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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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

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

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

 

 

The development of the new variant, which was first discovered in South Africa, can be attributed to our failure to open-source our vaccines and freely transfer technology, contrary to claims from the pharmaceutical industry and its political allies. Their big talking point is that South Africa currently has more vaccines than it can effectively use at the moment.

This claim ignores two important points. The first is that we really don’t know where this strain originated. It was first identified in South Africa in part because its screening system happened to catch it. South Africa then did the responsible thing and reported to the world that it had uncovered a new variant.

This doesn’t mean that the Omicron variant originated in South Africa. It has been identified in samples taken in the Netherlands several days before its discovery in South Africa. The variant was also identified in a sample in Nigeria that was taken in October. Since we are not sure where it originated at this point, it’s not clear that South Africa’s current ability to deliver vaccines has much relevance to the development of the omicron variant.

But a second point is even more important. The development of variants depends on the extent of the spread of the virus. The more people who get COVID-19, the more opportunity the virus has to mutate.

Suppose we had a genuine worldwide effort to contain the pandemic from when it was first recognized in February of 2020. Ideally, we would have seen international collaboration involving the sharing of technology and resources. This would have meant creating a world in which anyone with the production capacity, or the ability to develop the production capacity, could manufacture mRNA vaccines. It also would have meant coordinating the production and distribution of the less effective Chinese vaccines, as well as vaccines from Russia and India, until we could produce a sufficient number of mRNA vaccines.

If we had really engaged in an all out effort to get the world vaccinated, it is likely the vast majority of the world’s population could have been vaccinated by the summer. (China had produced close to 2 billion of its vaccines by the end of July.) This would have hugely slowed the spread of the pandemic and drastically reduced the likelihood of mutations.

Of course, we can never say for certain whether a specific variant would have developed in a world with much less spread, just as we can never say whether a particular hurricane is attributable to global warming. But we know that without global warming we would see fewer hurricanes and with less spread we would see fewer mutations.

So yes, blame government-granted patent monopolies. Maybe one day we can have a serious discussion of better mechanisms for financing the development of new drugs and vaccines. In the meantime, we need to double down on our efforts to get the world vaccinated as quickly as possible.

 

Correction:

An earlier version said that South Africa had a very good screening system for detecting variants. While it does have the best system in Africa, it screens a far smaller portion of its tests that most wealthy countries.

The development of the new variant, which was first discovered in South Africa, can be attributed to our failure to open-source our vaccines and freely transfer technology, contrary to claims from the pharmaceutical industry and its political allies. Their big talking point is that South Africa currently has more vaccines than it can effectively use at the moment.

This claim ignores two important points. The first is that we really don’t know where this strain originated. It was first identified in South Africa in part because its screening system happened to catch it. South Africa then did the responsible thing and reported to the world that it had uncovered a new variant.

This doesn’t mean that the Omicron variant originated in South Africa. It has been identified in samples taken in the Netherlands several days before its discovery in South Africa. The variant was also identified in a sample in Nigeria that was taken in October. Since we are not sure where it originated at this point, it’s not clear that South Africa’s current ability to deliver vaccines has much relevance to the development of the omicron variant.

But a second point is even more important. The development of variants depends on the extent of the spread of the virus. The more people who get COVID-19, the more opportunity the virus has to mutate.

Suppose we had a genuine worldwide effort to contain the pandemic from when it was first recognized in February of 2020. Ideally, we would have seen international collaboration involving the sharing of technology and resources. This would have meant creating a world in which anyone with the production capacity, or the ability to develop the production capacity, could manufacture mRNA vaccines. It also would have meant coordinating the production and distribution of the less effective Chinese vaccines, as well as vaccines from Russia and India, until we could produce a sufficient number of mRNA vaccines.

If we had really engaged in an all out effort to get the world vaccinated, it is likely the vast majority of the world’s population could have been vaccinated by the summer. (China had produced close to 2 billion of its vaccines by the end of July.) This would have hugely slowed the spread of the pandemic and drastically reduced the likelihood of mutations.

Of course, we can never say for certain whether a specific variant would have developed in a world with much less spread, just as we can never say whether a particular hurricane is attributable to global warming. But we know that without global warming we would see fewer hurricanes and with less spread we would see fewer mutations.

So yes, blame government-granted patent monopolies. Maybe one day we can have a serious discussion of better mechanisms for financing the development of new drugs and vaccines. In the meantime, we need to double down on our efforts to get the world vaccinated as quickly as possible.

 

Correction:

An earlier version said that South Africa had a very good screening system for detecting variants. While it does have the best system in Africa, it screens a far smaller portion of its tests that most wealthy countries.

The New York Times had an interesting piece about how a medical researcher may have found a cure for Type 1 diabetes after three decades of research following his son being diagnosed with the illness. While the drug he developed may potentially be a great breakthrough, the piece included this discouraging comment:

“The company [Vertex, which bought up the rights to the drug] will not announce a price for its diabetes treatment until it is approved. But it is likely to be expensive. Like other companies, Vertex has enraged patients with high prices for drugs that are difficult and expensive to make.”

There are two important points here. First, the high prices are not the result of drugs being “difficult and expensive to make.” It is unlikely that the drug referred to in the linked piece, Orkambi, a treatment for cystic fibrosis, costs Vertex even one-tenth the $270,000 sale price. The price is due to the fact that the drug is ostensibly a cure for a debilitating disease, and Vertex owns a government-granted patent monopoly on it, and then is allowed to charge what it wants.

The other point is that we don’t need to grant patent monopolies as a way to pay for expensive clinical trials, as this piece implies. The government can pay for the trials directly, as it just did in the case of Moderna’s Covid vaccine. (I describe a mechanism for doing this in chapter 5 of Rigged [it’s free].) High drug prices are a policy choice, not an inevitable outcome of the drug development process.

The New York Times had an interesting piece about how a medical researcher may have found a cure for Type 1 diabetes after three decades of research following his son being diagnosed with the illness. While the drug he developed may potentially be a great breakthrough, the piece included this discouraging comment:

“The company [Vertex, which bought up the rights to the drug] will not announce a price for its diabetes treatment until it is approved. But it is likely to be expensive. Like other companies, Vertex has enraged patients with high prices for drugs that are difficult and expensive to make.”

There are two important points here. First, the high prices are not the result of drugs being “difficult and expensive to make.” It is unlikely that the drug referred to in the linked piece, Orkambi, a treatment for cystic fibrosis, costs Vertex even one-tenth the $270,000 sale price. The price is due to the fact that the drug is ostensibly a cure for a debilitating disease, and Vertex owns a government-granted patent monopoly on it, and then is allowed to charge what it wants.

The other point is that we don’t need to grant patent monopolies as a way to pay for expensive clinical trials, as this piece implies. The government can pay for the trials directly, as it just did in the case of Moderna’s Covid vaccine. (I describe a mechanism for doing this in chapter 5 of Rigged [it’s free].) High drug prices are a policy choice, not an inevitable outcome of the drug development process.

Former New York Times reporter Donald McNeil had an interesting Medium piece on how antitrust law could be impeding the development of effective treatments for COVID-19. McNeil argued that COVID-19 treatments that were developed by Pfizer and Merck, and are now in the final stages of testing, may work best when taken together.

He argues that this may be the case because the drugs use two fundamentally different mechanisms for attacking the virus. By using the two in combination, we would be maximizing the likelihood that at least one would be effective. This has been the approach followed with effective H.I.V. drugs, as well as Hepatitis C treatments.

McNeil argues that the reason combinations are not pursued is because of antitrust laws. If, instead of competing with their different drugs, two giant drug manufacturers, like Pfizer and Merck, were to collaborate to produce the best possible treatment for COVID-19, they would be risking an antitrust action from the government or competing drug companies. McNeil recommends waiving antitrust rules when lifesaving medications are involved.

While that would clearly be desirable in this case, it is worth stepping back a minute. Let’s imagine that we were not relying on government-granted patent monopolies to finance biomedical research. Suppose that, instead of granting monopolies, the government just paid for the research upfront. (This is pretty much what we did with Moderna’s vaccine, but we also gave them a patent monopoly.)

If the government was paying for the research, a condition of getting the funding would be that all results are fully open.[1] In that context, Pfizer, Merck, and anyone else doing research on treating COVID-19 would have every reason in the world to examine the effectiveness of using drugs in combination.

The incentive would be for showing results that improved people’s health, not advancing the prospects for a specific drug. (I recommend the funding take the form of long-term contracts, which could be renewed and expanded, depending on the results shown from prior rounds of funding.) This system would also have the benefit that no one would have the incentive to hide results that reflected poorly on particular drugs (e.g. the addictiveness of the new generation of opioids).

In this context antitrust would not be an issue. All drugs would be produced as generics from the day they came on the market. While there could be some basis for concern if manufacturing became too concentrated, there would be no problems associated with companies collaborating in the development of new drugs.

Ideally, we would also be seeing this sort of collaboration internationally. This is what many of us hoped for at the start of the pandemic. Imagine if we had been prepared to collaborate with China to have their vaccines distributed as widely as possible, while we waited for production of the more effective mRNA vaccines to ramp up. (And, everyone in the world would be able to produce the mRNA vaccines if they could develop or convert the manufacturing capacity.) We might have saved hundreds of thousands, or even millions, of lives and substantially slowed the spread.

The pandemic presented an opportunity to experiment with new ways of supporting the development of vaccines, tests, and treatments. Unfortunately, we instead dug deeper into our prior methods, with great cost in lives, as well as the health of people around the world. It might be late in the game in terms of combatting this pandemic, but some new thinking would be tremendously valuable in preparing for the next pandemic, as well as our ongoing struggles with cancer, heart disease, and other longstanding health issues.

[1] I outline how this sort of funding mechanism could work in chapter 5 of Rigged [it’s free].

Former New York Times reporter Donald McNeil had an interesting Medium piece on how antitrust law could be impeding the development of effective treatments for COVID-19. McNeil argued that COVID-19 treatments that were developed by Pfizer and Merck, and are now in the final stages of testing, may work best when taken together.

He argues that this may be the case because the drugs use two fundamentally different mechanisms for attacking the virus. By using the two in combination, we would be maximizing the likelihood that at least one would be effective. This has been the approach followed with effective H.I.V. drugs, as well as Hepatitis C treatments.

McNeil argues that the reason combinations are not pursued is because of antitrust laws. If, instead of competing with their different drugs, two giant drug manufacturers, like Pfizer and Merck, were to collaborate to produce the best possible treatment for COVID-19, they would be risking an antitrust action from the government or competing drug companies. McNeil recommends waiving antitrust rules when lifesaving medications are involved.

While that would clearly be desirable in this case, it is worth stepping back a minute. Let’s imagine that we were not relying on government-granted patent monopolies to finance biomedical research. Suppose that, instead of granting monopolies, the government just paid for the research upfront. (This is pretty much what we did with Moderna’s vaccine, but we also gave them a patent monopoly.)

If the government was paying for the research, a condition of getting the funding would be that all results are fully open.[1] In that context, Pfizer, Merck, and anyone else doing research on treating COVID-19 would have every reason in the world to examine the effectiveness of using drugs in combination.

