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.

I was somewhat surprised to read in a NYT article on integrating solar panels with agriculture that the price of steel is skyrocketing. The article has a link to this May 2021 piece, when the price of steel was indeed skyrocketing.

However, it is now June of 2022, not May of 2021. The price of a ton of the steel highlighted in the May 2021 piece is now down more than 40 percent from its May 2021 price, to $910 a ton. This is below the nominal peaks hit in 2018, and adjusted for inflation, lower than peaks hit early in the last decade. In short, it is no longer true that the price of steel is skyrocketing.

I was somewhat surprised to read in a NYT article on integrating solar panels with agriculture that the price of steel is skyrocketing. The article has a link to this May 2021 piece, when the price of steel was indeed skyrocketing.

However, it is now June of 2022, not May of 2021. The price of a ton of the steel highlighted in the May 2021 piece is now down more than 40 percent from its May 2021 price, to $910 a ton. This is below the nominal peaks hit in 2018, and adjusted for inflation, lower than peaks hit early in the last decade. In short, it is no longer true that the price of steel is skyrocketing.

I’ve had some exchanges with people in recent weeks where I raised the prospect that a new Cold War with China would seriously undermine our efforts to deal with climate change. Incredibly, most people did not see the connection. Maybe I have been an economist for too long, but to me the connection is pretty damn direct, and should be hitting us all in the face.

The basic story is that cold wars cost money, lots of it. If we spend large sums of money building up our military to meet the challenge of our Cold War adversary, we won’t have the money needed to address climate change. It’s sort of like if you spend your whole paycheck on gambling and alcohol, you won’t have money to pay the rent and for your kids’ college education.

To get an idea of what is at stake, we are currently projected to spend an average of 3.0 percent of GDP on the military budget over the next decade. During Reagan’s Cold War buildup in the 1980s, military spending peaked at more than 6.0 percent of GDP. Spending went to over 9.0 percent of GDP when we had actually hot wars in Vietnam and Korea.

But, let’s just take the 6.0 percent figure. That’s 3.0 percentage points more than what we are on a path to spend now. If we take that over the course of a decade, as is now fashionable in budget debates, that would come to an additional $9.0 trillion in spending. That’s far more than twice President Biden’s “massive” Build Back Better agenda.

Where would we get this $9 trillion? Does anyone think we could get the political support to raise taxes by even a small portion of this amount? If we saw anything like this level of military spending, it would almost certainly mean massive cuts to existing levels of spending on education, health care, and every other category of non-military spending, including climate.

But wait, it gets worse. At its peak, the Soviet economy was roughly 60 percent of the size of the US economy. This means that if we spent roughly equal amounts on our military, it was a much greater burden on the Soviet economy than the U.S. economy.

The opposite is the case with China. Its economy is already more than 20 percent larger than the US economy, according to data from the International Monetary Fund. China’s economy is also growing more rapidly. Given its current growth path, China’s economy will be close to 50 percent larger by the end of the decade.

 

Source: International Monetary Fund.

 

The reason people typically refer to China’s economy as the world’s second largest economy, after the United States, rather than the largest, is that they use exchange rate conversions of GDP. This method takes a country’s GDP in its own currency and then converts it to dollars at the current exchange rate.

Since exchange rates are somewhat arbitrary and often fluctuate by large amounts, most economists prefer an alternative measure of GDP, called “purchasing power parity.” This measure uses the same prices to measure all goods and services produced in different countries around the world. This means, for example, a Nissan Sentra is counted as being $20,000 in the GDP (or whatever its actual price) in any country that produces a Nissan Sentra, regardless of the price it sells for in that country. A loaf of bread will count as $3 in every country producing bread, again regardless of the actual price of bread in that country. This methodology is applied to all the goods and services produced in a country.

Needless to say, this is difficult to do accurately, but in principle this method gives us apples-to-apples comparisons of GDP. It should give us a reasonable measure of the relative sizes of economies around the world. It is this measure that shows China’s economy is currently more than 20 percent larger than the US economy. The IMF growth path shows that this gap will grow larger in the rest of the decade.

China currently spends a much smaller share of its GDP on its military than the United States. According to the CIA World Factbook, China is currently spending about 1.5 percent of its GDP on its military. Given its $30 trillion GDP, China’s military spending in 2022 would come to around $450 billion, a bit more than half current US spending.

However, we cannot take China’s lower spending for granted. If China’s leadership considers the country’s security interests threatened, it can obviously increase its military spending. And, if China’s leadership wanted large-scale increases in its military spending, it would face far less political opposition than in the United States.

And, there should be little doubt that China would be able to match the United States in military technology. While there are undoubtedly many areas of military technology, where the United States does have an advantage, this is not true in all areas. For example, China appears to be ahead of the United States in developing hypersonic missiles. China has many highly-skilled engineers, software designers, and experts in other areas of military technology. There is no basis for believing that the United States will somehow be able to maintain an edge in technology over China going forward.

