Groundhog Day at the Federal Reserve

The Pitch: Economic Update for February 2nd, 2023

Friends,

Yesterday, the Federal Reserve moved to raise interest rates by a quarter point, and promised a slate of “ongoing increases” for the foreseeable future. By contrast with the Fed’s aggressive pace of interest rate hikes last year, pundits have hailed this increase as a saner, more measured approach that could potentially slow the economy down while still avoiding a massive recession. Those headlines, though, don’t take into account the effects that the Fed’s decisions have on ordinary Americans.

In last week’s issue of The Pitch, I mentioned a Federal Reserve working paper authored by Daniel Ringo that examined exactly how rate increases play out in the real world. Ringo finds that “a 1 percentage point policy-induced increase in mortgage rates lowers the presence of low-income households in the population of home buyers by 1 percentage point, and of low- and moderate-income households by 2 percentage points.”

While the media often describes interest-rate hikes as a way to make it harder for businesses to borrow money and slow down hiring, rate hikes also make it more expensive for ordinary people to buy homes. And homeownership, remember, is how most Americans accrue wealth and pass on generational wealth, and is the most reliable ladder into the American middle class for low-income families.

So not only do the Federal Reserve’s interest-rate hikes run the risk of putting Americans out of work, but they also have a clear and, as Ringo puts it, “near-instantaneous” negative impact on housing wealth for Americans in the bottom third of the income scale — including a disproportionate number of Black and Latino households. For every percentage point mortgages increase, some 260,000 Americans who would otherwise have bought a home instead fall out of the housing market over the next year. Even yesterday’s so-called “modest” quarter of a percentage point rate increase leaves tens of thousands of families behind, expanding income inequality.

More journalists should be paying attention to the Fed’s own research and reporting this economic damage every time the Fed chooses to raise rates. Remember — the economy isn’t some grand thought experiment that’s detached from the real world, and it’s not an uncontrollable force like the weather. The economy is made up of people, and the decisions made by those in power have a tremendous impact on all of us. When we talk about the Fed, we should always keep that human cost in mind.

The Latest Economic News and Updates

Are Layoffs Spreading? Not If You Look at the Numbers.

The past month has seen an uptick in news about layoffs at big tech companies–many of which, like Google and Amazon, have been invulnerable to market dips for decades. Public attention increased this week after one CEO was forced to apologize for a rambling, tone-deaf layoff announcement that quoted Dr. Martin Luther King Jr. With layoffs splashed across the headlines, the average American would be forgiven for assuming that the job market was in free-fall.

But the data suggests that’s simply not true. December’s Job Openings and Labor Turnover Survey (JOLTS) report shows that “the number and rate of job openings increased to 11.0 million and 6.7 percent, respectively. In December, the largest increases in job openings were in accommodation and food services (+409,000), retail trade (+134,000), and construction (+82,000).”

So while recession fears dominated the news and consumer spending dipped, employers added more job openings. “In another sign of confidence among workers, people voluntarily left their jobs at about the same rate [in December] as they did in November,” writes the New York Times’s Lydia DiPillis. What’s more, the total number of layoffs in America stayed level for December, though the JOLTS report does note a dip of 107,000 jobs in the information sector, which reflects these tech layoffs.

What, exactly is going on? For one thing, tech seems to be suffering some pandemic-era growing pains. As Americans clambered online during the lockdowns of 2020 and 2021, tech companies hired tens of thousands of new workers to meet the increasing demand. Now, as people are spending more time in public and less time online, some experts believe the tech giants are contracting a bit.

But at the L.A. Times, Brian Merchant investigates the conventional wisdom about these layoffs, asking “Why have many of the most profitable companies of our generation — most of which are still very much profitable — announced staggering rounds of layoffs, one after the other? And why now?”

Merchant cites some experts who argue that tech companies “are doing layoffs mostly because everyone else is, even though layoffs actually often cost a given company money. And the fact all these layoffs are happening in such rapid succession gives the companies some cover — making them seem elemental, inevitable.”

Yesterday, Facebook parent company Meta basically confirmed Merchant’s argument that these tech layoffs aren’t about profits when they announced a $40 billion stock buyback plan, handing tens of billions of dollars in pure profit away to shareholders just months after they announced 11,000 layoffs across all levels of the company.

