Cruel Summers

The Pitch: Economic Update for June 23rd, 2022

(The Pitch is a weekly economics newsletter written by Zach Silk. Follow here on Medium or sign up for free on Substack.)

Friends,

Inflation is on everyone’s minds right now, and all the experts are chiming in with proposed solutions. In a speech on Monday, former Treasury Secretary Larry Summers announced that “we need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment.”

For Marketwatch, Steve Goldstein explains the horror underlying Summers’ comments in plain English: “Put a different way, Summers is calling for the unemployed rolls to swell to roughly 16 million from just under 6 million in May.” That’s millions of American households losing one or both incomes at a time when rents and house prices are soaring, when homeless populations are swelling, and when social safety nets are straining to recover from the pandemic.

Summers is using the inflation crisis of the late 1970s and early 1980s as his reference point, and because that inflation crisis ended during a recession that pushed unemployment to sky-high levels, he believes the current levels of inflation can only be resolved by cooling the market down and putting millions of people out of work.

But the inflation crisis of the past has very little in common with our experience today. The rising prices we’ve seen are a result of the supply chain blockages and other aftereffects of the pandemic and the Russian invasion of Ukraine—plus a massive dose of corporate price-gouging. Summers blames a significant share of high prices on so-called “wage inflation” — or what you or I would call “higher paychecks caused by a strong labor market” — and ignores the fact that corporate profits have skyrocketed in the last few years, in a manner totally inconsistent with how they behaved during the 1970s inflation crisis.

Summers believes that depressed consumer demand caused by unemployment will significantly drive prices down. But I’ve said it before and I’ll say it again: The consumer demand created by those growing American paychecks is holding America’s economy aloft right now. Summers is calling to kick the support beams out from under the economy based on 40-year-old economic principles. We shouldn’t be quibbling over how many millions of miserable, impoverished Americans we must sacrifice to end inflation— we should be looking for solutions that address the root causes of this crisis.

The Latest Economic News and Updates

Deflating inflation myths

We’re not done talking about inflation just yet. A couple of new reports in the past week have helped to dimensionalize the contours of this crisis, and there are a few new ideas about the causes of the high prices everyone is paying. First, The Roosevelt Institute confirms that corporate profits and price markups are at their highest level since the 1950s — in other words, we haven’t seen this kind of price-gouging in modern history. They draw a direct line between higher prices and profits and inflation, and they make the case that direct government intervention to lower prices would succeed without hurting the economy.

Second, Karl Russell and Jeanna Smialek at the New York Times show that the Fed’s decision to raise interest rates to combat inflation has been attempted around the world, but interest rates are up everywhere and so are prices. In fact, nations like Brazil, India, the Czech Republic, and Mexico which have the highest interest rates at the moment are projected to end the year with the highest inflation rates.

And Matt Stoller’s excellent Substack publication BIG continues to look into the role that corporate monopolies play in the inflation crisis. Stoller was one of the first to point out that as much as 60 percent of the higher prices we pay at grocery stores and gas stations is going straight to corporate profits, and I’m happy to report that in his latest issue, he says that lawmakers are taking action to stem the tide of price-gouging:

In the U.S., Pennsylvania is considering stronger price-fixing laws. The FTC is investigating price discrimination by dominant firms, and Rohit Chopra at the Consumer Financial Bureau is cracking down on various junk fees charged by banks, which drain tens of billions of dollars from consumers. Most importantly, Congress actually passed a law re-regulating ocean shipping, and Biden signed it.

Reforging the supply chain

The supply chain crisis has helped remind us that the world in the 21st century is a very, very small place. Products are built in multiple different nations and regions, sent from one corner of the world to another for assembly, and then shipped halfway around the world to be sold to consumers. A weather event in one nation can throw off entire product categories.

The supply chain is now bracing for another shock: Ana Swanson reports for the New York Times that an American law intended to combat slave labor in China is going to cause major supply chain disruptions around the globe.

“The apparel industry has scrambled to find new suppliers, and solar firms have had to pause many U.S. projects while they investigated their supply chains,” Swanson writes, adding that the slave labor trade in China is also apparently responsible for a significant chunk of the world’s tomato paste and cotton industries. It’s imperative that the United States lead the global fight against slave labor, but in the process of that fight, it’s important to keep in mind that the ramifications of this law will be felt by virtually everyone. This particular economic pain, though, is an important development toward building a better world.

The Center for American Progress has put together a sweeping investigation of America’s baby formula shortage. The piece serves as a scathing indictment of corporate consolidation in America, which uses mammoth corporate profits as an excuse for an embarrassing and dangerous system in which one factory can produce nearly half of the nation’s tainted supply of baby formula. A more competitive market would empower a wider array of companies, and it would also establish a system wherein one factory’s failure wouldn’t result in a total collapse of the entire baby formula production chain.

And baby formula is just the tip of the iceberg. For the Democracy Journal, Senator Cory Booker published a damning exploration of the many injustices created by America’s food supply chain. Corporate consolidation has produced a food insecurity crisis, in which many of the poorest parts of the country have become food deserts, and a nutrition crisis in which even Americans with easy access to grocery stores are finding it difficult to meet basic nutritional needs.

