Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

We have heard much about the supply chain crisis as we recover from the pandemic recession. As the economy has bounced back there have been shortages of many items with the economy unable to produce and ship the volume of goods that is being demanded. Many of us see this supply chain crisis as the main factor behind the upsurge in inflation that we have witnessed over the last year.

My expectation has been that the many items that have soared in price over the last year will see prices stabilize and fall when the supply chain crunch eases. I have repeatedly used the case of televisions as an example. Television prices had been on a downward path for decades, but the CPI index for televisions rose 8.7 percent between March and August of last year. The index then turned around, and has since dropped by 6.3 percent, reversing most of the prior increase.

Used cars provide another example. Used car prices soared in 2020 and 2021, with the index rising by more than 50 percent between February 2020 and January 2022. However, prices began falling in February. In one private price index, by the middle of March, used car prices had fallen almost 6.0 percent from their January peak.

If we see a comparable price decline in other items that have had extraordinary runups in prices in the last year, like appliances, clothing, and household furnishing, it will sharply dampen the inflation rate going forward. The key factor in this story is resolving the supply chain crisis.

This is where inventories come in. Inventories fell sharply in 2020, as many businesses sharply cut back production or shutdown altogether at the start of the pandemic. Inventories did begin to increase later in the year, but not as fast as consumption. Large parts of the service sector remained shut, so people shifted their consumption from areas like restaurants and travel, to cars, televisions, and appliances.

But, demand is now shifting back the other way. People are going to restaurants at pretty much the same rate as before the pandemic. While air travel is still somewhat below the pre-pandemic pace, most of the remaining gap is likely explained by reduced business travel. (I had a number of flights last week and they were all packed.)

Anyhow, this shift to services means that people must either be cutting back on their demand for goods, or spending a larger share of their income, and thereby saving less. Thus far in the recovery, the saving rate has remained relatively high, even as the pandemic payments and unemployment insurance supplements fade into the past.

It’s possible that this will change going forward, as people spend out of the savings they accumulated during the pandemic. However, it’s also possible that they will pay for their increased demand for services, by reducing their demand for goods.

In this story, it is worth noting that overall consumption is not especially high right now. Overall consumption in January, the last month for which we have data, was 5.0 percent higher, after adjusting for inflation, than in the fourth quarter of 2019. This implies a 2.3 percent annual rate of growth, pretty much in line with longer term trends.

While overall consumption is not out of line with its longer-term trend, demand for goods is. Durable goods consumption was 25.7 percent higher in January than in the fourth quarter of 2019 and consumption of non-durables was 13.0 percent higher, implying respective annual growth rates of 10.9 percent and 5.7 percent. If consumption of goods falls back closer to its trend growth path, then we will see an inventory glut.

Here’s the picture for retail non-car inventories.[1]

As can be seen, there has been there has been a sharp rise in recent months, with the level in January standing 16.1 percent above the February 2020 level. We saw a further 1.2 percent rise in non-car inventories in February, putting them 17.4 percent above their pre-pandemic level. The cumulative inflation in non-car goods over this period has been 12.1 percent (much of this is higher gasoline prices), which means that if consumption of goods fell back to its trend level, we would be back to pre-pandemic inventory-to-sales ratios and the supply chain crisis would be largely behind us.

The picture looks even better at the wholesale level.

 

These data (which include inventories of vehicles) have risen even more sharply in recent months. If we include the 2.1 percent jump in February, wholesale inventories were 20.8 percent above their pre-pandemic level. And, wholesale inventories usually end up as retail inventories in the not distant future.

These data suggest that in many categories of goods, we should have a very adequate supply in the not distant future. This will be especially true if we see consumption of goods and services revert to more normal patterns.

In this respect it is worth noting that large bursts of goods consumption tend to be followed by lower consumption in future periods. If people buy a new car or refrigerator in 2021, they are not likely to buy another car or refrigerator in 2022 or 2023. The huge burst of goods consumption that we saw in 2020 and 2021 should be another factor, in addition to the winding down of the pandemic, leading to a shift to services.

In short, the inventory data indicate that we should be getting to the end of shortages due to supply chain problems. This doesn’t mean that there will not still be many items, most notably new cars, that are in short supply, but these will be the exception rather than the rule. In that story, we will likely see price declines in a wide range of items, pulling down inflation in the rest of 2022.

[1] The supply of cars has been limited by a worldwide shortage of semi-conductors due to a fire in a large semi-conductor factory in Japan. This is a separate issue from more general supply chain problems.

We have heard much about the supply chain crisis as we recover from the pandemic recession. As the economy has bounced back there have been shortages of many items with the economy unable to produce and ship the volume of goods that is being demanded. Many of us see this supply chain crisis as the main factor behind the upsurge in inflation that we have witnessed over the last year.

My expectation has been that the many items that have soared in price over the last year will see prices stabilize and fall when the supply chain crunch eases. I have repeatedly used the case of televisions as an example. Television prices had been on a downward path for decades, but the CPI index for televisions rose 8.7 percent between March and August of last year. The index then turned around, and has since dropped by 6.3 percent, reversing most of the prior increase.

Used cars provide another example. Used car prices soared in 2020 and 2021, with the index rising by more than 50 percent between February 2020 and January 2022. However, prices began falling in February. In one private price index, by the middle of March, used car prices had fallen almost 6.0 percent from their January peak.

If we see a comparable price decline in other items that have had extraordinary runups in prices in the last year, like appliances, clothing, and household furnishing, it will sharply dampen the inflation rate going forward. The key factor in this story is resolving the supply chain crisis.

This is where inventories come in. Inventories fell sharply in 2020, as many businesses sharply cut back production or shutdown altogether at the start of the pandemic. Inventories did begin to increase later in the year, but not as fast as consumption. Large parts of the service sector remained shut, so people shifted their consumption from areas like restaurants and travel, to cars, televisions, and appliances.

But, demand is now shifting back the other way. People are going to restaurants at pretty much the same rate as before the pandemic. While air travel is still somewhat below the pre-pandemic pace, most of the remaining gap is likely explained by reduced business travel. (I had a number of flights last week and they were all packed.)

Anyhow, this shift to services means that people must either be cutting back on their demand for goods, or spending a larger share of their income, and thereby saving less. Thus far in the recovery, the saving rate has remained relatively high, even as the pandemic payments and unemployment insurance supplements fade into the past.

It’s possible that this will change going forward, as people spend out of the savings they accumulated during the pandemic. However, it’s also possible that they will pay for their increased demand for services, by reducing their demand for goods.

In this story, it is worth noting that overall consumption is not especially high right now. Overall consumption in January, the last month for which we have data, was 5.0 percent higher, after adjusting for inflation, than in the fourth quarter of 2019. This implies a 2.3 percent annual rate of growth, pretty much in line with longer term trends.

While overall consumption is not out of line with its longer-term trend, demand for goods is. Durable goods consumption was 25.7 percent higher in January than in the fourth quarter of 2019 and consumption of non-durables was 13.0 percent higher, implying respective annual growth rates of 10.9 percent and 5.7 percent. If consumption of goods falls back closer to its trend growth path, then we will see an inventory glut.

Here’s the picture for retail non-car inventories.[1]

As can be seen, there has been there has been a sharp rise in recent months, with the level in January standing 16.1 percent above the February 2020 level. We saw a further 1.2 percent rise in non-car inventories in February, putting them 17.4 percent above their pre-pandemic level. The cumulative inflation in non-car goods over this period has been 12.1 percent (much of this is higher gasoline prices), which means that if consumption of goods fell back to its trend level, we would be back to pre-pandemic inventory-to-sales ratios and the supply chain crisis would be largely behind us.

The picture looks even better at the wholesale level.

 

These data (which include inventories of vehicles) have risen even more sharply in recent months. If we include the 2.1 percent jump in February, wholesale inventories were 20.8 percent above their pre-pandemic level. And, wholesale inventories usually end up as retail inventories in the not distant future.

These data suggest that in many categories of goods, we should have a very adequate supply in the not distant future. This will be especially true if we see consumption of goods and services revert to more normal patterns.

In this respect it is worth noting that large bursts of goods consumption tend to be followed by lower consumption in future periods. If people buy a new car or refrigerator in 2021, they are not likely to buy another car or refrigerator in 2022 or 2023. The huge burst of goods consumption that we saw in 2020 and 2021 should be another factor, in addition to the winding down of the pandemic, leading to a shift to services.

In short, the inventory data indicate that we should be getting to the end of shortages due to supply chain problems. This doesn’t mean that there will not still be many items, most notably new cars, that are in short supply, but these will be the exception rather than the rule. In that story, we will likely see price declines in a wide range of items, pulling down inflation in the rest of 2022.

[1] The supply of cars has been limited by a worldwide shortage of semi-conductors due to a fire in a large semi-conductor factory in Japan. This is a separate issue from more general supply chain problems.

There is a story of a football coach who ran running plays near the end of a game, when he clearly should have been passing. Apparently, he had seen data showing that teams that win, on average, run on a certain number of plays. His team was below this number, so he decided that he had to have more runs if his team was going to win.

This is a classic case of confusing correlation with causation. (For those not familiar with football, when a team is ahead, it generally uses running plays to take lots of time off the clock. They run because they are winning, they don’t win because they run.) This distinction is important when considering various predictions for a recession in the current environment.

There are many features of an economy that we commonly see before a recession. For example, we typically see higher prices for oil, wheat, and other commodities before a recession. We also often see an inverted yield curve, where the interest rate on short-term Treasury debt (e.g., 90-day or 2-year notes) exceed the interest rate on 10-year Treasury bonds.

