has trended down slightly from 2012 until 2018, which is the last year in graph. At that point, it was roughly back to its 2000 level.
There may have been a story in these data, but that was a decade ago when the ratio was peaking. It is more than a bit bizarre that the Washington Post would choose to highlight this trend now. But when you have an economy that is doing great by almost every standard measure, I guess it’s necessary to dig deep to tell the bad economy story. The Washington Post deserves a big hand MAGA for this one!
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I don’t have time to do an exhaustive analysis of the implication of the downward revisions to the jobs numbers today, but I will make a few quick points.
First, the people complaining that this downward revision exposes cooked jobs data in prior months need to get their heads screwed on straight. Let’s just try a little logic here.
If the Biden-Harris administration had the ability to cook the job numbers, do we think they are too stupid to realize that they should keep cooking them at least through November? Seriously, do we think they are total morons? If you’ve been cooking the numbers for twenty months, wouldn’t you keep cooking them until Election Day?
Okay, but getting more serious here, the staff of the Bureau of Labor Statistics (BLS) is a professional outfit that does exactly what we want it to do. They produce the data about the economy as best they can in a completely objective way. And they use methods that are completely transparent.
People can go to the BLS website and read as much as they like about the nature of the survey that produces the monthly jobs number and large revision we saw today. The basic story is that the monthly survey goes to hundreds of thousands of employers who are supposed to be representative of the millions of employers in the economy. Generally, the survey gives us a pretty accurate job count, but it will never be exact.
Every year the BLS adjusts the data from the survey based on state unemployment insurance (UI) filings which have data from nearly every employer in the country. These UI filings are a near census for all payroll employment. If the UI data gives a different picture than the survey of employers, then the filings are almost certainly right and BLS revises it data accordingly.
For reasons that we can only speculate about, there was an unusually large gap this year. Many economists and statisticians will spend many hours trying to figure out why this is the case. But one thing we should be confident of is that no one cooked the data. BLS did the best they could in structuring their survey of employers. If they can find ways to improve it, they will, as they have in the past.
What Does This Tell Us About the Economy?
Turning briefly to the substance of the revision, I realize many people will be quick to say that this is bad news for our picture of the economy. That is not clear at all.
First, we should be clear that even with the revision the economy still created jobs at a very rapid pace in the period covered, from March 2023 to March 2024. While BLS had previously reported that we created 2.9 million jobs over this period, or 242,000 a month. The revision means we created 2.1 million jobs or 172,000 jobs a month. By comparison, in the three years prior to the onset of the pandemic, we created jobs at a rate of 179,000 a month. Even with the downward revision, we were still creating jobs at a very healthy pace.
To put these numbers in a larger context, it is necessary to have a broader picture of the labor market. Every month we look at two independent surveys in the BLS Employment Report. One is the establishment survey which will be revised based on today’s report from the UI filings. The other is the survey of households, the Current Population Survey (CPS), which tells us the percentage of the workforce that is employed and unemployed.
The CPS also has a measure of employment, but we generally pay it much less attention, since on a monthly basis it is highly erratic. For example, in October of 2017, when the economy seemed to be growing at a healthy pace, the CPS showed a loss of 677,000 jobs. It is implausible there actually was a job loss anything like that in the month, just as it was implausible there was a job gain like the 783,000 reported for the prior month.
Over longer periods of time, the erratic jumps and plunges tend to average out, but even here there are problems. The CPS gives us ratios for the percent of people who are employed and unemployed and the characteristics of their employment, such as whether their job is full-time or part-time, the industry they are employed in, their race, gender, education, and other factors.
However, the total employment figure depends on population controls that come indirectly from the decennial Census. The population controls take the total number of people found in the Census and then adjust based on estimates of births, deaths, immigration, and emigration. This process is imperfect and can often lead to large errors.
For example, at the end of the decade of the 1990s, more than two million people were added into the population controls for the survey because of an underestimate of population growth in the decade. In recent years, the employment growth in the CPS has seriously lagged job growth in the CES. This is true even after today’s downward revision to the CES.
The most plausible explanation for the large gap between the two surveys is that the population controls are underestimating the impact of immigration. A recent paper from the Brookings Institution calculates that undercounting immigration may have led the CPS to understate employment growth by more than 1 million a year.
While we may not be able to use the CPS to get a more accurate count of the actual number of jobs generated by the economy, what it does give us is actually more important. It tells us the share of the population that is employed, unemployed, employed part-time, and even gives us data on wages.
