• Economic Crisis and RecoveryCrisis económica y recuperaciónInflationUnited StatesEE. UU.
Okay, I have not become an evangelical Christian, but I am still not ready to throw in the towel on the likelihood of sustained inflation. To be clear, there is no doubt that the September CPI was bad news.
You have to dig pretty deep in that report to find much evidence of inflation slowing. We knew some of the numbers would be bad by construction. BLS has done very good research showing how its rental indexes lag private indexes of marketed units. This means that even if rental inflation was slowing in September (this is what the private indexes show), the CPI index would still be reflecting the rapid increases we saw in the market indexes this spring.
Similarly, the health insurance index, which rose 2.1 percent in September, and has risen 28.2 percent over the last year, is based on the gap between insurers’ premiums and what they spend on care. This also lags considerably. The sharp rise in the index reflects a large drop in health care spending during the pandemic. This will likely be reversed in the months ahead, but in the meantime, this component is a big contributor to inflation in the CPI.
But having an explanation for the bad news doesn’t make it good news. We can reasonably expect inflation in the rental indexes to moderate and the health insurance index to turn negative, but for now they are still telling pretty bad stories.
The real disappointment in the September data is that we still have not seen much improvement in the areas where supply chain problems were big factors in pushing up inflation over the last year and a half. There were some good signs, but not much.
Used car prices fell 1.1 percent, but they are still up by more than 50 percent from the start of the pandemic. The appliance index fell 0.3 percent in September, its third consecutive decline. However, appliance prices were still up 13.3 percent from the pre-pandemic level. They had been falling before the pandemic. Apparel prices, which had also been trending downward before the pandemic, fell 0.3 percent, which left them up by 5.5 percent year-over-year (YOY).
Prices continued to rise in other areas where we had seen supply chain issues. Most notably, new vehicle prices rose 0.7 percent, putting their YOY increase at 9.4 percent. The index for car parts and equipment was up 0.8 percent in September, bringing its YOY rise to 13.4 percent year-over-year. And, the price of store-bought food increased 0.7 percent, putting the YOY rise at 13.0 percent.
In short, there was not much evidence of slowing inflation here. The picture looked pretty bad in most major sectors and also most of the minor ones.
Nonetheless, there are still reasons for thinking that inflation will not remain high going forward. My big three are:
Expectations
Taking these in turn, the point on expectations is straightforward. The story of the 1970s inflation was that people came to expect inflation. This led workers to push for higher pay increases. Businesses were more likely to grant them, since they believed that they could quickly recover higher costs with higher prices. This made it harder to push inflation back down to more acceptable levels, since high rates of expected inflation effectively became self-perpetuating.
We have a very different story at present. Expectations of inflation, whether measured by surveys like the University of Michigan’s Consumer Sentiment Index or financial markets through breakeven inflation rates on indexed Treasury bonds, have come back down to pre-pandemic levels, after rising at the end of 2021 and start of this year. (It is worth noting that the even at their peak, inflation expectations were only up by around a percentage point from pre-pandemic levels. This was nothing like what we saw in the 1970s.)
The reasons for the drop can be debated. Perhaps the decline is a vote of confidence in the inflation-fighting commitment of the Fed. In the case of consumer sentiments, it’s likely that three months of falling gas prices played an important role. Whatever the cause, of the drop, the fact that people are not expecting high inflation to persist is undeniable.
Related to this issue, we never saw a pattern of wage growth acceleration remotely comparable to what we saw in the 1970s. The pace of wage growth did increase sharply in 2021, even if we control for issues raised by changes in the composition of employment. However, since peaking at the end of the year, it has slowed sharply in 2022.
Taking my preferred measure, of annualizing the growth in wages from one three-month period to the next three-month period, wage growth peaked at a 6.1 percent annual rate at the start of this year. In the most recent three-month period (July, August, September) compared with the prior three months (April, May, June), wages grew at a 4.8 percent annual rate. That is too fast to be consistent with the Fed’s 2.0 percent inflation target, but the direction of change is clear, wage growth is slowing, not accelerating.
In fact, if we just look at the last two months, the average hourly wage has increased at a 3.6 percent annual rate. As I always point out, the monthly data are erratic and subject to revisions, so we surely would not want to put a lot of weight on these data just yet. Nonetheless, there is at least a possibility that they are accurate. A 3.6 percent pace of wage growth is in fact consistent with the Fed’s inflation target. Wages grew at a 3.4 percent rate in 2019, when inflation was comfortably below 2.0 percent.
In any case, it is clear that we are not seeing the pattern of accelerating wage growth, pushing inflation higher, that we saw in the 1970s. This should mean there is less urgency in pushing inflation down.
Import Prices
The Bureau of Labor Statistics released its report on September import and export prices the day after the CPI. It received almost no attention. This is unfortunate, because it does tell us a great deal about inflationary pressures facing the economy.
While the CPI was worse than expected, the import price data for September was better than expected. The overall import price index fell by 1.2 percent in September. This was driven largely by a 7.5 percent drop in the index for imported fuels, but even pulling this out, import prices dropped by 0.4 percent in September, the fifth straight monthly decline. This means that the prices for a wide range of items that we import, like clothes, cars, appliances, and thousands of other goods and services, are now falling.
This is a big deal. Since May, the non-fuel import price index has fallen by 2.0 percent. This is a 4.7 percent annual rate of decline. By contrast, in the years from May 2020 to May 2021, this index rose by 6.1 percent, and by 5.9 between May 2021 and May 2022. The story here is that the prices of a wide range of imported goods had been putting upward pressure on inflation until the spring of this year. With these prices now falling, imports should be an important factor restraining inflation in the near-term future.
It is also important to realize how important imports are to the economy. Non-oil imports came to $3,734 billion at an annualized rate in the second quarter of this year. This is equal to 14.8 percent of GDP. If the prices of items comprising 14.8 percent of GDP are now falling at a 4.7 percent annual rate, instead of rising at a 6.0 percent annual rate, that has to drastically improve the inflation picture. To be clear, we can’t assume that import prices will keep declining, and certainly not at their recent rate, but the inflationary pressure from rapidly rising import prices seems to be behind us. (The import price index prior to the pandemic had a slight downward trend.)
Even this switch from rapidly rising import prices to rapidly falling ones understates the impact on inflation. Shipping costs soared during the pandemic, as we tried to move a vastly increased quantity of goods, even as Covid was forcing shutdowns of ports and forcing many workers to stay home due to illness. One commonly used index increased almost ten-fold at its peak in September of 2021. It has now fallen back almost 70 percent from that peak, and it seems likely it will fall further.
Shipping costs are not included in the import price index. This means that the prices we pay for the goods we are importing are falling even more sharply than is indicated by the import price index. This should go far towards alleviating inflationary pressures.
Productivity
At least implicitly, productivity growth is a huge part of the inflation story. To simplify a bit, inflation will be equal to the rate of wage growth minus the rate of productivity growth. (This assumes profit shares remain constant, among other things.) This means that if we have wage growth of 3.5 percent, and productivity grows at a 1.5 percent annual rate, inflation will be 2.0 percent.
Higher rates of productivity growth mean that we can have more rapid wage growth without higher inflation. I had been noting an uptick in productivity growth through the fourth quarter of 2021, and argued that workplace innovations associated with the pandemic may have put us on a faster productivity growth path.
That hope vanished with the release of the productivity data from the first and second quarter of 2022. They showed annual rates of decline in productivity of 7.4 percent and 4.1 percent, respectively. Productivity data are notoriously erratic, so single quarter surges or declines are best ignored. I have also been skeptical of the drop in GDP reported for the first half of this year, believing that subsequent revisions may show the economy grew during this period.
But that aside, there can be little doubt that productivity growth in the first half of 2022 was terrible. There are two plausible explanations as to why productivity would suddenly decline. One is labor hoarding. The idea here is that companies are finding it difficult to hire and keep workers, so they in effect hire everyone they can and keep them on the payroll whether they need them or not. This is common behavior in a recession, especially with large companies and highly skilled workers.
I am skeptical of this labor hoarding explanation because it typically would be associated with a decline in the length of the average workweek. The idea would be that you keep workers on the payroll, but maybe you have them work 35 hours a week rather than 40, because you don’t need them for 40 hours. You may not need them for 35 hours either, but since you want to keep the worker, it’s necessary to give them something close to normal hours. (Presumably the employer is also paying for health insurance and other benefits.)
Anyhow, there is not much of a case for a big drop in the length of the workweek in the first half of 2022. There had been some decline in the average workweek in 2021. The length peaked at 35.0 hours in January of 2021 and then fell back to 34.8 hours by the fourth quarter. This would be consistent with a story where employers, unable to hire the workers they needed, worked their existing workforce more hours.
There is a somewhat further decline in the first half of 2022, but the average was 34.6 hours, which is still higher than the 34.4 hour average for 2019, before the pandemic. There is a similar story in most major sectors. This doesn’t rule out the possibility of labor hoarding, but it does seem odd that there would not be some decline in the length of the workweek.
The explanation that strikes me as more likely is that supply chain disruptions are proving to be major obstacles to normal production. This story can be best told with the construction sector.
The combined categories in the National Income and Product Accounts of non-residential construction and residential construction (Table 1.1.6, Lines 10 and 13) fell 6.8 percent between the fourth quarter of 2019 and the second quarter of 2022. By contrast, the Bureau of Labor Statistics (BLS) index of aggregate hours for the construction sector rose 1.0 percent over this period. This would imply roughly a 7.8 percent decline in productivity over this ten-quarter period.[1]
It doesn’t seem plausible that either construction technology or the quality of labor in the industry could have deteriorated so much in such a short period of time. The more obvious explanation for a decline in productivity in construction is that many workers were effectively wasting their time waiting for parts or materials that were needed for them to do their jobs. If there is a comparable picture in many other workplaces, where supply chain issues keep workers from doing their jobs, then the decline in productivity in the first half of 2022 can make some sense.
The positive side of this story is that, if either the labor hoarding or supply chain explanation proves correct, then the drop in productivity reported for the first of 2022 is temporary and should be reversed in future quarters. Data available for the third quarter indicate that we should get some modest positive rate of productivity growth for the quarter.
This brings us back to the costs and inflation picture. The weak productivity performance in the first half of 2022 meant that businesses were seeing sharply higher costs. The data from the Bureau of Labor Statistics show that unit labor costs rose at annual rates of 12.7 percent and 10.2 percent, in the first and second quarters, respectively. Since the profit share was also above its pre-pandemic level, it seems businesses were having no problem passing on these costs in higher prices, but the data imply that they really were seeing sharply rising costs.
However, with productivity growth returning to a more normal pace, the pressure on costs will be far lower than it was in the first half of 2022. This means that a major source of inflationary pressure will have been removed.
Are We Out of the Woods on Inflation?
As a card-carrying member of Team Transitory, I know that my prognostications on inflation have to be viewed with some serious skepticism at this point, but I would urge people to just look at the data. The story on inflation expectations is clear, investors and consumers both anticipate that inflation will come down to pre-pandemic rates. In addition, wage growth has clearly slowed, not accelerated as the bad story would predict. Whether it has slowed to levels consistent with an acceptable rate of inflation remains to be seen.