The basic story is that if we get into a situation where China perceives the United States to be threatening its national security interests, there can be little doubt it can and would radically ramp up its military spending. If we then get into an arms race, the burden on our economy could be enormous.

And, it would almost certainly require massive reductions in non-military spending, including spending on efforts to reduce greenhouse gas emissions and mitigate the effects of climate change. If we have a new Cold War with China, we can forget about a major commitment of resources to deal with climate change, as well as addressing other long neglected needs.  

Cooperation Rather the Confrontation: An Alternative Path

While the defense industry would hugely benefit from a new Cold War with China, most of the rest of us would not. We stand to gain far more from a relationship that seeks out paths of cooperation, where they are available.

Just to be clear, choosing a path of selective cooperation does not imply approval of China’s government. China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

Saying that we should not be engaging in a Cold War with China does not imply approval of these actions. It is simply a recognition of two facts.

First, many of the people who are most vigorous in denouncing abuses in China seem just fine with serious abuses in US allies. Saudi Arabia, a close US ally, tolerates no open dissent and has an explicit policy of treating women as second-class citizens. It recently had a US resident suffocated and torn to pieces in its Turkish embassy.

The United States also has a long history of supporting the overthrow of democratically elected governments that are perceived as threatening our interests in some way. Two famous examples are the overthrow of Mohammad Mossadegh in Iran in 1953 and the overthrow of Jacobo Arbenz in Guatemala in 1954.

But we don’t have to go back to the early days of the Cold War to find involvement in the overthrow of democratically elected governments. The US gave support for the coup that ousted President Jean-Bertrand Aristide in Haiti in 2004. More recently, the US supported throwing out election results in Bolivia when they didn’t go the way the Trump administration wanted. It also raised no objection to the repression that followed, most of which was directed against its indigenous population.

To put it simply, we do not have a consistent policy of supporting democracy and human rights around the world. Perhaps it would be good if we did, but we don’t. There are plenty of places elsewhere in the world where we support undemocratic regimes that abuse human rights. Clearly the complaints against human rights abuses in China are not the result of a deep and universal commitment to protecting these rights.

The other point is that it is not clear how those who push this agenda hope that their hostile actions will improve the human rights situation in China. If we assume, for the moment, that the human rights critics don’t intend to go to war to overthrow China’s current government, and then install a regime that will respect human rights, we should ask how we think a stance of growing hostility to China will improve the prospects for the people who we hope to help?

If there was good reason to believe that building up military forces against China, and curtailing economic relations, would improve the human rights situation in China and move the regime towards democracy, there would be a good argument for pursuing this route. But that hardly seems likely given the current situation in China. In this context, confrontation is at best a feel-good policy for the people pushing it.

Cooperating with China to Save the Planet

I have written before how we have two obvious areas of cooperation with China that could offer enormous benefits to both the US and China and the world as a whole: climate and health. Suppose that, instead of wasting resources in military competition, and bottling up technologies in trying to gain economic advantage, we followed a path where we tried to maximize cooperation between the superpowers, bringing in most of the rest of the world in the process.  

The idea of sharing knowledge, rather than locking it down for private profit with patents, copyrights, and related protections, goes in the exact opposite direction of public policy for the last four decades. Nonetheless, it is important to get it on the table as a pole in public debate. People have to recognize that there is an alternative to the path that Biden appears set on taking the country, which would have very different implications for both our dealings with China and also inequality in the United States.

The cooperative alternative would involve maximizing the sharing of technology. The basic logic would be that the United States, China, and other countries we pull into the system would commit to spending a certain amount of money to support research in the designated areas based on their GDP and per capita income.

For example, we could require that a rich country like the United States would contribute 1.0 percent of its GDP to research and development, or roughly $210 billion a year, based on 2021 GDP. Middle-income countries like China might be expected to contribute a smaller share of their GDP, say 0.5 percent. For China, that would come to $150 billion a year (on a purchasing power parity basis) based on its 2022 GDP. Poorer countries might be expected to make a token contribution, or pay nothing at all.

Obviously, it would be necessary to negotiate the exact formulas. There would also need to be some mechanism for dealing with countries that refused to participate, perhaps applying something like patent monopolies to countries that remained outside the network. (I outline some of the issues that would have to be dealt with here and in chapter 5 of Rigged [it’s free].)

There are issues that would be difficult to hammer out in trying to work out arrangements for sharing along these lines, but the process of synchronizing rules on intellectual products is also very difficult now. The Trans-Pacific Partnership almost certainly would have been finalized at least two years sooner if not for the battles over the intellectual property rules that would be included in the pact.

