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.

Jeanna Smialek and Ben Casselman had a good piece in the NYT on the inflation of the 1970s and the differences with the current situation.  However, it left out one important part of the story.

In the 1970s, actually in the late 1960s also, the Consumer Price Index (CPI) had an error in its construction that led it to overstate the rate of inflation relative to the current measure. In some years, especially in the late 1970s, the error was especially large, peaking at 2.6 percentage points in 1979. Here’s the picture for the official CPI used at the time, compared with the Bureau of Labor Statistics CPI-U-RS, which calculates the inflation rate using the current methodology.

 

              CPI           CPI-U-RS

1978      9.0%          7.8%

1979     13.3%        10.7%

1980    12.5%         10.7%

This mattered a lot in the 1970s because, as Smialek and Casselman point out, many wage contracts were directly indexed to the CPI. This means that an overstatement in the measured rate of inflation would show up directly in higher wages. Many rental contracts were also indexed to the CPI. This measurement error undoubtedly contributed to the wage-price spiral of the 1970s. Presumably we don’t have to worry about the same sort of measurement error today, and even if there were such an error, many fewer contracts are now indexed to the CPI. ( I wrote about this issue many years ago.)

Jeanna Smialek and Ben Casselman had a good piece in the NYT on the inflation of the 1970s and the differences with the current situation.  However, it left out one important part of the story.

In the 1970s, actually in the late 1960s also, the Consumer Price Index (CPI) had an error in its construction that led it to overstate the rate of inflation relative to the current measure. In some years, especially in the late 1970s, the error was especially large, peaking at 2.6 percentage points in 1979. Here’s the picture for the official CPI used at the time, compared with the Bureau of Labor Statistics CPI-U-RS, which calculates the inflation rate using the current methodology.

 

              CPI           CPI-U-RS

1978      9.0%          7.8%

1979     13.3%        10.7%

1980    12.5%         10.7%

This mattered a lot in the 1970s because, as Smialek and Casselman point out, many wage contracts were directly indexed to the CPI. This means that an overstatement in the measured rate of inflation would show up directly in higher wages. Many rental contracts were also indexed to the CPI. This measurement error undoubtedly contributed to the wage-price spiral of the 1970s. Presumably we don’t have to worry about the same sort of measurement error today, and even if there were such an error, many fewer contracts are now indexed to the CPI. ( I wrote about this issue many years ago.)

There have been many warnings, most notably from former Treasury Secretary Larry Summers, that President Biden’s robust recovery package would lead to spiraling inflation. I have written several times that I don’t think the inflation hawks are right, but their warnings deserve to be taken seriously. The most recent evidence supports the view that, for the moment, we can put aside our inflation fears.

To add some context to the debate, we all knew that there would be some disruptions as the economy reopened. Large segments of the economy, most visibly hotels and restaurants, were running at a fraction of their capacity until the last few months. Now that most pandemic restrictions have been removed, businesses in these sectors are rushing to add staff and get fully up to speed.

But this is a process that takes time. (That’s why some of us supported measures like work sharing or the paycheck protection program, that kept workers tied to their employers.) During this adjustment process, there will be shortages in various sectors. There also will be problems for many employers trying to attract workers. In many cases they will have to offer higher wages, which is not a bad thing, but may require some adjustment on the part of businesses who are not used to competing for workers.

The difference between the view that the adjustment process will be difficult, and involve some inflation, and the inflation hawks’ view, that we are on a path to spiraling inflation and the return of 1970s stagflation, is whether the inflationary pressures are likely to be enduring. The latest evidence is supporting the temporary disruption story. (See, Preview: What to Look for in the June Consumer Price Index)

To take the most visible case, lumber prices having fallen by roughly 50 percent from the peak hit in early May. They are still high, but the soaring prices of the winter and early spring have proven to be temporary.

There also has been a very visible price surge in used cars. This is the result of both temporary supply problems for new cars (a fire temporarily reduced capacity in the semi-conductor industry) and a huge surge in demand as rental car companies sought to rebuild their fleets. The price surge now appears to be slowing,  if not actually going into reverse. New car production is starting to catch up with demand, but it will likely be several more months, perhaps not until 2022, until the car market returns to something resembling normal.

Oil is another area where we have seen a price surge. As people may recall, the price for oil futures actually turned negative briefly last spring, as people were effectively looking to be paid to store oil. With the economy picking up steam in the U.S. and around the world, oil consumption is bouncing back to more normal levels. However, production has not kept pace.

Part of this is by design, as OPEC moved to restrain production during the pandemic and is still targeting a level of production well below pre-pandemic output. When it failed to reach a deal on higher production quotas earlier this week, the price of oil spiked to over $77 a barrel. While this is at least temporarily bad news on the inflation front (good news on the climate front), the impact of this decision is not likely to be long-lasting.

Historically, it has been difficult for cartels to maintain their limits on output because there is an enormous incentive to cheat. Each producer stands to benefit if they can sell additional oil at near the cartel price, while the other producers stick to their quota. This has been an ongoing problem with OPEC, so it would not be surprising if countries soon begin to exceed the agreed upon quotas. As of July 8th, the price of oil had fallen to $72 a barrel.  

Unfortunately, high oil prices still mean bad news in the short-term for the economy and also politically for the person in the White House. Higher oil prices not only show up directly as higher inflation in gas and heating oil prices, they also show up in items like air fares and rents, which often include the cost of utilities. Surging oil prices would contribute to inflationary pressures, so from that standpoint, moderation of oil prices is a good thing.

 

The Labor Market

We have been seeing strong wage growth the last few months, especially at the bottom end of the labor market. Many of us see this as a good thing. After all, anyone who supported a $15 an hour minimum wage for 2026 has to want to see substantial wage increases in sectors like retail and restaurants, where the average hourly wage for production and non-supervisory workers is $18.57 and $16.21, respectively. Thus far in 2021 the pattern of wage increases has been very progressive with rapid wage growth in sectors with low pay, and much less rapid wage growth in industries with higher average pay. With wages overall increasing at annual rate of just over 4.0 percent, it is not clear that there is much to worry about with inflation.

We got important news today on the labor shortage story. The Labor Department’s Job Openings and Labor Turnover Survey showed a drop in the quit rate from 2.8 percent in April to 2.5 percent in May. This should not be that big a deal, except that when we saw a rise from 2.5 percent in March to 2.8 percent in April, it was treated as a very big deal. This was the highest rate ever reported in this survey, which goes back to 2000. It was taken as evidence that workers were so confident of their labor market prospects, they would freely quit jobs in search of a better one.

The 2.5 percent level reported for May is still high, but it is comparable to what we have seen in prior years. The recovery package was good news for workers, as is the rapid growth in employment that we have been seeing this year, but Biden has not yet created a worker’s paradise.

 

The Bond Market

In a series of tweets this morning, Paul Krugman noted the interest rate on 10-year Treasury bonds had fallen to under 1.3 percent. It had been over 1.7 percent as recently as March. This is interesting from the standpoint of inflation forecasts, since it doesn’t seem likely that many investors would be holding long-term bonds at a 1.3 percent interest rate if they expected inflation in the range of 3-4 percent, and possibly higher. In other words, the bond markets don’t seem to agree with Larry Summers’ view on inflation risks.

Markets are often wrong (just look at the price of Bitcoin), but it is striking that people with lots of money on the line clearly are not acting as though they anticipate a large uptick in the inflation rate. They apparently are not taking the warnings of the inflation hawks very seriously.

There is a great irony in this story. The deficit hawks always told us that the bond market was the big enforcer. Clinton Treasury Secretary Robert Rubin used the term “bond market vigilantes,” for the investors in the bond market who would send interest rates soaring in response to deficits they perceived as too large. We are now looking at far larger deficits, even relative to the size of the economy, than anything we were looking at during the Clinton years. Yet, the bond market vigilantes seem to be asleep at the wheel.

At the end of the day, the bond market may or may not prove to be right on this one, but it sure is nice to see that bond investors are not supporting the people with their actions, who claim to be speaking on their behalf.  

 

There have been many warnings, most notably from former Treasury Secretary Larry Summers, that President Biden’s robust recovery package would lead to spiraling inflation. I have written several times that I don’t think the inflation hawks are right, but their warnings deserve to be taken seriously. The most recent evidence supports the view that, for the moment, we can put aside our inflation fears.

To add some context to the debate, we all knew that there would be some disruptions as the economy reopened. Large segments of the economy, most visibly hotels and restaurants, were running at a fraction of their capacity until the last few months. Now that most pandemic restrictions have been removed, businesses in these sectors are rushing to add staff and get fully up to speed.

But this is a process that takes time. (That’s why some of us supported measures like work sharing or the paycheck protection program, that kept workers tied to their employers.) During this adjustment process, there will be shortages in various sectors. There also will be problems for many employers trying to attract workers. In many cases they will have to offer higher wages, which is not a bad thing, but may require some adjustment on the part of businesses who are not used to competing for workers.

The difference between the view that the adjustment process will be difficult, and involve some inflation, and the inflation hawks’ view, that we are on a path to spiraling inflation and the return of 1970s stagflation, is whether the inflationary pressures are likely to be enduring. The latest evidence is supporting the temporary disruption story. (See, Preview: What to Look for in the June Consumer Price Index)

To take the most visible case, lumber prices having fallen by roughly 50 percent from the peak hit in early May. They are still high, but the soaring prices of the winter and early spring have proven to be temporary.