Higher import prices had been a major factor pushing inflation higher in 2021 and the first five months of this year. Since May, they have been falling rapidly. The impact of this drop in prices is amplified by a huge reduction in shipping costs over this period. Instead of putting upward pressure on prices, these factors should allow for price declines on many items. (We already see evidence of this on items like appliances, with have been falling in price in recent months.)
Finally, we had a horrible story on productivity in the first half of 2022. The reported decline in productivity during the first two quarters meant enormous increases in costs for businesses, most or all of which seems to have been passed on in prices. The good news here is that we seem to be on at least a normal productivity growth path again in the third quarter. Whether it ends up being faster or slower than the pre-pandemic pace remains to be seen, but at least it will be positive.
For these reasons, we can anticipate that inflation will be much less of a problem in the rest of this year and in 2023 than it has been. Does this story mean the Fed should stop raising rates?
Given the September CPI, it would be difficult for the Fed to declare victory and end its hikes. But it can certainly slow the pace. We all know that the full impact of rate hikes takes time and we are just beginning to see the effect of the most recent hikes. It seems there is much more risk at this point of going too far than going too slow. It is also reasonable for the Fed to at least consider the impact of its hikes on the rest of the world, even though we all understand that it is basing its monetary policy on the needs of the U.S. economy.
A small hike in November can show its determination to restrain inflation, while allowing itself more time to assess the data. If the October employment report shows another month of modest of wage growth, it will provide solid evidence that it has brought wage growth down to a non-inflationary sustainable pace.
Unfortunately, the Fed will not have this report until after its meeting. There seems little risk in going with a smaller hike in November, and then take into account the October employment data, along with other data, in determining its course at future meetings.
[1] This is a very crude productivity measure. On the output side, the residential construction data includes some services related to mortgage issuance, which would not be produced by construction workers. The BLS measure of hours only counts payroll employment, excluding self-employed and likely also many workers who might work off the books.
Okay, I have not become an evangelical Christian, but I am still not ready to throw in the towel on the likelihood of sustained inflation. To be clear, there is no doubt that the September CPI was bad news.
You have to dig pretty deep in that report to find much evidence of inflation slowing. We knew some of the numbers would be bad by construction. BLS has done very good research showing how its rental indexes lag private indexes of marketed units. This means that even if rental inflation was slowing in September (this is what the private indexes show), the CPI index would still be reflecting the rapid increases we saw in the market indexes this spring.
Similarly, the health insurance index, which rose 2.1 percent in September, and has risen 28.2 percent over the last year, is based on the gap between insurers’ premiums and what they spend on care. This also lags considerably. The sharp rise in the index reflects a large drop in health care spending during the pandemic. This will likely be reversed in the months ahead, but in the meantime, this component is a big contributor to inflation in the CPI.
But having an explanation for the bad news doesn’t make it good news. We can reasonably expect inflation in the rental indexes to moderate and the health insurance index to turn negative, but for now they are still telling pretty bad stories.
The real disappointment in the September data is that we still have not seen much improvement in the areas where supply chain problems were big factors in pushing up inflation over the last year and a half. There were some good signs, but not much.
Used car prices fell 1.1 percent, but they are still up by more than 50 percent from the start of the pandemic. The appliance index fell 0.3 percent in September, its third consecutive decline. However, appliance prices were still up 13.3 percent from the pre-pandemic level. They had been falling before the pandemic. Apparel prices, which had also been trending downward before the pandemic, fell 0.3 percent, which left them up by 5.5 percent year-over-year (YOY).
Prices continued to rise in other areas where we had seen supply chain issues. Most notably, new vehicle prices rose 0.7 percent, putting their YOY increase at 9.4 percent. The index for car parts and equipment was up 0.8 percent in September, bringing its YOY rise to 13.4 percent year-over-year. And, the price of store-bought food increased 0.7 percent, putting the YOY rise at 13.0 percent.
In short, there was not much evidence of slowing inflation here. The picture looked pretty bad in most major sectors and also most of the minor ones.
Nonetheless, there are still reasons for thinking that inflation will not remain high going forward. My big three are:
Expectations
Taking these in turn, the point on expectations is straightforward. The story of the 1970s inflation was that people came to expect inflation. This led workers to push for higher pay increases. Businesses were more likely to grant them, since they believed that they could quickly recover higher costs with higher prices. This made it harder to push inflation back down to more acceptable levels, since high rates of expected inflation effectively became self-perpetuating.
We have a very different story at present. Expectations of inflation, whether measured by surveys like the University of Michigan’s Consumer Sentiment Index or financial markets through breakeven inflation rates on indexed Treasury bonds, have come back down to pre-pandemic levels, after rising at the end of 2021 and start of this year. (It is worth noting that the even at their peak, inflation expectations were only up by around a percentage point from pre-pandemic levels. This was nothing like what we saw in the 1970s.)
The reasons for the drop can be debated. Perhaps the decline is a vote of confidence in the inflation-fighting commitment of the Fed. In the case of consumer sentiments, it’s likely that three months of falling gas prices played an important role. Whatever the cause, of the drop, the fact that people are not expecting high inflation to persist is undeniable.
Related to this issue, we never saw a pattern of wage growth acceleration remotely comparable to what we saw in the 1970s. The pace of wage growth did increase sharply in 2021, even if we control for issues raised by changes in the composition of employment. However, since peaking at the end of the year, it has slowed sharply in 2022.
Taking my preferred measure, of annualizing the growth in wages from one three-month period to the next three-month period, wage growth peaked at a 6.1 percent annual rate at the start of this year. In the most recent three-month period (July, August, September) compared with the prior three months (April, May, June), wages grew at a 4.8 percent annual rate. That is too fast to be consistent with the Fed’s 2.0 percent inflation target, but the direction of change is clear, wage growth is slowing, not accelerating.
In fact, if we just look at the last two months, the average hourly wage has increased at a 3.6 percent annual rate. As I always point out, the monthly data are erratic and subject to revisions, so we surely would not want to put a lot of weight on these data just yet. Nonetheless, there is at least a possibility that they are accurate. A 3.6 percent pace of wage growth is in fact consistent with the Fed’s inflation target. Wages grew at a 3.4 percent rate in 2019, when inflation was comfortably below 2.0 percent.
In any case, it is clear that we are not seeing the pattern of accelerating wage growth, pushing inflation higher, that we saw in the 1970s. This should mean there is less urgency in pushing inflation down.
Import Prices
The Bureau of Labor Statistics released its report on September import and export prices the day after the CPI. It received almost no attention. This is unfortunate, because it does tell us a great deal about inflationary pressures facing the economy.
While the CPI was worse than expected, the import price data for September was better than expected. The overall import price index fell by 1.2 percent in September. This was driven largely by a 7.5 percent drop in the index for imported fuels, but even pulling this out, import prices dropped by 0.4 percent in September, the fifth straight monthly decline. This means that the prices for a wide range of items that we import, like clothes, cars, appliances, and thousands of other goods and services, are now falling.
This is a big deal. Since May, the non-fuel import price index has fallen by 2.0 percent. This is a 4.7 percent annual rate of decline. By contrast, in the years from May 2020 to May 2021, this index rose by 6.1 percent, and by 5.9 between May 2021 and May 2022. The story here is that the prices of a wide range of imported goods had been putting upward pressure on inflation until the spring of this year. With these prices now falling, imports should be an important factor restraining inflation in the near-term future.
It is also important to realize how important imports are to the economy. Non-oil imports came to $3,734 billion at an annualized rate in the second quarter of this year. This is equal to 14.8 percent of GDP. If the prices of items comprising 14.8 percent of GDP are now falling at a 4.7 percent annual rate, instead of rising at a 6.0 percent annual rate, that has to drastically improve the inflation picture. To be clear, we can’t assume that import prices will keep declining, and certainly not at their recent rate, but the inflationary pressure from rapidly rising import prices seems to be behind us. (The import price index prior to the pandemic had a slight downward trend.)
Even this switch from rapidly rising import prices to rapidly falling ones understates the impact on inflation. Shipping costs soared during the pandemic, as we tried to move a vastly increased quantity of goods, even as Covid was forcing shutdowns of ports and forcing many workers to stay home due to illness. One commonly used index increased almost ten-fold at its peak in September of 2021. It has now fallen back almost 70 percent from that peak, and it seems likely it will fall further.
Shipping costs are not included in the import price index. This means that the prices we pay for the goods we are importing are falling even more sharply than is indicated by the import price index. This should go far towards alleviating inflationary pressures.
Productivity
At least implicitly, productivity growth is a huge part of the inflation story. To simplify a bit, inflation will be equal to the rate of wage growth minus the rate of productivity growth. (This assumes profit shares remain constant, among other things.) This means that if we have wage growth of 3.5 percent, and productivity grows at a 1.5 percent annual rate, inflation will be 2.0 percent.
Higher rates of productivity growth mean that we can have more rapid wage growth without higher inflation. I had been noting an uptick in productivity growth through the fourth quarter of 2021, and argued that workplace innovations associated with the pandemic may have put us on a faster productivity growth path.
That hope vanished with the release of the productivity data from the first and second quarter of 2022. They showed annual rates of decline in productivity of 7.4 percent and 4.1 percent, respectively. Productivity data are notoriously erratic, so single quarter surges or declines are best ignored. I have also been skeptical of the drop in GDP reported for the first half of this year, believing that subsequent revisions may show the economy grew during this period.
But that aside, there can be little doubt that productivity growth in the first half of 2022 was terrible. There are two plausible explanations as to why productivity would suddenly decline. One is labor hoarding. The idea here is that companies are finding it difficult to hire and keep workers, so they in effect hire everyone they can and keep them on the payroll whether they need them or not. This is common behavior in a recession, especially with large companies and highly skilled workers.
I am skeptical of this labor hoarding explanation because it typically would be associated with a decline in the length of the average workweek. The idea would be that you keep workers on the payroll, but maybe you have them work 35 hours a week rather than 40, because you don’t need them for 40 hours. You may not need them for 35 hours either, but since you want to keep the worker, it’s necessary to give them something close to normal hours. (Presumably the employer is also paying for health insurance and other benefits.)
Anyhow, there is not much of a case for a big drop in the length of the workweek in the first half of 2022. There had been some decline in the average workweek in 2021. The length peaked at 35.0 hours in January of 2021 and then fell back to 34.8 hours by the fourth quarter. This would be consistent with a story where employers, unable to hire the workers they needed, worked their existing workforce more hours.
There is a somewhat further decline in the first half of 2022, but the average was 34.6 hours, which is still higher than the 34.4 hour average for 2019, before the pandemic. There is a similar story in most major sectors. This doesn’t rule out the possibility of labor hoarding, but it does seem odd that there would not be some decline in the length of the workweek.
The explanation that strikes me as more likely is that supply chain disruptions are proving to be major obstacles to normal production. This story can be best told with the construction sector.
