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.

It was very frustrating to read Noam Scheiber’s profile of Jaz Brisack, the person who led the first successful union organizing drive at a Starbucks. Brisack does sound like a very impressive person and it is good to see her getting the attention her efforts warrant. However, Scheiber ruins the story by repeatedly telling readers that the neoliberals, who have dominated political debate in recent decades, want a free market. Nothing could be further from the truth.

I will start the indictment with their support of intellectual property. Government-granted patent and copyright monopolies transfer many hundred billion dollars annually from the rest of us to the top 10 percent, and especially the top one percent. Bill Gates would still be working for a living if the government didn’t threaten to arrest anyone who made copies of Microsoft software without his permission.

Then we have “free trade.” The neoliberals made it a top priority to make it as easy as possible to bring in cheap manufactured goods from developing countries. This cost millions of manufacturing jobs, and put downward pressure on the pay of noncollege educated workers more generally.

By contrast, if you talk to most neoliberals about removing the barriers that make it difficult for foreign doctors to practice in the United States, or other highly paid professionals, most suddenly get really stupid, like they don’t know what “free trade” is. Neoliberals have been happy to lower the trade barriers that protect the wages of less-educated workers, but then it comes to the barriers that support the pay of people like them, they are the most protectionist people around.

The financial sector is another example. When people buy clothes or food in most places they pay a sales tax. But that’s not the case for purchases of financial assets. Suppose we ended the special treatment for the financial sector and imposed a very modest 0.1 percent on sales of stock and other financial assets. This would radically reduce the incomes of many very rich Wall Street types, while having a minimal impact on the ability of the financial sector to carry through its productive purposes.

It is also not the free market to give Facebook and other social media behemoths Section 230 protection against defamation suits that print and broadcast outlets don’t enjoy. Mark Zuckerberg and other Facebook insiders would be much poorer without this protection, but we would be moving towards a free market by taking it away.

I could go on (see Rigged [it’s free]) but the point should be clear. Neoliberal types are just fine with all sorts of government interventions that redistribute income upward. They just get upset when the government intervenes in ways that redistributes from those on top to the rest of us.

It is understandable that neoliberals would like to be seen as big advocates of the free market. After all, it sounds much better to say that you favor a free market than to see that you favor redistributing from the poor and working class to the rich and very rich.

But the neoliberals self-description is not accurate, and people like Scheiber should not be repeating it. Neoliberals need to be exposed for who they really are.  

It was very frustrating to read Noam Scheiber’s profile of Jaz Brisack, the person who led the first successful union organizing drive at a Starbucks. Brisack does sound like a very impressive person and it is good to see her getting the attention her efforts warrant. However, Scheiber ruins the story by repeatedly telling readers that the neoliberals, who have dominated political debate in recent decades, want a free market. Nothing could be further from the truth.

I will start the indictment with their support of intellectual property. Government-granted patent and copyright monopolies transfer many hundred billion dollars annually from the rest of us to the top 10 percent, and especially the top one percent. Bill Gates would still be working for a living if the government didn’t threaten to arrest anyone who made copies of Microsoft software without his permission.

Then we have “free trade.” The neoliberals made it a top priority to make it as easy as possible to bring in cheap manufactured goods from developing countries. This cost millions of manufacturing jobs, and put downward pressure on the pay of noncollege educated workers more generally.

By contrast, if you talk to most neoliberals about removing the barriers that make it difficult for foreign doctors to practice in the United States, or other highly paid professionals, most suddenly get really stupid, like they don’t know what “free trade” is. Neoliberals have been happy to lower the trade barriers that protect the wages of less-educated workers, but then it comes to the barriers that support the pay of people like them, they are the most protectionist people around.

The financial sector is another example. When people buy clothes or food in most places they pay a sales tax. But that’s not the case for purchases of financial assets. Suppose we ended the special treatment for the financial sector and imposed a very modest 0.1 percent on sales of stock and other financial assets. This would radically reduce the incomes of many very rich Wall Street types, while having a minimal impact on the ability of the financial sector to carry through its productive purposes.

It is also not the free market to give Facebook and other social media behemoths Section 230 protection against defamation suits that print and broadcast outlets don’t enjoy. Mark Zuckerberg and other Facebook insiders would be much poorer without this protection, but we would be moving towards a free market by taking it away.

I could go on (see Rigged [it’s free]) but the point should be clear. Neoliberal types are just fine with all sorts of government interventions that redistribute income upward. They just get upset when the government intervenes in ways that redistributes from those on top to the rest of us.

It is understandable that neoliberals would like to be seen as big advocates of the free market. After all, it sounds much better to say that you favor a free market than to see that you favor redistributing from the poor and working class to the rich and very rich.

But the neoliberals self-description is not accurate, and people like Scheiber should not be repeating it. Neoliberals need to be exposed for who they really are.  

The media look to be switching rapidly from their full-fledged inflation hysteria to recession hysteria. The Washington Post is leading the pack with an article headlined, “Americans are starting to pull back on travel and restaurants.”

The one clear substantive item in the piece supporting the headline is the drop in retail spending the Commerce Department reported for May. However, the May retail sales report actually showed restaurant spending was up 0.7 percent for the month.

But the highlight of the piece is a chart headlined “Spending on services is declining faster than it is for goods.” The chart shows year-over-year increases in spending on services and goods based on data from Barclay’s Research. Spending on goods is shown to be up year-over-year by around 10.0 percent in January, rising to 13 percent in March and then falling back to a 9.0 percent year-over-year increase by June. In contrast, service spending is shown to be up by more than 30 percent in January, with the size of the year-over-year increase declining so sharply that it is just over 15.0 percent in the June data.

I don’t know how Barclay’s Research calculates these figures, but there are two obvious points here. First, the comparison year is 2021. At the start of the year, few people were vaccinated, which meant that most people were reluctant to go to restaurants or use other in person services. By June of 2021, most of the people who wanted to be vaccinated were vaccinated, so we began to see the shift back to services that has continued ever since. Therefore, it is not surprising that the year-over-year change would be lower in June than in January, even if there was no recession on the horizon.

The more important point is that these year-over-year increases are still huge. Even adjusting for inflation over the last year, these data still imply very large increases in consumer spending. They don’t point to a recession.

If Washington Post reporters and editors had access to the Washington Post, they would know that the Federal Reserve Board was ostensibly worried about the economy growing too rapidly, thereby triggering inflation. The data in this column are more supportive of the too rapid growth story than the recession story it’s trying to push on readers.

 

The media look to be switching rapidly from their full-fledged inflation hysteria to recession hysteria. The Washington Post is leading the pack with an article headlined, “Americans are starting to pull back on travel and restaurants.”

The one clear substantive item in the piece supporting the headline is the drop in retail spending the Commerce Department reported for May. However, the May retail sales report actually showed restaurant spending was up 0.7 percent for the month.

But the highlight of the piece is a chart headlined “Spending on services is declining faster than it is for goods.” The chart shows year-over-year increases in spending on services and goods based on data from Barclay’s Research. Spending on goods is shown to be up year-over-year by around 10.0 percent in January, rising to 13 percent in March and then falling back to a 9.0 percent year-over-year increase by June. In contrast, service spending is shown to be up by more than 30 percent in January, with the size of the year-over-year increase declining so sharply that it is just over 15.0 percent in the June data.

I don’t know how Barclay’s Research calculates these figures, but there are two obvious points here. First, the comparison year is 2021. At the start of the year, few people were vaccinated, which meant that most people were reluctant to go to restaurants or use other in person services. By June of 2021, most of the people who wanted to be vaccinated were vaccinated, so we began to see the shift back to services that has continued ever since. Therefore, it is not surprising that the year-over-year change would be lower in June than in January, even if there was no recession on the horizon.

The more important point is that these year-over-year increases are still huge. Even adjusting for inflation over the last year, these data still imply very large increases in consumer spending. They don’t point to a recession.

If Washington Post reporters and editors had access to the Washington Post, they would know that the Federal Reserve Board was ostensibly worried about the economy growing too rapidly, thereby triggering inflation. The data in this column are more supportive of the too rapid growth story than the recession story it’s trying to push on readers.

