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.

As every graduate of Econ 101 can tell you, tariffs lead to corruption. The basic point is that if the government puts a 25 percent tariff on imports of say, steel or shoes, domestic producers are able to sell their products at a price that is 25 percent higher than the world price.

This both creates incentives to try to bring in items without paying the tariff, for example misclassifying the product, and for companies to effectively pay off politicians to extend and increase the tariff. If all items were imported tariff-free, then these opportunities for corruption would disappear.

It’s the same story with government-granted patent monopolies on prescription drugs, except the effective tariffs are much larger, as is the amount of money at issue. Patent monopolies on prescription drugs can often raise the price of a drug by 20 or 30 times the free market price, making them equivalent to tariffs of 2000—3000 percent.

Also, the amount of money we spend on prescription drugs dwarfs spending on almost any other item. We are on a track to spend over $530 billion on prescription drugs this year, more than $4,000 per family. These drugs would likely sell for less than $100 billion in a free market without patent monopolies or other protections.

Given the huge gap between the patent-protected price and the free market price, it would be surprising if we did not see a great deal of corruption. Therefore, when the New York Times ran a piece on how an inner city hospital in Richmond, Virginia had shut down its intensive care unit and stopped providing many other services, it should not have been a shock to discover that the exploitation of a government program on prescription drugs was the source of the problem.

According to the piece, the government provides hospitals located in depressed areas with drugs at a discount below their patent-protected price. This allows the hospital to profit by selling the drugs at the patent-protected price.

The piece gives one example of this scam:

“Thanks to 340B, Richmond Community Hospital can buy a vial of Keytruda, a cancer drug, at the discounted price of $3,444, according to an estimate by Sara Tabatabai, a former researcher at Memorial Sloan Kettering Cancer Center.

“But the hospital charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425, according to a price list that hospitals are required to publish. That is nearly $22,000 profit on a single vial. Adults need two vials per treatment course.”

The free market price of Keytruda (no patent monopolies or related protection) would likely be just a few hundred dollars per vial, providing little opportunity for scamming. However, when a government-granted patent monopoly allows the drug to sell for a price that could be a hundred times its free market price, it creates enormous opportunities for corruption. In this case, the company that owns the hospital found it more profitable to run this scam than to serve the patients in the community in which it is located.

It would be good if we could have a serious discussion of alternatives to patent monopoly financing of prescription drugs, to end this sort of corruption. Unfortunately, major media outlets don’t want to raise this issue on their pages. Instead, we just get hand-wringing over the resulting corruption and the usual “what can you do?”

 

As every graduate of Econ 101 can tell you, tariffs lead to corruption. The basic point is that if the government puts a 25 percent tariff on imports of say, steel or shoes, domestic producers are able to sell their products at a price that is 25 percent higher than the world price.

This both creates incentives to try to bring in items without paying the tariff, for example misclassifying the product, and for companies to effectively pay off politicians to extend and increase the tariff. If all items were imported tariff-free, then these opportunities for corruption would disappear.

It’s the same story with government-granted patent monopolies on prescription drugs, except the effective tariffs are much larger, as is the amount of money at issue. Patent monopolies on prescription drugs can often raise the price of a drug by 20 or 30 times the free market price, making them equivalent to tariffs of 2000—3000 percent.

Also, the amount of money we spend on prescription drugs dwarfs spending on almost any other item. We are on a track to spend over $530 billion on prescription drugs this year, more than $4,000 per family. These drugs would likely sell for less than $100 billion in a free market without patent monopolies or other protections.

Given the huge gap between the patent-protected price and the free market price, it would be surprising if we did not see a great deal of corruption. Therefore, when the New York Times ran a piece on how an inner city hospital in Richmond, Virginia had shut down its intensive care unit and stopped providing many other services, it should not have been a shock to discover that the exploitation of a government program on prescription drugs was the source of the problem.

According to the piece, the government provides hospitals located in depressed areas with drugs at a discount below their patent-protected price. This allows the hospital to profit by selling the drugs at the patent-protected price.

The piece gives one example of this scam:

“Thanks to 340B, Richmond Community Hospital can buy a vial of Keytruda, a cancer drug, at the discounted price of $3,444, according to an estimate by Sara Tabatabai, a former researcher at Memorial Sloan Kettering Cancer Center.

“But the hospital charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425, according to a price list that hospitals are required to publish. That is nearly $22,000 profit on a single vial. Adults need two vials per treatment course.”

The free market price of Keytruda (no patent monopolies or related protection) would likely be just a few hundred dollars per vial, providing little opportunity for scamming. However, when a government-granted patent monopoly allows the drug to sell for a price that could be a hundred times its free market price, it creates enormous opportunities for corruption. In this case, the company that owns the hospital found it more profitable to run this scam than to serve the patients in the community in which it is located.

It would be good if we could have a serious discussion of alternatives to patent monopoly financing of prescription drugs, to end this sort of corruption. Unfortunately, major media outlets don’t want to raise this issue on their pages. Instead, we just get hand-wringing over the resulting corruption and the usual “what can you do?”

 

Catherine Rampell’s latest Washington Post column argued that lower-income people have been hardest hit by inflation, so they will benefit most if the Fed gets inflation under control. The argument is that items that they must buy, like food, gas, and rent, have risen most rapidly in price. Furthermore, since lower-income people tend to already be buying lower-priced brands, they have little ability to protect themselves against inflation by switching to less expensive alternatives.

There are two problems with this logic. As many of us have noted, and Rampell acknowledges, workers at the bottom end of the wage distribution have seen wage increases well above the average over the last two years. If the unemployment rate were to rise by a percentage point or more (it could rise by much more), we would almost certainly see the more rapid wage gains at the bottom come to an end.

In fact, the story could well go into reverse. Over the last four decades, wage gains for the bottom half of the wage distribution trailed average wage growth, this is especially true during periods of high unemployment. In fairness, if the unemployment rate stays under 5.0 percent, this would still qualify as a period of relatively low unemployment, but there is no guarantee that workers at the bottom would be seeing wage gains equal to the average pace of wage growth.

There is also the issue of the distribution of unemployment. Relatively few doctors and computer scientists are likely to face unemployment as a result of the Fed’s rate hikes. The people who lose their jobs will be disproportionately retail and restaurant workers and others employed in a low-paying sector.

The Black unemployment rate is on average twice as high as the unemployment rate for whites. For Hispanics, the ratio is roughly 1.5 times as high. If the unemployment rate for whites rises by 1.0 percentage points, this means we can expect a rise in the unemployment rate for Blacks of around 2.0 percentage points and 1.5 percentage points for Hispanics.

It is very difficult to see how families who have one or more member going from being employed to being unemployed can benefit from the Fed’s fight against inflation. These families will be unambiguous losers in this story. Also, since most spells of unemployment are short, there will actually be a large number of families who are in this situation over the course of a year or two.

Will the Fed’s Fight Slow Inflation in the Staples?

If we want to make the argument that the Fed has to fight inflation to help lower-income people, then we would have to believe that higher rates will be especially effective in slowing inflation in food, energy, and rent. That is not obviously the case.

Starting with food, the jump in prices since the pandemic was largely a worldwide phenomenon. We saw big increases in the price of wheat and many other commodities associated with supply chain disruptions from both the pandemic and the war in Ukraine.

These prices are now headed downward as the world economy is adjusting to these disruptions. Reducing demand in the United States can help relieve the stress in these markets, but U.S. demand has only a limited impact on the world market.

In some cases, the Fed’s rate hikes will provide almost no benefit. For example, Avian flu devastated the U.S. chicken stock, pushing up both the price of chicken and eggs. Fed rate hikes will not help this story much. In short, it is not likely that the Fed’s rate hikes will save people much on food.

There is a similar story with gas and energy more generally. These prices are determined on a world market. The U.S. is a major user of energy, but still only accounts for around a fifth of world demand. Reducing U.S. consumption by 2-3 percent (a large reduction) will not have a big impact on world prices.

There is an issue of the “crack spread,” the gap between the price of a gallon of gasoline and the cost of the oil contained in it. That had exploded earlier this year, arguably because of oil companies using monopoly power to limit supply, but has now fallen back to more normal levels. This spread can be affected somewhat by domestic demand, but it accounts for less than 20 percent of the price of a gallon of gas.

Finally, there is rent. The Fed’s rate hikes had an immediate and large impact on home sales. Mortgage rates have more than doubled from their year-ago level. This has led to a sharp drop in sales. This decline in sales has only had a limited effect on sale prices to date, but with inventories of unsold homes rising rapidly, it seems inevitable that prices will soon decline.

There is likely to be a spillover from the sale market to the rental market. Many of the houses that go unsold are likely to end up as rentals. An increased supply of rental units will put downward pressure on rents.

We are seeing some evidence of slower rental inflation in some private indexes, but this process will take time to work through. This will definitely help low and moderate-income households, but the good news is that the Fed has pretty much done its work in this area.

With mortgage rates now over 6.0 percent, it is not clear that pushing rates still higher will have much additional impact on the housing market. We are likely to see some improvement in the rental market over the next six months to a year.

However, getting prices down to more affordable levels is a longer-term story that depends on more construction. In this area, Fed rate hikes are a clear negative. Housing starts are already down by double-digit levels against their year-ago pace. Further hikes are likely to slow construction even more. That is not a good story for housing affordability.

Fed Rate Hikes Are Bad News at the Bottom

To sum up the story, we know with absolute certainty that Fed rate hikes will disproportionately hit lower-paid workers. They are both the ones most likely to lose their jobs and the ones to see the biggest impact on wage growth.

Insofar as lower-income families are seeing the biggest hit from inflation, due to rising prices in necessities, Fed policy is likely to be of limited help. The rate hikes have slowed inflation in the housing sector, which is huge, but it is not clear that further hikes will provide much benefit in the form of lower rents for moderate-income households. In short, it is hard to make the case that Fed rate hikes will somehow help lower-income households.