We are currently seeing a serious run-up in many commodity prices. It’s very plausible that we will see an inverted yield curve in the next year or so. The question is whether this means we should be expecting a recession in the near future?

While I would not rule out a recession beginning this year or next, we have to be careful to ask about the causation and not just look for events that tend to be correlated with recessions. Neither high commodity prices nor an inverted yield curve should be sufficient grounds for believing we will see a recession.

The Problem of High Commodity Prices

Taking these in turn, the impact of high commodity prices on economic growth is ambiguous. Higher prices for gas and food (insofar as commodity prices get passed on in food prices) will take money out of households’ pockets, meaning that they have less money to spend on other things. In this way, they can be thought of as being comparable to tax increases.

However, there is a flip side to these tax increases. Higher commodity prices, especially in the case of oil, provide incentive to invest more money in the search for more oil. With the explosion of fracking in the United States, much of this investment is likely to take place here. This investment will provide a boost to demand that can partially, or even fully, offset the extent to which higher oil and gas prices reduce consumption.

There is a complicating factor in this story. The plunge in oil prices from 2014 to 2015, which took prices from over $100 a barrel to roughly $40 barrel, brought a quick end to the fracking boom. The whole industry was hard hit and many companies went bankrupt.

This history has made many companies reluctant to invest in a big way, even as oil prices again soar to over $100 a barrel. Nonetheless, the number of oil rigs is up by more than 50 percent from its year ago level, even though it is still far below the pre-recession figure. It seems likely that if oil prices stay high that we will see continued rapid growth in drilling, with the investment largely offsetting the drop in consumption due to higher gas prices.

The story with other commodities is similarly ambiguous. Higher grain prices mean higher incomes for farmers. Also, the price of grain is a relatively small factor in our food prices. (They matter much more for people in the developing world.) Most of the increase in food costs since the pandemic reflect higher shipping costs and increased profits, not a rise in grain prices.

It is also important to remember that commodity prices are hugely volatile with both upward and downward swings that are often far larger than is warranted by market fundamentals. This could be the case with sharp rise in many prices since the Russian invasion of Ukraine.

For example, much discussion of the oil market has treated as a serious possibility the complete loss to world markets of Russia’s exports of five million barrels a day. As a practical matter, that scenario is almost impossible. While the United States and some other countries are now boycotting Russian oil, most of Europe is still buying it.

However, even if the European Union were to go along with a Russian oil boycott, most of this oil would still not be lost to world markets. In all probability, many other countries, most importantly China and India would still be buying Russian oil. These countries would likely buy most of the oil that the US and EU were boycotting, presumably get a discount off the world price for their willingness to flaunt sanctions.

Since demand for oil in China and India is not going to increase to absorb the Russian oil, the Russian oil will displace oil that they are currently importing from other countries. This means that oil from Saudi Arabia, the United Arab Emirates, and other countries, that used to go to China and India, will instead be going to the EU or the United States. There clearly will be some oil lost in this story (not all oil is perfectly substitutable) but the net effect will be hugely less than the full amount of Russia’s exports.

There is a similar story with grain prices. In many places grains can be easily substituted for each other. This means that if wheat prices rise a great deal, due to the loss of production from Ukraine, people in many areas may switch to corn, rice, or other grains. This will limit the extent of the price increase in areas where people have no choice but to buy wheat.

There are many factors that can affect commodity prices over the next couple of years and it is possible that the price of oil, wheat and other commodities will rise even further. But the claims that have often been made in the media do not justify the price increases that we have seen to date.

The Inverted Yield Curve

The other recession scare story, the inverted real curve, has more foundation in reality. Most recessions in the post-World War II era have been caused by the Federal Reserve Board raising interest rates to slow the economy. A slower economy reduced job growth, which reduces inflationary pressures, by putting downward pressure on wages. The exceptions were the 2001 recession, which was caused by the collapse of the stock bubble, the 2007-09 recession which was caused by the collapse of the housing bubble, and the 2020 recession, which was the result of the pandemic.

Short-term interest rates move much more than longer term rates. If the overnight money rate, that the Fed directly controls, rises by 2.0-2.5 percentage points over the next year and a half, as is now widely expected, it is likely to far exceed the increases in longer term interest rates. This creates the possibility of an inverted yield curve, where shorter term rates exceed longer term rates.

In this situation, we may well expect to see a recession, but the key factor is the Fed’s increase in shorter term rates. The Fed’s goal in raising rates is to slow the economy. If it pushes the economy into a recession, then it will have gone too far.

We may also see an inverted yield curve in this situation, as short-term rates are pushed higher by the Fed. In addition to not rising as much as short-term rates, long-term rates may also be held down by an expectation that a recession will imply lower short-term interest rates in the future. But the inverted yield curve is not the cause of the recession. It is a phenomenon that goes along with a recession.

Will We See a Recession?

There is a real risk that in the effort to slow inflation, the Fed goes too far and pushes the economy into a recession, but this is still very far from a done deal. The economy had been growing very rapidly in the fourth quarter of 2021. It would have to slow sharply from that pace to push the economy into a recession.

That is a possible story. Rapid consumption growth was the biggest factor pushing GDP higher in the recovery. This growth was fueled in part by the pandemic checks sent out to people in the CARES Acts and the Biden recovery package, as well as the unemployment insurance supplements. These payments are now in the past. People still have more money in their bank accounts than before the pandemic, but thus far they have not spent from these savings to any substantial extent.

Higher interest rates will also directly discourage consumption of items typically bought on credit, like cars and major appliances. Higher rates also have already put an end to a refinancing boom, that allowed for interest savings of thousands of dollars a year for tens of millions of homeowners. Also, to some extent the spending we saw over the last year and a half will directly depress future consumption. If someone bought a new car in 2021, they are unlikely to buy another one in 2022.

For these reasons, it is very likely that we will see a sharp slowing of consumption in 2022, which will in turn depress overall growth. But, the flip side of this slowing of consumption growth is that it should alleviate the supply chain problems that have played such a central role in driving up inflation. If the demand falls for cars, refrigerators, and other goods that people bought in large quantities in 2020 and 2021, we may see their prices fall back towards pre-pandemic levels.

We have already seen this story with televisions, where a 6.3 percent drop in prices over the last five months, has largely reversed an 8.7 percent increase between March and August of last year. We also may be seeing this story with used cars. Used car prices soared in 2020 and 2021, with the index rising by more than 50 percent between February 2020 and January 2022. However, prices began falling in February. In one private price index, by the middle of March, used car prices had fallen almost 6.0 percent from their January peak.  

If these price reversals continue, and are seen in other items that saw rapid inflation during the pandemic, then we will have much less inflation for the Fed to fight. This presumably means fewer rate hikes and less of a hit to the economy.

It is also worth noting that growth in other sectors is likely to help support the economy, even if consumption growth is weak. We are seeing a boom in housing construction, which is likely to persist, even in the face of rising interest rates. House prices have risen by more than 30 percent over the last two years, which should mean that builders can still make healthy profits even if they have to pay somewhat higher interest on the money they borrow.  

Nonresidential investment has also been strong, in spite of weakness in the construction of office buildings and other non-residential structures. And, the government sector should also be boosting growth, as the Biden infrastructure package takes effect and state and local governments spend more of the money they accumulated from the various pandemic rescue packages.  

In short, while there are real grounds for being concerned about the risk of a recession, there are also good reasons for believing that the economy can continue to grow at a healthy pace. In any case, we should keep our eyes on the forces that actually drive the economy, and not be distracted by quirky recession signals that don’t tell us anything.

There is a story of a football coach who ran running plays near the end of a game, when he clearly should have been passing. Apparently, he had seen data showing that teams that win, on average, run on a certain number of plays. His team was below this number, so he decided that he had to have more runs if his team was going to win.

This is a classic case of confusing correlation with causation. (For those not familiar with football, when a team is ahead, it generally uses running plays to take lots of time off the clock. They run because they are winning, they don’t win because they run.) This distinction is important when considering various predictions for a recession in the current environment.

There are many features of an economy that we commonly see before a recession. For example, we typically see higher prices for oil, wheat, and other commodities before a recession. We also often see an inverted yield curve, where the interest rate on short-term Treasury debt (e.g., 90-day or 2-year notes) exceed the interest rate on 10-year Treasury bonds.

We are currently seeing a serious run-up in many commodity prices. It’s very plausible that we will see an inverted yield curve in the next year or so. The question is whether this means we should be expecting a recession in the near future?

While I would not rule out a recession beginning this year or next, we have to be careful to ask about the causation and not just look for events that tend to be correlated with recessions. Neither high commodity prices nor an inverted yield curve should be sufficient grounds for believing we will see a recession.

The Problem of High Commodity Prices

Taking these in turn, the impact of high commodity prices on economic growth is ambiguous. Higher prices for gas and food (insofar as commodity prices get passed on in food prices) will take money out of households’ pockets, meaning that they have less money to spend on other things. In this way, they can be thought of as being comparable to tax increases.

However, there is a flip side to these tax increases. Higher commodity prices, especially in the case of oil, provide incentive to invest more money in the search for more oil. With the explosion of fracking in the United States, much of this investment is likely to take place here. This investment will provide a boost to demand that can partially, or even fully, offset the extent to which higher oil and gas prices reduce consumption.

There is a complicating factor in this story. The plunge in oil prices from 2014 to 2015, which took prices from over $100 a barrel to roughly $40 barrel, brought a quick end to the fracking boom. The whole industry was hard hit and many companies went bankrupt.

