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.

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.

 

I wanted to say a bit more about the New York Times piece on the shortage of truck drivers and how this is the biggest factor causing the current supply chain problems. In an earlier post, I pointed out that the real hourly wage for truckers has dropped by more than 5 percent since 1990. If we are wondering why there is a shortage of drivers, this would be an obvious place to start.

But the drop in pay is just part of the story. The industry is far less unionized than it was back in the 1970s, when President Carter began to deregulate trucking.

Not having a union means that truckers have far less control over their working conditions. That’s a big deal in trucking. Without a union to stand behind them, truckers can be forced to work irregular shifts and long hours. They can be forced to drive in all sorts of weather. They can also be forced to drive trucks that they don’t think are safe due to bad brakes or other issues.

In addition, there has been an enormous increase in the number of independent truckers who own their trucks. For the most part, these should not be thought of as being small businesses, but rather like Uber or Lyft drivers. The large shipping companies contract with these drivers and control almost everything about their work conditions. This can mean that they require them to wait, often many hours, for a shipment to unload and then be transported to a store or warehouse.

Since a contract will typically pay by the mile, if the time spent waiting is factored into the equation, the hourly pay for these drivers will often be very low, possibly even less than the minimum wage. That doesn’t matter, however, since these truckers are classified as independent contractors, not employees. This means that the minimum wage does not apply to them, nor are they eligible for unemployment benefits if they can’t find work, or workers’ compensation if they are injured on the job.

In short, trucking doesn’t look like a very lucrative occupation these days. It’s not surprising that workers are not lining up for the job.

But this problem comes with an obvious solution. Employers have to pay higher wages and offer better working conditions. (There also is a huge issue with sexism, less than 10 percent of truckers are women.)

For some reason, this solution does not feature prominently in the article. The piece does tell us:

“In response, the companies have raised their wages. The average weekly earnings for long-distance drivers have increased about 21 percent since the start of 2019, according to the Bureau of Labor Statistics. Last year, commercial truck drivers had a median wage of $47,130.”

Real hourly wages for truck drivers have risen somewhat over the last two years but still are well below the level of thirty years ago. It is also important to note that average weekly hours have increased by around 5 percent since 2019. This increase would account for almost a quarter of the increase in the nominal weekly wage over the last two years and more than one-third of the real increase. So even the pay increase over the last two years is not quite as impressive as the article implies.

How Much Should Truckers Be Paid?

Later in the piece, the article tells readers of a trucking company that says it pays an average wage of $70,000 a year. It then describes the situation of a trucker, earning $75, 000 to $85,000 a year, who is unhappy with his work schedule, but probably won’t quit.

These numbers are presumably supposed to tell us that trucking is a high-paying occupation. While these pay figures are certainly far more than workers will earn in most other jobs that do not require a college degree, they are not especially high. These truckers almost certainly work far more than forty hours a week on average. If we assume an average of 50 hours a week for these jobs, a $75,000 annual wage would come to $30 an hour, even assuming no premium for overtime pay.

It is also important to realize that we have seen an enormous upward redistribution of wage income over the last four decades. If the minimum wage had kept pace with productivity growth since its peak value in 1968 (when the unemployment rate was less than 4.0 percent), it would be over $26 an hour today. That would come to $52,000 a year for a fifty-week year, in which workers put in 40 hours a week. In that context, putting in a lot of overtime, and getting $70,000 to $80,000 a year, doesn’t sound especially good.    

But let’s give the question of truckers’ pay a bit more thought. The piece tells us:

“The shortage has alarmed trucking companies, which say there are not enough young people to replace those aging out of the work force. The stereotypes attached with the job, the isolating lifestyle and younger generations’ focus on pursuing four-year college degrees have made it difficult to entice drivers. Trucking companies have also struggled to retain workers: Turnover rates have reached as high as 90 percent for large carriers.”

The idea is that this is not just a short-term problem, but a long-term one that may actually get worse. That is bizarre. There is some training needed to drive a truck, but we’re talking weeks and months, not years.  

Suppose that truckers got $150,000 a year and worked something like regular 40-hour weeks, and weren’t forced to drive unsafe trucks in unsafe conditions? Does anyone think the industry would have a hard time finding enough people to work as truckers? (Actually, if truckers’ pay had kept pace with productivity growth over the last four decades it would be somewhere around $150k a year today.)

The point here is that the trucker shortage is overwhelmingly a problem of inadequate pay. This is what the market is telling us. But rather than listen to the market, we get a grand tour of other possible solutions. Why does the NYT have such a hard time listening to the market?

This seems like just another case of prejudice against workers who do not have college degrees. It’s true that higher pay for truckers would get passed on in the prices of a wide range of goods. But the $300,000 plus average pay of physicians gets passed on to us in the cost of our health care insurance. And the millions of dollars that private equity partners and hedge fund partners get paid to lose pension fund and university endowments money leads to higher prices for houses and other items, as they outbid normal workers. And government-granted patent monopolies cost us hundreds of billions in higher drug prices.

In these, and other areas, we have policies that make a relatively small number of people very wealthy, but that is not supposed to concern us. But the idea that we might have to pay truck drivers something like $150,000 a year, and therefore incur higher costs, is somehow intolerable.

Sorry folks, this is class bias pure and simple. When the market is telling the NYT something it does not want to hear, it just chooses to ignore the market.

The market may not always be right, but we should be clear on where we are willing to listen to market signals (given how we have structured it) and when we are not. When the market is telling us that a particular type of work done by less-educated workers needs to be much more highly compensated, this is a message that NYT editors do not want to hear.

I wanted to say a bit more about the New York Times piece on the shortage of truck drivers and how this is the biggest factor causing the current supply chain problems. In an earlier post, I pointed out that the real hourly wage for truckers has dropped by more than 5 percent since 1990. If we are wondering why there is a shortage of drivers, this would be an obvious place to start.

But the drop in pay is just part of the story. The industry is far less unionized than it was back in the 1970s, when President Carter began to deregulate trucking.

Not having a union means that truckers have far less control over their working conditions. That’s a big deal in trucking. Without a union to stand behind them, truckers can be forced to work irregular shifts and long hours. They can be forced to drive in all sorts of weather. They can also be forced to drive trucks that they don’t think are safe due to bad brakes or other issues.

In addition, there has been an enormous increase in the number of independent truckers who own their trucks. For the most part, these should not be thought of as being small businesses, but rather like Uber or Lyft drivers. The large shipping companies contract with these drivers and control almost everything about their work conditions. This can mean that they require them to wait, often many hours, for a shipment to unload and then be transported to a store or warehouse.

Since a contract will typically pay by the mile, if the time spent waiting is factored into the equation, the hourly pay for these drivers will often be very low, possibly even less than the minimum wage. That doesn’t matter, however, since these truckers are classified as independent contractors, not employees. This means that the minimum wage does not apply to them, nor are they eligible for unemployment benefits if they can’t find work, or workers’ compensation if they are injured on the job.

In short, trucking doesn’t look like a very lucrative occupation these days. It’s not surprising that workers are not lining up for the job.

But this problem comes with an obvious solution. Employers have to pay higher wages and offer better working conditions. (There also is a huge issue with sexism, less than 10 percent of truckers are women.)

For some reason, this solution does not feature prominently in the article. The piece does tell us:

“In response, the companies have raised their wages. The average weekly earnings for long-distance drivers have increased about 21 percent since the start of 2019, according to the Bureau of Labor Statistics. Last year, commercial truck drivers had a median wage of $47,130.”

Real hourly wages for truck drivers have risen somewhat over the last two years but still are well below the level of thirty years ago. It is also important to note that average weekly hours have increased by around 5 percent since 2019. This increase would account for almost a quarter of the increase in the nominal weekly wage over the last two years and more than one-third of the real increase. So even the pay increase over the last two years is not quite as impressive as the article implies.

How Much Should Truckers Be Paid?

Later in the piece, the article tells readers of a trucking company that says it pays an average wage of $70,000 a year. It then describes the situation of a trucker, earning $75, 000 to $85,000 a year, who is unhappy with his work schedule, but probably won’t quit.

These numbers are presumably supposed to tell us that trucking is a high-paying occupation. While these pay figures are certainly far more than workers will earn in most other jobs that do not require a college degree, they are not especially high. These truckers almost certainly work far more than forty hours a week on average. If we assume an average of 50 hours a week for these jobs, a $75,000 annual wage would come to $30 an hour, even assuming no premium for overtime pay.

It is also important to realize that we have seen an enormous upward redistribution of wage income over the last four decades. If the minimum wage had kept pace with productivity growth since its peak value in 1968 (when the unemployment rate was less than 4.0 percent), it would be over $26 an hour today. That would come to $52,000 a year for a fifty-week year, in which workers put in 40 hours a week. In that context, putting in a lot of overtime, and getting $70,000 to $80,000 a year, doesn’t sound especially good.    

But let’s give the question of truckers’ pay a bit more thought. The piece tells us:

“The shortage has alarmed trucking companies, which say there are not enough young people to replace those aging out of the work force. The stereotypes attached with the job, the isolating lifestyle and younger generations’ focus on pursuing four-year college degrees have made it difficult to entice drivers. Trucking companies have also struggled to retain workers: Turnover rates have reached as high as 90 percent for large carriers.”

The idea is that this is not just a short-term problem, but a long-term one that may actually get worse. That is bizarre. There is some training needed to drive a truck, but we’re talking weeks and months, not years.  