The potential gains from this sort of sharing of knowledge and technology are enormous. Instead of looking to lock up new discoveries behind patent monopolies, a condition of getting funding should be that all results are posted on the web as quickly as possible so that researchers around the world could benefit. The Bermuda Principles of posting results on the web nightly, which the scientists working on the human genome project adopted, would be a useful model.   

The idea that science advances most rapidly when it is open should not seem far-fetched. We benefit from having as many eyes as possible on new discoveries and innovations so that researchers can build on successes and uncover flaws.

We got some great examples for this view in the pandemic. Pfizer reported in February of 2021 that it had found a way to alter its production process that cut its production time by 50 percent.  It also discovered that its vaccine did not have to be super-frozen at minus 94 degrees Fahrenheit, but instead could be kept in a normal freezer for up to two weeks. It also discovered in January that its standard vial contained six vaccine doses, not the five that it had expected, causing one-sixth of its vaccines to be thrown out at a time when they were in very short supply.

Imagine Pfizer had open-sourced its whole production process. These discoveries would almost certainly have come considerably sooner, allowing tens of millions of people to be vaccinated more quickly. There are undoubtedly other efficiencies that could be discovered both about Pfizer’s vaccine and the vaccines produced by other manufacturers, if engineers around the world could review their production methods.

Of course, the biggest gain from having open-sourced the technology would have been that manufacturers around the world would have been able to produce all the vaccines. We likely could have had enough vaccines for the whole world by the first half of 2021. This could have saved millions of lives and prevented hundreds of millions of infections. A more rapid pace of vaccination might have even slowed the spread enough to prevent the development of the delta and omicron variants, which would have saved the world from an enormous amount of suffering.

This logic applies to health care more generally. Why would we not want every researcher in the world to have full access to the latest developments in the areas where they work? Are we worried that a researcher in China or Turkey might develop an effective treatment for a particular cancer or liver disease before researchers in the United States? There doesn’t seem an obvious downside to going this route.

The same applies to climate technology. We should want researchers to be able to quickly build on each other’s innovation in wind and solar energy, as well as energy storage. Slowing global warming is a shared crisis. We should want to do everything possible to develop the best technology and to have it installed as widely as feasible.

There are other areas of research where cooperation may prove more difficult. For example, we may want to keep more control over communications technologies that could have military uses. But, at the very least, health care and climate are two major areas of research where both China and the US, as well as the rest of the world, can benefit from having shared and open research. And, if we can successfully implement a system of cooperative technology development in these two areas, we should be able to find other areas of the economy where we can adopt similar systems.

Will Cooperation Promote Democracy?

There also is an important potential side benefit to going this route. Back in the 1990s, when we were debating more open trade between the United States and China, many advocates of the trade path we took argued that China would become more liberal and democratic if it had a strong growing economy. The argument was essentially that there was a link between capitalist economies and liberal democracies.

In retrospect, that argument has not held up very well. China has seen very strong growth for the last four decades. Its economy is more than five times as large as it was when it was admitted to the WTO in 2000.  Yet, China is no one’s image of a liberal democracy. It’s not even clear that it has become more open in the last two decades.

This history should make anyone cautious about making broad claims on political evolution in China as a result of its economic progress, but there is an important difference about the route outlined here. If China were to engage in large-scale exchanges of knowledge and research in health care, climate, and possibly other areas, it would mean that tens of thousands of their researchers were in regular contact with their counterparts in the United States and other liberal democracies.   

Most of the actors in China’s manufacturing export boom in the first decade of this century were low-paid (by US standards) and relatively uneducated workers in factories. In this story of collaborating in some of the most sophisticated areas of technology, the main actors are highly educated and relatively well-paid workers. They will be the parents, siblings, and children of the people holding positions of political power in the country’s government. It is reasonable to believe that they might have more influence in pushing for a more open and liberal society than poorly educated workers in a textile factory.

Again, anyone should be cautious in making strong claims about how a particular economic policy will lead China to a path of liberal democracy. But it is plausible that having relatively privileged actors in its economy, in regular contact with their counterparts in the West, could have a positive impact on the country’s politics from the standpoint of promoting liberal democratic values.

The Economic Winners and Losers from Cooperating with China

There is one group that is likely to be a loser from going this path of cooperative technological development: the most highly paid scientists and engineers, as well as CEOs and shareholders of the companies that are directly affected. To be clear, under a system along the lines outlined here, there is every reason to believe that accomplished researchers would still be well-paid, with the most successful likely getting high six-figure or even seven-figure salaries. There would still be plenty of profits available to companies that contract to do research in these areas, just as companies that contract to design weapon systems for the Pentagon can make very healthy profits.