The incentive would be for showing results that improved people’s health, not advancing the prospects for a specific drug. (I recommend the funding take the form of long-term contracts, which could be renewed and expanded, depending on the results shown from prior rounds of funding.) This system would also have the benefit that no one would have the incentive to hide results that reflected poorly on particular drugs (e.g. the addictiveness of the new generation of opioids).

In this context antitrust would not be an issue. All drugs would be produced as generics from the day they came on the market. While there could be some basis for concern if manufacturing became too concentrated, there would be no problems associated with companies collaborating in the development of new drugs.

Ideally, we would also be seeing this sort of collaboration internationally. This is what many of us hoped for at the start of the pandemic. Imagine if we had been prepared to collaborate with China to have their vaccines distributed as widely as possible, while we waited for production of the more effective mRNA vaccines to ramp up. (And, everyone in the world would be able to produce the mRNA vaccines if they could develop or convert the manufacturing capacity.) We might have saved hundreds of thousands, or even millions, of lives and substantially slowed the spread.

The pandemic presented an opportunity to experiment with new ways of supporting the development of vaccines, tests, and treatments. Unfortunately, we instead dug deeper into our prior methods, with great cost in lives, as well as the health of people around the world. It might be late in the game in terms of combatting this pandemic, but some new thinking would be tremendously valuable in preparing for the next pandemic, as well as our ongoing struggles with cancer, heart disease, and other longstanding health issues.

[1] I outline how this sort of funding mechanism could work in chapter 5 of Rigged [it’s free].

Okay, I’m an economist nerd, so don’t expect a rundown of all the good things and bad things we have seen in the last year. I will focus on the economy, but I have to say a few words about the pandemic.

No one can be happy about the resurgence of case numbers this fall, but there is an important point worth recognizing. As public health experts have repeatedly said, this is now a pandemic of the unvaccinated. I realize that many people who have been vaccinated are still getting the virus (including me).

But the people filling the hospitals, and especially the intensive care units, are overwhelmingly unvaccinated. The story is even more striking if people get booster shots. This further reduces the risk of serious illness, especially for older people and those with serious health conditions.

We can see how this story plays out by looking at Israel, which has been very aggressive in pushing boosters. Its seven-day average for new cases is 410, which would be the equivalent of 14,800 cases a day in the United States. Its average for Covid deaths is 4, the equivalent of 144 a day in the United States.

We might like to see these numbers go to zero, but that is not going to happen. It’s also worth pointing out that Israel has its share of anti-vaxxers as well, so these figures are not coming from a fully vaccinated population. (Also, it is worth repeating that the whole world could have been vaccinated far more quickly if the United States and other rich countries had not insisted on maintaining patent monopolies for the vaccines.)   

Anyhow, if folks are vaccinated and get boosters, they can feel pretty well-protected against the pandemic. Those who have serious health issues will still be at some risk. Unfortunately, we have lots of loony tunes in this country whose definition of freedom means exposing these people to the pandemic, but thankfully most of us can now consider ourselves pretty safe in spite of these jerks.

 

Back to the Economy

With the booster rollout going at a pretty good pace, most people are getting back to normal and this shows up in the economic data. The 4.6 percent unemployment rate is still more than a percentage point higher than the pre-pandemic level, but already quite low by recent historical standards. We didn’t see an unemployment rate this low following the Great Recession until February of 2017.

In February, the Congressional Budget Office (CBO) projected that the unemployment rate would average 5.3 percent for the fourth quarter of this year. With the unemployment rate likely to fall further in November and December, we may average close to a full percentage point lower than the CBO projection for the full quarter.

The labor market has not looked so good, especially for workers at the bottom rung of the wage ladder, in more than fifty years. We just heard that weekly unemployment insurance claims for the week before Thanksgiving fell to 199,000, a level not seen since 1969 when the labor force was just half the current size.

Workers are quitting their jobs at record rates, especially in low-paying jobs like restaurant work. They feel confident that they can leave a job with low pay, bad working conditions, or an abusive boss, and find another one that is better.  

And, this is showing up in higher wages. The real average hourly wage (this is the wage increase in excess of price increases) for production and non-supervisory workers has risen by 2.1 percent over the last two years. For the lowest-paid workers, the increase has been even larger. For restaurant workers, the increase in real pay has been 7.6 percent. For workers in convenience stores, the average real pay increase has been 19.6 percent.

The higher pay and the option to leave bad jobs means a huge improvement in the lives of tens of millions of workers. This has to be a good Thanksgiving for these people and their families. In fact, many of these workers will actually be able to spend Thanksgiving with their families since, in response to the tight labor market, Target, Walmart and many other major retailers will not be open on Thanksgiving this year.

But What About Inflation?

As I noted earlier, the media have been on anti-inflation Jihad. This has included distorting and even making up data to push their case. Nonetheless, inflation has clearly jumped to levels that few would find acceptable, and if they were to rise still further, we would definitely have a serious problem on our hands.

I have been and remain in the camp that sees this jump as a temporary phenomenon. The world economy reopened in a big way in the last six months, after being largely shut down in 2020. This led to serious disruptions in supply chains, which were not prepared for all the items being pushed through, especially since the demand was disproportionately on the goods side.

Compounding the problem, we had a fire at a major semiconductor factory in Japan, which led to a worldwide shortage of semiconductors. This led to a shortage of cars since semiconductors are an important component in new cars. The car shortage has been a major source of inflation over the last year, with new vehicle prices up 9.8 percent over the last year and used vehicle prices up 26.4 percent.

There are good reasons for believing that these price hikes will be temporary. Rather than leading to accelerating inflation, they are more likely to be reversed in the months ahead. In the case of car prices, we are seeing a rapid expansion in semiconductor production, which is allowing major manufacturers like Ford and Toyota to return to their normal production schedule.

We are also likely to see a falloff in demand in the months ahead. People who bought a car in 2021 are not likely to buy another one in 2022. This will be true for a wide range of products that saw a surge in demand both because of the pandemic checks people received at the start of the year and because they could not spend money on services like restaurants and concerts due to the pandemic.

These factors are now behind us. Restaurant spending is now above its pre-pandemic level, although spending on other services has not yet returned to its early 2020 pace.

Also, the pandemic checks, the paycheck protection program, the supplemental unemployment insurance supplements, and other pandemic programs are all in the rearview mirror. This means that any excessive spending attributable to these programs is history. People are spending now based on their current income.

In this respect, it is worth noting that the savings rate as a share of disposable income for October was 7.3 percent, just a hair below the 7.5 percent average for the three years prior to the pandemic. This is a big deal since it means that, to date, we are not seeing evidence that people are spending down the savings they accrued during the pandemic.

This means that we have little reason to believe that we will be creating new stress on supply chains going forward. We have a backlog of items that have to be shoved through the supply chain, but new demand should be close enough to pre-pandemic levels that our supply chains should be able to deal with them.

There is some evidence that we are already seeing price declines in many of the items that had pushed up inflation earlier this year. For example, lumber futures, which typically traded in a range of $300 to $500 before the pandemic, soared to a peak of almost $1,700 in May. They then fell back to under $500 in August. (More recently, they have bounced up higher, but still have generally remained at prices that are less than half the May peak.)  

There is a similar story with a number of other commodities. The Baltic Dry Goods Index, which is a worldwide index of the spot prices for a number of widely traded commodities, soared earlier this year, peaking at over 5,500 at the start of October. Its more normal range would be between 1,400 and 1,600. In the last month and a half, it has fallen back sharply to 2,650.

It is worth noting that these price rises reflect worldwide conditions, not just the U.S. market. This point is important because other countries didn’t get the same boost to their recovery as we saw here with the American Recovery Plan (ARP) that President Biden pushed through Congress. This indicates that much of the inflation we are now seeing had little to do with the ARP, but rather was due to problems with reopening that would have been present regardless of the extent to which we boosted the U.S.  economy.

The other point is that the price declines recently seen for many commodities support the argument for the price burst being a temporary one, which will be reversed in many areas. I have used televisions as a canary in the coal mine for this story. After rising by 10.2 percent from March to August (a 26.3 percent annual rate), television prices have since fallen by 2.8 percent in the last two months. They still have a way to fall to get back to their March level, but my guess is that this decline will continue and that we will see a similar story with many other products that had pushed up inflation earlier this year.

There is one other point worth making on the temporary side. Contrary to the prediction of Larry Summers and other inflation hawks, the dollar has not fallen in value in the wake of the ARP. In fact, it has risen sharply. The dollar is up by almost 10.0 percent against the euro since the start of the year.

This matters not only because it suggests that financial markets don’t see a story of spiraling inflation (the continued low interest rate on 10-year Treasury bonds also supports the temporary story), but it also means that imports should be falling in price in the months ahead. To take a simple case, if a car or television set sells for the same price in euros in Germany or the Netherlands as it did at the start of the year, it would now cost 10 percent less in dollar terms.

As noted earlier, other countries have seen some issues with inflation as well, but if we assume that Biden’s ARP did not set off a worldwide inflationary spiral, these price increases will slow or reverse. At that point, we should be seeing cheaper imports coming into the United States. While imports typically have a limited impact on inflation in the U.S. (they are equal to a bit less than 15 percent of GDP), in this case, they account for a large share of the items that have been pushing up inflation. This means that lower-priced imports should be an important factor countering inflation here in the months ahead.  

 

The Labor Market and the Problem of Not Being Able to Get Good Help

The most important issue for the future course of inflation is what happens in labor markets. As noted earlier, many workers at the bottom end of the wage distribution have seen double-digit pay increases in the last year. This is great news for these workers, many of whom would have been living near the poverty level, especially if they were supporting children. (The $3,000 child tax credit, $3,600 for kids under age six, is also a huge deal.)

But double-digit pay increases are not sustainable in an environment of moderate inflation. If wage growth continues at that pace we have seen at the lower end of the wage distribution, we will certainly see serious problems with inflation going forward.

In fact, the situation is not so dire from the perspective of inflation. As Arin Dube has shown using data from the Current Population Survey, the rapid wage growth has been disproportionately at the bottom end of the wage distribution. Workers at higher points of the distribution have seen stagnant or even declining real wages.

This matters not only from the standpoint of seeing greater equality, but it also means there is less inflation pressure here than may first appear to be the case. When workers getting $100,000 or $200,000 a year get a ten percent pay increase, that means a big increase in labor costs in the economy.  When workers earning $20,000 a year get a ten percent pay increase, the impact on aggregate labor costs is much smaller.

This is largely the story we are seeing today. The occupations where real wages have been stagnant or declining over the past four decades have been seeing strong wage growth due to the tightness of the labor market. There is room for their pay to rise with a limited impact on inflation.

The price of the goods and services that these low-paid workers produce may rise, but so what? It may cost 10 percent more to get a cappuccino at Starbucks, but that is hardly an economic crisis. Truck drivers have seen their real pay fall by close to 30 percent since the 1970s. If we want enough truckers to move the country’s freight, their pay may have to return to 1970s levels, and maybe even go higher. 

These pay increases will mean reversing some of the upward redistribution of the last four decades. This is just the market working its magic.

Of course, if those at the top, including professionals like doctors and lawyers, as well as Wall Street types and high-level corporate executives, are able to exert their political power to ensure that they can still afford to get good help, then we will have an inflationary spiral. That battle is still several steps down the road. The fact that the media won’t even countenance a discussion of the impact of intellectual property on income distribution, or the corruption of corporate governance on CEO pay, is not encouraging.