These factors are more important because these factors tell us more directly how well people are doing. The number of jobs in itself doesn’t answer that question. It is not like runs in a baseball game. We care about jobs because people who want to work should be able to get a job. If it turns out that we are generated somewhat fewer jobs than we thought, but most people who want jobs have jobs, then this is a pretty good story.
That looks like the situation today. The unemployment rate was 4.3 percent in July. That is higher than the 3.4 percent low hit in April of last year, but it is still quite low by historical standards. It was only this low for three months of the George W. Bush administration, it only got down to 4.3 percent or lower for the last two years of the late 1990s boom. It never got close to 4.3 percent during the Reagan “boom” years.
To be clear, the rise in the unemployment rate since last April is cause for concern. If that continues, unemployment will definitely be a serious issue. But if we just take the snapshot for the unemployment rate for July of this year, it is hard to see much cause for complaint.
We can also flip this over and ask the opposite question of what share of the population is employed. Here we have a very good story. If we look at the prime age population, people between the ages of 25 and 54, the employment to population ratio stood at 80.9 percent in July. We would have to go back to April of 2001 to find a higher rate.
It is reasonable to look at prime-age employment to control for the effect of the aging of the population. Most of us would not consider it a bad thing that people in their sixties and seventies opt to retire rather than work. As the huge baby boom cohorts age, we are seeing a growing share of the population in retirement. Looking just at the prime age population allows us to see the share of the population that we think would want to work, who can actually get jobs.
We can also look at other factors like the share of the population who are working part-time, but want full-time jobs, which is now very low. And we can look at the growth rate of real wages (wages adjusted for higher prices), which has been good overall and especially for those at the lower end of the wage distribution.
How Do the Revisions Change the Economic Picture?
Nothing about the revisions to the CES change the story of an economy where jobs are relatively plentiful, and workers are seeing wage increases in excess of inflation. What they tell us is that the economy is creating fewer jobs than we had previously believed. But if we have high levels of employment with fewer jobs, what exactly is the problem?
In fact, there is a very positive side to this story. Assuming that we have accurately measured output (there are issues here too), if we generated this output with fewer jobs than we had previously estimated, this means productivity growth has been faster than had previously been estimated.
Productivity growth is the change in output per hour of work. If the economy created fewer jobs than we thought, then the growth in hours of work was less than we had previously believed. This means that productivity growth was stronger than had been reported.
This is a big deal since productivity growth ultimately determines how rapidly living standards can improve. There are huge issues of distribution, and also measurement (much of what affects living standards will not be picked up in productivity), but if productivity is growing at a 2.0 percent annual rate, this means that we can in principle see more rapid gains in living standards than if it is growing at just a 1.5 percent annual rate.
The one-year change doesn’t matter much, but over time this difference is substantial. In the case of a gap between a 2.0 percent growth rate versus a 1.5 percent growth rate, after a decade it would be almost 6.0 percent. For a worker near the median wage this would be the difference between taking home $53,000 a year versus $50,000 a year.
After 20 years, the gap would grow to almost 14 percent. This would amount to a wage gap of close to $7,000 for a worker earning near the median annual wage.
The lower job growth resulting from the revisions today would imply that hours grew by 0.5 percent less from the first quarter of 2023 to the first quarter of 2024. Productivity growth for this period is currently reported as 2.9 percent. A reduction in hours growth of 0.5 percent would mean that productivity growth is 0.5 percentage points faster than had been reported, or 3.4 percent over this period.
Before celebrating this extraordinary rate of productivity growth (we had averaged just 1.1 percent in the decade prior to the pandemic) it is important to realize that the data are highly erratic, especially in the period following the pandemic. Productivity had actually fallen 0.5 percent in the prior year.
So, it’s far too early to celebrate a pickup in productivity growth, but the downward revision to hours growth implied by today’s revision to the jobs data unambiguously raises the pace of productivity growth over the last year. In that sense, it is good news. But as with all economic data, it’s part of a big picture, and we can’t make too much of any specific data release in isolation.
Take Away from Revision—More Fears of Weakness and Hope for Faster Productivity
The rise in unemployment since its recovery low has caused many to fear a new recession. This is definitely a cause for concern, but most other data, including very current data on items like road and air travel and restaurant reservations, do not give evidence of a recession. Nonetheless, the report showing that we were creating jobs at a slower pace than previously reported, albeit still very rapid, points in the direction of weakness.