However, we would probably not see the vast fortunes that many individuals and companies have earned based on their patent monopolies. For example, the pandemic probably would not have created five Moderna billionaires under this alternative system. We also would be less likely to see a company’s stock price increase more than 2000 percent in a year and a half, adding $170 billion to its market capitalization.

The Moderna billionaires, as well as the companies’ shareholders, were allowed to make vast sums because the company was allowed to patent and in other ways appropriate the benefits of research, much of which was funded by the government. If the condition of sharing in government supported research, was that any subsequent research would be fully open, the Moderna billionaires and its shareholders would not have profited to such an enormous extent from the pandemic.[1]

The smaller paychecks at the top, coupled with the elimination of all the waste associated with the patent system, will effectively mean higher paychecks at the middle and bottom. By my calculations, if we sold all prescription drugs in a free market, without patents or related protections, we would spend around $80 billion a year. That is a saving of $420 billion, or $3,000 per family, compared with the $500 billion a year that we now spend on drugs. That translates into a lot of additional money in the pockets of low- and middle-income people as a result of lower health care spending.

In short, going the route of cooperative development of technology with China is likely to not only reduce tensions between the world’s two superpowers, but can be a major factor in reversing the upward redistribution of the last four decades. It can very directly lead to less money going to those at the top end of the income distribution and increased real wages for those at the middle and the bottom.

The False Promise of Manufacturing Jobs

Many politicians have argued that the route of confrontation with China is a way to gain back manufacturing jobs that were lost to trade in the prior three decades. This is a classic case of the old line about “fool me once, shame on you, fool me twice, shame on me.”

The loss of millions of manufacturing jobs due to trade with China and other developing countries in the 1990s and 2000s devastated cities and towns across the country. The manufacturing jobs that were lost paid far better than alternatives in other sectors. Workers in manufacturing jobs could support a middle-class life-style in a way that was not true if they were forced to work in retail or other service sector jobs.

However, this is no longer the case today. The wage premium enjoyed by manufacturing workers has largely disappeared, as a result of the massive job loss in recent decades. Mishel (2018) found a 7.8 percent straight wage premium for non-college-educated workers for the years 2010 to 2016, in an analysis that controlled for age, race, and gender, and other factors.

That compares to a manufacturing wage premium for non-college-educated workers of 13.1 percent in the 1980s. This analysis found that differences in non-wage compensation added 2.6 percentage points to the manufacturing wage premium for all workers, in the years 2010-2016. But, the non-wage compensation differential may be less for non-college-educated workers since they are less likely to get health care coverage and retirement benefits.

This premium has almost certainly fallen much further in more recent years. The ratio of average hourly earnings of production and non-supervisory workers in manufacturing to the private sector has as whole fell from 96.0 percent in the years covered by the analysis (2010 to 2016) to 91.9 percent in 2021.[2] The falloff in relative pay was even sharper using the Bureau of Labor Statistics Employer Cost for Employee Compensation measure. By this measure, which includes the cost of pensions, health care and other benefits, the ratio of pay for manufacturing workers, relative to all workers, dropped from 110.6 percent in the period analyzed by Mishel, to 103.6 percent in 2021.

The sharp shift in relative pay away from manufacturing workers in the last five years suggests that if there is still a manufacturing wage premium, it is almost certainly very small. The reason for the loss of the manufacturing wage premium should not be any surprise. In addition to manufacturing workers facing the constant threat of outsourcing, there has also been a sharp drop in unionization rates in the sector.

In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had largely disappeared, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

Furthermore, in the last decade, as the manufacturing sector has gotten back some of the jobs lost to trade and the Great Recession, these have mostly not been union jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing dropped by 400,000 over this period.

This means that winning back manufacturing jobs from China, or other countries, is not likely to produce any substantial gains for ordinary workers. The jobs that we gain back are not likely to pay any substantial wage premium over other jobs in the economy, nor are they any more likely to be union jobs.  

Will They Get Us Coming and Going?

The opening of trade in manufactured goods in the last four decades was sold as a grand principle, advancing the cause of “free trade.” As I have continually pointed out, it was not about free trade in general. There was little effort to facilitate trade in physicians’ services or other services provided by highly paid professionals. As a result, the pay of doctors and other protected professionals rose sharply relative to the pay of ordinary workers.

And, our trade deals actually increased barriers in the form of government-granted patent and copyright monopolies and other forms of intellectual property. The increase in protectionism imposed an enormous efficiency cost on the economy. It also was a major factor in the upward redistribution of income in the last four decades. Many of the country’s richest people owe their fortunes in large part to these protections.

It would be truly ironic if we were to transfer still more income upward, with increased subsidies for research and development, with the gains locked down by a small elite with their patent and copyright monopolies. And, the compensation for these gains was a modest increase in manufacturing jobs, which no longer pay a substantial wage premium over other jobs in the economy.