We all understand the Fed’s responsibility for preventing inflation from spiraling to dangerous levels. There can be reasonable differences on the extent of this threat currently, but we should be clear on the trade-offs involved in Fed policy. Those at the bottom end of the income distribution will be paying the biggest price for the Fed’s anti-inflation policy, and it is important to recognize this fact.

Catherine Rampell’s latest Washington Post column argued that lower-income people have been hardest hit by inflation, so they will benefit most if the Fed gets inflation under control. The argument is that items that they must buy, like food, gas, and rent, have risen most rapidly in price. Furthermore, since lower-income people tend to already be buying lower-priced brands, they have little ability to protect themselves against inflation by switching to less expensive alternatives.

There are two problems with this logic. As many of us have noted, and Rampell acknowledges, workers at the bottom end of the wage distribution have seen wage increases well above the average over the last two years. If the unemployment rate were to rise by a percentage point or more (it could rise by much more), we would almost certainly see the more rapid wage gains at the bottom come to an end.

In fact, the story could well go into reverse. Over the last four decades, wage gains for the bottom half of the wage distribution trailed average wage growth, this is especially true during periods of high unemployment. In fairness, if the unemployment rate stays under 5.0 percent, this would still qualify as a period of relatively low unemployment, but there is no guarantee that workers at the bottom would be seeing wage gains equal to the average pace of wage growth.

There is also the issue of the distribution of unemployment. Relatively few doctors and computer scientists are likely to face unemployment as a result of the Fed’s rate hikes. The people who lose their jobs will be disproportionately retail and restaurant workers and others employed in a low-paying sector.

The Black unemployment rate is on average twice as high as the unemployment rate for whites. For Hispanics, the ratio is roughly 1.5 times as high. If the unemployment rate for whites rises by 1.0 percentage points, this means we can expect a rise in the unemployment rate for Blacks of around 2.0 percentage points and 1.5 percentage points for Hispanics.

It is very difficult to see how families who have one or more member going from being employed to being unemployed can benefit from the Fed’s fight against inflation. These families will be unambiguous losers in this story. Also, since most spells of unemployment are short, there will actually be a large number of families who are in this situation over the course of a year or two.

Will the Fed’s Fight Slow Inflation in the Staples?

If we want to make the argument that the Fed has to fight inflation to help lower-income people, then we would have to believe that higher rates will be especially effective in slowing inflation in food, energy, and rent. That is not obviously the case.

Starting with food, the jump in prices since the pandemic was largely a worldwide phenomenon. We saw big increases in the price of wheat and many other commodities associated with supply chain disruptions from both the pandemic and the war in Ukraine.

These prices are now headed downward as the world economy is adjusting to these disruptions. Reducing demand in the United States can help relieve the stress in these markets, but U.S. demand has only a limited impact on the world market.

In some cases, the Fed’s rate hikes will provide almost no benefit. For example, Avian flu devastated the U.S. chicken stock, pushing up both the price of chicken and eggs. Fed rate hikes will not help this story much. In short, it is not likely that the Fed’s rate hikes will save people much on food.

There is a similar story with gas and energy more generally. These prices are determined on a world market. The U.S. is a major user of energy, but still only accounts for around a fifth of world demand. Reducing U.S. consumption by 2-3 percent (a large reduction) will not have a big impact on world prices.

There is an issue of the “crack spread,” the gap between the price of a gallon of gasoline and the cost of the oil contained in it. That had exploded earlier this year, arguably because of oil companies using monopoly power to limit supply, but has now fallen back to more normal levels. This spread can be affected somewhat by domestic demand, but it accounts for less than 20 percent of the price of a gallon of gas.

Finally, there is rent. The Fed’s rate hikes had an immediate and large impact on home sales. Mortgage rates have more than doubled from their year-ago level. This has led to a sharp drop in sales. This decline in sales has only had a limited effect on sale prices to date, but with inventories of unsold homes rising rapidly, it seems inevitable that prices will soon decline.

There is likely to be a spillover from the sale market to the rental market. Many of the houses that go unsold are likely to end up as rentals. An increased supply of rental units will put downward pressure on rents.

We are seeing some evidence of slower rental inflation in some private indexes, but this process will take time to work through. This will definitely help low and moderate-income households, but the good news is that the Fed has pretty much done its work in this area.

With mortgage rates now over 6.0 percent, it is not clear that pushing rates still higher will have much additional impact on the housing market. We are likely to see some improvement in the rental market over the next six months to a year.

However, getting prices down to more affordable levels is a longer-term story that depends on more construction. In this area, Fed rate hikes are a clear negative. Housing starts are already down by double-digit levels against their year-ago pace. Further hikes are likely to slow construction even more. That is not a good story for housing affordability.

Fed Rate Hikes Are Bad News at the Bottom

To sum up the story, we know with absolute certainty that Fed rate hikes will disproportionately hit lower-paid workers. They are both the ones most likely to lose their jobs and the ones to see the biggest impact on wage growth.

Insofar as lower-income families are seeing the biggest hit from inflation, due to rising prices in necessities, Fed policy is likely to be of limited help. The rate hikes have slowed inflation in the housing sector, which is huge, but it is not clear that further hikes will provide much benefit in the form of lower rents for moderate-income households. In short, it is hard to make the case that Fed rate hikes will somehow help lower-income households.

We all understand the Fed’s responsibility for preventing inflation from spiraling to dangerous levels. There can be reasonable differences on the extent of this threat currently, but we should be clear on the trade-offs involved in Fed policy. Those at the bottom end of the income distribution will be paying the biggest price for the Fed’s anti-inflation policy, and it is important to recognize this fact.

I have long been a big fan of reduced work time, whether it take the form of more vacations, more time for paid leaves, such as family leave and sick days, or shorter workweeks. The basic logic is that, as our economy gets more productive, we should get some of the benefit in the form of more leisure, instead of just higher income. (Yeah, I know about income inequality, and that most workers have not seen much in terms of higher income in the last half century, but let’s leave that one aside for the moment.)

Anyhow, four-day workweeks always seemed an especially interesting way to reduce work hours, since they also eliminated one day of commuting. If everyone commuted 20 percent less, it would save a huge amount in commuting costs. And, not only would people be commuting fewer days, but by having fewer trips, we would have less congestion and less energy wasted by cars sitting in traffic. That sounds like a really good deal all around. (Of course, working from home, and not commuting at all, is even better.)

One issue is what happens to the productivity of workers who work a four-day week rather than a five-day week. The New York Times had a piece on an experiment in the United Kingdom, where 70 companies switched to a four-day week at the start of the year.

According to the piece, a private foundation covered the cost of paying workers for a fifth day, even when they were only coming in four days a week. The piece reports that the experience has been overwhelmingly positive, with the vast majority reporting that they intend to stick to a four-day workweek even after the experiment is over.

While this is very positive news for fans of a four-day workweek, the piece is very unclear about its measure of productivity. According to the piece, productivity did not fall at the companies that switched to a four-day workweek. But it is not clear how productivity is being measured.

Ordinarily, economists measure productivity as output per hour of work. Is the piece using this measure of productivity? This means that if workers were putting in four eight-hour days, then their output would be 20 percent less than when they were working five eight-hour days. If this is the case, it would be difficult to see how employers could pay them the same amount per week, unless they had extraordinary profits before the experiment.

It’s possible that workers are putting longer days now. Perhaps they are working 10-hour days, so their four-day workweeks still correspond to a 40-hour workweek. In that case, we can be encouraged that the longer day didn’t mean any decline in productivity, and if workers prefer one fewer day of work per week, that would be great.

It’s also possible that workers are putting in fewer hours in their four-day week than they did in their five-day week, but still managing to produce the same amount of output. There is some evidence than when France adopted a 35-hour standard workweek in the late 1990s it was associated with an increase in the rate of productivity growth. Perhaps we are seeing the same story with a four-day week.

However, to assess the extent to which productivity might have been increased in the companies switching to a four-day week, we have to know how many hours workers are putting in each day. It is not at all clear from this NYT piece (or the linked site for the organization coordinating the experiment), how many hours people are working.

If we take the extreme case, where workers are still putting in eight-hour days, the four-day week would imply a 25 percent increase in productivity. This is almost impossible to imagine. Economists would be thrilled by any policy that would increase aggregate productivity by just 1.0 percent over a period of years. That would imply an increase of $250 billion a year in annual output, that would be a really big deal.

A policy that could lead to an increase in productivity of 25 percent, overnight, is impossibly great. Even if workers were putting in nine-hour days and maintaining the same level of output it would imply an extraordinary 11.1 percent increase in productivity. That would be a really huge deal, as would an increase in productivity of even half this size.

Anyhow, it is hugely important for those advocating four-day workweeks to know what its impact is on productivity. Unfortunately, this piece provides no real basis for making that assessment.   

 

Addendum

I was happy to hear that my friend, Juliet Schor, is the lead researcher on this project. They are in fact making an effort to measure productivity, or at least revenue. Since many of these companies produce software, that should be pretty much the same thing.

She has informed me that while the bulk have gone to four eight-hour days a few have increased hours per day, so that they have not gone from a 40-hour week to a 35 or 36 hour-week. This would still imply very substantial productivity gains if they can maintain output levels.

According to Schor, even the ones that have gone from 40 to 32 hours are still managing to maintain the same level of output. They did this by planning for several months in advance and finding tasks (mostly meetings) that could be eliminated without reducing output.

In any case, Schor is a serious researcher and I’m confident that we will get useful data from this experiment after it is completed at the end of the year. Hopefully, the New York Times will do a follow up piece when the final report is available.

 

I have long been a big fan of reduced work time, whether it take the form of more vacations, more time for paid leaves, such as family leave and sick days, or shorter workweeks. The basic logic is that, as our economy gets more productive, we should get some of the benefit in the form of more leisure, instead of just higher income. (Yeah, I know about income inequality, and that most workers have not seen much in terms of higher income in the last half century, but let’s leave that one aside for the moment.)

