In Praise of Guardrails

The Pitch: Economic Update for November 9th, 2023

Friends,

While this newsletter is focused on political economy — politics is how economics becomes policy, after all — we don’t usually bother ourselves with stories about candidate polling or horserace electoral politics. But over the weekend, my phone started blowing up over a New York Times poll released one year before the 2024 presidential election showing President Biden losing to Donald Trump in five out of six key swing states. The story inspired panic (some might call it bed-wetting) from coast to coast — particularly in the media. Polling stories fall far outside the realm of what we talk about here, but one particular result likely caught the eye of Pitch readers: Biden polled far below Trump in voter confidence on economic issues.

First, on the politics side, let me share the response that I always offered in my time as a campaign manager: Polling this far out from an election is only useful in the most directional sense. It gives a candidate or a campaign an idea of what voters are thinking the week the poll was taken, offers some sense of their weakness, and helps them identify opportunities. But they are terrible predictors of outcomes this far out. And this is especially true in presidential elections. In fact, the incumbent is usually at a disadvantage about a year before the election, as we saw with Obama, Reagan, and just about every other modern president heading into the last year of their first term. Incumbent presidents almost always win, even though they are almost always at a disadvantage at this point in the election cycle.

And given the fact that Tuesday’s election results almost universally showed big positive wins for progressive policies in the reddest of red states, the political picture simply doesn’t look as bad as the polling makes it out to be. Democratic Kentucky Governor Andy Beshear ran on an explicitly middle-out economic platform promoting his big investments in the middle class, and his race was the first one called on Tuesday night because he was so clearly trouncing his opponent. Middle out economics is a compelling political story, and voters listen.

On the economics side of things, I’m going to repeat what I wrote just last week: Most Americans think about the economy only when it intersects directly with their daily lives — at the grocery stores, in their paychecks, at the gas pumps, when they pay their rent or monthly mortgage payments. So even though average American pay has grown significantly while inflation is way down from its highs of last year, a gallon of milk or a meal at a restaurant still costs noticeably more than it did two years ago, and housing prices have grown significantly since the beginning of the pandemic.

You simply can’t convince Americans that the economy is strong when their bills have skyrocketed — even if they are likely making more in their weekly paychecks. So what’s the path forward for the Biden Administration? I’d argue that this polling indicates that they need to redouble their efforts to improve outcomes for the middle class by raising wages and lowering costs — combating junk fees, fighting to increase worker pay through every available channel including enthusiastically supporting striking workers, and getting more factories open and infrastructure projects underway in parts of the country that haven’t seen the kind of economic growth that coastal urban areas have enjoyed over the last two decades.

And more specifically, people need to feel as though their leaders are working hard to bring housing prices down. Rising rents and mortgages are likely to be one of the most important issues of the 2024 campaign, and whoever offers the best vision to ensure that Americans have access to stable, affordable housing is likely to win the trust of independent swing voters.

The bad news is that the American economy isn’t a speed boat that can turn on a dime — it’s more like a cruise ship that requires both patience and time to change course. It’s going to take more time for people to feel the improvements in their lives. And it’s going to take discipline to stay the course even in rocky seas.

I received a lot of despairing messages this weekend, and that’s understandable. It’s okay to feel sad, or even like giving up, for a little bit. But what’s important is that you take the time to feel bad, and then you get up and get back to work. When it comes to the economy, our goal should be to grow the American middle class (and through it the entire economy) by growing paychecks and cutting prices. That’s the track record that you want to be measured against your opponent one year from now on Election Day.

The Latest Economic News and Updates

Inflation Is Down, but What About Prices?

Last week, the Federal Reserve announced that it was holding interest rates steady. Some financial experts have interpreted this to mean that the Fed is done with its campaign of steep interest-rate increases, but some — including leaders inside the Fed — are not so sure that’s true. The Fed will be watching a number of economic indicators in the weeks to come, including the rate of inflation and employment numbers (we cover the latest unemployment report in the next section.)

But just about everyone agrees that high interest rates are here to stay. Justin Lahart at the Wall Street Journal says the Fed does not “expect to be cutting rates soon, and when they eventually do, they don’t think they are going to be cutting them by all that much.” That means you can expect housing prices, credit card rates, and interest on car loans to stay high for the foreseeable future, too.