The combined categories in the National Income and Product Accounts of non-residential construction and residential construction (Table 1.1.6, Lines 10 and 13) fell 6.8 percent between the fourth quarter of 2019 and the second quarter of 2022. By contrast, the Bureau of Labor Statistics (BLS) index of aggregate hours for the construction sector rose 1.0 percent over this period. This would imply roughly a 7.8 percent decline in productivity over this ten-quarter period.[1]
It doesn’t seem plausible that either construction technology or the quality of labor in the industry could have deteriorated so much in such a short period of time. The more obvious explanation for a decline in productivity in construction is that many workers were effectively wasting their time waiting for parts or materials that were needed for them to do their jobs. If there is a comparable picture in many other workplaces, where supply chain issues keep workers from doing their jobs, then the decline in productivity in the first half of 2022 can make some sense.
The positive side of this story is that, if either the labor hoarding or supply chain explanation proves correct, then the drop in productivity reported for the first of 2022 is temporary and should be reversed in future quarters. Data available for the third quarter indicate that we should get some modest positive rate of productivity growth for the quarter.
This brings us back to the costs and inflation picture. The weak productivity performance in the first half of 2022 meant that businesses were seeing sharply higher costs. The data from the Bureau of Labor Statistics show that unit labor costs rose at annual rates of 12.7 percent and 10.2 percent, in the first and second quarters, respectively. Since the profit share was also above its pre-pandemic level, it seems businesses were having no problem passing on these costs in higher prices, but the data imply that they really were seeing sharply rising costs.
However, with productivity growth returning to a more normal pace, the pressure on costs will be far lower than it was in the first half of 2022. This means that a major source of inflationary pressure will have been removed.
Are We Out of the Woods on Inflation?
As a card-carrying member of Team Transitory, I know that my prognostications on inflation have to be viewed with some serious skepticism at this point, but I would urge people to just look at the data. The story on inflation expectations is clear, investors and consumers both anticipate that inflation will come down to pre-pandemic rates. In addition, wage growth has clearly slowed, not accelerated as the bad story would predict. Whether it has slowed to levels consistent with an acceptable rate of inflation remains to be seen.
Higher import prices had been a major factor pushing inflation higher in 2021 and the first five months of this year. Since May, they have been falling rapidly. The impact of this drop in prices is amplified by a huge reduction in shipping costs over this period. Instead of putting upward pressure on prices, these factors should allow for price declines on many items. (We already see evidence of this on items like appliances, with have been falling in price in recent months.)
Finally, we had a horrible story on productivity in the first half of 2022. The reported decline in productivity during the first two quarters meant enormous increases in costs for businesses, most or all of which seems to have been passed on in prices. The good news here is that we seem to be on at least a normal productivity growth path again in the third quarter. Whether it ends up being faster or slower than the pre-pandemic pace remains to be seen, but at least it will be positive.
For these reasons, we can anticipate that inflation will be much less of a problem in the rest of this year and in 2023 than it has been. Does this story mean the Fed should stop raising rates?
Given the September CPI, it would be difficult for the Fed to declare victory and end its hikes. But it can certainly slow the pace. We all know that the full impact of rate hikes takes time and we are just beginning to see the effect of the most recent hikes. It seems there is much more risk at this point of going too far than going too slow. It is also reasonable for the Fed to at least consider the impact of its hikes on the rest of the world, even though we all understand that it is basing its monetary policy on the needs of the U.S. economy.
A small hike in November can show its determination to restrain inflation, while allowing itself more time to assess the data. If the October employment report shows another month of modest of wage growth, it will provide solid evidence that it has brought wage growth down to a non-inflationary sustainable pace.
Unfortunately, the Fed will not have this report until after its meeting. There seems little risk in going with a smaller hike in November, and then take into account the October employment data, along with other data, in determining its course at future meetings.
[1] This is a very crude productivity measure. On the output side, the residential construction data includes some services related to mortgage issuance, which would not be produced by construction workers. The BLS measure of hours only counts payroll employment, excluding self-employed and likely also many workers who might work off the books.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónHealthcareInflationUnited StatesEE. UU.
There was not much positive news in the September CPI report that came out yesterday. So, since I don’t have anything good to say on inflation, let’s change the topic to health care. (Actually, there is some basis for optimism on inflation, which I will get to in the next couple of days.)
Anyhow, apart from the issues with inflation, there is an important story with health care that has gotten little attention. Health care spending has slowed sharply from its pre-pandemic path. In fact, measured as a share of GDP it was actually lower in the second quarter of 2022 than in 2019, as shown below.[1]
Source: Bureau of Economic Analysis and author’s calculations, see text.
By my calculations, health care spending as share of GDP was 0.7 percent of GDP less in the second quarter of 2022 than it had been in 2019. This is especially impressive because the Centers for Medicare and Medicaid Services (CMS) had projected that the health care spending share of GDP would rise by roughly 0.2 percentage points a year. That puts current spending roughly 1.3 percentage points below what CMS had projected before the pandemic.
This is a big deal. This falloff in spending corresponds to $325 billion annually in the current economy. That comes to roughly $1,000 a year per person, or $4,000 for a family of four, that is freed up for other purposes.
Of course, not all this money will show up in family budgets. Some of this is savings to the government on health care programs like Medicare and Medicaid. Some of this will be savings to employers, who presumably are paying somewhat less to insure their workers than they would have if health care spending had followed its projected path. But, some of this translates into savings to households who are paying less for medical services and insurance than would have been the case if health care costs had stayed on its pre-pandemic course.
It is important to recognize that the savings on health care is not all a positive story. One major source of savings is the million plus people who have died from COVID-19. The people who died from COVID-19 were on average older and less healthy than the population as a whole, and therefore likely received more medical care than most people. Their deaths meant less demand for medical services, but this is not how we want to save money.
It may also be the case that people are still getting fewer services than they might have before the pandemic. For example, spending on visits to dentists fell sharply during the pandemic for obvious reasons, but it seems to be largely on track at present.
There may be some efficiencies in the provision of services, which allow people to get the same quality care at a lower cost. For example, the use of telemedicine has exploded since the pandemic. A survey conducted by the Department of Health and Human Services found that one-in-four people reported having a remote visit with a health care provider in the prior four weeks. Since most people will not visit any health care provider in a random four-week period, this figure indicates that a very large share of the people needing health care are now taking advantage of remote visits. Home therapeutic devices may also substitute for visits to doctors or other health care professionals.
There is a possibility that these substitutions are jeopardizing the quality of care. We will only find this out after more time, if we discover a deterioration in health status. But, it is important to remember that what we value is health, not visits to the doctor or various medical tests and procedures. If we can have fewer services, and not have a deterioration in the public’s health, that is a positive for society.
This is not the first time that a sharp slowing in health care spending has passed unnoticed. The growth of health care spending slowed sharply after the passage of “Obamacare” in 2010. In 2009, the CMS projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.
For some reason, the Democrats never took credit for this slowing in health care cost growth. While Obamacare surely was not the only factor leading to slower spending growth, it almost certainly played a role. And, there is no doubt that if spending growth had accelerated, even for reasons that had nothing to do with Obamacare, the Republicans and the media would have hyped this fact endlessly.
Anyhow, the reduction in the share of GDP going to health care spending since the start of the pandemic is a big deal. It deserves more attention than it has received.
[1] I know these numbers are slightly higher than what the CMS report for health care spending as a share of GDP. I assume this is due to some double counting, where I may have some government health care spending, which also shows up as consumption. For those wanting to check, I added lines 64, 119, 170, and 273 from NIPA Table 2.4.5U and line 32 from NIPA Table 3.12U. These are therapeutic equipment, pharmaceuticals and other medical products, health care services, and net health care insurance. Line 32 is the government spending on Medicaid and other health care provision. While my sum for this spending is obviously somewhat higher than the share CMS shows, which was 17.6 percent of GDP for 2019, presumably the changes since 2019 are following medical spending as defined by CMS reasonably closely.
There was not much positive news in the September CPI report that came out yesterday. So, since I don’t have anything good to say on inflation, let’s change the topic to health care. (Actually, there is some basis for optimism on inflation, which I will get to in the next couple of days.)
Anyhow, apart from the issues with inflation, there is an important story with health care that has gotten little attention. Health care spending has slowed sharply from its pre-pandemic path. In fact, measured as a share of GDP it was actually lower in the second quarter of 2022 than in 2019, as shown below.[1]
Source: Bureau of Economic Analysis and author’s calculations, see text.
By my calculations, health care spending as share of GDP was 0.7 percent of GDP less in the second quarter of 2022 than it had been in 2019. This is especially impressive because the Centers for Medicare and Medicaid Services (CMS) had projected that the health care spending share of GDP would rise by roughly 0.2 percentage points a year. That puts current spending roughly 1.3 percentage points below what CMS had projected before the pandemic.
This is a big deal. This falloff in spending corresponds to $325 billion annually in the current economy. That comes to roughly $1,000 a year per person, or $4,000 for a family of four, that is freed up for other purposes.
Of course, not all this money will show up in family budgets. Some of this is savings to the government on health care programs like Medicare and Medicaid. Some of this will be savings to employers, who presumably are paying somewhat less to insure their workers than they would have if health care spending had followed its projected path. But, some of this translates into savings to households who are paying less for medical services and insurance than would have been the case if health care costs had stayed on its pre-pandemic course.
It is important to recognize that the savings on health care is not all a positive story. One major source of savings is the million plus people who have died from COVID-19. The people who died from COVID-19 were on average older and less healthy than the population as a whole, and therefore likely received more medical care than most people. Their deaths meant less demand for medical services, but this is not how we want to save money.
It may also be the case that people are still getting fewer services than they might have before the pandemic. For example, spending on visits to dentists fell sharply during the pandemic for obvious reasons, but it seems to be largely on track at present.
There may be some efficiencies in the provision of services, which allow people to get the same quality care at a lower cost. For example, the use of telemedicine has exploded since the pandemic. A survey conducted by the Department of Health and Human Services found that one-in-four people reported having a remote visit with a health care provider in the prior four weeks. Since most people will not visit any health care provider in a random four-week period, this figure indicates that a very large share of the people needing health care are now taking advantage of remote visits. Home therapeutic devices may also substitute for visits to doctors or other health care professionals.
There is a possibility that these substitutions are jeopardizing the quality of care. We will only find this out after more time, if we discover a deterioration in health status. But, it is important to remember that what we value is health, not visits to the doctor or various medical tests and procedures. If we can have fewer services, and not have a deterioration in the public’s health, that is a positive for society.
This is not the first time that a sharp slowing in health care spending has passed unnoticed. The growth of health care spending slowed sharply after the passage of “Obamacare” in 2010. In 2009, the CMS projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.
For some reason, the Democrats never took credit for this slowing in health care cost growth. While Obamacare surely was not the only factor leading to slower spending growth, it almost certainly played a role. And, there is no doubt that if spending growth had accelerated, even for reasons that had nothing to do with Obamacare, the Republicans and the media would have hyped this fact endlessly.
Anyhow, the reduction in the share of GDP going to health care spending since the start of the pandemic is a big deal. It deserves more attention than it has received.