Anyhow, four-day workweeks always seemed an especially interesting way to reduce work hours, since they also eliminated one day of commuting. If everyone commuted 20 percent less, it would save a huge amount in commuting costs. And, not only would people be commuting fewer days, but by having fewer trips, we would have less congestion and less energy wasted by cars sitting in traffic. That sounds like a really good deal all around. (Of course, working from home, and not commuting at all, is even better.)

One issue is what happens to the productivity of workers who work a four-day week rather than a five-day week. The New York Times had a piece on an experiment in the United Kingdom, where 70 companies switched to a four-day week at the start of the year.

According to the piece, a private foundation covered the cost of paying workers for a fifth day, even when they were only coming in four days a week. The piece reports that the experience has been overwhelmingly positive, with the vast majority reporting that they intend to stick to a four-day workweek even after the experiment is over.

While this is very positive news for fans of a four-day workweek, the piece is very unclear about its measure of productivity. According to the piece, productivity did not fall at the companies that switched to a four-day workweek. But it is not clear how productivity is being measured.

Ordinarily, economists measure productivity as output per hour of work. Is the piece using this measure of productivity? This means that if workers were putting in four eight-hour days, then their output would be 20 percent less than when they were working five eight-hour days. If this is the case, it would be difficult to see how employers could pay them the same amount per week, unless they had extraordinary profits before the experiment.

It’s possible that workers are putting longer days now. Perhaps they are working 10-hour days, so their four-day workweeks still correspond to a 40-hour workweek. In that case, we can be encouraged that the longer day didn’t mean any decline in productivity, and if workers prefer one fewer day of work per week, that would be great.

It’s also possible that workers are putting in fewer hours in their four-day week than they did in their five-day week, but still managing to produce the same amount of output. There is some evidence than when France adopted a 35-hour standard workweek in the late 1990s it was associated with an increase in the rate of productivity growth. Perhaps we are seeing the same story with a four-day week.

However, to assess the extent to which productivity might have been increased in the companies switching to a four-day week, we have to know how many hours workers are putting in each day. It is not at all clear from this NYT piece (or the linked site for the organization coordinating the experiment), how many hours people are working.

If we take the extreme case, where workers are still putting in eight-hour days, the four-day week would imply a 25 percent increase in productivity. This is almost impossible to imagine. Economists would be thrilled by any policy that would increase aggregate productivity by just 1.0 percent over a period of years. That would imply an increase of $250 billion a year in annual output, that would be a really big deal.

A policy that could lead to an increase in productivity of 25 percent, overnight, is impossibly great. Even if workers were putting in nine-hour days and maintaining the same level of output it would imply an extraordinary 11.1 percent increase in productivity. That would be a really huge deal, as would an increase in productivity of even half this size.

Anyhow, it is hugely important for those advocating four-day workweeks to know what its impact is on productivity. Unfortunately, this piece provides no real basis for making that assessment.   

 

Addendum

I was happy to hear that my friend, Juliet Schor, is the lead researcher on this project. They are in fact making an effort to measure productivity, or at least revenue. Since many of these companies produce software, that should be pretty much the same thing.

She has informed me that while the bulk have gone to four eight-hour days a few have increased hours per day, so that they have not gone from a 40-hour week to a 35 or 36 hour-week. This would still imply very substantial productivity gains if they can maintain output levels.

According to Schor, even the ones that have gone from 40 to 32 hours are still managing to maintain the same level of output. They did this by planning for several months in advance and finding tasks (mostly meetings) that could be eliminated without reducing output.

In any case, Schor is a serious researcher and I’m confident that we will get useful data from this experiment after it is completed at the end of the year. Hopefully, the New York Times will do a follow up piece when the final report is available.

 

There is a common myth that Germany’s hyperinflation led to the collapse of democracy in Germany and the rise of Hitler. That is a nice story for pushing the inflation hawks’ agenda, but it doesn’t correspond to reality.

The hyperinflation had ended by 1924 and Germany’s economy stabilized with moderate rates of inflation and unemployment. The economic event that most directly was associated with Hitler’s rise to power was the Great Depression and surge in unemployment that followed the crash of the US stock market in 1929.

This reality didn’t stop Jonathan Wiseman, in a NYT “political memo,” from invoking this myth in a piece on the political consequences of inflation.

“’From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy,’ Helmut Kohl, the chancellor of Germany, said in 1995, harking back to the hyperinflation of the Weimar Republic.”

The piece also blames Jimmy Carter’s failed re-election effort on the inflation in 1979 and 1980.

“Four years later, Jimmy Carter’s dreams of a second term were vaporized by 13.5 percent inflation.”

While high inflation surely hurt Carter’s re-election prospects, we also had a severe recession in 1980.

 

The unemployment rate soared from 6.0 percent in December of 1979, to 7.8 percent in July of 1980. This was one of the fastest surges of unemployment in the country’s history. The run-up in unemployment, just months before the election, surely had a large impact on Carter’s prospects. It is very misleading to imply that it was just inflation that sank Carter.

There is a common myth that Germany’s hyperinflation led to the collapse of democracy in Germany and the rise of Hitler. That is a nice story for pushing the inflation hawks’ agenda, but it doesn’t correspond to reality.

The hyperinflation had ended by 1924 and Germany’s economy stabilized with moderate rates of inflation and unemployment. The economic event that most directly was associated with Hitler’s rise to power was the Great Depression and surge in unemployment that followed the crash of the US stock market in 1929.

This reality didn’t stop Jonathan Wiseman, in a NYT “political memo,” from invoking this myth in a piece on the political consequences of inflation.

“’From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy,’ Helmut Kohl, the chancellor of Germany, said in 1995, harking back to the hyperinflation of the Weimar Republic.”

The piece also blames Jimmy Carter’s failed re-election effort on the inflation in 1979 and 1980.

“Four years later, Jimmy Carter’s dreams of a second term were vaporized by 13.5 percent inflation.”

While high inflation surely hurt Carter’s re-election prospects, we also had a severe recession in 1980.

 

The unemployment rate soared from 6.0 percent in December of 1979, to 7.8 percent in July of 1980. This was one of the fastest surges of unemployment in the country’s history. The run-up in unemployment, just months before the election, surely had a large impact on Carter’s prospects. It is very misleading to imply that it was just inflation that sank Carter.

I was glad to see Ezra Klein’s piece today touting the Biden administration’s creation of ARPA-H. This is the Advanced Research Projects Agency-Health, a DARPA-type agency explicitly designed to promote the development of health-related innovations, like vaccines, drugs, and medical equipment.

Like Ezra, I’m a big fan of increased public funding for biomedical research. However, he goes a bit astray in his thinking near the end of the piece. He notes proposals, like those put forward by Bernie Sanders, for a cash prize to take the place of a patent monopoly. The government hands out $100 million, $500 million or $1 billion, and then allows the drug, vaccine, or whatever to be sold as a cheap generic. That likely means breakthrough cancer drugs selling for hundreds of dollars rather than hundreds of thousands of dollars.

“The government could identify, say, 12 conditions that it wants to see a drug developed for. The first group to develop and prove out such a drug would get a princely sum — $100 million, or $500 million, or a billion dollars, depending on the condition and the efficacy. In return, that drug would be immediately off-patent, available for any generic drug producer to manufacture for a pittance (and available for other countries, particularly poor countries, to produce immediately).”

I think the Sanders’ proposal is a great improvement over the current system. But coming in the middle of a discussion of a plan for more direct government funding, it makes the famous Moderna mistake: paying companies twice.

For folks who may have forgotten, we paid Moderna $450 million to develop its coronavirus vaccine. We then paid it another $450 million to cover the cost of the phase 3 testing needed for FDA approval. We then allowed it to claim intellectual property in the vaccine, which meant tens of billions of dollars in revenue. It also led to the creation of at least five Moderna billionaires. Tell me again how technology creates inequality.

It really shouldn’t not sound too radical to say that companies only get paid once for their work. If the government pays for the research, it doesn’t also give you a patent monopoly. These are alternative funding mechanisms, not part of a smorgasbord that we throw at innovators to allow them to get incredibly rich at the expense of the rest of us.

Like Ezra, I applaud the Biden administration’s commitment to increase government support for developing new technologies, but we should not be doing this in a way that makes our inequality problem even worse. We can argue over the best mechanisms.

I personally prefer direct public funding to a Sanders-type prize system. The main reason is that we can require everything be fully open-sourced as quickly as possible under a direct funding system, allowing science to advance more quickly.

Also, I suspect that awarding the prizes will prove to be a huge legal and moral nightmare. It is not always clear who actually met the prize conditions and also who made the biggest contribution to getting there. For example, a researcher may make a huge breakthrough that allows pretty much anyone to come along and cross the finish line and claim the prize. Direct upfront funding removes this problem. (I discuss this issue in chapter 5 of the good book, Rigged [it’s free].)

In any case, we can debate the best mechanism through which public funding can take place, patent monopolies, prizes, or direct funding, but the idea that you only get paid once should not be controversial. It is unfortunate that Ezra doesn’t address this issue in his piece, since he does know better (he reads my stuff). There is a huge amount of money at stake in who gets the gains from innovation, likely more than $1 trillion a year, and it would be an incredible failing of the political process if the issue is not even discussed.

 

 

I was glad to see Ezra Klein’s piece today touting the Biden administration’s creation of ARPA-H. This is the Advanced Research Projects Agency-Health, a DARPA-type agency explicitly designed to promote the development of health-related innovations, like vaccines, drugs, and medical equipment.

Like Ezra, I’m a big fan of increased public funding for biomedical research. However, he goes a bit astray in his thinking near the end of the piece. He notes proposals, like those put forward by Bernie Sanders, for a cash prize to take the place of a patent monopoly. The government hands out $100 million, $500 million or $1 billion, and then allows the drug, vaccine, or whatever to be sold as a cheap generic. That likely means breakthrough cancer drugs selling for hundreds of dollars rather than hundreds of thousands of dollars.