There also has been a very visible price surge in used cars. This is the result of both temporary supply problems for new cars (a fire temporarily reduced capacity in the semi-conductor industry) and a huge surge in demand as rental car companies sought to rebuild their fleets. The price surge now appears to be slowing,  if not actually going into reverse. New car production is starting to catch up with demand, but it will likely be several more months, perhaps not until 2022, until the car market returns to something resembling normal.

Oil is another area where we have seen a price surge. As people may recall, the price for oil futures actually turned negative briefly last spring, as people were effectively looking to be paid to store oil. With the economy picking up steam in the U.S. and around the world, oil consumption is bouncing back to more normal levels. However, production has not kept pace.

Part of this is by design, as OPEC moved to restrain production during the pandemic and is still targeting a level of production well below pre-pandemic output. When it failed to reach a deal on higher production quotas earlier this week, the price of oil spiked to over $77 a barrel. While this is at least temporarily bad news on the inflation front (good news on the climate front), the impact of this decision is not likely to be long-lasting.

Historically, it has been difficult for cartels to maintain their limits on output because there is an enormous incentive to cheat. Each producer stands to benefit if they can sell additional oil at near the cartel price, while the other producers stick to their quota. This has been an ongoing problem with OPEC, so it would not be surprising if countries soon begin to exceed the agreed upon quotas. As of July 8th, the price of oil had fallen to $72 a barrel.  

Unfortunately, high oil prices still mean bad news in the short-term for the economy and also politically for the person in the White House. Higher oil prices not only show up directly as higher inflation in gas and heating oil prices, they also show up in items like air fares and rents, which often include the cost of utilities. Surging oil prices would contribute to inflationary pressures, so from that standpoint, moderation of oil prices is a good thing.

 

The Labor Market

We have been seeing strong wage growth the last few months, especially at the bottom end of the labor market. Many of us see this as a good thing. After all, anyone who supported a $15 an hour minimum wage for 2026 has to want to see substantial wage increases in sectors like retail and restaurants, where the average hourly wage for production and non-supervisory workers is $18.57 and $16.21, respectively. Thus far in 2021 the pattern of wage increases has been very progressive with rapid wage growth in sectors with low pay, and much less rapid wage growth in industries with higher average pay. With wages overall increasing at annual rate of just over 4.0 percent, it is not clear that there is much to worry about with inflation.

We got important news today on the labor shortage story. The Labor Department’s Job Openings and Labor Turnover Survey showed a drop in the quit rate from 2.8 percent in April to 2.5 percent in May. This should not be that big a deal, except that when we saw a rise from 2.5 percent in March to 2.8 percent in April, it was treated as a very big deal. This was the highest rate ever reported in this survey, which goes back to 2000. It was taken as evidence that workers were so confident of their labor market prospects, they would freely quit jobs in search of a better one.

The 2.5 percent level reported for May is still high, but it is comparable to what we have seen in prior years. The recovery package was good news for workers, as is the rapid growth in employment that we have been seeing this year, but Biden has not yet created a worker’s paradise.

 

The Bond Market

In a series of tweets this morning, Paul Krugman noted the interest rate on 10-year Treasury bonds had fallen to under 1.3 percent. It had been over 1.7 percent as recently as March. This is interesting from the standpoint of inflation forecasts, since it doesn’t seem likely that many investors would be holding long-term bonds at a 1.3 percent interest rate if they expected inflation in the range of 3-4 percent, and possibly higher. In other words, the bond markets don’t seem to agree with Larry Summers’ view on inflation risks.

Markets are often wrong (just look at the price of Bitcoin), but it is striking that people with lots of money on the line clearly are not acting as though they anticipate a large uptick in the inflation rate. They apparently are not taking the warnings of the inflation hawks very seriously.

There is a great irony in this story. The deficit hawks always told us that the bond market was the big enforcer. Clinton Treasury Secretary Robert Rubin used the term “bond market vigilantes,” for the investors in the bond market who would send interest rates soaring in response to deficits they perceived as too large. We are now looking at far larger deficits, even relative to the size of the economy, than anything we were looking at during the Clinton years. Yet, the bond market vigilantes seem to be asleep at the wheel.

At the end of the day, the bond market may or may not prove to be right on this one, but it sure is nice to see that bond investors are not supporting the people with their actions, who claim to be speaking on their behalf.  

 

Buying Democracy in a Good Way

Brian Beutler tweeted something this week that got me thinking about ways the Democrats can get around a Republican filibuster on voting rights: make it about money. The key problem facing any voting rights measure is that the Republicans are determined to filibuster anything that limits the ability of states to suppress the vote or gerrymander congressional and legislative districts.

At the moment, at least two Democratic senators (Joe Manchin of West Virginia and Kyrsten Sinema of Arizona) seem unwilling to go along with voting to weaken the filibuster to allow voting rights measures to pass with a simple majority. As a result, it is hard to see how anything can pass.

But, the Democrats can pass bills that involve appropriations with a simple majority through the reconciliation process. This is where the point that Brian made comes in, we can make voting rights about money.

Suppose the next reconciliation bill included a provision that gave $1,000 per person to every adult living in a state where the districts are drawn by an independent commission, where basic provisions of access are guaranteed (e.g. two weeks of early voting, no excuse absentee voting), and where elections are run by career civil servants and cannot be overturned by elected officials. We should probably throw in some provisions about mandatory five-year prison terms for harassing or threatening election officials.

This is a straight up appropriation bill, it’s not telling states what they have to do, so it should pass muster for reconciliation. It may be the case that Republican states will still insist on their voter suppression measures and rigged districts, and look to blow off the money, as they did with Medicaid expansion, but this would be a very different story.

Medicaid expansion was largely seen as benefitting poor people and people of color. In this case, the issue is $1,000 that would go directly into the pocket of real Americans. It should be a great election issue that Republican governors and legislators pulled $1,000 out of their pockets so that they could rig the elections and keep their friends in office.

I suppose the Republicans can argue that voter suppression and gerrymandered districts are a matter of basic rights that are more important than money, but I’m not sure that would be a winning position. In any case, I really would love to find out.  

Brian Beutler tweeted something this week that got me thinking about ways the Democrats can get around a Republican filibuster on voting rights: make it about money. The key problem facing any voting rights measure is that the Republicans are determined to filibuster anything that limits the ability of states to suppress the vote or gerrymander congressional and legislative districts.

At the moment, at least two Democratic senators (Joe Manchin of West Virginia and Kyrsten Sinema of Arizona) seem unwilling to go along with voting to weaken the filibuster to allow voting rights measures to pass with a simple majority. As a result, it is hard to see how anything can pass.

But, the Democrats can pass bills that involve appropriations with a simple majority through the reconciliation process. This is where the point that Brian made comes in, we can make voting rights about money.

Suppose the next reconciliation bill included a provision that gave $1,000 per person to every adult living in a state where the districts are drawn by an independent commission, where basic provisions of access are guaranteed (e.g. two weeks of early voting, no excuse absentee voting), and where elections are run by career civil servants and cannot be overturned by elected officials. We should probably throw in some provisions about mandatory five-year prison terms for harassing or threatening election officials.

This is a straight up appropriation bill, it’s not telling states what they have to do, so it should pass muster for reconciliation. It may be the case that Republican states will still insist on their voter suppression measures and rigged districts, and look to blow off the money, as they did with Medicaid expansion, but this would be a very different story.

Medicaid expansion was largely seen as benefitting poor people and people of color. In this case, the issue is $1,000 that would go directly into the pocket of real Americans. It should be a great election issue that Republican governors and legislators pulled $1,000 out of their pockets so that they could rig the elections and keep their friends in office.

I suppose the Republicans can argue that voter suppression and gerrymandered districts are a matter of basic rights that are more important than money, but I’m not sure that would be a winning position. In any case, I really would love to find out.  

The June jobs report was damn good news. The 850,000 new jobs created was at the high end of what I imagined to be possible. There is a limit to how rapidly businesses can hire. It is easiest when it’s just a matter of recalling workers who are laid off. But the vast pool of people on temporary layoffs has dwindled. As I pointed out, the share of the unemployment due to temporary layoffs had fallen to a level that was normal for a recession. It was 19.0 percent in June, down from a peak of 77.9 percent last April.

We also are looking at a situation in which an extraordinarily large share of the unemployed are long-term unemployed (more than twenty-six weeks). Historically, it has been harder for this group of workers to find new jobs.

For these reasons, it didn’t seem likely that we could have the sort of million plus monthly job growth that we saw last summer. In that context, adding 850,000 jobs in a month is probably about as good as we could hope for.

The strong job growth was associated with strong wage growth, especially for workers in lower-paying sectors. This is consistent with the hard to get good help story that we are constantly hearing about in the business press. Of course, it is not really impossible in most cases to get more workers, restaurants added 195,000 jobs in June, employers just have to pay more money.

The story in the June data is that workers are getting pay increases, and this is especially the case for workers at the bottom of the wage ladder. The data from the Bureau of Labor Statistics’ establishment survey are not ideal for measuring wage growth for different groups (the Current Population Survey is much better, but the monthly and even quarterly data are very noisy) but we can get a general picture.