At the moment, given the bipartisan consensus on confronting China, this outcome seems likely. We face a real risk that our path of confrontation will both further increase the upward redistribution of income and also doom efforts to limit the damage from global warming. And no one is even talking about it.

[1] The rule for sharing in research should also preclude using non-disclosure agreements to keep researchers and engineers from sharing their knowledge.

[2] There can still be a wage premium for manufacturing workers even if their average pay is lower than in the private sector, due to composition issues. For example, the average production worker in manufacturing may have less education than production workers in other sectors, or they may live in areas where the average wage is lower than for the country as a whole.

I’ve had some exchanges with people in recent weeks where I raised the prospect that a new Cold War with China would seriously undermine our efforts to deal with climate change. Incredibly, most people did not see the connection. Maybe I have been an economist for too long, but to me the connection is pretty damn direct, and should be hitting us all in the face.

The basic story is that cold wars cost money, lots of it. If we spend large sums of money building up our military to meet the challenge of our Cold War adversary, we won’t have the money needed to address climate change. It’s sort of like if you spend your whole paycheck on gambling and alcohol, you won’t have money to pay the rent and for your kids’ college education.

To get an idea of what is at stake, we are currently projected to spend an average of 3.0 percent of GDP on the military budget over the next decade. During Reagan’s Cold War buildup in the 1980s, military spending peaked at more than 6.0 percent of GDP. Spending went to over 9.0 percent of GDP when we had actually hot wars in Vietnam and Korea.

But, let’s just take the 6.0 percent figure. That’s 3.0 percentage points more than what we are on a path to spend now. If we take that over the course of a decade, as is now fashionable in budget debates, that would come to an additional $9.0 trillion in spending. That’s far more than twice President Biden’s “massive” Build Back Better agenda.

Where would we get this $9 trillion? Does anyone think we could get the political support to raise taxes by even a small portion of this amount? If we saw anything like this level of military spending, it would almost certainly mean massive cuts to existing levels of spending on education, health care, and every other category of non-military spending, including climate.

But wait, it gets worse. At its peak, the Soviet economy was roughly 60 percent of the size of the US economy. This means that if we spent roughly equal amounts on our military, it was a much greater burden on the Soviet economy than the U.S. economy.

The opposite is the case with China. Its economy is already more than 20 percent larger than the US economy, according to data from the International Monetary Fund. China’s economy is also growing more rapidly. Given its current growth path, China’s economy will be close to 50 percent larger by the end of the decade.

 

Source: International Monetary Fund.

 

The reason people typically refer to China’s economy as the world’s second largest economy, after the United States, rather than the largest, is that they use exchange rate conversions of GDP. This method takes a country’s GDP in its own currency and then converts it to dollars at the current exchange rate.

Since exchange rates are somewhat arbitrary and often fluctuate by large amounts, most economists prefer an alternative measure of GDP, called “purchasing power parity.” This measure uses the same prices to measure all goods and services produced in different countries around the world. This means, for example, a Nissan Sentra is counted as being $20,000 in the GDP (or whatever its actual price) in any country that produces a Nissan Sentra, regardless of the price it sells for in that country. A loaf of bread will count as $3 in every country producing bread, again regardless of the actual price of bread in that country. This methodology is applied to all the goods and services produced in a country.

Needless to say, this is difficult to do accurately, but in principle this method gives us apples-to-apples comparisons of GDP. It should give us a reasonable measure of the relative sizes of economies around the world. It is this measure that shows China’s economy is currently more than 20 percent larger than the US economy. The IMF growth path shows that this gap will grow larger in the rest of the decade.

China currently spends a much smaller share of its GDP on its military than the United States. According to the CIA World Factbook, China is currently spending about 1.5 percent of its GDP on its military. Given its $30 trillion GDP, China’s military spending in 2022 would come to around $450 billion, a bit more than half current US spending.

However, we cannot take China’s lower spending for granted. If China’s leadership considers the country’s security interests threatened, it can obviously increase its military spending. And, if China’s leadership wanted large-scale increases in its military spending, it would face far less political opposition than in the United States.

And, there should be little doubt that China would be able to match the United States in military technology. While there are undoubtedly many areas of military technology, where the United States does have an advantage, this is not true in all areas. For example, China appears to be ahead of the United States in developing hypersonic missiles. China has many highly-skilled engineers, software designers, and experts in other areas of military technology. There is no basis for believing that the United States will somehow be able to maintain an edge in technology over China going forward.

The basic story is that if we get into a situation where China perceives the United States to be threatening its national security interests, there can be little doubt it can and would radically ramp up its military spending. If we then get into an arms race, the burden on our economy could be enormous.

And, it would almost certainly require massive reductions in non-military spending, including spending on efforts to reduce greenhouse gas emissions and mitigate the effects of climate change. If we have a new Cold War with China, we can forget about a major commitment of resources to deal with climate change, as well as addressing other long neglected needs.  