[1] I know these numbers are slightly higher than what the CMS report for health care spending as a share of GDP. I assume this is due to some double counting, where I may have some government health care spending, which also shows up as consumption. For those wanting to check, I added lines 64, 119, 170, and 273 from NIPA Table 2.4.5U and line 32 from NIPA Table 3.12U. These are therapeutic equipment, pharmaceuticals and other medical products, health care services, and net health care insurance. Line 32 is the government spending on Medicaid and other health care provision. While my sum for this spending is obviously somewhat higher than the share CMS shows, which was 17.6 percent of GDP for 2019, presumably the changes since 2019 are following medical spending as defined by CMS reasonably closely.
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No, that’s not what the NYT told us. Its mind-reading reporters instead told readers:
“To date, Mr. Macron has been loath to tax the oil giants’ windfall profits, worrying it would tarnish the country’s investment appeal, and preferring instead that companies make what he termed a ‘contribution.'”
The NYT, of course, does not know if Macron is really “worrying” about damaging France’s appeal to investors. This may be what Macron says, but [pro tip here] politicians are not always truthful about their motives.
There are undoubtedly many people in France who would claim that Macron is beholden to the rich and does not want to tax the oil companies’ windfall profits because he doesn’t want to hurt his friends. The NYT would never consider attributing that motive to Macron as an objective fact, although it may quote a political opponent making this complaint.
In the same vein, the paper should not attribute Macron’s alleged concerns about hurting France’s investment climate as an objective fact. It can simply report his or others’ statements to this effect.
No, that’s not what the NYT told us. Its mind-reading reporters instead told readers:
“To date, Mr. Macron has been loath to tax the oil giants’ windfall profits, worrying it would tarnish the country’s investment appeal, and preferring instead that companies make what he termed a ‘contribution.'”
The NYT, of course, does not know if Macron is really “worrying” about damaging France’s appeal to investors. This may be what Macron says, but [pro tip here] politicians are not always truthful about their motives.
There are undoubtedly many people in France who would claim that Macron is beholden to the rich and does not want to tax the oil companies’ windfall profits because he doesn’t want to hurt his friends. The NYT would never consider attributing that motive to Macron as an objective fact, although it may quote a political opponent making this complaint.
In the same vein, the paper should not attribute Macron’s alleged concerns about hurting France’s investment climate as an objective fact. It can simply report his or others’ statements to this effect.
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Dear Beat the Press Readers,
This is Dawn, Dean’s colleague at the Center for Economic and Policy Research, hijacking Dean’s blog to invite you to a special event on Tuesday, October 25, 2022, at 7 PM ET that we’re calling “Winner Winner Chicken Dinner.”
Dean and the Institute for New Economic Thinking partnered to produce a video series outlining how we can “Uncluck” America. Well, except they didn’t use the term “Uncluck” – we’re sure you can use your imagination to figure out what flagged them as NSFW and prevented us from sharing these videos widely. Yep, they were that smoking hot. And finger-lickin good.
Dean is hosting a live virtual screening of Episode 1: “How to Unf★ck Intellectual Property.” Afterward, he will answer your questions and explain further how, if everyone listened to Dean, there would be a chicken in every pot.
This event is a fundraiser to support Dean’s great work. You can sponsor this event at whatever level you choose (dinner provided by you):
And the good news? All are vegan-friendly!
Click HERE to register
Thanks for your support of Dean’s work over the years. We all know that America has been “clucked” for a long time. It’s time we unrig the economy so that people, and chickens, get a fair deal.
Now, back to your regularly scheduled program…
Dear Beat the Press Readers,
This is Dawn, Dean’s colleague at the Center for Economic and Policy Research, hijacking Dean’s blog to invite you to a special event on Tuesday, October 25, 2022, at 7 PM ET that we’re calling “Winner Winner Chicken Dinner.”
Dean and the Institute for New Economic Thinking partnered to produce a video series outlining how we can “Uncluck” America. Well, except they didn’t use the term “Uncluck” – we’re sure you can use your imagination to figure out what flagged them as NSFW and prevented us from sharing these videos widely. Yep, they were that smoking hot. And finger-lickin good.
Dean is hosting a live virtual screening of Episode 1: “How to Unf★ck Intellectual Property.” Afterward, he will answer your questions and explain further how, if everyone listened to Dean, there would be a chicken in every pot.
This event is a fundraiser to support Dean’s great work. You can sponsor this event at whatever level you choose (dinner provided by you):
And the good news? All are vegan-friendly!
Click HERE to register
Thanks for your support of Dean’s work over the years. We all know that America has been “clucked” for a long time. It’s time we unrig the economy so that people, and chickens, get a fair deal.
Now, back to your regularly scheduled program…
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• Economic Crisis and RecoveryCrisis económica y recuperación
The Paycheck Protection Program (PPP), was inevitably going to face problems. It was designed in a huge rush, as Congress sought to keep businesses and workers whole through an indeterminate period of mandated shutdowns. The idea was that if businesses kept workers on the payroll, the government would pick up most of the tab.
It was obviously not going to be easy to police a new program being put in place in the middle of a pandemic. The verification relied to a substantial extent on self-reporting. The key issue was that in order to get a loan forgiven, 75 percent of the funds had to be used for payroll related expenses, specifically pay and employee benefits.
This was already a lax standard for a program designed to keep workers getting paychecks. It might have been reasonable to require 80 or even 90 percent of the money in a “paycheck protection program” to actually be used to cover paychecks.
Unfortunately, Congress went the other way, instead of tightening the rules, it decided to loosen them. It reduced the portion of the loans that had to go to wages and benefits, in order to be forgiven, to just 60 percent.
This seems like an incredibly foolish decision for anyone concerned about whether the government money would be well-used, as NPR noted in a segment this evening. It turned to experts to find out why the rules were so lax.
A Little History
If NPR wanted a fuller answer to this question, it might have reviewed its own coverage of the PPP at the time. For example, on May 4, 2020, it ran a piece telling listeners about the problems with the PPP.
“Some small businesses say the loans have too many strings
“Business owners lucky enough to get the funding have said the money kept their businesses afloat. However, some owners also said PPP rules are not allowing them to use the money in the ways they see as best.
“Among their biggest complaints: 75% of the forgiven amount on the loans must be spent on payroll. The rest can only be spent on a few categories: rent, mortgage interest or utilities.
“But with many businesses unable to reopen, owners wonder how to spend that much on payroll when they have little or no work for their employees to do.
“’I understand in principle it’s encouraging us to get people back to work,’ said Christian Piatt, the co-owner of Brew Drinkery in Granbury, Texas. ‘But in practice, when you have a retail storefront that is not being allowed by local authorities to operate in the way that we had before, there should be some consideration to make it to account for that.’”
This was not the only time NPR made a pitch for loosening the rules on PPP loans. Later that month it has another piece on troubles with the PPP. At one point it told listeners:
“Some businesses fear PPP consequences
“Some business owners like Kern-Desjarlais have decided that the PPP just doesn’t work with their finances. The restrictions surrounding how the money must be spent — for example, that it must be spent in eight weeks, with 75% spent on payroll in order to be forgiven — have frustrated some business owners.”
In short, if NPR wants to do an honest piece on why the PPP rules were so lax and allowed so much room for abuse, it really needs to look at media coverage, including its own, which was effectively a lobbying campaign for loosening standards. It would have been fine to present views of business owners wanting looser rules (surprise, surprise), but the media should have also presented the views of virtually every policy expert who could have explained why loosening rules would have opened the door to abuse.
The voices of these policy experts were largely absent from NPR and other major news outlets when business groups were pushing for relaxing standards. In short, if NPR wants to know why there was so much corruption in the PPP, it should start by looking in the mirror.
The Paycheck Protection Program (PPP), was inevitably going to face problems. It was designed in a huge rush, as Congress sought to keep businesses and workers whole through an indeterminate period of mandated shutdowns. The idea was that if businesses kept workers on the payroll, the government would pick up most of the tab.
It was obviously not going to be easy to police a new program being put in place in the middle of a pandemic. The verification relied to a substantial extent on self-reporting. The key issue was that in order to get a loan forgiven, 75 percent of the funds had to be used for payroll related expenses, specifically pay and employee benefits.
This was already a lax standard for a program designed to keep workers getting paychecks. It might have been reasonable to require 80 or even 90 percent of the money in a “paycheck protection program” to actually be used to cover paychecks.
Unfortunately, Congress went the other way, instead of tightening the rules, it decided to loosen them. It reduced the portion of the loans that had to go to wages and benefits, in order to be forgiven, to just 60 percent.
This seems like an incredibly foolish decision for anyone concerned about whether the government money would be well-used, as NPR noted in a segment this evening. It turned to experts to find out why the rules were so lax.
A Little History
If NPR wanted a fuller answer to this question, it might have reviewed its own coverage of the PPP at the time. For example, on May 4, 2020, it ran a piece telling listeners about the problems with the PPP.
“Some small businesses say the loans have too many strings
“Business owners lucky enough to get the funding have said the money kept their businesses afloat. However, some owners also said PPP rules are not allowing them to use the money in the ways they see as best.
“Among their biggest complaints: 75% of the forgiven amount on the loans must be spent on payroll. The rest can only be spent on a few categories: rent, mortgage interest or utilities.
“But with many businesses unable to reopen, owners wonder how to spend that much on payroll when they have little or no work for their employees to do.
“’I understand in principle it’s encouraging us to get people back to work,’ said Christian Piatt, the co-owner of Brew Drinkery in Granbury, Texas. ‘But in practice, when you have a retail storefront that is not being allowed by local authorities to operate in the way that we had before, there should be some consideration to make it to account for that.’”
This was not the only time NPR made a pitch for loosening the rules on PPP loans. Later that month it has another piece on troubles with the PPP. At one point it told listeners:
“Some businesses fear PPP consequences
“Some business owners like Kern-Desjarlais have decided that the PPP just doesn’t work with their finances. The restrictions surrounding how the money must be spent — for example, that it must be spent in eight weeks, with 75% spent on payroll in order to be forgiven — have frustrated some business owners.”
In short, if NPR wants to do an honest piece on why the PPP rules were so lax and allowed so much room for abuse, it really needs to look at media coverage, including its own, which was effectively a lobbying campaign for loosening standards. It would have been fine to present views of business owners wanting looser rules (surprise, surprise), but the media should have also presented the views of virtually every policy expert who could have explained why loosening rules would have opened the door to abuse.
The voices of these policy experts were largely absent from NPR and other major news outlets when business groups were pushing for relaxing standards. In short, if NPR wants to know why there was so much corruption in the PPP, it should start by looking in the mirror.
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• Economic Crisis and RecoveryCrisis económica y recuperación
We have been hearing endless stories about how inflation is wiping out families who are struggling to make ends meet. And now, just when you thought it couldn’t get any worse, the Washington Post tells us that the major retailers are slashing prices to deal with an inventory glut.
“Dell has too many computers. Nike is swimming in summer clothes. And Gap is flooded with basics like T-shirts and shorts.”
“In response, many of the country’s largest retailers are kicking off holiday sales earlier than ever, in hopes of clearing their warehouses enough to accommodate a new round of winter orders, according to company filings and earnings calls.”
Many of us who follow the news might think this would be great news, just what the doctor ordered for households struggling with inflation, but no, that would be wrong.