Suppose that truckers got $150,000 a year and worked something like regular 40-hour weeks, and weren’t forced to drive unsafe trucks in unsafe conditions? Does anyone think the industry would have a hard time finding enough people to work as truckers? (Actually, if truckers’ pay had kept pace with productivity growth over the last four decades it would be somewhere around $150k a year today.)

The point here is that the trucker shortage is overwhelmingly a problem of inadequate pay. This is what the market is telling us. But rather than listen to the market, we get a grand tour of other possible solutions. Why does the NYT have such a hard time listening to the market?

This seems like just another case of prejudice against workers who do not have college degrees. It’s true that higher pay for truckers would get passed on in the prices of a wide range of goods. But the $300,000 plus average pay of physicians gets passed on to us in the cost of our health care insurance. And the millions of dollars that private equity partners and hedge fund partners get paid to lose pension fund and university endowments money leads to higher prices for houses and other items, as they outbid normal workers. And government-granted patent monopolies cost us hundreds of billions in higher drug prices.

In these, and other areas, we have policies that make a relatively small number of people very wealthy, but that is not supposed to concern us. But the idea that we might have to pay truck drivers something like $150,000 a year, and therefore incur higher costs, is somehow intolerable.

Sorry folks, this is class bias pure and simple. When the market is telling the NYT something it does not want to hear, it just chooses to ignore the market.

The market may not always be right, but we should be clear on where we are willing to listen to market signals (given how we have structured it) and when we are not. When the market is telling us that a particular type of work done by less-educated workers needs to be much more highly compensated, this is a message that NYT editors do not want to hear.

Those of us who have spent decades trying to call attention to the situation of ordinary workers, and their stagnant wages over the last four decades, are glad to see the media’s newfound interest in real wages (the difference between wage growth and price growth). They have been anxious to highlight the fact that inflation has exceeded the rate of wage growth over the last year.

While that is unfortunate, it is also the case that this is not unusual. Here’s the picture over the last four decades.

 

Source: Bureau of Labor Statistics.

As can be seen, there are many periods in which wage growth has not kept up with inflation. Starting in the 1980s, wages lagged inflation through most of the decade. This is the period that was known in the media as the “Reagan Boom,” or “morning in America.” Wages did exceed inflation from the mid-1990s to the early 2000s. They then fell behind inflation just before President Bush’s reelection campaign, although the media generally didn’t prominently highlight falling real wages in that election.

Wages again fell behind inflation in the weak recovery from the Great Recession. As the unemployment rate fell, workers again began to see real wage gains in the middle and last part of the decade. There was a surge in real wage growth at the start of the pandemic. This was a composition effect. Many of the lower-paid workers lost their jobs, which raised the average wage for people who were still working.

This year we are seeing this composition effect in reverse. The lower-paid workers are getting rehired, bringing down average pay.  This is why the year-over-year change in the real wage was -3.4 percent in April. This was not a story of workers taking massive pay cuts, it was a story of lower-paid workers getting rehired and bringing down the average.

We are still seeing this story. The wage in October of 2020 was boosted by the fact that many lower-paid workers had not yet gotten back their jobs. Now, most of those lower-paid workers are back on the job.

If we look at wage growth over the last two years, it comes out to 2.1 percent, or an average of 1.05 percent annually. That’s not great, but that’s much better than workers did through most of the last four decades, especially the years when Republicans were in the White House.

Just to be clear, we absolutely should be concerned about inflation and real wage growth. Workers should be sharing in the benefits of the economy’s growth, and if wages are not keeping pace with inflation, then most likely they are not. (Benefits like the child tax credit do change the picture somewhat.)

But, we should try to look at these numbers carefully. One year-over-year comparison does not tell us much. If we are still looking at 6.0 percent year-over-year inflation in the spring, and there has been no uptick in wage growth, then we should be asking seriously about how workers are faring. But given the media’s decades of ignoring the plight of ordinary workers, it is hard to take the newfound concern very seriously. 

Those of us who have spent decades trying to call attention to the situation of ordinary workers, and their stagnant wages over the last four decades, are glad to see the media’s newfound interest in real wages (the difference between wage growth and price growth). They have been anxious to highlight the fact that inflation has exceeded the rate of wage growth over the last year.

While that is unfortunate, it is also the case that this is not unusual. Here’s the picture over the last four decades.

 

Source: Bureau of Labor Statistics.

As can be seen, there are many periods in which wage growth has not kept up with inflation. Starting in the 1980s, wages lagged inflation through most of the decade. This is the period that was known in the media as the “Reagan Boom,” or “morning in America.” Wages did exceed inflation from the mid-1990s to the early 2000s. They then fell behind inflation just before President Bush’s reelection campaign, although the media generally didn’t prominently highlight falling real wages in that election.

Wages again fell behind inflation in the weak recovery from the Great Recession. As the unemployment rate fell, workers again began to see real wage gains in the middle and last part of the decade. There was a surge in real wage growth at the start of the pandemic. This was a composition effect. Many of the lower-paid workers lost their jobs, which raised the average wage for people who were still working.

This year we are seeing this composition effect in reverse. The lower-paid workers are getting rehired, bringing down average pay.  This is why the year-over-year change in the real wage was -3.4 percent in April. This was not a story of workers taking massive pay cuts, it was a story of lower-paid workers getting rehired and bringing down the average.

We are still seeing this story. The wage in October of 2020 was boosted by the fact that many lower-paid workers had not yet gotten back their jobs. Now, most of those lower-paid workers are back on the job.

If we look at wage growth over the last two years, it comes out to 2.1 percent, or an average of 1.05 percent annually. That’s not great, but that’s much better than workers did through most of the last four decades, especially the years when Republicans were in the White House.

Just to be clear, we absolutely should be concerned about inflation and real wage growth. Workers should be sharing in the benefits of the economy’s growth, and if wages are not keeping pace with inflation, then most likely they are not. (Benefits like the child tax credit do change the picture somewhat.)

But, we should try to look at these numbers carefully. One year-over-year comparison does not tell us much. If we are still looking at 6.0 percent year-over-year inflation in the spring, and there has been no uptick in wage growth, then we should be asking seriously about how workers are faring. But given the media’s decades of ignoring the plight of ordinary workers, it is hard to take the newfound concern very seriously. 

Common Dreams, November 11, 2021
Eurasia Review, November 11, 2021

The October Consumer Price Index data has gotten the inflation hawks into a frenzy. And, there is no doubt it is bad news. The overall index was up 0.9 percent in the month, while the core index, which excludes food and energy, rose by 0.6 percent. Over the last year, they are up 6.2 percent and 4.6 percent, respectively. This eats into purchasing power, leaving people able to buy less with their paychecks or Social Security benefits.

There is no argument about what the numbers show, but the key questions are what caused this rise in inflation and what can be done to bring it down. There are four important points to recognize:

  • Inflation has risen sharply in many wealthy countries, so this isn’t something that can be laid entirely on the policies of the Trump and Biden administrations.
  • There are good reasons for believing that many of the factors driving this inflation are temporary and will be reversed in the not too distant future.
  • Conventional remedies for inflation, like raising interest rates to increase unemployment, and thereby putting downward pressure on wages, are likely to prove counterproductive; and
  • Many people have seen increases in wages and benefits that far outweigh the impact of higher prices.

Inflation Has Risen Sharply in Many Countries, not Just the United States

On the first point, most wealthy countries have seen a substantial increase in their inflation rate in the last year, even if the current pace may not be as high as in the United States. The OECD puts Canada’s inflation rate at 4.4 percent over the last year. In Norway and Germany, the inflation rate was 4.1 percent. Some countries do have lower inflation rates. In France, the inflation rate over the last year was 2.6 percent, in Italy 2.5 percent, and in Japan, the debt king of the world, just 0.2 percent. (These data only run through September, a period in which the inflation rate for the U.S. was 5.3 percent over the prior year.)

While there are differences in inflation rates across countries, the sharp increases in places like Canada, and especially European countries like Norway and Germany, can’t be blamed in any plausible way on U.S. policies to get through and recover from the pandemic. There is also no clear relationship between the size of the rescue and recovery packages and current inflation. For example, the size of the packages in France and Japan were considerably larger than the packages put in place in Germany, yet both countries have considerably lower inflation.

The Case for This Inflation Being Temporary

In many of the areas seeing the sharpest price increases, the inflation is clearly due to factors associated with the pandemic and the reopening of the economy which are not likely to persist long into the future. The most obvious example here is new and used vehicles, the prices of which have risen over the last year by 9.8 percent and 26.4 percent, respectively.

These two sectors, which added more than 1.2 percentage points to the overall inflation rate over the last year, have seen sharp rises in prices due to production snags associated with a worldwide shortage of semiconductors. The latter shortage in turn results from a major semiconductor producer in Japan being temporarily sidelined by a fire. This supply reduction coincided with a big upturn in worldwide demand. Because of the pandemic, consumers in the United States and other countries shifted their consumption from services, like restaurants and movies, to goods like cars, television sets, and smartphones.

This surge in demand for goods created the backlog of containers and container ships that we are now seeing at major ports. However, we will likely work through this backlog, both because supply issues will eventually be resolved as companies arrange to hire more truck drivers and trucks, and because demand for goods will wane for the simple reason that people don’t make these purchases every month. If someone bought a car in May of 2021, they are not likely to buy another one in May of 2022.