On the other hand, the revision is encouraging in that it bolsters the case for a productivity upturn. It is far too early to declare the upturn is here, but it’s great to get another data point in the right direction. For this reason, the slower job growth indicated by this revision should be seen as more good than bad.
I don’t have time to do an exhaustive analysis of the implication of the downward revisions to the jobs numbers today, but I will make a few quick points.
First, the people complaining that this downward revision exposes cooked jobs data in prior months need to get their heads screwed on straight. Let’s just try a little logic here.
If the Biden-Harris administration had the ability to cook the job numbers, do we think they are too stupid to realize that they should keep cooking them at least through November? Seriously, do we think they are total morons? If you’ve been cooking the numbers for twenty months, wouldn’t you keep cooking them until Election Day?
Okay, but getting more serious here, the staff of the Bureau of Labor Statistics (BLS) is a professional outfit that does exactly what we want it to do. They produce the data about the economy as best they can in a completely objective way. And they use methods that are completely transparent.
People can go to the BLS website and read as much as they like about the nature of the survey that produces the monthly jobs number and large revision we saw today. The basic story is that the monthly survey goes to hundreds of thousands of employers who are supposed to be representative of the millions of employers in the economy. Generally, the survey gives us a pretty accurate job count, but it will never be exact.
Every year the BLS adjusts the data from the survey based on state unemployment insurance (UI) filings which have data from nearly every employer in the country. These UI filings are a near census for all payroll employment. If the UI data gives a different picture than the survey of employers, then the filings are almost certainly right and BLS revises it data accordingly.
For reasons that we can only speculate about, there was an unusually large gap this year. Many economists and statisticians will spend many hours trying to figure out why this is the case. But one thing we should be confident of is that no one cooked the data. BLS did the best they could in structuring their survey of employers. If they can find ways to improve it, they will, as they have in the past.
What Does This Tell Us About the Economy?
Turning briefly to the substance of the revision, I realize many people will be quick to say that this is bad news for our picture of the economy. That is not clear at all.
First, we should be clear that even with the revision the economy still created jobs at a very rapid pace in the period covered, from March 2023 to March 2024. While BLS had previously reported that we created 2.9 million jobs over this period, or 242,000 a month. The revision means we created 2.1 million jobs or 172,000 jobs a month. By comparison, in the three years prior to the onset of the pandemic, we created jobs at a rate of 179,000 a month. Even with the downward revision, we were still creating jobs at a very healthy pace.
To put these numbers in a larger context, it is necessary to have a broader picture of the labor market. Every month we look at two independent surveys in the BLS Employment Report. One is the establishment survey which will be revised based on today’s report from the UI filings. The other is the survey of households, the Current Population Survey (CPS), which tells us the percentage of the workforce that is employed and unemployed.
The CPS also has a measure of employment, but we generally pay it much less attention, since on a monthly basis it is highly erratic. For example, in October of 2017, when the economy seemed to be growing at a healthy pace, the CPS showed a loss of 677,000 jobs. It is implausible there actually was a job loss anything like that in the month, just as it was implausible there was a job gain like the 783,000 reported for the prior month.
Over longer periods of time, the erratic jumps and plunges tend to average out, but even here there are problems. The CPS gives us ratios for the percent of people who are employed and unemployed and the characteristics of their employment, such as whether their job is full-time or part-time, the industry they are employed in, their race, gender, education, and other factors.
However, the total employment figure depends on population controls that come indirectly from the decennial Census. The population controls take the total number of people found in the Census and then adjust based on estimates of births, deaths, immigration, and emigration. This process is imperfect and can often lead to large errors.
For example, at the end of the decade of the 1990s, more than two million people were added into the population controls for the survey because of an underestimate of population growth in the decade. In recent years, the employment growth in the CPS has seriously lagged job growth in the CES. This is true even after today’s downward revision to the CES.
The most plausible explanation for the large gap between the two surveys is that the population controls are underestimating the impact of immigration. A recent paper from the Brookings Institution calculates that undercounting immigration may have led the CPS to understate employment growth by more than 1 million a year.
While we may not be able to use the CPS to get a more accurate count of the actual number of jobs generated by the economy, what it does give us is actually more important. It tells us the share of the population that is employed, unemployed, employed part-time, and even gives us data on wages.
These factors are more important because these factors tell us more directly how well people are doing. The number of jobs in itself doesn’t answer that question. It is not like runs in a baseball game. We care about jobs because people who want to work should be able to get a job. If it turns out that we are generated somewhat fewer jobs than we thought, but most people who want jobs have jobs, then this is a pretty good story.