The data for the last year are somewhat skewed by composition effects (the lowest paid workers lost their jobs, thereby raising average pay), but if we take the averages for the last two years, with most workers now rehired, the impact of composition changes is more limited. What we see is that average wage growth has been strong over this period, but it has been strongest for the lowest paid workers.

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

As the chart shows, the average hourly wage for all workers increased at an average annual rate of 4.3 percent. If we look at the average for all production and non-supervisory workers, a category which excludes most higher paid workers, the average annual increase has been 4.6 percent. It has been even higher in the industries with the lowest pay. Average annual increases in retail has been 5.8 percent, while in the category that includes hotel and restaurant workers it was 6.0 percent.   

This is a big deal for these workers. In the case of hotel and restaurant workers, the increases over the last two years come to $1.77 an hour. For someone working a full-time full-year job (many of these workers only work 20-30 hours a week), this would mean a pay increase of more than $3,500 a year.

Of course, how much this translates into higher living standards will depend on inflation. Inflation over the last two years has averaged 2.6 percent annually. This means that the lowest paid workers still got large pay increases, even after adjusting for the rise in prices. After adjusting for inflation, the average hourly wage for retail workers still rose by more 6.4 percent over the last two years. For restaurant workers the increase a bit less than 7.0 percent.

We will likely see a somewhat slower pace of wage growth once the surge of reopening hiring is over. As pandemic restrictions have ended over the last few months, many businesses rushed to staff up to accommodate more customers. This led to a record number of job openings reported for April. The story is likely to be similar in the May data released this week, but we will probably be through this stretch by the end of the summer.

Also, the normal rise in seasonal demand has added to difficulty for employers in finding workers. Many hotels and restaurants always add to their staff in summer months. This is a seasonal effect that is accounted for in our seasonal adjustments. But when this additional hiring coincides with the ending of the pandemic, it makes hiring considerably more difficult. However, when we get to September. The situation is reversed, with seasonal workers being laid off.

On the negative side, this means that the bargaining power that many lower paid workers enjoy at the moment is likely to be eroded quickly. On the plus side, there is less reason to fear that we are seeing the beginning of an inflationary spiral, with higher wages forcing price increases, which then lead to higher wage demands.

Wage Growth and Inflation

It is also important to remember that lower paid workers account for a relatively small portion of the total wage bill. If all workers were seeing 6.0 percent annual pay increases, it almost certainly would lead to higher inflation. But these sorts of pay hikes in the restaurant and retail sector have little impact on overall inflation.

The 4.3 percent average rate of wage growth overall is roughly a percentage point higher than the rates we were seeing before the pandemic, but this can be largely absorbed in a lower profit share and more rapid pace of productivity growth. A decline in profit shares would just be reversing the rise we saw following the Great Recession. It may be bad news for the stock market, but good news for just about everyone who didn’t own large amounts of stock.

Productivity growth has been extraordinary since the recession. In the year from the first quarter of 2020 to the first quarter of 2021 productivity rose 4.1 percent. This compares to average annual rate of just over 1.0 percent in the prior decade. With GDP likely to show an increase of close to 8.0 percent in the second quarter, the rate of productivity growth will again be close to 4.0 percent in the current quarter.

Productivity growth is always erratic, especially around recessions. No one expects the economy to sustain anything like a 4.0 percent rate of productivity growth, but businesses were forced to find new ways of operating in the pandemic. Many of these changes led to more efficient ways of doing business. As innovations diffuse more widely, it is very plausible that we will see substantially more rapid productivity growth for at least the next few years. This will allow for more rapid wage growth without inflation.

Trends in Oil

Oil prices are an area that provide some basis for concern in the overall inflation picture. While oil is far less important to the economy than it was in the 1970s, it is still important, and rising oil prices show up as higher inflation in not obvious places like rent (which often includes utilities) and airfares, which are highly responsive to the price of jet fuel. Of course, higher gas prices are highly visible and likely to be an issue raised in elections.

Oil prices had plummeted during the pandemic, with future prices actually turning negative, meaning that it was necessary to pay people to commit to taking delivery of oil. Crude prices have been rising consistently since last fall, with the current price hovering near $75 a barrel, roughly the same as the peak levels in the years just before the pandemic.

It’s not clear if this sort of price can be sustained long. There are many places in the world where oil can be profitably produced at $75 aa barrel, but not at $50 or even $60 a barrel. Production was shut down in these areas in the pandemic, but we can expect many to be coming back on line in the next few months.

There is also another factor that could put serious downward pressure on oil prices. If oil producers take seriously the commitments to electric cars and clean energy by the United States and other major consuming nations, then they will realize that they have an asset whose value is likely to plummet in coming years. In that context, it makes sense to try to produce as much as possible while the price is still reasonably high.

Clearly this is not happening now, and most projections show oil demand continuing to rise modestly throughout the decade. But it is possible to imagine that aggressive moves towards clean energy could change this picture and create a climate of fear among oil producers.

Progress, But Not Home Yet

Given the depths to which the economy sank last spring, and the huge surge in coronavirus cases and deaths this winter, you have to be pretty happy with the way things stand now with the economy and the pandemic. In the case of the latter, the daily rate of both cases and deaths is down by far more than 90 percent from the winter peaks. In the states with the highest vaccination rates, the number of cases reported daily is down by more than 99 percent.

We may not see more months of 850,000 job growth, but it certainly is reasonable to believe that we can stay in a range between 500,000 and 700,000 at least through the rest of the year. Since we are still down 6.5 million jobs from before the pandemic started, this means we won’t make up the jobs lost until the winter. It will be even longer until we can get back to the pre-pandemic trend and get back jobs that should have been created over the last year and a half.[1]

Still, the picture looks hugely better than it did six months ago. If Congress can use the summer to pass legislation dealing with longer term problems, like addressing global warming, improving child care and home health care, fixing Medicare, and making health care more affordable generally, the picture will be even better.

[1] We may end up a somewhat lower trend growth path if, for example, some older workers choose to retire earlier than they had planned before the pandemic. More early retirements is not a bad thing, if it is voluntary, but it does reduce the size of the workforce.

The June jobs report was damn good news. The 850,000 new jobs created was at the high end of what I imagined to be possible. There is a limit to how rapidly businesses can hire. It is easiest when it’s just a matter of recalling workers who are laid off. But the vast pool of people on temporary layoffs has dwindled. As I pointed out, the share of the unemployment due to temporary layoffs had fallen to a level that was normal for a recession. It was 19.0 percent in June, down from a peak of 77.9 percent last April.

We also are looking at a situation in which an extraordinarily large share of the unemployed are long-term unemployed (more than twenty-six weeks). Historically, it has been harder for this group of workers to find new jobs.

For these reasons, it didn’t seem likely that we could have the sort of million plus monthly job growth that we saw last summer. In that context, adding 850,000 jobs in a month is probably about as good as we could hope for.

The strong job growth was associated with strong wage growth, especially for workers in lower-paying sectors. This is consistent with the hard to get good help story that we are constantly hearing about in the business press. Of course, it is not really impossible in most cases to get more workers, restaurants added 195,000 jobs in June, employers just have to pay more money.

The story in the June data is that workers are getting pay increases, and this is especially the case for workers at the bottom of the wage ladder. The data from the Bureau of Labor Statistics’ establishment survey are not ideal for measuring wage growth for different groups (the Current Population Survey is much better, but the monthly and even quarterly data are very noisy) but we can get a general picture.

The data for the last year are somewhat skewed by composition effects (the lowest paid workers lost their jobs, thereby raising average pay), but if we take the averages for the last two years, with most workers now rehired, the impact of composition changes is more limited. What we see is that average wage growth has been strong over this period, but it has been strongest for the lowest paid workers.

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

As the chart shows, the average hourly wage for all workers increased at an average annual rate of 4.3 percent. If we look at the average for all production and non-supervisory workers, a category which excludes most higher paid workers, the average annual increase has been 4.6 percent. It has been even higher in the industries with the lowest pay. Average annual increases in retail has been 5.8 percent, while in the category that includes hotel and restaurant workers it was 6.0 percent.   

This is a big deal for these workers. In the case of hotel and restaurant workers, the increases over the last two years come to $1.77 an hour. For someone working a full-time full-year job (many of these workers only work 20-30 hours a week), this would mean a pay increase of more than $3,500 a year.

Of course, how much this translates into higher living standards will depend on inflation. Inflation over the last two years has averaged 2.6 percent annually. This means that the lowest paid workers still got large pay increases, even after adjusting for the rise in prices. After adjusting for inflation, the average hourly wage for retail workers still rose by more 6.4 percent over the last two years. For restaurant workers the increase a bit less than 7.0 percent.

We will likely see a somewhat slower pace of wage growth once the surge of reopening hiring is over. As pandemic restrictions have ended over the last few months, many businesses rushed to staff up to accommodate more customers. This led to a record number of job openings reported for April. The story is likely to be similar in the May data released this week, but we will probably be through this stretch by the end of the summer.

Also, the normal rise in seasonal demand has added to difficulty for employers in finding workers. Many hotels and restaurants always add to their staff in summer months. This is a seasonal effect that is accounted for in our seasonal adjustments. But when this additional hiring coincides with the ending of the pandemic, it makes hiring considerably more difficult. However, when we get to September. The situation is reversed, with seasonal workers being laid off.