It is not hard to find an example of this sort of price reversal. Television prices rose by 10.2 percent in the five months from March to August, a 26.3 percent annual rate of increase. In the last two months, they have fallen by 2.8 percent.

We can see similar stories in other areas.  The price of a bushel of corn rose by more than 100 percent from its low in August of 2020 to its high in May of this year. It has since fallen back by almost 20 percent, to a price that is well below what we were seeing back in 2013. Lumber is an even more striking case. The price more than quadrupled from its low point in April of 2020 to its peak in May of this year. It has now fallen back by more than 50 percent to a price that is about 10 percent higher than a peak hit in June of 2018.

It’s not easy to determine how quickly supply chain issues will be resolved, but when they are, we are likely to see the price of a wide range of goods, starting with cars and trucks, reverse itself and start falling. This will be true not only for consumer goods but many intermediate goods that have been in short supply in recent months. The end of the backlogs is also likely to mean a reversal in shipping costs, which have risen by 11.2 percent in the last year, adding to the price of a wide range of products.

It is also worth noting some prices that have not risen much. The cost of medical care has risen by just 1.3 percent over the last year. The cost of college tuition is up 1.8 percent. Inflation in these former problem sectors has remained well under control through the pandemic and recovery.

Finally, it is worth mentioning the situation with rent, which accounts for almost a third of the overall CPI. We are seeing a sharp divergence in rental inflation across cities. The rent proper index was up 1.5 percent year-over-year in Boston and Los Angeles, 1.7 percent in Seattle and 0.2 percent in NYC. It was down 0.3 percent in Washington, DC and 0.4 percent in San Francisco over the last year. By contrast, it is up 6.3 percent in Detroit and 7.5 percent in Atlanta. This is consistent with people moving from high-priced cities to lower-priced ones.

The low rental inflation, or falling rents, in high-priced metro areas is obviously good news for renters there. However, the rising rents in previously low-priced areas are bad news for prior residents who may be looking at large rent increases. Even with 6.3 percent rental inflation, rents will still look cheap in Detroit for someone moving from Boston or New York.

It’s also important to remember that almost two-thirds of households are homeowners (only 44 percent for Blacks and 48 percent for Hispanics). For people who own their home, higher implicit rents are not a problem, and if the sale price goes up, as it has been doing, this is good news.

Anyhow, we may see some further increases in rental inflation in the months ahead. We have seen a large rise in home sales prices since the pandemic, which has far exceeded the rise in rents. The vacancy rate has also fallen somewhat, although the pace of new construction did pick up sharply, which should help to lower rents over time.

Will Slamming on the Brakes Cure Inflation?

The standard remedy for inflation is to deliberately slow the economy with higher interest rates from the Fed and possibly cuts in government spending and/or tax increases. The idea is that by slowing the economy and throwing people out of work, we can put downward pressure on wages, which will then mean lower prices.

There is no doubt that if we force workers to take large enough pay cuts, it will alleviate inflationary pressures, but this is a rather perverse way to accomplish the goal. With low interest rates and high demand, companies have large incentives to innovate to get around bottlenecks. It’s much better to allow the economy to work its way through a stretch of high inflation in ways that could lead to lasting productivity gains than to squeeze workers so as to alleviate cost pressures.

It’s also worth noting that many of the proposals being put forward by the Biden administration will help to alleviate inflationary pressures in both the long term and the short term. In the latter category, universal pre-K and increased access to childcare will make it easier for many parents, primarily women, to enter the labor force or to work more hours.

In the longer-term category, increased access to broadband and improving our transportation infrastructure will increase our capacity in many areas. Also, money spent to protect against the effects of climate change will reduce the disruptions caused by extreme weather events in the future.

This is a much more promising path for dealing with inflation than forcing workers to take pay cuts.

Keeping Score on Inflation

There have been several pieces in major news outlets in the last week telling people how inflation has been devastating for low- and moderate-income families. While it is undoubtedly hard for many families to pay more for food and other necessities, it is important to keep an eye on the income side of the equation.

In the case of families who have children, the vast majority are receiving the expanded child tax credit. Before the American Recovery Act (ARA), the credit was $2,000, but only partially refundable. This meant that many low- and moderate-income families only received $1,400 per child. Under the ARA, these families are receiving $3,000 per child and $3,600 for every child under the age of six. This is a big gain in income for a family with an income of $20,000 or $30,000. (There are families that don’t get the credit. This includes undocumented workers who are not eligible and others who are excluded because of bureaucratic obstacles. These are important issues, but unrelated to the problem of inflation.)

There also have been sharp increases in wages for workers at the bottom end of the pay ladder. Restaurant workers have seen their pay rise by $1.84 an hour over the last year. This would come to an increase of $3,680 for a full-year, full-time worker.

These increases in income would dwarf the rise in food costs that have featured prominently in news accounts on inflation. The Bureau of Labor Statistics puts the weight of food in a household’s budget at 7.4 percent. Suppose we double this for moderate-income families and make it 15 percent. For a family that spends $30,000 a year, that comes to $4,500 a year. If we apply the estimated 4.5 percent rate of food inflation over the last year, the higher prices will take a bit more than $200 out of this family’s pockets.

That is less than 10 percent of the pay increases that we expect low-paid workers to be receiving or the gains from the child tax credit for families with kids. If we’re going to talk about the well-being of these families it is incredibly irresponsible to only talk about the spending side of the ledger and ignore the income side.       

Conclusion: Team Transitory Is Not Throwing in the Towel

While the stretch of high inflation has gone on much longer than many of us anticipated, there are still good reasons for thinking that inflation will slow sharply in the months ahead. We have seen the prices of many items, like television sets and lumber, reverse and fall sharply after prior run-ups. It is likely that many other items, like cars and meat, will be in this category in the near future.

For what it’s worth, it seems that financial markets also agree with this assessment. The interest rate on 10-year Treasury bonds is only 1.56 percent, well below the pre-pandemic level. That is not consistent with a story where markets expect 4 or 5 percent inflation in coming years.

Also, contrary to gloom and doom predictions, the dollar has been rising in value against the euro and other currencies. That is also not consistent with a belief that the U.S. is facing a wage-price spiral.

Financial markets can be wrong, as those of us who predicted the collapse of the stock and housing bubbles know well. But for now at least, they seem to be in agreement with the analysis from Team Transitory.  

Common Dreams, November 11, 2021
Eurasia Review, November 11, 2021

The October Consumer Price Index data has gotten the inflation hawks into a frenzy. And, there is no doubt it is bad news. The overall index was up 0.9 percent in the month, while the core index, which excludes food and energy, rose by 0.6 percent. Over the last year, they are up 6.2 percent and 4.6 percent, respectively. This eats into purchasing power, leaving people able to buy less with their paychecks or Social Security benefits.

There is no argument about what the numbers show, but the key questions are what caused this rise in inflation and what can be done to bring it down. There are four important points to recognize:

  • Inflation has risen sharply in many wealthy countries, so this isn’t something that can be laid entirely on the policies of the Trump and Biden administrations.
  • There are good reasons for believing that many of the factors driving this inflation are temporary and will be reversed in the not too distant future.
  • Conventional remedies for inflation, like raising interest rates to increase unemployment, and thereby putting downward pressure on wages, are likely to prove counterproductive; and
  • Many people have seen increases in wages and benefits that far outweigh the impact of higher prices.

Inflation Has Risen Sharply in Many Countries, not Just the United States

On the first point, most wealthy countries have seen a substantial increase in their inflation rate in the last year, even if the current pace may not be as high as in the United States. The OECD puts Canada’s inflation rate at 4.4 percent over the last year. In Norway and Germany, the inflation rate was 4.1 percent. Some countries do have lower inflation rates. In France, the inflation rate over the last year was 2.6 percent, in Italy 2.5 percent, and in Japan, the debt king of the world, just 0.2 percent. (These data only run through September, a period in which the inflation rate for the U.S. was 5.3 percent over the prior year.)

While there are differences in inflation rates across countries, the sharp increases in places like Canada, and especially European countries like Norway and Germany, can’t be blamed in any plausible way on U.S. policies to get through and recover from the pandemic. There is also no clear relationship between the size of the rescue and recovery packages and current inflation. For example, the size of the packages in France and Japan were considerably larger than the packages put in place in Germany, yet both countries have considerably lower inflation.

The Case for This Inflation Being Temporary

In many of the areas seeing the sharpest price increases, the inflation is clearly due to factors associated with the pandemic and the reopening of the economy which are not likely to persist long into the future. The most obvious example here is new and used vehicles, the prices of which have risen over the last year by 9.8 percent and 26.4 percent, respectively.

These two sectors, which added more than 1.2 percentage points to the overall inflation rate over the last year, have seen sharp rises in prices due to production snags associated with a worldwide shortage of semiconductors. The latter shortage in turn results from a major semiconductor producer in Japan being temporarily sidelined by a fire. This supply reduction coincided with a big upturn in worldwide demand. Because of the pandemic, consumers in the United States and other countries shifted their consumption from services, like restaurants and movies, to goods like cars, television sets, and smartphones.

This surge in demand for goods created the backlog of containers and container ships that we are now seeing at major ports. However, we will likely work through this backlog, both because supply issues will eventually be resolved as companies arrange to hire more truck drivers and trucks, and because demand for goods will wane for the simple reason that people don’t make these purchases every month. If someone bought a car in May of 2021, they are not likely to buy another one in May of 2022.

