American Workers Saved the Economy

The Pitch: Economic Update for September 19th, 2024

Friends,

“The Federal Reserve cut interest rates on Wednesday for the first time since early 2020, the clearest signal yet that central bankers believe they are winning their years long battle against rapid inflation,” writes Jeanna Smialek at the New York Times. The Fed’s rate cut should make mortgages and loans cheaper for everyone, hopefully spurring additional economic growth after a long period of unnecessarily high interest rates.

“Fed officials slashed borrowing costs by half a percentage point, an unusually large reduction,” Smialek explains. “The decision lowers rates to about 4.9 percent, down from a more than two-decade high”

This half-percentage interest-rate cut is a welcome surprise from a Federal Reserve that many have argued has been way too cautious over the past few years. In his press conference after the announcement of the cut, Fed Chair Jerome Powell explained that the Federal Reserve made the big cut because they saw data indicating that the job market’s slowdown was spreading.

The news was met with jubilation from the mainstream economics community. “There is a lot of praise for the Fed among money managers and bank economists today,” writes Talmon Joseph Smith for the Times. “But in the background, many labor economists I speak with have generally been disappointed that the Fed’s pivot has taken this long and feel that much of the recent damage to the jobs market wasn’t necessary.”

We can’t forget that the Federal Reserve was raising rates and keeping them high specifically to slow down the job market, under the mistaken assumption that high worker wages were causing inflation. In reality, the inflationary high prices consumers have been paying were due to the supply chain disruptions caused by turning the global economy off and then on again during the early days of Covid. And prices were held aloft over the last few years due to greedy corporations using inflation as an excuse to raise prices and plump their profit margins to record heights.

Paul Krugman recently shared a graph showing how high mainstream economists believed the unemployment rate would have to rise in order to get inflation under control. Compare those predictions (the two blue dotted lines) with the actual unemployment rate (the black line):

And the Congressional Budget Office’s predictions for spiking unemployment on this graph were actually on the conservative side: Famous trickle-downers like Obama economist Larry Summers said ten million Americans were going to have to lose their jobs to get prices under control. Let’s be as clear as possible here: Summers was absolutely wrong.

Now, everyone can see that workers didn’t have to suffer in order to tame inflation. Despite the claims of mainstream economists, job growth was never the cause of inflation. In fact, American consumer spending actually held the American economy aloft during the inflationary crisis of skyrocketing prices. A new Census report found that American household income grew by 4% last year. Those growing paychecks made it possible for Americans to hunker down and weather the global price increases without mass economic misery. Now that inflation seems to be under control, it should be clearer than ever that those workers made our economic recovery from the pandemic and price increases the envy of the world:

The Fed was wrong to raise interest rates as high as they did, and to keep them high for as long as they did. It took too long for them to act, but the Fed’s decision to cut rates yesterday was absolutely the right move. Hopefully this experience will help future Fed officials to understand that American workers, not the wealthy few, are the center of the American economy. If they do learn that lesson, this whole ordeal could potentially change America’s institutional responses to recessions and other economic disasters in the future, allowing us to continue to build the economy from the middle out, not the top down.

The Latest Economic News and Updates

What the Fed’s Decision Might Mean for Business

Despite the good news from the Fed yesterday, the truth is that many Americans still feel like the economy isn’t working for them. While price increases have cooled, prices at grocery stores are still much higher than they were before the pandemic, and you can see on this chart from the New York Times that the Fed kept interest rates abnormally high even as inflation has declined:

It’s very likely that Americans who don’t pay attention to economic details are still interpreting their high interest rates as a symptom of the inflation crisis. Just look at the absurd rates Americans have been paying on their credit cards:

“While Wednesday’s news will likely bring relief for shoppers and borrowers, the effects of Fed rate changes are not instantaneous, and it could be months before credit card APRs, mortgage costs and other interest rates meaningfully change,” writes Karl Russell at the Times. Even if the Federal Open Market Committee’s prediction of lowering unemployment and rising GDP over the next few years turn out to be true, it’s going to be a while before people truly feel like the economy is working for them again.

There are a few pitfalls for business in the months ahead. The Times notes that landlords of office buildings, who have been hit hard by work-at-home policies adopted during the pandemic, are likely to celebrate the lower interest rates by buying and selling “more commercial properties…at lower prices,” which “could force big landlords to lower the value of comparable properties in their portfolios,” the Times explains. “An uptick in activity spurred by lower rates could prompt a cascade of falling building valuations.”