But we can leave this one for another day. For this Thanksgiving, we can be happy that the tight labor market is allowing tens of millions of people to have much better pay and working conditions than they had before the pandemic.

Okay, I’m an economist nerd, so don’t expect a rundown of all the good things and bad things we have seen in the last year. I will focus on the economy, but I have to say a few words about the pandemic.

No one can be happy about the resurgence of case numbers this fall, but there is an important point worth recognizing. As public health experts have repeatedly said, this is now a pandemic of the unvaccinated. I realize that many people who have been vaccinated are still getting the virus (including me).

But the people filling the hospitals, and especially the intensive care units, are overwhelmingly unvaccinated. The story is even more striking if people get booster shots. This further reduces the risk of serious illness, especially for older people and those with serious health conditions.

We can see how this story plays out by looking at Israel, which has been very aggressive in pushing boosters. Its seven-day average for new cases is 410, which would be the equivalent of 14,800 cases a day in the United States. Its average for Covid deaths is 4, the equivalent of 144 a day in the United States.

We might like to see these numbers go to zero, but that is not going to happen. It’s also worth pointing out that Israel has its share of anti-vaxxers as well, so these figures are not coming from a fully vaccinated population. (Also, it is worth repeating that the whole world could have been vaccinated far more quickly if the United States and other rich countries had not insisted on maintaining patent monopolies for the vaccines.)   

Anyhow, if folks are vaccinated and get boosters, they can feel pretty well-protected against the pandemic. Those who have serious health issues will still be at some risk. Unfortunately, we have lots of loony tunes in this country whose definition of freedom means exposing these people to the pandemic, but thankfully most of us can now consider ourselves pretty safe in spite of these jerks.

 

Back to the Economy

With the booster rollout going at a pretty good pace, most people are getting back to normal and this shows up in the economic data. The 4.6 percent unemployment rate is still more than a percentage point higher than the pre-pandemic level, but already quite low by recent historical standards. We didn’t see an unemployment rate this low following the Great Recession until February of 2017.

In February, the Congressional Budget Office (CBO) projected that the unemployment rate would average 5.3 percent for the fourth quarter of this year. With the unemployment rate likely to fall further in November and December, we may average close to a full percentage point lower than the CBO projection for the full quarter.

The labor market has not looked so good, especially for workers at the bottom rung of the wage ladder, in more than fifty years. We just heard that weekly unemployment insurance claims for the week before Thanksgiving fell to 199,000, a level not seen since 1969 when the labor force was just half the current size.

Workers are quitting their jobs at record rates, especially in low-paying jobs like restaurant work. They feel confident that they can leave a job with low pay, bad working conditions, or an abusive boss, and find another one that is better.  

And, this is showing up in higher wages. The real average hourly wage (this is the wage increase in excess of price increases) for production and non-supervisory workers has risen by 2.1 percent over the last two years. For the lowest-paid workers, the increase has been even larger. For restaurant workers, the increase in real pay has been 7.6 percent. For workers in convenience stores, the average real pay increase has been 19.6 percent.

The higher pay and the option to leave bad jobs means a huge improvement in the lives of tens of millions of workers. This has to be a good Thanksgiving for these people and their families. In fact, many of these workers will actually be able to spend Thanksgiving with their families since, in response to the tight labor market, Target, Walmart and many other major retailers will not be open on Thanksgiving this year.

But What About Inflation?

As I noted earlier, the media have been on anti-inflation Jihad. This has included distorting and even making up data to push their case. Nonetheless, inflation has clearly jumped to levels that few would find acceptable, and if they were to rise still further, we would definitely have a serious problem on our hands.

I have been and remain in the camp that sees this jump as a temporary phenomenon. The world economy reopened in a big way in the last six months, after being largely shut down in 2020. This led to serious disruptions in supply chains, which were not prepared for all the items being pushed through, especially since the demand was disproportionately on the goods side.

Compounding the problem, we had a fire at a major semiconductor factory in Japan, which led to a worldwide shortage of semiconductors. This led to a shortage of cars since semiconductors are an important component in new cars. The car shortage has been a major source of inflation over the last year, with new vehicle prices up 9.8 percent over the last year and used vehicle prices up 26.4 percent.

There are good reasons for believing that these price hikes will be temporary. Rather than leading to accelerating inflation, they are more likely to be reversed in the months ahead. In the case of car prices, we are seeing a rapid expansion in semiconductor production, which is allowing major manufacturers like Ford and Toyota to return to their normal production schedule.

We are also likely to see a falloff in demand in the months ahead. People who bought a car in 2021 are not likely to buy another one in 2022. This will be true for a wide range of products that saw a surge in demand both because of the pandemic checks people received at the start of the year and because they could not spend money on services like restaurants and concerts due to the pandemic.

These factors are now behind us. Restaurant spending is now above its pre-pandemic level, although spending on other services has not yet returned to its early 2020 pace.

Also, the pandemic checks, the paycheck protection program, the supplemental unemployment insurance supplements, and other pandemic programs are all in the rearview mirror. This means that any excessive spending attributable to these programs is history. People are spending now based on their current income.

In this respect, it is worth noting that the savings rate as a share of disposable income for October was 7.3 percent, just a hair below the 7.5 percent average for the three years prior to the pandemic. This is a big deal since it means that, to date, we are not seeing evidence that people are spending down the savings they accrued during the pandemic.

This means that we have little reason to believe that we will be creating new stress on supply chains going forward. We have a backlog of items that have to be shoved through the supply chain, but new demand should be close enough to pre-pandemic levels that our supply chains should be able to deal with them.

There is some evidence that we are already seeing price declines in many of the items that had pushed up inflation earlier this year. For example, lumber futures, which typically traded in a range of $300 to $500 before the pandemic, soared to a peak of almost $1,700 in May. They then fell back to under $500 in August. (More recently, they have bounced up higher, but still have generally remained at prices that are less than half the May peak.)  

There is a similar story with a number of other commodities. The Baltic Dry Goods Index, which is a worldwide index of the spot prices for a number of widely traded commodities, soared earlier this year, peaking at over 5,500 at the start of October. Its more normal range would be between 1,400 and 1,600. In the last month and a half, it has fallen back sharply to 2,650.

It is worth noting that these price rises reflect worldwide conditions, not just the U.S. market. This point is important because other countries didn’t get the same boost to their recovery as we saw here with the American Recovery Plan (ARP) that President Biden pushed through Congress. This indicates that much of the inflation we are now seeing had little to do with the ARP, but rather was due to problems with reopening that would have been present regardless of the extent to which we boosted the U.S.  economy.

The other point is that the price declines recently seen for many commodities support the argument for the price burst being a temporary one, which will be reversed in many areas. I have used televisions as a canary in the coal mine for this story. After rising by 10.2 percent from March to August (a 26.3 percent annual rate), television prices have since fallen by 2.8 percent in the last two months. They still have a way to fall to get back to their March level, but my guess is that this decline will continue and that we will see a similar story with many other products that had pushed up inflation earlier this year.

There is one other point worth making on the temporary side. Contrary to the prediction of Larry Summers and other inflation hawks, the dollar has not fallen in value in the wake of the ARP. In fact, it has risen sharply. The dollar is up by almost 10.0 percent against the euro since the start of the year.

This matters not only because it suggests that financial markets don’t see a story of spiraling inflation (the continued low interest rate on 10-year Treasury bonds also supports the temporary story), but it also means that imports should be falling in price in the months ahead. To take a simple case, if a car or television set sells for the same price in euros in Germany or the Netherlands as it did at the start of the year, it would now cost 10 percent less in dollar terms.

As noted earlier, other countries have seen some issues with inflation as well, but if we assume that Biden’s ARP did not set off a worldwide inflationary spiral, these price increases will slow or reverse. At that point, we should be seeing cheaper imports coming into the United States. While imports typically have a limited impact on inflation in the U.S. (they are equal to a bit less than 15 percent of GDP), in this case, they account for a large share of the items that have been pushing up inflation. This means that lower-priced imports should be an important factor countering inflation here in the months ahead.  

 

The Labor Market and the Problem of Not Being Able to Get Good Help

The most important issue for the future course of inflation is what happens in labor markets. As noted earlier, many workers at the bottom end of the wage distribution have seen double-digit pay increases in the last year. This is great news for these workers, many of whom would have been living near the poverty level, especially if they were supporting children. (The $3,000 child tax credit, $3,600 for kids under age six, is also a huge deal.)

But double-digit pay increases are not sustainable in an environment of moderate inflation. If wage growth continues at that pace we have seen at the lower end of the wage distribution, we will certainly see serious problems with inflation going forward.

In fact, the situation is not so dire from the perspective of inflation. As Arin Dube has shown using data from the Current Population Survey, the rapid wage growth has been disproportionately at the bottom end of the wage distribution. Workers at higher points of the distribution have seen stagnant or even declining real wages.

This matters not only from the standpoint of seeing greater equality, but it also means there is less inflation pressure here than may first appear to be the case. When workers getting $100,000 or $200,000 a year get a ten percent pay increase, that means a big increase in labor costs in the economy.  When workers earning $20,000 a year get a ten percent pay increase, the impact on aggregate labor costs is much smaller.

This is largely the story we are seeing today. The occupations where real wages have been stagnant or declining over the past four decades have been seeing strong wage growth due to the tightness of the labor market. There is room for their pay to rise with a limited impact on inflation.

The price of the goods and services that these low-paid workers produce may rise, but so what? It may cost 10 percent more to get a cappuccino at Starbucks, but that is hardly an economic crisis. Truck drivers have seen their real pay fall by close to 30 percent since the 1970s. If we want enough truckers to move the country’s freight, their pay may have to return to 1970s levels, and maybe even go higher. 

These pay increases will mean reversing some of the upward redistribution of the last four decades. This is just the market working its magic.

Of course, if those at the top, including professionals like doctors and lawyers, as well as Wall Street types and high-level corporate executives, are able to exert their political power to ensure that they can still afford to get good help, then we will have an inflationary spiral. That battle is still several steps down the road. The fact that the media won’t even countenance a discussion of the impact of intellectual property on income distribution, or the corruption of corporate governance on CEO pay, is not encouraging.

But we can leave this one for another day. For this Thanksgiving, we can be happy that the tight labor market is allowing tens of millions of people to have much better pay and working conditions than they had before the pandemic.

INFLATION IN THE U.S. ECONOMY IS CLEARLY A PROBLEM. There, I said it in all caps so that everyone can see I recognize it as a problem. The question is how big a problem. After all, we have lots of problems, millions of children in poverty, a huge homeless population, parents without access to affordable childcare, among others.

But none of these other problems has gotten anywhere near the same amount of attention from the media in recent months as inflation. These pieces have often been quite openly dishonest. The nonstop hype of “inflation, inflation, inflation” unsurprisingly leads many people to believe inflation is a really big problem, even if their own finances are pretty good, because they hear all those wise reporters at CNN, NPR, the NYT and elsewhere telling them it’s a really big problem.