 

That may seem a strange question, given that the network packs its shows with Never Trump Republicans, but yesterday’s big rate hike by the Fed is a clear warning. The issue here is the network’s coverage of the economy, which has been inflation, inflation, inflation 24-7.

There is no doubt that inflation is a real problem. Higher prices for gas, food, rent, and other items has taken a big bite out of many families’ paychecks. It certainly warrants serious attention from CNN and the rest of the media.

But inflation is not the whole story of the economy. We also have an unemployment rate that is near 50-year low. That is a really big deal, because the vast majority of families work for most of their income.

And, a low unemployment rate is not just an issue of a few million people going from being unemployed to having jobs, as the highly paid pundits tell us. Over six million people lose or leave their job every month. That would come to more than 70 million over the course of a year, although many of these workers change jobs multiple times.

However, the point is that the state of the labor market matters hugely to large segments of the population, not just the relatively small number of people who transition from being unemployed to having job. And, in a strong labor market, tens of millions of workers feel empowered to leave a job that doesn’t pay well, has bad conditions, offer few opportunities for advancement, or where the boss is a jerk. This is a really big deal that has been almost completely missed in the 24-7 inflation, inflation, inflation coverage.

Of course, CNN does not have that large an audience, so its coverage really doesn’t matter very much in the overall picture. Unfortunately, inflation, inflation, inflation seems to be the theme of economic coverage pretty much everywhere. The gas stations in California advertising record high prices seem to be a required destination for reporters. Undoubtedly, many gas stations now plan price hikes to get publicity on national TV.

All of this could be dismissed as a silly joke, except it has real world consequences. Yesterday, Federal Reserve Board Chair Jerome Powell had a press conference after announcing the Fed’s 75 basis point rate hike, the largest in almost three decades. He said that one motivation for the big rate hike is that consumers had started expecting higher rates of inflation.

Surveys of consumer confidence have started to indicate that people are now beginning to think that inflation will persist for long into the future. Powell said that he raised rates to convince people that this will not be the case.

Now people obviously don’t need the media to tell them that gas prices and food prices are up. They see this when they buy gas or go to the supermarket. But, when it comes to their expectations of future inflation, it is likely that the media’s reporting does play a big role.

After all, most people are probably not sitting down with economic models projecting future inflation based on interest rates, unemployment, and other economic data. If they hear inflation 24-7, then they are more likely to think it is a persistent problem than if they got a fuller picture of the economy.

The fact that Chair Powell is now explicitly looking at the public’s perception of inflation when making his interest rate decisions, means that the media’s reporting is now directly influencing Fed policy. There is big risk that Powell and the Fed will go overboard with their rate hikes and push the economy into a recession.

That is a really big deal, since a recession will mean that millions of people will lose their job. It will also mean that we have a very bad labor market, where people cannot easily quit bad jobs for better ones.

And, this gets us to putting Donald Trump back in the White House. When it comes to the election in 2024, many more swing voters are likely to cast their ballot on the state of the economy than on preserving democracy. That means that by pushing the Fed to needlessly bring on a recession, the Never Trumper gang at CNN will have played a huge role in getting Trump back in the White House.

Oh well, no one ever said these folks were very politically astute.

That may seem a strange question, given that the network packs its shows with Never Trump Republicans, but yesterday’s big rate hike by the Fed is a clear warning. The issue here is the network’s coverage of the economy, which has been inflation, inflation, inflation 24-7.

There is no doubt that inflation is a real problem. Higher prices for gas, food, rent, and other items has taken a big bite out of many families’ paychecks. It certainly warrants serious attention from CNN and the rest of the media.

But inflation is not the whole story of the economy. We also have an unemployment rate that is near 50-year low. That is a really big deal, because the vast majority of families work for most of their income.

And, a low unemployment rate is not just an issue of a few million people going from being unemployed to having jobs, as the highly paid pundits tell us. Over six million people lose or leave their job every month. That would come to more than 70 million over the course of a year, although many of these workers change jobs multiple times.

However, the point is that the state of the labor market matters hugely to large segments of the population, not just the relatively small number of people who transition from being unemployed to having job. And, in a strong labor market, tens of millions of workers feel empowered to leave a job that doesn’t pay well, has bad conditions, offer few opportunities for advancement, or where the boss is a jerk. This is a really big deal that has been almost completely missed in the 24-7 inflation, inflation, inflation coverage.

Of course, CNN does not have that large an audience, so its coverage really doesn’t matter very much in the overall picture. Unfortunately, inflation, inflation, inflation seems to be the theme of economic coverage pretty much everywhere. The gas stations in California advertising record high prices seem to be a required destination for reporters. Undoubtedly, many gas stations now plan price hikes to get publicity on national TV.

All of this could be dismissed as a silly joke, except it has real world consequences. Yesterday, Federal Reserve Board Chair Jerome Powell had a press conference after announcing the Fed’s 75 basis point rate hike, the largest in almost three decades. He said that one motivation for the big rate hike is that consumers had started expecting higher rates of inflation.

Surveys of consumer confidence have started to indicate that people are now beginning to think that inflation will persist for long into the future. Powell said that he raised rates to convince people that this will not be the case.

Now people obviously don’t need the media to tell them that gas prices and food prices are up. They see this when they buy gas or go to the supermarket. But, when it comes to their expectations of future inflation, it is likely that the media’s reporting does play a big role.

After all, most people are probably not sitting down with economic models projecting future inflation based on interest rates, unemployment, and other economic data. If they hear inflation 24-7, then they are more likely to think it is a persistent problem than if they got a fuller picture of the economy.

The fact that Chair Powell is now explicitly looking at the public’s perception of inflation when making his interest rate decisions, means that the media’s reporting is now directly influencing Fed policy. There is big risk that Powell and the Fed will go overboard with their rate hikes and push the economy into a recession.

That is a really big deal, since a recession will mean that millions of people will lose their job. It will also mean that we have a very bad labor market, where people cannot easily quit bad jobs for better ones.

And, this gets us to putting Donald Trump back in the White House. When it comes to the election in 2024, many more swing voters are likely to cast their ballot on the state of the economy than on preserving democracy. That means that by pushing the Fed to needlessly bring on a recession, the Never Trumper gang at CNN will have played a huge role in getting Trump back in the White House.

Oh well, no one ever said these folks were very politically astute.

That’s the question millions are asking, or hopefully at least the folks at the Fed making decisions on interest rates. Ostensibly, the Fed is concerned that the economy is too strong and that we are either on the edge, or already stuck in, the sort of wage-price spiral that led to double digit inflation back in the 1970s. The story back then was that higher prices led workers to demand higher wages, which in turn raised costs and pushed prices still higher.

The Fed has begun to raise interest rates to head off this risk. There are many who are urging the Fed to raise rates faster than they have thus far planned, claiming that we are already in this dangerous spiral.

The problem with that story is that, rather than spiraling upward, wage growth has actually been slowing in recent months. The chart below shows the annualized rate of growth in the average hourly wage. The calculation is based on three-month averages, where it annualizes the rate of growth between three-month periods

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

As can be seen, the rate of wage growth has slowed sharply this year.[1] After peaking at an annual rate of 6.1 percent between the three-month periods centered on September and December of last year, it has slowed to an annualized rate of just 4.4 in the three-month periods centered on January and April of this year.

This is only a percentage point higher than the pre-pandemic rate of wage growth, a period in which the inflation rate was consistently below the Fed’s 2.0 percent target. More importantly, the direction of change has clearly been towards slower wage growth. It is very hard to see how we get a wage price spiral when the rate of wage growth is slowing.

To be clear, it is not good to see workers’ wages falling behind inflation. The main villains here are the Ukraine war-related jump in energy and food price, as well as the supply chain issues, which seem to finally be getting resolved.

If some sort of peace deal, or at least cease-fire, can be arranged in Ukraine, presumably most of the recent rise in energy and food prices will be reversed. If not, it would be good to have some tax and transfer system so that low- and middle-income people can be compensated for the hit to their living standards.

In any case, the pattern of wage-growth we are seeing is clearly not consistent with a wage-price spiral story. The Fed would be making a bad mistake if it raises rates as though it were responding to one.     