Banks, too, are likely to see an increase in business as big corporations prepare to engage in mergers and acquisitions that were put off while rates were high — but those mergers could result in layoffs for workers.

The Times lays out the options for businesses as they move forward in an environment of lowering interest rates: “If companies can borrow more cheaply, the savings should mean they can spend more on hiring, for acquisitions, or to reward their shareholders with stock buybacks and dividends.”.

The question, then, is how banks and corporations choose to respond to the Fed cut. Remember, though trickle-downers like to pretend that they work in service of an all-knowing market that perfectly chooses winners and losers, the truth is that CEOs and corporate boards have plenty of options ahead. If they decide to enrich a tiny number of shareholders through stock buybacks and layoffs, working Americans will suffer. But if they invest in growth, everyone will do better because working Americans will do better.

Given that businesses have gone back on very public promises to invest in customers and workers in the recent past, it would be smart to prepare for the former. The Biden Administration has already worked hard to discourage giant corporations from merging by enforcing long-dormant antitrust laws, and Biden also installed a first-of-its-kind 1% tax on stock buybacks, with a proposal to raise the tax to 4%. As we saw during the greedflation epidemic that raised prices and harmed the whole economy, the future of America’s economic security shouldn’t depend on expecting businesses to invest in long term growth. We should have more and better guard rails in place to make sure that businesses don’t loot working Americans to fatten their profit margins.

What the Fed’s Decision Might Mean for Housing

“The cost of rent and utilities in 2023 rose faster than home values for the first time in a decade,” writes Rachel Siegel for the Washington Post. This is the latest in a long string of bad news for Americans who have been hammered by a housing price crisis.

“From 2011 to 2019, real rent costs rose less than 3 percent every year, the data shows. In 2022, after peaking during the coronavirus pandemic, rent grew 1 percent,” Siegel explains. “But last year, rent rose 3.8 percent, compared with a 1.8 percent rise in inflation-adjusted median home values.”

Prices are skyrocketing for homeowners, too. “Some 5.4 million of the nation’s 85.7 million homeowners paid $4,000 a year or more for insurance in 2023,” Siegel writes.

When it comes to America’s declining inflation, “housing inflation is the one piece that is dragging a bit,” Fed chair Jerome Powell said in a press conference yesterday. Powell said he expects the housing market to loosen up as mortgage rates go down and people who have been waiting to jump into the housing market finally feel as though they can afford to buy.

“But the real issue with housing is that we have had, and are on track to continue to have, not enough housing,” Powell said. “So it’s going to be challenging. It’s hard to find zone lots in places where people want to live, all of the aspects of housing are more and more difficult.”

The question is, Powell said, “Where are we going to get the [housing] supply? This is not something that the Fed can really fix. As we normalize rates, you’ll see the housing market normalize,”Powell said. But ultimately, “the supply question will have to be dealt with by the market, and also by government.”

On this point, Powell and I are in violent agreement. America needs millions more units of housing — by which I mean homes, condos, and apartments, for people of all incomes — and it doesn’t seem as though the markets are equipped to provide them without some form of government intervention.

The future of America’s housing is on the ballot in the form of the presidential election this November. As Siegel explains, “Vice President Kamala Harris, the Democratic presidential nominee, talks about building 3 million more homes if elected, combined with offering large tax credits to help buyers get into the market.” On the other hand, “Former president and GOP nominee Donald Trump, meanwhile, says his plans to deport undocumented immigrants will open up housing supply.”

One of these proposals will create jobs and make housing more affordable. The other proposal is pure nonsense. I’ll leave it to you to figure out which is which.

Examining the Harris Economic Plan

Washington Post columnist Heather Long wrote an editorial laying out a two-step economic vision that she believes Vice President Kamala Harris should promote in the final month-and-a-half before election day. First, Long argues, Harris should embrace the Biden Administration’s economic successes. “Wages and incomes are up, especially for the middle class. Unemployment has been incredibly low, and many people have been able to find better jobs. The inflation battle has been won; Americans are seeing prices fall for gas, cars and other goods, and the Federal Reserve is ready to lower interest rates,” Long writes.

“Second,” Long continues, “she needs to emphasize that, now that the economy has healed, the president and Congress have an opportunity to fix the country’s long-standing problems and invest in the jobs of the future.”

Long correctly points out that Harris has already released several policy proposals, and those proposals suggest that she is “rejecting neoliberalism” and the false trickle-down doctrine that prioritizes the super-rich as the real job creators in the American economy.

