Can you imagine doing a 1300-word piece on how ordinary people are faring in the economy and never once mentioning unemployment? Apparently, the New York Times opinion page editors don’t think jobs matter to people, since they ran a column by Karen Petrou (the managing partner of Federal Financial Analytics) that didn’t mention unemployment once. The piece is titled “Why Voters Aren’t Buying Biden’s Boasts About Bidenomics” and uses a cornucopia of bad economics to argue the case against Biden.
It’s hard to know where to begin in addressing this piece, so it’s probably best to start where the piece starts.
“On Oct. 26, the Department of Commerce announced that gross domestic product had grown at an annual rate of 4.9 percent in the third quarter. This growth rate ran well above even optimistic forecasts, leading to what can only be called triumphalism from a White House dead-set on making “Bidenomics” a key to its 2024 presidential campaign. President Biden issued a self-congratulatory statement, the White House echoed it over and over — and Donald Trump’s relative popularity increased.”
Like every president, Biden has talked about economic growth. But he also talks about jobs and wages, sort of like all the time, as when he touted the big wage gains by UAW workers following their strike (which he supported). In fact, the very next week after the GDP report, Biden was very happy to boast about the 21st consecutive month of unemployment below 4.0 percent when the October jobs data were released.
Low unemployment is actually a very big deal for workers, not only because it means they have jobs, but it means that they can leave jobs they don’t like and find better ones. Workers have been doing this in large numbers since the unemployment rate fell to extraordinarily low levels in early 2022. As a result, according to the Conference Board, workplace satisfaction is at its highest level in the nearly forty years they have conducted the survey.
Biden also was happy to boast about wages that were outstripping inflation, a point that sort of squeaks through in the confusion in Petrou’s piece. The piece includes a graph of nominal wage growth and nominal price growth.
The graph shows wage growth modestly outstripping prices through most of Trump’s term, and then hugely outstripping prices in 2020. For Biden we get the opposite story, prices outpaced wages in 2021, then hugely outpaced wages in 2022, but inflation then dropped and wages are again outpacing inflation, with the biggest gains for those at the bottom (contrary to what Petrou told readers).
The pattern here is not much of a mystery to people who follow the economy. Wages hugely outstripped prices in 2020 because tens of millions of low-paid workers in restaurants, hotels and other service industries lost their jobs. When you get rid of low-paid workers, the average wage rises, just as the average height in a room increases if we get the short people to leave.
We saw the opposite story in 2021 as low-paid workers got their jobs back. We also did have the problem of serious supply disruptions created by the pandemic and Russia’s invasion of Ukraine. As the supply problems have eased inflation has come back down.
Inflation due to the pandemic was a worldwide phenomenon, not just something that hit the United States. In fact, we have dealt with the problem very well. The U.S. inflation rate is now the second lowest among major economies, only slightly higher than Japan’s.
It is fair to say that people don’t care that things are worse in Germany or Canada, they care about their own finances. But, Petrou is quite explicitly making an attack on Bidenomics as policy, not the fact that the economy has faced huge headwinds that would have caused serious problems regardless of what policies were pursued.
Ignoring the importance of the pandemic and the Russian invasion would be like complaining about the shortage of housing in an area just devastated by a hurricane and not noting the hurricane. It is understandable that the average person might recognize the damage done by a hurricane more readily than the economic damage caused by the pandemic, but it would be reasonable to expect that a person writing for the New York Times would be familiar with the impact of the pandemic.
Petrou highlights polls showing that most people think that the economy is doing badly and they are not buying Biden’s boasts. That is true, but a recent poll gives us important insights on this point.
The poll shows that roughly half the people think that the economy in their town or city is doing okay, but just 26 percent think the national economy is doing well. This huge gap between people’s assessment of their local economy and their assessment of the national economy cannot be explained by their personal experience. Rather this gap must be attributable to things that they are hearing about the economy from places like Fox News and the New York Times.
Can you imagine doing a 1300-word piece on how ordinary people are faring in the economy and never once mentioning unemployment? Apparently, the New York Times opinion page editors don’t think jobs matter to people, since they ran a column by Karen Petrou (the managing partner of Federal Financial Analytics) that didn’t mention unemployment once. The piece is titled “Why Voters Aren’t Buying Biden’s Boasts About Bidenomics” and uses a cornucopia of bad economics to argue the case against Biden.
It’s hard to know where to begin in addressing this piece, so it’s probably best to start where the piece starts.
“On Oct. 26, the Department of Commerce announced that gross domestic product had grown at an annual rate of 4.9 percent in the third quarter. This growth rate ran well above even optimistic forecasts, leading to what can only be called triumphalism from a White House dead-set on making “Bidenomics” a key to its 2024 presidential campaign. President Biden issued a self-congratulatory statement, the White House echoed it over and over — and Donald Trump’s relative popularity increased.”
Like every president, Biden has talked about economic growth. But he also talks about jobs and wages, sort of like all the time, as when he touted the big wage gains by UAW workers following their strike (which he supported). In fact, the very next week after the GDP report, Biden was very happy to boast about the 21st consecutive month of unemployment below 4.0 percent when the October jobs data were released.
Low unemployment is actually a very big deal for workers, not only because it means they have jobs, but it means that they can leave jobs they don’t like and find better ones. Workers have been doing this in large numbers since the unemployment rate fell to extraordinarily low levels in early 2022. As a result, according to the Conference Board, workplace satisfaction is at its highest level in the nearly forty years they have conducted the survey.
Biden also was happy to boast about wages that were outstripping inflation, a point that sort of squeaks through in the confusion in Petrou’s piece. The piece includes a graph of nominal wage growth and nominal price growth.
The graph shows wage growth modestly outstripping prices through most of Trump’s term, and then hugely outstripping prices in 2020. For Biden we get the opposite story, prices outpaced wages in 2021, then hugely outpaced wages in 2022, but inflation then dropped and wages are again outpacing inflation, with the biggest gains for those at the bottom (contrary to what Petrou told readers).
The pattern here is not much of a mystery to people who follow the economy. Wages hugely outstripped prices in 2020 because tens of millions of low-paid workers in restaurants, hotels and other service industries lost their jobs. When you get rid of low-paid workers, the average wage rises, just as the average height in a room increases if we get the short people to leave.
We saw the opposite story in 2021 as low-paid workers got their jobs back. We also did have the problem of serious supply disruptions created by the pandemic and Russia’s invasion of Ukraine. As the supply problems have eased inflation has come back down.
Inflation due to the pandemic was a worldwide phenomenon, not just something that hit the United States. In fact, we have dealt with the problem very well. The U.S. inflation rate is now the second lowest among major economies, only slightly higher than Japan’s.
It is fair to say that people don’t care that things are worse in Germany or Canada, they care about their own finances. But, Petrou is quite explicitly making an attack on Bidenomics as policy, not the fact that the economy has faced huge headwinds that would have caused serious problems regardless of what policies were pursued.
Ignoring the importance of the pandemic and the Russian invasion would be like complaining about the shortage of housing in an area just devastated by a hurricane and not noting the hurricane. It is understandable that the average person might recognize the damage done by a hurricane more readily than the economic damage caused by the pandemic, but it would be reasonable to expect that a person writing for the New York Times would be familiar with the impact of the pandemic.
Petrou highlights polls showing that most people think that the economy is doing badly and they are not buying Biden’s boasts. That is true, but a recent poll gives us important insights on this point.
The poll shows that roughly half the people think that the economy in their town or city is doing okay, but just 26 percent think the national economy is doing well. This huge gap between people’s assessment of their local economy and their assessment of the national economy cannot be explained by their personal experience. Rather this gap must be attributable to things that they are hearing about the economy from places like Fox News and the New York Times.
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Local journalism serves an essential public service, providing people with information about the problems facing their communities and efforts to address them. It is also an essential check on corruption. Journalists have exposed a vast number of crimes in both the public and private sector.
Without effective journalism, it is a sure bet there would be far more corruption than is currently the case. We may not know about it, because no one would be reporting on it, but we would be paying for it in higher prices, lower quality and less safe products, and less safe working conditions and lower pay.
As it stands, local journalism is not profitable without government support. The problem is that the information reporters uncover can be transferred at essentially zero cost. This was always the case, but it became especially true in the Internet Age, where information can be passed along instantly over the web. (Government-granted copyright monopolies are one form of public subsidy, but this has diminished value when information can be quickly circulated over the web.)
While the public might benefit hugely from knowing that a politician is stealing their tax dollars, the market does not require them to pay the reporters who discover the theft. If no one pays the reporters who do the investigating, then we don’t get the investigations, and the theft continues unchecked.
Addressing the Funding Shortfall
There are at least two ongoing efforts to support local journalism through a system of individual vouchers. One of them is still in nascent form in Seattle and the other is a bill introduced in Washington, DC by City Councilmember Janeese Lewis George. These proposals stem from work that has been done over recent decades on ways to support journalism as newspapers close and the survivors lay off journalists.
The proposals are still works in progress, but the basic idea is that a sum of money would be put aside for individuals to allocate to support the journalistic work of their choice. In the DC proposal, which is now available on the web, the work that is supported through this mechanism would be freely available to the public without paywalls. There are differences in how the mechanism works and what journalism qualifies for funding, but the basic principle is straightforward.
The logic of an individual voucher system is that it lets individuals decide which news outlets are worth their support. Rather than having the government determine which news outlets and journalists should be supported, this leaves the choice to individuals.
The closest analogy to this sort of system is the tax deduction for charitable contributions. Under this system, to qualify for tax-deductible contributions, an organization has to register with the I.R.S. and state what it does that qualifies for tax-exempt status. The I.R.S. simply verifies that the organization does what it claims. It makes no effort to determine whether the organization is a good museum, think tank, or church. It only determines that it is a museum, think tank, or church. It is up to the individuals donating the money to determine which ones merit their contributions.
The government would play a comparable role with local journalism vouchers. It would set rules as to what qualifies as local journalism and would ensure that news outlets meet these criteria. It is up to individuals to determine which outlets merit their vouchers.
Criticism of the Local Journalism Voucher Model
While this approach is just now gaining some public traction, there have already been some serious criticisms raised. Specifically, Brier Dudley, the Seattle Times Free Press editor, has raised a number of objections to the proposal being crafted in Seattle.
He has a serious perspective on this issue, and his points are worth addressing. He argues that vouchers have serious problems. He suggests as an alternative, the Journalism Competition and Preservation Act, a bill that has been introduced in Congress, which would allow smaller news outlets to collectively negotiate with Google, Meta, and other Internet platforms for a portion of their ad revenue.
The first and most important point in Dudley’s criticism is the potential problem of low participation. Dudley points out that participation rates for Seattle’s democracy voucher program is very low. This program is to some extent a model for the news voucher program. Under the democracy voucher program, voters in Seattle get public money in the form of vouchers that they can contribute to support the campaigns of candidates for local office. This program has been very expensive to administer and only around 10 percent of the vouchers have been used.
Dudley also points out that there have been some questionable uses of these vouchers, with one candidate apparently spending more money in winning democracy vouchers than in winning votes. This is a very serious concern.
There is a way around this problem, which the DC bill uses. The amount of the voucher is not fixed in advance, rather the total funding is fixed and the amount of the voucher adjusts to the number that are used. The entire system is on-line so this minimizes any costs associated with distributing and collecting physical vouchers.
This means, for example, if $10 million is designated for the program (a bit less than the $11 million actual sum in DC) and 100,000 people use the voucher, then each one is worth $100. If only 10,000 people decide to use the voucher, then each one is worth $1,000.