“The government could identify, say, 12 conditions that it wants to see a drug developed for. The first group to develop and prove out such a drug would get a princely sum — $100 million, or $500 million, or a billion dollars, depending on the condition and the efficacy. In return, that drug would be immediately off-patent, available for any generic drug producer to manufacture for a pittance (and available for other countries, particularly poor countries, to produce immediately).”

I think the Sanders’ proposal is a great improvement over the current system. But coming in the middle of a discussion of a plan for more direct government funding, it makes the famous Moderna mistake: paying companies twice.

For folks who may have forgotten, we paid Moderna $450 million to develop its coronavirus vaccine. We then paid it another $450 million to cover the cost of the phase 3 testing needed for FDA approval. We then allowed it to claim intellectual property in the vaccine, which meant tens of billions of dollars in revenue. It also led to the creation of at least five Moderna billionaires. Tell me again how technology creates inequality.

It really shouldn’t not sound too radical to say that companies only get paid once for their work. If the government pays for the research, it doesn’t also give you a patent monopoly. These are alternative funding mechanisms, not part of a smorgasbord that we throw at innovators to allow them to get incredibly rich at the expense of the rest of us.

Like Ezra, I applaud the Biden administration’s commitment to increase government support for developing new technologies, but we should not be doing this in a way that makes our inequality problem even worse. We can argue over the best mechanisms.

I personally prefer direct public funding to a Sanders-type prize system. The main reason is that we can require everything be fully open-sourced as quickly as possible under a direct funding system, allowing science to advance more quickly.

Also, I suspect that awarding the prizes will prove to be a huge legal and moral nightmare. It is not always clear who actually met the prize conditions and also who made the biggest contribution to getting there. For example, a researcher may make a huge breakthrough that allows pretty much anyone to come along and cross the finish line and claim the prize. Direct upfront funding removes this problem. (I discuss this issue in chapter 5 of the good book, Rigged [it’s free].)

In any case, we can debate the best mechanism through which public funding can take place, patent monopolies, prizes, or direct funding, but the idea that you only get paid once should not be controversial. It is unfortunate that Ezra doesn’t address this issue in his piece, since he does know better (he reads my stuff). There is a huge amount of money at stake in who gets the gains from innovation, likely more than $1 trillion a year, and it would be an incredible failing of the political process if the issue is not even discussed.

 

 

It is bizarre how the media keep insisting that we have some big problem of missing workers, since we don’t. The Washington Post has the latest entry in the search for non-missing workers.

As with other pieces, it implies that an unusual large percentage of people are opting not to be in the labor market. It tells readers:

“The share of working-age Americans who have a job or are looking for one is at 62.4 percent, a full percentage point lower than it was in February 2020, according to Labor Department data.”

This is not true. That figure refers to the share of the civilian non-institutionalized population that has a job or is looking for work. This includes everyone over age 16 who is not in the military, prison, or some other institution.

The population is two and half years older now than it was in February of 2020. This matters because the huge baby boom generation is now mostly in its sixties and seventies. It is hardly a secret, even to labor economists, that people who are age 66 and a half are less likely to be working than people who are 64.

If we control for age, there is very little evidence of people dropping out of the labor force. The labor force participation rate for prime age workers, people between the ages of 25 and 54, was 82.8 percent in August. This is just 0.2 percentage points below the level in February of 2020 and only below the rate for one month of 2019.

It is a bit far-fetched to see this falloff as a big problem to be explained. It is common for the labor force participation rate to move this much in a single month.

The piece also tells us the big issue is with older workers:

“It’s unclear whether — or when — many of the people who left the workforce during the pandemic will return. That’s particularly true for workers 55 and older, who have stopped working at higher rates. The job market is still short more than 500,000 workers from that age group.”

As noted, this group is close to two and half years older than it was two and a half years ago. It is surprising that anyone would be surprised that a smaller share of them is working. If we hold age constant, the Post’s mystery disappears.

In February of 2020 the labor force participation rate for people between the ages of 55 and 64 was 65.5 percent, the same as the rate in February and March of this year. The rate has fallen by a percentage point in the last five months, but this is likely just error in the data. In short, there is nothing here either.

The problem we are seeing is an extraordinary restructuring of the labor market due to the pandemic. Many businesses will not survive (welcome to capitalism). With luck, we will end up with a situation where employers will be forced to offer higher pay and better conditions to attract and keep workers. That is not a bad story.

 

It is bizarre how the media keep insisting that we have some big problem of missing workers, since we don’t. The Washington Post has the latest entry in the search for non-missing workers.

As with other pieces, it implies that an unusual large percentage of people are opting not to be in the labor market. It tells readers:

“The share of working-age Americans who have a job or are looking for one is at 62.4 percent, a full percentage point lower than it was in February 2020, according to Labor Department data.”

This is not true. That figure refers to the share of the civilian non-institutionalized population that has a job or is looking for work. This includes everyone over age 16 who is not in the military, prison, or some other institution.

The population is two and half years older now than it was in February of 2020. This matters because the huge baby boom generation is now mostly in its sixties and seventies. It is hardly a secret, even to labor economists, that people who are age 66 and a half are less likely to be working than people who are 64.

If we control for age, there is very little evidence of people dropping out of the labor force. The labor force participation rate for prime age workers, people between the ages of 25 and 54, was 82.8 percent in August. This is just 0.2 percentage points below the level in February of 2020 and only below the rate for one month of 2019.

It is a bit far-fetched to see this falloff as a big problem to be explained. It is common for the labor force participation rate to move this much in a single month.

The piece also tells us the big issue is with older workers:

“It’s unclear whether — or when — many of the people who left the workforce during the pandemic will return. That’s particularly true for workers 55 and older, who have stopped working at higher rates. The job market is still short more than 500,000 workers from that age group.”

As noted, this group is close to two and half years older than it was two and a half years ago. It is surprising that anyone would be surprised that a smaller share of them is working. If we hold age constant, the Post’s mystery disappears.

In February of 2020 the labor force participation rate for people between the ages of 55 and 64 was 65.5 percent, the same as the rate in February and March of this year. The rate has fallen by a percentage point in the last five months, but this is likely just error in the data. In short, there is nothing here either.

The problem we are seeing is an extraordinary restructuring of the labor market due to the pandemic. Many businesses will not survive (welcome to capitalism). With luck, we will end up with a situation where employers will be forced to offer higher pay and better conditions to attract and keep workers. That is not a bad story.

 

I have had many people ask me if there is not a better way to fight inflation than the current route of Federal Reserve Board rate hikes. Just to remind people, this route fights inflation by slowing the economy, throwing people out of work, and then forcing workers to take pay cuts.

The people who are most likely to lose jobs are the ones who already face the most discrimination in the labor market: Blacks, Hispanics, people with less education, and people with criminal records. Not only will millions of these workers lose jobs, tens of millions of workers at the bottom half of the wage distribution will be forced to take pay cuts. They are the ones whose bargaining power is most sensitive to the level of unemployment in the economy, not doctors and lawyers.

It seems more than a bit absurd, that when we have all these various public and private initiatives that are supposed to improve the lot of disadvantaged groups, we can have an arm of the government, the Federal Reserve Board, just swamp these efforts by creating a tidal wave of unemployment. I don’t want to disparage well-meaning efforts to help the disadvantaged, but they can’t come to close to offsetting the impact of a three or four percentage point rise in the unemployment rate for Blacks or Hispanics. And, the hit could be much larger.

So, it seems like a good idea to think of an alternative path to lowering the rate of inflation. When I want to reduce inflationary pressures I naturally think of the ways in which we have structured the market to redistribute income upward, as discussed in Rigged [it’s free].

We can look to reduce some of the waste in the financial sector that makes some Wall Street types very rich at the expense of the rest of us. My toolbox includes a financial transactions tax, universal accounts at the Fed (eliminates tens of billions in annual bank fees), getting pension funds to stop throwing money away making private equity partners rich, and getting universities to stop making hedge fund partners rich managing their endowments.

These are all great things to do, but not the sorts of policies that can be implemented overnight to stem current inflation. We can maybe get a foot in the door, but even in a best-case scenario the benefits will only be felt several years down the road.

Then there is the plan to end the protectionism that benefits highly paid professionals, like doctors and dentists. If our doctors got paid roughly the same as their counterparts in Germany or Canada, it would save us around $100 billion a year, or $900 per family. This would mean setting up international standards to ensure quality, and then many years of foreign doctors coming to the U.S., as well as increased competition from nurse practitioners and other health care professionals, to bring our physicians’ pay structure into balance. Again, great policy, but not the sort of thing that will have a big effect in the immediate future.

Next, we have reducing the corruption in the corporate governance structure. As it is, the corporate boards, who are supposed to keep a lid on CEO pay, don’t even see this as part of their job description. They see their jobs as helping the CEO and other top management.   

We can look to change the incentive structure for directors, so they actually do take an interest in putting a check on CEO pay. As I point out, this matters not just for the CEO, but bloated CEO pay affects pay structures at the top more generally, taking huge amounts of money out of the pockets of ordinary workers.

My favorite tool is to put some teeth in the “say on pay” votes by shareholders on CEO pay. I would have the directors lose their pay when a CEO pay package is voted down. That seems like a great way to get their attention, but again, a change that will take years to have an impact, not something that could address the current inflation.

The last item in my market restructuring has more promise. This is the system of government granted patent and copyright monopolies, which has allowed Bill Gates and many others to get ridiculously rich. I have argued for radically downsizing the importance of these monopolies, by increasing the role of public funding for research and creative work.

While the full agenda calls for largely replacing patents as a source of funding for innovation in the case of prescription drugs and medical equipment, and reducing their importance elsewhere, there are intermediate steps which can be taken to both reduce costs and get us further down this road. One is simply the sort of price controls on prescription drugs that were part of the Inflation Reduction Act.