On the negative side, this means that the bargaining power that many lower paid workers enjoy at the moment is likely to be eroded quickly. On the plus side, there is less reason to fear that we are seeing the beginning of an inflationary spiral, with higher wages forcing price increases, which then lead to higher wage demands.

Wage Growth and Inflation

It is also important to remember that lower paid workers account for a relatively small portion of the total wage bill. If all workers were seeing 6.0 percent annual pay increases, it almost certainly would lead to higher inflation. But these sorts of pay hikes in the restaurant and retail sector have little impact on overall inflation.

The 4.3 percent average rate of wage growth overall is roughly a percentage point higher than the rates we were seeing before the pandemic, but this can be largely absorbed in a lower profit share and more rapid pace of productivity growth. A decline in profit shares would just be reversing the rise we saw following the Great Recession. It may be bad news for the stock market, but good news for just about everyone who didn’t own large amounts of stock.

Productivity growth has been extraordinary since the recession. In the year from the first quarter of 2020 to the first quarter of 2021 productivity rose 4.1 percent. This compares to average annual rate of just over 1.0 percent in the prior decade. With GDP likely to show an increase of close to 8.0 percent in the second quarter, the rate of productivity growth will again be close to 4.0 percent in the current quarter.

Productivity growth is always erratic, especially around recessions. No one expects the economy to sustain anything like a 4.0 percent rate of productivity growth, but businesses were forced to find new ways of operating in the pandemic. Many of these changes led to more efficient ways of doing business. As innovations diffuse more widely, it is very plausible that we will see substantially more rapid productivity growth for at least the next few years. This will allow for more rapid wage growth without inflation.

Trends in Oil

Oil prices are an area that provide some basis for concern in the overall inflation picture. While oil is far less important to the economy than it was in the 1970s, it is still important, and rising oil prices show up as higher inflation in not obvious places like rent (which often includes utilities) and airfares, which are highly responsive to the price of jet fuel. Of course, higher gas prices are highly visible and likely to be an issue raised in elections.

Oil prices had plummeted during the pandemic, with future prices actually turning negative, meaning that it was necessary to pay people to commit to taking delivery of oil. Crude prices have been rising consistently since last fall, with the current price hovering near $75 a barrel, roughly the same as the peak levels in the years just before the pandemic.

It’s not clear if this sort of price can be sustained long. There are many places in the world where oil can be profitably produced at $75 aa barrel, but not at $50 or even $60 a barrel. Production was shut down in these areas in the pandemic, but we can expect many to be coming back on line in the next few months.

There is also another factor that could put serious downward pressure on oil prices. If oil producers take seriously the commitments to electric cars and clean energy by the United States and other major consuming nations, then they will realize that they have an asset whose value is likely to plummet in coming years. In that context, it makes sense to try to produce as much as possible while the price is still reasonably high.

Clearly this is not happening now, and most projections show oil demand continuing to rise modestly throughout the decade. But it is possible to imagine that aggressive moves towards clean energy could change this picture and create a climate of fear among oil producers.

Progress, But Not Home Yet

Given the depths to which the economy sank last spring, and the huge surge in coronavirus cases and deaths this winter, you have to be pretty happy with the way things stand now with the economy and the pandemic. In the case of the latter, the daily rate of both cases and deaths is down by far more than 90 percent from the winter peaks. In the states with the highest vaccination rates, the number of cases reported daily is down by more than 99 percent.

We may not see more months of 850,000 job growth, but it certainly is reasonable to believe that we can stay in a range between 500,000 and 700,000 at least through the rest of the year. Since we are still down 6.5 million jobs from before the pandemic started, this means we won’t make up the jobs lost until the winter. It will be even longer until we can get back to the pre-pandemic trend and get back jobs that should have been created over the last year and a half.[1]

Still, the picture looks hugely better than it did six months ago. If Congress can use the summer to pass legislation dealing with longer term problems, like addressing global warming, improving child care and home health care, fixing Medicare, and making health care more affordable generally, the picture will be even better.

[1] We may end up a somewhat lower trend growth path if, for example, some older workers choose to retire earlier than they had planned before the pandemic. More early retirements is not a bad thing, if it is voluntary, but it does reduce the size of the workforce.

Yes, it is that time of month again. As I always say, this sort of comparison is silly, since there are so many factors determining job growth that have nothing to do with the person in the White House. But, we all know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot.

So, here’s the latest, the economy has created more than 3 million jobs in the first five months of the Biden administration. It lost almost 2.9 million jobs in the four years of the Trump administration. Biden has now created more jobs than Trump lost.

Source: Bureau of Labor Statistics.

Yes, it is that time of month again. As I always say, this sort of comparison is silly, since there are so many factors determining job growth that have nothing to do with the person in the White House. But, we all know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot.

So, here’s the latest, the economy has created more than 3 million jobs in the first five months of the Biden administration. It lost almost 2.9 million jobs in the four years of the Trump administration. Biden has now created more jobs than Trump lost.

Source: Bureau of Labor Statistics.

There are lots of silly comments that pass for great wisdom in elite circles. Steve Rattner gave us one of my favorites in his NYT column warning President Biden against putting too much money into reviving our system of train travel.

Rattner tells us:

“America is not Europe, with its dense population centers clustered reasonably close together.”

This is of course true, but in a totally trivial sense. The density of our population per mile of land is much lower than in Europe, especially if we include Alaska. But this is completely beside the point when it comes to trains. The issue is not building passenger lines from New York to Fairbanks, it’s about connecting cities that actually are reasonably close to together.

For example, Chicago is 790 miles from New York. By contrast, Berlin is 670 miles from Paris. If we stretch the trip to Warsaw the distance is over 1000 miles. And, we have many major cities in the Midwest that are closer to New York than Chicago, such as Cleveland, Detroit, and Cincinnati.

In short, if we think about the issue seriously, the difference in population density between the U.S. and Europe should not affect the feasibility of train service in the United States. As a practical matter, we have found it very difficult to build high speed rail for a variety of reasons that Rattner notes. We must address these problems if we are going to have viable passenger train service, but density is simply not the issue.

There are lots of silly comments that pass for great wisdom in elite circles. Steve Rattner gave us one of my favorites in his NYT column warning President Biden against putting too much money into reviving our system of train travel.

Rattner tells us:

“America is not Europe, with its dense population centers clustered reasonably close together.”

This is of course true, but in a totally trivial sense. The density of our population per mile of land is much lower than in Europe, especially if we include Alaska. But this is completely beside the point when it comes to trains. The issue is not building passenger lines from New York to Fairbanks, it’s about connecting cities that actually are reasonably close to together.

For example, Chicago is 790 miles from New York. By contrast, Berlin is 670 miles from Paris. If we stretch the trip to Warsaw the distance is over 1000 miles. And, we have many major cities in the Midwest that are closer to New York than Chicago, such as Cleveland, Detroit, and Cincinnati.

In short, if we think about the issue seriously, the difference in population density between the U.S. and Europe should not affect the feasibility of train service in the United States. As a practical matter, we have found it very difficult to build high speed rail for a variety of reasons that Rattner notes. We must address these problems if we are going to have viable passenger train service, but density is simply not the issue.

I know I harp a lot on all the ways we structure the market to redistribute income upward, but that’s because we keep digging in deeper on these policies, and almost no one else talks about it. I get that it’s cool to talk about all sorts of tax and transfer schemes to redistribute some of the money we give to the rich and super-rich. But, I’m one of those old-fashion sorts who think it’s simpler just not to give them all the money in the first place. So, now that you have been warned, here again is my short list of ways to not give so much money to rich people.

Patent and Copyright Monopolies

The immediate issue that prompts this tirade was a request by President Biden for another $6.5 billion  (0.15 percent of the budget) in 2022 to support research into diseases like cancer, diabetes, and Alzheimer’s. I’m not upset at all that the federal government is spending more money on research in these areas.

In fact, I think more federal funding of research into these and other areas of biomedical research is great. The problem is that we can be all but certain that all the breakthroughs that may be realized as a result of this spending will result in patent monopolies that will be very profitable for the companies that are awarded them.

If this is too abstract for people, then think of Moderna, a company that saw its stock price increase more than 1000 percent since the pandemic began, creating more than $80 billion in stock wealth. Obviously, the main reason for this run-up was its Covid vaccine, which was developed almost entirely on the taxpayer’s dime. We can get angry that so many people became millionaires or billionaires on taxpayer funded research, but when we pay for the research and then give the company a patent monopoly, what else did we think would happen?

The alternative is to pay for the research and have it placed in the public domain. This means both, that all the findings are fully public so that other researchers can learn from them and build on them, and also that all patents are placed in the public domain. That means that anything developed can be produced as a cheap generic from the day it is approved by the FDA.

With respect to the vaccines, it is also worth mentioning that if we had gone the open-source route, we could have required that all the technology involved in the production process would also be freely shared. One of the problems with increasing production of the vaccines is that, even if we removed patent protection, most manufacturers would not have the necessary technical expertise to begin producing the vaccines immediately. However, if a condition of getting public funding was that this technology would be freely shared, then potential producers anywhere in the world would be able to get technical assistance in setting up their facilities.[1]

Another huge advantage of going the open-source route came up with the FDA’s decision to approve the Alzheimer’s drug, Aduhelm. In approving this drug, the FDA overruled the recommendation of its advisory panel, a step which it rarely takes. The panel argued that the evidence for the drug’s effectiveness was very weak, and there are serious side effects, which means that many patients may be made worse off by taking the drug.