Fixing this food system, Booker writes, is a thoroughly American issue, one that is “intimately tied to the outcomes of our children, the future of climate change, and the health and wellbeing of Black people in America.”

Investments in children reap lifelong rewards

George Fenton at the Center on Budget and Policy Priorities highlights some striking new research which proves that “infants in families who receive more support from child-related tax benefits go on to have higher test scores, high school graduation rates, and earnings into young adulthood,” which likely results in greater prosperity for their entire lives.

Can Black homeownership close America’s racial wealth gap?

Dorothy Brown writes about how homeownership has contributed to the wealth gap between Black and white households in America. In short, white families possess eight times more wealth than Black families, and a lot of that has to do with the value tied up in homes. It’s harder for Black families to get loans to buy homes, and homes in Black neighborhoods tend to be about half as valuable as similar homes in white neighborhoods.

And these barriers to Black homeownership prevent parents from passing on wealth to their children at anything comparable to the rate which white parents pass on to their children, causing the wealth gap to grow even wider. Black families that move to predominantly white neighborhoods also tend to suffer from higher stress and anxiety levels, which produce worse health outcomes in the long run.

Brown proposes that the government find a way to “ensure that Black homeowners get the same rate of return living in all-Black or racially diverse neighborhoods,” effectively allowing families to build and pass on wealth to their children at the same rate as white families. Whether that rate of return takes the form of a tax rebate or something else, Brown doesn’t say. But it’s an intriguing call to address the wealth that Americans have tied up in real estate — and it’s possible that if we unlock this specific policy problem we can begin to undo some of the other real-estate-centric problems that have been unfolding in cities around the nation for the past two decades.

Real-Time Economic Analysis

Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.

• On Civic Action Live this week, we’re going to debunk some of the foolishness that mainstream economists have spread around the inflation crisis, we’ll look at the vulnerabilities in the supply chain and what that means for the global economy, and we’ll explore how tax incentives and home ownership can result in positive economic benefits for a lifetime — and even across generations. Join us at 10:30 am PST.
• Women who choose to become mothers have long suffered a serious economic penalty at their workplaces — they earn less than fathers on average, they don’t rise as high in the organization, and they’re the first to leave the workforce when a crisis arises. Reshma Saujani joins Nick and Goldy on Pitchfork Economics this week to discuss how mothers suffered the economic brunt of the pandemic, why moms have been the last group to recover during the jobs boom, and how we can rethink childcare to allow moms to fully reenter the workforce.
• In his Business Insider column, Paul writes about the global wealth inequality gap and how we can close it once and for all. Wealth inequality wasn’t a huge problem for most of human history, but in the last 200 years it has exploded, with the wealthiest people getting richer and the poorest regions of the world losing wealth at a rapid clip. The good news is that it hasn’t always been that way, and smart policies can close that global wealth inequality gap once and for all.

Closing Thoughts

Politically, it’s easy to understand why President Biden called for a summer-long gas tax holiday this week. Gas prices are so high right now that even the 18 cents Americans pay per gallon in tax feels significant, and Biden needs to do something to try to drive prices down.

That said, tax holidays are generally bad policy. For one thing, they contribute to the trickle-down narrative that taxes are punitive and only exist to drive up prices for consumers. A tax holiday almost feels like an admission of guilt from leaders that taxes are an unnecessary, and avoidable, burden. And in particular, a gas tax holiday in the middle of a climate crisis caused in large part by the burning of fossil fuels seems like a dreadfully mixed message to send to a country that is just starting to realize that climate change affects everyone.

I appreciated the response from the office of Washington State Governor Jay Inslee when they were asked to comment on the idea of a tax holiday: “The governor has been consistent about his skepticism for this approach. The oil companies would be the ones to benefit from suspending the gas tax because it provides another opportunity for them to pocket more profit at the expense of our ability to put people to work fixing our roads and bridges.”

That’s a textbook middle-out economic response: It explains that a tax holiday would likely benefit the wealthy few, and it prioritizes the wallets and material lives of the majority of Americans.

The one point I would have added is that a law targeting the exorbitant profits of Big Oil and returning those profits in the form of dividends to ordinary Americans has already passed through the House of Representatives (with no Republican support) and it’s ready to go to the Senate. Such a bill would address the root of the gas-price problem directly and offer a solution for families that are paying more at the pump to get to work and school.

Policies are a choice, and the kind of policies you embrace say a lot about the kind of world you want to create. Policies like tax holidays might seem like the most immediate solution to pressing problems, but they have long-term effects that run counter to widespread prosperity. When in doubt, our leaders should always prioritize the solutions that benefit the most people, rather than the wealthy few. People have wasted their whole lives waiting for prosperity to trickle down from the tippy-top of the economy; we can’t afford to lose another minute to that failed ideology.

Be kind. Be brave. Get vaccinated — and don’t forget your booster.

Zach