But remember: The Fed is supposedly raising interest rates in order to fight inflation. They’re doing so in an attempt to slow the economy down under the theory that prices will decrease if people have less money to spend. And the economic consensus is finally coming around to the truth that the Fed’s actions are not what have brought inflation in line. For the Wall Street Journal, James Mackintosh writes that “there is no obvious link between the Fed action and the slowdown in inflation. Instead, inflation fell mostly because of things the Fed has no control over, as normality returned after the pandemic.”

So what are we even doing here? Inflation is down, Americans aren’t being laid off in huge numbers, and wages are still climbing — though nowhere near as fast as they were in the last two years. “Two things are true in the United States today: The economy is good, and people hate it,” writes Emily Stewart at Vox. “Poll after poll shows that many Americans think the economy is in the gutter and that it’s getting worse. That’s even though the labor market is robust, economic growth is strong, and many people say their personal financial situations are just fine.”

The problem, Stewart says, isn’t inflation — it’s the fact that prices have gone up and stayed there. “People really do not like paying more for stuff than they used to. That doesn’t mean American consumers aren’t still spending — they are — but they’re mad about it.”

As Stewart says, most consumer metrics are showing very strong positive signals. But Courtenay Brown at Axios says one datapoint is showing signs of strain: The number of Americans going into credit card delinquency is now higher than any point since the Great Recession.

“About 8% of credit card balances transitioned into delinquency by the end of September,” Brown notes, adding that “In the same period in 2020, when consumers were flush with pandemic-era stimulus, the figure was 5.7%.” Brown quotes a Fed researcher who reports that “The continued rise in credit card delinquency rates is broad based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans.”

You know what would help combat spiking credit card delinquency rates? A lower interest rate. (I’m looking at you, Fed.)

And lower interest rates would also bring down the cost of mortgages, which would help with another affordability issue for American consumers: Housing affordability just reached a 39-year low. “The principal and interest payment on a mortgage, which excludes taxes, insurance, and homeowners association fees, surpassed $2,500 in October,” making those prices higher, inflation-adjusted, than any time “since 1975,” reports Morningstar.

This is quite a mess. The Fed has raised interest rates to fight inflation, but inflation went down for reasons unrelated to the interest-rate increases, but the interest-rate increases caused housing prices and credit card debt to balloon, which could potentially cause even more problems than the inflation crisis that kicked off this whole negative feedback loop in the first place.

We could use some respected adults in the economics space to make some noise about the housing affordability crisis and the credit crunch that’s affecting young Americans, because everyone at the Fed seems to be too hyper-fixated on inflation numbers to notice what’s going on in the real world.

WeWork Stops Working

This week, the once-smoking-hot coworking startup WeWork officially filed for bankruptcy. “The beleaguered company, once valued at $47bn on the private market, endured a 98% decline in its share price this year, leaving it with a market capitalization of less than $50m,” writes The Guardian. “In August, it raised ‘substantial doubt’ that it could continue to operate as it grappled with $2.9bn in net long-term debt and more than $13bn in long-term leases.”

There are a lot of unique causes of WeWork’s stunning rise and fall, of course — the company was built on the appeal of a CEO who turned out to have exponentially more charisma than business sense, and the pandemic knocked the wind out of coworking’s sails in spectacular fashion. But WeWork isn’t the only high-profile bankruptcy happening right now.

Nathan Bomey at Axios lumps together WeWork’s bankruptcy with the Chapter 11 filings of chain pharmacy Rite Aid and tooth alignment startup SmileDirectClub, and he makes a compelling case for why the Fed pushed these companies into tipping over: “The pileup illustrates the real-world consequences of the end of the free-money era, when lower interest rates made financing a cinch, providing Band-Aids for problems and extending the lives of otherwise flawed operations,” he writes.

Granted, none of those three companies — or Bed, Bath, and Beyond, which self-destructed earlier this year — were in good financial health, and none of them had compelling business plans. They were doomed to end sooner or later. But high interest rates have perhaps accelerated the death-spiral timelines of these companies, and we’re likely to see a wave of similar businesses on the edge of failure go under in the near future.

Employers Annoyed by Growing Worker Power

The job losses from those bankruptcies don’t seem to have had a measurable impact on employment numbers. Last Friday, the Labor Department’s monthly jobs report showed that the economy added 150,000 jobs in October. Talmon Joseph Smith at the New York Times reports that “The three-month average — a frequent reference point for economists — is 204,000, a robust pace by historical standards. And the economy has generated job gains for a remarkable 34 straight months.”