Biogen, the maker of Aduhelm, announced that it would price the drug at $56,000 for a year’s dosage. With over 6 million people suffering from Alzheimer’s, this could mean tens of billions a year in revenue for Biogen, with most of it paid by the federal government through Medicare and Medicaid.

But even beyond the issue of the money, there is also the concern that the FDA’s decision may have been influenced by the lobbying efforts of Biogen. Many researchers get support from Biogen, and it’s hard to believe that their assessment of the drug is not affected by the money they receive. If we took the money out of the equation and were looking at a situation where Adulhelm was going to be produced as a cheap generic, there would be little reason for researchers not to give their honest assessment of the evidence of the drug’s safety and effectiveness. This is a reason that open-source research is likely to lead to better outcomes.

Having cheap drugs and vaccines would not only mean that some of the rich are less rich, but it also raises incomes for everyone who is not benefitting from patent monopolies. If we pay less for drugs, then the real value of everyone’s paycheck goes up. If we had less of a role for patent monopolies, not only for prescription drugs, but also for medical equipment, computers, software, and other technologies, the price of a large set of goods and services would fall sharply, hugely increasing real wages.

 

Downsizing Finance

The United States has a hugely bloated financial sector, which is responsible for many of the country’s great fortunes. This should not be a source of pride.

To restate the Econ 101 definition for the purpose of the financial sector, it is about allocating capital to its best uses. Finance is an intermediate good, like trucking. Unlike final goods, like housing, medical care, or food, it provides no direct benefit to society. This means that we want the financial sector to be as small as possible, while still being able to serve its purpose.

In fact, the financial sector has exploded relative to the size of the economy over the last half century. The narrow financial sector, commodities and securities trading, and investment banking have quintupled as a share of GDP since the 1970s. If the trucking sector has similarly expanded, all our economists would be complaining about our incredibly inefficient trucking sector. Yet, there seems little appreciation of the fact that finance is a huge source of both waste and inequality.  

The cost of running this bloated financial sector comes out of the pockets of the rest of us. It takes the forms of fees and commissions on trading stock and other assets, fees and penalties assessed by banks and other financial institutions, and fees assessed by private equity partners for managing the assets of pension funds and university endowments.

My favorite quick fix here is a financial transactions tax to downsize Wall Street. We could easily raise more than 0.5 percent of GDP ($60 billion a year) from such a tax, with the revenue coming almost entirely out the pocket of Wall Street. (To be clear, they will pass on the cost of the tax. They will lose because higher transactions costs will mean less trading, and therefore less revenue for Wall Street.)

We can hugely cut down on the fees earned by banks and bank-like companies both with better regulation and more competition. The best route for the latter would be for the Federal Reserve Board to offer digital accounts to every person and corporation in the country. This route is already being considered at the Fed. It would mean that we would no longer need accounts at traditional banks. We could have our paychecks and bills processed through the Fed at essentially zero cost.

Hedge fund and private equity partners justify their huge paychecks, which often run into the tens, or even hundreds, of millions by the claim that they are getting outsized returns for investors. It turns out that this is not true. In recent years, both hedge funds and private equity funds have typically underperformed the S&P 500. This means that their investors would have been better off just buying an S&P index fund than putting their money in private equity or hedge funds.

It is hard to pass laws that prevent investors from being stupid with their money but are things that can be done. In the case of public pension funds, we could have legislation requiring full disclosure of the terms of their contracts with private equity funds (and other investment managers), including the returns received. That way any reporter or interested person could look on the website and see how much money the state’s pension funds were paying some rich private equity types to lose the pension fund’s money.[2]

Universities have been losing large amounts of money paying hedge fund partners (overwhelmingly white males) to manage their endowments. Again, it would be hard to pass laws prohibiting Harvard, Yale, and the rest from throwing away their money, but if there were any progressive students or faculty on these campuses, they might be able to change the practice. After all, there is a reasonable case to be made that it is better to give money for financial aid to low- and moderate- income students than Wall Street types earning tens of millions a year.

 

Corporate Governance and Super-Rich CEOs

There has been a lot of discussion of the high pay that many CEOs have managed to pocket in the pandemic year. What is largely missing in the debate on CEO pay is that top executives are essentially ripping off the companies they work for.

Specifically, they do not contribute an amount to corporate bottom line that is commensurate with their pay. The implication is that companies can pay a CEO considerably less money, without concern that their profits would suffer. And, lower CEO pay would also mean pay cuts for the whole top tier of corporate executives. Lower pay for top tier corporate executives would also lead to lower pay for top management in the non-profit and university sector. In short, excessive pay for CEOs should be a big deal.

There is considerable evidence for the claim that CEOs don’t earn their pay. Some of it is cited in chapter six of Rigged. My own contribution to this literature was a paper with Jessica Schieder that looked at what happened to CEO pay in the health insurance industry after the ACA was passed. A provision of the law eliminated the deductibility of executive compensation (all compensation) in excess of $1 million. Since the nominal tax rate at the time was 35 percent, this change effectively raised the cost of CEO pay by more than 50 percent. If corporations were balancing pay CEO with their contribution to the company’s bottom line, this change should have unambiguously lowered pay. We tried a wide variety of specifications, controlling for revenue growth, profit growth, stock price appreciation, and other factors. In none of them was there any evidence that CEO pay in the health care industry fell relative to pay in other sectors.

If CEOs are ripping off the companies they work for, then shareholders should be allies in the effort to contain CEO pay. This seems an obvious conclusion, but there seems to be very little interest in policies that will increase the ability of shareholders to contain CEO pay. The labor market would look very different if CEOs earned 20 to 30 times the pay of the typical worker ($2 million to $3 million a year) rather than the current 200 to 300 times.  

My favorite mechanism for bringing CEO pay down to earth is to put some teeth into the “Say on Pay” shareholder votes on CEO pay. These votes were required to take place every three years by a provision in the Dodd-Frank financial reform package. As it stands now, there is no consequence when a package is voted down. (Less than 3.0 percent are turned down.)

Suppose that directors lost their stipend (typically around $200k a year) if a CEO pay package was voted down. This would give directors some real incentive to ask questions about whether they could pay their CEO less. Anyhow, there are many other mechanisms that would increase shareholders’ ability to reduce CEO pay, but this is the direction we should be thinking.

 

Section 230 and Special Immunity for Mark Zuckerberg

If the New York Times runs a defamatory ad, it can face a large lawsuit for libel. If Mark Zuckerberg runs the same ad on Facebook, he faces no legal liability. Only the person who paid for the ad can be sued. It’s not obvious why we should think that an Internet intermediary bears no liability for spreading defamatory claims but a print or broadcast outlet does.

Clearly far more material is carried over Internet outlets, but that is the choice of the outlets. That doesn’t seem like a good reason to allow them to profit from defaming someone.

The reason Mark Zuckerberg doesn’t face liability and the New York Times does is that Congress gives him and other Internet intermediaries special protection. Section 230 of the 1996 Communications Decency Act, protects Internet intermediaries from liability for third party content. This protects it from being sued for both the ads it carries and also the posts from individual account holders.

We don’t have to give Facebook this special protection. We could make Zuckerberg liable for ads in the same way that the New York Times and CNN are liable for ads that they carry. This means that he would have to scrutinize ads for defamatory material in the same way that traditional media outlets have this responsibility.

We can also make Facebook libel for defamatory posts just like the New York Times is libel for defamatory statements that appear in letters to the editor. It would of course be impossible for Facebook to screen every post in advance. We can structure the liability to take the form of a takedown requirement after notification, just as is down now with material that is alleged to infringe on copyrights.[3] This will undoubtedly add considerable costs for a company operating on Facebook’s business model, but so what?

I had a series of Twitter exchanges in the last couple of weeks in which several people argued that this sort of change in the law would just benefit Facebook at the expense of smaller competitors since its size would make it better able to absorb the added costs. I had argued for continuing to exempt common carriers, who don’t control content, but we can draw the line somewhat differently.

We can exempt any intermediary that does not either sell advertising or personal information. This would mean that any intermediary that either made its money on a subscription basis or was operated as a public service, would not face liability for third party content. That should provide a substantial advantage to Facebook’s competitors who choose to structure themselves in a way that they could benefit from this protection.     

 

If We Care About Inequality, Maybe We Should Stop Giving So Much Money to the Rich

At this point, I would usually give my tirade about how doctors make so much more money in the U.S. than in other wealthy countries because we protect them from competition, but this is enough for today. The point is that we have structured the market to redistribute an enormous amount of income upward.

I’m a big fan of progressive taxation, but the reality is that it is much easier to not give rich people so much money in the first place than to try to tax it back after the fact. It would be nice if more progressives paid some attention to the ways in which we give the rich money.   

[1] I outline an alternative funding mechanism in chapter 5 of Rigged (it’s free).

[2] We can also pass legislation that cracks down on the some of the abusive tactics, like surprise medical billing, that private equity pursues to try to boost returns.