This approach has two important effects. First, it ensures that a substantial sum will be distributed to support local journalism from the program’s inception. Low participation will not translate into an underfunded program. This also means that news outlets will understand that there is money available to them, if they choose to seek it out.
The second is that the problem of low participation is likely to be self-correcting. If only 10,000 people participate, and each voucher ends up being worth $1,000, it is likely to get people angry. Their route to correct the problem is to use the vouchers themselves.
This parallels a story that Alan Greenspan tells in his autobiography. As Chair of the Federal Reserve Board, Greenspan sat on the board of the Resolution Trust Corporation (RTC), the agency set up to sell off the assets of the Savings and Loans that went bankrupt in the 1980s.
In the RTC’s first major auction, assets sold at ridiculously low prices. There were stories of perfectly fine middle-class homes selling for $5,000, which was absurdly low even then. These stories created a mini-scandal. However, they led to many more people taking part in later auctions, which led to much more reasonable prices.
According to Greenspan in his autobiography, the low prices and mini-scandal was by design. He knew that reports of great bargains would increase interest in the auctions. (I don’t believe him, I think they just failed to publicize the auctions adequately.)
Anyhow, there is a valid point here that the DC design of the news voucher system takes into account. If people see that they will have a large chunk of money to give to whatever news outlets they value, they will take advantage of the opportunity to use the money. If the first round has low participation, it is likely that the high value of each voucher will lead many more people to participate in subsequent rounds.
Dudley is of course right that any sort of subsidy system does pose a risk of abuse. The most immediate check is that people ideally have some knowledge of the news outlet to whom they are contributing, and won’t give their money to an outlet that doesn’t perform useful work. But there are no guarantees.
We know that there are many cases where charities abuse their I.R.S. tax-exempt status, which effectively is a taxpayer subsidy of 40 cents on each dollar given. There are instances where the top people running charities line their pockets and actually use very little of their donations for the ostensible purpose of the organization. In spite of these abuses, there are relatively few voices calling for the elimination of the deduction for charitable contributions. (It is worth noting that Mr. Dudley’s employer, the Seattle Times, has opted to take advantage of this subsidy by setting up a non-profit to support investigative journalism.)
The Journalism Competition and Preservation Act as an Alternative
The main thrust of the Journalism Competition and Preservation Act (JCPA) is to effectively provide an anti-trust exception, so that smaller news outlets can collectively negotiate with the Internet giants. While this would likely be good policy (the Internet giants do have huge market power), it is not likely to be sufficient to reverse the loss of funding to local news outlets in recent decades.
Extrapolating from the experience in Australia, where negotiations have yielded roughly $50 million in annual revenue, a comparable law in the U.S. would yield in the neighborhood of $600 to $800 million annually. That would clearly be a substantial help, but would not nearly make up for the drop in revenue to newspapers over the last three decades.
There are also two areas where the voucher approach has a huge advantage over the JCPA. First, the voucher approach would not just look to preserve the current structure in the news business. It is consciously intended to open the door to new voices and perspectives. This is a huge issue, since public trust in the media has fallen through the floor in recent decades.
It is understandable that the prospect of new competition might make some of the existing news outlets unhappy, but if we want news media that are truly responsive to the public’s needs, we should be trying to structure it in a way that opens as many doors as possible. The voucher system does this, whereas the JCPA simply gets more funding for existing outlets.
The other important advantage of the voucher system is that it will produce material that is available to the public at no cost. We want people to have as much access to information as possible. While it might be good for people to buy subscriptions to their local paper, most people don’t. Even if there are ways around paywalls and people can still share information, ideally we should want information to be spread as cheaply as possible.
Economists usually want items to sell at their marginal cost. This means the price should be what it cost to produce one more loaf of bread, one more shirt, or one more paper clip. The marginal cost of transferring a news article is zero. The voucher system allows for it to sell at that price, the current system does not. This makes it as cheap as possible to have a well-informed public since anyone with access to the web could have full access to all the material supported by the voucher system.
Local or National Measures
Dudley also argues that the problem of supporting local journalism is far better addressed at the national level, since it is a national problem. Also, the national government’s finances are far more robust than those of any city. Even in a downturn, the federal government is not restricted in its spending.
This point is well-taken, but it ignores the current political environment. We have one house of Congress controlled by a party that seems to think shutting down the government is an end in itself. Even the JCPA is likely an undoable lift with a Republican Party that seems unwilling to do anything that might impinge on corporate profits.
A major part of the rationale for creating voucher systems at the local level is to show that they are workable. If Seattle and Washington, DC take the lead in setting up these systems, and they prove popular, other cities are sure to follow. And, if there is a track record of success, it is likely there will be a push to have a public journalism voucher system implemented nationally.
There are many examples of policies advancing along these lines, notably unemployment insurance and the minimum wage. Congress is quite reasonably reluctant to take big steps in uncharted water, but when a system has been demonstrated to be effective at the state or local level, there is less risk in adopting it nationally. Congress also then has the benefit of seeing the plusses and minuses of a system that is actually in practice, rather than drawing it up from scratch.
In short, adopting a system like the journalism vouchers at the local level is not an alternative to doing it at the national level. It is a necessary step in that direction.
Local Journalism Vouchers – Big Potential Gains, Little Downside Risk
The proposals being crafted in Seattle and Washington, DC draw on several decades of analysis and debate among academics and journalists. They surely are not perfect, but they offer a clear route for addressing a real problem.
Even if they are adopted and there ends up being less to show than their advocates (including me) expect, we will not walk away empty-handed. Some number of news outlets and serious reporters will be supported with this funding. There will be investigations that would not have otherwise been undertaken and news stories that would not have been written and read. Perhaps most importantly, the system will have supported a number of journalists for its duration, helping them to develop skills, which they can then use in other contexts, even if the voucher system does not survive.
For these reasons, there seems very little downside risk in trying the local journalism voucher route. And, there are enormous potential benefits.
Local journalism serves an essential public service, providing people with information about the problems facing their communities and efforts to address them. It is also an essential check on corruption. Journalists have exposed a vast number of crimes in both the public and private sector.
Without effective journalism, it is a sure bet there would be far more corruption than is currently the case. We may not know about it, because no one would be reporting on it, but we would be paying for it in higher prices, lower quality and less safe products, and less safe working conditions and lower pay.
As it stands, local journalism is not profitable without government support. The problem is that the information reporters uncover can be transferred at essentially zero cost. This was always the case, but it became especially true in the Internet Age, where information can be passed along instantly over the web. (Government-granted copyright monopolies are one form of public subsidy, but this has diminished value when information can be quickly circulated over the web.)
While the public might benefit hugely from knowing that a politician is stealing their tax dollars, the market does not require them to pay the reporters who discover the theft. If no one pays the reporters who do the investigating, then we don’t get the investigations, and the theft continues unchecked.
Addressing the Funding Shortfall
There are at least two ongoing efforts to support local journalism through a system of individual vouchers. One of them is still in nascent form in Seattle and the other is a bill introduced in Washington, DC by City Councilmember Janeese Lewis George. These proposals stem from work that has been done over recent decades on ways to support journalism as newspapers close and the survivors lay off journalists.
The proposals are still works in progress, but the basic idea is that a sum of money would be put aside for individuals to allocate to support the journalistic work of their choice. In the DC proposal, which is now available on the web, the work that is supported through this mechanism would be freely available to the public without paywalls. There are differences in how the mechanism works and what journalism qualifies for funding, but the basic principle is straightforward.
The logic of an individual voucher system is that it lets individuals decide which news outlets are worth their support. Rather than having the government determine which news outlets and journalists should be supported, this leaves the choice to individuals.
The closest analogy to this sort of system is the tax deduction for charitable contributions. Under this system, to qualify for tax-deductible contributions, an organization has to register with the I.R.S. and state what it does that qualifies for tax-exempt status. The I.R.S. simply verifies that the organization does what it claims. It makes no effort to determine whether the organization is a good museum, think tank, or church. It only determines that it is a museum, think tank, or church. It is up to the individuals donating the money to determine which ones merit their contributions.
The government would play a comparable role with local journalism vouchers. It would set rules as to what qualifies as local journalism and would ensure that news outlets meet these criteria. It is up to individuals to determine which outlets merit their vouchers.
Criticism of the Local Journalism Voucher Model
While this approach is just now gaining some public traction, there have already been some serious criticisms raised. Specifically, Brier Dudley, the Seattle Times Free Press editor, has raised a number of objections to the proposal being crafted in Seattle.
He has a serious perspective on this issue, and his points are worth addressing. He argues that vouchers have serious problems. He suggests as an alternative, the Journalism Competition and Preservation Act, a bill that has been introduced in Congress, which would allow smaller news outlets to collectively negotiate with Google, Meta, and other Internet platforms for a portion of their ad revenue.
The first and most important point in Dudley’s criticism is the potential problem of low participation. Dudley points out that participation rates for Seattle’s democracy voucher program is very low. This program is to some extent a model for the news voucher program. Under the democracy voucher program, voters in Seattle get public money in the form of vouchers that they can contribute to support the campaigns of candidates for local office. This program has been very expensive to administer and only around 10 percent of the vouchers have been used.
Dudley also points out that there have been some questionable uses of these vouchers, with one candidate apparently spending more money in winning democracy vouchers than in winning votes. This is a very serious concern.
There is a way around this problem, which the DC bill uses. The amount of the voucher is not fixed in advance, rather the total funding is fixed and the amount of the voucher adjusts to the number that are used. The entire system is on-line so this minimizes any costs associated with distributing and collecting physical vouchers.
This means, for example, if $10 million is designated for the program (a bit less than the $11 million actual sum in DC) and 100,000 people use the voucher, then each one is worth $100. If only 10,000 people decide to use the voucher, then each one is worth $1,000.
This approach has two important effects. First, it ensures that a substantial sum will be distributed to support local journalism from the program’s inception. Low participation will not translate into an underfunded program. This also means that news outlets will understand that there is money available to them, if they choose to seek it out.
The second is that the problem of low participation is likely to be self-correcting. If only 10,000 people participate, and each voucher ends up being worth $1,000, it is likely to get people angry. Their route to correct the problem is to use the vouchers themselves.
This parallels a story that Alan Greenspan tells in his autobiography. As Chair of the Federal Reserve Board, Greenspan sat on the board of the Resolution Trust Corporation (RTC), the agency set up to sell off the assets of the Savings and Loans that went bankrupt in the 1980s.
In the RTC’s first major auction, assets sold at ridiculously low prices. There were stories of perfectly fine middle-class homes selling for $5,000, which was absurdly low even then. These stories created a mini-scandal. However, they led to many more people taking part in later auctions, which led to much more reasonable prices.
According to Greenspan in his autobiography, the low prices and mini-scandal was by design. He knew that reports of great bargains would increase interest in the auctions. (I don’t believe him, I think they just failed to publicize the auctions adequately.)
Anyhow, there is a valid point here that the DC design of the news voucher system takes into account. If people see that they will have a large chunk of money to give to whatever news outlets they value, they will take advantage of the opportunity to use the money. If the first round has low participation, it is likely that the high value of each voucher will lead many more people to participate in subsequent rounds.
Dudley is of course right that any sort of subsidy system does pose a risk of abuse. The most immediate check is that people ideally have some knowledge of the news outlet to whom they are contributing, and won’t give their money to an outlet that doesn’t perform useful work. But there are no guarantees.