CNN’s Milk Story Goes Sour

Just to give a few of my favorite examples, let’s start with the milk hoarding family that CNN found, who was being bankrupted by the price of milk. According to CNN, the family was really pinched because the price of milk had gone from $1.99 a gallon to $2.79 a gallon, and they buy 12 gallons a week.

The first point that many folks seized on is that this family buys 12 gallons a week. I suppose there are families that drink this much milk, but they clearly are not typical. CNN is not informing us about the typical family when they find an extreme outlier, who for some reason drinks a huge amount of milk.

But the second point is probably more important. Where did they find milk prices going up by 80 cents a gallon, or slightly over 40 percent? The Consumer Price Index shows that milk prices are up 4.0 percent year over year. There are differences for types of milk and by region, but it’s hard to imagine that there is anywhere in the country where milk prices have risen by 40 percent over the last year.

Since we have the national data, we know this increase is not typical. So again, maybe CNN has uncovered some extreme outlier family who gets gouged at the store where they buy their milk, but why are they presenting their story as typical?

Finally, we have the other side of the picture, the family’s income. This has likely risen a great deal in the last year, especially if our milk drinkers are a low or moderate-income family, as the piece suggests. The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years.

The increases are even larger towards the bottom end of the wage distribution. The average hourly wage for non-supervisory workers in restaurants has risen 12.4 percent over the last year and 13.5 percent over the last two years. 

This means that the higher pay this family is getting is almost certainly swamping the impact of the rise in milk prices they are seeing. Yet, somehow CNN wants to tell us this family is being crushed by higher milk prices.

CNN also failed to mention the child tax credit. The child tax credit was increased from $2,000 a year in 2020 to $3,000 a year in 2021, with the credit for children under age 6 rising to $3,600. Furthermore, this credit is fully refundable, the limit on refundability for the prior credit was $1,400.

Since these big milk drinkers presumably have lots of kids, their additional income from the child tax credit should dwarf the impact of higher milk prices. In short, CNN’s story of low and moderate-income families being derailed by higher milk prices had no basis in reality.

 

The New York Times Is a Gas on Inflation

The New York Times decided to tell us that we are all suffering because of higher gas prices, running a piece saying that no one can afford to visit their family this Thanksgiving. As with the CNN milk piece, there is no mention of wage increases that most workers have seen since the pandemic began, especially those towards the bottom end of the wage ladder.

But, like CNN with milk, the NYT also plays silly tricks with gas prices. It tells readers:

“Millions of American drivers have acutely felt the recent surge in gas prices, which last month hit their highest level since 2014. The national average for a gallon of gas is $3.41, which is $1.29 more than it was a year ago, according to AAA.”

Well, last year the United States and the rest of the world were in the early stages of recovering from worldwide shutdowns that sent the prices of gas plummeting. If we go back two years ago, the Energy Information Agency puts the average price of a gallon of gasoline at $2.61 compared to the current $3.39. This means the current price is an increase of 78 cents a gallon or 29.9 percent.

That’s not trivial, but considerably smaller than the comparison to last year. A typical person drives their car roughly 10,000 miles a year, which means that if they get 20 miles a gallon, they buy 10 gallons a week. Higher gas prices would cost then cost them $7.80 a week.

If we go back to 2018, the average price of a gallon of gas was $2.75 in November. This means that a typical driver would be spending $6.40 more on gas a week compared to 2018 when their pay was considerably lower.

The NYT also managed to find the gas-guzzling equivalent of CNN’s milk hoarding family.

“Aldo McCoy, who owns an auto repair shop in Toms River, watched the numbers on a gas pump flash higher Wednesday as he filled up the tank of his 1963 Chevrolet Impala. He recalled recently filling his 2003 Cadillac Escalade and seeing the price go above $100, where it used to be $45.

“Mr. McCoy said he and his staff were working more than 15 hours of overtime each week to compensate for the extra money they spent on gas. He has also cut back on his household spending.”

Perhaps Mr. McCoy really does use a huge amount of gas, but then he is a very atypical person. If he is actually working an extra 15 hours a week to cover gas costs, this would come to over $105 a week at the minimum wage. If he and his staff get $20 an hour on average, the extra 15 hours would be $300 a week.

That additional income would be enough to cover the added cost of more than 230 gallons a week when measured against last year’s prices. It would be enough to cover the added cost of almost 470 gallons a week when measured against 2018 prices.

Readers of course have no idea how much Mr. McCoy actually drives, or what he drives, but if he buys hundreds of gallons of gas a week his expenses are very far from being representative of a typical American family.

National Public Radio Drains the Reserves to Trash Biden

NPR interviewed Tony Fratto, Deputy Press Secretary to George W. Bush. He told listeners why drawing down the strategic oil reserves to lower gas prices was a bad idea. The piece began with the cheap trick used by the New York Times, making a comparison between this year’s gas prices and last year’s pandemic depressed gas prices.

It then let Fratto make a number of misleading or inaccurate assertions without any pushback. First of all, Fratto neglected to mention that the release of reserves was being coordinated with China, Japan, and several other countries, which will make the impact on world oil markets considerably larger. Such a coordinated release likely would not have been possible with our prior “America First” president.

While Fratto trivialized the impact of another 700,000 barrels a day of oil on world markets, in fact, losses of oil of comparable amounts have often had a noticeable impact in prior years, such as when Libyan oil production dropped off due to its civil war. In the short run, demand for oil is highly inelastic (meaning it does not respond much to changes in price) so even limited changes in supply can have a substantial impact on prices.

Fratto also claimed that dipping into reserves to affect prices is extraordinary. In fact, many presidents have dipped into reserves to limit price increases, including President George H.W. Bush at the start of the first Iraq War and President George W. Bush after Hurricane Katrina idled capacity in Louisiana. The decision by President Biden to tap reserves to smooth markets as the economy recovers from a worldwide pandemic is very much in keeping with past practices.

The Media Has Decided Inflation is The Issue and Will Not Let the Data Get in the Way

We are likely to see many more stories along these lines in the weeks and months ahead as the media seem determined to say that inflation is the crisis of the century, no matter how much they have to abuse the data to make this point. They should be embarrassed to run pieces like the ones above, but unfortunately, shame has no place in policy discussions these days.

As I said at the beginning, inflation is a problem, but we need to look at the issue with clear eyes. There are good reasons for believing that many of the price increases we have seen in recent months are temporary and will be reversed. This is most notable with new and used cars, but also with many other items.

The spending-induced pandemic checks and unemployment insurance supplements are behind us. Saving rates are at normal levels, meaning that people are not spending down their accumulated wealth to any significant extent. If we can continue to bring the pandemic under control with vaccines and other measures, we can look forward to pretty clear sailing with the economy.  

INFLATION IN THE U.S. ECONOMY IS CLEARLY A PROBLEM. There, I said it in all caps so that everyone can see I recognize it as a problem. The question is how big a problem. After all, we have lots of problems, millions of children in poverty, a huge homeless population, parents without access to affordable childcare, among others.

But none of these other problems has gotten anywhere near the same amount of attention from the media in recent months as inflation. These pieces have often been quite openly dishonest. The nonstop hype of “inflation, inflation, inflation” unsurprisingly leads many people to believe inflation is a really big problem, even if their own finances are pretty good, because they hear all those wise reporters at CNN, NPR, the NYT and elsewhere telling them it’s a really big problem.

CNN’s Milk Story Goes Sour

Just to give a few of my favorite examples, let’s start with the milk hoarding family that CNN found, who was being bankrupted by the price of milk. According to CNN, the family was really pinched because the price of milk had gone from $1.99 a gallon to $2.79 a gallon, and they buy 12 gallons a week.

The first point that many folks seized on is that this family buys 12 gallons a week. I suppose there are families that drink this much milk, but they clearly are not typical. CNN is not informing us about the typical family when they find an extreme outlier, who for some reason drinks a huge amount of milk.

But the second point is probably more important. Where did they find milk prices going up by 80 cents a gallon, or slightly over 40 percent? The Consumer Price Index shows that milk prices are up 4.0 percent year over year. There are differences for types of milk and by region, but it’s hard to imagine that there is anywhere in the country where milk prices have risen by 40 percent over the last year.

Since we have the national data, we know this increase is not typical. So again, maybe CNN has uncovered some extreme outlier family who gets gouged at the store where they buy their milk, but why are they presenting their story as typical?

Finally, we have the other side of the picture, the family’s income. This has likely risen a great deal in the last year, especially if our milk drinkers are a low or moderate-income family, as the piece suggests. The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years.

The increases are even larger towards the bottom end of the wage distribution. The average hourly wage for non-supervisory workers in restaurants has risen 12.4 percent over the last year and 13.5 percent over the last two years. 

This means that the higher pay this family is getting is almost certainly swamping the impact of the rise in milk prices they are seeing. Yet, somehow CNN wants to tell us this family is being crushed by higher milk prices.

CNN also failed to mention the child tax credit. The child tax credit was increased from $2,000 a year in 2020 to $3,000 a year in 2021, with the credit for children under age 6 rising to $3,600. Furthermore, this credit is fully refundable, the limit on refundability for the prior credit was $1,400.

Since these big milk drinkers presumably have lots of kids, their additional income from the child tax credit should dwarf the impact of higher milk prices. In short, CNN’s story of low and moderate-income families being derailed by higher milk prices had no basis in reality.

 

The New York Times Is a Gas on Inflation

The New York Times decided to tell us that we are all suffering because of higher gas prices, running a piece saying that no one can afford to visit their family this Thanksgiving. As with the CNN milk piece, there is no mention of wage increases that most workers have seen since the pandemic began, especially those towards the bottom end of the wage ladder.

But, like CNN with milk, the NYT also plays silly tricks with gas prices. It tells readers:

“Millions of American drivers have acutely felt the recent surge in gas prices, which last month hit their highest level since 2014. The national average for a gallon of gas is $3.41, which is $1.29 more than it was a year ago, according to AAA.”

Well, last year the United States and the rest of the world were in the early stages of recovering from worldwide shutdowns that sent the prices of gas plummeting. If we go back two years ago, the Energy Information Agency puts the average price of a gallon of gasoline at $2.61 compared to the current $3.39. This means the current price is an increase of 78 cents a gallon or 29.9 percent.

That’s not trivial, but considerably smaller than the comparison to last year. A typical person drives their car roughly 10,000 miles a year, which means that if they get 20 miles a gallon, they buy 10 gallons a week. Higher gas prices would cost then cost them $7.80 a week.

If we go back to 2018, the average price of a gallon of gas was $2.75 in November. This means that a typical driver would be spending $6.40 more on gas a week compared to 2018 when their pay was considerably lower.

The NYT also managed to find the gas-guzzling equivalent of CNN’s milk hoarding family.

“Aldo McCoy, who owns an auto repair shop in Toms River, watched the numbers on a gas pump flash higher Wednesday as he filled up the tank of his 1963 Chevrolet Impala. He recalled recently filling his 2003 Cadillac Escalade and seeing the price go above $100, where it used to be $45.

“Mr. McCoy said he and his staff were working more than 15 hours of overtime each week to compensate for the extra money they spent on gas. He has also cut back on his household spending.”

Perhaps Mr. McCoy really does use a huge amount of gas, but then he is a very atypical person. If he is actually working an extra 15 hours a week to cover gas costs, this would come to over $105 a week at the minimum wage. If he and his staff get $20 an hour on average, the extra 15 hours would be $300 a week.