These don’t begin to take effect until 2026 and only apply to a limited number of drugs, but we could in principle go much further. We will spend over $500 billion this year (almost $4,000 per family), for drugs that would likely sell for less than $100 billion in a free market. In other words, there is lots of room for inflation reduction here.

If we don’t like the government setting prices, even when government-granted monopolies made prices high in the first place, there is also the option of weakening the monopoly. We can require drug and medical equipment companies to issue compulsory licenses.

This means that anyone could produce a patented drug or medical device, but they would have to pay a modest licensing fee (say 5 percent) to the holder of the patent. This can be put in place now under the Defense Production Act, but going forward we can require companies to agree to this condition as a requirement for anyone benefiting from the fruits of government funded research.

All of these routes to curbing inflation involve more time than just having the Fed raise interest rates, but it seems much fairer to make those who benefited from the upward redistribution of the last four decades pay the price for reducing inflation than those who have been the victims. It is also worth keeping in mind that the pandemic inflation may not a one-time story.

We know that climate change is going to lead to more and larger weather disasters in the years ahead. If we see a major industry or agricultural crop knocked out by flooding, fires, or extreme heat or alternatively, if millions of people must be relocated due to such events, it will impose a serious strain on the economy. The supply-side impact could lead to another bout of inflation like we are seeing now.

It hardly seems fair that we again tell the Fed to throw the must vulnerable people out of work to get inflation under control. We can use other routes, if we plan ahead.

I know that this program has pretty much zero chance in Washington. It means challenging the Great Big Lie, that inequality just happened, but we can still talk about these sorts of alternatives. And progressives who actually want to see less inequality will push them.   

 

I have had many people ask me if there is not a better way to fight inflation than the current route of Federal Reserve Board rate hikes. Just to remind people, this route fights inflation by slowing the economy, throwing people out of work, and then forcing workers to take pay cuts.

The people who are most likely to lose jobs are the ones who already face the most discrimination in the labor market: Blacks, Hispanics, people with less education, and people with criminal records. Not only will millions of these workers lose jobs, tens of millions of workers at the bottom half of the wage distribution will be forced to take pay cuts. They are the ones whose bargaining power is most sensitive to the level of unemployment in the economy, not doctors and lawyers.

It seems more than a bit absurd, that when we have all these various public and private initiatives that are supposed to improve the lot of disadvantaged groups, we can have an arm of the government, the Federal Reserve Board, just swamp these efforts by creating a tidal wave of unemployment. I don’t want to disparage well-meaning efforts to help the disadvantaged, but they can’t come to close to offsetting the impact of a three or four percentage point rise in the unemployment rate for Blacks or Hispanics. And, the hit could be much larger.

So, it seems like a good idea to think of an alternative path to lowering the rate of inflation. When I want to reduce inflationary pressures I naturally think of the ways in which we have structured the market to redistribute income upward, as discussed in Rigged [it’s free].

We can look to reduce some of the waste in the financial sector that makes some Wall Street types very rich at the expense of the rest of us. My toolbox includes a financial transactions tax, universal accounts at the Fed (eliminates tens of billions in annual bank fees), getting pension funds to stop throwing money away making private equity partners rich, and getting universities to stop making hedge fund partners rich managing their endowments.

These are all great things to do, but not the sorts of policies that can be implemented overnight to stem current inflation. We can maybe get a foot in the door, but even in a best-case scenario the benefits will only be felt several years down the road.

Then there is the plan to end the protectionism that benefits highly paid professionals, like doctors and dentists. If our doctors got paid roughly the same as their counterparts in Germany or Canada, it would save us around $100 billion a year, or $900 per family. This would mean setting up international standards to ensure quality, and then many years of foreign doctors coming to the U.S., as well as increased competition from nurse practitioners and other health care professionals, to bring our physicians’ pay structure into balance. Again, great policy, but not the sort of thing that will have a big effect in the immediate future.

Next, we have reducing the corruption in the corporate governance structure. As it is, the corporate boards, who are supposed to keep a lid on CEO pay, don’t even see this as part of their job description. They see their jobs as helping the CEO and other top management.   

We can look to change the incentive structure for directors, so they actually do take an interest in putting a check on CEO pay. As I point out, this matters not just for the CEO, but bloated CEO pay affects pay structures at the top more generally, taking huge amounts of money out of the pockets of ordinary workers.

My favorite tool is to put some teeth in the “say on pay” votes by shareholders on CEO pay. I would have the directors lose their pay when a CEO pay package is voted down. That seems like a great way to get their attention, but again, a change that will take years to have an impact, not something that could address the current inflation.

The last item in my market restructuring has more promise. This is the system of government granted patent and copyright monopolies, which has allowed Bill Gates and many others to get ridiculously rich. I have argued for radically downsizing the importance of these monopolies, by increasing the role of public funding for research and creative work.

While the full agenda calls for largely replacing patents as a source of funding for innovation in the case of prescription drugs and medical equipment, and reducing their importance elsewhere, there are intermediate steps which can be taken to both reduce costs and get us further down this road. One is simply the sort of price controls on prescription drugs that were part of the Inflation Reduction Act.

These don’t begin to take effect until 2026 and only apply to a limited number of drugs, but we could in principle go much further. We will spend over $500 billion this year (almost $4,000 per family), for drugs that would likely sell for less than $100 billion in a free market. In other words, there is lots of room for inflation reduction here.

If we don’t like the government setting prices, even when government-granted monopolies made prices high in the first place, there is also the option of weakening the monopoly. We can require drug and medical equipment companies to issue compulsory licenses.

This means that anyone could produce a patented drug or medical device, but they would have to pay a modest licensing fee (say 5 percent) to the holder of the patent. This can be put in place now under the Defense Production Act, but going forward we can require companies to agree to this condition as a requirement for anyone benefiting from the fruits of government funded research.

All of these routes to curbing inflation involve more time than just having the Fed raise interest rates, but it seems much fairer to make those who benefited from the upward redistribution of the last four decades pay the price for reducing inflation than those who have been the victims. It is also worth keeping in mind that the pandemic inflation may not a one-time story.

We know that climate change is going to lead to more and larger weather disasters in the years ahead. If we see a major industry or agricultural crop knocked out by flooding, fires, or extreme heat or alternatively, if millions of people must be relocated due to such events, it will impose a serious strain on the economy. The supply-side impact could lead to another bout of inflation like we are seeing now.

It hardly seems fair that we again tell the Fed to throw the must vulnerable people out of work to get inflation under control. We can use other routes, if we plan ahead.

I know that this program has pretty much zero chance in Washington. It means challenging the Great Big Lie, that inequality just happened, but we can still talk about these sorts of alternatives. And progressives who actually want to see less inequality will push them.   

 

The August Consumer Price Index (CPI) came in higher than many of us expected. While the overall inflation rate for the month was just 0.1 percent, the core index rose 0.6 percent, up from a 0.3 percent increase in July. Food prices also had another sharp jump, rising 0.7 percent, pushing the year over year increase in store bought food to 13.5 percent. This was not a good inflation story.

The biggest items in the core story were a large jump in new vehicle prices, which rose 0.8 percent in August, and high inflation in rents. Inflation in the rental indexes had moderated slightly in July, with the inflation rate for both indexes edging down by 0.1 percentage points compared to the June rate. But both indexes showed 0.7 percent inflation in August, with the number for owners’ equivalent rent being 0.1 percentage point higher than the July rate.

Most of the other data in the report were also not encouraging. The medical services index rose 0.8 percent, driven largely by a 2.4 percent rise in the health insurance index. The household furnishings and supply index rose 1.1 percent, continuing a pattern of sharp price increases in a category that typically showed almost no inflation before the pandemic.  

There were some price declines in the August report. Used car prices fell a modest 0.1 percent, but that was after a 0.4 percent drop in July. Even with the recent drop used car prices were still 7.8 percent above their year ago level and more than 50 percent higher than their pre-pandemic level. Appliance prices fell 1.2 percent, after a 0.6 percent drop in July. This is a category where it seems the supply chain problems have been resolved, but prices are still 13.9 percent higher than before the pandemic.

The Good News

It is hard to feel good about the course of future inflation based on the August CPI report. Fortunately, we got somewhat better news the next two days with the Producer Price Indexes (PPI) report and the Import/Export Price Indexes Report. Both of these reports showed widespread price declines in both overall and core measures.

The overall August PPI fell 0.1 percent in August. This follows a decline of 0.4 percent in July. The core index also showed inflation to be tame. The August rise was 0.2 percent, following increases of 0.1 percent in July and 0.3 percent in June.

There was higher inflation in the PPI earlier in the year, but the PPI typically leads the CPI by several months. This means that the slower inflation in the PPI likely means lower inflation in the CPI in the months ahead.

It is worth noting that rents do not appear in the PPI. Rent is a major factor in both the overall and core CPI, accounting for almost 31.0 percent of the overall index and nearly 40.0 percent of the core index. Rental inflation is likely to remain high for the rest of the year, although private indexes show the rate of rental inflation is slowing. This means that we are likely to see high inflation in the CPI for the next several months, even if most components show slow inflation or even falling prices.

It is important to remember that much of the story of rental inflation is that a much larger share of the workforce is now working from home. We had been seeing rents and house sale prices outpace inflation for about five years before the pandemic.

The story here is that after having a glut of housing as a result of a building boom during the housing bubble, we seriously underbuilt housing for a dozen years. Starts were running at an annual rate of more than 2.2 million units at the start of 2006. They then fell to under 600,000 in the Great Recession. We didn’t cross 1 million units again until 2015. Construction continued to inch up, but we were still under a 1.4 million unit rate when the pandemic hit.