It’s also important to note that nearly 100,000 workers were technically unemployed because they were on strike in October — the largest number since 1997. Now that both the SAG-AFTRA and the UAW strikes are on the way to being settled and striking workers are getting back on the job, the numbers look stronger now than they did last week. And the UAW victory is likely helping other unions flex their muscles — for instance, hospitality worker unions in Las Vegas this week announced that they had reached an agreement with their employers just two days before a strike.

And importantly, earnings still hovered above inflation, meaning that paychecks are growing faster than prices.

Another group of workers has made tremendous progress in the past few years, notes the Wall Street Journal’s Harriet Torry. “Nearly 1.8 million people with a disability have joined the labor force since just before the pandemic hit the U.S., a 28% increase, according to the Labor Department.” She explains that the shift to remote work has allowed disabled Americans to find employment at near-record levels. This summer, she explains, “25% of adults with disabilities were part of the labor force, meaning they had or were actively seeking jobs, the highest level in records going back 15 years.”

So if remote work is enlarging the labor force and putting record numbers of Americans back to work, why are employers so eager to end work-from-home arrangements? Ed Zitron explains for Business Insider that bosses are going to extreme measures to get workers back in the office.

“When perturbed employees have pressed executives for the reason behind the mandate, supposedly data-obsessed higher-ups have seemed to have no data to justify it.” Zitron continues, “Asked in August about this, Mike Hopkins, a senior vice president of Prime Video and Amazon Studios, offered a vague response, saying that he had “no data either way” on whether mandating in-office work made people more productive but that executives believe Amazon’s workers do their best work when they’re together.”

The above stories are the result of an exceptional wave of increasing worker power that began in 2021 and still continues today. This growing power is allowing workers to take more of the vacation time that their employers offer, and it’s giving workers more paid sick leave — although low-wage workers still fall far behind in paid sick days:

But it’s important to note that the headline of the Wall Street Journal story about Americans taking more paid time off is framed in such a way as to make it sound like a threat: “Workers Are Doing Less Work for the Same Pay.” This is an outright lie, given that worker productivity rose higher in the third quarter than at any point in the last three years.

The general tone of media coverage of the job market now is that employers are growing resentful of workers’ advances over the past few years and framing them, predictably, as bad news for the economy. In another hilarious piece of anti-worker propaganda, Chip Cutter writes for the Wall Street Journal that nobody wants to quit anymore. “Turnover has declined so steeply at some large employers that companies now find themselves over budget on certain teams, requiring leaders to weigh whether to postpone projects or to cut additional staff as the end of year approaches,” Cutter writes.

This is scare-mongering of the worst, trickle-down kind. Remember, not so long ago we were told workers were ungrateful and lazy for leaving their jobs because nobody wanted to work anymore. Now, workers are being shamed in the media for using the benefits that they’ve earned and staying at the higher-wage jobs that they took during the last few years. It’s enough to give you whiplash.

This Week in Middle Out

• First, a point of regional pride: In the city of Bellingham, Washington, just a couple hours or so north of Seattle, voters have likely approved a measure to “raise the minimum wage a dollar an hour for workers in the city to $17.28 in 2024 and at least $18.28 in 2025.” (And as a little exercise in spotting corporate BS in the wild, I recommend reading the local TV affiliate’s coverage of the minimum wage initiative and taking in the typical trickle-down claims that raising the minimum wage will kill jobs, which seem to be debunked by the same restaurant CEO’s suggestion that she already pays workers much more than the minimum wage.)
• The Department of Justice is investigating a giant $3.3 billion healthcare merger between Amedisys and UnitedHealth Group. “There have been several recent healthcare deals that were delayed because regulators asked for more information, including Amazon’s $3.9 billion buy of One Medical and CVS’ $8 billion bid for Signify Health,” writes Fierce Healthcare. “The FTC also took a deeper look at UnitedHealth Group’s $5 billion acquisition of home health provider LHC Group. All three deals went through.”
• And while we’re talking about mergers & acquisitions, this clip of Jim Cramer complaining about the Biden Administration’s M&A policies could be a campaign ad for Joe Biden next year: “The President is a pro-worker president. M&A is bad for workers and good for capital — anytime you see something bad for workers and good for capital, the President is against it.”
• The Biden Administration’s investment in green energy is bringing solar manufacturing back to life in the United States, reports Ana Swanson and Jim Tankersly at the New York Times: “In the year since the climate law was passed, companies have announced nearly $8 billion in new investments in solar factories across the United States…That is more than triple the amount of total investment announced from 2018 through the middle of 2022.”
• David Dayen at the Prospect has more information about the Biden Administration’s new proposed regulation requiring retirement investment advisers to make decisions that serve their clients’ best interests. Acting Labor Secretary Julie Su explains that the proposed regulation is “a very basic principle that retirees who save their whole lives for a secure retirement should be able to rely on financial advice that they get that’s in their best interest, not in the interest of bad advisers.”