That additional income would be enough to cover the added cost of more than 230 gallons a week when measured against last year’s prices. It would be enough to cover the added cost of almost 470 gallons a week when measured against 2018 prices.

Readers of course have no idea how much Mr. McCoy actually drives, or what he drives, but if he buys hundreds of gallons of gas a week his expenses are very far from being representative of a typical American family.

National Public Radio Drains the Reserves to Trash Biden

NPR interviewed Tony Fratto, Deputy Press Secretary to George W. Bush. He told listeners why drawing down the strategic oil reserves to lower gas prices was a bad idea. The piece began with the cheap trick used by the New York Times, making a comparison between this year’s gas prices and last year’s pandemic depressed gas prices.

It then let Fratto make a number of misleading or inaccurate assertions without any pushback. First of all, Fratto neglected to mention that the release of reserves was being coordinated with China, Japan, and several other countries, which will make the impact on world oil markets considerably larger. Such a coordinated release likely would not have been possible with our prior “America First” president.

While Fratto trivialized the impact of another 700,000 barrels a day of oil on world markets, in fact, losses of oil of comparable amounts have often had a noticeable impact in prior years, such as when Libyan oil production dropped off due to its civil war. In the short run, demand for oil is highly inelastic (meaning it does not respond much to changes in price) so even limited changes in supply can have a substantial impact on prices.

Fratto also claimed that dipping into reserves to affect prices is extraordinary. In fact, many presidents have dipped into reserves to limit price increases, including President George H.W. Bush at the start of the first Iraq War and President George W. Bush after Hurricane Katrina idled capacity in Louisiana. The decision by President Biden to tap reserves to smooth markets as the economy recovers from a worldwide pandemic is very much in keeping with past practices.

The Media Has Decided Inflation is The Issue and Will Not Let the Data Get in the Way

We are likely to see many more stories along these lines in the weeks and months ahead as the media seem determined to say that inflation is the crisis of the century, no matter how much they have to abuse the data to make this point. They should be embarrassed to run pieces like the ones above, but unfortunately, shame has no place in policy discussions these days.

As I said at the beginning, inflation is a problem, but we need to look at the issue with clear eyes. There are good reasons for believing that many of the price increases we have seen in recent months are temporary and will be reversed. This is most notable with new and used cars, but also with many other items.

The spending-induced pandemic checks and unemployment insurance supplements are behind us. Saving rates are at normal levels, meaning that people are not spending down their accumulated wealth to any significant extent. If we can continue to bring the pandemic under control with vaccines and other measures, we can look forward to pretty clear sailing with the economy.  

Yesterday I heard a piece on NPR in which they highlighted “skimpflation.” This is where there is a deterioration in service quality, like long waits for service at a restaurant, which are not picked up in our standard measures of inflation. The implication is that the Consumer Price Index (CPI) is understating the true rate of inflation that people are seeing.

I had mixed feelings on hearing this report. On the positive side, I had made arguments like this a quarter-century ago, when the party line (the views of the elites in both political parties) was that that the official CPI overstated inflation.

The issue then was that there was a concerted effort to cut Social Security benefits. There is an annual cost-of-living adjustment (COLA) for Social Security that is tied to the CPI. The goal at the time was to reduce this COLA so that the government paid out less in Social Security.

The target was 1.0 percentage points. That may not sound like much, but the fall would accumulate through time. After ten years of getting 1.0 percent less each year, a retiree’s benefit would be 10.0 percent less. After twenty years, it would be 20.0 percent less. (The actual reduction would be somewhat less due to the effect of compounding.)

Many of the big names in the economics profession were mustered together in the effort to cut Social Security benefits, with the Senate Finance Committee assembling the “Boskin Commission” to lead the charge. I was rather lonely in my efforts to question their assessment.  

In addition to pointing out that much of the evidence that the CPI overstated inflation was weak, I also tried to call attention to ways in which it understated inflation. Some of these would fit the definition of today’s “skimpflation.” (Anyone interested can find this in my book, Getting Prices Right.)

For example, I pointed out that average capacity utilization in airlines went from around 75 percent in the 1970s to well over 90 percent in 1990s. This meant that you would rarely have a middle seat filled in the 1970s, to a situation where three people in a row would be standard in the 1990s. This loss of space (coupled with smaller seats and less distance between rows) was a deterioration in quality not picked up in the CPI.

There were similar stories in other areas. The NPR piece talked about reduced service in stores that had fewer salespeople. That was also a story in the 1990s as Walmart and big box stores were replacing neighborhood stores that might have had more clerks available to answer customers’ questions.

Anyhow, there was little media interest in these sorts of skimpflation issues back in 1990s since it went against the story that the media wanted to push. Social Security was in their cross-hairs and they were not interested in publicizing arguments that might undermine the cause (cutting benefits).

Today, they have the opposite cause. The major news outlets are pushing the inflation argument even when it means misrepresenting the true rate of price increases, distorting the story on real wages, and ignoring the benefits to low and moderate-income families from the child tax credit.  

Of course, skimpflation does refer to something real in the world, we have seen a deterioration in the quality of many services. But, if we want to try to discuss this as unmeasured inflation we have to think about it a bit more seriously.

In 2020, many of these services weren’t available at all in many places for much of the year. For example, restaurants were closed or did not have indoor seating. There would seem like a serious deterioration in service quality. Also, my guess is that southern Utah is not the only place in the country that had shortages of many items on store shelves last year.

Inflation is a measure of change in prices. If we want to say that deteriorating service quality and shortages of various items are a source of unmeasured inflation then we have to say that the story is worse today than it was last year or at some prior point. (Unless the point is that the media neglected all this inflation that occurred when Donald Trump was in the White House.)

If the media have some studies that can show how this deterioration has increased over time, it should share them. Many of us econ nerd types would be very interested in getting a good measure of this sort of quality deterioration.

But let me throw out a simpler proposition. Suppose that at some point, say six to eight months down the road, we no longer see restaurants short-staffed and shortages of random items in stores or on Internet sites.

Can we count on NPR and other news outlets to call attention to this unmeasured improvement in service quality, in effect, “skimpdeflation?” The whole world is waiting.

Yesterday I heard a piece on NPR in which they highlighted “skimpflation.” This is where there is a deterioration in service quality, like long waits for service at a restaurant, which are not picked up in our standard measures of inflation. The implication is that the Consumer Price Index (CPI) is understating the true rate of inflation that people are seeing.

I had mixed feelings on hearing this report. On the positive side, I had made arguments like this a quarter-century ago, when the party line (the views of the elites in both political parties) was that that the official CPI overstated inflation.

The issue then was that there was a concerted effort to cut Social Security benefits. There is an annual cost-of-living adjustment (COLA) for Social Security that is tied to the CPI. The goal at the time was to reduce this COLA so that the government paid out less in Social Security.

The target was 1.0 percentage points. That may not sound like much, but the fall would accumulate through time. After ten years of getting 1.0 percent less each year, a retiree’s benefit would be 10.0 percent less. After twenty years, it would be 20.0 percent less. (The actual reduction would be somewhat less due to the effect of compounding.)

Many of the big names in the economics profession were mustered together in the effort to cut Social Security benefits, with the Senate Finance Committee assembling the “Boskin Commission” to lead the charge. I was rather lonely in my efforts to question their assessment.  

In addition to pointing out that much of the evidence that the CPI overstated inflation was weak, I also tried to call attention to ways in which it understated inflation. Some of these would fit the definition of today’s “skimpflation.” (Anyone interested can find this in my book, Getting Prices Right.)

For example, I pointed out that average capacity utilization in airlines went from around 75 percent in the 1970s to well over 90 percent in 1990s. This meant that you would rarely have a middle seat filled in the 1970s, to a situation where three people in a row would be standard in the 1990s. This loss of space (coupled with smaller seats and less distance between rows) was a deterioration in quality not picked up in the CPI.

There were similar stories in other areas. The NPR piece talked about reduced service in stores that had fewer salespeople. That was also a story in the 1990s as Walmart and big box stores were replacing neighborhood stores that might have had more clerks available to answer customers’ questions.

Anyhow, there was little media interest in these sorts of skimpflation issues back in 1990s since it went against the story that the media wanted to push. Social Security was in their cross-hairs and they were not interested in publicizing arguments that might undermine the cause (cutting benefits).

Today, they have the opposite cause. The major news outlets are pushing the inflation argument even when it means misrepresenting the true rate of price increases, distorting the story on real wages, and ignoring the benefits to low and moderate-income families from the child tax credit.  

Of course, skimpflation does refer to something real in the world, we have seen a deterioration in the quality of many services. But, if we want to try to discuss this as unmeasured inflation we have to think about it a bit more seriously.

In 2020, many of these services weren’t available at all in many places for much of the year. For example, restaurants were closed or did not have indoor seating. There would seem like a serious deterioration in service quality. Also, my guess is that southern Utah is not the only place in the country that had shortages of many items on store shelves last year.

Inflation is a measure of change in prices. If we want to say that deteriorating service quality and shortages of various items are a source of unmeasured inflation then we have to say that the story is worse today than it was last year or at some prior point. (Unless the point is that the media neglected all this inflation that occurred when Donald Trump was in the White House.)

If the media have some studies that can show how this deterioration has increased over time, it should share them. Many of us econ nerd types would be very interested in getting a good measure of this sort of quality deterioration.

But let me throw out a simpler proposition. Suppose that at some point, say six to eight months down the road, we no longer see restaurants short-staffed and shortages of random items in stores or on Internet sites.

Can we count on NPR and other news outlets to call attention to this unmeasured improvement in service quality, in effect, “skimpdeflation?” The whole world is waiting.

That’s what readers of the paper must be asking after seeing this piece on Friday morning. The headline of the piece features her quote, “no one tells me what to do,” when in fact there is ample evidence that the pharmaceutical industry and rich contributors tell her exactly what to do.

Sinema has made herself famous this year by refusing to go along with tax hikes on rich people and corporations or limiting the patent monopolies given to prescription drug companies by negotiating prices. As a result, it is much more difficult for the Democrats to find offsets for the spending increases in the Build Back Better (BBB) bill.

The piece allows Sinema to tell her story on taxing the rich with zero pushback against obviously untrue statements. Sinema had voted against the Trump tax cuts when she was a member of the House in 2017, but now is refusing to go along with Democratic efforts to take back most of these cuts.

The piece tells readers:

“Sinema said her goal had been to ensure that any revenue-raising measures in the bill [BBB] are focused on ‘maintaining American competitiveness and ensuring that businesses of all sizes in America, and particularly in Arizona, have the ability to grow and to compete.’”

It would have been worth mentioning here that there is zero evidence that the Trump tax cuts had any notable effect in boosting the competitiveness and ability for growth of businesses in the United States or Arizona. This means that Senator Sinema is either completely ignorant of recent economic history, or lying. In this context, it might have been worth mentioning that Senator Sinema has been engaged in some recent fundraising efforts from very wealthy donors.

It might have also been worth mentioning Senator Sinema’s contributions from the pharmaceutical industry. Incredibly, the piece does not mention at all Senator Sinema’s successful effect to block negotiations on most drug prices to bring our prices more in line with the rest of the world. Reducing drug prices could have paid for much of the cost of the BBB bill. Senator Sinema had campaigned on reducing drug prices in her 2018 senate race.