It is not hard to find an example of this sort of price reversal. Television prices rose by 10.2 percent in the five months from March to August, a 26.3 percent annual rate of increase. In the last two months, they have fallen by 2.8 percent.

We can see similar stories in other areas.  The price of a bushel of corn rose by more than 100 percent from its low in August of 2020 to its high in May of this year. It has since fallen back by almost 20 percent, to a price that is well below what we were seeing back in 2013. Lumber is an even more striking case. The price more than quadrupled from its low point in April of 2020 to its peak in May of this year. It has now fallen back by more than 50 percent to a price that is about 10 percent higher than a peak hit in June of 2018.

It’s not easy to determine how quickly supply chain issues will be resolved, but when they are, we are likely to see the price of a wide range of goods, starting with cars and trucks, reverse itself and start falling. This will be true not only for consumer goods but many intermediate goods that have been in short supply in recent months. The end of the backlogs is also likely to mean a reversal in shipping costs, which have risen by 11.2 percent in the last year, adding to the price of a wide range of products.

It is also worth noting some prices that have not risen much. The cost of medical care has risen by just 1.3 percent over the last year. The cost of college tuition is up 1.8 percent. Inflation in these former problem sectors has remained well under control through the pandemic and recovery.

Finally, it is worth mentioning the situation with rent, which accounts for almost a third of the overall CPI. We are seeing a sharp divergence in rental inflation across cities. The rent proper index was up 1.5 percent year-over-year in Boston and Los Angeles, 1.7 percent in Seattle and 0.2 percent in NYC. It was down 0.3 percent in Washington, DC and 0.4 percent in San Francisco over the last year. By contrast, it is up 6.3 percent in Detroit and 7.5 percent in Atlanta. This is consistent with people moving from high-priced cities to lower-priced ones.

The low rental inflation, or falling rents, in high-priced metro areas is obviously good news for renters there. However, the rising rents in previously low-priced areas are bad news for prior residents who may be looking at large rent increases. Even with 6.3 percent rental inflation, rents will still look cheap in Detroit for someone moving from Boston or New York.

It’s also important to remember that almost two-thirds of households are homeowners (only 44 percent for Blacks and 48 percent for Hispanics). For people who own their home, higher implicit rents are not a problem, and if the sale price goes up, as it has been doing, this is good news.

Anyhow, we may see some further increases in rental inflation in the months ahead. We have seen a large rise in home sales prices since the pandemic, which has far exceeded the rise in rents. The vacancy rate has also fallen somewhat, although the pace of new construction did pick up sharply, which should help to lower rents over time.

Will Slamming on the Brakes Cure Inflation?

The standard remedy for inflation is to deliberately slow the economy with higher interest rates from the Fed and possibly cuts in government spending and/or tax increases. The idea is that by slowing the economy and throwing people out of work, we can put downward pressure on wages, which will then mean lower prices.

There is no doubt that if we force workers to take large enough pay cuts, it will alleviate inflationary pressures, but this is a rather perverse way to accomplish the goal. With low interest rates and high demand, companies have large incentives to innovate to get around bottlenecks. It’s much better to allow the economy to work its way through a stretch of high inflation in ways that could lead to lasting productivity gains than to squeeze workers so as to alleviate cost pressures.

It’s also worth noting that many of the proposals being put forward by the Biden administration will help to alleviate inflationary pressures in both the long term and the short term. In the latter category, universal pre-K and increased access to childcare will make it easier for many parents, primarily women, to enter the labor force or to work more hours.

In the longer-term category, increased access to broadband and improving our transportation infrastructure will increase our capacity in many areas. Also, money spent to protect against the effects of climate change will reduce the disruptions caused by extreme weather events in the future.

This is a much more promising path for dealing with inflation than forcing workers to take pay cuts.

Keeping Score on Inflation

There have been several pieces in major news outlets in the last week telling people how inflation has been devastating for low- and moderate-income families. While it is undoubtedly hard for many families to pay more for food and other necessities, it is important to keep an eye on the income side of the equation.

In the case of families who have children, the vast majority are receiving the expanded child tax credit. Before the American Recovery Act (ARA), the credit was $2,000, but only partially refundable. This meant that many low- and moderate-income families only received $1,400 per child. Under the ARA, these families are receiving $3,000 per child and $3,600 for every child under the age of six. This is a big gain in income for a family with an income of $20,000 or $30,000. (There are families that don’t get the credit. This includes undocumented workers who are not eligible and others who are excluded because of bureaucratic obstacles. These are important issues, but unrelated to the problem of inflation.)

There also have been sharp increases in wages for workers at the bottom end of the pay ladder. Restaurant workers have seen their pay rise by $1.84 an hour over the last year. This would come to an increase of $3,680 for a full-year, full-time worker.

These increases in income would dwarf the rise in food costs that have featured prominently in news accounts on inflation. The Bureau of Labor Statistics puts the weight of food in a household’s budget at 7.4 percent. Suppose we double this for moderate-income families and make it 15 percent. For a family that spends $30,000 a year, that comes to $4,500 a year. If we apply the estimated 4.5 percent rate of food inflation over the last year, the higher prices will take a bit more than $200 out of this family’s pockets.

That is less than 10 percent of the pay increases that we expect low-paid workers to be receiving or the gains from the child tax credit for families with kids. If we’re going to talk about the well-being of these families it is incredibly irresponsible to only talk about the spending side of the ledger and ignore the income side.       

Conclusion: Team Transitory Is Not Throwing in the Towel

While the stretch of high inflation has gone on much longer than many of us anticipated, there are still good reasons for thinking that inflation will slow sharply in the months ahead. We have seen the prices of many items, like television sets and lumber, reverse and fall sharply after prior run-ups. It is likely that many other items, like cars and meat, will be in this category in the near future.

For what it’s worth, it seems that financial markets also agree with this assessment. The interest rate on 10-year Treasury bonds is only 1.56 percent, well below the pre-pandemic level. That is not consistent with a story where markets expect 4 or 5 percent inflation in coming years.

Also, contrary to gloom and doom predictions, the dollar has been rising in value against the euro and other currencies. That is also not consistent with a belief that the U.S. is facing a wage-price spiral.

Financial markets can be wrong, as those of us who predicted the collapse of the stock and housing bubbles know well. But for now at least, they seem to be in agreement with the analysis from Team Transitory.  

We know that it is hard for trucking companies to get good help when it comes to their managers, but New York Times reporters might be expected to be a bit more on the ball. In an article on supply chain problems, the NYT completely accepts the industry line that there is a huge shortage of truckers. Furthermore, it tells us that it would get worse over the decade.

According to new developments in economic theory, it is believed that workers respond to incentives. It turns out that pay for truckers has fallen by more than five percent over the last three decades, according to the Bureau of Labor Statistics.

 

Source: Bureau of Labor Statistics.

Based on this theory, it is possible that the reason we don’t have enough truckers is that the industry is not willing to pay high enough wages. Furthermore, if we are looking out over a decade, they would have plenty of opportunity over this period to attract more truckers by raising wages.

The article should have investigated why trucking companies are not raising wages enough to attract the needed amount of drivers rather than repeating transparent self-serving nonsense from company managers.

We know that it is hard for trucking companies to get good help when it comes to their managers, but New York Times reporters might be expected to be a bit more on the ball. In an article on supply chain problems, the NYT completely accepts the industry line that there is a huge shortage of truckers. Furthermore, it tells us that it would get worse over the decade.

According to new developments in economic theory, it is believed that workers respond to incentives. It turns out that pay for truckers has fallen by more than five percent over the last three decades, according to the Bureau of Labor Statistics.

 

Source: Bureau of Labor Statistics.

Based on this theory, it is possible that the reason we don’t have enough truckers is that the industry is not willing to pay high enough wages. Furthermore, if we are looking out over a decade, they would have plenty of opportunity over this period to attract more truckers by raising wages.

The article should have investigated why trucking companies are not raising wages enough to attract the needed amount of drivers rather than repeating transparent self-serving nonsense from company managers.

After a couple of low side surprises, the October job numbers came in somewhat higher than generally expected at 535,000. This went along with large upward revisions of 235,000 to the prior two months’ growth, bringing the three-month average to a very respectable 442,000. The unemployment rate fell to 4.6 percent, a level not reached following the Great Recession until February 2017.

The story looks even better if we just look at the private sector, which added 604,000 jobs in the month. With the revised data, the private sector has now added an average of 491,000 jobs over the last three months.

This raises the obvious question of why the public sector keeps losing jobs? My guess is that we are looking at a supply-side story. Wages have been rising rapidly in the private sector, but not in the public sector. The Employment Cost Index for the third quarter showed private-sector compensation rising 1.4 percent in the quarter. Public sector compensation rose by just 0.8 percent. A restaurant that needs to get more workers can raise pay and offer hiring bonuses, local school boards generally can’t, or at least not without jumping through some bureaucratic hoops.

The average hourly wage for nonsupervisory workers in restaurants rose 12.4 percent over the last year. Imagine what reporting on the economy would look like right now if it were being written by restaurant workers.

Okay, but 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 5,583,000 jobs in his first nine months in the White House, compared to a loss of 2,876,000  jobs in the four years of Donald  Trump’s presidency.

After a couple of low side surprises, the October job numbers came in somewhat higher than generally expected at 535,000. This went along with large upward revisions of 235,000 to the prior two months’ growth, bringing the three-month average to a very respectable 442,000. The unemployment rate fell to 4.6 percent, a level not reached following the Great Recession until February 2017.