On the same call that announced the buybacks, Meta CEO Mark Zuckerberg also suggested that more layoffs are in store for 2023, which he described as “the year of efficiency.” Here’s a tip for Zuck: When you’re airlifting billions of dollars in profit away from your own company while simultaneously engaging in costly layoffs, perhaps crowing about your efficiency isn’t the wisest move?

Good Slowing, or Bad Slowing?

If you were forced to choose one word to describe the economy right now, “slowing” would probably be your best bet. Consumer spending slowed in December, and consumer savings have dropped from pandemic highs, too.

The slowing isn’t all bad, though. Home prices fell for the fifth consecutive month in November. Prices have been so high for so long that a drop in prices should be good news for potential homebuyers, though the increases in the mortgage rate that we discussed at the top of this email probably even out those lower prices and put buyers right back on the fence.

And inflation is slowing, too. Paul Krugman at the New York Times agrees with the mainstream economic take that we’re probably on the downward slope of inflation, but he points out that our inflation measurement systems are very messy. For Bloomberg’s Odd Lots podcast, strategist Viktor Shvets of Macquarie Capital analyzes the numbers and says that those who predicted inflation would be transitory were correct all along. Shvets believes that the so-called “soft landing” could be underway, and that the economy may have avoided a true recession in the aftermath of the pandemic.

But one slowing number that we need to keep an eye on is wages. The Wall Street Journal says that a report on American wages released earlier this week “showed wage and benefit growth ran at an annualized rate of 4% in the fourth quarter, well below the 5.8% rate recorded early in 2022.” So paychecks are still growing, but not at the rate that they once were.

With inflation finally slowing down, we have an opportunity here to finally create real wage growth —the difference between rising wage growth and shrinking inflation — and supercharge consumer spending. But if wage growth flattens out again to the stagnant rates it maintained over the last forty years, our recovery could be imperiled. The increased worker power that we’ve seen in the last year has powered us through the inflation crisis. If I were in charge of shaping economic policy, I would want to do as much as I could to ensure that those paychecks continue to rise.

The Debt Ceiling Crisis Gets Dumber and Dumber

Your alarm bells should be ringing when you read yesterday’s New York Times headline about the meeting between President Biden and Speaker McCarthy: “Biden and McCarthy Meet to Discuss Debt Limit as Both Sides Trade Barbs.” At this point, when you see “both sides” in a political headline, you should immediately suspect that one side is to blame and the media is straining hard in an effort to seem bipartisan.

The truth is that the debt ceiling crisis is entirely manufactured by House Republicans in an effort to impose austerity measures. Our national debt is not a looming crisis, as McCarthy paints it. But if McCarthy and the Republican majority continue to stonewall on this issue, the entire economy will be imperiled.

But because trickle-down economics is so unpopular, Alan Rappeport at the Times notes that Republicans can’t even admit what programs they want to cut: “Senator Ron Johnson of Wisconsin was asked to explain what specific spending cuts his party would support in exchange for lifting the borrowing cap. ‘Exactly what those are, we’re not willing to lay out here today,’ Mr. Johnson said.

So at the moment, Republicans are holding the global economy hostage, but they also refuse to negotiate or discuss the terms that they would accept to end the hostage crisis because the programs they really want to cut — Social Security and Medicare — are wildly popular with the American people. I just don’t see how anyone can both-sides this story.

Kiddie Gyms, Big Oil Profits, and Other Forms of Vulture Capitalism

For the New York Times, Lydia DiPillis and Michael Corkery write about what happened to the Little Gym franchise of indoor toddler playgrounds when the company was bought by a firm funded by private equity money called Unleashed Brands. “According to legal filings, internal documents, and interviews with more than half a dozen other franchisees — most of whom requested anonymity so as to avoid retaliation — Unleashed began to demand higher fees and institute more stringent requirements, which the independent owners thought would threaten their profits,” they write.