The piece also allowed Sinema to make contradictory assertions about her concerns with deficits and inflation. After boasting that she had warned about inflation from the spending in the American Recovery Act, which was approved in February, the piece quotes Sinema:

“When we were drafting the bipartisan infrastructure law, we specifically took care to include shovel-ready projects that would be ready to start moving as quickly as possible.”

If Senator Sinema is actually worried about the current inflation then absolutely the last thing she should want are “shovel-ready” projects. Such projects would mean more spending now, further increasing demand at a time when Sinema is complaining that we have too much demand and that it is causing inflation. To be consistent, Sinema should want spending that will take place several years down the road, when presumably inflationary pressures will have eased.

The piece also noted Sinema’s opposition to ending the filibuster. She argued her case in a Washington Post column earlier this year.  Incredibly, the column never acknowledged the filibuster’s origins as a legislative tool to protect slavery, or its more recent usage to protect Jim Crow laws and to block civil rights measures. Other democracies don’t allow a minority to block measures that are favored by an overwhelming majority of a legislature and an even larger majority of voters, given the structure of the Senate. It would have been reasonable for the Post interviewers to press Senator Sinema on this issue, if this had been a serious interview.

Most members of the Senate cannot get this sort of fluff piece to present themselves as brave political figures standing up to their party and the political winds. It is hard to see a good reason why the Post felt that it should let Senator Sinema present herself this way.

That’s what readers of the paper must be asking after seeing this piece on Friday morning. The headline of the piece features her quote, “no one tells me what to do,” when in fact there is ample evidence that the pharmaceutical industry and rich contributors tell her exactly what to do.

Sinema has made herself famous this year by refusing to go along with tax hikes on rich people and corporations or limiting the patent monopolies given to prescription drug companies by negotiating prices. As a result, it is much more difficult for the Democrats to find offsets for the spending increases in the Build Back Better (BBB) bill.

The piece allows Sinema to tell her story on taxing the rich with zero pushback against obviously untrue statements. Sinema had voted against the Trump tax cuts when she was a member of the House in 2017, but now is refusing to go along with Democratic efforts to take back most of these cuts.

The piece tells readers:

“Sinema said her goal had been to ensure that any revenue-raising measures in the bill [BBB] are focused on ‘maintaining American competitiveness and ensuring that businesses of all sizes in America, and particularly in Arizona, have the ability to grow and to compete.’”

It would have been worth mentioning here that there is zero evidence that the Trump tax cuts had any notable effect in boosting the competitiveness and ability for growth of businesses in the United States or Arizona. This means that Senator Sinema is either completely ignorant of recent economic history, or lying. In this context, it might have been worth mentioning that Senator Sinema has been engaged in some recent fundraising efforts from very wealthy donors.

It might have also been worth mentioning Senator Sinema’s contributions from the pharmaceutical industry. Incredibly, the piece does not mention at all Senator Sinema’s successful effect to block negotiations on most drug prices to bring our prices more in line with the rest of the world. Reducing drug prices could have paid for much of the cost of the BBB bill. Senator Sinema had campaigned on reducing drug prices in her 2018 senate race.

The piece also allowed Sinema to make contradictory assertions about her concerns with deficits and inflation. After boasting that she had warned about inflation from the spending in the American Recovery Act, which was approved in February, the piece quotes Sinema:

“When we were drafting the bipartisan infrastructure law, we specifically took care to include shovel-ready projects that would be ready to start moving as quickly as possible.”

If Senator Sinema is actually worried about the current inflation then absolutely the last thing she should want are “shovel-ready” projects. Such projects would mean more spending now, further increasing demand at a time when Sinema is complaining that we have too much demand and that it is causing inflation. To be consistent, Sinema should want spending that will take place several years down the road, when presumably inflationary pressures will have eased.

The piece also noted Sinema’s opposition to ending the filibuster. She argued her case in a Washington Post column earlier this year.  Incredibly, the column never acknowledged the filibuster’s origins as a legislative tool to protect slavery, or its more recent usage to protect Jim Crow laws and to block civil rights measures. Other democracies don’t allow a minority to block measures that are favored by an overwhelming majority of a legislature and an even larger majority of voters, given the structure of the Senate. It would have been reasonable for the Post interviewers to press Senator Sinema on this issue, if this had been a serious interview.

Most members of the Senate cannot get this sort of fluff piece to present themselves as brave political figures standing up to their party and the political winds. It is hard to see a good reason why the Post felt that it should let Senator Sinema present herself this way.

We’re getting a lot of “I told you so’s” on inflation in recent days. Yesterday, it was Larry Summers in the Washington Post, today we get Steven Rattner in a New York Times column. Their story is that the 6.4 percent year-over-year inflation shown in the October CPI proves that their warnings about Biden’s recovery package being too large were correct.

Before analyzing this claim and Rattner’s takeaways going forward, let me clearly say that I did not anticipate this sort of price jump. While some increase in inflation was inevitable, and even desirable, the rise was considerably more than I expected. I attribute this to supply chain issues, which are almost certain to be temporary (more on this later). But I am happy to acknowledge that this burst of inflation did catch me by surprise.

So, let’s get to Rattner’s story. He and Summers argued that the American Recovery Package (ARP) that Congress passed in February overstimulated the economy, leading to a serious problem with inflation. They want the Fed to raise rates to slow the economy, saying that its wait and see attitude is irresponsible and will lead to more inflation. Rattner also wants the Democrats to cut back their Build Back Better plan to make sure that it does not increase the deficit.

Okay, so starting with the basic claim, clearly the ARP did give a big boost to the recovery. That is why the unemployment rate is down to 4.6 percent, a level that we didn’t reach following the Great Recession until February of 2017, more than nine years after the start of the recession. 

But, it is hard to blame the ARP as the sole cause of the spike in inflation. The UK just reported its year-over-year inflation rate as 4.2 percent, far above its central bank’s 2.0 percent target. The reason this is a big deal is that the UK didn’t have a big stimulus package and its central bank has been far more vigilant in its commitment to low inflation than the Fed. While 4.2 percent is obviously less than 6.4 percent, the jump in the UK shows that there is something more than an over-stimulated economy driving these inflation numbers.

There are a couple of other things that don’t fit well with the Summers-Rattner line. Contrary to what Summers very explicitly predicted, the dollar has not fallen against other major currencies, it actually has risen substantially since the start of the year. It’s up by more than 6.0 percent against the euro.

This means both that investors are not anxious to dump the dollar as inflation erodes its value, but also that we can buy lots of imported goods more cheaply from Europe and other places, insofar as both our inflation exceeded theirs and also the dollar has risen in value against their currencies. That would be an important check on inflation going forward.

The other point here is that the financial markets clearly are not buying the Summers-Rattner hyperinflation story. The interest rate on the 10-year Treasury bond is currently 1.63 percent. It’s hard to believe investors would accept this sort of interest rate if they anticipated 4-5 percent annual inflation. (By comparison, it never got below 4.0 percent in budget surplus Clinton 1990s.) The breakeven 10-year Treasury rate (comparing the rate on Treasury bonds and inflation-indexed bonds) is 2.7 percent.

As someone who warned about both the stock bubble in the 1990s and the housing bubble in the 00s, I am well aware that financial markets can be seriously wrong. Nonetheless, it is worth noting that they clearly do not accept the Summers-Rattner inflation story.

Demand Pressure Going Forward

While we can debate forever whether the ARP put too much money into the economy in the spring and summer, the relevant question is what the economy looks like going forward. On this front, there are good reasons for thinking that our problem may be too little demand rather than too much demand.

First and most importantly, we ended the special pandemic unemployment insurance (UI) programs and $300 weekly supplements in September. At the time, we had almost 9 million people getting benefits under the pandemic programs, as well as 3 million people getting convention UI in various forms. The loss of these benefits would conservatively amount to roughly $280 billion (1.2 percent of GDP) on an annual basis.

In addition, various other pandemic programs are coming to an end. The funds in the Paycheck Protection Program have mostly been disbursed. The eviction moratorium came to an end in September, which will lead to evictions in some cases and more rent payments in others. The moratorium on student loan payments ends in January, which will also be a drag on the spending of millions of people with debts.

All of these factors will be a drag on the economy moving forward. In addition, there are some inevitable sources of drag due to one-time actions. The pace of mortgage refinancing has slowed sharply, largely because this is the sort of thing people only do once. There is a lot of money generated from these fees. If the costs of refinancing a $250,000 mortgage are 2 percent, that comes to $5,000 in fees and commissions that we won’t be seeing as the pace slows. Also, we won’t be seeing additional money freed up for consumption by families that are able to refinance at lower rates.

There is a similar story with homebuying. There had been a big surge at the start of the pandemic as people took advantage of increased opportunities to work from home and move to new houses. This switch will continue, but at a much slower pace going forward. It is important to remember that people moving to new homes often buy new refrigerators, washers and dryers, and other items currently seeing rapid price increases.  

These factors will be serious drags on the economy going forward. They are not likely to tip us into recession, but they should make us hesitant to accept the inflation hawks’ complaints that the economy is overstimulated.

It is also worth mentioning that the supply chain problems will likely work themselves out in the next several months. Decreased demand for a wide range of household items, coupled with shippers innovating and hiring more workers, should get things back to something like normal some time next year. This will mean falling prices in many areas. We already see this with the price of televisions, which has dropped 2.8 percent in the last two months after rising rapidly over the summer.   

 

Should We Trim Build Back Better?

The bottom line from Rattner is that we need to start worrying about budget deficits big time. If we are not likely to see much inflationary pressure going forward, this is not clear, but it’s also important to get some idea of the magnitude involved. Most of the Build Back Better (BBB) plan is paid for with tax increases, but let’s say that we have a shortfall of $300 billion. That comes to $30 billion a year over the course of a decade, or roughly 0.1 percent of GDP in a $30 trillion economy.

There is no plausible story in which this sort of shortfall will have a noticeable impact on inflation. Furthermore, as has been widely pointed out, many aspects of the program will lower inflation, such as increasing parents’ ability to work with increased childcare, as well as improved access to broadband and better infrastructure.

It is also worth mentioning an inflation-debt issue that the deficit hawks persist in ignoring. The government grants patent and copyright monopolies every year that lead to higher prices for everything from prescription drugs to computer software and video games. These monopolies both stimulate economic activity (that is their point) and effectively create debt in the form of higher prices. In the case of prescription drugs alone, we are likely paying an additional $400 billion a year due to patent monopolies and related protections.   

The insistence on ignoring the impact of these government-granted monopolies in their calculations of deficits and debt shows the lack of seriousness of the deficit hawks. How is it any different from the standpoint of the macroeconomy if we increase the deficit by $50 billion by spending more on biomedical research, as opposed to stimulating another $50 billion in spending by the pharmaceutical industry through more generous patent monopolies?

The fact that they never even consider the issue shows a profound lack of seriousness. Anyhow, we do need to be concerned about the risks that we are overheating the economy and creating real problems of inflation going forward. But, in spite of the victory lap from the deficit hawks, there is good reason to believe that they are not correct and that Congress and the Biden administration should proceed as planned with the BBB.  

