Demand and supply — in that order

The Pitch: Economic Update for July 21, 2022

Friends,

I was intrigued by Neil Irwin and Courtenay Brown’s framing in Axios of the latest developments in the housing crisis. “Sometimes, when you set out to destroy demand, you can’t help but destroy supply along the way,” the story begins.

They explain that as the Federal Reserve continues to raise interest rates in an effort to cool the economy down, it’s getting harder for ordinary people to take out loans — and mortgages. As a result, the number of new single-family home construction starts declined 8.1% from May to June, a two-year low. This, at a time when homelessness is on the rise and rents are climbing.

Brown and Irwin’s framing is noteworthy because it recognizes how the economy really works. Over the last 40 years, the trickle-down crowd promoted the idea of supply-side economics, which argued that if you lowered taxes and regulations on the so-called “real job creators” at the top of the economy, they would invest in supply, consumer demand would follow, and the economy would grow for everyone.

But that’s not at all how the economy works: a thriving middle class is the real source of prosperity. It’s your consumer demand that creates jobs and directs market forces. When the majority of people don’t have enough money to buy houses, house construction comes to a shuddering halt — even though plenty of people in this country need homes right now.

The Fed, and other economic policymakers, should take note: You create a strong economy by supporting demand, not the other way around. And kudos to Irwin and Brown for correctly assessing the situation. It’s so important that reporters recognize how the economy really works in their coverage, and not just what wealthy special interests and their supply-side economists want them to report.

The Latest Economic News and Updates

Are we in an affordability crisis?

It’s easy to think of the current inflation crisis as a freak accident — a result of a once-in-a-lifetime global pandemic — but the truth is that everything is connected. In the New York Times, Ezra Klein helpfully casts our current inflation crisis as the latest in an evolving “affordability crisis” that has been eating away at the American middle class for decades.

The affordability crisis makes some sense of the last few decades of our economic debates: a crisis of housing debt, a huge new program to subsidize health insurance costs, debates about making college free and forgiving student loans, proposal after proposal for the government to pay for child care and preschool, a bubble in crypto that attracted so many investors in part because it seemed like an elevator into wealth that anyone could ride.

I don’t know if Klein’s “affordability crisis” framing will catch on, honestly — you could also describe it as a “paycheck crisis” but at bottom, this is just the continuing, four-decade story of growing American income inequality. Though Klein’s argument that politicians should take affordability seriously as a top-tier voter concern issue is timely.

No matter how you describe it, the middle class is being squeezed out of existence by rising prices on everything — chlidcare, health care, education, housing, food, gas, transportation — and politicians have to acknowledge those high prices while also doing their best to raise paychecks and dramatically lower income inequality. This is a tall order, but nobody should get into politics because it’s easy.

A growing chorus warns that the Federal Reserve risks overreacting to inflation

Next week, the Federal Reserve will be convening to raise interest rates, supposedly by another three-quarters of a percent. We’ve been saying for a while now that the Fed could be misreading the current inflationary crisis, and their actions to cool off the economy and potentially put millions of Americans out of work could cause economic misery for no good reason. This inflation crisis is not the inflation crisis of the 1970s, and there’s no guarantee that following the playbook of the 70s and 80s will garner the same results.

Thankfully, more organizations and outlets are stepping up to warn that the Fed might be endangering millions of Americans for nothing. Here are just a few of the reports that have been published over the past seven days:

• You should definitely read EPI’s warning that “A recession would be worse than today’s inflation.”
• At the American Prospect, Robert Kuttner writes, “We must hope that as price increases continue to decelerate, the Fed will come to its senses before it inflicts further needless damage.”
• A WalletHub survey finds that six out of 10 Americans are dissatisfied with the Fed’s actions.
• Even the Wall Street Journal’s Alan S. Blinder warns that the Fed’s hasty actions could “overshoot and cause a recession.”