This history has made many companies reluctant to invest in a big way, even as oil prices again soar to over $100 a barrel. Nonetheless, the number of oil rigs is up by more than 50 percent from its year ago level, even though it is still far below the pre-recession figure. It seems likely that if oil prices stay high that we will see continued rapid growth in drilling, with the investment largely offsetting the drop in consumption due to higher gas prices.

The story with other commodities is similarly ambiguous. Higher grain prices mean higher incomes for farmers. Also, the price of grain is a relatively small factor in our food prices. (They matter much more for people in the developing world.) Most of the increase in food costs since the pandemic reflect higher shipping costs and increased profits, not a rise in grain prices.

It is also important to remember that commodity prices are hugely volatile with both upward and downward swings that are often far larger than is warranted by market fundamentals. This could be the case with sharp rise in many prices since the Russian invasion of Ukraine.

For example, much discussion of the oil market has treated as a serious possibility the complete loss to world markets of Russia’s exports of five million barrels a day. As a practical matter, that scenario is almost impossible. While the United States and some other countries are now boycotting Russian oil, most of Europe is still buying it.

However, even if the European Union were to go along with a Russian oil boycott, most of this oil would still not be lost to world markets. In all probability, many other countries, most importantly China and India would still be buying Russian oil. These countries would likely buy most of the oil that the US and EU were boycotting, presumably get a discount off the world price for their willingness to flaunt sanctions.

Since demand for oil in China and India is not going to increase to absorb the Russian oil, the Russian oil will displace oil that they are currently importing from other countries. This means that oil from Saudi Arabia, the United Arab Emirates, and other countries, that used to go to China and India, will instead be going to the EU or the United States. There clearly will be some oil lost in this story (not all oil is perfectly substitutable) but the net effect will be hugely less than the full amount of Russia’s exports.

There is a similar story with grain prices. In many places grains can be easily substituted for each other. This means that if wheat prices rise a great deal, due to the loss of production from Ukraine, people in many areas may switch to corn, rice, or other grains. This will limit the extent of the price increase in areas where people have no choice but to buy wheat.

There are many factors that can affect commodity prices over the next couple of years and it is possible that the price of oil, wheat and other commodities will rise even further. But the claims that have often been made in the media do not justify the price increases that we have seen to date.

The Inverted Yield Curve

The other recession scare story, the inverted real curve, has more foundation in reality. Most recessions in the post-World War II era have been caused by the Federal Reserve Board raising interest rates to slow the economy. A slower economy reduced job growth, which reduces inflationary pressures, by putting downward pressure on wages. The exceptions were the 2001 recession, which was caused by the collapse of the stock bubble, the 2007-09 recession which was caused by the collapse of the housing bubble, and the 2020 recession, which was the result of the pandemic.

Short-term interest rates move much more than longer term rates. If the overnight money rate, that the Fed directly controls, rises by 2.0-2.5 percentage points over the next year and a half, as is now widely expected, it is likely to far exceed the increases in longer term interest rates. This creates the possibility of an inverted yield curve, where shorter term rates exceed longer term rates.

In this situation, we may well expect to see a recession, but the key factor is the Fed’s increase in shorter term rates. The Fed’s goal in raising rates is to slow the economy. If it pushes the economy into a recession, then it will have gone too far.

We may also see an inverted yield curve in this situation, as short-term rates are pushed higher by the Fed. In addition to not rising as much as short-term rates, long-term rates may also be held down by an expectation that a recession will imply lower short-term interest rates in the future. But the inverted yield curve is not the cause of the recession. It is a phenomenon that goes along with a recession.

Will We See a Recession?

There is a real risk that in the effort to slow inflation, the Fed goes too far and pushes the economy into a recession, but this is still very far from a done deal. The economy had been growing very rapidly in the fourth quarter of 2021. It would have to slow sharply from that pace to push the economy into a recession.

That is a possible story. Rapid consumption growth was the biggest factor pushing GDP higher in the recovery. This growth was fueled in part by the pandemic checks sent out to people in the CARES Acts and the Biden recovery package, as well as the unemployment insurance supplements. These payments are now in the past. People still have more money in their bank accounts than before the pandemic, but thus far they have not spent from these savings to any substantial extent.

Higher interest rates will also directly discourage consumption of items typically bought on credit, like cars and major appliances. Higher rates also have already put an end to a refinancing boom, that allowed for interest savings of thousands of dollars a year for tens of millions of homeowners. Also, to some extent the spending we saw over the last year and a half will directly depress future consumption. If someone bought a new car in 2021, they are unlikely to buy another one in 2022.

For these reasons, it is very likely that we will see a sharp slowing of consumption in 2022, which will in turn depress overall growth. But, the flip side of this slowing of consumption growth is that it should alleviate the supply chain problems that have played such a central role in driving up inflation. If the demand falls for cars, refrigerators, and other goods that people bought in large quantities in 2020 and 2021, we may see their prices fall back towards pre-pandemic levels.

We have already seen this story with televisions, where a 6.3 percent drop in prices over the last five months, has largely reversed an 8.7 percent increase between March and August of last year. We also may be seeing this story with used cars. Used car prices soared in 2020 and 2021, with the index rising by more than 50 percent between February 2020 and January 2022. However, prices began falling in February. In one private price index, by the middle of March, used car prices had fallen almost 6.0 percent from their January peak.  

If these price reversals continue, and are seen in other items that saw rapid inflation during the pandemic, then we will have much less inflation for the Fed to fight. This presumably means fewer rate hikes and less of a hit to the economy.

It is also worth noting that growth in other sectors is likely to help support the economy, even if consumption growth is weak. We are seeing a boom in housing construction, which is likely to persist, even in the face of rising interest rates. House prices have risen by more than 30 percent over the last two years, which should mean that builders can still make healthy profits even if they have to pay somewhat higher interest on the money they borrow.  

Nonresidential investment has also been strong, in spite of weakness in the construction of office buildings and other non-residential structures. And, the government sector should also be boosting growth, as the Biden infrastructure package takes effect and state and local governments spend more of the money they accumulated from the various pandemic rescue packages.  

In short, while there are real grounds for being concerned about the risk of a recession, there are also good reasons for believing that the economy can continue to grow at a healthy pace. In any case, we should keep our eyes on the forces that actually drive the economy, and not be distracted by quirky recession signals that don’t tell us anything.

The New York Times had a piece today assessing whether we were likely to return to the pre-pandemic situation, with low inflation, low interest rates, and moderate growth. One issue it raised arguing in the opposite direction was that consumer spending has remained exceptionally strong. “And they thought consumer spending would taper off as government pandemic relief checks faded into the rearview mirror. Shoppers have kept at it.”

Actually, savings rates have been pretty much at their pre-pandemic average the last few months.

Consumption would be exceptionally strong if the saving rate had fallen below its pre-recession level, implying that people were spending based on the wealth they accumulated during the pandemic. While that could still happen, to date, there is little evidence that people are spending down their accumulated wealth to any substantial extent.

The labor market has also largely returned to its pre-pandemic state. The employment-to-population ratio for prime age workers (ages 25 to 54) is just a 1.0 percentage points below its pre-pandemic peak, a level above its average for 2018. Most of the remaining gap is easily explained by the 1.2 million people who reported that they were not in the labor force in February because they either had COVID-19, were concerned about getting it, or caring for a family member with COVID-19.

 

The New York Times had a piece today assessing whether we were likely to return to the pre-pandemic situation, with low inflation, low interest rates, and moderate growth. One issue it raised arguing in the opposite direction was that consumer spending has remained exceptionally strong. “And they thought consumer spending would taper off as government pandemic relief checks faded into the rearview mirror. Shoppers have kept at it.”

Actually, savings rates have been pretty much at their pre-pandemic average the last few months.

Consumption would be exceptionally strong if the saving rate had fallen below its pre-recession level, implying that people were spending based on the wealth they accumulated during the pandemic. While that could still happen, to date, there is little evidence that people are spending down their accumulated wealth to any substantial extent.

The labor market has also largely returned to its pre-pandemic state. The employment-to-population ratio for prime age workers (ages 25 to 54) is just a 1.0 percentage points below its pre-pandemic peak, a level above its average for 2018. Most of the remaining gap is easily explained by the 1.2 million people who reported that they were not in the labor force in February because they either had COVID-19, were concerned about getting it, or caring for a family member with COVID-19.

 

There has been much press around President Biden’s demands that China not support Russia in its invasion of Ukraine. The implication of these demands is that the United States has the ability to punish China economically in a way that imposes more pain on China than on us. That may be true for now, but it’s not clear it will be true much longer, and it may not even prove to be true at present.

It is common to refer to China as the world’s second largest economy, after the United States. However, using a purchasing power parity measure, China’s GDP actually passed US GDP in 2016. The IMF projects that it will be more than one third larger by 2026, the last year of its projection period.

Source: IMF

The purchasing power parity measure, in contrast to the more commonly cited exchange rate measure, applies a common set of prices for all the goods and services produced in both economies. Most economists view purchasing power parity measures as a better measure of the strength of an economy, since it is measuring what is actually produced. The exchange rate measure can fluctuate hugely as a country’s currency moves up or down in financial markets. It also will understate a country’s GDP if it is deliberately holding down the value of its currency.

It is worth noting that on a per capita basis China is still much poorer than the United States. It has nearly four times as many people, so its per capita GDP is still less than one-third of the per capita GDP in the United States. Nonetheless, its economic power in the world depends more on its overall GDP than its per capita GDP.

This fact means that Biden is effectively threatening an economy with a bigger GDP than the United States. Any major economic sanctions, such as a sharp reduction in imports, will have large negative effects on the US economy as well, especially in the context of an economy that is still unwinding the supply chain disruptions caused by the pandemic.