This Week on the Pitchfork Economics Podcast

Two researchers from the Economic Policy Institute, Jennifer Sherer and Nina Mast, join Nick and Goldy to discuss the coordinated efforts of state lawmakers weakening child labor protections, at a time when child labor violations are on the rise nationally. Who profits from rolled-back protections on child labor, and why do they feel emboldened to combat those regulations right now? This episode digs deep into one of the most troubling political stories of the year, and it’s definitely worth a listen.

Closing Thoughts

Around this time last year the world watched nervously as the preeminent cryptocurrency exchange, FTX, collapsed into a cloud of dust. The company had been said to be worth more than $32 billion dollars, and its CEO, Sam Bankman-Fried, had been hailed in news reports and on the covers of magazines as the genius who would finally bring cryptocurrency to the masses.

It all fell apart in less than two weeks. And then all eyes turned to Bankman-Fried. Was he going to face consequences for the fraud that he seemed to be perpetrating? His enormous fortune of $26 billion seemed to be propped up, at least in part, by $10 billion in misappropriated customer funds. At the time, people responded with cynicism on social media. One Reddit thread pulled at random from one year ago is full of comments that are skeptical Bankman-Fried would ever do time: “​​scumbags like him always get the chance to settle,” one user announced. “Jail is for the poor,” another agreed.

“No, he won’t [go to jail] because he was the second largest Democrat donor in the US. He won’t even undergo a real investigation,” one user explained in a post that elaborately laid out Bankman-Fried’s supposed ironclad ties to the Democratic Party before concluding, “Sadly, this exposes, beyond the shadow of a doubt what a f-ed up third world nation the US has become.”

The cynics, I’m happy to report, were 100% wrong. It took about a year, but on Friday Bankman-Fried was found guilty of fraud and conspiracy by a jury of his peers, and he faces up to 100 years in prison for his crimes.

I don’t include those claims to dunk on them or to single the users out as exceptional in any way. Their claims were all too common: You couldn’t go anywhere on social media without seeing skepticism that Bankman-Fried would ever see the inside of a prison cell. I’d guess that a majority of the American people don’t believe that wealthy people are subject to the same laws as everyone else — and that wealthy people don’t face consequences for their actions.

That’s why Bankman-Fried’s conviction is so important. Americans need to see that the justice system works, that there are real guard rails in place to protect us from fraud and the mismanagement of customer funds. For one thing, it bolsters public support for government by proving that elected officials and public servants can and will act quickly to maintain laws and protect people from those with malicious intent. And for another thing, Bankman-Fried’s story serves as a warning for all the other future CEOs and corporate executives out there that there are consequences for their actions, and that they’re not above the law.

“In the end, the case, and the trial, served to shatter the myth of the monkish, eccentric crypto billionaire — an image that empowered Bankman-Fried to wield influence over crypto regulation and even on US politics,” writes Whizy Kim for Vox, adding, “The outcome of the biggest crypto fraud trial ever all but ensures that the industry will be the target of more scrutiny, attempts at regulation, and cynicism.”

That last word is important. In the end, the cynicism surrounding Bankman-Fried should have been applied before he was arrested and convicted — the media, other financial institutions, and others who embraced Bankman-Fried uncritically should have demanded proof of his outrageous claims of wealth pulled from thin air. And as Kim notes, this trial will hopefully convince lawmakers to take action to finally bring strong regulations to the crypto space to ensure that another Bankman-Fried debacle doesn’t happen.

We’ve all seen stories of people who commit egregious acts and then just walk away free. Those stories of unpunished injustices enflame our sense of fairness. But those stories should be — and I believe are — the exception to the rule. Cases like this, where justice is done on behalf of the people, should be the norm: If someone just walks away with your savings account, they should suffer the consequences for it. Those consequences and guardrails are an important part of the system — we have to believe that they work in order for the whole economy to work. And in this case, this part of the system functioned exactly as it should.

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

Zach