That looks like the situation today. The unemployment rate was 4.3 percent in July. That is higher than the 3.4 percent low hit in April of last year, but it is still quite low by historical standards. It was only this low for three months of the George W. Bush administration, it only got down to 4.3 percent or lower for the last two years of the late 1990s boom. It never got close to 4.3 percent during the Reagan “boom” years.
To be clear, the rise in the unemployment rate since last April is cause for concern. If that continues, unemployment will definitely be a serious issue. But if we just take the snapshot for the unemployment rate for July of this year, it is hard to see much cause for complaint.
We can also flip this over and ask the opposite question of what share of the population is employed. Here we have a very good story. If we look at the prime age population, people between the ages of 25 and 54, the employment to population ratio stood at 80.9 percent in July. We would have to go back to April of 2001 to find a higher rate.
It is reasonable to look at prime-age employment to control for the effect of the aging of the population. Most of us would not consider it a bad thing that people in their sixties and seventies opt to retire rather than work. As the huge baby boom cohorts age, we are seeing a growing share of the population in retirement. Looking just at the prime age population allows us to see the share of the population that we think would want to work, who can actually get jobs.
We can also look at other factors like the share of the population who are working part-time, but want full-time jobs, which is now very low. And we can look at the growth rate of real wages (wages adjusted for higher prices), which has been good overall and especially for those at the lower end of the wage distribution.
How Do the Revisions Change the Economic Picture?
Nothing about the revisions to the CES change the story of an economy where jobs are relatively plentiful, and workers are seeing wage increases in excess of inflation. What they tell us is that the economy is creating fewer jobs than we had previously believed. But if we have high levels of employment with fewer jobs, what exactly is the problem?
In fact, there is a very positive side to this story. Assuming that we have accurately measured output (there are issues here too), if we generated this output with fewer jobs than we had previously estimated, this means productivity growth has been faster than had previously been estimated.
Productivity growth is the change in output per hour of work. If the economy created fewer jobs than we thought, then the growth in hours of work was less than we had previously believed. This means that productivity growth was stronger than had been reported.
This is a big deal since productivity growth ultimately determines how rapidly living standards can improve. There are huge issues of distribution, and also measurement (much of what affects living standards will not be picked up in productivity), but if productivity is growing at a 2.0 percent annual rate, this means that we can in principle see more rapid gains in living standards than if it is growing at just a 1.5 percent annual rate.
The one-year change doesn’t matter much, but over time this difference is substantial. In the case of a gap between a 2.0 percent growth rate versus a 1.5 percent growth rate, after a decade it would be almost 6.0 percent. For a worker near the median wage this would be the difference between taking home $53,000 a year versus $50,000 a year.
After 20 years, the gap would grow to almost 14 percent. This would amount to a wage gap of close to $7,000 for a worker earning near the median annual wage.
The lower job growth resulting from the revisions today would imply that hours grew by 0.5 percent less from the first quarter of 2023 to the first quarter of 2024. Productivity growth for this period is currently reported as 2.9 percent. A reduction in hours growth of 0.5 percent would mean that productivity growth is 0.5 percentage points faster than had been reported, or 3.4 percent over this period.
Before celebrating this extraordinary rate of productivity growth (we had averaged just 1.1 percent in the decade prior to the pandemic) it is important to realize that the data are highly erratic, especially in the period following the pandemic. Productivity had actually fallen 0.5 percent in the prior year.
So, it’s far too early to celebrate a pickup in productivity growth, but the downward revision to hours growth implied by today’s revision to the jobs data unambiguously raises the pace of productivity growth over the last year. In that sense, it is good news. But as with all economic data, it’s part of a big picture, and we can’t make too much of any specific data release in isolation.
Take Away from Revision—More Fears of Weakness and Hope for Faster Productivity
The rise in unemployment since its recovery low has caused many to fear a new recession. This is definitely a cause for concern, but most other data, including very current data on items like road and air travel and restaurant reservations, do not give evidence of a recession. Nonetheless, the report showing that we were creating jobs at a slower pace than previously reported, albeit still very rapid, points in the direction of weakness.
On the other hand, the revision is encouraging in that it bolsters the case for a productivity upturn. It is far too early to declare the upturn is here, but it’s great to get another data point in the right direction. For this reason, the slower job growth indicated by this revision should be seen as more good than bad.
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