The United States would be helped in this sort of confrontation by the fact that Biden can likely count on the support of wealthy allies in Western Europe and Japan, as well as pockets elsewhere in the world. Adding in the economies of US allies, Biden can still command an economic bloc that is larger than China.

But, it is important to remember that China also has allies. This list includes major Asian countries such as Pakistan and Iran, as well as many countries throughout Africa and Latin America, who resent the way the United States and West Europe have treated them over the last two hundred years.

For now, Biden’s economic bloc is almost certainly larger than Xi’s, but that still doesn’t mean that he is better positioned to impose economic pain on China than the other way around. As best we can tell, Xi doesn’t have to worry about opposition within China, at least as long as he isn’t facing a complete economic collapse.

By contrast, we can be absolutely certain that the Republican Party will jump on every price increase and shortage that results from any sanctions imposed by Biden or Chinese counter measures. The Republican attacks will also be supported by most media outlets, who will either embrace them wholeheartedly or do a he said/she said that leaves it to their audience to determine whether economic pain is due to Biden’s inept management of the economy or his efforts to punish China. Given that the political consequences likely mean defeat in the 2022 and 2024 elections for Biden and the Democrats, it is not clear Biden has the better position in an economic confrontation with China.

Getting Beyond Russia’s Invasion

If we can envision a world after the invasion has been resolved in some manner, we will still have major choices to make on our relationship with China. There are many who would like to maintain a stance of confrontation similar to our relationship with the Soviet Union in the Cold War. That is a story that is not likely to turn out well for the United States or the world.

As noted above, China’s economy is already larger than the US economy and the gap will, in all probability, grow considerably in coming decades. This means that the story that we can build up our military and spend China into the ground, which we arguably did with the Soviet Union, simply is not plausible.

We are more likely to spend ourselves into the ground in that story. We need a different strategy. Rather than one of ongoing confrontation, we need one of selective cooperation, where we work with China where we have clear common interests.

The most obvious places where common interests exist is with climate change and health care. The United States, China, and the whole world would benefit from shared and open research in these areas, so that the whole world can quickly adopt innovations, wherever they occur.

This would imply some sort of international agreement on committing funds for research, based on countries’ size and wealth. The details of such an agreement would be contentious, but those who have failed negotiations on the Trans-Pacific Partnership and other trade deals know that negotiations on the current system of intellectual property rules are also very contentious.

There would be enormous benefits from having all new climate technologies transferred at zero cost, without the markups for government-granted patent monopolies or related protections. This should hugely accelerate the pace at which clean energy and electric cars are adopted.

There is a similar story with medical technologies. Without government-granted monopolies, nearly all drugs, vaccines and medical equipment would be cheap.[1] All but the poorest people in the world would find them affordable, and meeting the needs of the poor would be a doable task for international aid organizations.   

Protecting “Our” Intellectual Property

When I propose this route in dealing with China, I almost invariably encounter the complaint that we are giving away our intellectual property. This indicates some very serious confusion.

The intellectual property at issue does not belong to any “us,” it belongs to Bill Gates, Pfizer, and Moderna, which has created at least five billionaires since the beginning of the pandemic. In fact, our system of patents and copyrights has been a major cause of the growth in inequality over the last four decades.

It would be incredibly foolish, from a progressive perspective, if we were to confront China in order to protect this antiquated and inequitable system. Bizarrely, rather than contesting intellectual property rules that increase inequality, many are looking to regain manufacturing jobs that were lost to trade with China and other countries, in the last few decades.

This strategy is bizarre because it ignores the changes in the quality of manufacturing jobs over this period, in large part due to trade. Four decades ago, manufacturing was a heavily unionized sector. As a result, jobs in manufacturing paid considerably more than jobs in other industries.

This is no longer true. The unionization rate in manufacturing is only slightly higher than the unionization rate in the private sector as a whole. The wage premium in manufacturing has largely disappeared.

Source: Bureau of Labor Statistics.

 

If progressives were to embrace a path of confrontation with China, that has protection of intellectual property at its center, in exchange for some not especially good jobs in manufacturing, it would be a real lose-lose-lose story for anyone who cares about inequality and peace. We really should not go down that route. It is important that we can have a serious discussion on these issues now.

[1] Nondisclosure agreements, which allow companies to protect industrial secrets, would be unenforceable on publicly funded research in these areas.  

There has been much press around President Biden’s demands that China not support Russia in its invasion of Ukraine. The implication of these demands is that the United States has the ability to punish China economically in a way that imposes more pain on China than on us. That may be true for now, but it’s not clear it will be true much longer, and it may not even prove to be true at present.

It is common to refer to China as the world’s second largest economy, after the United States. However, using a purchasing power parity measure, China’s GDP actually passed US GDP in 2016. The IMF projects that it will be more than one third larger by 2026, the last year of its projection period.

Source: IMF

The purchasing power parity measure, in contrast to the more commonly cited exchange rate measure, applies a common set of prices for all the goods and services produced in both economies. Most economists view purchasing power parity measures as a better measure of the strength of an economy, since it is measuring what is actually produced. The exchange rate measure can fluctuate hugely as a country’s currency moves up or down in financial markets. It also will understate a country’s GDP if it is deliberately holding down the value of its currency.

It is worth noting that on a per capita basis China is still much poorer than the United States. It has nearly four times as many people, so its per capita GDP is still less than one-third of the per capita GDP in the United States. Nonetheless, its economic power in the world depends more on its overall GDP than its per capita GDP.

This fact means that Biden is effectively threatening an economy with a bigger GDP than the United States. Any major economic sanctions, such as a sharp reduction in imports, will have large negative effects on the US economy as well, especially in the context of an economy that is still unwinding the supply chain disruptions caused by the pandemic.

The United States would be helped in this sort of confrontation by the fact that Biden can likely count on the support of wealthy allies in Western Europe and Japan, as well as pockets elsewhere in the world. Adding in the economies of US allies, Biden can still command an economic bloc that is larger than China.

But, it is important to remember that China also has allies. This list includes major Asian countries such as Pakistan and Iran, as well as many countries throughout Africa and Latin America, who resent the way the United States and West Europe have treated them over the last two hundred years.

For now, Biden’s economic bloc is almost certainly larger than Xi’s, but that still doesn’t mean that he is better positioned to impose economic pain on China than the other way around. As best we can tell, Xi doesn’t have to worry about opposition within China, at least as long as he isn’t facing a complete economic collapse.

By contrast, we can be absolutely certain that the Republican Party will jump on every price increase and shortage that results from any sanctions imposed by Biden or Chinese counter measures. The Republican attacks will also be supported by most media outlets, who will either embrace them wholeheartedly or do a he said/she said that leaves it to their audience to determine whether economic pain is due to Biden’s inept management of the economy or his efforts to punish China. Given that the political consequences likely mean defeat in the 2022 and 2024 elections for Biden and the Democrats, it is not clear Biden has the better position in an economic confrontation with China.

Getting Beyond Russia’s Invasion

If we can envision a world after the invasion has been resolved in some manner, we will still have major choices to make on our relationship with China. There are many who would like to maintain a stance of confrontation similar to our relationship with the Soviet Union in the Cold War. That is a story that is not likely to turn out well for the United States or the world.

As noted above, China’s economy is already larger than the US economy and the gap will, in all probability, grow considerably in coming decades. This means that the story that we can build up our military and spend China into the ground, which we arguably did with the Soviet Union, simply is not plausible.

We are more likely to spend ourselves into the ground in that story. We need a different strategy. Rather than one of ongoing confrontation, we need one of selective cooperation, where we work with China where we have clear common interests.

The most obvious places where common interests exist is with climate change and health care. The United States, China, and the whole world would benefit from shared and open research in these areas, so that the whole world can quickly adopt innovations, wherever they occur.

This would imply some sort of international agreement on committing funds for research, based on countries’ size and wealth. The details of such an agreement would be contentious, but those who have failed negotiations on the Trans-Pacific Partnership and other trade deals know that negotiations on the current system of intellectual property rules are also very contentious.

There would be enormous benefits from having all new climate technologies transferred at zero cost, without the markups for government-granted patent monopolies or related protections. This should hugely accelerate the pace at which clean energy and electric cars are adopted.

There is a similar story with medical technologies. Without government-granted monopolies, nearly all drugs, vaccines and medical equipment would be cheap.[1] All but the poorest people in the world would find them affordable, and meeting the needs of the poor would be a doable task for international aid organizations.   

Protecting “Our” Intellectual Property

When I propose this route in dealing with China, I almost invariably encounter the complaint that we are giving away our intellectual property. This indicates some very serious confusion.

The intellectual property at issue does not belong to any “us,” it belongs to Bill Gates, Pfizer, and Moderna, which has created at least five billionaires since the beginning of the pandemic. In fact, our system of patents and copyrights has been a major cause of the growth in inequality over the last four decades.

It would be incredibly foolish, from a progressive perspective, if we were to confront China in order to protect this antiquated and inequitable system. Bizarrely, rather than contesting intellectual property rules that increase inequality, many are looking to regain manufacturing jobs that were lost to trade with China and other countries, in the last few decades.

This strategy is bizarre because it ignores the changes in the quality of manufacturing jobs over this period, in large part due to trade. Four decades ago, manufacturing was a heavily unionized sector. As a result, jobs in manufacturing paid considerably more than jobs in other industries.

This is no longer true. The unionization rate in manufacturing is only slightly higher than the unionization rate in the private sector as a whole. The wage premium in manufacturing has largely disappeared.

Source: Bureau of Labor Statistics.