We know that there are many cases where charities abuse their I.R.S. tax-exempt status, which effectively is a taxpayer subsidy of 40 cents on each dollar given. There are instances where the top people running charities line their pockets and actually use very little of their donations for the ostensible purpose of the organization. In spite of these abuses, there are relatively few voices calling for the elimination of the deduction for charitable contributions. (It is worth noting that Mr. Dudley’s employer, the Seattle Times, has opted to take advantage of this subsidy by setting up a non-profit to support investigative journalism.)
The Journalism Competition and Preservation Act as an Alternative
The main thrust of the Journalism Competition and Preservation Act (JCPA) is to effectively provide an anti-trust exception, so that smaller news outlets can collectively negotiate with the Internet giants. While this would likely be good policy (the Internet giants do have huge market power), it is not likely to be sufficient to reverse the loss of funding to local news outlets in recent decades.
Extrapolating from the experience in Australia, where negotiations have yielded roughly $50 million in annual revenue, a comparable law in the U.S. would yield in the neighborhood of $600 to $800 million annually. That would clearly be a substantial help, but would not nearly make up for the drop in revenue to newspapers over the last three decades.
There are also two areas where the voucher approach has a huge advantage over the JCPA. First, the voucher approach would not just look to preserve the current structure in the news business. It is consciously intended to open the door to new voices and perspectives. This is a huge issue, since public trust in the media has fallen through the floor in recent decades.
It is understandable that the prospect of new competition might make some of the existing news outlets unhappy, but if we want news media that are truly responsive to the public’s needs, we should be trying to structure it in a way that opens as many doors as possible. The voucher system does this, whereas the JCPA simply gets more funding for existing outlets.
The other important advantage of the voucher system is that it will produce material that is available to the public at no cost. We want people to have as much access to information as possible. While it might be good for people to buy subscriptions to their local paper, most people don’t. Even if there are ways around paywalls and people can still share information, ideally we should want information to be spread as cheaply as possible.
Economists usually want items to sell at their marginal cost. This means the price should be what it cost to produce one more loaf of bread, one more shirt, or one more paper clip. The marginal cost of transferring a news article is zero. The voucher system allows for it to sell at that price, the current system does not. This makes it as cheap as possible to have a well-informed public since anyone with access to the web could have full access to all the material supported by the voucher system.
Local or National Measures
Dudley also argues that the problem of supporting local journalism is far better addressed at the national level, since it is a national problem. Also, the national government’s finances are far more robust than those of any city. Even in a downturn, the federal government is not restricted in its spending.
This point is well-taken, but it ignores the current political environment. We have one house of Congress controlled by a party that seems to think shutting down the government is an end in itself. Even the JCPA is likely an undoable lift with a Republican Party that seems unwilling to do anything that might impinge on corporate profits.
A major part of the rationale for creating voucher systems at the local level is to show that they are workable. If Seattle and Washington, DC take the lead in setting up these systems, and they prove popular, other cities are sure to follow. And, if there is a track record of success, it is likely there will be a push to have a public journalism voucher system implemented nationally.
There are many examples of policies advancing along these lines, notably unemployment insurance and the minimum wage. Congress is quite reasonably reluctant to take big steps in uncharted water, but when a system has been demonstrated to be effective at the state or local level, there is less risk in adopting it nationally. Congress also then has the benefit of seeing the plusses and minuses of a system that is actually in practice, rather than drawing it up from scratch.
In short, adopting a system like the journalism vouchers at the local level is not an alternative to doing it at the national level. It is a necessary step in that direction.
Local Journalism Vouchers – Big Potential Gains, Little Downside Risk
The proposals being crafted in Seattle and Washington, DC draw on several decades of analysis and debate among academics and journalists. They surely are not perfect, but they offer a clear route for addressing a real problem.
Even if they are adopted and there ends up being less to show than their advocates (including me) expect, we will not walk away empty-handed. Some number of news outlets and serious reporters will be supported with this funding. There will be investigations that would not have otherwise been undertaken and news stories that would not have been written and read. Perhaps most importantly, the system will have supported a number of journalists for its duration, helping them to develop skills, which they can then use in other contexts, even if the voucher system does not survive.
For these reasons, there seems very little downside risk in trying the local journalism voucher route. And, there are enormous potential benefits.
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The shrieks of the deficit hawks have been growing louder with the fiscal 2023 deficit crossing 6.0 percent of GDP, and the projected future deficits being no lower. With interest rates now close to or above GDP growth, we regularly hear about the story of a looming debt spiral, where high debt leads to high interest payments, which add to annual deficits, making the debt even larger.
To try to think clearly about the deficit and debt, it is worth pulling them apart and dealing with them as separate issues. This avoids many common sources of confusion.
Is the Deficit Too Large? Is Inflation Out of Control?
Back in the old days we used to argue about whether we needed to balance the budget. With a deficit of more than 6.0 percent of GDP, that question seems pretty much moot. If we wanted to balance the budget with tax increases, we would need to increase revenue by almost a third. If we tried to do this on the spending side, we would need cuts in non-interest spending of almost 29 percent. Neither of those seems close to politically realistic. And splitting the difference, tax increases of 15 percent, spending cuts of 14.5 percent, doesn’t look remotely plausible either.
So, we can forget about balanced budgets (thankfully), but the question is then how large a deficit is too large? There actually is a relatively simple answer to this one. A deficit that leads to inflation is a deficit that is too large.
This is the story that the Modern Monetary Theory crew keeps telling us, and it is right. If too much borrowing drives up interest rates, the Fed can counteract upward pressure on rates by buying bonds and/or targeting lower rates. The potential problem from the Fed maintaining low rates in a high deficit situation is that it can lead to too much demand in the economy, causing inflation.
We did see a surge in inflation in 2021 and 2022. Part of that story was too much demand, due to the generous pandemic support from the federal government, however the real story was the supply problems associated with the pandemic. Whatever excess demand problem we had went away when the programs ended, and supply recovered after the ending of the pandemic.
In any case, that history is behind us, the question is whether there is good reason to believe that we are seeing excess demand now. There are still important questions about the future course of inflation, but it has fallen quite rapidly over the last year and is virtually certain to fall further.[1]
Wage growth has also slowed to a pace that is close to its growth rate before the pandemic, when inflation was at the Fed’s 2.0 percent target. Other measures of the labor market, like quit rates and unemployment insurance claims, are at levels that are consistent with a strong labor market, but well below/above the levels seen when the labor market was very tight in the spring of 2022.
In short, it is certainly not clear that deficit-driven demand is so strong that it is causing inflation. Of course, the Fed has raised interest rates by more than 5.0 percentage points from their pandemic low, so arguably we are seeing a classic crowding-out story where demand would be causing inflation, if not for high-interest rates slowing demand.
This story can’t be completely dismissed, but it is hard to tell if we have a frame of reference beyond the recovery from the Great Recession. Interest rates are above their pre-pandemic level, but compared to the slightly more distant past, they still look pretty low.
The 10-year Treasury bond rate is currently roughly 4.6 percent. That is well below the rates we saw from 1998 to 2000 when the government was running budget surpluses. And, inflation is at least modestly higher today than it was in those years, meaning that the real interest rate (the nominal rate minus the inflation rate) is actually somewhat lower now with our deficits of 6.0 percent of GDP than in the balanced budget days at the end of the Clinton presidency.
It is also hard to tell the other part of this story, that investment has been crowded out by high-interest rates. Non-residential investment as a share of GDP is well above its average over the last two decades. The residential investment share of GDP is also well above its average for the decade prior to the pandemic, although down by a percentage point from its pandemic peak. This drop is primarily due to the end of the refinancing boom, since most of the expenses in refinancing mortgages count as residential investment in the national accounts.
High mortgage rates have discouraged home buying. Sales of existing homes are down by more than a third from peaks hit in the pandemic, and more than 20 percent compared to pre-pandemic rates. But part of this story is not simply high long-term rates. There is an unusually large gap between the 30-year mortgage rate and 10-year Treasury rate.
It is currently around 3.0 percentage points, giving us 30-year mortgage rates around 7.6 percent with a 10-year Treasury rate of 4.6 percent. More typically, the gap would be around 1.75 percentage points, which would translate into a 30-year mortgage rate of 6.35 percentage points. That is still considerably higher than the rates seen before the pandemic, which were generally under 5.0 percent, but not nearly as bad as what we are seeing now. (If anyone has thoughts on why we see this extraordinary spread between mortgage rates and Treasury rates, I’m happy to be informed.)
Anyhow, it would certainly be desirable to see somewhat lower interest rates. If inflation remains under control, we will likely see the Fed begin to lower the federal funds rate next year and long-term rates will follow. And, this would be the case even without any deficit reduction.
In short, it might be desirable to see somewhat lower interest rates, but the current rates are not especially high by historical standards. Furthermore, it is not clear that large budget deficits are the main culprit, as opposed to the interest rate policy of the Fed.
Should Exploding Debt Bother Us?
If current deficits are not a big deal, should the prospect of an exploding debt spiral worry us? In this story, the debt continually builds primarily as a result of higher interest payments, which in turn lead to still higher interest payments, until interest ends up taking up a ridiculously large share of the budget.
There are a few points to be made about this story. First, this is a gradual process. Even in the story where we have a deficit of 6.0 percent of GDP, the debt-to-GDP ratio rises slowly. If we have 2.0 percent growth and 2.5 percent inflation, then nominal GDP is increasing by 4.5 percent. With a debt that is roughly 100 percent of GDP, the debt-to-GDP ratio would only increase by around 1.5 percentage points. Even with relatively large deficits, we don’t have to worry about the debt-to-GDP ratio suddenly exploding.
Some of the deficit hawks raise the prospect of a crisis of confidence, where investors suddenly become unwilling to hold U.S. debt and interest rates go through the roof and the dollar goes through the floor. There are certainly examples of countries where this has happened, but not in situations where they had an otherwise healthy economy, as is the case with the United States.
Furthermore, there is no evidence that we are on the edge of anything like this. Interest rates have risen, but that was primarily because they were pushed up by the Fed. And, as noted earlier, they are still relatively low by historical standards. And the dollar is actually higher against most other currencies than it was before the pandemic.
It is also worth noting that the U.S. debt to GDP ratio is not exceptionally high by international standards. The ratio of debt to GDP in France and the United Kingdom is very comparable to the U.S. and in Italy and Japan it is far higher. In fact, using gross debt, a measure that includes debt to public pension funds, Japan has a debt-to-GDP ratio of 260 percent. The current interest rate on long-term Japanese bonds is less than 1.0 percent.
Thinking About the Future
Even if interest is a bearable burden and the dollar is not on the edge of collapse, there are still many who see the debt as imposing a major burden on future generations. This is really a case of missing the forest for the trees.
Let’s say that because of our failure to get the deficit down, a decade from now the debt-to-GDP ratio is 20 percentage points higher than if we had been “fiscally responsible.” If the real interest rate on government debt is 2.0 percent, somewhat higher than it is today, that means we would be paying another 0.4 percent of GDP in interest compared to our fiscally responsible scenario.
That’s not entirely trivial, but it’s also had to tell the story that it is an enormous burden. Our current interest payments on the debt are roughly 2.7 percent of GDP. They were 3.3 percent of GDP in the early 1990s. That burden did not prevent the 1990s from being our most prosperous decade since the 1960s.
It is also worth mentioning that if AI proves to be anywhere near as important as its proselytizers insist, then the uptick in growth over the next decade could actually create a situation where the debt-to-GDP ratio stays flat or even falls.