The story looks even better if we just look at the private sector, which added 604,000 jobs in the month. With the revised data, the private sector has now added an average of 491,000 jobs over the last three months.

This raises the obvious question of why the public sector keeps losing jobs? My guess is that we are looking at a supply-side story. Wages have been rising rapidly in the private sector, but not in the public sector. The Employment Cost Index for the third quarter showed private-sector compensation rising 1.4 percent in the quarter. Public sector compensation rose by just 0.8 percent. A restaurant that needs to get more workers can raise pay and offer hiring bonuses, local school boards generally can’t, or at least not without jumping through some bureaucratic hoops.

The average hourly wage for nonsupervisory workers in restaurants rose 12.4 percent over the last year. Imagine what reporting on the economy would look like right now if it were being written by restaurant workers.

Okay, but 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 5,583,000 jobs in his first nine months in the White House, compared to a loss of 2,876,000  jobs in the four years of Donald  Trump’s presidency.

Margot Sanger-Katz had an Upshot piece praising the Democrats for pursuing a path on lowering drug prices, which she argues will have a relatively small impact on innovation. It also will have a relatively small impact in reducing drug prices.

Sanger argues that high drug prices are necessary for innovation, since most important new drugs come from small start-upstarts. These start-ups rely on venture capitalists to put up big money in the hope that they might have a big payoff if a new drug or vaccine proves successful. By reducing the size of the potential payoff, there is a risk that these venture capitalists will be less willing to put up the money these start-ups need.

Incredibly, Sanger-Katz never mentions the possibility that public funding could be a substitute for some or all of the money from venture capitalists. This is bizarre not only because the federal government already spends around $50 billion a year on bio-medical research, but also because we just saw the government make large-scale expenditures to support the development of vaccines, treatments, and tests for Covid through Operation Warp Speed.

If we are seriously concerned that reduced drug prices will lead to less incentive for venture capitalists to finance innovation, we can look to offset any reduction in incentive with more direct funding. (The $50 billion the government now spends compares to roughly $100 billion that the industry currently spends, according to the Commerce Department.) In addition to lowering drug prices, the spending from the government has the advantage that all research can be fully open as a condition of funding. This would mean that researchers all around the world could learn and build on new findings as soon as they are made.

Lower drug prices also have the benefit of reducing the perverse incentives created by government-granted patent monopolies. The high prices resulting from these monopolies give drug companies a huge incentive to lie about the safety and effectiveness of their drugs. This is a widely recognized problem among public health professionals. Deceptive marketing by drug companies happens all the time, with the most dramatic instance being the opioid crisis, where major manufacturers allegedly misled doctors about the addictiveness of the new generation of opioids in order to boost sales.

Margot Sanger-Katz had an Upshot piece praising the Democrats for pursuing a path on lowering drug prices, which she argues will have a relatively small impact on innovation. It also will have a relatively small impact in reducing drug prices.

Sanger argues that high drug prices are necessary for innovation, since most important new drugs come from small start-upstarts. These start-ups rely on venture capitalists to put up big money in the hope that they might have a big payoff if a new drug or vaccine proves successful. By reducing the size of the potential payoff, there is a risk that these venture capitalists will be less willing to put up the money these start-ups need.

Incredibly, Sanger-Katz never mentions the possibility that public funding could be a substitute for some or all of the money from venture capitalists. This is bizarre not only because the federal government already spends around $50 billion a year on bio-medical research, but also because we just saw the government make large-scale expenditures to support the development of vaccines, treatments, and tests for Covid through Operation Warp Speed.

If we are seriously concerned that reduced drug prices will lead to less incentive for venture capitalists to finance innovation, we can look to offset any reduction in incentive with more direct funding. (The $50 billion the government now spends compares to roughly $100 billion that the industry currently spends, according to the Commerce Department.) In addition to lowering drug prices, the spending from the government has the advantage that all research can be fully open as a condition of funding. This would mean that researchers all around the world could learn and build on new findings as soon as they are made.

Lower drug prices also have the benefit of reducing the perverse incentives created by government-granted patent monopolies. The high prices resulting from these monopolies give drug companies a huge incentive to lie about the safety and effectiveness of their drugs. This is a widely recognized problem among public health professionals. Deceptive marketing by drug companies happens all the time, with the most dramatic instance being the opioid crisis, where major manufacturers allegedly misled doctors about the addictiveness of the new generation of opioids in order to boost sales.

There have been numerous news articles in recent years telling us that China faces a demographic crisis. The basic story is that the market reforms put in place in the late 1970s, together with the country’s one-child policy, led to many fewer children being born in the last four decades. As a result, the number of current workers entering retirement exceeds the size of the cohorts entering the workforce, leading to a stagnant or declining workforce. This is supposed to be a crisis.

I used the word “supposed” because it is not in any way obvious that a declining workforce is any sort of crisis. We see shifts of population all the time, which can lead many cities or regions to have a decline in their population or workforce, even if the country as a whole does not. That doesn’t necessarily mean a crisis for the areas losing population unless of course the population decline is due to the loss of a major employer.

A drop in the growth rate of the workforce, or an actual decline, will likely mean slower GDP growth, but so what? A country’s standard of living is determined by its income per capita (along with many other factors), not its absolute level of GDP. India’s GDP is almost eight times Denmark’s, but Denmark is the far richer country. The reason is that India has more than two hundred times as many people.

If a country’s growth rate is slower because the growth rate of its workforce slows, that is hardly a disaster. People can still be seeing improvements in their standard of living, and in the case of China, these improvements would still be quite rapid even if its annual growth rate slowed by 2-3 percentage points from its recent pace of more than 6.0 percent annually.

There is a common argument that countries with aging populations, like China, will suffer because each worker will have to support a larger number of retirees. It is easy to show that this view is silly. Even a modest rate of productivity growth will swamp the impact of a declining ratio of workers to retirees. With output per worker increasing, both workers and retirees can enjoy rising living standards even as the ratio of workers to retirees fall.

That should not sound surprising. The ratio of workers to retirees has been falling in the United States for the last two decades, yet we have seen substantial increases in living standards, even if the wealthy have gotten the bulk of these gains. The idea that China’s declining ratio of workers to retirees poses a supply-side problem, where it cannot produce enough goods and services to support its population, is absurd on its face.  

The Problem of Secular Stagnation

It turns out that the major problem of an aging population is not too much demand, but rather too little. Older people tend to spend less money than people in their working years. Also, when a country’s workforce is not growing, companies need to spend less money on investment. Employers need more capital when they hire more workers. This could mean desks and computers, or it could be machinery in a factory, or a truck on the road. The more workers companies hire, the more capital they need, which means more investment.

But if the workforce stagnates, then companies need to spend less on investment. They will still modernize their equipment and replace worn out items, but they don’t have to invest to accommodate the needs of a larger workforce.

With both consumption and investment falling relative to GDP, economies will face the problem of inadequate demand. In principle, the economy is capable of producing more goods and services than households and businesses are prepared to buy. This is the situation that we faced in the Great Depression, and again, on a smaller scale, in the Great Recession. It means mass unemployment. In the Great Depression, unemployment peaked at 25 percent of the workforce.

It is ironic that the economists warning about the implications of an aging population not only got the magnitude of the problem wrong, they even got the direction wrong. With our aging population, we don’t have to worry about too much demand, we have to worry about too little. This is yet another example of the old saying that economists are not very good at economics.

 

Spending Money: The Cure for Secular Stagnation

We discovered the cure for secular stagnation in the 1930s: the government has to spend money to make up for the failure to spend by the private sector. President Roosevelt embraced this strategy to a limited extent with his New Deal programs. These put millions of people back to work while modernizing our housing and infrastructure.

Of course, the government spending program that really got the economy back to full employment was World War II. With the country united behind the need to defeat Germany and Japan, budget deficits ceased being an issue. We saw record low unemployment rates in the war years as tens of millions of workers were either serving in the military or producing the food, clothes, and weapons needed by the military.

The war provided the political support for massive spending (and budget deficits), but it was the spending that got the economy to full employment. Money spent on civilian uses will create jobs every bit as well as money spent on the military.

This brings us back to China’s demographic crisis and global warming. As Paul Krugman wrote in a recent column, China is going to have to make a massive adjustment in its economy in the years ahead. It has been spending an incredible 43 percent of its GDP on capital formation, either investment goods purchased by businesses, or residential housing. By comparison, the figure for Japan is 24 percent and for the United States less than 22 percent.  

This massive spending on capital formation made sense when China was seeing rapid growth in its labor force and also a huge shift in its population from rural to urban. But this process is now reaching an endpoint, both with a decline in its working-age population and the rural to urban shift largely completed.

Currently, over 62 percent of China’s population lives in urban areas. The figure for most wealthy countries is close to 80 percent, but the pace of shift for China will be much slower going forward than in the past. In 1980, less than 20 percent of its population was urban.

This means that China’s big problem going forward is to find a way to spend a very large amount of money. For simplicity, let’s say that their needed spending on capital formation falls to 23 percent of GDP, roughly splitting the difference between Japan and the United States. This would mean that China’s government has to figure out what to do with 20 percent of its GDP.

This is an incredible amount of money. In 2021, 20 percent of China’s GDP would be $5.4 trillion. According to the I.M.F.’s projections, the annual amount would be almost $8 trillion in 2026. Over the next decade, it would be more than $80 trillion, that’s more than 20 times the original $3.5 trillion Build Back Better plan. In short, it’s real money.