[1] As has been widely noted, the growth rate of the hourly wage is affected by the changing composition of the workforce. When workers in low-paying jobs in sectors, like restaurants and hotels, go back to work, it reduces the measured increase in wage-growth. This would have been more of a factor in the fall, when we were adding close to 600,000 jobs a month, than in more recent months when the rate of job growth has been closer to 400,000.    

That’s the question millions are asking, or hopefully at least the folks at the Fed making decisions on interest rates. Ostensibly, the Fed is concerned that the economy is too strong and that we are either on the edge, or already stuck in, the sort of wage-price spiral that led to double digit inflation back in the 1970s. The story back then was that higher prices led workers to demand higher wages, which in turn raised costs and pushed prices still higher.

The Fed has begun to raise interest rates to head off this risk. There are many who are urging the Fed to raise rates faster than they have thus far planned, claiming that we are already in this dangerous spiral.

The problem with that story is that, rather than spiraling upward, wage growth has actually been slowing in recent months. The chart below shows the annualized rate of growth in the average hourly wage. The calculation is based on three-month averages, where it annualizes the rate of growth between three-month periods

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

As can be seen, the rate of wage growth has slowed sharply this year.[1] After peaking at an annual rate of 6.1 percent between the three-month periods centered on September and December of last year, it has slowed to an annualized rate of just 4.4 in the three-month periods centered on January and April of this year.

This is only a percentage point higher than the pre-pandemic rate of wage growth, a period in which the inflation rate was consistently below the Fed’s 2.0 percent target. More importantly, the direction of change has clearly been towards slower wage growth. It is very hard to see how we get a wage price spiral when the rate of wage growth is slowing.

To be clear, it is not good to see workers’ wages falling behind inflation. The main villains here are the Ukraine war-related jump in energy and food price, as well as the supply chain issues, which seem to finally be getting resolved.

If some sort of peace deal, or at least cease-fire, can be arranged in Ukraine, presumably most of the recent rise in energy and food prices will be reversed. If not, it would be good to have some tax and transfer system so that low- and middle-income people can be compensated for the hit to their living standards.

In any case, the pattern of wage-growth we are seeing is clearly not consistent with a wage-price spiral story. The Fed would be making a bad mistake if it raises rates as though it were responding to one.     

[1] As has been widely noted, the growth rate of the hourly wage is affected by the changing composition of the workforce. When workers in low-paying jobs in sectors, like restaurants and hotels, go back to work, it reduces the measured increase in wage-growth. This would have been more of a factor in the fall, when we were adding close to 600,000 jobs a month, than in more recent months when the rate of job growth has been closer to 400,000.    

I was very disappointed with Ezra Klein’s NYT interview with Bhaskar Sunkara, in large part because I have a high opinion of Sunkara, the founder of Jacobin and now the president of The Nation. My main disappointment stems from his non-answer to one of the main questions raised by Klein.

Klein asked why the Democrats, and other liberal/left parties around the world, rely largely on more educated people for their support, while more working-class types have turned to the right. Socialists had historically envisioned socialism as the agenda of the working class, not college-educated professionals.

Sunkara gave an answer that put the blame on the decline in unions, which is undoubtedly a big part of the story. But the answer clearly goes beyond this.

Liberal/left parties around the world in recent decades, have not only often supported policies that weakened unions, but they have also supported policies that directly redistribute money from the traditional working class to people with more education, you know, the ones carrying the flame of socialism.

My favorite example here is government-granted patent and copyright monopolies. As I have pointed out endlessly, hundreds of billions of dollars annually, quite possibly over a trillion (5 percent of GDP, more than the military budget), are transferred from the public as a whole, to the people in a position to benefit from these monopolies.  

If not for these government-granted monopolies, Bill Gates would likely still be working for a living. But the beneficiaries go far beyond the very rich. The labor of millions of people, with education in a wide variety of areas, is made far more valuable because of these monopolies, which have been made longer and stronger in the last four decades.

Since intellectuals thrive on making really silly arguments, let me be clear. I am sure that almost no working-class type decides they will not support the Democrats in the United States, or Socialists in France, or Social Democrats in Germany because these parties support patent and copyright monopolies.

Their reason for opposing these parties is that they see lots of people who have benefitted from the way the economy has been restructured over the last four decades, and they know that they have been losers in that deal. It is not surprising that they would not like the people who have benefitted from upward redistribution at their expense, even if they have very little understanding of the processes involved.

As I have pointed out in Rigged [it’s free], the policies causing upward redistribution go beyond just patent and copyright monopolies. The concept of “free trade” has become a sacred cause for many of these left-liberal parties, but this concept almost never extends to the work of highly paid professionals like doctors, dentists, and lawyers. While they view it as very important to drive down the pay of autoworkers by making it as easy as possible to import cars and parts from countries with low-paid manufacturing workers, there is very little interest in removing the barriers that prevent qualified doctors from India or Mexico from working in the United States.

Most of these left-liberal parties have acquiesced in, if not actively supported, the growth of a bloated financial sector that is a massive drag on the productive economy. To be clear, we need a financial sector to facilitate transactions and to allocate capital, but when the size of this sector increases five-fold relative to the rest of the economy, without any obvious improvement in services (are your investments more secure today than they were in 1970?), that is waste. And, the beneficiaries of this waste are overwhelmingly more educated people who land plush jobs in the financial sector.

I can go on with more policies (how big would Facebook be without Section 230 protection?, what market mechanism limits the pay of CEOs and other top executives?) that have had the effect of redistributing income from working-class types to college-educated people in recent decades, but the point should be clear. College-educated people have benefited from a wide range of policies that have taken money from the working class.

Incredibly, Sunkara seems to have zero appreciation of this fact. He wants to redistribute through social democratic tax and transfer policies, which is great, but the working class would not be wrong to think that this looks like pie in the sky. We have not seen great progress in advancing the welfare state in the last four decades, especially in the United States.

Marx very explicitly looked at how income was distributed in the production process. He got many things wrong, but I thought this was an approach that most self-described socialists still followed. Apparently, that is not the case, and that is a big disappointment.  

I was very disappointed with Ezra Klein’s NYT interview with Bhaskar Sunkara, in large part because I have a high opinion of Sunkara, the founder of Jacobin and now the president of The Nation. My main disappointment stems from his non-answer to one of the main questions raised by Klein.

Klein asked why the Democrats, and other liberal/left parties around the world, rely largely on more educated people for their support, while more working-class types have turned to the right. Socialists had historically envisioned socialism as the agenda of the working class, not college-educated professionals.

Sunkara gave an answer that put the blame on the decline in unions, which is undoubtedly a big part of the story. But the answer clearly goes beyond this.

Liberal/left parties around the world in recent decades, have not only often supported policies that weakened unions, but they have also supported policies that directly redistribute money from the traditional working class to people with more education, you know, the ones carrying the flame of socialism.

My favorite example here is government-granted patent and copyright monopolies. As I have pointed out endlessly, hundreds of billions of dollars annually, quite possibly over a trillion (5 percent of GDP, more than the military budget), are transferred from the public as a whole, to the people in a position to benefit from these monopolies.  

If not for these government-granted monopolies, Bill Gates would likely still be working for a living. But the beneficiaries go far beyond the very rich. The labor of millions of people, with education in a wide variety of areas, is made far more valuable because of these monopolies, which have been made longer and stronger in the last four decades.

Since intellectuals thrive on making really silly arguments, let me be clear. I am sure that almost no working-class type decides they will not support the Democrats in the United States, or Socialists in France, or Social Democrats in Germany because these parties support patent and copyright monopolies.

Their reason for opposing these parties is that they see lots of people who have benefitted from the way the economy has been restructured over the last four decades, and they know that they have been losers in that deal. It is not surprising that they would not like the people who have benefitted from upward redistribution at their expense, even if they have very little understanding of the processes involved.