More importantly, if we get an uptick in growth from AI and other technologies, it will swamp the impact of higher interest burdens. If AI led to just a 0.2 percentage point increase in annual productivity growth, it would imply a GDP that is 4.0 percentage points higher after two decades than in a world without this new technology. (Productivity growth averaged 4.3 percent the last two quarters, after averaging just 1.1 percent in the decade prior to the pandemic. It is important to recognize that productivity data are enormously erratic and subject to huge revisions.)
This sort of boost to output from AI is an order of magnitude larger than any plausible burden associated with a higher debt to GDP ratio. This is especially true when we remember that the bulk of interest payments are made to people in the United States. The interest payments do limit the extent to which we can spend in other areas, without higher taxes, but they are not a net burden on the economy.
It is also important to remember that direct spending is not the only way the government pays for things. It pays for innovation and creative work by issuing patent and copyright monopolies. These monopolies impose an enormous cost in the form of higher prices – effectively a tax paid by households in the future. In the case of drugs alone, this tax is likely in the neighborhood of $500 billion a year, or 2.0 percent of GDP.
Adding in the higher prices we pay as a result of these monopolies for medical equipment, computers, software and a wide variety of other items, it is likely the cost is over $1 trillion a year. The benefits we get from the innovation and creative work fostered by these government-granted monopolies may still make them good policy (there are alternative mechanisms), but to not acknowledge the costs attributable to patent and copyright monopolies when discussing the burden of the debt is simply dishonest.
It is also important to remember that government spending plays a direct role in supporting the economy. Due to efforts to contain the deficit following the Great Recession, the recovery was much slower than it could have been. It took us a full decade to get back to full employment.
This meant both that millions of people were not working, who could have had jobs if we had not been obsessed with austerity, and that tens of millions of workers got lower pay because they lacked bargaining power in a period of high unemployment. As we have seen in the tight labor markets of the pandemic recovery, tight labor markets disproportionately benefit those at the lower end of the wage distribution. The benefits of maintaining a high employment economy are hugely larger than any downsides associated with higher interest payments on the debt.
Finally, if we are keeping generational scorecards, the success of efforts to contain global warming will have far more impact on future generations than plausible increases in the interest burden of the debt. If twenty years from now, we have completely failed in limiting global warming, but we have cut the debt in half, our children will have no reason to be thanking us.
Deficits and Spending Going Forward
Saying that we don’t need to reduce the deficit doesn’t mean that we should not look to raise more revenue to support additional spending in key areas. There are some great ways to raise revenue that would actually make the economy more efficient. My two favorites are a tax on financial transactions (effectively a sales tax on stock, bond, and derivative trades) and shifting the basis of the corporate income tax to returns to shareholders, which would put the tax gaming industry out of business. We can also have higher taxes on rich people, the big gainers in the economy over the last half-century.
There are also areas where we desperately need to spend more money. The expanded child tax credit that Biden put in place with his recovery plan should be brought back. We also need to have additional funding for child care to make it affordable. And, we have a massive problem of homelessness.
This list could be extended at some length, but the point is that there is no urgency for reducing the deficit. We have many other problems that need to be addressed, which will require additional resources. This will mean making space in the economy by raising taxes, but the focus should be on addressing real problems in society, not reducing the deficit.
[1] We can be confident that inflation will fall further because the rental indexes, which account for 31 percent of the overall CPI and almost 40 percent of the core index, are virtually guaranteed to show lower rates of inflation in the months ahead. Private indexes measuring the rent of marketed units that change hands, show sharply lower inflation. The CPI rent indexes, which measure rents in all units, not just marketed units, lag these private indexes by six months to a year.
The shrieks of the deficit hawks have been growing louder with the fiscal 2023 deficit crossing 6.0 percent of GDP, and the projected future deficits being no lower. With interest rates now close to or above GDP growth, we regularly hear about the story of a looming debt spiral, where high debt leads to high interest payments, which add to annual deficits, making the debt even larger.
To try to think clearly about the deficit and debt, it is worth pulling them apart and dealing with them as separate issues. This avoids many common sources of confusion.
Is the Deficit Too Large? Is Inflation Out of Control?
Back in the old days we used to argue about whether we needed to balance the budget. With a deficit of more than 6.0 percent of GDP, that question seems pretty much moot. If we wanted to balance the budget with tax increases, we would need to increase revenue by almost a third. If we tried to do this on the spending side, we would need cuts in non-interest spending of almost 29 percent. Neither of those seems close to politically realistic. And splitting the difference, tax increases of 15 percent, spending cuts of 14.5 percent, doesn’t look remotely plausible either.
So, we can forget about balanced budgets (thankfully), but the question is then how large a deficit is too large? There actually is a relatively simple answer to this one. A deficit that leads to inflation is a deficit that is too large.
This is the story that the Modern Monetary Theory crew keeps telling us, and it is right. If too much borrowing drives up interest rates, the Fed can counteract upward pressure on rates by buying bonds and/or targeting lower rates. The potential problem from the Fed maintaining low rates in a high deficit situation is that it can lead to too much demand in the economy, causing inflation.
We did see a surge in inflation in 2021 and 2022. Part of that story was too much demand, due to the generous pandemic support from the federal government, however the real story was the supply problems associated with the pandemic. Whatever excess demand problem we had went away when the programs ended, and supply recovered after the ending of the pandemic.
In any case, that history is behind us, the question is whether there is good reason to believe that we are seeing excess demand now. There are still important questions about the future course of inflation, but it has fallen quite rapidly over the last year and is virtually certain to fall further.[1]
Wage growth has also slowed to a pace that is close to its growth rate before the pandemic, when inflation was at the Fed’s 2.0 percent target. Other measures of the labor market, like quit rates and unemployment insurance claims, are at levels that are consistent with a strong labor market, but well below/above the levels seen when the labor market was very tight in the spring of 2022.
In short, it is certainly not clear that deficit-driven demand is so strong that it is causing inflation. Of course, the Fed has raised interest rates by more than 5.0 percentage points from their pandemic low, so arguably we are seeing a classic crowding-out story where demand would be causing inflation, if not for high-interest rates slowing demand.
This story can’t be completely dismissed, but it is hard to tell if we have a frame of reference beyond the recovery from the Great Recession. Interest rates are above their pre-pandemic level, but compared to the slightly more distant past, they still look pretty low.
The 10-year Treasury bond rate is currently roughly 4.6 percent. That is well below the rates we saw from 1998 to 2000 when the government was running budget surpluses. And, inflation is at least modestly higher today than it was in those years, meaning that the real interest rate (the nominal rate minus the inflation rate) is actually somewhat lower now with our deficits of 6.0 percent of GDP than in the balanced budget days at the end of the Clinton presidency.
It is also hard to tell the other part of this story, that investment has been crowded out by high-interest rates. Non-residential investment as a share of GDP is well above its average over the last two decades. The residential investment share of GDP is also well above its average for the decade prior to the pandemic, although down by a percentage point from its pandemic peak. This drop is primarily due to the end of the refinancing boom, since most of the expenses in refinancing mortgages count as residential investment in the national accounts.
High mortgage rates have discouraged home buying. Sales of existing homes are down by more than a third from peaks hit in the pandemic, and more than 20 percent compared to pre-pandemic rates. But part of this story is not simply high long-term rates. There is an unusually large gap between the 30-year mortgage rate and 10-year Treasury rate.
It is currently around 3.0 percentage points, giving us 30-year mortgage rates around 7.6 percent with a 10-year Treasury rate of 4.6 percent. More typically, the gap would be around 1.75 percentage points, which would translate into a 30-year mortgage rate of 6.35 percentage points. That is still considerably higher than the rates seen before the pandemic, which were generally under 5.0 percent, but not nearly as bad as what we are seeing now. (If anyone has thoughts on why we see this extraordinary spread between mortgage rates and Treasury rates, I’m happy to be informed.)
Anyhow, it would certainly be desirable to see somewhat lower interest rates. If inflation remains under control, we will likely see the Fed begin to lower the federal funds rate next year and long-term rates will follow. And, this would be the case even without any deficit reduction.
In short, it might be desirable to see somewhat lower interest rates, but the current rates are not especially high by historical standards. Furthermore, it is not clear that large budget deficits are the main culprit, as opposed to the interest rate policy of the Fed.
Should Exploding Debt Bother Us?
If current deficits are not a big deal, should the prospect of an exploding debt spiral worry us? In this story, the debt continually builds primarily as a result of higher interest payments, which in turn lead to still higher interest payments, until interest ends up taking up a ridiculously large share of the budget.
There are a few points to be made about this story. First, this is a gradual process. Even in the story where we have a deficit of 6.0 percent of GDP, the debt-to-GDP ratio rises slowly. If we have 2.0 percent growth and 2.5 percent inflation, then nominal GDP is increasing by 4.5 percent. With a debt that is roughly 100 percent of GDP, the debt-to-GDP ratio would only increase by around 1.5 percentage points. Even with relatively large deficits, we don’t have to worry about the debt-to-GDP ratio suddenly exploding.
Some of the deficit hawks raise the prospect of a crisis of confidence, where investors suddenly become unwilling to hold U.S. debt and interest rates go through the roof and the dollar goes through the floor. There are certainly examples of countries where this has happened, but not in situations where they had an otherwise healthy economy, as is the case with the United States.
Furthermore, there is no evidence that we are on the edge of anything like this. Interest rates have risen, but that was primarily because they were pushed up by the Fed. And, as noted earlier, they are still relatively low by historical standards. And the dollar is actually higher against most other currencies than it was before the pandemic.
It is also worth noting that the U.S. debt to GDP ratio is not exceptionally high by international standards. The ratio of debt to GDP in France and the United Kingdom is very comparable to the U.S. and in Italy and Japan it is far higher. In fact, using gross debt, a measure that includes debt to public pension funds, Japan has a debt-to-GDP ratio of 260 percent. The current interest rate on long-term Japanese bonds is less than 1.0 percent.
Thinking About the Future
Even if interest is a bearable burden and the dollar is not on the edge of collapse, there are still many who see the debt as imposing a major burden on future generations. This is really a case of missing the forest for the trees.
Let’s say that because of our failure to get the deficit down, a decade from now the debt-to-GDP ratio is 20 percentage points higher than if we had been “fiscally responsible.” If the real interest rate on government debt is 2.0 percent, somewhat higher than it is today, that means we would be paying another 0.4 percent of GDP in interest compared to our fiscally responsible scenario.
That’s not entirely trivial, but it’s also had to tell the story that it is an enormous burden. Our current interest payments on the debt are roughly 2.7 percent of GDP. They were 3.3 percent of GDP in the early 1990s. That burden did not prevent the 1990s from being our most prosperous decade since the 1960s.
It is also worth mentioning that if AI proves to be anywhere near as important as its proselytizers insist, then the uptick in growth over the next decade could actually create a situation where the debt-to-GDP ratio stays flat or even falls.
More importantly, if we get an uptick in growth from AI and other technologies, it will swamp the impact of higher interest burdens. If AI led to just a 0.2 percentage point increase in annual productivity growth, it would imply a GDP that is 4.0 percentage points higher after two decades than in a world without this new technology. (Productivity growth averaged 4.3 percent the last two quarters, after averaging just 1.1 percent in the decade prior to the pandemic. It is important to recognize that productivity data are enormously erratic and subject to huge revisions.)