“And the timing couldn’t be worse, as Americans’ appetite for clothing, furniture, electronics and other goods has cooled off in part due to surging inflation but also because of changing pandemic patterns toward services like restaurants and travel. Monthly household spending on goods has slowed lately.
“With inflation stubbornly near 40-year highs, many are finding that even the deepest discounts aren’t translating into sales. Americans are spending more of their budgets on essentials like gas and groceries, leaving less for nonessential items.”
This sure looks like a bad case of the “which way is up?” problem in economics. After telling us about how people think the economy is awful because of inflation, now the Washington Post gives us the bad news that prices for a wide range of products is plunging.
Oh, and just in case readers get confused, many of these items with falling prices, like clothes, fit into the essential category. Apparently the Post missed it, but gas prices have fallen sharply since their peak this spring and are now much lower in real terms than they were through the first half of the last decade, so high gas prices are not keeping people from buying other things.
After telling us how the rundown of inventories will slow economic growth, towards the end of the piece, the Post finally does mention a positive side to the picture.
“Wide-ranging discounts could help ease some of the pain of inflation. Overall prices have risen 8.3 percent from a year ago, a notch down from the summer’s highs but still far higher than historic norms, according to the Bureau of Labor Statistics.
“There are already signs that prices are easing in some parts of the economy. Appliances, bedroom furniture, jewelry, TVs and smartphones were all cheaper in August than they were in July.
“’Prices will get lower,’ said Liz Ann Sonders, chief investment strategist at Charles Schwab. ‘We’re already seeing it to some degree: disinflation, if not outright deflation, in some areas where companies just have to work down their inventories.’”
After hearing endless stories of “inflation, inflation, inflation,” we might think tumbling prices for a wide range of goods would be a really positive story, but not in the Washington Post. This is just a story of troubled retailers, struggling to manage inventories and seeing shrinking profit margins.
As they say, “bad news for Biden.”
We have been hearing endless stories about how inflation is wiping out families who are struggling to make ends meet. And now, just when you thought it couldn’t get any worse, the Washington Post tells us that the major retailers are slashing prices to deal with an inventory glut.
“Dell has too many computers. Nike is swimming in summer clothes. And Gap is flooded with basics like T-shirts and shorts.”
“In response, many of the country’s largest retailers are kicking off holiday sales earlier than ever, in hopes of clearing their warehouses enough to accommodate a new round of winter orders, according to company filings and earnings calls.”
Many of us who follow the news might think this would be great news, just what the doctor ordered for households struggling with inflation, but no, that would be wrong.
“And the timing couldn’t be worse, as Americans’ appetite for clothing, furniture, electronics and other goods has cooled off in part due to surging inflation but also because of changing pandemic patterns toward services like restaurants and travel. Monthly household spending on goods has slowed lately.
“With inflation stubbornly near 40-year highs, many are finding that even the deepest discounts aren’t translating into sales. Americans are spending more of their budgets on essentials like gas and groceries, leaving less for nonessential items.”
This sure looks like a bad case of the “which way is up?” problem in economics. After telling us about how people think the economy is awful because of inflation, now the Washington Post gives us the bad news that prices for a wide range of products is plunging.
Oh, and just in case readers get confused, many of these items with falling prices, like clothes, fit into the essential category. Apparently the Post missed it, but gas prices have fallen sharply since their peak this spring and are now much lower in real terms than they were through the first half of the last decade, so high gas prices are not keeping people from buying other things.
After telling us how the rundown of inventories will slow economic growth, towards the end of the piece, the Post finally does mention a positive side to the picture.
“Wide-ranging discounts could help ease some of the pain of inflation. Overall prices have risen 8.3 percent from a year ago, a notch down from the summer’s highs but still far higher than historic norms, according to the Bureau of Labor Statistics.
“There are already signs that prices are easing in some parts of the economy. Appliances, bedroom furniture, jewelry, TVs and smartphones were all cheaper in August than they were in July.
“’Prices will get lower,’ said Liz Ann Sonders, chief investment strategist at Charles Schwab. ‘We’re already seeing it to some degree: disinflation, if not outright deflation, in some areas where companies just have to work down their inventories.’”
After hearing endless stories of “inflation, inflation, inflation,” we might think tumbling prices for a wide range of goods would be a really positive story, but not in the Washington Post. This is just a story of troubled retailers, struggling to manage inventories and seeing shrinking profit margins.
As they say, “bad news for Biden.”
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• Economic Crisis and RecoveryCrisis económica y recuperaciónEconomic PolicyUnited StatesEE. UU.
The media keep telling us that the economy is a losing issue for Democrats. I know that this is the Republicans’ talking point, but that is not what the data show.
For tens of millions of people, there is a huge amount of good news about the economy over the last year and a half. That doesn’t mean that tens of millions of people are not struggling, they are. And, that is always true in the US economy.
The fact that a country as rich as ours does not have decent welfare state provisions that can ensure people adequate housing, food, and health care is an outrage. But that is a longer-term story, not something that just happened in the last year and a half. When the media suddenly choose to emphasize the struggling population, in ways that they have not done in the past, that is a political decision on their part, not one responding to a new economic reality.
Anyhow, with that issue out of the way, I’m going to emphasize some of the positive aspects of the economy which are getting little attention from media.
People Quitting Crappy Jobs
We have heard a great deal about the bad news from a tight labor market: rapidly rising wages are creating inflationary pressures, which the Fed is combatting with its aggressive path of interest rate hikes. For some reason, the flip side of this picture has gotten much less attention.
The tight labor market has meant that millions of workers have been able to quit jobs that they don’t like. In the last year, there were 51.5 million voluntary quits from jobs. That is 9.3 million more than the number of people who quit their jobs in the year before the pandemic hit. (This number is for total quits, since some people quit more than once, the actual number of people who quit jobs would be somewhat lower.)
The increase was seen most clearly in the lowest paying jobs. The quit rate in the hotel and restaurant sector, meaning the percentage of workers who quit their job each month, has averaged almost 6.0 percent in the last year. That is 25 percent higher than the 4.8 percent average in the year before the pandemic.
It is also important to remember that we had a very strong labor market in the year before the pandemic, with the lowest unemployment rates in half a century. So workers have felt far more freedom to quit jobs they don’t like in the last year than has been the case for a very long time.
Rising Real Wages at the Bottom
Inflation has taken a toll on workers in the last year and a half, but the impact has been hugely exaggerated. If we look at the real average hourly wage for all workers since the start of the pandemic in February of 2020, it was down by 0.7 percent, as of August. (We don’t have inflation data yet for September.)
This is bad, but hardly unprecedented. For example, real average hourly wages dropped a full 1.0 percent in the year from November 2006 to November 2007, which was before the start of the Great Recession.
The picture looks somewhat better if we look at the data for production and nonsupervisory workers, which excludes most higher end workers. This series also goes back much further, historically. As of September, the real average hourly wage was down by less than 0.1 percent from its February 2020 level. That’s the wrong direction, but not exactly a crisis.
By comparison, this measure fell by 3.8 percent from January of 1980 to January of 1989, a period in which the media were touting “morning in America.”
The story looks better if we look to the lowest paid workers. Real average hour earnings for production and nonsupervisory in the leisure and hospitality industry (hotels and restaurants), rose by 3.9 percent from February 2020 to August. (Arin Dube and David Autor have been doing careful analysis with the Current Population Survey documenting the sharp increase in pay for low end workers during the pandemic recovery.)
To be clear, we should want to see a better picture on wage growth, with workers across the board seeing pay hikes. But the experience in the last year and a half hardly stands out as being especially bad by any historical measure. Furthermore, we have been through a worldwide pandemic and are now seeing the largest conflict in Europe since World War II. It would be a bit nuts to think we could pass through these events without any disruption to the economy.
The Benefits of Increased Work from Home
There has been a huge surge in the number of people working from home since the start of the pandemic. During the shutdown period in the spring of 2020, this was largely because there was no alternative. However, for the most part, people working from home at present are doing it by choice. In 2021, there were roughly 19 million more people (12.7 percent of the workforce) who reported that they primarily worked from home than in 2019.
This is a huge benefit for these workers. The average amount of time spent commuting in 2019 was 27.6 minutes for a one-way trip, or 55.2 minutes for the round-trip. If we assume an eight-hour work day, time spent commuting added an average of 11.5 percent to the length of the workday. We can think of this as equivalent to an 11.5 percent reduction in the hourly pay rate, compared to a situation where no time is spent commuting.
Commuting to work doesn’t just take time, it is expensive. The average commuting distance to work is more than 15 miles. That means 30 miles for the round-trip. At federal government’s mileage reimbursement rate of 62.5 cents per mile, this comes $18.75 a day or almost $4,900 a year. That is 7.0 percent of the annual pay of a worker earning $70,000 a year.
It’s not just travel expenses that people save by being able to work at home. They can save on paying for business clothes, dry cleaning, and buying a purchased lunch at work. For many families, working from home may also save on childcare, insofar as they are able to care for young children without seriously disrupting their work.
In short, the option to work from home can mean large savings in time and money. Also avoiding traffic jams may mean a major quality of life improvement. It is true that the option to work from home is available primarily to the top half of earners, and especially the top fifth, but this is still a very large number that extends far beyond just the rich.
Also, these higher paid workers have on average not seen their pay keep pace with inflation since the start of the pandemic. Insofar as they are able to save time and money by working from home, many are still likely coming out well ahead of where they were before the pandemic, if they can work from home at least part of the time.
Mortgage Refinancing
While the Fed’s rate hikes have pretty much put an end to the refinancing boom we saw in 2020 and 2021, this boom has meant much more money in the pockets of tens of millions of homeowners. More than 17 million homeowners refinanced their mortgages in 2020 and 2021 combined. The average amount of money in a refinance mortgage was close to $250,000. If people refinancing saved an average of 1.0 percentage points on their interest rate, this would imply savings of $2,500 a year.
Savings of this magnitude go a long way towards covering the increases in the price of milk and meat. For some reason, there is very little mention of the money saved by refinancing in media discussions of economic well-being during the pandemic recovery.
While homeownership, like the option to work from home, also skews towards the higher end of the income distribution, it goes much further down. Nearly two-thirds of households are homeowners. Furthermore, those most likely in a situation to benefit from refinancing are younger families, as older homeowners have likely paid off most or all of their mortgage. This means that a large share of very middle-income families are likely to be among the group that has benefitted from refinancing a mortgage at a lower interest rate in the last two and a half years.
Telemedicine
There has been a huge surge in telemedicine since the start of the pandemic which will likely continue going forward. According to a recent survey by the Department of Health and Human Services, almost one-in-four adults reported having a remote appointment with a health care professional in the four weeks prior to the survey.
While telemedicine will never completely replace in-person visits, it can provide enormous benefits to patients. It saves the time and expense that are involved in physically visiting a doctor or other health care professional. This is an especially big deal for patients who are in bad health, who are the ones most likely to be having appointments with health care professionals.
Telemedicine also radically increases the access of patients to specialists who may be in other parts of the country. A person with a rare condition, can use telemedicine to have an appointment with a leading expert on the other side of the country, rather than undertaking an expensive and exhausting trip to visit them in person.