 

If progressives were to embrace a path of confrontation with China, that has protection of intellectual property at its center, in exchange for some not especially good jobs in manufacturing, it would be a real lose-lose-lose story for anyone who cares about inequality and peace. We really should not go down that route. It is important that we can have a serious discussion on these issues now.

[1] Nondisclosure agreements, which allow companies to protect industrial secrets, would be unenforceable on publicly funded research in these areas.  

The debate over inflation has taken a bizarre twist in the last couple of weeks. Russia’s invasion of Ukraine, and the threat of much of its oil being removed from world markets, has sent the price of oil and other commodities soaring. In addition, a new outbreak of COVID-19 in China has led to shutdowns in many of the country’s major manufacturing plants. This means that supply chain problems are likely to persist longer in the future than many of us have expected.

In addition to being bad news for the people of Ukraine and those infected in China, these events are also bad news for the US economy. They mean that inflationary pressures in many sectors will persist for some time into the future, and possibly get worse.

Bizarrely, these events also seem to have produced a new round of “I told you so’s” from the inflation hawks. I’m not quite sure what the hawks think they told us in this story.

If they forecast the war in Ukraine, they deserve credit for their perceptive understanding of international relations. If they recognized both, that the virus would mutate into new strains, and that China would maintain its zero COVID-19 policy, they were more on top of matters than most of our epidemiologists. But I’m not sure what this has to do with the claim that Biden’s stimulus would lead to runaway inflation.

Even if there had been no stimulus package, the threat of Russia’s oil being withdrawn from world markets would have led to a sharp surge in the price of oil. Similarly, losing a substantial quantity of imported products and parts from China would lead to shortages and production disruptions whether or not Congress had passed Biden’s stimulus.

As many of us have repeatedly pointed out, almost all wealthy countries have seen big jumps in their inflation rates, even though their economies were not boosted by Biden’s stimulus package. In the United Kingdom, the central bank now expects its inflation rate to cross 8.0 percent. Perhaps the inflation hawks want to blame this on Biden’s stimulus as well, but that really doesn’t pass the laugh test.

There will be serious economic fallout from the war in Ukraine, as well as future waves of the pandemic. We will need to find effective ways to deal with these problems. However, sharp increases in interest rates by the Fed are not a cure to either problem. They may be able to reduce inflation, by pushing the unemployment rate higher, and thereby pushing down workers’ wages, but most would likely view this as a solution that is worse than the problem.

We should look for ways to address the prospect of less oil on world markets, such as paying individuals and countries to use less oil. We also should look to better ways to contain the pandemic, first and foremost by getting the world vaccinated.

But throwing millions out of work, to drive down the wages of tens of millions, is not a clever way to deal with these problems.

The debate over inflation has taken a bizarre twist in the last couple of weeks. Russia’s invasion of Ukraine, and the threat of much of its oil being removed from world markets, has sent the price of oil and other commodities soaring. In addition, a new outbreak of COVID-19 in China has led to shutdowns in many of the country’s major manufacturing plants. This means that supply chain problems are likely to persist longer in the future than many of us have expected.

In addition to being bad news for the people of Ukraine and those infected in China, these events are also bad news for the US economy. They mean that inflationary pressures in many sectors will persist for some time into the future, and possibly get worse.

Bizarrely, these events also seem to have produced a new round of “I told you so’s” from the inflation hawks. I’m not quite sure what the hawks think they told us in this story.

If they forecast the war in Ukraine, they deserve credit for their perceptive understanding of international relations. If they recognized both, that the virus would mutate into new strains, and that China would maintain its zero COVID-19 policy, they were more on top of matters than most of our epidemiologists. But I’m not sure what this has to do with the claim that Biden’s stimulus would lead to runaway inflation.

Even if there had been no stimulus package, the threat of Russia’s oil being withdrawn from world markets would have led to a sharp surge in the price of oil. Similarly, losing a substantial quantity of imported products and parts from China would lead to shortages and production disruptions whether or not Congress had passed Biden’s stimulus.

As many of us have repeatedly pointed out, almost all wealthy countries have seen big jumps in their inflation rates, even though their economies were not boosted by Biden’s stimulus package. In the United Kingdom, the central bank now expects its inflation rate to cross 8.0 percent. Perhaps the inflation hawks want to blame this on Biden’s stimulus as well, but that really doesn’t pass the laugh test.

There will be serious economic fallout from the war in Ukraine, as well as future waves of the pandemic. We will need to find effective ways to deal with these problems. However, sharp increases in interest rates by the Fed are not a cure to either problem. They may be able to reduce inflation, by pushing the unemployment rate higher, and thereby pushing down workers’ wages, but most would likely view this as a solution that is worse than the problem.

We should look for ways to address the prospect of less oil on world markets, such as paying individuals and countries to use less oil. We also should look to better ways to contain the pandemic, first and foremost by getting the world vaccinated.

But throwing millions out of work, to drive down the wages of tens of millions, is not a clever way to deal with these problems.

(This post contains corrections to three minimum wage articles published in January 2020, July 2020, February 4, 2021, and August 2021.)

It’s not just prominent Harvard professors who make Excel spreadsheet errors. I managed to do it myself a couple of years ago. I wrote a post that calculated the minimum wage would have been over $24 an hour in 2020 if it had kept pace with productivity growth since its real value peaked in 1968. That error was repeated in a later post in 2020 and contributed to a calculation error of $26 an hour in a 2021 post.

The point made in these posts was that the minimum wage had in fact risen in step with productivity growth from 1938, when the national minimum wage was first established, until 1968. Since 1968, the minimum wage has not even kept pace with inflation. The post argued that it is not unreasonable to imagine a world where the minimum wage had kept pace with productivity over the last 54 years, even if changes in the structure of the economy mean that this would not be possible in the immediate future.

Anyhow, it turns out my calculation was wrong. My friend, Josh Bivens, the research director at the Economic Policy Institute, was doing his own calculation and came up with a considerably lower number. After checking my own calculations, I discovered the spreadsheet error. When I corrected the error, I came up with $21.50 as a year-round average for the productivity adjusted minimum wage in 2020 and $23 in 2021.

I’m not happy that I got the number wrong. CEPR prides itself on getting numbers right, but I’m glad that Josh caught the error and that I can correct it now. At least it did not become the centerpiece in the case for global austerity that cost millions of workers their jobs.

(This post contains corrections to three minimum wage articles published in January 2020, July 2020, February 4, 2021, and August 2021.)

It’s not just prominent Harvard professors who make Excel spreadsheet errors. I managed to do it myself a couple of years ago. I wrote a post that calculated the minimum wage would have been over $24 an hour in 2020 if it had kept pace with productivity growth since its real value peaked in 1968. That error was repeated in a later post in 2020 and contributed to a calculation error of $26 an hour in a 2021 post.

The point made in these posts was that the minimum wage had in fact risen in step with productivity growth from 1938, when the national minimum wage was first established, until 1968. Since 1968, the minimum wage has not even kept pace with inflation. The post argued that it is not unreasonable to imagine a world where the minimum wage had kept pace with productivity over the last 54 years, even if changes in the structure of the economy mean that this would not be possible in the immediate future.

Anyhow, it turns out my calculation was wrong. My friend, Josh Bivens, the research director at the Economic Policy Institute, was doing his own calculation and came up with a considerably lower number. After checking my own calculations, I discovered the spreadsheet error. When I corrected the error, I came up with $21.50 as a year-round average for the productivity adjusted minimum wage in 2020 and $23 in 2021.

I’m not happy that I got the number wrong. CEPR prides itself on getting numbers right, but I’m glad that Josh caught the error and that I can correct it now. At least it did not become the centerpiece in the case for global austerity that cost millions of workers their jobs.

With bad news on oil prices, and a new wave of COVID-19 shutdowns in China, the inflation hawks are getting really excited. After all, higher oil prices and further supply disruptions are sure to add to the inflation the economy is already seeing. I guess they were right with their warnings.

Okay, let’s get back to Planet Earth. The large stimulus package that President Biden pushed through last year undoubtedly added to inflation in the economy, but it also quickly got the economy back to something close to full employment. If we had not had a big package, maybe the inflation rate would be a couple points lower, but the unemployment rate might be closer to 5.8 percent, rather than the 3.8 percent reported for February.

The point that many of us keep making is that most of the inflation we have seen over the last year was due to the reopening from the pandemic, not the stimulus package. A simple picture makes this point well. Inflation jumped pretty much everywhere across the OECD.

The rise in the United States was somewhat higher than average, but not hugely so. And countries like Spain and Belgium, which did not have huge stimulus packages, actually have higher rates of inflation.

So, what about the current issue with surging oil prices and new supply disruptions in China? First, the jump in oil prices associated with the war in Ukraine is likely not as bad as previously advertised. The big risk for oil prices was the withdrawal of Russia’s oil from world markets, which could result either from European sanctions or a unilateral decision by Russia to stop exporting its oil.

Neither of these scenarios seems very plausible. Europe doesn’t seem likely to join the U.S. sanctions on Russian oil, but even if it did, Russia’s oil would not disappear from world markets. Russia would look to sell its oil to China, India, and other countries not imposing sanctions. The oil that these countries would have otherwise been importing from Middle East or elsewhere, would instead be available to Europe and the United States.

There clearly would be costs associated with this sort of reshuffling, but nothing close to the costs of losing Russia’s exports of five million barrels a day. The markets seem to have figured this out, as oil prices have plunged by more than thirty dollars from their peak last week.

The other big source of higher inflation is the new round of COVID-19 shutdowns in China. These shutdowns have hit several cities that are major sources of exports of a wide variety of manufactured goods. This will worsen the supply chain problems we have been seeing over the last year. It’s clearly not good news for the economy (and obviously bad news for the people in China getting COVID-19).