We’re getting a lot of “I told you so’s” on inflation in recent days. Yesterday, it was Larry Summers in the Washington Post, today we get Steven Rattner in a New York Times column. Their story is that the 6.4 percent year-over-year inflation shown in the October CPI proves that their warnings about Biden’s recovery package being too large were correct.

Before analyzing this claim and Rattner’s takeaways going forward, let me clearly say that I did not anticipate this sort of price jump. While some increase in inflation was inevitable, and even desirable, the rise was considerably more than I expected. I attribute this to supply chain issues, which are almost certain to be temporary (more on this later). But I am happy to acknowledge that this burst of inflation did catch me by surprise.

So, let’s get to Rattner’s story. He and Summers argued that the American Recovery Package (ARP) that Congress passed in February overstimulated the economy, leading to a serious problem with inflation. They want the Fed to raise rates to slow the economy, saying that its wait and see attitude is irresponsible and will lead to more inflation. Rattner also wants the Democrats to cut back their Build Back Better plan to make sure that it does not increase the deficit.

Okay, so starting with the basic claim, clearly the ARP did give a big boost to the recovery. That is why the unemployment rate is down to 4.6 percent, a level that we didn’t reach following the Great Recession until February of 2017, more than nine years after the start of the recession. 

But, it is hard to blame the ARP as the sole cause of the spike in inflation. The UK just reported its year-over-year inflation rate as 4.2 percent, far above its central bank’s 2.0 percent target. The reason this is a big deal is that the UK didn’t have a big stimulus package and its central bank has been far more vigilant in its commitment to low inflation than the Fed. While 4.2 percent is obviously less than 6.4 percent, the jump in the UK shows that there is something more than an over-stimulated economy driving these inflation numbers.

There are a couple of other things that don’t fit well with the Summers-Rattner line. Contrary to what Summers very explicitly predicted, the dollar has not fallen against other major currencies, it actually has risen substantially since the start of the year. It’s up by more than 6.0 percent against the euro.

This means both that investors are not anxious to dump the dollar as inflation erodes its value, but also that we can buy lots of imported goods more cheaply from Europe and other places, insofar as both our inflation exceeded theirs and also the dollar has risen in value against their currencies. That would be an important check on inflation going forward.

The other point here is that the financial markets clearly are not buying the Summers-Rattner hyperinflation story. The interest rate on the 10-year Treasury bond is currently 1.63 percent. It’s hard to believe investors would accept this sort of interest rate if they anticipated 4-5 percent annual inflation. (By comparison, it never got below 4.0 percent in budget surplus Clinton 1990s.) The breakeven 10-year Treasury rate (comparing the rate on Treasury bonds and inflation-indexed bonds) is 2.7 percent.

As someone who warned about both the stock bubble in the 1990s and the housing bubble in the 00s, I am well aware that financial markets can be seriously wrong. Nonetheless, it is worth noting that they clearly do not accept the Summers-Rattner inflation story.

Demand Pressure Going Forward

While we can debate forever whether the ARP put too much money into the economy in the spring and summer, the relevant question is what the economy looks like going forward. On this front, there are good reasons for thinking that our problem may be too little demand rather than too much demand.

First and most importantly, we ended the special pandemic unemployment insurance (UI) programs and $300 weekly supplements in September. At the time, we had almost 9 million people getting benefits under the pandemic programs, as well as 3 million people getting convention UI in various forms. The loss of these benefits would conservatively amount to roughly $280 billion (1.2 percent of GDP) on an annual basis.

In addition, various other pandemic programs are coming to an end. The funds in the Paycheck Protection Program have mostly been disbursed. The eviction moratorium came to an end in September, which will lead to evictions in some cases and more rent payments in others. The moratorium on student loan payments ends in January, which will also be a drag on the spending of millions of people with debts.

All of these factors will be a drag on the economy moving forward. In addition, there are some inevitable sources of drag due to one-time actions. The pace of mortgage refinancing has slowed sharply, largely because this is the sort of thing people only do once. There is a lot of money generated from these fees. If the costs of refinancing a $250,000 mortgage are 2 percent, that comes to $5,000 in fees and commissions that we won’t be seeing as the pace slows. Also, we won’t be seeing additional money freed up for consumption by families that are able to refinance at lower rates.

There is a similar story with homebuying. There had been a big surge at the start of the pandemic as people took advantage of increased opportunities to work from home and move to new houses. This switch will continue, but at a much slower pace going forward. It is important to remember that people moving to new homes often buy new refrigerators, washers and dryers, and other items currently seeing rapid price increases.  

These factors will be serious drags on the economy going forward. They are not likely to tip us into recession, but they should make us hesitant to accept the inflation hawks’ complaints that the economy is overstimulated.

It is also worth mentioning that the supply chain problems will likely work themselves out in the next several months. Decreased demand for a wide range of household items, coupled with shippers innovating and hiring more workers, should get things back to something like normal some time next year. This will mean falling prices in many areas. We already see this with the price of televisions, which has dropped 2.8 percent in the last two months after rising rapidly over the summer.   

 

Should We Trim Build Back Better?

The bottom line from Rattner is that we need to start worrying about budget deficits big time. If we are not likely to see much inflationary pressure going forward, this is not clear, but it’s also important to get some idea of the magnitude involved. Most of the Build Back Better (BBB) plan is paid for with tax increases, but let’s say that we have a shortfall of $300 billion. That comes to $30 billion a year over the course of a decade, or roughly 0.1 percent of GDP in a $30 trillion economy.

There is no plausible story in which this sort of shortfall will have a noticeable impact on inflation. Furthermore, as has been widely pointed out, many aspects of the program will lower inflation, such as increasing parents’ ability to work with increased childcare, as well as improved access to broadband and better infrastructure.

It is also worth mentioning an inflation-debt issue that the deficit hawks persist in ignoring. The government grants patent and copyright monopolies every year that lead to higher prices for everything from prescription drugs to computer software and video games. These monopolies both stimulate economic activity (that is their point) and effectively create debt in the form of higher prices. In the case of prescription drugs alone, we are likely paying an additional $400 billion a year due to patent monopolies and related protections.   

The insistence on ignoring the impact of these government-granted monopolies in their calculations of deficits and debt shows the lack of seriousness of the deficit hawks. How is it any different from the standpoint of the macroeconomy if we increase the deficit by $50 billion by spending more on biomedical research, as opposed to stimulating another $50 billion in spending by the pharmaceutical industry through more generous patent monopolies?

The fact that they never even consider the issue shows a profound lack of seriousness. Anyhow, we do need to be concerned about the risks that we are overheating the economy and creating real problems of inflation going forward. But, in spite of the victory lap from the deficit hawks, there is good reason to believe that they are not correct and that Congress and the Biden administration should proceed as planned with the BBB.  

We are still getting through a worldwide pandemic that has taken tens of millions of lives. While we did develop effective vaccines, they were not produced and distributed quickly enough to prevent enormous loss of life. This is a tragedy that should force us to ask how we could have done better.

On the other side, some people did manage to get enormously rich from the pandemic. Specifically, those who had patent monopolies on the mRNA vaccines did very well, as the stock prices of both Pfizer and Moderna soared during the pandemic. Back in April, Forbes identified 40 people who became billionaires as a direct result of their ownership of stock in companies that were profiting off the pandemic. Three of these were from Moderna alone. The number has surely grown, as the stock market has gone up further in the last seven months.

The reason why the Moderna billionaires might be especially upsetting is that so much of what they did was with government funding. The development of mRNA technology, beginning in the early 1980s, was accomplished almost entirely on the government’s dime. While Moderna did do further research to develop a foundation for producing vaccines, the money to actually develop and test Moderna’s vaccine came entirely from the government through Operation Warp Speed. The government also signed a large advance purchase agreement, which would have required it to pay for several million Moderna vaccines, even if other vaccines were superior.

In spite of all this government assistance, Moderna was allowed to gain control over key patents and other intellectual property claims. It can therefore restrict the distribution of its vaccine and charge whatever price it chooses.

In short, we structured the relationship with Moderna so that it was able to profit enormously. Its profits come directly at the expense of lives. While we could have insisted that all the work on pandemic vaccines, tests, and treatments be fully open (at least those projects relying on government funding or past government-funded research), we instead had the taxpayers pick up the tab and then give Moderna, Pfizer, Merck, and the rest patent monopolies.

That’s a great plan if the goal is to make some people incredibly rich, as we’ve done. It is a terrible path to follow if the point is to bring the pandemic under control as quickly as possible and minimize death and disease.

If we had gone the open route, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, which would be freely available, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration. Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.  

But curbing the pandemic and saving lives was not on the agenda. The key issue was maintaining a market structure that allowed a small number of people to get incredibly rich. It seems that is again the case with climate change. The U.S and other governments want to maintain a market structure that will allow some people to get rich off of green technology rather than adopting the most efficient mechanisms for saving the planet.

Green Technology, If Saving the Planet Were the Goal

As is the case with the pandemic, we face a situation with global warming where we should want any new technology to be distributed as widely as possible as quickly as possible. Intellectual property claims like patents, copyrights, and industrial secrets are obstacles to this goal. Just as Moderna and other vaccine makers have been able to use their control over technology to limit the production of vaccines, these forms of intellectual property will limit the ability to manufacture solar panels, wind turbines, batteries, and other technologies needed to reduce the emission of greenhouse gases.

We should want all of these items to sell at just their cost of production, without having their prices jacked up by these government-granted monopolies. In the case of drugs and vaccines, the mark-ups associated with these protections are typically several thousand percent. Drugs and vaccines are almost always cheap to manufacture and distribute, they are expensive because the monopolies resulting from intellectual property allow companies to charge prices that vastly exceed the free market price.

The mark-ups from intellectual property associated with green technologies are likely to be lower in percentage terms, because it is considerably more costly to build things like a wind turbine than to manufacture and distribute a bottle of pills. But, we can still assume that the added cost associated with intellectual property claims will be considerable, thereby slowing the adoption of green technology.

The would-be climate billionaires will counter this argument by pointing out that they need incentives to develop the technology needed to save the planet. That point is true, but it tells us nothing about the need for intellectual property.

Patent monopolies and other forms of intellectual property are one way of providing incentives, but economists have discovered an alternative mechanism for providing incentive: money. According to economic theory, many people can be persuaded to work for money.

We got a great model of the use of money to promote innovation in the pandemic, with Operation Warp Speed, which gave billions of dollars to the pharmaceutical industry to speed the development of vaccines, treatments, and tests. There was a huge payoff with this spending, as the industry quickly responded with effective vaccines and treatments.

Applying the same plan with climate change, we would also use public funds, with a couple of differences. First, we would be thinking of longer-term funding. Speed was essential for saving lives with the pandemic. Speed is essential in addressing climate change as well, but no one thinks that we will have developed all the necessary technology for producing and storing clean energy in a year or two. We will need longer-term contracts that finance development of new technologies over three, five, or even ten years.

The other more important point is that this time the research will be open. We aren’t going to pay companies to develop better solar panels or batteries and then give them a patent monopoly that allows them to charge whatever they want. The government pays them once for their innovation, not twice.

If they sign a contract to develop clean technology and storage, then everything they develop is fully open. This means any manufacturer in the country or the world can use the technology at no cost. (I’ll come back to the international issue.)