As I have pointed out in Rigged [it’s free], the policies causing upward redistribution go beyond just patent and copyright monopolies. The concept of “free trade” has become a sacred cause for many of these left-liberal parties, but this concept almost never extends to the work of highly paid professionals like doctors, dentists, and lawyers. While they view it as very important to drive down the pay of autoworkers by making it as easy as possible to import cars and parts from countries with low-paid manufacturing workers, there is very little interest in removing the barriers that prevent qualified doctors from India or Mexico from working in the United States.

Most of these left-liberal parties have acquiesced in, if not actively supported, the growth of a bloated financial sector that is a massive drag on the productive economy. To be clear, we need a financial sector to facilitate transactions and to allocate capital, but when the size of this sector increases five-fold relative to the rest of the economy, without any obvious improvement in services (are your investments more secure today than they were in 1970?), that is waste. And, the beneficiaries of this waste are overwhelmingly more educated people who land plush jobs in the financial sector.

I can go on with more policies (how big would Facebook be without Section 230 protection?, what market mechanism limits the pay of CEOs and other top executives?) that have had the effect of redistributing income from working-class types to college-educated people in recent decades, but the point should be clear. College-educated people have benefited from a wide range of policies that have taken money from the working class.

Incredibly, Sunkara seems to have zero appreciation of this fact. He wants to redistribute through social democratic tax and transfer policies, which is great, but the working class would not be wrong to think that this looks like pie in the sky. We have not seen great progress in advancing the welfare state in the last four decades, especially in the United States.

Marx very explicitly looked at how income was distributed in the production process. He got many things wrong, but I thought this was an approach that most self-described socialists still followed. Apparently, that is not the case, and that is a big disappointment.  

The May Consumer Price Index showed sharp jumps in both the overall and core rates of inflation. The overall CPI rose by 1.0 percent, bringing its increase over the last year to 8.6 percent. The core index increased 0.6 percent, putting the year-over-year rate in the core at 6.0 percent. Both readings were higher than many of us had expected.

Starting with the bad news in the non-core, energy prices rose by 3.9 percent in May, bringing their increase over the last year to 34.6 percent. This is a Ukraine war story. While some Russian oil has been withdrawn from world markets due to sanctions, the bigger issue is the fear that either more aggressive sanctions or some unexpected actions from the war itself could lead to much larger losses of oil.

If the situation in Ukraine at least stabilizes, then some of the speculative fears will ease, presumably leading to a drop in world oil prices. A cease fire would be an even better story, but this would require Russia and Ukraine both accepting that major military gains are unlikely given the balance of forces. It’s not clear that either side is near this view at present.

World oil production is increasing at a modest pace, and with the world economy slowing, this should put some downward pressure on prices in the months ahead, barring major new developments with the Ukraine war. That could mean that oil and gas prices drift downward, albeit from very high levels.

There is a similar story with food prices, with the price of wheat and other grains soaring following the Russian invasion of Ukraine. Here also, a cease fire, or at least an arrangement to allow Ukrainian grain to reach world markets, could make a big difference.

There is at least some good news with some of the food items that had seen sharp price increases earlier in the recovery. The price of beef fell 0.7 percent in May, after falling 0.9 percent in April. One of the explanations given for high beef prices was soaring shipping costs and shortages of trucks and drivers. As these pressure points ease, we can expect some reversal of recent price hikes. (This is not happening with milk prices, which rose 2.8 percent in May, and are up 15.9 percent over the last year.)

The Mixed Picture in the Core

Some of the bad news in the core was expected, but some was a surprise, at least to me. Tops in the expected category were the 0.6 percent rises in rent and owners’ equivalent rent, bringing their year-over-year increases to 5.2 percent and 5.1 percent, respectively. Rental inflation had been picking up, driven in part by much sharper increases in home sale prices. Also, indexes measuring market rents (units that change hands) had been increasing much faster than the CPI rent measures.

This is likely to be a peak monthly rate as the inflation rates shown in the market rent measures have slowed. Also, the jump in mortgage rates has led to a quick turn in the housing market. The number of purchase mortgage applications is now running about 15 percent below year-ago levels. This is likely to mean that many families that would have moved up to larger units, or bought second homes, will instead stay where they are, freeing up space for other buyers or renters.

Also, we are likely to see a sharp uptick in the rate of housing completions, which will increase supply. While starts have risen from a 1.3 million annual rate before the pandemic to 1.8 million in recent months, completions remain near 1.3 million. This presumably reflects supply chain issues that are now being resolved. As one measure, lumber prices are now less than half of the peaks hit in March.  

At the top of the list of the unexpected bad news was the sharp increases in new and used vehicle prices. The major auto manufacturers have been saying that they have largely overcome the supply chain problems that sent prices soaring last year. Nonetheless, new vehicle prices rose 1.0 percent in May and are up 12.6 percent over the year.

Used vehicle prices, which actually had fallen the prior three months, rose 1.8 percent in May, bringing their increase over the last year to 16.1 percent. Together, new and used vehicles added 0.11 percentage points to the May inflation rate, and 0.14 percentage points to the core rate.

Another surprising increase in May, was the 0.7 percent rise in apparel prices. They are now up 5.0 percent over the last year. Apparel prices had fallen 0.8 percent in April, and many retailers were reporting gluts of some items, forcing sharp markdowns. These will presumably be reflected in the June CPI data.

On the positive side, appliances did show the sort of price decline that some of us have been expecting for a while. Appliance prices had been relatively stable before the pandemic, but rose sharply last year due to supply chain problems. The index fell by 0.7 percent in May after dropping 0.5 percent in April. Appliance prices are still up 6.4 percent year-over-year.

With many retailers now having excessive inventories, appliance pries may follow the same path as televisions. After rising sharply last year, television prices have been falling since September. They dropped 3.0 percent in May and are now down 9.5 percent year-over-year. If the price path for appliances, and other items that faced supply chain issues, follows the path of televisions, it will be a serious factor dampening inflation going forward.

There was also some good news with medical care services. Inflation in medical care services moderated to 0.4 percent in May, down from 0.6 percent in March and 0.5 percent in April. Half of this rise was due to a 2.0 percent jump in the index for health care insurance. This is good news both because the direction of change is downward, and also because medical care has a much larger weight in the Personal Consumption Expenditure deflator than in the PCE.

Are We Seeing a Wage-Price Spiral?

It’s pretty hard to be happy about the May CPI report. It’s bad news by almost any measure. It means lower real wages for workers and is another big piece of uncertainty in an economy shaking from both the pandemic and the war. But the big fear is whether we now destined for a wage-price spiral of the sort we saw in the 1970s, which the Fed might use a massive recession to rein in.

As I’ve been saying for close to a year, there are reasons for believing the high inflation we are now seeing is temporary. Yes, I obviously have been wrong so far and may be again. On the other hand, there were big non-economic factors that I hadn’t anticipated, like the delta variant, the omicron variant, and the war in Ukraine.

Anyhow, the positive news in this picture, which I am not altogether happy to say, is that we are not seeing the wage side of the wage-price spiral. Rather than accelerating to keep pace with inflation, wage growth has actually been slowing.

The annualized rates of growth in the average hourly wage comparing three-month periods (December 2021, January, February 2022) to (March-May 2022) was just 4.4 percent. That is down sharply from a peak annual rate of 6.1 percent in the period between August-October 2021 and November 2021-January 2022.[1] This is going in the wrong direction for a wage-price spiral.

To be clear, it is not a good story that workers’ wages are falling so much behind inflation, but if the remedy for treating inflation is double-digit unemployment (the Volcker method) then it is probably better to have slower wage growth now. If it turns out that the factors driving inflation, and especially food and energy prices, are temporary, then wages can considerably outpace inflation, even at the current rate of wage growth, when these price increases are reversed.  

Anyhow, I expect to see more price reversals soon, but that has been the case for a while. The buildup of inventories, reported both by the Commerce Department, and a topic of compliant in corporate profit calls, indicate that we will be seeing more price drops like what we have been seeing with televisions and appliances. The food and energy story will depend largely on the course of the war in Ukraine. But, I remain optimistic that the worst of inflation is behind us.

 

 

 

[1] The effect of changing composition should have done more to depress wage-growth last fall than this spring, since we were adding jobs at a far more rapid rate last fall.