Long categorizes Harris’s proposals to date in two buckets: First, “Her agenda calls for bold, strategic investments in the economy of tomorrow. She wants 3 million new homes. She wants more start-up businesses. She champions industrial policy to bring advanced manufacturing back to the United States,” Long writes. “In the debate, she even embraced investing in ‘diverse sources of energy.’ This build-build-build mentality is largely bipartisan and pro-business (and it draws on what has been dubbed the ‘abundance agenda’).”

But then Harris also wants to invest in working Americans. “This is where her bigger child tax credit comes in, as well as her push for affordable child care and elder care. All of this underscores her belief that the federal government should more aggressively police large companies that break the law with anticompetitive practices,” Long explains.

Long recognizes that Harris’s economics “don’t fall neatly on the liberal-to-conservative spectrum,” making cases for both public and private investments. It’s an economic theory that overlaps with both Bernie Sanders and Mark Cuban. But Long also argues that Harris’s current framing of this economic philosophy — the “opportunity economy” is too “vague,” and she proposes “middle-class capitalism” instead.

That’s not half bad, because it pinpoints the real focus of these economic theories: Growing the incomes of the American middle class and encouraging competitive markets. When it comes to political branding, clear and concise is almost always best — though respectfully to Ms. Long, I’d also suggest that “middle-out economics” has quite a nice ring to it.

Whatever you call Harris’s economic agenda, it seems to be resonating with the American people. Democratic presidential candidates almost always poll behind their Republican rivals when it comes to economic matters. Forty years of trickle-down propaganda had convinced the voting public that tax cuts for the wealthy and deregulation for the powerful is where prosperity comes from, and Republicans have always spoken more confidently about trickle-down matters than Democrats.

But Axios’s Emily Peck notes that Harris is polling very strongly on economic matters. “​​46% of voters said they trust Harris to handle the economy — the same share as former President Trump, according to a Morning Consult poll conducted in late August and released Thursday morning,” Peck writes. “A separate survey from FT-Michigan Ross, taken after the debate and released on Sunday, shows Harris with a slight edge over Trump when it comes to the economy.”

This is not just good news for Harris — it’s also a promising sign that trickle-down economics might have finally lost its grip on the American voting public.

Are We Entering a Crisp Labor Autumn?

“Aircraft assembly workers walked off the job early Friday at Boeing factories near Seattle and elsewhere after union members voted overwhelmingly to go on strike and reject a tentative contract that would have increased wages by 25% over four years,” reported David Koening last week.

Koening reports that union members were initially calling “for pay raises of 40% over three years” and “to restore traditional pensions that were axed a decade ago..”

Those 33,000 striking Boeing workers might mark the beginning of a new wave of labor action along the lines of the “Hot Labor Summer” we saw last year. Hotel workers around the country went on strike over Labor Day weekend, and more actions are on the horizon.

The United Auto Workers union is holding a strike authorization vote for members who work at Stellantis plants. UAW President Shawn Fain said “Stellantis breached the terms of the contract that was reached after last year’s six-week strike,”

Fain says Stellantis didn’t honor commitments to raise worker wages, and is “refusing to provide information about the company’s plans regarding its product commitments.”

Additionally, “Fain also said the company confirmed last week that it is planning to move Dodge Durango production from Detroit to Canada,” which violates the agreement the company made with striking workers.

Meanwhile, workers at a green energy manufacturing company outside of Pittsburgh, Pennsylvania, voted to unionize. Kalena Thomhave writes at Capital & Main that Eos Energy Enterprises has taken millions of dollars from President Biden’s Inflation Reduction Act investments in the green economy, but it has reportedly violated workers rights on multiple occasions.

“In the runup to Thursday’s election, the union filed six unfair labor practice charges against Eos with the National Labor Relations Board, alleging among other things that the company retaliated against workers who supported the union effort through firings and disciplinary changes,” Thomhave writes.

“Workers also alleged that the company shut down production and sent workers home without pay in order to keep them from interacting with union organizers,” Thomhave reports, adding, “The disconnect prompted union supporters to question whether federal funds should support companies that engaged in what they considered union busting.”

With labor actions ramping up during a presidential election season, it seems likely that one or more of these unions might wind up in the national spotlight this fall.