Anyhow, the question that all of us, including the Fed, should be asking, is whether these stories would be better if Biden had not boosted the economy and we still had something like a 5.8 percent unemployment rate? It’s hard to see how the answer to that question is yes.

The price of oil is determined on the world market. If Russia’s exports were withdrawn from the market, slightly lower demand from the United States would make very little difference. We still would be looking at a big jump in oil prices.

The same applies to the COVID-19 shutdowns in China. Would the pandemic not be spreading there if Biden hadn’t passed his stimulus package? We would still be facing pretty much the same supply chain problems even if the unemployment rate were 5.8 percent.

In short, the inflation hawks may be enjoying a victory lap, but the facts don’t support their case. We are seeing higher inflation primarily because of factors that have nothing to do with Biden’s stimulus package. We would not be better off if we faced slightly lower inflation with another 3 million people out of work.

With bad news on oil prices, and a new wave of COVID-19 shutdowns in China, the inflation hawks are getting really excited. After all, higher oil prices and further supply disruptions are sure to add to the inflation the economy is already seeing. I guess they were right with their warnings.

Okay, let’s get back to Planet Earth. The large stimulus package that President Biden pushed through last year undoubtedly added to inflation in the economy, but it also quickly got the economy back to something close to full employment. If we had not had a big package, maybe the inflation rate would be a couple points lower, but the unemployment rate might be closer to 5.8 percent, rather than the 3.8 percent reported for February.

The point that many of us keep making is that most of the inflation we have seen over the last year was due to the reopening from the pandemic, not the stimulus package. A simple picture makes this point well. Inflation jumped pretty much everywhere across the OECD.

The rise in the United States was somewhat higher than average, but not hugely so. And countries like Spain and Belgium, which did not have huge stimulus packages, actually have higher rates of inflation.

So, what about the current issue with surging oil prices and new supply disruptions in China? First, the jump in oil prices associated with the war in Ukraine is likely not as bad as previously advertised. The big risk for oil prices was the withdrawal of Russia’s oil from world markets, which could result either from European sanctions or a unilateral decision by Russia to stop exporting its oil.

Neither of these scenarios seems very plausible. Europe doesn’t seem likely to join the U.S. sanctions on Russian oil, but even if it did, Russia’s oil would not disappear from world markets. Russia would look to sell its oil to China, India, and other countries not imposing sanctions. The oil that these countries would have otherwise been importing from Middle East or elsewhere, would instead be available to Europe and the United States.

There clearly would be costs associated with this sort of reshuffling, but nothing close to the costs of losing Russia’s exports of five million barrels a day. The markets seem to have figured this out, as oil prices have plunged by more than thirty dollars from their peak last week.

The other big source of higher inflation is the new round of COVID-19 shutdowns in China. These shutdowns have hit several cities that are major sources of exports of a wide variety of manufactured goods. This will worsen the supply chain problems we have been seeing over the last year. It’s clearly not good news for the economy (and obviously bad news for the people in China getting COVID-19).

Anyhow, the question that all of us, including the Fed, should be asking, is whether these stories would be better if Biden had not boosted the economy and we still had something like a 5.8 percent unemployment rate? It’s hard to see how the answer to that question is yes.

The price of oil is determined on the world market. If Russia’s exports were withdrawn from the market, slightly lower demand from the United States would make very little difference. We still would be looking at a big jump in oil prices.

The same applies to the COVID-19 shutdowns in China. Would the pandemic not be spreading there if Biden hadn’t passed his stimulus package? We would still be facing pretty much the same supply chain problems even if the unemployment rate were 5.8 percent.

In short, the inflation hawks may be enjoying a victory lap, but the facts don’t support their case. We are seeing higher inflation primarily because of factors that have nothing to do with Biden’s stimulus package. We would not be better off if we faced slightly lower inflation with another 3 million people out of work.

The jump in the Consumer Price Index (CPI) we saw in February was bad news. The overall CPI rose by 0.8 percent for the month, while the core rate increased 0.5 percent. This brought the year-over-year inflation rate to 7.9 percent overall and 6.4 percent in the core.

However, the report was disappointing even beyond the bottom line numbers. Many of us have been banking on the idea that we would soon see a reversal in the prices of items where prices have been driven up by supply chain issues. The idea is that if a clogged supply chain was responsible for the rise in prices, then prices should come back down when the supply chain becomes unclogged.

But, I’ve been saying this for a while, prices in most areas have not started to come down. In fact, the prices of many of these items are continuing to rise. After being flat in January, new vehicle prices rose by 0.3 percent in February, bringing their increase since the pandemic began to 13.7 percent. Apparel prices rose by 0.7 percent for the month and are now up 6.6 percent over the last year. The price of appliances also went up 0.7 percent, bringing their rise since the pandemic began to 15.2 percent.

So, should Jerome Powell put on his Paul Volcker outfit and push interest rates through the roof? I would argue that, while modest rate hikes are appropriate, it is too soon to bring out the heavy artillery.

Why I Still Believe Inflation Will Fall

There are three main reasons why inflation is likely to be falling in the months ahead. Just to be clear, I’m focusing on monthly rates of inflation, not year-over-year rates. We don’t know how to change the past.

A Shift in Income Shares Back from Profits to Wages

In the 1970s inflation, there was a very plausible story of a wage-price spiral where companies were raising prices in response to higher wages to protect their profit margins. Profit shares were in fact lower than in the 1960s.

The opposite has happened in the pandemic. The profit share of national income for 2021 was 1.1 percentage points higher than in 2020, this is an 8.5 percent increase in the profit share. There is a plausible explanation for this rise in the context of shortages faced during the pandemic. Higher prices ration excess demand. But if we envision that the shortages will end at some point, it is reasonable to believe that this shift from wages to profits will be reversed, unless we think that conditions of competition in the economy have been permanently changed as a result of the pandemic.

This issue gets to the claim that monopoly power has been a major factor in the inflation we have seen in the last year. If companies have been able to take advantage of the pandemic to use their market power to increase their profits, then we may expect that the profit share will stay near its current level. By contrast, if we think that prices rose in the pandemic because of real shortages, and not especially due to market power, then we would expect the profit share to fall back to the pre-pandemic level when the shortages are alleviated.

There are two points worth noting here. First, overall demand in the economy is not out of line with longer term trends. Real personal consumption expenditures in January were 4.6 percent higher than in January of 2019. This translates into growth of 2.3 percent annually. That is a level of demand that the economy should be easily able to meet without the disruptions of the pandemic.

The major problem in meeting demand has been a shift in consumption from services to goods. Goods consumption was 16.9 percent higher in January than two years ago, and durable goods consumption was 24.3 percent higher. By contrast, consumption of services was still 0.8 percent lower than in January of 2019. The basic story is that the pandemic prevented people from spending money on restaurants, travel, and other services. Instead they bought cars, new refrigerators, and other types of goods.

This created strains on the production and delivery systems that we would have not seen if demand had been more balanced. (This is the distinction between blaming “supply chains” as opposed to simply too much demand.) These strains are likely to be alleviated as demand shifts back to services and the manufacturing and distribution networks are able to work through bottlenecks. It also helps that companies will not have to deal with widespread absences due to illness if the pandemic remains relatively contained.

Therefore, it is still reasonable to believe that the strains on supply chains will be alleviated in the not too distant future. (I know, I said that last fall too.) If we believe that our manufacturing and distribution systems have not been permanently damaged by the pandemic, we should be able to meet future demand without excessive strains on our production networks. That should mean prices falling in many areas.

Just to repeat an example I have used before, the price of apparel is up 6.6 percent from its year ago level. The vast majority of the apparel we buy is imported. The index for imported apparel prices (which does not include shipping costs) has risen by less than 2.0 percent over the last year. This implies that most of the jump in apparel prices is due to higher shipping costs. If our supply system gets back to normal, we should expect shipping costs to decline, and presumably domestic apparel prices will fall back in line with import prices. This is a story that we are likely to see with cars, refrigerators, and a wide variety of other items.

The other item worth noting is that beef prices are up 23.9 percent from February 2020 to February 2022. This is striking because demand for beef has fallen back to pre-pandemic levels. This jump is clearly not due to excessive demand for beef. (Demand had risen sharply in 2020 as people stopped going to restaurants and bought more food at home. Real restaurant spending is now slightly above its pre-pandemic level.)  

The continued high price of beef reflects either continuing problems in the supply chain, which are raising shipping costs, or a change in the state of competition in the industry. If it’s the former, we should expect beef prices to come down over the course of the year. In the latter case, high beef prices may persist, unless stronger antitrust measures are taken.  

Productivity Growth

We have seen an uptick in productivity growth the last three years, with growth averaging 2.3 percent annually since the fourth quarter of 2018, compared to a rate of just 0.8 percent over the prior eight years. This is the opposite of the 1970s, where we saw productivity growth fall from an average of 2.5 percent over the prior quarter century to just 1.0 percent in the years from 1973 to 1980.

In the seventies, workers had been accustomed to seeing real wage growth roughly in line with productivity growth. Real wage growth in excess of 2.0 percent annually was no longer possible in an economy with annual productivity growth of just 1.0 percent. This was a major factor in the wage-price spiral we saw in the decade.

At present, we are seeing the opposite story. The increase in productivity growth means that workers can see real wage growth in excess of 2.0 percent annually, without causing inflation. This is in effect the flip side of the shift from wages to profits over the last two years. Real wages have risen in this period, but by far less than the increase in productivity. This leaves plenty of room for real wages to rise without a corresponding increase in prices.