 

The May Consumer Price Index showed sharp jumps in both the overall and core rates of inflation. The overall CPI rose by 1.0 percent, bringing its increase over the last year to 8.6 percent. The core index increased 0.6 percent, putting the year-over-year rate in the core at 6.0 percent. Both readings were higher than many of us had expected.

Starting with the bad news in the non-core, energy prices rose by 3.9 percent in May, bringing their increase over the last year to 34.6 percent. This is a Ukraine war story. While some Russian oil has been withdrawn from world markets due to sanctions, the bigger issue is the fear that either more aggressive sanctions or some unexpected actions from the war itself could lead to much larger losses of oil.

If the situation in Ukraine at least stabilizes, then some of the speculative fears will ease, presumably leading to a drop in world oil prices. A cease fire would be an even better story, but this would require Russia and Ukraine both accepting that major military gains are unlikely given the balance of forces. It’s not clear that either side is near this view at present.

World oil production is increasing at a modest pace, and with the world economy slowing, this should put some downward pressure on prices in the months ahead, barring major new developments with the Ukraine war. That could mean that oil and gas prices drift downward, albeit from very high levels.

There is a similar story with food prices, with the price of wheat and other grains soaring following the Russian invasion of Ukraine. Here also, a cease fire, or at least an arrangement to allow Ukrainian grain to reach world markets, could make a big difference.

There is at least some good news with some of the food items that had seen sharp price increases earlier in the recovery. The price of beef fell 0.7 percent in May, after falling 0.9 percent in April. One of the explanations given for high beef prices was soaring shipping costs and shortages of trucks and drivers. As these pressure points ease, we can expect some reversal of recent price hikes. (This is not happening with milk prices, which rose 2.8 percent in May, and are up 15.9 percent over the last year.)

The Mixed Picture in the Core

Some of the bad news in the core was expected, but some was a surprise, at least to me. Tops in the expected category were the 0.6 percent rises in rent and owners’ equivalent rent, bringing their year-over-year increases to 5.2 percent and 5.1 percent, respectively. Rental inflation had been picking up, driven in part by much sharper increases in home sale prices. Also, indexes measuring market rents (units that change hands) had been increasing much faster than the CPI rent measures.

This is likely to be a peak monthly rate as the inflation rates shown in the market rent measures have slowed. Also, the jump in mortgage rates has led to a quick turn in the housing market. The number of purchase mortgage applications is now running about 15 percent below year-ago levels. This is likely to mean that many families that would have moved up to larger units, or bought second homes, will instead stay where they are, freeing up space for other buyers or renters.

Also, we are likely to see a sharp uptick in the rate of housing completions, which will increase supply. While starts have risen from a 1.3 million annual rate before the pandemic to 1.8 million in recent months, completions remain near 1.3 million. This presumably reflects supply chain issues that are now being resolved. As one measure, lumber prices are now less than half of the peaks hit in March.  

At the top of the list of the unexpected bad news was the sharp increases in new and used vehicle prices. The major auto manufacturers have been saying that they have largely overcome the supply chain problems that sent prices soaring last year. Nonetheless, new vehicle prices rose 1.0 percent in May and are up 12.6 percent over the year.

Used vehicle prices, which actually had fallen the prior three months, rose 1.8 percent in May, bringing their increase over the last year to 16.1 percent. Together, new and used vehicles added 0.11 percentage points to the May inflation rate, and 0.14 percentage points to the core rate.

Another surprising increase in May, was the 0.7 percent rise in apparel prices. They are now up 5.0 percent over the last year. Apparel prices had fallen 0.8 percent in April, and many retailers were reporting gluts of some items, forcing sharp markdowns. These will presumably be reflected in the June CPI data.

On the positive side, appliances did show the sort of price decline that some of us have been expecting for a while. Appliance prices had been relatively stable before the pandemic, but rose sharply last year due to supply chain problems. The index fell by 0.7 percent in May after dropping 0.5 percent in April. Appliance prices are still up 6.4 percent year-over-year.

With many retailers now having excessive inventories, appliance pries may follow the same path as televisions. After rising sharply last year, television prices have been falling since September. They dropped 3.0 percent in May and are now down 9.5 percent year-over-year. If the price path for appliances, and other items that faced supply chain issues, follows the path of televisions, it will be a serious factor dampening inflation going forward.

There was also some good news with medical care services. Inflation in medical care services moderated to 0.4 percent in May, down from 0.6 percent in March and 0.5 percent in April. Half of this rise was due to a 2.0 percent jump in the index for health care insurance. This is good news both because the direction of change is downward, and also because medical care has a much larger weight in the Personal Consumption Expenditure deflator than in the PCE.

Are We Seeing a Wage-Price Spiral?

It’s pretty hard to be happy about the May CPI report. It’s bad news by almost any measure. It means lower real wages for workers and is another big piece of uncertainty in an economy shaking from both the pandemic and the war. But the big fear is whether we now destined for a wage-price spiral of the sort we saw in the 1970s, which the Fed might use a massive recession to rein in.

As I’ve been saying for close to a year, there are reasons for believing the high inflation we are now seeing is temporary. Yes, I obviously have been wrong so far and may be again. On the other hand, there were big non-economic factors that I hadn’t anticipated, like the delta variant, the omicron variant, and the war in Ukraine.

Anyhow, the positive news in this picture, which I am not altogether happy to say, is that we are not seeing the wage side of the wage-price spiral. Rather than accelerating to keep pace with inflation, wage growth has actually been slowing.

The annualized rates of growth in the average hourly wage comparing three-month periods (December 2021, January, February 2022) to (March-May 2022) was just 4.4 percent. That is down sharply from a peak annual rate of 6.1 percent in the period between August-October 2021 and November 2021-January 2022.[1] This is going in the wrong direction for a wage-price spiral.

To be clear, it is not a good story that workers’ wages are falling so much behind inflation, but if the remedy for treating inflation is double-digit unemployment (the Volcker method) then it is probably better to have slower wage growth now. If it turns out that the factors driving inflation, and especially food and energy prices, are temporary, then wages can considerably outpace inflation, even at the current rate of wage growth, when these price increases are reversed.  

Anyhow, I expect to see more price reversals soon, but that has been the case for a while. The buildup of inventories, reported both by the Commerce Department, and a topic of compliant in corporate profit calls, indicate that we will be seeing more price drops like what we have been seeing with televisions and appliances. The food and energy story will depend largely on the course of the war in Ukraine. But, I remain optimistic that the worst of inflation is behind us.

 

 

 

[1] The effect of changing composition should have done more to depress wage-growth last fall than this spring, since we were adding jobs at a far more rapid rate last fall.

 

Okay, that’s not exactly what the Post article said, but pretty much what is implied by the headline, “most Americans expect inflation to get worse, Post-Schar School poll finds.” As a practical matter, most Americans are probably not sitting up at night trying to project future inflation rates based on the available data.

Most Americans views of future inflation likely are based on what they hear from the media. With the media’s coverage of the economy focusing almost exclusively on inflation (most people think the economy has lost jobs since Biden took office, even though we actually have seen the fastest job growth ever), it is not surprising that most people would expect inflation to pick up.

If convincing people that inflation would get worse was the goal of economic reporting, then news outlets should take a bow. If their goal was informing the public, they might want to do some rethinking. FWIW, investors don’t share the view of most Americans. They expect inflation to slow sharply in the years ahead.

This article certainly helps build the case that inflation is devastating most people’s budget. The article profiles a nursing student in Logan, Utah who it says has seen their rent rise by 50 percent. That would be a crisis for most families. Thankfully, this person is very atypical. According to the Bureau of Labor Statistics, rent rose on average by 4.8 percent in the last year, after increasing just 1.8 percent in the prior 12 months.

 

This is not the only atypical example in the piece. The article also profiles a couple in Kentucky who take home $300 a week between them. We are told that one of them earns $9.25 an hour, which translates into take home pay of roughly $170 a week for a 20-hour workweek. If the other person also works a 20-hour workweek, then she must be getting close to $7.00 an hour.

This puts the pay of both workers will below the cutoff for the 10th percentile of wage earners, which was $11.71 an hour last year. It’s good that the Post is paying attention to people facing hardship in the economy, but it is wrong to present their experiences as typical.