Cooperation Rather the Confrontation: An Alternative Path

While the defense industry would hugely benefit from a new Cold War with China, most of the rest of us would not. We stand to gain far more from a relationship that seeks out paths of cooperation, where they are available.

Just to be clear, choosing a path of selective cooperation does not imply approval of China’s government. China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

Saying that we should not be engaging in a Cold War with China does not imply approval of these actions. It is simply a recognition of two facts.

First, many of the people who are most vigorous in denouncing abuses in China seem just fine with serious abuses in US allies. Saudi Arabia, a close US ally, tolerates no open dissent and has an explicit policy of treating women as second-class citizens. It recently had a US resident suffocated and torn to pieces in its Turkish embassy.

The United States also has a long history of supporting the overthrow of democratically elected governments that are perceived as threatening our interests in some way. Two famous examples are the overthrow of Mohammad Mossadegh in Iran in 1953 and the overthrow of Jacobo Arbenz in Guatemala in 1954.

But we don’t have to go back to the early days of the Cold War to find involvement in the overthrow of democratically elected governments. The US gave support for the coup that ousted President Jean-Bertrand Aristide in Haiti in 2004. More recently, the US supported throwing out election results in Bolivia when they didn’t go the way the Trump administration wanted. It also raised no objection to the repression that followed, most of which was directed against its indigenous population.

To put it simply, we do not have a consistent policy of supporting democracy and human rights around the world. Perhaps it would be good if we did, but we don’t. There are plenty of places elsewhere in the world where we support undemocratic regimes that abuse human rights. Clearly the complaints against human rights abuses in China are not the result of a deep and universal commitment to protecting these rights.

The other point is that it is not clear how those who push this agenda hope that their hostile actions will improve the human rights situation in China. If we assume, for the moment, that the human rights critics don’t intend to go to war to overthrow China’s current government, and then install a regime that will respect human rights, we should ask how we think a stance of growing hostility to China will improve the prospects for the people who we hope to help?

If there was good reason to believe that building up military forces against China, and curtailing economic relations, would improve the human rights situation in China and move the regime towards democracy, there would be a good argument for pursuing this route. But that hardly seems likely given the current situation in China. In this context, confrontation is at best a feel-good policy for the people pushing it.

Cooperating with China to Save the Planet

I have written before how we have two obvious areas of cooperation with China that could offer enormous benefits to both the US and China and the world as a whole: climate and health. Suppose that, instead of wasting resources in military competition, and bottling up technologies in trying to gain economic advantage, we followed a path where we tried to maximize cooperation between the superpowers, bringing in most of the rest of the world in the process.  

The idea of sharing knowledge, rather than locking it down for private profit with patents, copyrights, and related protections, goes in the exact opposite direction of public policy for the last four decades. Nonetheless, it is important to get it on the table as a pole in public debate. People have to recognize that there is an alternative to the path that Biden appears set on taking the country, which would have very different implications for both our dealings with China and also inequality in the United States.

The cooperative alternative would involve maximizing the sharing of technology. The basic logic would be that the United States, China, and other countries we pull into the system would commit to spending a certain amount of money to support research in the designated areas based on their GDP and per capita income.

For example, we could require that a rich country like the United States would contribute 1.0 percent of its GDP to research and development, or roughly $210 billion a year, based on 2021 GDP. Middle-income countries like China might be expected to contribute a smaller share of their GDP, say 0.5 percent. For China, that would come to $150 billion a year (on a purchasing power parity basis) based on its 2022 GDP. Poorer countries might be expected to make a token contribution, or pay nothing at all.

Obviously, it would be necessary to negotiate the exact formulas. There would also need to be some mechanism for dealing with countries that refused to participate, perhaps applying something like patent monopolies to countries that remained outside the network. (I outline some of the issues that would have to be dealt with here and in chapter 5 of Rigged [it’s free].)

There are issues that would be difficult to hammer out in trying to work out arrangements for sharing along these lines, but the process of synchronizing rules on intellectual products is also very difficult now. The Trans-Pacific Partnership almost certainly would have been finalized at least two years sooner if not for the battles over the intellectual property rules that would be included in the pact.

The potential gains from this sort of sharing of knowledge and technology are enormous. Instead of looking to lock up new discoveries behind patent monopolies, a condition of getting funding should be that all results are posted on the web as quickly as possible so that researchers around the world could benefit. The Bermuda Principles of posting results on the web nightly, which the scientists working on the human genome project adopted, would be a useful model.   

The idea that science advances most rapidly when it is open should not seem far-fetched. We benefit from having as many eyes as possible on new discoveries and innovations so that researchers can build on successes and uncover flaws.