It is likely that we will see increased use of remote services in a wide variety of areas going forward, saving large amounts of time and money on in-person visits. Also, the remote provision of many of these services, such as college classes, is likely to improve through time as better technologies are developed and people become more accustomed to using these tools.
The Score on Living Standards
If we try to get a fuller picture of the economic situation it is hard to find the dismal economy that is front and center in economic reporting. As noted, the lowest paid workers have seen pay gains that have exceeded inflation since the start of the pandemic, so the story of increased suffering among this group is not accurate, based on the data we have.
Tens of millions of more middle-income workers have seen their pay slightly lag inflation, but this is not a phenomenon unique to the Biden presidency. There have been many periods in the last half century where the typical worker’s pay has not kept pace with prices, most notably the eight years of the Reagan presidency, which are often described as the “Reagan boom.”
In addition, millions of middle-income workers have been able to save thousands of dollars in annual interest payments by refinancing their mortgages at the low rates available in 2020 and 2021. A large share of the people in the top 40 percent of wage earners have also benefited by the explosion in remote work. These people have been able to save a large amount of time and money on commuting costs.
It is worth pointing out an oddity in our economic accounting. The money that workers save on commuting by working from home does not appear as a reduction in the cost of living in the consumer price index or other measures of inflation. For purposes of accounting, the money people spend on their drive to and from work is treated no differently than the money spent on items that actually provide direct benefit, like food, clothing, or shelter.
If a worker can save $4,000 a year on expenses associated with working in an office, this does not show up as a benefit anywhere in our accounts. Similarly, if a patient can substitute a remote video conference for a three-day cross-country trip to visit a specialist, this does not appear as any sort of gain. Tens of millions of people are experiencing these benefits as a result of changes brought on by the pandemic, but they are not picked up in our usual measures of living standards.
Just to go back to a point made the beginning, there are tens of millions of people who are struggling in today’s economy. Almost 12.0 percent of the population is living below the poverty line, that translates into almost 40 million people. We can add in people living at less than twice the poverty line and get more than 80 million people who are facing serious hardship.
But the point is that this is always true. With the poor quality of its welfare state, and its large number of low-paying jobs, the United States will always have a huge number of people struggling to get by even in the best of times. The decision made by the media to put these struggling people at the center of the economic story during Biden’s presidency is a political decision, not one driven by economic reality.
The media keep telling us that the economy is a losing issue for Democrats. I know that this is the Republicans’ talking point, but that is not what the data show.
For tens of millions of people, there is a huge amount of good news about the economy over the last year and a half. That doesn’t mean that tens of millions of people are not struggling, they are. And, that is always true in the US economy.
The fact that a country as rich as ours does not have decent welfare state provisions that can ensure people adequate housing, food, and health care is an outrage. But that is a longer-term story, not something that just happened in the last year and a half. When the media suddenly choose to emphasize the struggling population, in ways that they have not done in the past, that is a political decision on their part, not one responding to a new economic reality.
Anyhow, with that issue out of the way, I’m going to emphasize some of the positive aspects of the economy which are getting little attention from media.
People Quitting Crappy Jobs
We have heard a great deal about the bad news from a tight labor market: rapidly rising wages are creating inflationary pressures, which the Fed is combatting with its aggressive path of interest rate hikes. For some reason, the flip side of this picture has gotten much less attention.
The tight labor market has meant that millions of workers have been able to quit jobs that they don’t like. In the last year, there were 51.5 million voluntary quits from jobs. That is 9.3 million more than the number of people who quit their jobs in the year before the pandemic hit. (This number is for total quits, since some people quit more than once, the actual number of people who quit jobs would be somewhat lower.)
The increase was seen most clearly in the lowest paying jobs. The quit rate in the hotel and restaurant sector, meaning the percentage of workers who quit their job each month, has averaged almost 6.0 percent in the last year. That is 25 percent higher than the 4.8 percent average in the year before the pandemic.
It is also important to remember that we had a very strong labor market in the year before the pandemic, with the lowest unemployment rates in half a century. So workers have felt far more freedom to quit jobs they don’t like in the last year than has been the case for a very long time.
Rising Real Wages at the Bottom
Inflation has taken a toll on workers in the last year and a half, but the impact has been hugely exaggerated. If we look at the real average hourly wage for all workers since the start of the pandemic in February of 2020, it was down by 0.7 percent, as of August. (We don’t have inflation data yet for September.)
This is bad, but hardly unprecedented. For example, real average hourly wages dropped a full 1.0 percent in the year from November 2006 to November 2007, which was before the start of the Great Recession.
The picture looks somewhat better if we look at the data for production and nonsupervisory workers, which excludes most higher end workers. This series also goes back much further, historically. As of September, the real average hourly wage was down by less than 0.1 percent from its February 2020 level. That’s the wrong direction, but not exactly a crisis.
By comparison, this measure fell by 3.8 percent from January of 1980 to January of 1989, a period in which the media were touting “morning in America.”
The story looks better if we look to the lowest paid workers. Real average hour earnings for production and nonsupervisory in the leisure and hospitality industry (hotels and restaurants), rose by 3.9 percent from February 2020 to August. (Arin Dube and David Autor have been doing careful analysis with the Current Population Survey documenting the sharp increase in pay for low end workers during the pandemic recovery.)
To be clear, we should want to see a better picture on wage growth, with workers across the board seeing pay hikes. But the experience in the last year and a half hardly stands out as being especially bad by any historical measure. Furthermore, we have been through a worldwide pandemic and are now seeing the largest conflict in Europe since World War II. It would be a bit nuts to think we could pass through these events without any disruption to the economy.
The Benefits of Increased Work from Home
There has been a huge surge in the number of people working from home since the start of the pandemic. During the shutdown period in the spring of 2020, this was largely because there was no alternative. However, for the most part, people working from home at present are doing it by choice. In 2021, there were roughly 19 million more people (12.7 percent of the workforce) who reported that they primarily worked from home than in 2019.
This is a huge benefit for these workers. The average amount of time spent commuting in 2019 was 27.6 minutes for a one-way trip, or 55.2 minutes for the round-trip. If we assume an eight-hour work day, time spent commuting added an average of 11.5 percent to the length of the workday. We can think of this as equivalent to an 11.5 percent reduction in the hourly pay rate, compared to a situation where no time is spent commuting.
Commuting to work doesn’t just take time, it is expensive. The average commuting distance to work is more than 15 miles. That means 30 miles for the round-trip. At federal government’s mileage reimbursement rate of 62.5 cents per mile, this comes $18.75 a day or almost $4,900 a year. That is 7.0 percent of the annual pay of a worker earning $70,000 a year.
It’s not just travel expenses that people save by being able to work at home. They can save on paying for business clothes, dry cleaning, and buying a purchased lunch at work. For many families, working from home may also save on childcare, insofar as they are able to care for young children without seriously disrupting their work.
In short, the option to work from home can mean large savings in time and money. Also avoiding traffic jams may mean a major quality of life improvement. It is true that the option to work from home is available primarily to the top half of earners, and especially the top fifth, but this is still a very large number that extends far beyond just the rich.
Also, these higher paid workers have on average not seen their pay keep pace with inflation since the start of the pandemic. Insofar as they are able to save time and money by working from home, many are still likely coming out well ahead of where they were before the pandemic, if they can work from home at least part of the time.
Mortgage Refinancing
While the Fed’s rate hikes have pretty much put an end to the refinancing boom we saw in 2020 and 2021, this boom has meant much more money in the pockets of tens of millions of homeowners. More than 17 million homeowners refinanced their mortgages in 2020 and 2021 combined. The average amount of money in a refinance mortgage was close to $250,000. If people refinancing saved an average of 1.0 percentage points on their interest rate, this would imply savings of $2,500 a year.
Savings of this magnitude go a long way towards covering the increases in the price of milk and meat. For some reason, there is very little mention of the money saved by refinancing in media discussions of economic well-being during the pandemic recovery.
While homeownership, like the option to work from home, also skews towards the higher end of the income distribution, it goes much further down. Nearly two-thirds of households are homeowners. Furthermore, those most likely in a situation to benefit from refinancing are younger families, as older homeowners have likely paid off most or all of their mortgage. This means that a large share of very middle-income families are likely to be among the group that has benefitted from refinancing a mortgage at a lower interest rate in the last two and a half years.
Telemedicine
There has been a huge surge in telemedicine since the start of the pandemic which will likely continue going forward. According to a recent survey by the Department of Health and Human Services, almost one-in-four adults reported having a remote appointment with a health care professional in the four weeks prior to the survey.
While telemedicine will never completely replace in-person visits, it can provide enormous benefits to patients. It saves the time and expense that are involved in physically visiting a doctor or other health care professional. This is an especially big deal for patients who are in bad health, who are the ones most likely to be having appointments with health care professionals.
Telemedicine also radically increases the access of patients to specialists who may be in other parts of the country. A person with a rare condition, can use telemedicine to have an appointment with a leading expert on the other side of the country, rather than undertaking an expensive and exhausting trip to visit them in person.
It is likely that we will see increased use of remote services in a wide variety of areas going forward, saving large amounts of time and money on in-person visits. Also, the remote provision of many of these services, such as college classes, is likely to improve through time as better technologies are developed and people become more accustomed to using these tools.
The Score on Living Standards
If we try to get a fuller picture of the economic situation it is hard to find the dismal economy that is front and center in economic reporting. As noted, the lowest paid workers have seen pay gains that have exceeded inflation since the start of the pandemic, so the story of increased suffering among this group is not accurate, based on the data we have.
Tens of millions of more middle-income workers have seen their pay slightly lag inflation, but this is not a phenomenon unique to the Biden presidency. There have been many periods in the last half century where the typical worker’s pay has not kept pace with prices, most notably the eight years of the Reagan presidency, which are often described as the “Reagan boom.”
In addition, millions of middle-income workers have been able to save thousands of dollars in annual interest payments by refinancing their mortgages at the low rates available in 2020 and 2021. A large share of the people in the top 40 percent of wage earners have also benefited by the explosion in remote work. These people have been able to save a large amount of time and money on commuting costs.
It is worth pointing out an oddity in our economic accounting. The money that workers save on commuting by working from home does not appear as a reduction in the cost of living in the consumer price index or other measures of inflation. For purposes of accounting, the money people spend on their drive to and from work is treated no differently than the money spent on items that actually provide direct benefit, like food, clothing, or shelter.
If a worker can save $4,000 a year on expenses associated with working in an office, this does not show up as a benefit anywhere in our accounts. Similarly, if a patient can substitute a remote video conference for a three-day cross-country trip to visit a specialist, this does not appear as any sort of gain. Tens of millions of people are experiencing these benefits as a result of changes brought on by the pandemic, but they are not picked up in our usual measures of living standards.
Just to go back to a point made the beginning, there are tens of millions of people who are struggling in today’s economy. Almost 12.0 percent of the population is living below the poverty line, that translates into almost 40 million people. We can add in people living at less than twice the poverty line and get more than 80 million people who are facing serious hardship.