This sort of boost to output from AI is an order of magnitude larger than any plausible burden associated with a higher debt to GDP ratio. This is especially true when we remember that the bulk of interest payments are made to people in the United States. The interest payments do limit the extent to which we can spend in other areas, without higher taxes, but they are not a net burden on the economy.
It is also important to remember that direct spending is not the only way the government pays for things. It pays for innovation and creative work by issuing patent and copyright monopolies. These monopolies impose an enormous cost in the form of higher prices – effectively a tax paid by households in the future. In the case of drugs alone, this tax is likely in the neighborhood of $500 billion a year, or 2.0 percent of GDP.
Adding in the higher prices we pay as a result of these monopolies for medical equipment, computers, software and a wide variety of other items, it is likely the cost is over $1 trillion a year. The benefits we get from the innovation and creative work fostered by these government-granted monopolies may still make them good policy (there are alternative mechanisms), but to not acknowledge the costs attributable to patent and copyright monopolies when discussing the burden of the debt is simply dishonest.
It is also important to remember that government spending plays a direct role in supporting the economy. Due to efforts to contain the deficit following the Great Recession, the recovery was much slower than it could have been. It took us a full decade to get back to full employment.
This meant both that millions of people were not working, who could have had jobs if we had not been obsessed with austerity, and that tens of millions of workers got lower pay because they lacked bargaining power in a period of high unemployment. As we have seen in the tight labor markets of the pandemic recovery, tight labor markets disproportionately benefit those at the lower end of the wage distribution. The benefits of maintaining a high employment economy are hugely larger than any downsides associated with higher interest payments on the debt.
Finally, if we are keeping generational scorecards, the success of efforts to contain global warming will have far more impact on future generations than plausible increases in the interest burden of the debt. If twenty years from now, we have completely failed in limiting global warming, but we have cut the debt in half, our children will have no reason to be thanking us.
Deficits and Spending Going Forward
Saying that we don’t need to reduce the deficit doesn’t mean that we should not look to raise more revenue to support additional spending in key areas. There are some great ways to raise revenue that would actually make the economy more efficient. My two favorites are a tax on financial transactions (effectively a sales tax on stock, bond, and derivative trades) and shifting the basis of the corporate income tax to returns to shareholders, which would put the tax gaming industry out of business. We can also have higher taxes on rich people, the big gainers in the economy over the last half-century.
There are also areas where we desperately need to spend more money. The expanded child tax credit that Biden put in place with his recovery plan should be brought back. We also need to have additional funding for child care to make it affordable. And, we have a massive problem of homelessness.
This list could be extended at some length, but the point is that there is no urgency for reducing the deficit. We have many other problems that need to be addressed, which will require additional resources. This will mean making space in the economy by raising taxes, but the focus should be on addressing real problems in society, not reducing the deficit.
[1] We can be confident that inflation will fall further because the rental indexes, which account for 31 percent of the overall CPI and almost 40 percent of the core index, are virtually guaranteed to show lower rates of inflation in the months ahead. Private indexes measuring the rent of marketed units that change hands, show sharply lower inflation. The CPI rent indexes, which measure rents in all units, not just marketed units, lag these private indexes by six months to a year.
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Do reporters get lessons on saying silly things when they discuss deflation? It seems that way from reading news articles that discuss the problem. Bloomberg gives us the latest example.
Before explaining why the discussion of deflation is silly, it’s worth first briefly discussing what deflation means. When we have deflation, it means that average prices in the economy are falling.[1]
The point about “average” is crucial. All prices don’t move at exactly the same rate. When we have a low rate of inflation, say 0.5 percent, it means that a substantial share of items (say 45 percent) have falling prices, but a somewhat larger share (say 55 percent) have rising prices.
If we switch to having 0.5 percent deflation, then these ratios might reverse. In that case, we might have 55 percent of items with falling prices and 45 percent with rising prices.
This simple point should make the point about the needless hysteria over deflation clear. If 55 percent of items have falling prices, rather than 45 percent, what’s the big deal?
There is a point about falling prices making investment less desirable. If a car company is looking to expand, but it expects the price of cars to fall by 1.0 percent a year, it will be less likely to invest at a given interest rate, than if it expects the price of cars to rise by 1.0 percent a year.
But zero has no special importance in this story. At a given interest rate, it will be more likely to invest if it expects car prices to rise 2.0 percent a year rather than 1.0 percent a year. The problem is that lower expected inflation discourages investment. If inflation turns negative its investment prospects worsen, but that is also true if the rate of inflation falls from 2.0 percent to 1.0 percent.
In short, crossing zero has no special importance for an individual product or the economy as a whole. It is just a story where lower inflation is worse than higher (but still low) rates of inflation.
The other part of the story that gets high marks for silliness is the idea that deflation will cause consumers to delay purchases, thereby dampening consumption, that this Bloomberg piece raises. The reason this is silly is that the rates of deflation being discussed (less than 1.0 percent in absolute terms) are too trivial to have a noticeable impact on consumption.
To take a simple example, suppose prices are falling at a 0.5 percent annual rate. If someone is thinking of buying a $1,000 refrigerator, this means that if they put off the purchase by six months, they would save $2.50. Know anyone who would do this?
Deflation can be fast enough that this sort of delay could make sense, but we haven’t seen this story in any major economy for many decades. Certainly, the deflation rates of 0.0 to -1.0 percent that Japan and China have occasionally experienced don’t fit the bill.
The point here is that an inflation rate that is too low can be a problem. A negative rate of inflation (deflation) is a bigger problem than low positive rates, but there is nothing magical about crossing zero. It is absurd to panic about a small amount of deflation, with the idea that everything is fine with a low positive rate.
[1] Making things more complicated, these are quality-adjusted prices. The statistical agencies try to adjust prices for quality improvements or deterioration. Many buyers may be unaware of the ways in which quality is assumed to have improved and just see a price increase, when the quality-adjusted price stays the same or falls. This is true with many consumer goods like computers and televisions, where quality-adjusted prices have fallen sharply, even as there has been little change in the average price of the product.
Do reporters get lessons on saying silly things when they discuss deflation? It seems that way from reading news articles that discuss the problem. Bloomberg gives us the latest example.
Before explaining why the discussion of deflation is silly, it’s worth first briefly discussing what deflation means. When we have deflation, it means that average prices in the economy are falling.[1]
The point about “average” is crucial. All prices don’t move at exactly the same rate. When we have a low rate of inflation, say 0.5 percent, it means that a substantial share of items (say 45 percent) have falling prices, but a somewhat larger share (say 55 percent) have rising prices.
If we switch to having 0.5 percent deflation, then these ratios might reverse. In that case, we might have 55 percent of items with falling prices and 45 percent with rising prices.
This simple point should make the point about the needless hysteria over deflation clear. If 55 percent of items have falling prices, rather than 45 percent, what’s the big deal?
There is a point about falling prices making investment less desirable. If a car company is looking to expand, but it expects the price of cars to fall by 1.0 percent a year, it will be less likely to invest at a given interest rate, than if it expects the price of cars to rise by 1.0 percent a year.
But zero has no special importance in this story. At a given interest rate, it will be more likely to invest if it expects car prices to rise 2.0 percent a year rather than 1.0 percent a year. The problem is that lower expected inflation discourages investment. If inflation turns negative its investment prospects worsen, but that is also true if the rate of inflation falls from 2.0 percent to 1.0 percent.
In short, crossing zero has no special importance for an individual product or the economy as a whole. It is just a story where lower inflation is worse than higher (but still low) rates of inflation.
The other part of the story that gets high marks for silliness is the idea that deflation will cause consumers to delay purchases, thereby dampening consumption, that this Bloomberg piece raises. The reason this is silly is that the rates of deflation being discussed (less than 1.0 percent in absolute terms) are too trivial to have a noticeable impact on consumption.
To take a simple example, suppose prices are falling at a 0.5 percent annual rate. If someone is thinking of buying a $1,000 refrigerator, this means that if they put off the purchase by six months, they would save $2.50. Know anyone who would do this?
Deflation can be fast enough that this sort of delay could make sense, but we haven’t seen this story in any major economy for many decades. Certainly, the deflation rates of 0.0 to -1.0 percent that Japan and China have occasionally experienced don’t fit the bill.
The point here is that an inflation rate that is too low can be a problem. A negative rate of inflation (deflation) is a bigger problem than low positive rates, but there is nothing magical about crossing zero. It is absurd to panic about a small amount of deflation, with the idea that everything is fine with a low positive rate.
[1] Making things more complicated, these are quality-adjusted prices. The statistical agencies try to adjust prices for quality improvements or deterioration. Many buyers may be unaware of the ways in which quality is assumed to have improved and just see a price increase, when the quality-adjusted price stays the same or falls. This is true with many consumer goods like computers and televisions, where quality-adjusted prices have fallen sharply, even as there has been little change in the average price of the product.
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Michelle Cottle had a NYT column headlined “What Voters Want That Trump Seems to Have.” She needed to make up a few facts to push her case. For example, she tells us that people don’t like Biden because crime is high. But, crime rose sharply in 2020 when Donald Trump was in the White House, it has fallen since Biden took office.
If people are actually unhappy about crime then they should be voting for Biden, not Trump. If they prefer Trump on this issue it is because they are confused about the timing of recent patterns in crime, perhaps because people like Ms. Cottle have been misleading them.
There is a similar story with Cottle’s pronouncements on inflation. She told readers that in the last year of Trump’s term, just before the pandemic:
“Inflation was practically nonexistent.”
That’s actually not what our friends at the Bureau of Labor Statistics say. Year-over-year inflation was 2.5 percent as of January of 2020, just before the pandemic hit.
That isn’t exactly frightening, but hardly nonexistent. In fact, with lower rental inflation pretty much baked into the data (we know this from patterns in housing units that turn over), the inflation rate is likely to be lower than this by Election Day.
Cottle also has advice for those of us who try to connect how people feel about the economy to economic data.
“The degree to which Mr. Biden’s policies have helped or hurt does not much matter, especially on the economy. He owns it. And here’s the thing: You can’t argue with voters’ feelings. Even if you win the debate on points, you’re not going to convince people that they or the nation is actually doing swell. Trying, in fact, often just makes you look like a condescending, out-of-touch jerk.”
This is true, people feel how they feel. We can ask why they feel the way they do (I suspect endless trashing of the economy in often dishonest ways by the media has a lot to do with it), but we can’t tell them how they should feel.
So, we can point out that real wages for many workers, especially those at the bottom, have risen in spite of the massive hit from the pandemic. We can point out that homeownership rates for young people, Blacks, Hispanics, and moderate-income homeowners have all risen under Biden. But yeah, people still feel how they feel.
However, we may want to look more broadly when asserting how people feel. According to the Conference Board, people report a higher level of workplace satisfaction currently than at any point in the nearly forty years that they have done their survey.
I don’t think it takes a huge amount of economic training to believe that workplace satisfaction has something to do with the economy. The workplace is where workers spend close to half of their waking hours, so if workers say they are more satisfied now than ever before, that seems like a really good story about the economy
But, I guess that New York Times columnists get to be condescending, out-of-touch jerks when they want to make their case. If they insist that people think the economy is awful, we can’t let what people say get in the way.
Michelle Cottle had a NYT column headlined “What Voters Want That Trump Seems to Have.” She needed to make up a few facts to push her case. For example, she tells us that people don’t like Biden because crime is high. But, crime rose sharply in 2020 when Donald Trump was in the White House, it has fallen since Biden took office.