Predictions of productivity growth have a terrible track record, so I won’t try to put forward any here. I will say that there are reasons for believing the uptick seen in the last three years could continue.

First, many companies have been forced to find ways to be more efficient, since they often couldn’t get the workers they needed, and faced major disruptions due to pandemic restrictions. The restaurant industry provides an obvious example. Its real output in the fourth quarter of 2021 was more than 2.0 percent higher than in the fourth quarter of 2019, even though the index of hours worked in the industry was more than 7.0 percent lower.

In the same way that restaurants have been able to find ways to serve more meals with fewer workers, other industries are developing new methods of doing business. We are seeing more use of online services and new technology that can enable businesses to be more efficient. Replacing business travel with Zoom meetings is probably the most obvious and important example of this sort of gain.

It’s also important to realize that many of the gains will not be picked up in conventional measures of GDP and productivity. The increased frequency of work from home is the biggest source of such gains. Workers are seeing tens of billions in savings on work-related expenses, such as commuting, business clothes, and dry cleaning. This is in addition to the hundreds of millions of hours saved commuting.

There are gains in other areas as well. The use of telemedicine has exploded in the pandemic. This not only saves the costs of traveling to and from health care providers, but also the distress that people in poor health may experience from having to endure what can be a difficult trip for them.

Similarly, the spread of online car retailers, which save people from having to endure a trip to a dealership, can be a large gain in well-being for many people. This also would not be picked in measures of GDP or productivity.

These are just some prominent examples of innovations that are taking place across the economy. They provide reason to believe that the uptick in productivity growth over the last three years may continue, but best guesses on productivity growth have proved wrong in the past, so we can’t take faster productivity growth for granted.

Slowing Nominal Wage Growth

The final reason that we don’t seem likely to see the sort of wage-price spiral we had in the 1970s is that wage growth appears to be moderating. It would be foolish to make too much of one month’s data, but the average hourly wage was flat in February. The year-over-year increase in the average hourly wage was 5.1 percent, down from a peak of 5.5 percent in January and 5.4 percent in October.

There has been a sharper slowing in some of lower paying industries that had seen the sharpest gains. For example, the year-over-year wage gains for production and nonsupervisory workers in restaurants were 14.3 percent in February, down from 16.6 percent in December.

Given how erratic the wage data are, especially with the complication of the composition effect from the pandemic shutdowns (it depressed wage growth a great deal in the middle of 2021, less so in more recent months), it would be wrong to make much of this modest evidence of a slowdown in wage growth. However, we do not seem to be seeing evidence of accelerating wage growth, which would be the story of a wage-price spiral.  

As many of us have argued previously, it is unlikely that we will see the sort of wage-price spiral we saw in the seventies because of changes in the structure of the labor market. In the 1970s, more than 20 percent of the private sector workforce was unionized. Now, it’s just over 6.0 percent.

We also have a much more globalized economy. This makes its difficult to have sharply higher inflation rates in the United States than in our trading partners. If the price of cars, steel, and other items produced in the United States rises much more than the price of the same items produced Germany, Japan, and China, then we will import much more and buy less of domestically produced goods. That would put serious downward pressure on prices and wages.

A fall in the dollar against the value of other currencies will offset differences in inflation rates. However, contrary to what many inflation hawks predicted, the dollar rose over the last year (even before the Russian invasion of Ukraine). This is clearly inconsistent with the wage-price spiral story.

Conclusion: Don’t Panic Over Inflation

High rates of inflation have definitely persisted for longer than I expected. I still don’t think there is cause for panic about the sort of high and rising inflation we saw in the 1970s.

It is reasonable for the Federal Reserve Board to start on a path of moderate rate hikes. The economy is clearly near full employment, so measures aimed at slowing the pace of economic and job growth are appropriate. At the same time, it does not make sense to try to jack up the rate of unemployment to slow wage and price growth.

It’s worth asking what conditions might be the cause for more concern. First, if we saw more instances like the beef industry, where demand has returned to pre-pandemic levels, but prices remain hugely above pre-pandemic levels. I don’t expect prices to fall back fully to pre-pandemic levels, but if we see supply chain problems resolved, we should see a substantial movement in that direction.

Similarly, if we see a further shift toward profit shares, it would be very concerning. This means both that workers are not getting their share of the gains of economic growth, and also that prices are becoming detached from costs.

If we do see this shift, it would be a strong argument for more aggressive antitrust measures. There already is a strong case, but a further shift to profits would mean that monopoly power is a key source of inflation. We also need to remember that profit data are erratic and subject to large revisions, so one or two quarters of data may not be telling us an accurate story.

Finally, if nominal wage growth accelerates, we should be concerned. It’s great to see workers getting wage gains, but if we see hourly wage growth approach double-digits, it virtually guarantees inflation rates that are uncomfortably high.

In short, there are real grounds for being concerned about the inflation we have been seeing, but we have a long way to go before seeing a 1970s wage-price spiral.   

 

The jump in the Consumer Price Index (CPI) we saw in February was bad news. The overall CPI rose by 0.8 percent for the month, while the core rate increased 0.5 percent. This brought the year-over-year inflation rate to 7.9 percent overall and 6.4 percent in the core.

However, the report was disappointing even beyond the bottom line numbers. Many of us have been banking on the idea that we would soon see a reversal in the prices of items where prices have been driven up by supply chain issues. The idea is that if a clogged supply chain was responsible for the rise in prices, then prices should come back down when the supply chain becomes unclogged.

But, I’ve been saying this for a while, prices in most areas have not started to come down. In fact, the prices of many of these items are continuing to rise. After being flat in January, new vehicle prices rose by 0.3 percent in February, bringing their increase since the pandemic began to 13.7 percent. Apparel prices rose by 0.7 percent for the month and are now up 6.6 percent over the last year. The price of appliances also went up 0.7 percent, bringing their rise since the pandemic began to 15.2 percent.

So, should Jerome Powell put on his Paul Volcker outfit and push interest rates through the roof? I would argue that, while modest rate hikes are appropriate, it is too soon to bring out the heavy artillery.

Why I Still Believe Inflation Will Fall

There are three main reasons why inflation is likely to be falling in the months ahead. Just to be clear, I’m focusing on monthly rates of inflation, not year-over-year rates. We don’t know how to change the past.

A Shift in Income Shares Back from Profits to Wages

In the 1970s inflation, there was a very plausible story of a wage-price spiral where companies were raising prices in response to higher wages to protect their profit margins. Profit shares were in fact lower than in the 1960s.

The opposite has happened in the pandemic. The profit share of national income for 2021 was 1.1 percentage points higher than in 2020, this is an 8.5 percent increase in the profit share. There is a plausible explanation for this rise in the context of shortages faced during the pandemic. Higher prices ration excess demand. But if we envision that the shortages will end at some point, it is reasonable to believe that this shift from wages to profits will be reversed, unless we think that conditions of competition in the economy have been permanently changed as a result of the pandemic.

This issue gets to the claim that monopoly power has been a major factor in the inflation we have seen in the last year. If companies have been able to take advantage of the pandemic to use their market power to increase their profits, then we may expect that the profit share will stay near its current level. By contrast, if we think that prices rose in the pandemic because of real shortages, and not especially due to market power, then we would expect the profit share to fall back to the pre-pandemic level when the shortages are alleviated.

There are two points worth noting here. First, overall demand in the economy is not out of line with longer term trends. Real personal consumption expenditures in January were 4.6 percent higher than in January of 2019. This translates into growth of 2.3 percent annually. That is a level of demand that the economy should be easily able to meet without the disruptions of the pandemic.

The major problem in meeting demand has been a shift in consumption from services to goods. Goods consumption was 16.9 percent higher in January than two years ago, and durable goods consumption was 24.3 percent higher. By contrast, consumption of services was still 0.8 percent lower than in January of 2019. The basic story is that the pandemic prevented people from spending money on restaurants, travel, and other services. Instead they bought cars, new refrigerators, and other types of goods.

This created strains on the production and delivery systems that we would have not seen if demand had been more balanced. (This is the distinction between blaming “supply chains” as opposed to simply too much demand.) These strains are likely to be alleviated as demand shifts back to services and the manufacturing and distribution networks are able to work through bottlenecks. It also helps that companies will not have to deal with widespread absences due to illness if the pandemic remains relatively contained.

Therefore, it is still reasonable to believe that the strains on supply chains will be alleviated in the not too distant future. (I know, I said that last fall too.) If we believe that our manufacturing and distribution systems have not been permanently damaged by the pandemic, we should be able to meet future demand without excessive strains on our production networks. That should mean prices falling in many areas.

Just to repeat an example I have used before, the price of apparel is up 6.6 percent from its year ago level. The vast majority of the apparel we buy is imported. The index for imported apparel prices (which does not include shipping costs) has risen by less than 2.0 percent over the last year. This implies that most of the jump in apparel prices is due to higher shipping costs. If our supply system gets back to normal, we should expect shipping costs to decline, and presumably domestic apparel prices will fall back in line with import prices. This is a story that we are likely to see with cars, refrigerators, and a wide variety of other items.

The other item worth noting is that beef prices are up 23.9 percent from February 2020 to February 2022. This is striking because demand for beef has fallen back to pre-pandemic levels. This jump is clearly not due to excessive demand for beef. (Demand had risen sharply in 2020 as people stopped going to restaurants and bought more food at home. Real restaurant spending is now slightly above its pre-pandemic level.)  

The continued high price of beef reflects either continuing problems in the supply chain, which are raising shipping costs, or a change in the state of competition in the industry. If it’s the former, we should expect beef prices to come down over the course of the year. In the latter case, high beef prices may persist, unless stronger antitrust measures are taken.  