As a result, there was a severe shortage of housing when millions of people suddenly decided that they needed bigger homes, and often in different places, since they were now working from home. They also had the money to pay for larger homes. The stimulus checks helped, as did extraordinarily low mortgage rates, but these families were saving thousands of dollars a year in commuting and other expenses related to working in an office. (These savings do not show up in the CPI.)

Anyhow, this rush to get bigger homes sent house prices soaring, with prices rising nationally by more than 30 percent, and considerably more in many areas. The Fed’s rate hikes have slowed these increases and led to declines in many areas. It will take some time for the full impact to be felt, in part because there is a long lead time between when a house sale is contracted and the house is sold and the sale price shows up in our data. But there is little doubt that the big pandemic price surge has come to an end.

However, it will take longer to address the underlying shortage of housing. Construction did rise sharply during the pandemic, with starts peaking at over 1.8 million this spring, before Fed rate hikes sent them sharply lower.

The picture on housing completions looks better. Even though starts had soared, completions had remained under 1.4 million. This was due to supply chain problems that prevented builders from finishing homes. These are now being resolved and completions are increasing in spite of the drop in starts.

A higher rate of completions will help, but it will still take some time to restore something resembling balance in the housing market. During this period, we are likely to see rental inflation continue to outpace the overall rate of inflation regardless of the state of the overall economy, even if it comes down from its current rate.

The Export-Import Price Indexes

The data on export and import prices was released on Wednesday. This also gave us some good news on inflation. The overall index dropped 1.0 percent in August following a 1.5 percent drop in July. This was not just the good news on gas and oil prices, the non-fuel index fell 0.2 percent, its fourth consecutive monthly decline.

The drop in import prices is also likely to show up in consumer prices, especially in areas like apparel and furniture, where most of demand is met by imports. While the CPI for apparel has increased only slightly more than the import price index, the furniture index has risen by 23.1 percent since the start of the pandemic, compared to 11.3 percent for the import price index. There is a similar story with motor vehicles, with the index for new vehicles in the CPI rising by 18.1 percent compared to 5.9 percent for the price index for imported vehicles.

The items in these indexes don’t correspond exactly, and there are other factors in the retail prices here, but it is hard to imagine the sort of discrepancies between the CPI price increases and the import price indexes persisting for long. In short, this is another factor pointing to good news in the months ahead on inflation.

The Labor Market

At the end of the day, the Fed’s rate hike agenda is focused on the labor market more than anything else. The story is simple, if we have persistently rapid wage growth, there is no way to avoid high inflation. To take the recent numbers, if the average hourly wage is rising at a 5.0 percent annual rate, then we are almost certainly looking at sustained inflation in a 3-4 percent range, well above the Fed’s 2.0 percent target.

The Fed’s rate hikes are aimed at slowing the rate of wage growth by weakening the labor market and reducing workers’ bargaining power. In other words, they want to increase the unemployment rate.

While the labor market was almost certainly too strong, earlier in the recovery, it is less clearly the case now. The most immediate measure of labor market strength is the number of weekly unemployment insurance claims. Weekly claims had fallen to under 170,000 at the start of April, a level not seen since the late 1960s, when the labor force was less than half its current size.  

There is a good case that a labor market this strong is going to create major inflationary pressures, which cannot be sustained through time without seeing a serious inflationary spiral. However, weekly claims did rise sharply in the spring and summer, hitting a peak of 260,000 in mid-July. They have again edged back down, but the recent numbers of around 220,000 a week are above the levels seen in many weeks in 2019, before the pandemic.

On the other side, the number of continuing claims, which measures the people who remain unemployed and getting benefits, is still extraordinarily low. Just over 1.4 million workers were collecting benefits in the most recent week, this is roughly 180,000 less than the lowest figures before the pandemic.

This indicates that people who do lose a job are able to quickly find a new job, an indication of a very strong labor market. On the other hand, the fact that employers are willing to lay off workers at a more or less normal rate, indicates that they are not so stressed for workers that they keep workers on the payroll even when they have no immediate need for their labor.

In the same vein, the length of the average workweek has fallen back to its pre-pandemic level. The length of the workweek averaged 34.4 hours in 2019. It rose in the pandemic as employers struggled to get workers and had their existing workforce put in more hours. It peaked at 35.0 hours in January of 2021. If that sounds like a small increase, consider that it is an increase of 1.7 percent, the equivalent of more than 2.5 million jobs.

The average workweek stood at 34.5 hours in August, the same as for many months in 2018 and 2019. Most employers are not now seeing a need to get their workers to put in unusually long hours.

The share of unemployment due to voluntary quits, a measure of workers’ confidence in their labor market prospects, rose to 15.2 percent in August. This is slightly higher than peaks hit in 2000 and 2019, but these data are erratic. The share stood at just 12.8 percent as recently as April. If the figure remains above 15.0 percent, it would definitely be an indication of a very strong labor market, but we should not make too much of a single month’s data.

The data series that the inflation hawks point to as suggesting a seriously overheated labor is the job vacancy rate. This is at record highs (the series only goes back to December of 2000), with the July reading at 6.9 percent. That compares to a pre-pandemic peak of 4.8 percent.

This has to raise serious concerns about an excessively strong labor market, but even here the picture is not unambiguous. The vacancy rate peaked at 7.3 percent in March, so we have seen a substantial decline over four months that was not associated with any increase in the unemployment rate.

In some sectors the decline has been considerably more rapid. In hotels and restaurants, the vacancy rate dropped from 10.9 percent last August to 8.9 percent in July. In retail, the rate peaked at 7.1 percent last August, but now sits at 5.8 percent, below pre-pandemic peaks.

This raises the possibility that the extraordinarily high vacancy rates we are now seeing may fall back to more normal levels without a big jump in unemployment. They may also not have as clear a relationship with wage growth as they have in prior decades.

At the end of the day, inflation will depend on the pace of wage growth. We actually got good news on that front in the August employment report. The average hourly wage increased at just a 0.3 percent rate for the month, that would translate to a 3.8 percent annual rate, a pace not far out of bounds for the Fed’s 2.0 percent target inflation.

As I always point out, the monthly data are erratic and also subject to large revisions, so we can’t make much of the August number. However, we can say that wage growth is not accelerating from the pace seen at the end of 2021, as would be predicted by the record high vacancy rate. In fact, it has slowed slightly.

If wage growth has not been following the predicted pattern for the last year, it seems a stretch to insist it will follow it going forward. This could mean that we will see wage growth fall back to a pace consistent with more acceptable rates of inflation without a big jump in the unemployment rate.

Does the Fed Have to Keep Going Big?

It is virtually certain that the Fed will again raise rates at its meeting next week. The only question is by how much, with the consensus seeming to be on another 75 basis points hike, with some expecting 100 basis points.

The Fed must be concerned about inflation, but it also has a responsibility to maximize employment. Chair Powell has taken this responsibility far more seriously than any of his predecessors over the last eight decades. There are clearly forces pushing inflation lower, as the supply chain problems get resolved. We don’t know the extent to which they will tame inflation without further action from the Fed.

We also know that the full effect of past rate hikes has not been felt yet. There has been a massive whack to the housing market, which is clear in a variety of indicators. This is spilling over to other sectors, but we are just beginning to see the secondary impact. Higher interest rates will also have an impact over time on many other sectors. There is a serious cost to the Fed’s rate hikes.

The data on inflation expectations continue to show that they are headed lower rather than higher. This means that, at least for now, there is little basis for fearing a wage-price spiral driven by self-fulfilling expectations of higher inflation.

As was the case before this week’s data, the overall story on inflation remains mixed. There are real grounds for concern, but also evidence that inflation is headed downward without the need for sharp increases in the unemployment rate. In this situation, the Fed would be best advised to raise rates with caution.

The August Consumer Price Index (CPI) came in higher than many of us expected. While the overall inflation rate for the month was just 0.1 percent, the core index rose 0.6 percent, up from a 0.3 percent increase in July. Food prices also had another sharp jump, rising 0.7 percent, pushing the year over year increase in store bought food to 13.5 percent. This was not a good inflation story.

The biggest items in the core story were a large jump in new vehicle prices, which rose 0.8 percent in August, and high inflation in rents. Inflation in the rental indexes had moderated slightly in July, with the inflation rate for both indexes edging down by 0.1 percentage points compared to the June rate. But both indexes showed 0.7 percent inflation in August, with the number for owners’ equivalent rent being 0.1 percentage point higher than the July rate.

Most of the other data in the report were also not encouraging. The medical services index rose 0.8 percent, driven largely by a 2.4 percent rise in the health insurance index. The household furnishings and supply index rose 1.1 percent, continuing a pattern of sharp price increases in a category that typically showed almost no inflation before the pandemic.  

There were some price declines in the August report. Used car prices fell a modest 0.1 percent, but that was after a 0.4 percent drop in July. Even with the recent drop used car prices were still 7.8 percent above their year ago level and more than 50 percent higher than their pre-pandemic level. Appliance prices fell 1.2 percent, after a 0.6 percent drop in July. This is a category where it seems the supply chain problems have been resolved, but prices are still 13.9 percent higher than before the pandemic.

The Good News

It is hard to feel good about the course of future inflation based on the August CPI report. Fortunately, we got somewhat better news the next two days with the Producer Price Indexes (PPI) report and the Import/Export Price Indexes Report. Both of these reports showed widespread price declines in both overall and core measures.

The overall August PPI fell 0.1 percent in August. This follows a decline of 0.4 percent in July. The core index also showed inflation to be tame. The August rise was 0.2 percent, following increases of 0.1 percent in July and 0.3 percent in June.

There was higher inflation in the PPI earlier in the year, but the PPI typically leads the CPI by several months. This means that the slower inflation in the PPI likely means lower inflation in the CPI in the months ahead.

It is worth noting that rents do not appear in the PPI. Rent is a major factor in both the overall and core CPI, accounting for almost 31.0 percent of the overall index and nearly 40.0 percent of the core index. Rental inflation is likely to remain high for the rest of the year, although private indexes show the rate of rental inflation is slowing. This means that we are likely to see high inflation in the CPI for the next several months, even if most components show slow inflation or even falling prices.