If people are actually unhappy about crime then they should be voting for Biden, not Trump. If they prefer Trump on this issue it is because they are confused about the timing of recent patterns in crime, perhaps because people like Ms. Cottle have been misleading them.
There is a similar story with Cottle’s pronouncements on inflation. She told readers that in the last year of Trump’s term, just before the pandemic:
“Inflation was practically nonexistent.”
That’s actually not what our friends at the Bureau of Labor Statistics say. Year-over-year inflation was 2.5 percent as of January of 2020, just before the pandemic hit.
That isn’t exactly frightening, but hardly nonexistent. In fact, with lower rental inflation pretty much baked into the data (we know this from patterns in housing units that turn over), the inflation rate is likely to be lower than this by Election Day.
Cottle also has advice for those of us who try to connect how people feel about the economy to economic data.
“The degree to which Mr. Biden’s policies have helped or hurt does not much matter, especially on the economy. He owns it. And here’s the thing: You can’t argue with voters’ feelings. Even if you win the debate on points, you’re not going to convince people that they or the nation is actually doing swell. Trying, in fact, often just makes you look like a condescending, out-of-touch jerk.”
This is true, people feel how they feel. We can ask why they feel the way they do (I suspect endless trashing of the economy in often dishonest ways by the media has a lot to do with it), but we can’t tell them how they should feel.
So, we can point out that real wages for many workers, especially those at the bottom, have risen in spite of the massive hit from the pandemic. We can point out that homeownership rates for young people, Blacks, Hispanics, and moderate-income homeowners have all risen under Biden. But yeah, people still feel how they feel.
However, we may want to look more broadly when asserting how people feel. According to the Conference Board, people report a higher level of workplace satisfaction currently than at any point in the nearly forty years that they have done their survey.
I don’t think it takes a huge amount of economic training to believe that workplace satisfaction has something to do with the economy. The workplace is where workers spend close to half of their waking hours, so if workers say they are more satisfied now than ever before, that seems like a really good story about the economy
But, I guess that New York Times columnists get to be condescending, out-of-touch jerks when they want to make their case. If they insist that people think the economy is awful, we can’t let what people say get in the way.
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The Republican Party, which now likes to call itself the party of working people, is demanding that President Biden agree to give the rich a license to steal and make life more difficult for ordinary workers. That may sound like a caricature, but unfortunately it isn’t.
Now that the Republicans finally have a Speaker, and the House of Representatives can go back to work, they immediately set about carrying through with their priorities. Top on this list is cutting funding for the I.R.S. so that it will not have the resources needed to go after rich tax cheats.
The Republicans apparently believe that rich people should not have to pay taxes if they don’t want to. And, many of them don’t. The government loses hundreds of billions of dollars a year in revenue because rich people get away with not paying the taxes they owe.
The Biden administration included a provision in the Inflation Reduction Act that increased funding for the I.R.S. so that it would be better able to catch people who are cheating on their taxes. The Republicans decided to make rescinding this funding a top priority by attaching it to a supplemental aid bill for Israel that has wide support in Congress.
The Republicans are claiming that reducing the I.R.S. funding will cover the cost of the funding for Israel. But this is beyond absurd. It would be like a store reducing its security against shoplifting in order to increase its profits.
Even a Republican politician understands that stores will not have higher profits if they don’t have any security against shoplifting. And, they know that we will collect less tax revenue if we don’t have anyone at the I.R.S. to ensure that rich people pay their taxes.
And, we have to be clear that this is about rich people paying their taxes. Most of us have the bulk of our taxes deducted directly from our paychecks. Not paying taxes is not an option for ordinary workers. It is only rich people, who have large amounts of income from selling stock, dividends, and business income that are able to evade paying the taxes they owe.
That may sound bad, but it gets worse. The Biden administration has instructed the I.R.S. to develop a system that would allow people to file their taxes for free using simple software available directly from I.R.S. This would save ordinary taxpayers billions of dollars a year that they now spend on tax filing services like H&R Block and Quicken.
That is exactly why the Republicans have made eliminating the Biden administration’s direct file option a top target. They included this provision in a House bill for funding a wide range of government functions. They apparently want to make sure that the money keeps going into the pockets of the tax filing services rather than staying in the pockets of ordinary workers.
It’s good that the Republicans keep telling us that they are the party of working people. Since their main priorities seem to be giving ever more money to the rich, and making life more difficult for ordinary workers, the rest of us would probably never know that they are the party of working people if they didn’t tell us.
The Republican Party, which now likes to call itself the party of working people, is demanding that President Biden agree to give the rich a license to steal and make life more difficult for ordinary workers. That may sound like a caricature, but unfortunately it isn’t.
Now that the Republicans finally have a Speaker, and the House of Representatives can go back to work, they immediately set about carrying through with their priorities. Top on this list is cutting funding for the I.R.S. so that it will not have the resources needed to go after rich tax cheats.
The Republicans apparently believe that rich people should not have to pay taxes if they don’t want to. And, many of them don’t. The government loses hundreds of billions of dollars a year in revenue because rich people get away with not paying the taxes they owe.
The Biden administration included a provision in the Inflation Reduction Act that increased funding for the I.R.S. so that it would be better able to catch people who are cheating on their taxes. The Republicans decided to make rescinding this funding a top priority by attaching it to a supplemental aid bill for Israel that has wide support in Congress.
The Republicans are claiming that reducing the I.R.S. funding will cover the cost of the funding for Israel. But this is beyond absurd. It would be like a store reducing its security against shoplifting in order to increase its profits.
Even a Republican politician understands that stores will not have higher profits if they don’t have any security against shoplifting. And, they know that we will collect less tax revenue if we don’t have anyone at the I.R.S. to ensure that rich people pay their taxes.
And, we have to be clear that this is about rich people paying their taxes. Most of us have the bulk of our taxes deducted directly from our paychecks. Not paying taxes is not an option for ordinary workers. It is only rich people, who have large amounts of income from selling stock, dividends, and business income that are able to evade paying the taxes they owe.
That may sound bad, but it gets worse. The Biden administration has instructed the I.R.S. to develop a system that would allow people to file their taxes for free using simple software available directly from I.R.S. This would save ordinary taxpayers billions of dollars a year that they now spend on tax filing services like H&R Block and Quicken.
That is exactly why the Republicans have made eliminating the Biden administration’s direct file option a top target. They included this provision in a House bill for funding a wide range of government functions. They apparently want to make sure that the money keeps going into the pockets of the tax filing services rather than staying in the pockets of ordinary workers.
It’s good that the Republicans keep telling us that they are the party of working people. Since their main priorities seem to be giving ever more money to the rich, and making life more difficult for ordinary workers, the rest of us would probably never know that they are the party of working people if they didn’t tell us.
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We all know about Donald Trump’s “Big Lie” that he won the 2020 election. This is of course laughable, there is nothing in the real world to support Trump’s fantasies of massive voter fraud.
However, there is arguably an even bigger lie that enjoys near universal acceptance in intellectual circles. It is the claim the huge rise in inequality over the last half century was due to market forces.
The usually insightful Peter Coy plays along with this Big Lie in his New York Times column today. Coy lays out the argument of a new NBER paper, by Ilyana Kuziemko, Nicolas Longuet Marx, and Suresh Naidu, that the Democrats have been hurt politically because they adopted a strategy, beginning in the seventies, of compensating losers from market outcomes.
The model of this story is that removing protectionist barriers in a movement towards free trade invariably creates winners and losers. According to standard theory, the winners are supposed to get more than the losers lose, so in principle we can tax the winners and pay the losers and make everyone better off.
The paper argues that this strategy is a political loser because people don’t want to see themselves as beneficiaries of government handouts. It’s also the case that there were never any serious proposals to tax the winners within an order of magnitude of what would be needed to compensate the losers.
However, the more important point, ignored by Coy, is that how we chose to move to “free trade” was itself a political choice. We could have moved to free trade by radically reducing the barriers that prevent doctors and dentists trained in India and other developing countries (or even rich countries) from practicing medicine in the United States. This could have still involved meeting U.S. standards, but medical students could train and test in other countries rather than the United States.
If we had gone this route, our doctors and dentists would likely be paid more in line with what they get in other rich countries, (e.g. around $150,000 a year rather than $350,000 a year) saving us close to $200 billion a year in health care expenses ($1,600 a family). We could have aggressively applied the quest for free trade to all highly paid professions, making highly paid professionals losers and blue collar workers winners.
The same story applies to patent and copyright monopolies. We have made these government-granted monopolies longer and stronger in the last half-century. Our elites have turned language and logic on its head and called these protections “free-trade.” They redistribute massive amounts of income upward, more than $400 billion a year ($3,200 per family) in the case of prescription drugs alone. Democrats have been fully complicit in making these protections longer and stronger, having supported the Bayh-Dole Act (approved under Carter) and a variety of other measures that meant greater protection both domestically and internationally.
In short, the issue is not just that the Democrats have supported a regime where the winners are supposed to compensate the losers from a “free market.” They have supported structuring the free market in ways that make the working-class losers. (Yes, this is my book, Rigged [it’s free.])
This means the working-class has very good reasons for not liking the modern Democratic Party, even if the Republicans are no better on this score. But, they won’t let you make these points in the New York Times, it hits too close to home.
We all know about Donald Trump’s “Big Lie” that he won the 2020 election. This is of course laughable, there is nothing in the real world to support Trump’s fantasies of massive voter fraud.
However, there is arguably an even bigger lie that enjoys near universal acceptance in intellectual circles. It is the claim the huge rise in inequality over the last half century was due to market forces.
The usually insightful Peter Coy plays along with this Big Lie in his New York Times column today. Coy lays out the argument of a new NBER paper, by Ilyana Kuziemko, Nicolas Longuet Marx, and Suresh Naidu, that the Democrats have been hurt politically because they adopted a strategy, beginning in the seventies, of compensating losers from market outcomes.
The model of this story is that removing protectionist barriers in a movement towards free trade invariably creates winners and losers. According to standard theory, the winners are supposed to get more than the losers lose, so in principle we can tax the winners and pay the losers and make everyone better off.
The paper argues that this strategy is a political loser because people don’t want to see themselves as beneficiaries of government handouts. It’s also the case that there were never any serious proposals to tax the winners within an order of magnitude of what would be needed to compensate the losers.
However, the more important point, ignored by Coy, is that how we chose to move to “free trade” was itself a political choice. We could have moved to free trade by radically reducing the barriers that prevent doctors and dentists trained in India and other developing countries (or even rich countries) from practicing medicine in the United States. This could have still involved meeting U.S. standards, but medical students could train and test in other countries rather than the United States.
If we had gone this route, our doctors and dentists would likely be paid more in line with what they get in other rich countries, (e.g. around $150,000 a year rather than $350,000 a year) saving us close to $200 billion a year in health care expenses ($1,600 a family). We could have aggressively applied the quest for free trade to all highly paid professions, making highly paid professionals losers and blue collar workers winners.
The same story applies to patent and copyright monopolies. We have made these government-granted monopolies longer and stronger in the last half-century. Our elites have turned language and logic on its head and called these protections “free-trade.” They redistribute massive amounts of income upward, more than $400 billion a year ($3,200 per family) in the case of prescription drugs alone. Democrats have been fully complicit in making these protections longer and stronger, having supported the Bayh-Dole Act (approved under Carter) and a variety of other measures that meant greater protection both domestically and internationally.
In short, the issue is not just that the Democrats have supported a regime where the winners are supposed to compensate the losers from a “free market.” They have supported structuring the free market in ways that make the working-class losers. (Yes, this is my book, Rigged [it’s free.])