We got some great examples for this view in the pandemic. Pfizer reported in February of 2021 that it had found a way to alter its production process that cut its production time by 50 percent.  It also discovered that its vaccine did not have to be super-frozen at minus 94 degrees Fahrenheit, but instead could be kept in a normal freezer for up to two weeks. It also discovered in January that its standard vial contained six vaccine doses, not the five that it had expected, causing one-sixth of its vaccines to be thrown out at a time when they were in very short supply.

Imagine Pfizer had open-sourced its whole production process. These discoveries would almost certainly have come considerably sooner, allowing tens of millions of people to be vaccinated more quickly. There are undoubtedly other efficiencies that could be discovered both about Pfizer’s vaccine and the vaccines produced by other manufacturers, if engineers around the world could review their production methods.

Of course, the biggest gain from having open-sourced the technology would have been that manufacturers around the world would have been able to produce all the vaccines. We likely could have had enough vaccines for the whole world by the first half of 2021. This could have saved millions of lives and prevented hundreds of millions of infections. A more rapid pace of vaccination might have even slowed the spread enough to prevent the development of the delta and omicron variants, which would have saved the world from an enormous amount of suffering.

This logic applies to health care more generally. Why would we not want every researcher in the world to have full access to the latest developments in the areas where they work? Are we worried that a researcher in China or Turkey might develop an effective treatment for a particular cancer or liver disease before researchers in the United States? There doesn’t seem an obvious downside to going this route.

The same applies to climate technology. We should want researchers to be able to quickly build on each other’s innovation in wind and solar energy, as well as energy storage. Slowing global warming is a shared crisis. We should want to do everything possible to develop the best technology and to have it installed as widely as feasible.

There are other areas of research where cooperation may prove more difficult. For example, we may want to keep more control over communications technologies that could have military uses. But, at the very least, health care and climate are two major areas of research where both China and the US, as well as the rest of the world, can benefit from having shared and open research. And, if we can successfully implement a system of cooperative technology development in these two areas, we should be able to find other areas of the economy where we can adopt similar systems.

Will Cooperation Promote Democracy?

There also is an important potential side benefit to going this route. Back in the 1990s, when we were debating more open trade between the United States and China, many advocates of the trade path we took argued that China would become more liberal and democratic if it had a strong growing economy. The argument was essentially that there was a link between capitalist economies and liberal democracies.

In retrospect, that argument has not held up very well. China has seen very strong growth for the last four decades. Its economy is more than five times as large as it was when it was admitted to the WTO in 2000.  Yet, China is no one’s image of a liberal democracy. It’s not even clear that it has become more open in the last two decades.

This history should make anyone cautious about making broad claims on political evolution in China as a result of its economic progress, but there is an important difference about the route outlined here. If China were to engage in large-scale exchanges of knowledge and research in health care, climate, and possibly other areas, it would mean that tens of thousands of their researchers were in regular contact with their counterparts in the United States and other liberal democracies.   

Most of the actors in China’s manufacturing export boom in the first decade of this century were low-paid (by US standards) and relatively uneducated workers in factories. In this story of collaborating in some of the most sophisticated areas of technology, the main actors are highly educated and relatively well-paid workers. They will be the parents, siblings, and children of the people holding positions of political power in the country’s government. It is reasonable to believe that they might have more influence in pushing for a more open and liberal society than poorly educated workers in a textile factory.

Again, anyone should be cautious in making strong claims about how a particular economic policy will lead China to a path of liberal democracy. But it is plausible that having relatively privileged actors in its economy, in regular contact with their counterparts in the West, could have a positive impact on the country’s politics from the standpoint of promoting liberal democratic values.

The Economic Winners and Losers from Cooperating with China

There is one group that is likely to be a loser from going this path of cooperative technological development: the most highly paid scientists and engineers, as well as CEOs and shareholders of the companies that are directly affected. To be clear, under a system along the lines outlined here, there is every reason to believe that accomplished researchers would still be well-paid, with the most successful likely getting high six-figure or even seven-figure salaries. There would still be plenty of profits available to companies that contract to do research in these areas, just as companies that contract to design weapon systems for the Pentagon can make very healthy profits.

However, we would probably not see the vast fortunes that many individuals and companies have earned based on their patent monopolies. For example, the pandemic probably would not have created five Moderna billionaires under this alternative system. We also would be less likely to see a company’s stock price increase more than 2000 percent in a year and a half, adding $170 billion to its market capitalization.