[3] There is a concern that Facebook would be over-zealous in removing items that have been challenged, as has been the case with intermediaries responding to notifications of copyright violations. While this is possible, the penalties for copyright violations are far more severe than defamation. Copyright violations carry statutory penalties, so that even trivial infringements, that cost the copyright holder just a few dollars, can result in thousands of dollars of damages and legal expenses. There is nothing comparable with libel law.

I know I harp a lot on all the ways we structure the market to redistribute income upward, but that’s because we keep digging in deeper on these policies, and almost no one else talks about it. I get that it’s cool to talk about all sorts of tax and transfer schemes to redistribute some of the money we give to the rich and super-rich. But, I’m one of those old-fashion sorts who think it’s simpler just not to give them all the money in the first place. So, now that you have been warned, here again is my short list of ways to not give so much money to rich people.

Patent and Copyright Monopolies

The immediate issue that prompts this tirade was a request by President Biden for another $6.5 billion  (0.15 percent of the budget) in 2022 to support research into diseases like cancer, diabetes, and Alzheimer’s. I’m not upset at all that the federal government is spending more money on research in these areas.

In fact, I think more federal funding of research into these and other areas of biomedical research is great. The problem is that we can be all but certain that all the breakthroughs that may be realized as a result of this spending will result in patent monopolies that will be very profitable for the companies that are awarded them.

If this is too abstract for people, then think of Moderna, a company that saw its stock price increase more than 1000 percent since the pandemic began, creating more than $80 billion in stock wealth. Obviously, the main reason for this run-up was its Covid vaccine, which was developed almost entirely on the taxpayer’s dime. We can get angry that so many people became millionaires or billionaires on taxpayer funded research, but when we pay for the research and then give the company a patent monopoly, what else did we think would happen?

The alternative is to pay for the research and have it placed in the public domain. This means both, that all the findings are fully public so that other researchers can learn from them and build on them, and also that all patents are placed in the public domain. That means that anything developed can be produced as a cheap generic from the day it is approved by the FDA.

With respect to the vaccines, it is also worth mentioning that if we had gone the open-source route, we could have required that all the technology involved in the production process would also be freely shared. One of the problems with increasing production of the vaccines is that, even if we removed patent protection, most manufacturers would not have the necessary technical expertise to begin producing the vaccines immediately. However, if a condition of getting public funding was that this technology would be freely shared, then potential producers anywhere in the world would be able to get technical assistance in setting up their facilities.[1]

Another huge advantage of going the open-source route came up with the FDA’s decision to approve the Alzheimer’s drug, Aduhelm. In approving this drug, the FDA overruled the recommendation of its advisory panel, a step which it rarely takes. The panel argued that the evidence for the drug’s effectiveness was very weak, and there are serious side effects, which means that many patients may be made worse off by taking the drug.

Biogen, the maker of Aduhelm, announced that it would price the drug at $56,000 for a year’s dosage. With over 6 million people suffering from Alzheimer’s, this could mean tens of billions a year in revenue for Biogen, with most of it paid by the federal government through Medicare and Medicaid.

But even beyond the issue of the money, there is also the concern that the FDA’s decision may have been influenced by the lobbying efforts of Biogen. Many researchers get support from Biogen, and it’s hard to believe that their assessment of the drug is not affected by the money they receive. If we took the money out of the equation and were looking at a situation where Adulhelm was going to be produced as a cheap generic, there would be little reason for researchers not to give their honest assessment of the evidence of the drug’s safety and effectiveness. This is a reason that open-source research is likely to lead to better outcomes.

Having cheap drugs and vaccines would not only mean that some of the rich are less rich, but it also raises incomes for everyone who is not benefitting from patent monopolies. If we pay less for drugs, then the real value of everyone’s paycheck goes up. If we had less of a role for patent monopolies, not only for prescription drugs, but also for medical equipment, computers, software, and other technologies, the price of a large set of goods and services would fall sharply, hugely increasing real wages.

 

Downsizing Finance

The United States has a hugely bloated financial sector, which is responsible for many of the country’s great fortunes. This should not be a source of pride.

To restate the Econ 101 definition for the purpose of the financial sector, it is about allocating capital to its best uses. Finance is an intermediate good, like trucking. Unlike final goods, like housing, medical care, or food, it provides no direct benefit to society. This means that we want the financial sector to be as small as possible, while still being able to serve its purpose.

In fact, the financial sector has exploded relative to the size of the economy over the last half century. The narrow financial sector, commodities and securities trading, and investment banking have quintupled as a share of GDP since the 1970s. If the trucking sector has similarly expanded, all our economists would be complaining about our incredibly inefficient trucking sector. Yet, there seems little appreciation of the fact that finance is a huge source of both waste and inequality.  

The cost of running this bloated financial sector comes out of the pockets of the rest of us. It takes the forms of fees and commissions on trading stock and other assets, fees and penalties assessed by banks and other financial institutions, and fees assessed by private equity partners for managing the assets of pension funds and university endowments.

My favorite quick fix here is a financial transactions tax to downsize Wall Street. We could easily raise more than 0.5 percent of GDP ($60 billion a year) from such a tax, with the revenue coming almost entirely out the pocket of Wall Street. (To be clear, they will pass on the cost of the tax. They will lose because higher transactions costs will mean less trading, and therefore less revenue for Wall Street.)

We can hugely cut down on the fees earned by banks and bank-like companies both with better regulation and more competition. The best route for the latter would be for the Federal Reserve Board to offer digital accounts to every person and corporation in the country. This route is already being considered at the Fed. It would mean that we would no longer need accounts at traditional banks. We could have our paychecks and bills processed through the Fed at essentially zero cost.

Hedge fund and private equity partners justify their huge paychecks, which often run into the tens, or even hundreds, of millions by the claim that they are getting outsized returns for investors. It turns out that this is not true. In recent years, both hedge funds and private equity funds have typically underperformed the S&P 500. This means that their investors would have been better off just buying an S&P index fund than putting their money in private equity or hedge funds.

It is hard to pass laws that prevent investors from being stupid with their money but are things that can be done. In the case of public pension funds, we could have legislation requiring full disclosure of the terms of their contracts with private equity funds (and other investment managers), including the returns received. That way any reporter or interested person could look on the website and see how much money the state’s pension funds were paying some rich private equity types to lose the pension fund’s money.[2]

Universities have been losing large amounts of money paying hedge fund partners (overwhelmingly white males) to manage their endowments. Again, it would be hard to pass laws prohibiting Harvard, Yale, and the rest from throwing away their money, but if there were any progressive students or faculty on these campuses, they might be able to change the practice. After all, there is a reasonable case to be made that it is better to give money for financial aid to low- and moderate- income students than Wall Street types earning tens of millions a year.

 

Corporate Governance and Super-Rich CEOs

There has been a lot of discussion of the high pay that many CEOs have managed to pocket in the pandemic year. What is largely missing in the debate on CEO pay is that top executives are essentially ripping off the companies they work for.

Specifically, they do not contribute an amount to corporate bottom line that is commensurate with their pay. The implication is that companies can pay a CEO considerably less money, without concern that their profits would suffer. And, lower CEO pay would also mean pay cuts for the whole top tier of corporate executives. Lower pay for top tier corporate executives would also lead to lower pay for top management in the non-profit and university sector. In short, excessive pay for CEOs should be a big deal.

There is considerable evidence for the claim that CEOs don’t earn their pay. Some of it is cited in chapter six of Rigged. My own contribution to this literature was a paper with Jessica Schieder that looked at what happened to CEO pay in the health insurance industry after the ACA was passed. A provision of the law eliminated the deductibility of executive compensation (all compensation) in excess of $1 million. Since the nominal tax rate at the time was 35 percent, this change effectively raised the cost of CEO pay by more than 50 percent. If corporations were balancing pay CEO with their contribution to the company’s bottom line, this change should have unambiguously lowered pay. We tried a wide variety of specifications, controlling for revenue growth, profit growth, stock price appreciation, and other factors. In none of them was there any evidence that CEO pay in the health care industry fell relative to pay in other sectors.

If CEOs are ripping off the companies they work for, then shareholders should be allies in the effort to contain CEO pay. This seems an obvious conclusion, but there seems to be very little interest in policies that will increase the ability of shareholders to contain CEO pay. The labor market would look very different if CEOs earned 20 to 30 times the pay of the typical worker ($2 million to $3 million a year) rather than the current 200 to 300 times.  

My favorite mechanism for bringing CEO pay down to earth is to put some teeth into the “Say on Pay” shareholder votes on CEO pay. These votes were required to take place every three years by a provision in the Dodd-Frank financial reform package. As it stands now, there is no consequence when a package is voted down. (Less than 3.0 percent are turned down.)

Suppose that directors lost their stipend (typically around $200k a year) if a CEO pay package was voted down. This would give directors some real incentive to ask questions about whether they could pay their CEO less. Anyhow, there are many other mechanisms that would increase shareholders’ ability to reduce CEO pay, but this is the direction we should be thinking.

 

Section 230 and Special Immunity for Mark Zuckerberg

If the New York Times runs a defamatory ad, it can face a large lawsuit for libel. If Mark Zuckerberg runs the same ad on Facebook, he faces no legal liability. Only the person who paid for the ad can be sued. It’s not obvious why we should think that an Internet intermediary bears no liability for spreading defamatory claims but a print or broadcast outlet does.

Clearly far more material is carried over Internet outlets, but that is the choice of the outlets. That doesn’t seem like a good reason to allow them to profit from defaming someone.