This means the working-class has very good reasons for not liking the modern Democratic Party, even if the Republicans are no better on this score. But, they won’t let you make these points in the New York Times, it hits too close to home.
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The New York Times seems to really love telling readers that China is facing a demographic crisis because its population is falling. It is not clear why the NYT thinks this amounts to a crisis for China, since many other countries have declining populations without experiencing any obvious crisis.
The most obvious examples are two of China’s neighbors, Japan and Korea, both of which are seeing modest drops in population. In both countries, per capita income is continuing to rise, in spite of a shrinking workforce. In fact, in South Korea, per capita income has risen at a 2.0 percent annual rate in the last four years, a faster pace than in the United States.
This growth figure actually understates improvements in living standards, since a smaller population also means less congestion and less pollution, factors that are not picked up in GDP. It is not clear why China should be worried if it experiences a similar decline in population.
The New York Times seems to really love telling readers that China is facing a demographic crisis because its population is falling. It is not clear why the NYT thinks this amounts to a crisis for China, since many other countries have declining populations without experiencing any obvious crisis.
The most obvious examples are two of China’s neighbors, Japan and Korea, both of which are seeing modest drops in population. In both countries, per capita income is continuing to rise, in spite of a shrinking workforce. In fact, in South Korea, per capita income has risen at a 2.0 percent annual rate in the last four years, a faster pace than in the United States.
This growth figure actually understates improvements in living standards, since a smaller population also means less congestion and less pollution, factors that are not picked up in GDP. It is not clear why China should be worried if it experiences a similar decline in population.
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Understanding the economy is often like putting together a jigsaw puzzle. You try to put together the pieces in a way where they fit together and give a clear picture. Unfortunately, the data do not always cooperate with this effort.
That is very much the case with the October jobs report released yesterday. On the one hand, we can look to the 150,000 job growth reported in the establishment survey and say that we had another month of very solid, albeit slowing, job growth. The figure is especially impressive when we add in the roughly 30,000 workers who were not counted because of the UAW strike. These workers will show up in the November data, now that the strike has ended.
However, we get a very different picture from the household survey. This showed another 0.1 percentage point rise in the unemployment rate to 3.9 percent. While this is still very low by historical measures, it is an increase of 0.5 percentage points from the April level. Furthermore, the household survey showed an actual drop in employment, with the number of people reporting that they are employed down by 348,000 from the September level.
This divergence continues a pattern since April. Over the last six months, the establishment survey showed a gain of 1,234,000 jobs. The household survey showed an increase in the number of people employed of just 191,000.
The two surveys are often out-of-line, that has been especially the case in the pandemic recovery. Many of us were very troubled by the discrepancy that was reported last year. In the eleven months from January 2022 to December, 2022 the establishment survey showed the economy created 4,430,000 jobs. The household survey showed employment had increased by just 2,120,000, creating a gap of more than 2,300,000 jobs.
This gap was hugely reduced when the Bureau of Labor Statistics (BLS) introduced new population controls in January, based on Census data, which added 954,000 to the employment figure. Job growth in the establishment survey was also revised down by around 300,000 in the annual benchmarking to state unemployment insurance filings. That still left a substantial gap, but considerably less than had previously been reported. (Some of this gap is due to differences in definitions. There was a fall in self-employment in 2022. This would lower employment in the household survey, but it would not show up in the establishment data.)
When the surveys do diverge, to my view it is always better to go with the establishment survey. It has a much larger sample and far higher response rate. It surveys 651,000 establishments every month. By contrast the household survey only covers 60,000 households.
The response rate to the household survey has fallen sharply over the last three decades and it is now just over 70 percent. This raises serious issues of non-response bias, since there is reason to believe that people who are not employed are less likely to respond to the survey.
The response rate to the establishment survey has also fallen somewhat. The advance report, which is the basis for the employment report for the month, only has a response rate around 65 percent. However, BLS continues to collect responses for two subsequent months. The response rate by the third month is over 93 percent. Given its size and high response rate, at least by the third month, the establishment survey should be a much more reliable gage of the labor market.
We can also look to try to reconcile what we see in these surveys with other data on the economy. We saw truly extraordinary productivity growth in the second and third quarters, 3.6 percent and 4.7 percent, respectively. The productivity data are highly erratic, and also subject to large revisions, but it is definitional that if employment grew less than reported in the establishment survey, productivity growth would have been even higher than reported.
We also have other labor market surveys, notably the Job Openings and Labor Turnover Survey (JOLTS). This survey measures job openings listed by companies, as well as hiring, firing, and quits. The JOLTS data have shown some weakening over the last nine months, but this is consistent with the sort of slowing in job growth we have seen in the establishment data. It is not consistent with the virtual halting of employment growth implied by the household data. Private measures, like the Indeed data on new hires and listings, is also consistent with gradual slowing in a still strong labor market, rather than the grim story in the household data.
The household survey also regularly gives us anomalies that clearly did not actually happen in the economy. In the October report, the data on employment rates for college educated workers implied that the number of college-educate people in the country increased by 1.1 million from September to October.[1] The Biden administration has tried to push policies that will make it easier for people to go to college, but I doubt that it will be taking credit for this one-month jump in the number of college grads.
What Does the Establishment Survey Tell Us?
If we can largely dismiss the grim picture from the household survey, we then have to ask what does the establishment survey tell us about the state of the economy? It is generally a good story, but there are some grounds for concern.
The rate of employment growth is clearly slowing, but 180,000 new jobs is hardly cause for concern. The Fed had been raising interest rates with the goal of slowing the rate of job growth. The argument is that with unemployment below 4.0 percent, there are not very many people still looking to be employed, and the number of new entrants to the labor market is not over 200,000 a month. Therefore, if we had continued to see the rapid job growth of 2022 and the first half of 2023, we would see substantial upward pressure on wages, which would be inflationary.[2] From this standpoint, the slower rate of job growth is just what the Fed was looking for, and should be the basis for it easing up on interest rates, or at least not raising them further.
In this vein, the establishment data also showed that the rate of growth of the hourly wage has slowed sharply. The annual rate over the last three months is just 3.2 percent. With inflation slowing to rates below 3.0 percent, this will still allow for real wage growth, but should not cause concerns about inflationary pressure in the economy. Wage growth by this measure averaged 3.4 percent in 2018-2019, when inflation was at the Fed’s 2.0 percent target.
All of this looks very good from the standpoint of a sustainable recovery. Strong job growth, combined with modest growth in real wages, should allow for consumption growth to remain healthy. And, consumption is by far the largest component of GDP.
However, there is some basis for concern in the establishment survey. The job growth for October was heavily concentrated in a small number of sectors. Health care added 58,400 jobs, and the larger category health care and social assistance added 77,200 jobs, more than half of the employment growth reported for the month. (It’s still 43 percent of job growth if we adjust for the UAW strike.) The government sector, mostly state and local governments, added 51,000 jobs in October. This doesn’t leave much room for job growth in other sectors.
Retail, which accounts for almost 10.0 percent of payroll employment, added just 700 jobs. Restaurants, which have added an average of 31,000 jobs a month over the last year, lost 7,500 jobs in October. The transportation and warehousing sector, which is responsible for moving stuff around, lost 12,100 jobs, mostly in the category of warehousing and storage. And, the financial sector lost 2,000 jobs, driven by a drop in credit intermediation (e.g. mortgage issuance) of 10,000 jobs.
These are all somewhat worrying signs, since a recovery that is driven by a small number of sectors may not have long to live. In keeping with this concern, the one-month employment diffusion index, which measures the percentage of industries adding workers, fell from 61.4 in September to 52.0, the lowest level since the lockdowns. So, there is some ground for concern.
However, we can find some positives looking by industry. Construction, which is historically the most cyclically sensitive sector, along with manufacturing, added a healthy 23,000 jobs in October. And manufacturing employment would have been pretty much flat, had it not been for the impact of the UAW strike.
Also, the information sector lost 9,000 jobs in October, primarily due to a decline in employment of 5,400 in the motion picture industry. This is largely due to the ongoing strike by the Screen Actors Guild, which has caused most movie production to grind to a halt. Presumably this strike will end at some point and we will see a jump in employment in the sector.
Overall Picture: Things Look Good, but We Need to Worry
I suppose we should always be worried about the possibility of bad events on the horizon. For example, it is certainly possible to envision scenarios in which the wars in Ukraine and the Middle East expand in ways that have large economic impacts, in addition to an enormous human toll. High long-term interest rates have both put a huge cramp on the housing market (existing home sales are down more than 30 percent) and have created the basis for more of the financial instability that we saw with the collapse of Silicon Valley Bank. A Fed rate cut, or even a signal that one is on the horizon, could be a huge help here.
But for now, most aspects of the economy are looking pretty good. There have been few times in the last half-century where we could tell a better story about the state of the economy.
[1] The September data showed an employment-to-population ratio for college grads of 71.9 percent, with employment of 62,907,000. This implies a population of college grads of 87,492,000. The October data showed the employment-to-population ratio had fallen to 71.3 percent, but the number of employed college grads had increased to 63,172,000. That implies a total population of college grads of 88,600,000, a gain of more than 1.1 million from September.
[2] There are two arguments on wages and inflation that should be distinguished. One is that rapid wage growth caused the jump in inflation we saw in 2021 and 2022. This can be easily dismissed, since prices outpaced wages, at least through the first half of 2022. However, there is a second argument that needs to be taken seriously. If we sustain a rapid rate of wage growth going forward (wages had been growing at more than a 6.0 percent annual rate at the start of 2022), it will lead to inflation. Wages can outpace prices in line with productivity growth, and we can have some period where wages rise at the expense of profits, reversing some of the increase in the profit share since the pandemic and in prior years. However, wages cannot persistently outpace profits by an amount in excess of productivity growth, without leading to serious problems with inflation.
Understanding the economy is often like putting together a jigsaw puzzle. You try to put together the pieces in a way where they fit together and give a clear picture. Unfortunately, the data do not always cooperate with this effort.
That is very much the case with the October jobs report released yesterday. On the one hand, we can look to the 150,000 job growth reported in the establishment survey and say that we had another month of very solid, albeit slowing, job growth. The figure is especially impressive when we add in the roughly 30,000 workers who were not counted because of the UAW strike. These workers will show up in the November data, now that the strike has ended.
However, we get a very different picture from the household survey. This showed another 0.1 percentage point rise in the unemployment rate to 3.9 percent. While this is still very low by historical measures, it is an increase of 0.5 percentage points from the April level. Furthermore, the household survey showed an actual drop in employment, with the number of people reporting that they are employed down by 348,000 from the September level.
This divergence continues a pattern since April. Over the last six months, the establishment survey showed a gain of 1,234,000 jobs. The household survey showed an increase in the number of people employed of just 191,000.
The two surveys are often out-of-line, that has been especially the case in the pandemic recovery. Many of us were very troubled by the discrepancy that was reported last year. In the eleven months from January 2022 to December, 2022 the establishment survey showed the economy created 4,430,000 jobs. The household survey showed employment had increased by just 2,120,000, creating a gap of more than 2,300,000 jobs.
This gap was hugely reduced when the Bureau of Labor Statistics (BLS) introduced new population controls in January, based on Census data, which added 954,000 to the employment figure. Job growth in the establishment survey was also revised down by around 300,000 in the annual benchmarking to state unemployment insurance filings. That still left a substantial gap, but considerably less than had previously been reported. (Some of this gap is due to differences in definitions. There was a fall in self-employment in 2022. This would lower employment in the household survey, but it would not show up in the establishment data.)