The Moderna billionaires, as well as the companies’ shareholders, were allowed to make vast sums because the company was allowed to patent and in other ways appropriate the benefits of research, much of which was funded by the government. If the condition of sharing in government supported research, was that any subsequent research would be fully open, the Moderna billionaires and its shareholders would not have profited to such an enormous extent from the pandemic.[1]

The smaller paychecks at the top, coupled with the elimination of all the waste associated with the patent system, will effectively mean higher paychecks at the middle and bottom. By my calculations, if we sold all prescription drugs in a free market, without patents or related protections, we would spend around $80 billion a year. That is a saving of $420 billion, or $3,000 per family, compared with the $500 billion a year that we now spend on drugs. That translates into a lot of additional money in the pockets of low- and middle-income people as a result of lower health care spending.

In short, going the route of cooperative development of technology with China is likely to not only reduce tensions between the world’s two superpowers, but can be a major factor in reversing the upward redistribution of the last four decades. It can very directly lead to less money going to those at the top end of the income distribution and increased real wages for those at the middle and the bottom.

The False Promise of Manufacturing Jobs

Many politicians have argued that the route of confrontation with China is a way to gain back manufacturing jobs that were lost to trade in the prior three decades. This is a classic case of the old line about “fool me once, shame on you, fool me twice, shame on me.”

The loss of millions of manufacturing jobs due to trade with China and other developing countries in the 1990s and 2000s devastated cities and towns across the country. The manufacturing jobs that were lost paid far better than alternatives in other sectors. Workers in manufacturing jobs could support a middle-class life-style in a way that was not true if they were forced to work in retail or other service sector jobs.

However, this is no longer the case today. The wage premium enjoyed by manufacturing workers has largely disappeared, as a result of the massive job loss in recent decades. Mishel (2018) found a 7.8 percent straight wage premium for non-college-educated workers for the years 2010 to 2016, in an analysis that controlled for age, race, and gender, and other factors.

That compares to a manufacturing wage premium for non-college-educated workers of 13.1 percent in the 1980s. This analysis found that differences in non-wage compensation added 2.6 percentage points to the manufacturing wage premium for all workers, in the years 2010-2016. But, the non-wage compensation differential may be less for non-college-educated workers since they are less likely to get health care coverage and retirement benefits.

This premium has almost certainly fallen much further in more recent years. The ratio of average hourly earnings of production and non-supervisory workers in manufacturing to the private sector has as whole fell from 96.0 percent in the years covered by the analysis (2010 to 2016) to 91.9 percent in 2021.[2] The falloff in relative pay was even sharper using the Bureau of Labor Statistics Employer Cost for Employee Compensation measure. By this measure, which includes the cost of pensions, health care and other benefits, the ratio of pay for manufacturing workers, relative to all workers, dropped from 110.6 percent in the period analyzed by Mishel, to 103.6 percent in 2021.

The sharp shift in relative pay away from manufacturing workers in the last five years suggests that if there is still a manufacturing wage premium, it is almost certainly very small. The reason for the loss of the manufacturing wage premium should not be any surprise. In addition to manufacturing workers facing the constant threat of outsourcing, there has also been a sharp drop in unionization rates in the sector.

In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had largely disappeared, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

Furthermore, in the last decade, as the manufacturing sector has gotten back some of the jobs lost to trade and the Great Recession, these have mostly not been union jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing dropped by 400,000 over this period.

This means that winning back manufacturing jobs from China, or other countries, is not likely to produce any substantial gains for ordinary workers. The jobs that we gain back are not likely to pay any substantial wage premium over other jobs in the economy, nor are they any more likely to be union jobs.  

Will They Get Us Coming and Going?

The opening of trade in manufactured goods in the last four decades was sold as a grand principle, advancing the cause of “free trade.” As I have continually pointed out, it was not about free trade in general. There was little effort to facilitate trade in physicians’ services or other services provided by highly paid professionals. As a result, the pay of doctors and other protected professionals rose sharply relative to the pay of ordinary workers.

And, our trade deals actually increased barriers in the form of government-granted patent and copyright monopolies and other forms of intellectual property. The increase in protectionism imposed an enormous efficiency cost on the economy. It also was a major factor in the upward redistribution of income in the last four decades. Many of the country’s richest people owe their fortunes in large part to these protections.

It would be truly ironic if we were to transfer still more income upward, with increased subsidies for research and development, with the gains locked down by a small elite with their patent and copyright monopolies. And, the compensation for these gains was a modest increase in manufacturing jobs, which no longer pay a substantial wage premium over other jobs in the economy.

At the moment, given the bipartisan consensus on confronting China, this outcome seems likely. We face a real risk that our path of confrontation will both further increase the upward redistribution of income and also doom efforts to limit the damage from global warming. And no one is even talking about it.

[1] The rule for sharing in research should also preclude using non-disclosure agreements to keep researchers and engineers from sharing their knowledge.

[2] There can still be a wage premium for manufacturing workers even if their average pay is lower than in the private sector, due to composition issues. For example, the average production worker in manufacturing may have less education than production workers in other sectors, or they may live in areas where the average wage is lower than for the country as a whole.

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.

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