It is also important to note that China is already heavily invested in clean energy. China is by far the world leader in solar energy, with more than twice as much as the United States, the second-largest user of solar power. It is also by far the world leader in wind energy, again with more than twice as much installed wind power as the United States.  And, China also has more than twice as many electric cars on the road as any other country.

This means that China has a large domestic clean energy sector which can stand to gain by further spending on reducing greenhouse gas emissions. Of course, no one expects that the country will spend anything like $80 trillion over the next decade reducing greenhouse gas emissions, but it certainly can commit considerable resources to this effort. In addition to the benefits to the environment, this spending will help China’s economy grow and keep its workforce employed.

This is one of the opportunities created by China’s supposed demographic crisis. The issue is that because of the aging of the population it faces the prospect of a huge shortfall of demand in the economy. This is a good problem for a country to have, if its leadership is adept at managing its resources.

There are many grounds on which to criticize China’s government. It severely represses minority populations, most extremely the Uighurs, many of whom have been imprisoned for months or even years. It also does not respect freedom of speech, freedom of the press, or basic labor rights. But there is no doubt that it has done an outstanding job in managing its economy over the last four decades in a way that has led to an enormous improvement in living standards for the overwhelming majority of its population.

If China wants a path through its “demographic crisis,” or, in other words, coping with secular stagnation, devoting substantial resources towards greening its economy would be a great path forward. In the process, they can also give a big hand to the rest of the world, both by sharing the technology and showing how it can be done, as well as reducing the damage they are doing to the planet themselves.

There have been numerous news articles in recent years telling us that China faces a demographic crisis. The basic story is that the market reforms put in place in the late 1970s, together with the country’s one-child policy, led to many fewer children being born in the last four decades. As a result, the number of current workers entering retirement exceeds the size of the cohorts entering the workforce, leading to a stagnant or declining workforce. This is supposed to be a crisis.

I used the word “supposed” because it is not in any way obvious that a declining workforce is any sort of crisis. We see shifts of population all the time, which can lead many cities or regions to have a decline in their population or workforce, even if the country as a whole does not. That doesn’t necessarily mean a crisis for the areas losing population unless of course the population decline is due to the loss of a major employer.

A drop in the growth rate of the workforce, or an actual decline, will likely mean slower GDP growth, but so what? A country’s standard of living is determined by its income per capita (along with many other factors), not its absolute level of GDP. India’s GDP is almost eight times Denmark’s, but Denmark is the far richer country. The reason is that India has more than two hundred times as many people.

If a country’s growth rate is slower because the growth rate of its workforce slows, that is hardly a disaster. People can still be seeing improvements in their standard of living, and in the case of China, these improvements would still be quite rapid even if its annual growth rate slowed by 2-3 percentage points from its recent pace of more than 6.0 percent annually.

There is a common argument that countries with aging populations, like China, will suffer because each worker will have to support a larger number of retirees. It is easy to show that this view is silly. Even a modest rate of productivity growth will swamp the impact of a declining ratio of workers to retirees. With output per worker increasing, both workers and retirees can enjoy rising living standards even as the ratio of workers to retirees fall.

That should not sound surprising. The ratio of workers to retirees has been falling in the United States for the last two decades, yet we have seen substantial increases in living standards, even if the wealthy have gotten the bulk of these gains. The idea that China’s declining ratio of workers to retirees poses a supply-side problem, where it cannot produce enough goods and services to support its population, is absurd on its face.  

The Problem of Secular Stagnation

It turns out that the major problem of an aging population is not too much demand, but rather too little. Older people tend to spend less money than people in their working years. Also, when a country’s workforce is not growing, companies need to spend less money on investment. Employers need more capital when they hire more workers. This could mean desks and computers, or it could be machinery in a factory, or a truck on the road. The more workers companies hire, the more capital they need, which means more investment.

But if the workforce stagnates, then companies need to spend less on investment. They will still modernize their equipment and replace worn out items, but they don’t have to invest to accommodate the needs of a larger workforce.

With both consumption and investment falling relative to GDP, economies will face the problem of inadequate demand. In principle, the economy is capable of producing more goods and services than households and businesses are prepared to buy. This is the situation that we faced in the Great Depression, and again, on a smaller scale, in the Great Recession. It means mass unemployment. In the Great Depression, unemployment peaked at 25 percent of the workforce.

It is ironic that the economists warning about the implications of an aging population not only got the magnitude of the problem wrong, they even got the direction wrong. With our aging population, we don’t have to worry about too much demand, we have to worry about too little. This is yet another example of the old saying that economists are not very good at economics.

 

Spending Money: The Cure for Secular Stagnation

We discovered the cure for secular stagnation in the 1930s: the government has to spend money to make up for the failure to spend by the private sector. President Roosevelt embraced this strategy to a limited extent with his New Deal programs. These put millions of people back to work while modernizing our housing and infrastructure.

Of course, the government spending program that really got the economy back to full employment was World War II. With the country united behind the need to defeat Germany and Japan, budget deficits ceased being an issue. We saw record low unemployment rates in the war years as tens of millions of workers were either serving in the military or producing the food, clothes, and weapons needed by the military.

The war provided the political support for massive spending (and budget deficits), but it was the spending that got the economy to full employment. Money spent on civilian uses will create jobs every bit as well as money spent on the military.

This brings us back to China’s demographic crisis and global warming. As Paul Krugman wrote in a recent column, China is going to have to make a massive adjustment in its economy in the years ahead. It has been spending an incredible 43 percent of its GDP on capital formation, either investment goods purchased by businesses, or residential housing. By comparison, the figure for Japan is 24 percent and for the United States less than 22 percent.  

This massive spending on capital formation made sense when China was seeing rapid growth in its labor force and also a huge shift in its population from rural to urban. But this process is now reaching an endpoint, both with a decline in its working-age population and the rural to urban shift largely completed.

Currently, over 62 percent of China’s population lives in urban areas. The figure for most wealthy countries is close to 80 percent, but the pace of shift for China will be much slower going forward than in the past. In 1980, less than 20 percent of its population was urban.

This means that China’s big problem going forward is to find a way to spend a very large amount of money. For simplicity, let’s say that their needed spending on capital formation falls to 23 percent of GDP, roughly splitting the difference between Japan and the United States. This would mean that China’s government has to figure out what to do with 20 percent of its GDP.

This is an incredible amount of money. In 2021, 20 percent of China’s GDP would be $5.4 trillion. According to the I.M.F.’s projections, the annual amount would be almost $8 trillion in 2026. Over the next decade, it would be more than $80 trillion, that’s more than 20 times the original $3.5 trillion Build Back Better plan. In short, it’s real money.

It is also important to note that China is already heavily invested in clean energy. China is by far the world leader in solar energy, with more than twice as much as the United States, the second-largest user of solar power. It is also by far the world leader in wind energy, again with more than twice as much installed wind power as the United States.  And, China also has more than twice as many electric cars on the road as any other country.

This means that China has a large domestic clean energy sector which can stand to gain by further spending on reducing greenhouse gas emissions. Of course, no one expects that the country will spend anything like $80 trillion over the next decade reducing greenhouse gas emissions, but it certainly can commit considerable resources to this effort. In addition to the benefits to the environment, this spending will help China’s economy grow and keep its workforce employed.

This is one of the opportunities created by China’s supposed demographic crisis. The issue is that because of the aging of the population it faces the prospect of a huge shortfall of demand in the economy. This is a good problem for a country to have, if its leadership is adept at managing its resources.

There are many grounds on which to criticize China’s government. It severely represses minority populations, most extremely the Uighurs, many of whom have been imprisoned for months or even years. It also does not respect freedom of speech, freedom of the press, or basic labor rights. But there is no doubt that it has done an outstanding job in managing its economy over the last four decades in a way that has led to an enormous improvement in living standards for the overwhelming majority of its population.

If China wants a path through its “demographic crisis,” or, in other words, coping with secular stagnation, devoting substantial resources towards greening its economy would be a great path forward. In the process, they can also give a big hand to the rest of the world, both by sharing the technology and showing how it can be done, as well as reducing the damage they are doing to the planet themselves.

An article discussing the future prospects for paid family leave dismissed the claim by Senator Kirsten Gillibrand that almost every country in the world has paid family leave, by saying that most of these countries actually do not expect women to work after they have had children.

“Most of those countries can afford to offer paid leave because they do not actually expect women to work once they begin having children. Long leave plans help couples get started having children, but most countries then do not help with child care because they assume women will stay home.

“The US work force relies on women.”

While it is true that many women in developing countries with paid family leave do not work outside the home, most wealthy countries with paid leave actually have higher rates of women’s labor force participation than the United States. According to data from the OECD, 83.8 percent of women between the ages of 25 and 64 were in the labor force in Finland. In Germany, the figure was 84.4 percent; in France, it was 79.3 percent. By comparison, in the United States, it was just 77.2 percent, a figure that puts it well behind most other wealthy countries.

In short, the story is the exact opposite of what the New York Times told readers. The US workforce relies less on women than most of the wealthy countries that provide paid family leave.

 

An article discussing the future prospects for paid family leave dismissed the claim by Senator Kirsten Gillibrand that almost every country in the world has paid family leave, by saying that most of these countries actually do not expect women to work after they have had children.

“Most of those countries can afford to offer paid leave because they do not actually expect women to work once they begin having children. Long leave plans help couples get started having children, but most countries then do not help with child care because they assume women will stay home.