When the surveys do diverge, to my view it is always better to go with the establishment survey. It has a much larger sample and far higher response rate. It surveys 651,000 establishments every month. By contrast the household survey only covers 60,000 households.
The response rate to the household survey has fallen sharply over the last three decades and it is now just over 70 percent. This raises serious issues of non-response bias, since there is reason to believe that people who are not employed are less likely to respond to the survey.
The response rate to the establishment survey has also fallen somewhat. The advance report, which is the basis for the employment report for the month, only has a response rate around 65 percent. However, BLS continues to collect responses for two subsequent months. The response rate by the third month is over 93 percent. Given its size and high response rate, at least by the third month, the establishment survey should be a much more reliable gage of the labor market.
We can also look to try to reconcile what we see in these surveys with other data on the economy. We saw truly extraordinary productivity growth in the second and third quarters, 3.6 percent and 4.7 percent, respectively. The productivity data are highly erratic, and also subject to large revisions, but it is definitional that if employment grew less than reported in the establishment survey, productivity growth would have been even higher than reported.
We also have other labor market surveys, notably the Job Openings and Labor Turnover Survey (JOLTS). This survey measures job openings listed by companies, as well as hiring, firing, and quits. The JOLTS data have shown some weakening over the last nine months, but this is consistent with the sort of slowing in job growth we have seen in the establishment data. It is not consistent with the virtual halting of employment growth implied by the household data. Private measures, like the Indeed data on new hires and listings, is also consistent with gradual slowing in a still strong labor market, rather than the grim story in the household data.
The household survey also regularly gives us anomalies that clearly did not actually happen in the economy. In the October report, the data on employment rates for college educated workers implied that the number of college-educate people in the country increased by 1.1 million from September to October.[1] The Biden administration has tried to push policies that will make it easier for people to go to college, but I doubt that it will be taking credit for this one-month jump in the number of college grads.
What Does the Establishment Survey Tell Us?
If we can largely dismiss the grim picture from the household survey, we then have to ask what does the establishment survey tell us about the state of the economy? It is generally a good story, but there are some grounds for concern.
The rate of employment growth is clearly slowing, but 180,000 new jobs is hardly cause for concern. The Fed had been raising interest rates with the goal of slowing the rate of job growth. The argument is that with unemployment below 4.0 percent, there are not very many people still looking to be employed, and the number of new entrants to the labor market is not over 200,000 a month. Therefore, if we had continued to see the rapid job growth of 2022 and the first half of 2023, we would see substantial upward pressure on wages, which would be inflationary.[2] From this standpoint, the slower rate of job growth is just what the Fed was looking for, and should be the basis for it easing up on interest rates, or at least not raising them further.
In this vein, the establishment data also showed that the rate of growth of the hourly wage has slowed sharply. The annual rate over the last three months is just 3.2 percent. With inflation slowing to rates below 3.0 percent, this will still allow for real wage growth, but should not cause concerns about inflationary pressure in the economy. Wage growth by this measure averaged 3.4 percent in 2018-2019, when inflation was at the Fed’s 2.0 percent target.
All of this looks very good from the standpoint of a sustainable recovery. Strong job growth, combined with modest growth in real wages, should allow for consumption growth to remain healthy. And, consumption is by far the largest component of GDP.
However, there is some basis for concern in the establishment survey. The job growth for October was heavily concentrated in a small number of sectors. Health care added 58,400 jobs, and the larger category health care and social assistance added 77,200 jobs, more than half of the employment growth reported for the month. (It’s still 43 percent of job growth if we adjust for the UAW strike.) The government sector, mostly state and local governments, added 51,000 jobs in October. This doesn’t leave much room for job growth in other sectors.
Retail, which accounts for almost 10.0 percent of payroll employment, added just 700 jobs. Restaurants, which have added an average of 31,000 jobs a month over the last year, lost 7,500 jobs in October. The transportation and warehousing sector, which is responsible for moving stuff around, lost 12,100 jobs, mostly in the category of warehousing and storage. And, the financial sector lost 2,000 jobs, driven by a drop in credit intermediation (e.g. mortgage issuance) of 10,000 jobs.
These are all somewhat worrying signs, since a recovery that is driven by a small number of sectors may not have long to live. In keeping with this concern, the one-month employment diffusion index, which measures the percentage of industries adding workers, fell from 61.4 in September to 52.0, the lowest level since the lockdowns. So, there is some ground for concern.
However, we can find some positives looking by industry. Construction, which is historically the most cyclically sensitive sector, along with manufacturing, added a healthy 23,000 jobs in October. And manufacturing employment would have been pretty much flat, had it not been for the impact of the UAW strike.
Also, the information sector lost 9,000 jobs in October, primarily due to a decline in employment of 5,400 in the motion picture industry. This is largely due to the ongoing strike by the Screen Actors Guild, which has caused most movie production to grind to a halt. Presumably this strike will end at some point and we will see a jump in employment in the sector.
Overall Picture: Things Look Good, but We Need to Worry
I suppose we should always be worried about the possibility of bad events on the horizon. For example, it is certainly possible to envision scenarios in which the wars in Ukraine and the Middle East expand in ways that have large economic impacts, in addition to an enormous human toll. High long-term interest rates have both put a huge cramp on the housing market (existing home sales are down more than 30 percent) and have created the basis for more of the financial instability that we saw with the collapse of Silicon Valley Bank. A Fed rate cut, or even a signal that one is on the horizon, could be a huge help here.
But for now, most aspects of the economy are looking pretty good. There have been few times in the last half-century where we could tell a better story about the state of the economy.
[1] The September data showed an employment-to-population ratio for college grads of 71.9 percent, with employment of 62,907,000. This implies a population of college grads of 87,492,000. The October data showed the employment-to-population ratio had fallen to 71.3 percent, but the number of employed college grads had increased to 63,172,000. That implies a total population of college grads of 88,600,000, a gain of more than 1.1 million from September.
[2] There are two arguments on wages and inflation that should be distinguished. One is that rapid wage growth caused the jump in inflation we saw in 2021 and 2022. This can be easily dismissed, since prices outpaced wages, at least through the first half of 2022. However, there is a second argument that needs to be taken seriously. If we sustain a rapid rate of wage growth going forward (wages had been growing at more than a 6.0 percent annual rate at the start of 2022), it will lead to inflation. Wages can outpace prices in line with productivity growth, and we can have some period where wages rise at the expense of profits, reversing some of the increase in the profit share since the pandemic and in prior years. However, wages cannot persistently outpace profits by an amount in excess of productivity growth, without leading to serious problems with inflation.
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The New York Times ran a piece noting the huge increase in China’s use of solar power, but also highlighted concerns about its decision to build more coal-powered electricity plants. (The headline was “China Is Winning in Solar Power, but Its Coal Use Is Raising Alarm”) The piece talked about how John Kerry, President Biden’s special envoy for climate change, plans to raise the issue of coal with his Chinese counterpart at a meeting that starts Friday and that the issue is also likely to come up at a summit meeting with Biden and Xi next month.
While it is discouraging to see China continuing to build coal-powered plants, it is continuing to add wind and solar generation capacity at an incredibly fast pace. It is adding almost as much as the rest of the world combined, as this article notes.
The pace at which it adds capacity shows no evidence of slowing and may in fact accelerate if Xi decides to incorporate clean energy in a stimulus package. As a result of its rapid adoption of clean energy, its greenhouse gas emissions may peak next year, well ahead of its 2030 target. As it continues to add wind and solar capacity, its emissions will fall, especially in the context of its widely touted growth slowdown.
This raises the question of why it continues to build coal-powered plants. If China’s wind and solar capacity is growing more than its demand for electricity, this would imply less need for energy from coal-power plants, not more. And, once you have wind and solar capacity in place, it is far cheaper to get energy from these sources than from a coal-powered plant.
I can’t claim much knowledge of China’s politics, but I can see an analogous story in the United States. The Biden administration is pushing ahead with leasing large amounts of federal land for oil and gas development, even as it has put in place by far the most aggressive program for promoting clean energy the country has seen.
If the push for solar and wind energy is successful, there will be little demand for oil and gas from the land now being put up for lease. In that context, the leasing of land is an empty gesture to the oil and gas industry that will have little impact on future greenhouse gas emissions. (If it seems hard to imagine that major companies would put up tens of millions of dollars for leases that may never be used, consider that venture capitalists put up billions of dollars to finance We Work, a company whose great innovation was renting office space.)
If Xi faces comparable political considerations in China, it may make sense to allow politically connected interest groups to build coal-powered plants, even if there will be very little demand for their electricity once they are completed. Again, I have no way of knowing if Xi is making this sort of political calculation, but I do know that it is much cheaper to get electricity from wind and solar capacity that is already installed than from a coal-powered plant. Unless the plan is to subsidize the use of electricity from coal, most of these plants will never generate much electricity. From that standpoint, if China continues to aggressively add wind and solar capacity, we don’t really have to worry much about its construction of coal-powered plants.
The New York Times ran a piece noting the huge increase in China’s use of solar power, but also highlighted concerns about its decision to build more coal-powered electricity plants. (The headline was “China Is Winning in Solar Power, but Its Coal Use Is Raising Alarm”) The piece talked about how John Kerry, President Biden’s special envoy for climate change, plans to raise the issue of coal with his Chinese counterpart at a meeting that starts Friday and that the issue is also likely to come up at a summit meeting with Biden and Xi next month.
While it is discouraging to see China continuing to build coal-powered plants, it is continuing to add wind and solar generation capacity at an incredibly fast pace. It is adding almost as much as the rest of the world combined, as this article notes.
The pace at which it adds capacity shows no evidence of slowing and may in fact accelerate if Xi decides to incorporate clean energy in a stimulus package. As a result of its rapid adoption of clean energy, its greenhouse gas emissions may peak next year, well ahead of its 2030 target. As it continues to add wind and solar capacity, its emissions will fall, especially in the context of its widely touted growth slowdown.
This raises the question of why it continues to build coal-powered plants. If China’s wind and solar capacity is growing more than its demand for electricity, this would imply less need for energy from coal-power plants, not more. And, once you have wind and solar capacity in place, it is far cheaper to get energy from these sources than from a coal-powered plant.
I can’t claim much knowledge of China’s politics, but I can see an analogous story in the United States. The Biden administration is pushing ahead with leasing large amounts of federal land for oil and gas development, even as it has put in place by far the most aggressive program for promoting clean energy the country has seen.
If the push for solar and wind energy is successful, there will be little demand for oil and gas from the land now being put up for lease. In that context, the leasing of land is an empty gesture to the oil and gas industry that will have little impact on future greenhouse gas emissions. (If it seems hard to imagine that major companies would put up tens of millions of dollars for leases that may never be used, consider that venture capitalists put up billions of dollars to finance We Work, a company whose great innovation was renting office space.)
If Xi faces comparable political considerations in China, it may make sense to allow politically connected interest groups to build coal-powered plants, even if there will be very little demand for their electricity once they are completed. Again, I have no way of knowing if Xi is making this sort of political calculation, but I do know that it is much cheaper to get electricity from wind and solar capacity that is already installed than from a coal-powered plant. Unless the plan is to subsidize the use of electricity from coal, most of these plants will never generate much electricity. From that standpoint, if China continues to aggressively add wind and solar capacity, we don’t really have to worry much about its construction of coal-powered plants.
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