March 03, 2021
Washington Post columnist Steven Pearlstein had his final column today, and it is quite explicitly an attack on current progressive economic priorities. I will make three points, but first let me say that I have appreciated Pearlstein’s columns over the years. I have often criticized them, but I have also learned from them. And, I will give Pearlstein credit for talking to a diverse range of voices and not just repeating centrist claptrap, like some other economic commentators.
Okay, so getting to the beef:
- Pearlstein ignores the political context for the big Biden ask;
- The $15 minimum wage target is based on solid economic analysis;
- The financial bubbles that worry Pearlstein do not threaten the economy.
Political Context of the Pandemic Recovery Package
Starting with political context, any serious person must recognize that the Republican Party is now committed to obstruction of anything Democrats do, regardless of its cost to the economy and the country. This is not a question of ideological differences, the Republicans simply want to regain power and are happy to see people lose their jobs, their businesses, and even their lives if it will advance that goal.
We saw the indifference to the country’s economic well-being in the Obama presidency where they did everything they could to slow the economy and limit job gains so that they would be better positioned in challenging Obama and the Democrats. The indifference to human lives has been clear in their response to the pandemic. They have vigorously fought efforts to limit the pandemic’s spread in order to get talking points that apparently sell with their base.
In this context, the risks for Biden and the Democrats of going too low hugely outweigh the risks of going too high. We know with absolute certainty that if the Biden recovery package is inadequate enough to restore strong growth, the Republicans will do everything they can to prevent Biden from having another bite at the apple. Like most economists, I recognize that the package may be too large and lead to inflationary pressures, but we have the tools to contain inflation, if it proves to be a problem. We don’t have any tools to overcome deliberate economic sabotage by Republicans if they end up with a majority of either house.
The $15 Minimum Wage Is Based on Solid Analysis
The $15 minimum wage target did originate as an alliteration (Fight for $15), not a carefully thought out economic analysis, but time has brought the two together. Back in 2015, John Schmitt from CEPR and Larry Mishel and David Cooper from EPI, carefully reviewed the evidence to determine a plausible minimum wage target for 2020. They concluded that a $12.00 minimum wage for 2020 would allow for substantial improvements in living standards for low wage workers, with little risk of large-scale job loss.
If we look out to 2025, the combined impact of inflation and productivity growth would imply a minimum wage target that is roughly 20 percent higher than the $12 target for 2020. That would put as $14.40 an hour, a stone’s throw away from the $15 target proposed by Biden.
To be clear, the job loss from a $15 an hour minimum wage in 2025 will not be zero. Some businesses will cut back employment. And, small businesses go under every day of the week. In some cases, paying workers more could be the straw that broke the camel’s back. But a great deal of recent research indicates that we will not see large-scale job loss from a $15 minimum wage. (It’s also worth noting that if the minimum wage had kept pace with productivity growth since 1968, as it did in the three decades prior to 1968, it would be close to $30 an hour by 2025.)
In short, it is Pearlstein, not progressive advocates of a $15 minimum wage, who is being sloppy. The research indicates that a wage hike of this size will have enormous benefits for low-wage workers and their families. It will not lead to substantial job loss.
Not All Bubbles Are Created Equal
I was one of the few economists warning about the risks to the economy from the housing bubble from 2002 until it started to deflate in the second half of 2006. I also warned about the risks of the stock bubble in the prior decade. In both cases, the collapse of the bubble led to recessions. The recession was the worst since the Great Depression in the case of the housing bubble.
From a labor market perspective, the stock crash recession was also severe. We didn’t get back the jobs lost in the recession, which began in March of 2001, until January of 2005. At the time, this was the longest period without positive job growth since the Great Depression.
I am saying this just to make the point that I take asset bubbles seriously. However, I think Pearlstein is off the mark in arguing that current bubbles in the stock market and bond market pose a major threat to the economy.
The history of the Great Recession has been rewritten to make it a story of the financial crisis. While the financial crisis undoubtedly worsened the recession, the real story of the Great Recession was simply that the bubble that had been driving the economy in the years 2002-2007 had deflated. Residential construction fell from a peak of 6.7 percent of GDP to less than 2.0 percent of GDP. Consumption had boomed as people spent based on the bubble-generated equity in their homes. Soaring consumption pushed the savings rate to a record low 2.0 percent in 2006. After the collapse, it rose to a more normal 8.0 percent.
The combined impact of the lost construction and consumption was more than 8.0 percentage points of GDP, which would come to around $1.7 trillion in lost annual demand in today’s economy. This huge loss of demand would have led to a severe recession even if the financial system was operating perfectly.
This is all straightforward arithmetic. It is also supported by the obvious fact that by 2010, the financial system was pretty much back to normal, but the unemployment rate remained high and the economy was operating well below its potential.
Like many other analysts, Pearlstein has fallen into the trap of obsessing on the financial side of the story and ignoring the real side. I agree completely that the stock market is extraordinarily high by almost any measure. But suppose it falls by 20 or 30 percent, what bad thing will happen?
Unlike the 1990s stock bubble, the high stock market has not led to any investment boom. In fact, companies are spending far more money buying back shares than they are getting from issuing new shares. The high stock prices also have not led to any consumption boom, unlike in the 1990s when the savings rate was hitting then record lows. Saving rates were at very normal levels even before the pandemic hit. In short, unlike the earlier stock bubble or the housing bubble, this stock market is not driving the economy.
The same is true for what is arguably a bond bubble. Suppose the bond market loses $2-$4 trillion in value as bond prices tumble and some bonds default. We would have some very unhappy investors and perhaps some bankrupt hedge funds, but why would this sink the economy? The same is true for other bubbles, like Bitcoin and baseball cards. The collapse of these bubbles can leave a lot of people unhappy, but it is hard to see the economic disaster story.
In short, Pearlstein is right to worry about bubbles, but we have to focus on the bubbles that are actually driving the economy. The bubbles that have concerned him in recent years are clearly not driving the economy, even if their collapse will cause serious pain to true believers.
Anyhow, I wish Pearlstein a long and productive retirement.