But the point is that this is always true. With the poor quality of its welfare state, and its large number of low-paying jobs, the United States will always have a huge number of people struggling to get by even in the best of times. The decision made by the media to put these struggling people at the center of the economic story during Biden’s presidency is a political decision, not one driven by economic reality.
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• Economic Crisis and RecoveryCrisis económica y recuperación
Okay, that’s not exactly right, the headline was “U.S. National Debt Tops $31 Trillion for the First Time.” This was a bit weird for two reasons. First, $31 trillion, like $31.1 trillion, is not some nice round number that provides an obvious benchmark.
The other reason the headline was odd was the use of the expression “for the first time.” Our debt has been consistently rising for more than two decades. In fact, except for short period at the end of the last century and start of this century, it has been rising consistently for a half century.
This means that every debt number we hit will be “for the first time.” It’s sort of like the tree in my backyard being taller than it ever was before. That will always be true, not the sort of thing you would typically put in a headline.
In short, the New York Times took a non-event and decided that it was a good occasion to get its readers to worry about the national debt. That’s the sort of thing that would ordinarily go in the opinion section. But let’s look at the substance.
The piece tells us:
“The breach of the threshold, which was revealed in a Treasury Department report, comes at an inopportune moment, as historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation. While record levels of government borrowing to fight the pandemic and finance tax cuts were once seen by some policymakers as affordable, those higher rates are making America’s debts more costly over time.”
It then gives the views of two deficit hawks, along with warnings from the Congressional Budget Office (CBO) that, “investors could lose confidence in the government’s ability to repay what it owes.”
So, the big issue is that paying interest on the debt is going to become more costly over time. This is very plausible, but it might have been helpful if we had some context as to how large this cost will be, instead of just trying to scare readers with the really big numbers.
The most obvious starting point is the ratio of interest payments to GDP. This is actually still near historic lows, CBO projects interest to be equal to 1.7 percent of GDP in the current fiscal year. It does project the cost to rise, both because of an increase in the debt to GDP ratio and also due to higher interest rates. However, even with this rise, the ratio of interest payments to GDP only hits its 1990s peak of 3.2 percent of GDP in 2032.
Here’s the picture since 1962.
Source: Congressional Budget Office.
It’s also worth noting that the 1990s were actually a very good decade for the economy. We didn’t suffer in any obvious way from the high ratio of interest payments to GDP. This means that if the CBO projections prove accurate and we actually see the ratio of interest to GDP rise to the 1990s levels, it hardly implies some sort of economic disaster.
What About Government-Granted Patent and Copyright Monopolies?
It is bizarre that people complaining about government budget deficits literally never express concern about the government’s granting of patent and copyright monopolies, which can raise the price of protected items by many thousand percent above their free-market level.
As should be obvious, direct spending and patent and copyright monopolies are alternative ways for the government to pay for things. We can either have direct public funding, or we can tell companies to innovate or do creative work, and we will give them a monopoly over what they produce. For some reason, the New York Times is very concerned about the costs of the former, but doesn’t seem to care at all about the latter mechanism the government uses to pay for services.
Since I get tired of writing the same thing all the time, I’m just going to lift what I wrote in a blog post last year.
The more important part of this story is that the conventional calculations of the debt leave out the higher prices that we will pay for items like prescription drugs and computer software because of government-granted patent and copyright monopolies. This is a huge burden, which is many times larger than the debt burden, but policy types and reporters refuse to ever talk about it for some reason.
This is a simple and logical point. The government can pay for things by writing checks. It typically does this with things like roads, bridges, and teachers’ salaries. It can also pay for things by giving out patent or copyright monopolies.
When the government gives out these monopolies, it is telling innovators or creative workers to develop a new product or write a new book, and you will be given a monopoly for a period of time. This government-granted monopoly will allow you to charge a price that is far above the free market price.
This point has nothing to do with whether you think patents are a good way to support innovation or copyrights are the best way to support creative work, it is a logical point. If the government will threaten to arrest anyone who produces the Moderna vaccine, Moderna gets to charge a much higher price than if everyone in the world can produce the vaccine.[2]
This brings us back to my question: how can someone who claims to be concerned about the burden of the government debt on our children, ignore the burden, in the form of higher prices, created by government-granted patent and copyright monopolies? If the government were to put a tax on prescription drugs to help cover its debt service, we would all recognize this tax as a burden on households.
Yet somehow, we are supposed to believe that if the government gives out a patent monopoly that allows a drug company to charge a price that is far higher than the free market price, that is not a burden. That makes zero sense.
And this burden is very large. By my calculations, the higher cost due to patent monopolies and related protections comes to more than $400 billion (1.8 percent of GDP) in the case of prescription drugs alone. If we add in the higher costs that we pay for medical equipment, computers, software, and a variety of other items, the burden likely comes to more than $1 trillion a year, or 4.5 percent of GDP.
This is more than four times the burden of the debt, but the folks who complain about the debt burden on our kids never talk about it. This is simply not honest. If we are genuinely concerned about the burdens the government is imposing on our children, then we don’t get to selectively pick which burdens we will talk about.
The Deficit and Patent and Copyright Monopolies
There is a similar story with the deficit and these monopolies. And again, it is a matter of logic, not whether we think they are good mechanisms for supporting innovation and creative work. (I talk about alternatives in chapter 5 of Rigged [it’s free].)
Patent and copyright monopolies are intended to motivate people to innovate and do creative work. This means that they increase spending and GDP. The concern over large deficits is that the government is over-stimulating the economy, that it is demanding so many goods and services that the economy can’t meet both the demand from the private sector and the government.
If this is a concern, why should we not also be concerned about the increased demand created by government-granted patent and copyright monopolies? According to the National Income and Product Accounts (Table 5.6.5, Line 9), the pharmaceutical industry spent $105.7 billion on research in 2020. This has the same impact on demand in the economy as if the government spent another $105.7 billion on research.
How can we be concerned about the inflationary impact of government spending, but not the patent-induced spending by the industry? That makes zero sense.
Is an Honest Budget Debate Possible?
The point here is that we need to have honest discussions about debt and deficit concerns. The current discussions are not remotely honest because they refuse to take full accounting of the mechanisms the government uses to pay for goods and services. Others can debate whether this is due to laziness or deliberate dishonesty, but the media’s reporting on debt and deficits is not serving the public.
[1] The burden would be considerably lower if we adjusted for inflation, but we will leave that one alone for now.
[2] The government doesn’t directly threaten to arrest someone for infringing on a patent or copyright. Typically, the holder of the monopoly would go to court seeking damages and an injunction ordering the person to stop the infringement. If the person ignores the injunction and continues infringing, they could go to jail for ignoring an injunction.
Okay, that’s not exactly right, the headline was “U.S. National Debt Tops $31 Trillion for the First Time.” This was a bit weird for two reasons. First, $31 trillion, like $31.1 trillion, is not some nice round number that provides an obvious benchmark.
The other reason the headline was odd was the use of the expression “for the first time.” Our debt has been consistently rising for more than two decades. In fact, except for short period at the end of the last century and start of this century, it has been rising consistently for a half century.
This means that every debt number we hit will be “for the first time.” It’s sort of like the tree in my backyard being taller than it ever was before. That will always be true, not the sort of thing you would typically put in a headline.
In short, the New York Times took a non-event and decided that it was a good occasion to get its readers to worry about the national debt. That’s the sort of thing that would ordinarily go in the opinion section. But let’s look at the substance.
The piece tells us:
“The breach of the threshold, which was revealed in a Treasury Department report, comes at an inopportune moment, as historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation. While record levels of government borrowing to fight the pandemic and finance tax cuts were once seen by some policymakers as affordable, those higher rates are making America’s debts more costly over time.”
It then gives the views of two deficit hawks, along with warnings from the Congressional Budget Office (CBO) that, “investors could lose confidence in the government’s ability to repay what it owes.”
So, the big issue is that paying interest on the debt is going to become more costly over time. This is very plausible, but it might have been helpful if we had some context as to how large this cost will be, instead of just trying to scare readers with the really big numbers.
The most obvious starting point is the ratio of interest payments to GDP. This is actually still near historic lows, CBO projects interest to be equal to 1.7 percent of GDP in the current fiscal year. It does project the cost to rise, both because of an increase in the debt to GDP ratio and also due to higher interest rates. However, even with this rise, the ratio of interest payments to GDP only hits its 1990s peak of 3.2 percent of GDP in 2032.
Here’s the picture since 1962.
Source: Congressional Budget Office.
It’s also worth noting that the 1990s were actually a very good decade for the economy. We didn’t suffer in any obvious way from the high ratio of interest payments to GDP. This means that if the CBO projections prove accurate and we actually see the ratio of interest to GDP rise to the 1990s levels, it hardly implies some sort of economic disaster.
What About Government-Granted Patent and Copyright Monopolies?
It is bizarre that people complaining about government budget deficits literally never express concern about the government’s granting of patent and copyright monopolies, which can raise the price of protected items by many thousand percent above their free-market level.
As should be obvious, direct spending and patent and copyright monopolies are alternative ways for the government to pay for things. We can either have direct public funding, or we can tell companies to innovate or do creative work, and we will give them a monopoly over what they produce. For some reason, the New York Times is very concerned about the costs of the former, but doesn’t seem to care at all about the latter mechanism the government uses to pay for services.
Since I get tired of writing the same thing all the time, I’m just going to lift what I wrote in a blog post last year.
The more important part of this story is that the conventional calculations of the debt leave out the higher prices that we will pay for items like prescription drugs and computer software because of government-granted patent and copyright monopolies. This is a huge burden, which is many times larger than the debt burden, but policy types and reporters refuse to ever talk about it for some reason.
This is a simple and logical point. The government can pay for things by writing checks. It typically does this with things like roads, bridges, and teachers’ salaries. It can also pay for things by giving out patent or copyright monopolies.
When the government gives out these monopolies, it is telling innovators or creative workers to develop a new product or write a new book, and you will be given a monopoly for a period of time. This government-granted monopoly will allow you to charge a price that is far above the free market price.
This point has nothing to do with whether you think patents are a good way to support innovation or copyrights are the best way to support creative work, it is a logical point. If the government will threaten to arrest anyone who produces the Moderna vaccine, Moderna gets to charge a much higher price than if everyone in the world can produce the vaccine.[2]
This brings us back to my question: how can someone who claims to be concerned about the burden of the government debt on our children, ignore the burden, in the form of higher prices, created by government-granted patent and copyright monopolies? If the government were to put a tax on prescription drugs to help cover its debt service, we would all recognize this tax as a burden on households.
Yet somehow, we are supposed to believe that if the government gives out a patent monopoly that allows a drug company to charge a price that is far higher than the free market price, that is not a burden. That makes zero sense.
And this burden is very large. By my calculations, the higher cost due to patent monopolies and related protections comes to more than $400 billion (1.8 percent of GDP) in the case of prescription drugs alone. If we add in the higher costs that we pay for medical equipment, computers, software, and a variety of other items, the burden likely comes to more than $1 trillion a year, or 4.5 percent of GDP.