It is important to remember that much of the story of rental inflation is that a much larger share of the workforce is now working from home. We had been seeing rents and house sale prices outpace inflation for about five years before the pandemic.

The story here is that after having a glut of housing as a result of a building boom during the housing bubble, we seriously underbuilt housing for a dozen years. Starts were running at an annual rate of more than 2.2 million units at the start of 2006. They then fell to under 600,000 in the Great Recession. We didn’t cross 1 million units again until 2015. Construction continued to inch up, but we were still under a 1.4 million unit rate when the pandemic hit.

As a result, there was a severe shortage of housing when millions of people suddenly decided that they needed bigger homes, and often in different places, since they were now working from home. They also had the money to pay for larger homes. The stimulus checks helped, as did extraordinarily low mortgage rates, but these families were saving thousands of dollars a year in commuting and other expenses related to working in an office. (These savings do not show up in the CPI.)

Anyhow, this rush to get bigger homes sent house prices soaring, with prices rising nationally by more than 30 percent, and considerably more in many areas. The Fed’s rate hikes have slowed these increases and led to declines in many areas. It will take some time for the full impact to be felt, in part because there is a long lead time between when a house sale is contracted and the house is sold and the sale price shows up in our data. But there is little doubt that the big pandemic price surge has come to an end.

However, it will take longer to address the underlying shortage of housing. Construction did rise sharply during the pandemic, with starts peaking at over 1.8 million this spring, before Fed rate hikes sent them sharply lower.

The picture on housing completions looks better. Even though starts had soared, completions had remained under 1.4 million. This was due to supply chain problems that prevented builders from finishing homes. These are now being resolved and completions are increasing in spite of the drop in starts.

A higher rate of completions will help, but it will still take some time to restore something resembling balance in the housing market. During this period, we are likely to see rental inflation continue to outpace the overall rate of inflation regardless of the state of the overall economy, even if it comes down from its current rate.

The Export-Import Price Indexes

The data on export and import prices was released on Wednesday. This also gave us some good news on inflation. The overall index dropped 1.0 percent in August following a 1.5 percent drop in July. This was not just the good news on gas and oil prices, the non-fuel index fell 0.2 percent, its fourth consecutive monthly decline.

The drop in import prices is also likely to show up in consumer prices, especially in areas like apparel and furniture, where most of demand is met by imports. While the CPI for apparel has increased only slightly more than the import price index, the furniture index has risen by 23.1 percent since the start of the pandemic, compared to 11.3 percent for the import price index. There is a similar story with motor vehicles, with the index for new vehicles in the CPI rising by 18.1 percent compared to 5.9 percent for the price index for imported vehicles.

The items in these indexes don’t correspond exactly, and there are other factors in the retail prices here, but it is hard to imagine the sort of discrepancies between the CPI price increases and the import price indexes persisting for long. In short, this is another factor pointing to good news in the months ahead on inflation.

The Labor Market

At the end of the day, the Fed’s rate hike agenda is focused on the labor market more than anything else. The story is simple, if we have persistently rapid wage growth, there is no way to avoid high inflation. To take the recent numbers, if the average hourly wage is rising at a 5.0 percent annual rate, then we are almost certainly looking at sustained inflation in a 3-4 percent range, well above the Fed’s 2.0 percent target.

The Fed’s rate hikes are aimed at slowing the rate of wage growth by weakening the labor market and reducing workers’ bargaining power. In other words, they want to increase the unemployment rate.

While the labor market was almost certainly too strong, earlier in the recovery, it is less clearly the case now. The most immediate measure of labor market strength is the number of weekly unemployment insurance claims. Weekly claims had fallen to under 170,000 at the start of April, a level not seen since the late 1960s, when the labor force was less than half its current size.  

There is a good case that a labor market this strong is going to create major inflationary pressures, which cannot be sustained through time without seeing a serious inflationary spiral. However, weekly claims did rise sharply in the spring and summer, hitting a peak of 260,000 in mid-July. They have again edged back down, but the recent numbers of around 220,000 a week are above the levels seen in many weeks in 2019, before the pandemic.

On the other side, the number of continuing claims, which measures the people who remain unemployed and getting benefits, is still extraordinarily low. Just over 1.4 million workers were collecting benefits in the most recent week, this is roughly 180,000 less than the lowest figures before the pandemic.

This indicates that people who do lose a job are able to quickly find a new job, an indication of a very strong labor market. On the other hand, the fact that employers are willing to lay off workers at a more or less normal rate, indicates that they are not so stressed for workers that they keep workers on the payroll even when they have no immediate need for their labor.

In the same vein, the length of the average workweek has fallen back to its pre-pandemic level. The length of the workweek averaged 34.4 hours in 2019. It rose in the pandemic as employers struggled to get workers and had their existing workforce put in more hours. It peaked at 35.0 hours in January of 2021. If that sounds like a small increase, consider that it is an increase of 1.7 percent, the equivalent of more than 2.5 million jobs.

The average workweek stood at 34.5 hours in August, the same as for many months in 2018 and 2019. Most employers are not now seeing a need to get their workers to put in unusually long hours.

The share of unemployment due to voluntary quits, a measure of workers’ confidence in their labor market prospects, rose to 15.2 percent in August. This is slightly higher than peaks hit in 2000 and 2019, but these data are erratic. The share stood at just 12.8 percent as recently as April. If the figure remains above 15.0 percent, it would definitely be an indication of a very strong labor market, but we should not make too much of a single month’s data.

The data series that the inflation hawks point to as suggesting a seriously overheated labor is the job vacancy rate. This is at record highs (the series only goes back to December of 2000), with the July reading at 6.9 percent. That compares to a pre-pandemic peak of 4.8 percent.

This has to raise serious concerns about an excessively strong labor market, but even here the picture is not unambiguous. The vacancy rate peaked at 7.3 percent in March, so we have seen a substantial decline over four months that was not associated with any increase in the unemployment rate.

In some sectors the decline has been considerably more rapid. In hotels and restaurants, the vacancy rate dropped from 10.9 percent last August to 8.9 percent in July. In retail, the rate peaked at 7.1 percent last August, but now sits at 5.8 percent, below pre-pandemic peaks.

This raises the possibility that the extraordinarily high vacancy rates we are now seeing may fall back to more normal levels without a big jump in unemployment. They may also not have as clear a relationship with wage growth as they have in prior decades.

At the end of the day, inflation will depend on the pace of wage growth. We actually got good news on that front in the August employment report. The average hourly wage increased at just a 0.3 percent rate for the month, that would translate to a 3.8 percent annual rate, a pace not far out of bounds for the Fed’s 2.0 percent target inflation.

As I always point out, the monthly data are erratic and also subject to large revisions, so we can’t make much of the August number. However, we can say that wage growth is not accelerating from the pace seen at the end of 2021, as would be predicted by the record high vacancy rate. In fact, it has slowed slightly.

If wage growth has not been following the predicted pattern for the last year, it seems a stretch to insist it will follow it going forward. This could mean that we will see wage growth fall back to a pace consistent with more acceptable rates of inflation without a big jump in the unemployment rate.

Does the Fed Have to Keep Going Big?

It is virtually certain that the Fed will again raise rates at its meeting next week. The only question is by how much, with the consensus seeming to be on another 75 basis points hike, with some expecting 100 basis points.

The Fed must be concerned about inflation, but it also has a responsibility to maximize employment. Chair Powell has taken this responsibility far more seriously than any of his predecessors over the last eight decades. There are clearly forces pushing inflation lower, as the supply chain problems get resolved. We don’t know the extent to which they will tame inflation without further action from the Fed.

We also know that the full effect of past rate hikes has not been felt yet. There has been a massive whack to the housing market, which is clear in a variety of indicators. This is spilling over to other sectors, but we are just beginning to see the secondary impact. Higher interest rates will also have an impact over time on many other sectors. There is a serious cost to the Fed’s rate hikes.

The data on inflation expectations continue to show that they are headed lower rather than higher. This means that, at least for now, there is little basis for fearing a wage-price spiral driven by self-fulfilling expectations of higher inflation.

As was the case before this week’s data, the overall story on inflation remains mixed. There are real grounds for concern, but also evidence that inflation is headed downward without the need for sharp increases in the unemployment rate. In this situation, the Fed would be best advised to raise rates with caution.

It is common for politicians and pundit types to speculate on when or whether China’s economy will pass the US economy as the world’s largest. The latest episode to cross my path was a column by David Wallace in the New York Times.

There is little reason for this sort of speculation. China is already the world’s largest economy, its economy is more than 20 percent larger than the US economy, according to the IMF. Furthermore, it is growing considerably more rapidly (assuming they don’t continue their zero COVID-19 policy forever), so it is projected to be more than a third larger than the US economy by the end of the decade.

Here’s the picture.

Source: International Monetary Fund.

Many people misunderstand the relative sizes of the two economies because they rely on exchange rate measures of GDP. These measures a country’s GDP and then compare it to the US GDP by converting its currency into dollars at the current exchange rate.

Most economists argue that a purchasing power parity measure of GDP is superior. This applies a common set of prices to the goods and services produced in different countries. Any measure like this will always be inaccurate, but in principle it is comparing apples to apples. We assume that tables sell for $500 everywhere, that shoes sell for $60, etc.

Using the purchasing power parity measure, China’s GDP passed the US GDP around 2014. Since then it has made the gap larger.

Some folks seem to find it hard to accept that the US does not have the world’s largest economy, but such is life. Donald Trump lost the election and the US is number 2.

It is common for politicians and pundit types to speculate on when or whether China’s economy will pass the US economy as the world’s largest. The latest episode to cross my path was a column by David Wallace in the New York Times.