The piece also suffers from the old “which way is up” problem. Early on it tells readers that people are putting off planned purchases because of inflation:

“Nearly 9 in 10 Americans say they’ve started bargain-hunting for cheaper products, and about three-quarters are cutting back on restaurants and entertainment, or putting off planned purchases, according to the Post-Schar poll conducted in late April and early May.”

But, a bit further down we get the complete opposite story:

“As more Americans change their behavior assuming inflation will get worse, those actions can drive inflation up, leading to a cycle that’s difficult to break. Indeed, some 52 percent of Americans in the poll said they bought products before the prices went up.”

So, people are both putting off planned purchases because of the bite of inflation and buying things earlier than they would have otherwise because of inflation. Yes, inflation is really bad news.

Okay, that’s not exactly what the Post article said, but pretty much what is implied by the headline, “most Americans expect inflation to get worse, Post-Schar School poll finds.” As a practical matter, most Americans are probably not sitting up at night trying to project future inflation rates based on the available data.

Most Americans views of future inflation likely are based on what they hear from the media. With the media’s coverage of the economy focusing almost exclusively on inflation (most people think the economy has lost jobs since Biden took office, even though we actually have seen the fastest job growth ever), it is not surprising that most people would expect inflation to pick up.

If convincing people that inflation would get worse was the goal of economic reporting, then news outlets should take a bow. If their goal was informing the public, they might want to do some rethinking. FWIW, investors don’t share the view of most Americans. They expect inflation to slow sharply in the years ahead.

This article certainly helps build the case that inflation is devastating most people’s budget. The article profiles a nursing student in Logan, Utah who it says has seen their rent rise by 50 percent. That would be a crisis for most families. Thankfully, this person is very atypical. According to the Bureau of Labor Statistics, rent rose on average by 4.8 percent in the last year, after increasing just 1.8 percent in the prior 12 months.

 

This is not the only atypical example in the piece. The article also profiles a couple in Kentucky who take home $300 a week between them. We are told that one of them earns $9.25 an hour, which translates into take home pay of roughly $170 a week for a 20-hour workweek. If the other person also works a 20-hour workweek, then she must be getting close to $7.00 an hour.

This puts the pay of both workers will below the cutoff for the 10th percentile of wage earners, which was $11.71 an hour last year. It’s good that the Post is paying attention to people facing hardship in the economy, but it is wrong to present their experiences as typical.

The piece also suffers from the old “which way is up” problem. Early on it tells readers that people are putting off planned purchases because of inflation:

“Nearly 9 in 10 Americans say they’ve started bargain-hunting for cheaper products, and about three-quarters are cutting back on restaurants and entertainment, or putting off planned purchases, according to the Post-Schar poll conducted in late April and early May.”

But, a bit further down we get the complete opposite story:

“As more Americans change their behavior assuming inflation will get worse, those actions can drive inflation up, leading to a cycle that’s difficult to break. Indeed, some 52 percent of Americans in the poll said they bought products before the prices went up.”

So, people are both putting off planned purchases because of the bite of inflation and buying things earlier than they would have otherwise because of inflation. Yes, inflation is really bad news.

There are legitimate debates over what tax rates should be, even if many of us consider the current tax rates on the rich and super-rich far too low. However, there really is not a legitimate debate on whether the rich should have to pay the taxes they owe.

Unfortunately, our politics is such that it is now a partisan matter as to whether rich people should have to pay the taxes they owe. This comes up in many contexts, but perhaps most strikingly with the estate tax.

Just to be clear, the only people who owe any money at all under the estate tax are very rich. The current tax has a $12.06 million dollar exemption, per person. That means a couple can pass along $24.12 million to their kids without paying a dime in estate tax.

This is not a tax paid by small business owners or successful lawyers. It is a tax paid by the very rich: full stop. A successful small business owner would be extremely lucky to have accumulated $5 to $10 million in their business over their lifetime, less than half the cutoff for a couple to owe any estate tax at all.

It’s also important to remember that, like the income tax, the estate tax is a marginal tax where it is only paid on the increment above the cutoff. So, let’s suppose our “small” business owning couple has accumulated $24.2 million over their lifetime, $80,000 over the cutoff.

This means they will have to pay the 40 percent estate tax rate on the $80,000 over the cutoff, not the full $24,200,000. Their tax, in this case, would be $32,000 or 0.13 percent of the value of their estate. Can we find the world’s smallest violin?

Let’s not waste time with foolishness, the estate tax is a tax paid by a tiny number of rich people. That is who we are talking about.

Why Do Only the Non-Rich Have to Pay the Taxes They Owe?

The vast majority of people get the vast majority of their income through their wages. We don’t have much choice in paying our taxes, they are deducted directly from our paychecks. It is only the rich and the very rich that find ways to avoid or evade taxes.[1]

As noted earlier, we can debate how much different groups should be paying in taxes. The rich have been winning this debate big time over the last sixty years. The top marginal tax rate was lowered from 90 percent in the early 1960s to just under 40.0 percent in 2022.[2]

There is a similar story with the estate tax. In 1980, estates larger than $500,000 (in 2022 dollars) were subject to the tax. There were a set of marginal estate tax rates, but the top rate paid by the largest estates was 70 percent. This meant that a person with a $1 billion estate would pay close to $700 million in taxes to the government.

In the years since 1980, the cutoff for estate tax liability was both hugely raised, and the rate was cut almost in half to 40 percent. The current $24.12 million cutoff means that even the very rich avoid paying taxes on a sizable portion of their estate. A couple with an estate of $50 million would be able to have almost half of their estate completely avoid taxes, even without playing any games.

Unfortunately, the very rich are still not satisfied with this situation. They would prefer not to pay any taxes (so would we all), and they can hire the tax lawyers and accountants to make their tax aversion a reality. The law allows rich people to create trusts for a variety of purposes. These trusts can be used to transfer wealth to descendants, without anyone ever paying estate tax on the money.

Although the rules on trusts generally have limits on the amount of wealth that can be placed in them without being subject to tax, the rich have found ways to get around these limits.[3] These tricks have allowed some of the richest people in the country, for example Sam Walton, the founder of Walmart, to pass their fortune onto heirs, while paying minimal amounts of estate tax.

It makes no sense to allow these abuses to continue. Creating trusts or other vehicles, exclusively to avoid paying taxes is a total waste from an economic perspective. Not only are we allowing the richest people in the country to avoid paying the taxes they owe, but we are tying up resources, which could go to productive purposes, in this process. Many highly trained, and likely highly accomplished, lawyers, accountants, and their staff, spend millions of hours in this gaming.

As that great proponent of progressive taxation [sarcasm], Ronald Reagan, said when he launched his push for the 1986 tax bill, the tax code at the time “causes some to invest their money, not to make a better mousetrap but simply to avoid a tax trap.” After we have had the political battles over tax rates, there is not a political question as to whether the agreed upon tax rates should be paid. This is simply an issue of the rich wanting to steal from the rest of us.

Congress should crack down hard on the games being used by the very rich to avoid paying the estate tax. Senator Bernie Sanders has proposed legislation that would eliminate the most obvious tricks now being used. This is not just an effort by the progressive wing of the Democratic Party, people closer to the center, like Maryland Senator Chris Van Hollen, have also expressed support for curbing abuses, as has the Biden Treasury Department.

To my mind, the estate tax should be far higher. Rates of 60 or 70 percent would still allow the Elon Musks and Bill Gates’s of the country to pass on vast fortunes to their kids that will allow them to live in total luxury without working a day in their life. I also would not be troubled if the rich, say couples with $5 million in their estate, had to pay some tax, and not just the super-rich. (Remember, it is a marginal tax.)

That is a topic for future political battles. But once Congress has set the rate, there really is not an argument about whether it should actually be collected. This is simply a question of law enforcement and the super-rich stand on the other side. We need some good old-fashioned “law and order,” the super-rich have to be forced to pay the money they owe on the estate tax.

[1] The difference between tax avoidance and tax evasion is that avoidance is a legal method for reducing a person’s tax liability. Evasion is an illegal method. Some schemes are borderline, since their legality is not clear.