This is more than four times the burden of the debt, but the folks who complain about the debt burden on our kids never talk about it. This is simply not honest. If we are genuinely concerned about the burdens the government is imposing on our children, then we don’t get to selectively pick which burdens we will talk about.
The Deficit and Patent and Copyright Monopolies
There is a similar story with the deficit and these monopolies. And again, it is a matter of logic, not whether we think they are good mechanisms for supporting innovation and creative work. (I talk about alternatives in chapter 5 of Rigged [it’s free].)
Patent and copyright monopolies are intended to motivate people to innovate and do creative work. This means that they increase spending and GDP. The concern over large deficits is that the government is over-stimulating the economy, that it is demanding so many goods and services that the economy can’t meet both the demand from the private sector and the government.
If this is a concern, why should we not also be concerned about the increased demand created by government-granted patent and copyright monopolies? According to the National Income and Product Accounts (Table 5.6.5, Line 9), the pharmaceutical industry spent $105.7 billion on research in 2020. This has the same impact on demand in the economy as if the government spent another $105.7 billion on research.
How can we be concerned about the inflationary impact of government spending, but not the patent-induced spending by the industry? That makes zero sense.
Is an Honest Budget Debate Possible?
The point here is that we need to have honest discussions about debt and deficit concerns. The current discussions are not remotely honest because they refuse to take full accounting of the mechanisms the government uses to pay for goods and services. Others can debate whether this is due to laziness or deliberate dishonesty, but the media’s reporting on debt and deficits is not serving the public.
[1] The burden would be considerably lower if we adjusted for inflation, but we will leave that one alone for now.
[2] The government doesn’t directly threaten to arrest someone for infringing on a patent or copyright. Typically, the holder of the monopoly would go to court seeking damages and an injunction ordering the person to stop the infringement. If the person ignores the injunction and continues infringing, they could go to jail for ignoring an injunction.
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I gather everyone must know, since the reporting on Britain’s new Prime Minister Liz Truss’s proposed 43 billion pound tax cut never included any context. There was no effort to express the tax cut relative to the size of the economy, the budget, or on a per person basis. In fact, the reporting did not even make it clear that the cost is a one year figure, rather than a ten year number, which is now the standard in the United States.
For those who might not be intimately familiar with the size of the UK economy or budget, the tax cut would be a bit less than 2 percent of the UK’s projected GDP for 2023 and roughly 4 percent of its projected budget. It would be a bit more than 640 pounds per person (around $660 dollars). And, yes it is a one year figure.
But hey, you all knew this already, right?
I gather everyone must know, since the reporting on Britain’s new Prime Minister Liz Truss’s proposed 43 billion pound tax cut never included any context. There was no effort to express the tax cut relative to the size of the economy, the budget, or on a per person basis. In fact, the reporting did not even make it clear that the cost is a one year figure, rather than a ten year number, which is now the standard in the United States.
For those who might not be intimately familiar with the size of the UK economy or budget, the tax cut would be a bit less than 2 percent of the UK’s projected GDP for 2023 and roughly 4 percent of its projected budget. It would be a bit more than 640 pounds per person (around $660 dollars). And, yes it is a one year figure.
But hey, you all knew this already, right?
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• Economic Crisis and RecoveryCrisis económica y recuperaciónEconomic GrowthEl DesarolloUnited StatesEE. UU.
Jason Furman has been tweeting about how real disposable personal income has been falling behind its trend growth. After the August data came out last week, Jason tweeted that per capita real disposable income was 8.0 percent below its pre-pandemic trend growth pace. Since Jason is generally very careful in his work, and this would be a big falloff, I thought it was worth a closer look.
The first question to ask, is what growth should we have expected? Jason is projecting a pre-pandemic trend. It is generally reasonable to expect the future to be like the past, except when we know there will be some important differences.
In this case, we did know of an important difference even before the pandemic: the retirement of the baby boom generation. The bulk of the baby boomers is now in their sixties and seventies. We are in the peak years of baby boomer retirement, which means the labor force would be expected to grow more slowly than it had in the recent past.
If we want to know where we should have expected to be in terms of disposable income, we need projections that take baby boomer retirements into account. A useful place to start is the Congressional Budget Office (CBO) projections from January of 2020, which were made before anyone knew of the impact of the pandemic.
Table 1 below derives growth in real per capita personal income from the CBO projections. (I used population projections from the 2019 Social Security Trustees Report.) The CBO data is given quarterly rather than monthly, so I used the projections from the first quarter of 2020 (which would correspond closely to levels for February of 2020) and the third quarter of 2022 (which would correspond closely to August of 2022).
| 2020:Q1 | 2022:Q3 | Growth | |
|---|---|---|---|
| Personal Income | 19100 | 21094 | 10.44% |
| Inflation (CPI) | 260 | 276 | 6.37% |
| Real Personal Income | 7354 | 7636 | 3.83% |
| Population | 338 | 344 | 1.88% |
| Real per capita income | 21,790 | 22,206 | 1.91% |
The first row shows projected personal income for the first quarter of 2020 and the third quarter of 2022. As can be seen, CBO projected cumulative growth over this period of 10.4 percent. CBO doesn’t directly give real income growth, but it does have projections for the CPI. They projected that cumulative inflation over this period, as measured by the CPI, would be 6.4 percent. This implied real income personal income growth of 3.8 percent.
CBO does not directly project disposable personal income, but the difference between personal income and disposable income is taxes. If the tax rate does not change, then disposable personal income would increase at the same rate as personal income. I’ll come to the issue of taxes shortly.
The next issue is population growth. The Social Security Trustees Report projected a 1.9 percent population growth over this period. (I assumed the population for the period from the start of 2020 to the middle of 2022 was half the growth projected for the five years from 2020 to 2025.) This leaves us with a projection of real per capita personal income growth of 1.9 percent over this period.
| Actual | Predicted | Percent of Predicted | |||||
|---|---|---|---|---|---|---|---|
| Feb-20 | Aug-22 | 22-Aug | |||||
| Real per capita personal income | $52,140 | $53,121 | $53,136 | 99.97% | |||
| Real per capita disposable income | $45,948 | $45,292 | $46,826 | 96.72% | |||
| Tax Share of personal income | 11.88% | 14.74% | |||||
Table 2 shows the actual and predicted values of real per capita personal income and real per capita disposable income for February 2020 and August 2022. As can be seen, the actual value for real per capita personal income was almost exactly what we would have expected based on the CBO projections from January 2020. It is just 0.03 percent lower than the projected value.
However, the value for disposable income is 3.3 percent less than what would have been expected based on the CBO numbers. It turns out there is a simple explanation for this difference. People were paying a much larger share of their income in taxes in August of 2022 than in February of 2020.
Since there have been no major increases in personal taxes in the last two and a half years, the most obvious explanation for this increase in taxes is that people are paying capital gains taxes on stocks they sold at a profit. The capital gains themselves do not count as personal income, however, the taxes they pay on these gains are subtracted from disposable income. Insofar as we are seeing disposable income fall behind its projected growth path, it seems an increase in capital gain tax payments is the main factor.
In short, it looks as though income growth has held up surprisingly well through the pandemic, as well as the disruptions created by the war in Ukraine. The economy clearly faces serious problems, but these have not as yet had a major impact on the growth of disposable income.
Jason Furman has been tweeting about how real disposable personal income has been falling behind its trend growth. After the August data came out last week, Jason tweeted that per capita real disposable income was 8.0 percent below its pre-pandemic trend growth pace. Since Jason is generally very careful in his work, and this would be a big falloff, I thought it was worth a closer look.
The first question to ask, is what growth should we have expected? Jason is projecting a pre-pandemic trend. It is generally reasonable to expect the future to be like the past, except when we know there will be some important differences.
In this case, we did know of an important difference even before the pandemic: the retirement of the baby boom generation. The bulk of the baby boomers is now in their sixties and seventies. We are in the peak years of baby boomer retirement, which means the labor force would be expected to grow more slowly than it had in the recent past.
If we want to know where we should have expected to be in terms of disposable income, we need projections that take baby boomer retirements into account. A useful place to start is the Congressional Budget Office (CBO) projections from January of 2020, which were made before anyone knew of the impact of the pandemic.
Table 1 below derives growth in real per capita personal income from the CBO projections. (I used population projections from the 2019 Social Security Trustees Report.) The CBO data is given quarterly rather than monthly, so I used the projections from the first quarter of 2020 (which would correspond closely to levels for February of 2020) and the third quarter of 2022 (which would correspond closely to August of 2022).
| 2020:Q1 | 2022:Q3 | Growth | |
|---|---|---|---|
| Personal Income | 19100 | 21094 | 10.44% |
| Inflation (CPI) | 260 | 276 | 6.37% |
| Real Personal Income | 7354 | 7636 | 3.83% |
| Population | 338 | 344 | 1.88% |
| Real per capita income | 21,790 | 22,206 | 1.91% |
The first row shows projected personal income for the first quarter of 2020 and the third quarter of 2022. As can be seen, CBO projected cumulative growth over this period of 10.4 percent. CBO doesn’t directly give real income growth, but it does have projections for the CPI. They projected that cumulative inflation over this period, as measured by the CPI, would be 6.4 percent. This implied real income personal income growth of 3.8 percent.
CBO does not directly project disposable personal income, but the difference between personal income and disposable income is taxes. If the tax rate does not change, then disposable personal income would increase at the same rate as personal income. I’ll come to the issue of taxes shortly.
The next issue is population growth. The Social Security Trustees Report projected a 1.9 percent population growth over this period. (I assumed the population for the period from the start of 2020 to the middle of 2022 was half the growth projected for the five years from 2020 to 2025.) This leaves us with a projection of real per capita personal income growth of 1.9 percent over this period.
| Actual | Predicted | Percent of Predicted | |||||
|---|---|---|---|---|---|---|---|
| Feb-20 | Aug-22 | 22-Aug | |||||
| Real per capita personal income | $52,140 | $53,121 | $53,136 | 99.97% | |||
| Real per capita disposable income | $45,948 | $45,292 | $46,826 | 96.72% | |||
| Tax Share of personal income | 11.88% | 14.74% | |||||
Table 2 shows the actual and predicted values of real per capita personal income and real per capita disposable income for February 2020 and August 2022. As can be seen, the actual value for real per capita personal income was almost exactly what we would have expected based on the CBO projections from January 2020. It is just 0.03 percent lower than the projected value.
However, the value for disposable income is 3.3 percent less than what would have been expected based on the CBO numbers. It turns out there is a simple explanation for this difference. People were paying a much larger share of their income in taxes in August of 2022 than in February of 2020.
Since there have been no major increases in personal taxes in the last two and a half years, the most obvious explanation for this increase in taxes is that people are paying capital gains taxes on stocks they sold at a profit. The capital gains themselves do not count as personal income, however, the taxes they pay on these gains are subtracted from disposable income. Insofar as we are seeing disposable income fall behind its projected growth path, it seems an increase in capital gain tax payments is the main factor.
In short, it looks as though income growth has held up surprisingly well through the pandemic, as well as the disruptions created by the war in Ukraine. The economy clearly faces serious problems, but these have not as yet had a major impact on the growth of disposable income.
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