This Week in Middle Out

• The Department of Transportation is investigating four big airlines’ frequent flier programs. “Our goal is to ensure consumers are getting the value that was promised to them,” Transportation Secretary Pete Buttigieg said, “which means validating that these programs are transparent and fair.”
• The Department of Transportation also demanded certain customer protections before Alaskan Airlines’ merger with Hawaiian Airlines was allowed to go through this week. “Alaska and Hawaiian promised not to devalue their rewards programs and to ensure consumers get to keep the benefits and status they’ve earned,” explains Axios’s Joann Muller. “The combined airline must maintain critical inter-island service and key routes between Hawaii and U.S. mainland” and “They must also promise not to interfere with other airlines’ access to Honolulu’s airport.”
• The Consumer Financial Protection Bureau has made it harder for banks to impose overdraft fees on ATM usage and debit-card transactions.
• The Biden Administration is closing a loophole that Chinese ecommerce brands Shein and Temu have been using to avoid tariffs.
• Alan Rappeport has written a very interesting article for the New York Times explaining the bipartisan push to develop an American Sovereign Wealth Fund that would reinvest potential trade surpluses into new national assets.

This Week on the Pitchfork Economics Podcast

MIT economist Anna Stansbury joins Nick and Goldy to discuss a new paper she co-authored with Robert Schultz that examines the socioeconomic backgrounds of economists. They discovered that only a tiny minority of economists are from less-advantaged backgrounds. That lack of socioeconomic diversity affects the entire economics profession’s ability to perceive and address inequalities of power and income. Stansbury explains that it’s vital to include more economists from a wide variety of socioeconomic backgrounds — not just for purposes of equity but because it’s impossible to measure and solve economic problems unless a wide variety of economic experiences are included.

Closing Thoughts

I briefly mentioned it in last week’s newsletter, but I wanted to give a little more attention to a recent meta-analysis of minimum wage research that was recently released by Arindrajit Dube and Ben Zipperer. Zipperer and Dube have spent much of their careers exploring the impacts of the minimum wage, and this study is in many ways a culmination of that work up until now. (A PDF of the full report — which, full disclosure, is very technical — can be found right here.)

Dube and Zipperer aggregated every available academic study of employment following minimum-wage increases in America, Canada, the UK, and Europe from 1992 to present. (The vast majority of the studies — by a ratio of 56 to16 — are from the United States.) If there were any discrepancies in the studies, they reached out to the original authors “for guidance on model or sample selection.”

In the abstract, Zipperer and Dube explain their findings: “most studies to date suggest a fairly modest impact of minimum wages on jobs: the median [own-wage elasticity] estimate of 72 studies published in academic journals is -0.13, which suggests that only around 13 percent of the potential earnings gains from minimum wage increases are offset due to associated job losses.”

This is already an impressive number given that whenever a state or city proposes raising the minimum wage, trickle-downers will make outrageous claims that a quarter of restaurants will close, for example, and that unemployment would skyrocket. (The Atlantic back in 2014 warned that Seattle raising the wage to $15 would be a “disaster.”)

But Dube and Zipperer explain that the data seems to be changing. When it comes to earnings losses after minimum-wage gains, “Estimates published since 2010 tend to be closer to zero.”

How can this be? For the Economic Policy Institute, Zipperer explained that the more recent numbers reflect “improvements in research methodology over time.” The earlier studies were likely influenced by the (false) dominant trickle-down belief that raising the minimum wage must always result in job losses, so they overcompensated their research to find those negative results.

Here’s a rough metaphor that might explain what pre-2010 economists were doing: If I tell you that there’s a piece of broken glass somewhere on your living room carpet, you’re going to walk very differently than you usually do. You’re going to be overly cautious and you will keep looking for that shard of glass on hands and knees until you find it, and you’re probably going to spot lots of false positives along the way — a popcorn kernel from movie night, a necklace from a Barbie doll.

But as the research continued and economists had a better understanding of how the economy really grows, they refined their studies to examine what was really happening, and they found out that raising the minimum wage doesn’t actually shrink employment. There was no sliver of glass at all, and all that cautious searching for job losses only served the purpose of warping the studies to confirm job losses that were never there.

What this meta-analysis provides is an illustration of our understanding of how the economy really works. When economists bought into the idea that prosperity trickled down from the wealthy few at the top of the economy, they measured the economy to look for that flow of wealth — even though it didn’t really exist.

But now that we understand that it’s the vast majority of working Americans who create prosperity, economic studies are seeing the truth that’s been there all along: When workers have more money, they create jobs with their increased consumer demand. That’s great news for everyone.

Be kind. Be brave. Onward and upward.

Zach