[2] This includes the 2.95 percent Medicare tax that high income households must pay.

[3] Some of the ways in which these trusts are abused are discussed here, here, and here.

There are legitimate debates over what tax rates should be, even if many of us consider the current tax rates on the rich and super-rich far too low. However, there really is not a legitimate debate on whether the rich should have to pay the taxes they owe.

Unfortunately, our politics is such that it is now a partisan matter as to whether rich people should have to pay the taxes they owe. This comes up in many contexts, but perhaps most strikingly with the estate tax.

Just to be clear, the only people who owe any money at all under the estate tax are very rich. The current tax has a $12.06 million dollar exemption, per person. That means a couple can pass along $24.12 million to their kids without paying a dime in estate tax.

This is not a tax paid by small business owners or successful lawyers. It is a tax paid by the very rich: full stop. A successful small business owner would be extremely lucky to have accumulated $5 to $10 million in their business over their lifetime, less than half the cutoff for a couple to owe any estate tax at all.

It’s also important to remember that, like the income tax, the estate tax is a marginal tax where it is only paid on the increment above the cutoff. So, let’s suppose our “small” business owning couple has accumulated $24.2 million over their lifetime, $80,000 over the cutoff.

This means they will have to pay the 40 percent estate tax rate on the $80,000 over the cutoff, not the full $24,200,000. Their tax, in this case, would be $32,000 or 0.13 percent of the value of their estate. Can we find the world’s smallest violin?

Let’s not waste time with foolishness, the estate tax is a tax paid by a tiny number of rich people. That is who we are talking about.

Why Do Only the Non-Rich Have to Pay the Taxes They Owe?

The vast majority of people get the vast majority of their income through their wages. We don’t have much choice in paying our taxes, they are deducted directly from our paychecks. It is only the rich and the very rich that find ways to avoid or evade taxes.[1]

As noted earlier, we can debate how much different groups should be paying in taxes. The rich have been winning this debate big time over the last sixty years. The top marginal tax rate was lowered from 90 percent in the early 1960s to just under 40.0 percent in 2022.[2]

There is a similar story with the estate tax. In 1980, estates larger than $500,000 (in 2022 dollars) were subject to the tax. There were a set of marginal estate tax rates, but the top rate paid by the largest estates was 70 percent. This meant that a person with a $1 billion estate would pay close to $700 million in taxes to the government.

In the years since 1980, the cutoff for estate tax liability was both hugely raised, and the rate was cut almost in half to 40 percent. The current $24.12 million cutoff means that even the very rich avoid paying taxes on a sizable portion of their estate. A couple with an estate of $50 million would be able to have almost half of their estate completely avoid taxes, even without playing any games.

Unfortunately, the very rich are still not satisfied with this situation. They would prefer not to pay any taxes (so would we all), and they can hire the tax lawyers and accountants to make their tax aversion a reality. The law allows rich people to create trusts for a variety of purposes. These trusts can be used to transfer wealth to descendants, without anyone ever paying estate tax on the money.

Although the rules on trusts generally have limits on the amount of wealth that can be placed in them without being subject to tax, the rich have found ways to get around these limits.[3] These tricks have allowed some of the richest people in the country, for example Sam Walton, the founder of Walmart, to pass their fortune onto heirs, while paying minimal amounts of estate tax.

It makes no sense to allow these abuses to continue. Creating trusts or other vehicles, exclusively to avoid paying taxes is a total waste from an economic perspective. Not only are we allowing the richest people in the country to avoid paying the taxes they owe, but we are tying up resources, which could go to productive purposes, in this process. Many highly trained, and likely highly accomplished, lawyers, accountants, and their staff, spend millions of hours in this gaming.

As that great proponent of progressive taxation [sarcasm], Ronald Reagan, said when he launched his push for the 1986 tax bill, the tax code at the time “causes some to invest their money, not to make a better mousetrap but simply to avoid a tax trap.” After we have had the political battles over tax rates, there is not a political question as to whether the agreed upon tax rates should be paid. This is simply an issue of the rich wanting to steal from the rest of us.

Congress should crack down hard on the games being used by the very rich to avoid paying the estate tax. Senator Bernie Sanders has proposed legislation that would eliminate the most obvious tricks now being used. This is not just an effort by the progressive wing of the Democratic Party, people closer to the center, like Maryland Senator Chris Van Hollen, have also expressed support for curbing abuses, as has the Biden Treasury Department.

To my mind, the estate tax should be far higher. Rates of 60 or 70 percent would still allow the Elon Musks and Bill Gates’s of the country to pass on vast fortunes to their kids that will allow them to live in total luxury without working a day in their life. I also would not be troubled if the rich, say couples with $5 million in their estate, had to pay some tax, and not just the super-rich. (Remember, it is a marginal tax.)

That is a topic for future political battles. But once Congress has set the rate, there really is not an argument about whether it should actually be collected. This is simply a question of law enforcement and the super-rich stand on the other side. We need some good old-fashioned “law and order,” the super-rich have to be forced to pay the money they owe on the estate tax.

[1] The difference between tax avoidance and tax evasion is that avoidance is a legal method for reducing a person’s tax liability. Evasion is an illegal method. Some schemes are borderline, since their legality is not clear.

[2] This includes the 2.95 percent Medicare tax that high income households must pay.

[3] Some of the ways in which these trusts are abused are discussed here, here, and here.

Politico has decided to make a big deal out of Treasury Secretary Janet Yellen’s supposedly embarrassing admission that:

“There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn’t — at the time — didn’t fully understand, but we recognize that now.”

While Politico’s implication from this “admission” is that the $1.9 trillion American Recovery Plan Biden was a mistake, this is not what Yellen said. She said that she did not anticipate large shocks to the economy. Obviously, she is referring to the delta and omicron rounds of the pandemic, as well as the war in Ukraine.

These subsequent rounds of the pandemic both disrupted production in the United States and elsewhere, and prevented a more rapid return to normal consumption patterns. The ongoing disruption of production, due to the pandemic, prevented supply chains from returning to normal through the fall and winter, and even now, as China’s exports continue to face disruptions.  

The subsequent waves of COVID-19 also prevented people from returning to normal consumption patterns. This meant that consumers continued to spend less than normal amounts on services involving exposure to other people (restaurants, movies, gyms) and larger than normal amounts of money on things (televisions, cars, clothes). This continued shift to goods consumption aggravated supply chain problems.   

The war in Ukraine has sent the world price of oil and natural gas soaring. This has pushed gas prices to near record levels in real terms. The war has also raised the price of wheat and other agricultural commodities, as both Russia and Ukraine are major grain exporters.

It’s good that Yellen admitted her failure to see these shocks, although it’s not clear what different policy the administration should have pursued if she had seen them coming. The world price of oil, and therefore the price of gas, would be just as high today if the Biden administration had not passed its recovery plan.

There is a point here on which the Biden administration certainly can be criticized, although not one mentioned by Politico. If the Biden administration had made vaccinating the world a top priority, it is likely that we would not have seen the development of the omicron variant and quite possibly also have prevented the delta variant.

The number of mutations of a virus will depends on the extent of its spread. If we had worked aggressively with other countries to produce and distribute as many doses of the vaccine as quickly as possible, overriding patent monopolies and other protections, we could have prevented hundreds of millions of cases, along with the resulting sicknesses and death.

The Biden administration ostensibly supported a limited waiver of patent protection for vaccines, but this support was at best half-hearted. It really should have been the top priority of the Biden administration, from day one, to spread the vaccines, as well as tests and treatments, as widely as possible as quickly as possible. Clearly this was not the case, and for that it deserves considerable blame. (Of course, it would have been even better if we embarked on this path back in March of 2020, but we know Donald Trump doesn’t care about stopping deadly pandemics.)

Anyhow, there was a very serious mistake, for which the Biden administration deserves to be taken to task big time. Unfortunately, it is not a mistake that Politico is interested in talking about.

Politico has decided to make a big deal out of Treasury Secretary Janet Yellen’s supposedly embarrassing admission that:

“There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn’t — at the time — didn’t fully understand, but we recognize that now.”