Productivity Growth

We have seen an uptick in productivity growth the last three years, with growth averaging 2.3 percent annually since the fourth quarter of 2018, compared to a rate of just 0.8 percent over the prior eight years. This is the opposite of the 1970s, where we saw productivity growth fall from an average of 2.5 percent over the prior quarter century to just 1.0 percent in the years from 1973 to 1980.

In the seventies, workers had been accustomed to seeing real wage growth roughly in line with productivity growth. Real wage growth in excess of 2.0 percent annually was no longer possible in an economy with annual productivity growth of just 1.0 percent. This was a major factor in the wage-price spiral we saw in the decade.

At present, we are seeing the opposite story. The increase in productivity growth means that workers can see real wage growth in excess of 2.0 percent annually, without causing inflation. This is in effect the flip side of the shift from wages to profits over the last two years. Real wages have risen in this period, but by far less than the increase in productivity. This leaves plenty of room for real wages to rise without a corresponding increase in prices.

Predictions of productivity growth have a terrible track record, so I won’t try to put forward any here. I will say that there are reasons for believing the uptick seen in the last three years could continue.

First, many companies have been forced to find ways to be more efficient, since they often couldn’t get the workers they needed, and faced major disruptions due to pandemic restrictions. The restaurant industry provides an obvious example. Its real output in the fourth quarter of 2021 was more than 2.0 percent higher than in the fourth quarter of 2019, even though the index of hours worked in the industry was more than 7.0 percent lower.

In the same way that restaurants have been able to find ways to serve more meals with fewer workers, other industries are developing new methods of doing business. We are seeing more use of online services and new technology that can enable businesses to be more efficient. Replacing business travel with Zoom meetings is probably the most obvious and important example of this sort of gain.

It’s also important to realize that many of the gains will not be picked up in conventional measures of GDP and productivity. The increased frequency of work from home is the biggest source of such gains. Workers are seeing tens of billions in savings on work-related expenses, such as commuting, business clothes, and dry cleaning. This is in addition to the hundreds of millions of hours saved commuting.

There are gains in other areas as well. The use of telemedicine has exploded in the pandemic. This not only saves the costs of traveling to and from health care providers, but also the distress that people in poor health may experience from having to endure what can be a difficult trip for them.

Similarly, the spread of online car retailers, which save people from having to endure a trip to a dealership, can be a large gain in well-being for many people. This also would not be picked in measures of GDP or productivity.

These are just some prominent examples of innovations that are taking place across the economy. They provide reason to believe that the uptick in productivity growth over the last three years may continue, but best guesses on productivity growth have proved wrong in the past, so we can’t take faster productivity growth for granted.

Slowing Nominal Wage Growth

The final reason that we don’t seem likely to see the sort of wage-price spiral we had in the 1970s is that wage growth appears to be moderating. It would be foolish to make too much of one month’s data, but the average hourly wage was flat in February. The year-over-year increase in the average hourly wage was 5.1 percent, down from a peak of 5.5 percent in January and 5.4 percent in October.

There has been a sharper slowing in some of lower paying industries that had seen the sharpest gains. For example, the year-over-year wage gains for production and nonsupervisory workers in restaurants were 14.3 percent in February, down from 16.6 percent in December.

Given how erratic the wage data are, especially with the complication of the composition effect from the pandemic shutdowns (it depressed wage growth a great deal in the middle of 2021, less so in more recent months), it would be wrong to make much of this modest evidence of a slowdown in wage growth. However, we do not seem to be seeing evidence of accelerating wage growth, which would be the story of a wage-price spiral.  

As many of us have argued previously, it is unlikely that we will see the sort of wage-price spiral we saw in the seventies because of changes in the structure of the labor market. In the 1970s, more than 20 percent of the private sector workforce was unionized. Now, it’s just over 6.0 percent.

We also have a much more globalized economy. This makes its difficult to have sharply higher inflation rates in the United States than in our trading partners. If the price of cars, steel, and other items produced in the United States rises much more than the price of the same items produced Germany, Japan, and China, then we will import much more and buy less of domestically produced goods. That would put serious downward pressure on prices and wages.

A fall in the dollar against the value of other currencies will offset differences in inflation rates. However, contrary to what many inflation hawks predicted, the dollar rose over the last year (even before the Russian invasion of Ukraine). This is clearly inconsistent with the wage-price spiral story.

Conclusion: Don’t Panic Over Inflation

High rates of inflation have definitely persisted for longer than I expected. I still don’t think there is cause for panic about the sort of high and rising inflation we saw in the 1970s.

It is reasonable for the Federal Reserve Board to start on a path of moderate rate hikes. The economy is clearly near full employment, so measures aimed at slowing the pace of economic and job growth are appropriate. At the same time, it does not make sense to try to jack up the rate of unemployment to slow wage and price growth.

It’s worth asking what conditions might be the cause for more concern. First, if we saw more instances like the beef industry, where demand has returned to pre-pandemic levels, but prices remain hugely above pre-pandemic levels. I don’t expect prices to fall back fully to pre-pandemic levels, but if we see supply chain problems resolved, we should see a substantial movement in that direction.

Similarly, if we see a further shift toward profit shares, it would be very concerning. This means both that workers are not getting their share of the gains of economic growth, and also that prices are becoming detached from costs.

If we do see this shift, it would be a strong argument for more aggressive antitrust measures. There already is a strong case, but a further shift to profits would mean that monopoly power is a key source of inflation. We also need to remember that profit data are erratic and subject to large revisions, so one or two quarters of data may not be telling us an accurate story.

Finally, if nominal wage growth accelerates, we should be concerned. It’s great to see workers getting wage gains, but if we see hourly wage growth approach double-digits, it virtually guarantees inflation rates that are uncomfortably high.

In short, there are real grounds for being concerned about the inflation we have been seeing, but we have a long way to go before seeing a 1970s wage-price spiral.   

 

In an article about the difficulty the Biden administration faces in getting more funding to deal with the pandemic, the NYT told readers:

“At issue is whether the White House has provided the level of detail desired by Republicans about the trillions of dollars in Covid relief spending that Congress previously authorized.”

Unless the NYT’s reporters have mind reading capabilities, they don’t know what level of detail Republicans desire, they know what they are requesting. It would be good if they would restrict themselves to reporting on what politicians say and do, not what they think.

In an article about the difficulty the Biden administration faces in getting more funding to deal with the pandemic, the NYT told readers:

“At issue is whether the White House has provided the level of detail desired by Republicans about the trillions of dollars in Covid relief spending that Congress previously authorized.”

Unless the NYT’s reporters have mind reading capabilities, they don’t know what level of detail Republicans desire, they know what they are requesting. It would be good if they would restrict themselves to reporting on what politicians say and do, not what they think.

Sanctions

The Opera Singer and the Sanctions

The decision of the New York Metropolitan Opera to not host Russian opera singer Anna Netrebko, unless she explicitly repudiates Vladimir Putin, has received a great deal of attention. The issue is whether it is appropriate to effectively sanction artistic performers and athletes over the decision by Putin to invade Ukraine.  

This may be an easier call in the case of Netrebko than some others, since it seems that she has associated with Putin repeatedly, and her career was advanced by this association. But the issue arises with performing artists and athletes more generally. After all, they weren’t involved in Putin’s decision to attack Ukraine, why should they be punished for Putin’s murderous attack on a neighboring country?

That is a good question, but it extends far more widely than the big-name stars who have largely been the focus. The sanctions that the U.S. is imposing on Russia will lead to hardship for tens of millions of people in Russia. Millions of ordinary workers will lose their jobs. These are mostly people who do things like working in restaurants and hotels, retail stores and factories. They will likely find it difficult to pay their rent, buy food, and afford other necessities of life.

Sanctions are a reasonable response to Putin’s invasion, but we should not imagine that there will not innocent victims. Some of these will be the star performers and athletes who will be excluded from much of the world.

But for every one of these stars whose case may get written up in the New York Times there are tens of thousands of retail clerks and factory workers who lose their job because of sanctions. These people deserve our sympathy at least as much as the highly paid international stars. In any case, it is important to remember that sanctions do have collateral damage, even if they may be an effective way to punish Putin for his invasion.  

The decision of the New York Metropolitan Opera to not host Russian opera singer Anna Netrebko, unless she explicitly repudiates Vladimir Putin, has received a great deal of attention. The issue is whether it is appropriate to effectively sanction artistic performers and athletes over the decision by Putin to invade Ukraine.  

This may be an easier call in the case of Netrebko than some others, since it seems that she has associated with Putin repeatedly, and her career was advanced by this association. But the issue arises with performing artists and athletes more generally. After all, they weren’t involved in Putin’s decision to attack Ukraine, why should they be punished for Putin’s murderous attack on a neighboring country?

That is a good question, but it extends far more widely than the big-name stars who have largely been the focus. The sanctions that the U.S. is imposing on Russia will lead to hardship for tens of millions of people in Russia. Millions of ordinary workers will lose their jobs. These are mostly people who do things like working in restaurants and hotels, retail stores and factories. They will likely find it difficult to pay their rent, buy food, and afford other necessities of life.

Sanctions are a reasonable response to Putin’s invasion, but we should not imagine that there will not innocent victims. Some of these will be the star performers and athletes who will be excluded from much of the world.

But for every one of these stars whose case may get written up in the New York Times there are tens of thousands of retail clerks and factory workers who lose their job because of sanctions. These people deserve our sympathy at least as much as the highly paid international stars. In any case, it is important to remember that sanctions do have collateral damage, even if they may be an effective way to punish Putin for his invasion.  

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