There is little reason for this sort of speculation. China is already the world’s largest economy, its economy is more than 20 percent larger than the US economy, according to the IMF. Furthermore, it is growing considerably more rapidly (assuming they don’t continue their zero COVID-19 policy forever), so it is projected to be more than a third larger than the US economy by the end of the decade.

Here’s the picture.

Source: International Monetary Fund.

Many people misunderstand the relative sizes of the two economies because they rely on exchange rate measures of GDP. These measures a country’s GDP and then compare it to the US GDP by converting its currency into dollars at the current exchange rate.

Most economists argue that a purchasing power parity measure of GDP is superior. This applies a common set of prices to the goods and services produced in different countries. Any measure like this will always be inaccurate, but in principle it is comparing apples to apples. We assume that tables sell for $500 everywhere, that shoes sell for $60, etc.

Using the purchasing power parity measure, China’s GDP passed the US GDP around 2014. Since then it has made the gap larger.

Some folks seem to find it hard to accept that the US does not have the world’s largest economy, but such is life. Donald Trump lost the election and the US is number 2.

There is a large recession lobby in Washington these days that seems to view a recession as a positive good for the economy and society. The basic story is that we have seen a big jump in inflation associated with the pandemic and the war in Ukraine. They argue that a recession will be needed to bring inflation back down to acceptable levels.

The logic is that the higher unemployment associated with a recession will force workers to take pay cuts. This will reduce inflationary pressures in the economy.

I, and others, have pointed out the enormous human costs associated with a recession. Unemployment is traumatic for everyone, but we know that the people who are most likely to lose their jobs in a recession are those who are most disadvantaged in the labor market, such as Blacks, Hispanics, people with less education, and people with a criminal record.

And, contrary to what you often hear in the media, the unemployed are not a relatively small group. While 5.0 percent or 6.0 percent unemployment might seem like a relatively small share of the population, most unemployment spells are relatively short (thankfully), as people move in and out of unemployment. But this means that two to three times this number of people may experience unemployment over the course of the year.

Furthermore, the reduced bargaining power, which is the whole point of this exercise, is experienced by tens of millions of workers stretching up past the median worker. In our book, Getting Back to Full Employment, Jared Bernstein and I showed that the only times when the median worker saw sustained real wage growth in the years since 1980 were when we had very low rates of unemployment.

It seems more than a bit bizarre that we have all these private and public efforts intended to reduce inequality and overcome the effects of centuries of discrimination, and then we have a government agency—the Federal Reserve Board—acting to deliberately increase inequality. This doesn’t mean that we shouldn’t take the concerns with inflation seriously, just that we should be very reluctant to go the route of pushing unemployment up as the main tool to reduce it.

Many of us have argued that a big jump in unemployment will not be needed to restrain inflation. The pandemic and war-related factors that led to the jump in inflation are gradually being reversed, as seen most clearly with the plunge in gas prices the last three months.

With monthly inflation coming in at zero in July, and likely to do so again for August, the Fed has the luxury of adopting a wait and see approach before going ahead with more big rate hikes. Expectations of inflation are actually falling, so there is little immediate basis for fear about a self-fulfilling burst of higher wage and price increases leading to higher inflation.  

But there is another factor that needs to be considered when assessing the urgency of rate hikes and unemployment compared to the benefits of the wait and see approach: the likely Republican takeover of at least one house of Congress this fall. This is not a partisan question about whether the Fed should be acting to favor Republicans or Democrats (its actions at this point will have little impact on the pre-election economy), rather it is a recognition of how Republicans behave when there is a Democrat in the White House.

While political science on the whole probably has a worse track record than economists in terms of explaining its object of study, one item on which there is a high degree of certainty is that a weak economy is bad news for the incumbent president. The worse the economy looks in 2024, the poorer will be Joe Biden’s chances of getting reelected.

Congressional Republicans certainly know this. They did everything they could to sabotage the economy after they gained control of the Congress in 2010. They insisted on large budget cuts, which slowed growth and kept the unemployment rate high.

Their story was the old joke about the deficit. When a Democrat is in the White House, the Republicans are the biggest worriers about deficits and debt anywhere. We saw that under Clinton in the 1990s and President Obama in the last decade. However, deficits don’t matter when they want big tax cuts with Republicans like Reagan, Bush II, or Trump in the White House.

This history means that if the Republicans take over the House this fall, we can be absolutely certain that they will block any efforts to stimulate the economy to boost it out of recession. In fact, they will most likely be demanding budget cuts to make the recession worse. And, given recent history, they will be threatening government shutdowns and debt defaults to get these cuts.

The Republicans are a party that does not give a damn about the well-being of the country; after all, their rich backers will be doing fine in a recession. They want political power. Mitch McConnell put this as clearly as possible after Obama was elected in 2008. He said that it was his job to make sure that Obama was a one-term president. (McConnell obviously failed on that one.)

This political picture has to be taken into account when considering the relative risks of the Federal Reserve Board’s interest rate policy. The inflation hawks do have a point, there is a risk (albeit a small one in my view) that we will see the sort of wage-price spiral we saw in the 1970s, with inflation rates getting ever higher, or at least remaining at levels that few of us would consider acceptable.

However, there is also the risk that Republican control of Congress will make what would have been a relatively short and mild recession into a long and severe recession. If there is one lesson we have learned well following the Great Recession, it is much easier for the Fed to use monetary policy to slow the economy than to boost it out of a recession.

The Fed certainly has the ability to put the economy into a recession. If a Republican Congress wants to keep us in recession, there will not be much that the Fed can do to counter its actions.  

There is a large recession lobby in Washington these days that seems to view a recession as a positive good for the economy and society. The basic story is that we have seen a big jump in inflation associated with the pandemic and the war in Ukraine. They argue that a recession will be needed to bring inflation back down to acceptable levels.

The logic is that the higher unemployment associated with a recession will force workers to take pay cuts. This will reduce inflationary pressures in the economy.

I, and others, have pointed out the enormous human costs associated with a recession. Unemployment is traumatic for everyone, but we know that the people who are most likely to lose their jobs in a recession are those who are most disadvantaged in the labor market, such as Blacks, Hispanics, people with less education, and people with a criminal record.

And, contrary to what you often hear in the media, the unemployed are not a relatively small group. While 5.0 percent or 6.0 percent unemployment might seem like a relatively small share of the population, most unemployment spells are relatively short (thankfully), as people move in and out of unemployment. But this means that two to three times this number of people may experience unemployment over the course of the year.

Furthermore, the reduced bargaining power, which is the whole point of this exercise, is experienced by tens of millions of workers stretching up past the median worker. In our book, Getting Back to Full Employment, Jared Bernstein and I showed that the only times when the median worker saw sustained real wage growth in the years since 1980 were when we had very low rates of unemployment.

It seems more than a bit bizarre that we have all these private and public efforts intended to reduce inequality and overcome the effects of centuries of discrimination, and then we have a government agency—the Federal Reserve Board—acting to deliberately increase inequality. This doesn’t mean that we shouldn’t take the concerns with inflation seriously, just that we should be very reluctant to go the route of pushing unemployment up as the main tool to reduce it.

Many of us have argued that a big jump in unemployment will not be needed to restrain inflation. The pandemic and war-related factors that led to the jump in inflation are gradually being reversed, as seen most clearly with the plunge in gas prices the last three months.

With monthly inflation coming in at zero in July, and likely to do so again for August, the Fed has the luxury of adopting a wait and see approach before going ahead with more big rate hikes. Expectations of inflation are actually falling, so there is little immediate basis for fear about a self-fulfilling burst of higher wage and price increases leading to higher inflation.  

But there is another factor that needs to be considered when assessing the urgency of rate hikes and unemployment compared to the benefits of the wait and see approach: the likely Republican takeover of at least one house of Congress this fall. This is not a partisan question about whether the Fed should be acting to favor Republicans or Democrats (its actions at this point will have little impact on the pre-election economy), rather it is a recognition of how Republicans behave when there is a Democrat in the White House.

While political science on the whole probably has a worse track record than economists in terms of explaining its object of study, one item on which there is a high degree of certainty is that a weak economy is bad news for the incumbent president. The worse the economy looks in 2024, the poorer will be Joe Biden’s chances of getting reelected.

Congressional Republicans certainly know this. They did everything they could to sabotage the economy after they gained control of the Congress in 2010. They insisted on large budget cuts, which slowed growth and kept the unemployment rate high.

Their story was the old joke about the deficit. When a Democrat is in the White House, the Republicans are the biggest worriers about deficits and debt anywhere. We saw that under Clinton in the 1990s and President Obama in the last decade. However, deficits don’t matter when they want big tax cuts with Republicans like Reagan, Bush II, or Trump in the White House.

This history means that if the Republicans take over the House this fall, we can be absolutely certain that they will block any efforts to stimulate the economy to boost it out of recession. In fact, they will most likely be demanding budget cuts to make the recession worse. And, given recent history, they will be threatening government shutdowns and debt defaults to get these cuts.

The Republicans are a party that does not give a damn about the well-being of the country; after all, their rich backers will be doing fine in a recession. They want political power. Mitch McConnell put this as clearly as possible after Obama was elected in 2008. He said that it was his job to make sure that Obama was a one-term president. (McConnell obviously failed on that one.)

This political picture has to be taken into account when considering the relative risks of the Federal Reserve Board’s interest rate policy. The inflation hawks do have a point, there is a risk (albeit a small one in my view) that we will see the sort of wage-price spiral we saw in the 1970s, with inflation rates getting ever higher, or at least remaining at levels that few of us would consider acceptable.

However, there is also the risk that Republican control of Congress will make what would have been a relatively short and mild recession into a long and severe recession. If there is one lesson we have learned well following the Great Recession, it is much easier for the Fed to use monetary policy to slow the economy than to boost it out of a recession.

The Fed certainly has the ability to put the economy into a recession. If a Republican Congress wants to keep us in recession, there will not be much that the Fed can do to counter its actions.  

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