The reason Mark Zuckerberg doesn’t face liability and the New York Times does is that Congress gives him and other Internet intermediaries special protection. Section 230 of the 1996 Communications Decency Act, protects Internet intermediaries from liability for third party content. This protects it from being sued for both the ads it carries and also the posts from individual account holders.

We don’t have to give Facebook this special protection. We could make Zuckerberg liable for ads in the same way that the New York Times and CNN are liable for ads that they carry. This means that he would have to scrutinize ads for defamatory material in the same way that traditional media outlets have this responsibility.

We can also make Facebook libel for defamatory posts just like the New York Times is libel for defamatory statements that appear in letters to the editor. It would of course be impossible for Facebook to screen every post in advance. We can structure the liability to take the form of a takedown requirement after notification, just as is down now with material that is alleged to infringe on copyrights.[3] This will undoubtedly add considerable costs for a company operating on Facebook’s business model, but so what?

I had a series of Twitter exchanges in the last couple of weeks in which several people argued that this sort of change in the law would just benefit Facebook at the expense of smaller competitors since its size would make it better able to absorb the added costs. I had argued for continuing to exempt common carriers, who don’t control content, but we can draw the line somewhat differently.

We can exempt any intermediary that does not either sell advertising or personal information. This would mean that any intermediary that either made its money on a subscription basis or was operated as a public service, would not face liability for third party content. That should provide a substantial advantage to Facebook’s competitors who choose to structure themselves in a way that they could benefit from this protection.     

 

If We Care About Inequality, Maybe We Should Stop Giving So Much Money to the Rich

At this point, I would usually give my tirade about how doctors make so much more money in the U.S. than in other wealthy countries because we protect them from competition, but this is enough for today. The point is that we have structured the market to redistribute an enormous amount of income upward.

I’m a big fan of progressive taxation, but the reality is that it is much easier to not give rich people so much money in the first place than to try to tax it back after the fact. It would be nice if more progressives paid some attention to the ways in which we give the rich money.   

[1] I outline an alternative funding mechanism in chapter 5 of Rigged (it’s free).

[2] We can also pass legislation that cracks down on the some of the abusive tactics, like surprise medical billing, that private equity pursues to try to boost returns.

[3] There is a concern that Facebook would be over-zealous in removing items that have been challenged, as has been the case with intermediaries responding to notifications of copyright violations. While this is possible, the penalties for copyright violations are far more severe than defamation. Copyright violations carry statutory penalties, so that even trivial infringements, that cost the copyright holder just a few dollars, can result in thousands of dollars of damages and legal expenses. There is nothing comparable with libel law.

You might think so from reading this NYT article. The piece tells readers that Indonesia had 20,000 positive cases on Thursday. Furthermore:

“. . . and the national percentage of positive Covid tests reached 14.6 percent this past week. By comparison, the weekly positivity rate in the United States is now 1.8 percent.”

The article also reports that a number of doctors and other health care workers have been infected, and several have died, even after getting two shots of Sinovac, one of the vaccines developed by China.

Unfortunately, the piece does not put any of this in a context that is likely to make it meaningful to most NYT readers. First, it would be helpful to point out that Indonesia’s population is 276 million, more than 83 percent of the size of the U.S. population. That means the 20,000 cases reported on Thursday would be equivalent to roughly 24,000 cases in the United States. The infection rate in the United States peaked in late January at more than 250,000 a day, a figure more than ten times as high, adjusted for population.

While the high positive rate on tests indicates a large number of infections are going undetected, the U.S. also had a much higher positive test when its infection rates were peaking. In mid-January the positivity rate was averaging over 13.0 percent, only slightly lower than the rate in Indonesia. 

It also is worth noting that the 20,000 cases reported on Thursday may have been an anomaly. The country reported 18,900 cases today and its seven day average is under 15,000.

Of course Indonesia is much poorer than the United States and is less able to deal with seriously ill Covid patients, but its lack of medical facilities and equipment is clearly the big problem, not the large number of cases.

Also, the report that some number of doctors and health care workers are getting sick, in spite of being vaccinated, is not inconsistent with the vaccine being effective, albeit considerably less effective that the mRNA vaccines developed in the United States and Europe. As the piece reports:

“While 90 percent of the vaccinated doctors who tested positive in Kudus were either asymptomatic or had very mild illness, according to Dr. Ahmad, an already stretched health care system has been pulled taut.”

The piece notes that only 5 percent of Indonesia’s population has been vaccinated. It would certainly be better if the country could get get access to the mRNA vaccines, but that is not an option at present. In this context, a Chinese vaccine that protects most people against serious illness, is the best available option. 

You might think so from reading this NYT article. The piece tells readers that Indonesia had 20,000 positive cases on Thursday. Furthermore:

“. . . and the national percentage of positive Covid tests reached 14.6 percent this past week. By comparison, the weekly positivity rate in the United States is now 1.8 percent.”

The article also reports that a number of doctors and other health care workers have been infected, and several have died, even after getting two shots of Sinovac, one of the vaccines developed by China.

Unfortunately, the piece does not put any of this in a context that is likely to make it meaningful to most NYT readers. First, it would be helpful to point out that Indonesia’s population is 276 million, more than 83 percent of the size of the U.S. population. That means the 20,000 cases reported on Thursday would be equivalent to roughly 24,000 cases in the United States. The infection rate in the United States peaked in late January at more than 250,000 a day, a figure more than ten times as high, adjusted for population.

While the high positive rate on tests indicates a large number of infections are going undetected, the U.S. also had a much higher positive test when its infection rates were peaking. In mid-January the positivity rate was averaging over 13.0 percent, only slightly lower than the rate in Indonesia. 

It also is worth noting that the 20,000 cases reported on Thursday may have been an anomaly. The country reported 18,900 cases today and its seven day average is under 15,000.

Of course Indonesia is much poorer than the United States and is less able to deal with seriously ill Covid patients, but its lack of medical facilities and equipment is clearly the big problem, not the large number of cases.

Also, the report that some number of doctors and health care workers are getting sick, in spite of being vaccinated, is not inconsistent with the vaccine being effective, albeit considerably less effective that the mRNA vaccines developed in the United States and Europe. As the piece reports:

“While 90 percent of the vaccinated doctors who tested positive in Kudus were either asymptomatic or had very mild illness, according to Dr. Ahmad, an already stretched health care system has been pulled taut.”

The piece notes that only 5 percent of Indonesia’s population has been vaccinated. It would certainly be better if the country could get get access to the mRNA vaccines, but that is not an option at present. In this context, a Chinese vaccine that protects most people against serious illness, is the best available option. 

Like most economists, I have always been a Bitcoin skeptic. The question has always been what purpose does it serve?

The idea that it would be a useful alternative currency is laughable on its face. How can you have a currency that wildly fluctuates year to year and even hour to hour?  Imagine if you had a wage or rent contract written in Bitcoin. Both your pay and your rent would have more than tripled over the last year, likely leaving you unemployed and unable to pay your unaffordable rent. Economists often exaggerate the problem of inflation, but having currency that has large and unpredictable increases and decreases in value is a real problem.

So, Bitcoin may not be very useful as a currency, but maybe we can just treat as an outlet for harmless speculation, like baseball cards or non-fungible tokens. Well, it turns out that Bitcoin is not entirely useless. It is the currency of choice for those engaging in illegal activities like dealing drugs and gun-running, and of course extorting companies with ransomware. (Its value for this purpose took a major hit when the FBI was able to retrieve much of the money paid by Colonial Pipeline to the hackers who infiltrated its system. Apparently, Bitcoin transactions are not as untraceable as advertised.)

But Bitcoin cannot be dismissed as just fun and illegal games, it turns out it is also a major contributor to global warming. Bitcoin mining, the process by which new bitcoins are brought into existence, uses up an enormous amount of electricity. According to an analysis by researchers at Cambridge, Bitcoin mining uses more energy in a year than the country of Argentina.

This means that a lot of greenhouse gases are being emitted for essentially nothing. Most greenhouse gas (GHG) emissions are due to things like heating and cooling our homes, transporting our food and our ourselves, and also producing our food. These are all real needs. We can find ways to emit less GHG, for example by traveling less or switching to an electric car that hopefully be fueled by clean energy, but these involve some sacrifice and/or some expense.

Doing with less Bitcoin should be easy by comparison. That is the logic of taxing Bitcoin transactions; we tax the items for which we want to see less.

The Benefits of the Tax

First and foremost, a tax on Bitcoin transactions would raise revenue. I would propose a substantial tax on transactions of 1.0 percent annually. This compares to the tax 0.1 percent on stock trades that has been put forward by Representative Peter DeFazio in the House and Senator Brian Schatz in the Senate.[1]

The reason for suggesting a higher tax on Bitcoin, is that there would be little consequence for the economy if the Bitcoin market were seriously disrupted. People engaged in ransomware attacks might see somewhat more volatility in the value of their payments, and may find it slightly more difficult to change them back into traditional currencies, but otherwise there would be little economic impact.

By contrast, even with all the speculative trading on financial markets, they do still serve a productive purpose, so we would want to be cautious about imposing a tax that could be destabilizing. As it is, a tax of 1.0 percent is hardly without precedent. The United Kingdom currently has a tax of 0.5 percent on stock trades. It had been 1.0 percent until 1986. Nonetheless, the UK had one of the largest stock exchanges in the world.