This story is exactly what we should want to see if the world is going to move away from fossil fuels as quickly as possible. Imagine the price of solar panels, wind turbines, and batteries fall by 30-40 percent because there are no patents or related protections associated with them. They would be hugely more competitive with fossil fuels, leading to far more rapid adoption. Why would we not want this?

The System of Public Funding

Making new technology available at zero cost would be an enormous benefit over the current system, but that may not even be the biggest advantage of a system of open publicly funded research.[1] Under this sort of system, a condition of getting money would be that all findings are fully open, which means that results would be posted on the web as soon as practical. This would allow scientists all over the world to quickly benefit from each other’s successes and failures. As a result, the technology should advance far more quickly.

The companies currently in the industry may resist changing their business model, but it is possible to force the issue. Suppose the government is putting up funding for developing solar panels, with the condition that all the technology would be fully open. If a solar panel manufacturer chose to remain outside the system, they are soon likely to find themselves competing with panels that are sold at much lower prices, since they don’t have to cover the cost of the technology. (We need a provision like “copyleft” developed by the free software movement that prohibits the use of the technology developed through this system by anyone who themselves claim patent or other IP protection.)   

This prospect is likely to lead most of the companies currently involved in producing clean energy to join the system. Since the government payments are meant to be an alternative to patent monopolies, rather than a supplement, they will have to be larger relative to the research spending than we saw under OWL. It will likely be necessary in many cases to compensate companies for intellectual property claims they already possess to persuade them to join the system.

In some cases, this would also include industrial secrets, which are not quite the same as patent or copyright monopolies. Industrial secrets are protected by non-disclosure agreements that the relevant employees are forced to sign. As a condition of receiving public money, these agreements would be made unenforceable. This means that if a company develops some process or technique, which is not directly protected by patents or another form of intellectual property, any employee would have the option to leave and work for another company and share everything they know, which should already be posted on the web in any case.

International Cooperation

There is obviously a need to share research and development costs internationally rather than having the United States foot the bill alone. We would need an international agreement on this cost-sharing. The basic principle should be straightforward. We would want countries to contribute in proportion to their size and wealth.

There also need to be some criteria for what spending qualifies as being part of a country’s contribution. A million dollars paid to a company or researchers with a well-established track record has to count for more than a million dollars paid to a company controlled by a country’s president’s brother, with no track record whatsoever.  

It would take time to work out an agreement, just as it takes time to work out trade deals like the Trans-Pacific Partnership. But that should not be an excuse not to move forward. The United States and other countries in general agreement on this sort of process could start the process and begin funding research immediately, with the plan that adjustments and payments between nations could be decided later. That is what we would do if, for example, we faced an invasion from space aliens.

More of the Same and a Warming Planet

But, we know that fighting global warming is not really at the top of anyone’s agenda. And no one, including most liberal types, don’t want to do anything that might prevent us from creating more climate change billionaires – after all, they would then have less occasion to complain about inequality. In short, the threat of global warming is not a big enough deal to get our intellectual types to do any serious thinking – not much is.

[1] I give an outline of how this system could work for prescription drugs in chapter 5 of Rigged (it’s free). Our system of military contracting can be seen as a loose model for this system. Military contractors can still take out patents, but they rely on government payments for the vast majority of their revenue. A major difference is that military contractors can keep their work secret for obvious reasons. There is no reason we should want any development in clean technology to be kept secret.

 

We are still getting through a worldwide pandemic that has taken tens of millions of lives. While we did develop effective vaccines, they were not produced and distributed quickly enough to prevent enormous loss of life. This is a tragedy that should force us to ask how we could have done better.

On the other side, some people did manage to get enormously rich from the pandemic. Specifically, those who had patent monopolies on the mRNA vaccines did very well, as the stock prices of both Pfizer and Moderna soared during the pandemic. Back in April, Forbes identified 40 people who became billionaires as a direct result of their ownership of stock in companies that were profiting off the pandemic. Three of these were from Moderna alone. The number has surely grown, as the stock market has gone up further in the last seven months.

The reason why the Moderna billionaires might be especially upsetting is that so much of what they did was with government funding. The development of mRNA technology, beginning in the early 1980s, was accomplished almost entirely on the government’s dime. While Moderna did do further research to develop a foundation for producing vaccines, the money to actually develop and test Moderna’s vaccine came entirely from the government through Operation Warp Speed. The government also signed a large advance purchase agreement, which would have required it to pay for several million Moderna vaccines, even if other vaccines were superior.

In spite of all this government assistance, Moderna was allowed to gain control over key patents and other intellectual property claims. It can therefore restrict the distribution of its vaccine and charge whatever price it chooses.

In short, we structured the relationship with Moderna so that it was able to profit enormously. Its profits come directly at the expense of lives. While we could have insisted that all the work on pandemic vaccines, tests, and treatments be fully open (at least those projects relying on government funding or past government-funded research), we instead had the taxpayers pick up the tab and then give Moderna, Pfizer, Merck, and the rest patent monopolies.

That’s a great plan if the goal is to make some people incredibly rich, as we’ve done. It is a terrible path to follow if the point is to bring the pandemic under control as quickly as possible and minimize death and disease.

If we had gone the open route, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, which would be freely available, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration. Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.  

But curbing the pandemic and saving lives was not on the agenda. The key issue was maintaining a market structure that allowed a small number of people to get incredibly rich. It seems that is again the case with climate change. The U.S and other governments want to maintain a market structure that will allow some people to get rich off of green technology rather than adopting the most efficient mechanisms for saving the planet.

Green Technology, If Saving the Planet Were the Goal

As is the case with the pandemic, we face a situation with global warming where we should want any new technology to be distributed as widely as possible as quickly as possible. Intellectual property claims like patents, copyrights, and industrial secrets are obstacles to this goal. Just as Moderna and other vaccine makers have been able to use their control over technology to limit the production of vaccines, these forms of intellectual property will limit the ability to manufacture solar panels, wind turbines, batteries, and other technologies needed to reduce the emission of greenhouse gases.

We should want all of these items to sell at just their cost of production, without having their prices jacked up by these government-granted monopolies. In the case of drugs and vaccines, the mark-ups associated with these protections are typically several thousand percent. Drugs and vaccines are almost always cheap to manufacture and distribute, they are expensive because the monopolies resulting from intellectual property allow companies to charge prices that vastly exceed the free market price.

The mark-ups from intellectual property associated with green technologies are likely to be lower in percentage terms, because it is considerably more costly to build things like a wind turbine than to manufacture and distribute a bottle of pills. But, we can still assume that the added cost associated with intellectual property claims will be considerable, thereby slowing the adoption of green technology.

The would-be climate billionaires will counter this argument by pointing out that they need incentives to develop the technology needed to save the planet. That point is true, but it tells us nothing about the need for intellectual property.

Patent monopolies and other forms of intellectual property are one way of providing incentives, but economists have discovered an alternative mechanism for providing incentive: money. According to economic theory, many people can be persuaded to work for money.

We got a great model of the use of money to promote innovation in the pandemic, with Operation Warp Speed, which gave billions of dollars to the pharmaceutical industry to speed the development of vaccines, treatments, and tests. There was a huge payoff with this spending, as the industry quickly responded with effective vaccines and treatments.

Applying the same plan with climate change, we would also use public funds, with a couple of differences. First, we would be thinking of longer-term funding. Speed was essential for saving lives with the pandemic. Speed is essential in addressing climate change as well, but no one thinks that we will have developed all the necessary technology for producing and storing clean energy in a year or two. We will need longer-term contracts that finance development of new technologies over three, five, or even ten years.

The other more important point is that this time the research will be open. We aren’t going to pay companies to develop better solar panels or batteries and then give them a patent monopoly that allows them to charge whatever they want. The government pays them once for their innovation, not twice.

If they sign a contract to develop clean technology and storage, then everything they develop is fully open. This means any manufacturer in the country or the world can use the technology at no cost. (I’ll come back to the international issue.)

This story is exactly what we should want to see if the world is going to move away from fossil fuels as quickly as possible. Imagine the price of solar panels, wind turbines, and batteries fall by 30-40 percent because there are no patents or related protections associated with them. They would be hugely more competitive with fossil fuels, leading to far more rapid adoption. Why would we not want this?

The System of Public Funding

Making new technology available at zero cost would be an enormous benefit over the current system, but that may not even be the biggest advantage of a system of open publicly funded research.[1] Under this sort of system, a condition of getting money would be that all findings are fully open, which means that results would be posted on the web as soon as practical. This would allow scientists all over the world to quickly benefit from each other’s successes and failures. As a result, the technology should advance far more quickly.

The companies currently in the industry may resist changing their business model, but it is possible to force the issue. Suppose the government is putting up funding for developing solar panels, with the condition that all the technology would be fully open. If a solar panel manufacturer chose to remain outside the system, they are soon likely to find themselves competing with panels that are sold at much lower prices, since they don’t have to cover the cost of the technology. (We need a provision like “copyleft” developed by the free software movement that prohibits the use of the technology developed through this system by anyone who themselves claim patent or other IP protection.)   

This prospect is likely to lead most of the companies currently involved in producing clean energy to join the system. Since the government payments are meant to be an alternative to patent monopolies, rather than a supplement, they will have to be larger relative to the research spending than we saw under OWL. It will likely be necessary in many cases to compensate companies for intellectual property claims they already possess to persuade them to join the system.

In some cases, this would also include industrial secrets, which are not quite the same as patent or copyright monopolies. Industrial secrets are protected by non-disclosure agreements that the relevant employees are forced to sign. As a condition of receiving public money, these agreements would be made unenforceable. This means that if a company develops some process or technique, which is not directly protected by patents or another form of intellectual property, any employee would have the option to leave and work for another company and share everything they know, which should already be posted on the web in any case.

International Cooperation

There is obviously a need to share research and development costs internationally rather than having the United States foot the bill alone. We would need an international agreement on this cost-sharing. The basic principle should be straightforward. We would want countries to contribute in proportion to their size and wealth.

There also need to be some criteria for what spending qualifies as being part of a country’s contribution. A million dollars paid to a company or researchers with a well-established track record has to count for more than a million dollars paid to a company controlled by a country’s president’s brother, with no track record whatsoever.  

It would take time to work out an agreement, just as it takes time to work out trade deals like the Trans-Pacific Partnership. But that should not be an excuse not to move forward. The United States and other countries in general agreement on this sort of process could start the process and begin funding research immediately, with the plan that adjustments and payments between nations could be decided later. That is what we would do if, for example, we faced an invasion from space aliens.

More of the Same and a Warming Planet

But, we know that fighting global warming is not really at the top of anyone’s agenda. And no one, including most liberal types, don’t want to do anything that might prevent us from creating more climate change billionaires – after all, they would then have less occasion to complain about inequality. In short, the threat of global warming is not a big enough deal to get our intellectual types to do any serious thinking – not much is.

[1] I give an outline of how this system could work for prescription drugs in chapter 5 of Rigged (it’s free). Our system of military contracting can be seen as a loose model for this system. Military contractors can still take out patents, but they rely on government payments for the vast majority of their revenue. A major difference is that military contractors can keep their work secret for obvious reasons. There is no reason we should want any development in clean technology to be kept secret.

 

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