“The US work force relies on women.”

While it is true that many women in developing countries with paid family leave do not work outside the home, most wealthy countries with paid leave actually have higher rates of women’s labor force participation than the United States. According to data from the OECD, 83.8 percent of women between the ages of 25 and 64 were in the labor force in Finland. In Germany, the figure was 84.4 percent; in France, it was 79.3 percent. By comparison, in the United States, it was just 77.2 percent, a figure that puts it well behind most other wealthy countries.

In short, the story is the exact opposite of what the New York Times told readers. The US workforce relies less on women than most of the wealthy countries that provide paid family leave.

 

The 2.0 percent growth figure reported for the third quarter was widely viewed as disappointing. It was slower than most analysts had expected and certainly a large falloff from the 6.7 percent rate in the second quarter, but on the whole, it should be viewed as a positive report.

There are two key reasons for why I see the report as largely positive. First, there were extraordinary and temporary factors that prevented the growth from being considerably more rapid. Second, we need to get a fuller picture in assessing growth. In the pre-pandemic period, no one would have considered 2.0 percent growth particularly bad. It averaged 2.5 percent in the three years preceding the pandemic. We are already above the pre-pandemic level of GDP, although somewhat below the trend rate of growth, which means we are through the period where we would ordinarily anticipate extraordinary growth.

The Temporary Factors

The two major temporary factors slowing growth in the third quarter were supply chain problems and the pandemic. The supply chain problems have been widely reported. There are ships sitting offshore at our major ports waiting to unload cargo. The problem is that ports are overloaded as there has been a sharp increase in demand for goods during the pandemic. Since many of these goods are imported, this means more ships need to be unloaded.

The problem is not just one of unloading at the ports. The transportation companies that move the cargo to warehouses across the country are unable to meet the increased demand for their services.

A big part of this story is that they don’t have the truckers to move the freight. Several decades ago, trucking was a relatively high-paying industry for workers without college degrees. This was in large part due to the fact that it was a heavily unionized industry. The Teamsters union was very effective in raising the pay and improving the working conditions for truckers.

However, in the last four decades, trucking deregulation coupled with anti-union policies by employers, which often had the support of the government, substantially weakened the Teamsters. As a result, wages stagnated. The real hourly wage for a trucker, just before the pandemic, was 5.0 percent below its level in 1990. Also, without a strong union to back them up, truckers were often forced to work long and irregular hours and to drive unsafe trucks.

As a result, quit rates in the industry soared, peaking at 3.3 percent in April, 40 percent higher than the prior peak. The sector now reports a job opening rate of 7.8 percent, two and a half times the 3.3 percent peak in 2001, when the economy was still experiencing the Internet boom.

It is worth noting that the bottlenecks due to a lack of trucking capacity have little to do with whether we import our goods or produce them domestically. In either case, they must be moved from the place they are produced to the stores or Internet retailers that will eventually sell them to consumers.

The fact that we now import many of our manufactured goods is not the main source of our problems. The backlog of goods is showing up on our ports because that is where the goods come in. If we instead produced everything domestically, and our trucking sector was in no better shape, then we would see the goods piling up outside of Detroit, Milwaukee, and other major manufacturing hubs.

It is easy to see the impact of the supply chain problems in the third-quarter GDP data. Vehicle sales fell at a 53.9 percent annual rate in the quarter, subtracting 2.4 percentage points from the quarter’s growth. This was not due to people not wanting to buy cars, this was due to the fact that the cars were not there to be sold. This also showed up on the investment side, as transportation equipment sales fell at an 18.6 percent annual rate, subtracting another 0.2 percentage points from third-quarter growth.

Supply chain problems showed up in a number of other areas such as the 7.3 percent annual rate of decline in the sales of recreational goods and vehicles and the 7.7 percent decline in residential construction. The latter was primarily the result of a shortage of building materials, which crimped construction even as homebuilders report being highly optimistic about continuing demand in the market.  

Clearly, third-quarter growth would have looked considerably better if our supply chains had been operating normally. This fact should mean that future quarters will look considerably better. If fourth-quarter growth is exactly the same in all other areas, and fourth-quarter sales of cars and transportation equipment just remains at third-quarter levels, we would see fourth-quarter growth of roughly 4.6 percent. Of course, that scenario is not plausible, but the point is that the supply chain problems we are seeing now, set up a situation in which we can anticipate stronger growth in future quarters.

The other major factor slowing growth in the quarter was the surge in the pandemic due to the delta variant. This hampered growth but not in the ways that many seem to believe. Restaurant sales grew at a very healthy 5.9 percent annual rate. In places where the pandemic hit hardest during this period, people did not stop going to restaurants. Data from Open Table show Florida’s reservation numbers were consistently above their pre-pandemic level.

The pandemic had a much bigger effect on foreign travel to the United States, which fell slightly in the quarter and is running at around 30 percent of pre-pandemic levels. This drop-off is due to both fear of the pandemic and also legal restrictions on entering the United States.

The other way the pandemic affected third-quarter GDP was by preventing people from working. In September, 1.6 million people, just over 1.0 percent of the workforce, reported that they were not working or looking for work in the month because they were caring for someone who was sick or were sick themselves. As caseloads continue to fall, we can expect that these people will return to the labor market.

 

Thinking About Growth: What Are We Missing?

When we look at the categories of output that are most below their pre-pandemic growth path, several obvious ones stand out. First, expenditures on non-residential structures are more than 21.0 percent below their level from the fourth quarter of 2019. This is largely a story of fewer office buildings and stores being built, although factory construction is also down.

The big factor here is that we are seeing a large increase in work from home, which means that less office space is needed. In many major cities, less than half of the pre-pandemic workforce is back in their office. The other issue is that we have seen an explosion in online sales in the pandemic, which means that less retail space is needed.

On the consumption side, real expenditures on services are still 1.6 percent below their pre-pandemic level. There are several items that stand out here. Expenditures on health care services, which had been rising rapidly, are 1.0 percent below their pre-pandemic level. There is a grim, but obvious explanation for this decline, we have seen almost 900,000 people die due to the pandemic. (This is the excess death figure, which includes many people not identified as having died from Covid.)

The people who died were disproportionately the elderly and those with serious health issues. This shows up clearly in expenditures in nursing homes, which are down by 9.1 percent from their pre-pandemic level. On a per-person basis, these people required far more medical care than the average person, so there is now less need for health care.

On a more positive note, there has been an explosion in telemedicine, as many people are able to have consultations with doctors and other health care professionals remotely. This is a great innovation, which likely reduces the cost of medical services and saves the expenses associated with traveling to get health care.

Another major factor in the drop in service consumption is the drop in expenditures associated with going into work. This shows up most clearly with spending on ground transportation, which is down by 31.1 percent from the fourth quarter of 2019. It also shows up with the 26.7 percent drop in expenditures on personal care services, like hair salons and dry cleaning.

The drop in the provision of these services does not really represent a decline in well-being. If people don’t have to commute to go to work, they are not worse off as a result of not having the car or train trip to work. Similarly, if they don’t have to clean their business clothes because they are not wearing them, this is not likely to be viewed as a loss by most people.

People can argue that it’s fine if we don’t need some of the goods and services associated with our pre-pandemic lifestyles, but these resources should be redeployed elsewhere. This is true, but it is also an adjustment that takes time. We can’t reasonably expect that large shifts in the economy can be accomplished overnight, especially when we are still feeling the effects of the pandemic.

We also should recognize the reduction in work-related expenses as effectively an increase in our standard of living. If we can have the same amount of goods and services that we value, without having to pay costs associated with going to work in an office (including our time), this is a gain in well-being. It doesn’t get picked up in our national income accounts because we treat these expenses as final consumption, instead of the intermediate goods that they in fact are.

 

The Great Reshuffling

The third-quarter GDP numbers should be seen as evidence of an economy in the middle of a major transition. A 2.0 percent growth figure is not bad for an economy that has fully recovered the ground lost in the recession, but we are virtually certain to see stronger numbers in the quarters ahead. We will work through the backlog of goods sitting in our ports, which will not only mean more consumer goods, but also more intermediate goods needed in a wide range of production processes.

This will not only mean more output, but it will also likely mean sharply lower prices for many items, especially cars.  There is nothing about the production process that would lead the price of a car to be far higher in 2021 than in 2019. Once something resembling normal production has resumed, we should see prices fall back to their pre-pandemic level. The Fed of course is fully aware of this fact, which is why it is not anxious to start jacking up interest rates, in spite of the rants of the inflation hawks.

We will also see a major reshuffling in the labor market. Businesses that are having a hard time attracting workers will raise wages enough to get the workers they need. This will inevitably mean that some businesses will fail since they aren’t able to pay higher wages. This is unfortunate, but that is the way capitalism works. This is the reason half of our workforce is not still employed in agriculture; workers got higher pay in factories and the farms went under.

It is also important to recognize the dynamics involved here. A restaurant that is struggling to stay open, when only half-staffed, eventually goes under, which means that its former employees will be looking for jobs elsewhere. This process is likely to lead to fewer workers employed in many low-paying sectors, like restaurants, but likely at higher wages.

Finally, it is also important to mention how the bills before Congress will affect this picture. Assuming that both the reconciliation and infrastructure bills eventually get signed into law, they will provide a basis for further re-orienting the economy away from its pre-pandemic course. The infrastructure package will pull workers into the repair and improvement of the infrastructure. The incentives in both bills should create millions of jobs producing clean energy and electric cars. And, the additional money for pre-kindergarten and childcare should allow these sectors to offer more competitive wages.