And there continues to be some noise in the inflationary signals that the Fed is responding to:

• Clifford Krauss at the New York Times notes that gas prices, a leading cause of inflation, are going down sharply. Jacob Knutsen adds that this week’s decline in gas prices marks ”the first time the national average for regular gas has slipped below $4.50 since May 16.”
• While the Washington Post reports that consumer sentiment has reached an all-time low, retail sales increased by 1 percent at the same time, which is an economic mixed signal that shows our self-reporting does not match up with our behaviors.

Overworked, overqualified employees have finally had enough

At the Washington Post, Lauren Kaori Gurley writes about a distressing milestone crossed by American workers last month: “more workers now hold two full-time jobs, defined as more than 35 hours a week per job, than at any point since the Bureau of Labor Statistics began collecting this data in 1994: 426,000 Americans held two full-time jobs in June, compared to 308,000 in February 2020.”

This is a direct consequence of rising prices. Wages may be up, but prices are higher and some Americans literally have to find a full-time job in order to pay for the gas to drive to their other full-time jobs.

Of course, if those jobs paid more, those workers wouldn’t need to find extra work. Whole generations of young people went deeply into debt in order to earn degrees, only to find that the job market doesn’t value their education at all. I really enjoyed Ian Prassad Philbrick’s conversation with Noam Scheiber about how college graduates are leading the union drives at low-wage employers like Starbucks. Here’s Scheiber:

College-educated workers often get the ball rolling, but they’re pretty skilled at bringing together a diverse group. I talked to Brima Sylla, a Liberian immigrant who helped organize his co-workers at the Staten Island Amazon facility. He’s got a Ph.D. in public policy and speaks several languages. He helped sign up hundreds of people, a lot of them fellow African or Asian immigrants. Another organizer was Pasquale Cioffi. He’s a former longshoreman and has a more traditional working-class background. He was good at talking to noncollege folks and Trump supporters. Having a coalition that put Brima and Pat together helped the union win.

That’s a classic story of labor organizing, with a 21st century twist: A highly educated idealist who did exactly what the system told them to do, only to be undercut by the Great Recession and the pandemic and thrown to a system of work that treats them as disposable. If a college education doesn’t guarantee a good wage, that leaves workers with very few options other than organizing.

The system is definitely not working for employees right now. The Economic Policy Institute has a new report warning that the actual value of the federal minimum wage of $7.25 per hour has reached its lowest point in 66 years. EPI notes that a minimum-wage worker today “earns 27.4% less in inflation-adjusted terms than what their counterpart was paid in July 2009 when the minimum wage was last increased, and 40.2% less than a minimum wage worker in February 1968, the historical high point of the minimum wage’s value.”

If you need a palate-cleanser after that terrible news, EPI also offers a comprehensive list of all the states and cities that raised their minimum wage on the first day of this month. Workers around the country are making anywhere from a quarter to a dollar more per hour this month than they were last month. That’s a good thing.​​

On tax reform, it’s one step forward and two steps back

A pair of promising tax developments have failed to move forward in Congress. First, it seems that the Biden Administration’s groundbreaking global minimum tax proposal, which would have ended international tax shelters that allow big corporations and the wealthy to hide their money from the IRS, has been quietly killed by Senator Joe Manchin.

“America’s refusal to take part would be a significant setback for [Treasury Secretary Janet] Yellen, whose role in getting the deal done was viewed as her signature diplomatic achievement,” writes Alan Rappeport and Jim Tankersley at the New York Times. “For months last year, she lobbied nations around the world, from Ireland to India, on the merits of the tax agreement, only to see her own political party decline to heed her calls to get on board.”

That’s not the only disappointing development in tax policy. At the American Prospect, David Dayen explains that even though Democrats ran in 2020 on repealing the trickle-down Trump tax cuts, which benefitted corporations and the wealthy at the expense of everyone else, they’ve failed to make good on their word. Dayen writes a blistering excoriation of the Democrats in Congress — including Manchin — who have allowed the tax cuts to stand, calling it “embarrassing” and arguing that it’s a betrayal of voters.