Clearly a 1.0 percent transactions tax on Bitcoin will not shut down the market. However, it will substantially reduce the volume of transactions. It also is likely to make the currency less attractive to anyone who doesn’t need it for illicit purposes, which will reduce its value. This should mean that people will devote fewer resources to mining Bitcoin, which is a real win for the world.

There is also the issue of how much revenue a Bitcoin tax would raise. Currently, trading volume is around $1 billion a day or $350 billion a year. A tax of 1.0 percent would get us $3.5 billion a year, if there were no decline in trading volume. But, of course, the whole point of the tax is to reduce trading volume and interest in Bitcoin. If we see volume cut in half, due to both less trading and a lower Bitcoin price, then we would raise $1.75 billion a year or $17.5 billion over the course of a ten-year budget horizon.

This is not huge money in terms of the whole budget. CEPR’s “It’s the Budget, Stupid” budget calculator tells us that is would be equal 0.03 percent of the total budget. That’s not a huge deal, but not altogether trivial. The annual take is equal to roughly 110,000 food stamp person years.

But there is another benefit of going the Bitcoin transaction tax route. We can experiment with enforcement mechanisms with little downside risk.

It is often claimed that financial transactions taxes are unenforceable. The evidence suggests otherwise. The UK raised an amount equal to 0.2 percent of GDP annually (roughly $44 billion in the U.S. economy) from its tax on stock trades. (Other financial assets are not subject to the tax.) There are many other countries in the world that raise substantial revenue from financial transactions tax.

We also have a modest financial transactions tax in the United States already. Stock trades are subject to a tax of 0.0042 percent. The tax raises roughly $500 million annually, which is supposed to finance the operation of the Securities and Exchange Commission.

Clearly financial transactions taxes are enforceable, but there are certainly many trades that escape taxation. Evasion is likely to be an even bigger problem with Bitcoin, where many of the transactions involve illegal activity.

This is why we have a great opportunity to innovate. In addition to the other mechanisms available for enforcement, we can also offer a reward to people turning in tax evaders. We can, for example, give them 20 percent of the tax collected from their lead.

To take an example, suppose someone trades $200 million in Bitcoin. With a 1.0 percent tax rate, they would owe $2 million. If they chose not to pay their taxes, and an employer reported this person to the I.R.S., they would stand to collect $400,000, which would be a pretty payday. This sort of reward system would give workers a strong incentive to report the tax evasion of their bosses.

A tax on Bitcoin transactions would be a great place to test run this sort of incentive. Since there is little reason to care if the Bitcoin market is disrupted, there is not really a downside. If the reward system proves effective in cracking down on evasion, we have a new tool that can be applied elsewhere if we choose to tax financial transactions. We also can see any problems that might appear in this system and make the necessary adjustments so that we are better prepared to implement a financial transactions tax to larger financial markets.

In short, the Bitcoin market gives a great laboratory for experimenting with financial transactions taxes. While there is enough experience both here and elsewhere in dealing with financial transactions taxes that we can be reasonably confident that a FTT can be implemented without great difficulty, until there is political will to put in place a broadly based FTT, we can use the Bitcoin market as a place to have a practice tax.    

[1] I have proposed a somewhat higher tax on stock trades of 0.2 percent.

Like most economists, I have always been a Bitcoin skeptic. The question has always been what purpose does it serve?

The idea that it would be a useful alternative currency is laughable on its face. How can you have a currency that wildly fluctuates year to year and even hour to hour?  Imagine if you had a wage or rent contract written in Bitcoin. Both your pay and your rent would have more than tripled over the last year, likely leaving you unemployed and unable to pay your unaffordable rent. Economists often exaggerate the problem of inflation, but having currency that has large and unpredictable increases and decreases in value is a real problem.

So, Bitcoin may not be very useful as a currency, but maybe we can just treat as an outlet for harmless speculation, like baseball cards or non-fungible tokens. Well, it turns out that Bitcoin is not entirely useless. It is the currency of choice for those engaging in illegal activities like dealing drugs and gun-running, and of course extorting companies with ransomware. (Its value for this purpose took a major hit when the FBI was able to retrieve much of the money paid by Colonial Pipeline to the hackers who infiltrated its system. Apparently, Bitcoin transactions are not as untraceable as advertised.)

But Bitcoin cannot be dismissed as just fun and illegal games, it turns out it is also a major contributor to global warming. Bitcoin mining, the process by which new bitcoins are brought into existence, uses up an enormous amount of electricity. According to an analysis by researchers at Cambridge, Bitcoin mining uses more energy in a year than the country of Argentina.

This means that a lot of greenhouse gases are being emitted for essentially nothing. Most greenhouse gas (GHG) emissions are due to things like heating and cooling our homes, transporting our food and our ourselves, and also producing our food. These are all real needs. We can find ways to emit less GHG, for example by traveling less or switching to an electric car that hopefully be fueled by clean energy, but these involve some sacrifice and/or some expense.

Doing with less Bitcoin should be easy by comparison. That is the logic of taxing Bitcoin transactions; we tax the items for which we want to see less.

The Benefits of the Tax

First and foremost, a tax on Bitcoin transactions would raise revenue. I would propose a substantial tax on transactions of 1.0 percent annually. This compares to the tax 0.1 percent on stock trades that has been put forward by Representative Peter DeFazio in the House and Senator Brian Schatz in the Senate.[1]

The reason for suggesting a higher tax on Bitcoin, is that there would be little consequence for the economy if the Bitcoin market were seriously disrupted. People engaged in ransomware attacks might see somewhat more volatility in the value of their payments, and may find it slightly more difficult to change them back into traditional currencies, but otherwise there would be little economic impact.

By contrast, even with all the speculative trading on financial markets, they do still serve a productive purpose, so we would want to be cautious about imposing a tax that could be destabilizing. As it is, a tax of 1.0 percent is hardly without precedent. The United Kingdom currently has a tax of 0.5 percent on stock trades. It had been 1.0 percent until 1986. Nonetheless, the UK had one of the largest stock exchanges in the world.

Clearly a 1.0 percent transactions tax on Bitcoin will not shut down the market. However, it will substantially reduce the volume of transactions. It also is likely to make the currency less attractive to anyone who doesn’t need it for illicit purposes, which will reduce its value. This should mean that people will devote fewer resources to mining Bitcoin, which is a real win for the world.

There is also the issue of how much revenue a Bitcoin tax would raise. Currently, trading volume is around $1 billion a day or $350 billion a year. A tax of 1.0 percent would get us $3.5 billion a year, if there were no decline in trading volume. But, of course, the whole point of the tax is to reduce trading volume and interest in Bitcoin. If we see volume cut in half, due to both less trading and a lower Bitcoin price, then we would raise $1.75 billion a year or $17.5 billion over the course of a ten-year budget horizon.

This is not huge money in terms of the whole budget. CEPR’s “It’s the Budget, Stupid” budget calculator tells us that is would be equal 0.03 percent of the total budget. That’s not a huge deal, but not altogether trivial. The annual take is equal to roughly 110,000 food stamp person years.

But there is another benefit of going the Bitcoin transaction tax route. We can experiment with enforcement mechanisms with little downside risk.

It is often claimed that financial transactions taxes are unenforceable. The evidence suggests otherwise. The UK raised an amount equal to 0.2 percent of GDP annually (roughly $44 billion in the U.S. economy) from its tax on stock trades. (Other financial assets are not subject to the tax.) There are many other countries in the world that raise substantial revenue from financial transactions tax.

We also have a modest financial transactions tax in the United States already. Stock trades are subject to a tax of 0.0042 percent. The tax raises roughly $500 million annually, which is supposed to finance the operation of the Securities and Exchange Commission.

Clearly financial transactions taxes are enforceable, but there are certainly many trades that escape taxation. Evasion is likely to be an even bigger problem with Bitcoin, where many of the transactions involve illegal activity.

This is why we have a great opportunity to innovate. In addition to the other mechanisms available for enforcement, we can also offer a reward to people turning in tax evaders. We can, for example, give them 20 percent of the tax collected from their lead.

To take an example, suppose someone trades $200 million in Bitcoin. With a 1.0 percent tax rate, they would owe $2 million. If they chose not to pay their taxes, and an employer reported this person to the I.R.S., they would stand to collect $400,000, which would be a pretty payday. This sort of reward system would give workers a strong incentive to report the tax evasion of their bosses.

A tax on Bitcoin transactions would be a great place to test run this sort of incentive. Since there is little reason to care if the Bitcoin market is disrupted, there is not really a downside. If the reward system proves effective in cracking down on evasion, we have a new tool that can be applied elsewhere if we choose to tax financial transactions. We also can see any problems that might appear in this system and make the necessary adjustments so that we are better prepared to implement a financial transactions tax to larger financial markets.

In short, the Bitcoin market gives a great laboratory for experimenting with financial transactions taxes. While there is enough experience both here and elsewhere in dealing with financial transactions taxes that we can be reasonably confident that a FTT can be implemented without great difficulty, until there is political will to put in place a broadly based FTT, we can use the Bitcoin market as a place to have a practice tax.    

[1] I have proposed a somewhat higher tax on stock trades of 0.2 percent.

It’s short and relatively painless.

It’s short and relatively painless.

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