In short, the third-quarter GDP may not have been as strong as we might have hoped, but it was very far from the disaster some have painted. The future is still looking good, if we can ignore global warming and the fascist threat.  

The 2.0 percent growth figure reported for the third quarter was widely viewed as disappointing. It was slower than most analysts had expected and certainly a large falloff from the 6.7 percent rate in the second quarter, but on the whole, it should be viewed as a positive report.

There are two key reasons for why I see the report as largely positive. First, there were extraordinary and temporary factors that prevented the growth from being considerably more rapid. Second, we need to get a fuller picture in assessing growth. In the pre-pandemic period, no one would have considered 2.0 percent growth particularly bad. It averaged 2.5 percent in the three years preceding the pandemic. We are already above the pre-pandemic level of GDP, although somewhat below the trend rate of growth, which means we are through the period where we would ordinarily anticipate extraordinary growth.

The Temporary Factors

The two major temporary factors slowing growth in the third quarter were supply chain problems and the pandemic. The supply chain problems have been widely reported. There are ships sitting offshore at our major ports waiting to unload cargo. The problem is that ports are overloaded as there has been a sharp increase in demand for goods during the pandemic. Since many of these goods are imported, this means more ships need to be unloaded.

The problem is not just one of unloading at the ports. The transportation companies that move the cargo to warehouses across the country are unable to meet the increased demand for their services.

A big part of this story is that they don’t have the truckers to move the freight. Several decades ago, trucking was a relatively high-paying industry for workers without college degrees. This was in large part due to the fact that it was a heavily unionized industry. The Teamsters union was very effective in raising the pay and improving the working conditions for truckers.

However, in the last four decades, trucking deregulation coupled with anti-union policies by employers, which often had the support of the government, substantially weakened the Teamsters. As a result, wages stagnated. The real hourly wage for a trucker, just before the pandemic, was 5.0 percent below its level in 1990. Also, without a strong union to back them up, truckers were often forced to work long and irregular hours and to drive unsafe trucks.

As a result, quit rates in the industry soared, peaking at 3.3 percent in April, 40 percent higher than the prior peak. The sector now reports a job opening rate of 7.8 percent, two and a half times the 3.3 percent peak in 2001, when the economy was still experiencing the Internet boom.

It is worth noting that the bottlenecks due to a lack of trucking capacity have little to do with whether we import our goods or produce them domestically. In either case, they must be moved from the place they are produced to the stores or Internet retailers that will eventually sell them to consumers.

The fact that we now import many of our manufactured goods is not the main source of our problems. The backlog of goods is showing up on our ports because that is where the goods come in. If we instead produced everything domestically, and our trucking sector was in no better shape, then we would see the goods piling up outside of Detroit, Milwaukee, and other major manufacturing hubs.

It is easy to see the impact of the supply chain problems in the third-quarter GDP data. Vehicle sales fell at a 53.9 percent annual rate in the quarter, subtracting 2.4 percentage points from the quarter’s growth. This was not due to people not wanting to buy cars, this was due to the fact that the cars were not there to be sold. This also showed up on the investment side, as transportation equipment sales fell at an 18.6 percent annual rate, subtracting another 0.2 percentage points from third-quarter growth.

Supply chain problems showed up in a number of other areas such as the 7.3 percent annual rate of decline in the sales of recreational goods and vehicles and the 7.7 percent decline in residential construction. The latter was primarily the result of a shortage of building materials, which crimped construction even as homebuilders report being highly optimistic about continuing demand in the market.  

Clearly, third-quarter growth would have looked considerably better if our supply chains had been operating normally. This fact should mean that future quarters will look considerably better. If fourth-quarter growth is exactly the same in all other areas, and fourth-quarter sales of cars and transportation equipment just remains at third-quarter levels, we would see fourth-quarter growth of roughly 4.6 percent. Of course, that scenario is not plausible, but the point is that the supply chain problems we are seeing now, set up a situation in which we can anticipate stronger growth in future quarters.

The other major factor slowing growth in the quarter was the surge in the pandemic due to the delta variant. This hampered growth but not in the ways that many seem to believe. Restaurant sales grew at a very healthy 5.9 percent annual rate. In places where the pandemic hit hardest during this period, people did not stop going to restaurants. Data from Open Table show Florida’s reservation numbers were consistently above their pre-pandemic level.

The pandemic had a much bigger effect on foreign travel to the United States, which fell slightly in the quarter and is running at around 30 percent of pre-pandemic levels. This drop-off is due to both fear of the pandemic and also legal restrictions on entering the United States.

The other way the pandemic affected third-quarter GDP was by preventing people from working. In September, 1.6 million people, just over 1.0 percent of the workforce, reported that they were not working or looking for work in the month because they were caring for someone who was sick or were sick themselves. As caseloads continue to fall, we can expect that these people will return to the labor market.

 

Thinking About Growth: What Are We Missing?

When we look at the categories of output that are most below their pre-pandemic growth path, several obvious ones stand out. First, expenditures on non-residential structures are more than 21.0 percent below their level from the fourth quarter of 2019. This is largely a story of fewer office buildings and stores being built, although factory construction is also down.

The big factor here is that we are seeing a large increase in work from home, which means that less office space is needed. In many major cities, less than half of the pre-pandemic workforce is back in their office. The other issue is that we have seen an explosion in online sales in the pandemic, which means that less retail space is needed.

On the consumption side, real expenditures on services are still 1.6 percent below their pre-pandemic level. There are several items that stand out here. Expenditures on health care services, which had been rising rapidly, are 1.0 percent below their pre-pandemic level. There is a grim, but obvious explanation for this decline, we have seen almost 900,000 people die due to the pandemic. (This is the excess death figure, which includes many people not identified as having died from Covid.)

The people who died were disproportionately the elderly and those with serious health issues. This shows up clearly in expenditures in nursing homes, which are down by 9.1 percent from their pre-pandemic level. On a per-person basis, these people required far more medical care than the average person, so there is now less need for health care.

On a more positive note, there has been an explosion in telemedicine, as many people are able to have consultations with doctors and other health care professionals remotely. This is a great innovation, which likely reduces the cost of medical services and saves the expenses associated with traveling to get health care.

Another major factor in the drop in service consumption is the drop in expenditures associated with going into work. This shows up most clearly with spending on ground transportation, which is down by 31.1 percent from the fourth quarter of 2019. It also shows up with the 26.7 percent drop in expenditures on personal care services, like hair salons and dry cleaning.

The drop in the provision of these services does not really represent a decline in well-being. If people don’t have to commute to go to work, they are not worse off as a result of not having the car or train trip to work. Similarly, if they don’t have to clean their business clothes because they are not wearing them, this is not likely to be viewed as a loss by most people.

People can argue that it’s fine if we don’t need some of the goods and services associated with our pre-pandemic lifestyles, but these resources should be redeployed elsewhere. This is true, but it is also an adjustment that takes time. We can’t reasonably expect that large shifts in the economy can be accomplished overnight, especially when we are still feeling the effects of the pandemic.

We also should recognize the reduction in work-related expenses as effectively an increase in our standard of living. If we can have the same amount of goods and services that we value, without having to pay costs associated with going to work in an office (including our time), this is a gain in well-being. It doesn’t get picked up in our national income accounts because we treat these expenses as final consumption, instead of the intermediate goods that they in fact are.

 

The Great Reshuffling

The third-quarter GDP numbers should be seen as evidence of an economy in the middle of a major transition. A 2.0 percent growth figure is not bad for an economy that has fully recovered the ground lost in the recession, but we are virtually certain to see stronger numbers in the quarters ahead. We will work through the backlog of goods sitting in our ports, which will not only mean more consumer goods, but also more intermediate goods needed in a wide range of production processes.

This will not only mean more output, but it will also likely mean sharply lower prices for many items, especially cars.  There is nothing about the production process that would lead the price of a car to be far higher in 2021 than in 2019. Once something resembling normal production has resumed, we should see prices fall back to their pre-pandemic level. The Fed of course is fully aware of this fact, which is why it is not anxious to start jacking up interest rates, in spite of the rants of the inflation hawks.

We will also see a major reshuffling in the labor market. Businesses that are having a hard time attracting workers will raise wages enough to get the workers they need. This will inevitably mean that some businesses will fail since they aren’t able to pay higher wages. This is unfortunate, but that is the way capitalism works. This is the reason half of our workforce is not still employed in agriculture; workers got higher pay in factories and the farms went under.

It is also important to recognize the dynamics involved here. A restaurant that is struggling to stay open, when only half-staffed, eventually goes under, which means that its former employees will be looking for jobs elsewhere. This process is likely to lead to fewer workers employed in many low-paying sectors, like restaurants, but likely at higher wages.

Finally, it is also important to mention how the bills before Congress will affect this picture. Assuming that both the reconciliation and infrastructure bills eventually get signed into law, they will provide a basis for further re-orienting the economy away from its pre-pandemic course. The infrastructure package will pull workers into the repair and improvement of the infrastructure. The incentives in both bills should create millions of jobs producing clean energy and electric cars. And, the additional money for pre-kindergarten and childcare should allow these sectors to offer more competitive wages.

In short, the third-quarter GDP may not have been as strong as we might have hoped, but it was very far from the disaster some have painted. The future is still looking good, if we can ignore global warming and the fascist threat.  

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