But here’s a tax policy proposal that Congressional Democrats could use to improve outcomes for millions of Americans: The Center for American Progress proposes closing a tax loophole for the rich that would strengthen Medicare for everyone else. If Congress can close this loophole in reconciliation this year, CAP writes, it would:

• Close a tax loophole exploited by high-income business owners to avoid paying into Medicare.
• Raise more than $200 billion in revenue over 10 years. These funds would strengthen Medicare by extending the solvency of its trust fund.
• Level the playing field between wage earners and small-business owners who currently pay Medicare taxes, and those who have been able to dodge them.

I don’t know about you, but a proposal to raise taxes on the rich to lessen the burden on small businesses and strengthen Medicare for millions of Americans sounds like a pretty good policy outcome. This is a relatively easy win that Congressional Democrats should be pursuing at top speed right now, so they can communicate it to voters throughout the fall election season.

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’ll discuss why the housing market proves that trickle-down economics doesn’t work, how leaders at every level of government can lead the charge against Big Pharma’s price-gouging, and why educated Starbucks workers are leading the fight to raise worker wages. Join us at 10:30 am PST.
• In his Business Insider column, Paul debunks the idea that the Federal Reserve must cool the economy down and put millions of Americans out of work in order to stop runaway inflation. He points out that the nation’s wealthiest people tend to make money during recessions, so the Fed’s interest-rate hikes are a trickle-down policy which enriches the moneyed few at the expense of the many.
• And in this week’s episode of the Pitchfork Economics podcast, philosophy professor Elizabeth Anderson joins Nick and Goldy for a high-level conversation about what worker power means, and what a truly free workplace might look like. Every so often, it’s important to just step back and take a look at the bigger picture with a brilliant thinker like Anderson, to remind yourself of what’s possible.

Closing Thoughts

Last week, California Governor Gavin Newsom made a striking announcement: California was going to begin production and distribution of a generic insulin, to be sold nearly at cost. We’ve seen insulin prices skyrocket over the past twenty years, to the point where Americans are paying more than ten times the average insulin costs in other nations combined:

The free market — in this case Big Pharma — has clearly failed the American people on a catastrophic level. Newsom understands that this is exactly what government is meant to do: Step in when the market has failed, in order to provide solutions that help a majority of people. And while some tedious politician or pundit has undoubtedly referred to Newsom’s announcement as “socialism” by now, it’s actually capitalism at its finest: By keeping prices low, California will compete with pharmaceutical companies that have artificially inflated their prices. That’s exactly what the market is supposed to do.

Let’s be clear: High drug costs aren’t the price we have to pay for innovative pharmaceutical companies. They’re the result of corporations putting outsized profits above everything else. Last year, previously existing prescription drug prices increased by 16 percent — more than double the national inflation rate.

The federal government can lower prescription costs for everyone by using the 500-pound gorilla that is Medicare to negotiate for better prices. The Center for American Progress reports on a plan in the Senate right now that would require the government to negotiate lower prices for the ten most expensive prescription drugs on the market. Because virtually every senior citizen in America is on Medicare, the government possesses a powerful tool to make prescription drugs affordable through negotiation. The bill would also require pharmaceutical companies that raise the price of prescriptions above inflation to pay that additional profit back to customers in the form of a rebate, and it would encourage the creation of generic pharmaceuticals by cracking down on patent manipulation that stops drugs from entering the public domain.

These developments are a great reminder that there is no single policy solution that will solve every problem. When considering the biggest issues plaguing a majority of Americans, our leaders should consider what they can do on the state, local, and federal levels, and they should explore a wide variety of options to get things done. It’s heartening to see so many solutions moving from theory into practice on so many levels. These developments are a reminder that government isn’t just a referee in the economy — it’s an active participant.

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

Zach