When private equity firms get involved in a business — any business, from children’s entertainment to fast food to retail — those businesses stop being about providing goods or services to customers. Instead, they become focused on maximizing short-term profits at the expense of long-term viability. In the Little Gym’s situation, the franchisers become the primary source of profits and private equity begins to milk them for every cent that they can.

And after a year of sky-high gas prices and record profits, oil conglomerate Chevron just announced a 75 billion dollar series of stock buybacks. That means Chevron is taking billions of dollars of pure profit and handing it off to shareholders with no strings attached — that’s money that could go to wages, or lowering consumer prices, or — and here’s a wild idea — diversifying the company’s portfolio away from environmentally unsound fossil fuels and into more sustainable green energy. Instead, a handful of shareholders and corporate executives will scoop up those profits and keep them for themselves.

Vulture capitalism practiced by private equity firms and shareholder maximization that offloads billions of dollars in profits to shareholders might seem normal now, but it’s actually the result of nearly 50 years of policy choices. The good news is that since policy choices brought us here, a different set of policy choices can create a more sustainable, humane form of capitalism.

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.

• In this week’s episode of Pitchfork Economics, Nick and Goldy talk with two Oxford economists who are running the world’s first Guaranteed Jobs Program in Austria. The results thus far are quite promising. Not only does guaranteeing employment for all unemployed workers cost less than standard unemployment benefits, but it also increases economic stability and personal happiness.
• On Civic Action Live this week, we’ll discuss the Federal Reserve’s latest moves, the newest developments in the Republican plan to hold the debt ceiling hostage, and what to make of Chevron’s stock buyback scheme. Join us at 10:30 am PT tomorrow.

Closing Thoughts

In his newsletter, New York Times opinion columnist Peter Coy explores a January report showing that employers are giving workers inflated “managerial” titles in order to avoid paying overtime. Coy interviewed economist Heidi Shierholtz, Obama Department of Labor executive David Weil, and Civic Ventures founder Nick Hanauer to make the case against these bogus titles.

Shierholz argued that a strong overtime standard requires employers to take workers’ time into account: “When [overtime] is totally costless to employers, workers’ lives end up not being taken into consideration.”

Nick, as he tends to do, went even further, telling Coy that he “thought everyone earning under $90,000 annually should be guaranteed overtime pay. That would restore the protection to the high-water mark of 1975, in terms of the percentage of full-time salaried workers covered.”

Coy also asked Marc Freedman, an executive at the U.S. Chamber of Commerce, and Mike Layman of the International Franchise Association to defend bogus managerial titles like “food cart manager” and “price scanning coordinator” that allow employers to work their employees for additional hours and no extra pay. Their responses were laughable.

Layman dusted off the old trickle-down playbook to falsely warn that regulations like overtime are job-killers, telling Coy that “Adding a layer of regulatory restrictions to how small business can recruit and retain employees that they’re working desperately to find already doesn’t seem to fit the times.”

This is absurd. If Layman really wants to play the “no one wants to work anymore” card, then he has to acknowledge that paying workers more in exchange for their time would certainly incentivize people to work. Telling prospective employees that they would either have a strict 40-hour work week or they would be paid time-and-a-half for any extra hours they put in would inspire more people to apply.

But while Layman kept to the old talking points, Freeman employed an even more ridiculous argument, telling Coy that “Many employees really don’t want to be reclassified” into losing their phony managerial titles because “They see it as a professional credential. It gives them a feeling of status.”

This is one of the most out-of-touch arguments I’ve read in some time. Every American worker knows that you can’t pay the rent with professional credentials, and you can’t feed your children a feeling of status. To argue otherwise demonstrates that Freeman — who is, remember, employed at the biggest lobbying firm in the United States — is working from an increasingly depleted playbook.

The old trickle-down arguments don’t work anymore, and the American people are tired of being told why their bosses can’t afford to pay them more when headlines boast of record profits. Coy himself concludes, “Seems to me that proponents of stronger overtime protection have the better of the argument.”

I agree. Hopefully, the Biden Administration will take Coy’s article to heart and restore overtime to 1970s standards, when the American middle class was at its strongest. This would continue their record of strong economic policy that puts the broad majority of Americans back at the center of the economy, where they belong.

Be kind. Be brave. Take good care of yourself and your loved ones.

Zach