While Politico’s implication from this “admission” is that the $1.9 trillion American Recovery Plan Biden was a mistake, this is not what Yellen said. She said that she did not anticipate large shocks to the economy. Obviously, she is referring to the delta and omicron rounds of the pandemic, as well as the war in Ukraine.

These subsequent rounds of the pandemic both disrupted production in the United States and elsewhere, and prevented a more rapid return to normal consumption patterns. The ongoing disruption of production, due to the pandemic, prevented supply chains from returning to normal through the fall and winter, and even now, as China’s exports continue to face disruptions.  

The subsequent waves of COVID-19 also prevented people from returning to normal consumption patterns. This meant that consumers continued to spend less than normal amounts on services involving exposure to other people (restaurants, movies, gyms) and larger than normal amounts of money on things (televisions, cars, clothes). This continued shift to goods consumption aggravated supply chain problems.   

The war in Ukraine has sent the world price of oil and natural gas soaring. This has pushed gas prices to near record levels in real terms. The war has also raised the price of wheat and other agricultural commodities, as both Russia and Ukraine are major grain exporters.

It’s good that Yellen admitted her failure to see these shocks, although it’s not clear what different policy the administration should have pursued if she had seen them coming. The world price of oil, and therefore the price of gas, would be just as high today if the Biden administration had not passed its recovery plan.

There is a point here on which the Biden administration certainly can be criticized, although not one mentioned by Politico. If the Biden administration had made vaccinating the world a top priority, it is likely that we would not have seen the development of the omicron variant and quite possibly also have prevented the delta variant.

The number of mutations of a virus will depends on the extent of its spread. If we had worked aggressively with other countries to produce and distribute as many doses of the vaccine as quickly as possible, overriding patent monopolies and other protections, we could have prevented hundreds of millions of cases, along with the resulting sicknesses and death.

The Biden administration ostensibly supported a limited waiver of patent protection for vaccines, but this support was at best half-hearted. It really should have been the top priority of the Biden administration, from day one, to spread the vaccines, as well as tests and treatments, as widely as possible as quickly as possible. Clearly this was not the case, and for that it deserves considerable blame. (Of course, it would have been even better if we embarked on this path back in March of 2020, but we know Donald Trump doesn’t care about stopping deadly pandemics.)

Anyhow, there was a very serious mistake, for which the Biden administration deserves to be taken to task big time. Unfortunately, it is not a mistake that Politico is interested in talking about.

We have been hearing endless screaming from the media about out of control inflation. It certainly is the case that inflation is higher than anyone feels comfortable with, and prices of gas and food are especially troublesome, since they are necessities for most families.

But the key question when we get a monthly job report is whether the situation is getting better or worse. Anyone looking at the May jobs report with clear eyes should have concluded the picture is getting better.

The issue with jobs and inflation is the concern that we will see a wage-price spiral like what we saw in the 1970s. The story there is that workers saw rising prices, to which they responded by demanding higher wages. This meant higher costs for businesses, leading to still higher inflation, and an even larger round of pay hikes.

The 1970s story of spiraling inflation is one where the rate of wage growth is increasing. The May data shows that the pace of wage growth is actually falling. The average hourly wage, the key measure of wage growth in the report, increased by 6.5 percent over the last year. That is a pace that is clearly inconsistent with a rate of inflation that most people would consider acceptable.

However, we get a much better picture if we focus on the more recent period. The annualized rate of wage growth comparing the last three months (March, April, and May) with the prior three months (December, January, and February) was 4.3 percent. This is only moderately higher than the peak 3.6 percent year over year rate of wage growth hit in February 2019. In 2019, inflation was well under control, with few seeing it as a serious problem.

Wage data are erratic (that is the reason for taking three-month averages), but it is clear that the direction of change based on the data we have is downward. This is the opposite of the wage-price spiral story, wage growth is moderating.

This is not the only item in the May jobs report that should help to calm the inflation hawks. One way that businesses responded to the difficulty in hiring workers earlier in the recovery was to increase the length of the workweek. The average workweek was 34.4 hours in 2019, before the pandemic. It peaked at 35.0 hours in January of 2021. That would be equivalent to hiring roughly 2.6 million workers at 34.4 hours a week.

The length of the average workweek has now shortened to 34.6 hours over the last three months. This suggests that employers no longer feel a need to lengthen hours to compensate for not being able to hire workers. Again, this is evidence that the labor market is stabilizing.

The third item that should calm inflation hawks is the drop in the share of unemployment due to people voluntarily quitting their jobs. This is an important measure, since workers will only quit their jobs before having a new one lined up, if they are confident they will be able to get another job.

The share of unemployment due to voluntary quits edged down to 12.8 percent in May. It had peaked at 15.1 percent in February, and since trended downward. The share of unemployment due to quits also reached levels above 15.0 percent just before the pandemic and in 2000. In short, this is not a labor market in which workers feel totally comfortable quitting their jobs.

In short, this is a jobs report that should have made inflation hawks very happy. It shows a strong, but stable, labor market with moderating wage growth. This is definitely not a wage-price spiral story.

Of course, this report does nothing to reduce the price of gas. If you’re concerned about the price of gas, then you need to pay attention to the war in Ukraine, not the US labor market. The world price of oil determines the price of gas here, not our employment levels.   

We have been hearing endless screaming from the media about out of control inflation. It certainly is the case that inflation is higher than anyone feels comfortable with, and prices of gas and food are especially troublesome, since they are necessities for most families.

But the key question when we get a monthly job report is whether the situation is getting better or worse. Anyone looking at the May jobs report with clear eyes should have concluded the picture is getting better.

The issue with jobs and inflation is the concern that we will see a wage-price spiral like what we saw in the 1970s. The story there is that workers saw rising prices, to which they responded by demanding higher wages. This meant higher costs for businesses, leading to still higher inflation, and an even larger round of pay hikes.

The 1970s story of spiraling inflation is one where the rate of wage growth is increasing. The May data shows that the pace of wage growth is actually falling. The average hourly wage, the key measure of wage growth in the report, increased by 6.5 percent over the last year. That is a pace that is clearly inconsistent with a rate of inflation that most people would consider acceptable.

However, we get a much better picture if we focus on the more recent period. The annualized rate of wage growth comparing the last three months (March, April, and May) with the prior three months (December, January, and February) was 4.3 percent. This is only moderately higher than the peak 3.6 percent year over year rate of wage growth hit in February 2019. In 2019, inflation was well under control, with few seeing it as a serious problem.

Wage data are erratic (that is the reason for taking three-month averages), but it is clear that the direction of change based on the data we have is downward. This is the opposite of the wage-price spiral story, wage growth is moderating.

This is not the only item in the May jobs report that should help to calm the inflation hawks. One way that businesses responded to the difficulty in hiring workers earlier in the recovery was to increase the length of the workweek. The average workweek was 34.4 hours in 2019, before the pandemic. It peaked at 35.0 hours in January of 2021. That would be equivalent to hiring roughly 2.6 million workers at 34.4 hours a week.

The length of the average workweek has now shortened to 34.6 hours over the last three months. This suggests that employers no longer feel a need to lengthen hours to compensate for not being able to hire workers. Again, this is evidence that the labor market is stabilizing.

The third item that should calm inflation hawks is the drop in the share of unemployment due to people voluntarily quitting their jobs. This is an important measure, since workers will only quit their jobs before having a new one lined up, if they are confident they will be able to get another job.

The share of unemployment due to voluntary quits edged down to 12.8 percent in May. It had peaked at 15.1 percent in February, and since trended downward. The share of unemployment due to quits also reached levels above 15.0 percent just before the pandemic and in 2000. In short, this is not a labor market in which workers feel totally comfortable quitting their jobs.

In short, this is a jobs report that should have made inflation hawks very happy. It shows a strong, but stable, labor market with moderating wage growth. This is definitely not a wage-price spiral story.

Of course, this report does nothing to reduce the price of gas. If you’re concerned about the price of gas, then you need to pay attention to the war in Ukraine, not the US labor market. The world price of oil determines the price of gas here, not our employment levels.   

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