In the Driver’s Seat

The Pitch: Economic Update for November 2nd, 2023

Friends,

For a newsletter like this one devoted to middle-out economics, this week’s top story is obvious: The United Auto Workers union has reached tentative agreements with all three Detroit auto manufacturers, and those agreements are packed with huge wins for workers.

“The top U.A.W. wage would rise to more than $40 over the life of the new contracts, from $32 an hour. That would allow employees working 40 hours a week to earn about $84,000 a year,” writes the New York Times. Combined with overtime pay and a great benefits package, this agreement ensures that auto workers, who have lost ground like most American workers over the past 40 years, will have the financial stability of a middle-class life. Union victories around the country have created record-breaking wage hikes this year:

One of the biggest successes in the tentative agreement is the elimination of a tiered wage scale. Abha Bhattarai explains for the Washington Post that the tiered wage system “splits the workforce into haves and have-nots by confining newer employees to lower wages,” ensuring that the next generation of workers will never reach the wages that long-term employees have earned. Tiered wages, which became a frequent tactic of employers in the 1970s — perhaps not coincidentally the point when the wages of American workers divorced from productivity — allowed employers to shut the door on young workers, driving down salary expectations for every new hire.

The UAW made the elimination of tiered wages a top priority, and they’re not alone. Bhattarai writes that “Since 2021, at least a dozen U.S. employers — in industries as varied as aerospace, education and manufacturing — have abolished tiered wages and benefits.” Workers have used America’s booming economy and near-record low unemployment rates to demand that employers pay all their workers on the same scale.

And while those pay hikes are a huge deal, they’re not the only win that the UAW scored. The New York Times notes that the agreements require auto manufacturers to help their workforce evolve into the next big revolution in technology: “The agreements provide at least some protections to workers as electric vehicles replace gasoline models, and jobs at battery factories supplant jobs making components for combustion engine vehicles.”

This huge victory will ripple out into the economy in all sorts of ways. Noam Schieber at the Times notes that other unions could learn from the UAW’s stand-up strike strategy, in which the union directed workers at important factories to walk off the job at times that would cause the most pain for auto manufacturers.

“The approach may not translate perfectly to other industries, such as retail and hospitality, that are harder to disrupt with the loss of a small number of locations,” Scheiber writes. “But Peter Olney, a former organizing director with the International Longshore and Warehouse Union, said the strategy was more widely applicable than it might appear at first glance,” in part because “it is difficult for service-sector industries to send operations offshore in response to labor unrest, because proximity to customers is critical.”

And immediately after the Big Three auto manufacturers announced they’d reached a tentative agreement with the UAW, Toyota announced that it would be giving big raises to their employees, who are not unionized in the US. Axios says “Toyota workers got pay increases of $2.94 to a maximum of $34.80 per hour for production workers and $3.70 to a maximum of $43.20 per hour for skilled trades employees.”

Those rates aren’t as high as UAW wages, and UAW president Shawn Fain has confirmed that one of the UAW’s big goals for the next few years is to unionize non-union auto manufacturers so that “When we return to the bargaining table in 2028 it won’t just be with the Big Three, but with the Big Five or Big Six.”

This UAW win is a big deal for American workers. It has reaffirmed the value that you should be able to earn a middle-class salary even if you don’t work in an office, and it has rightly repositioned the worker at the center of this conversation about the economy. It’s meaningful for all workers to see these unions continue to rack up big victories, to remind everyone that salaries aren’t determined by some invisible hand of the market. Wage levels aren’t a universal constant, like the law of gravity. They can and should be continually questioned and debated. As Civic Ventures founder Nick Hanauer is fond of saying, “you’re not paid what you’re worth — you’re paid what you can negotiate.”

The Latest Economic News and Updates

Unfortunately, the Fed Is Sticking to the Plan

Liz Ann Sonders, the Chief Investment strategist at Charles Schwab, tweeted this week that Americans passed an economic milestone last month: “Real personal income excluding government transfer payments rose to [a] new all-time high in September,” she wrote.

We know that growing income generally leads to more consumer spending, and more consumer spending is good for the economy. That’s likely part of the reason why Goldman Sachs more than doubled their estimate for the 4th quarter Gross Domestic Product, from 0.7%to 1.6%.

And in the New York Times, Liz Alderman wrote that while the U.S. economy continues to grow, Europe’s economy is falling behind. “Growth in the eurozone contracted 0.1 percent this summer, more than expected, as record-high interest rates intended to fight inflation blunted economic activity in Germany and France, the region’s two biggest economies,” Alderman wrote, adding:

The anemic pace is in sharp contrast to the United States, where the economy has surged despite a jump in interest rates by the Federal Reserve to tame inflation. Gross domestic product expanded 1.2 percent in the third quarter from the previous quarter — a 4.9 percent annual rate — powered by prodigious consumer spending and slowing inflation, which lifted purchasing power.

This week’s JOLTS report shows that US job growth is staying steady, with 9.6 million jobs created in September — the latest in a long string of positive labor news for American workers. But at the same time, we know that polling indicates Americans are not happy with the economy, and we learned this week that consumer confidence dropped for the third straight month in October. 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 of course, telling American consumers that their European counterparts are doing much worse doesn’t do anything to improve their moods.

So the Federal Reserve met yesterday in the shadow of two conflicting pieces of information — the economy is sending signals of strength, but Americans are unhappy with how the economy is going. Fed Chair Jerome Powell recounted many of the recent positive economic signs from the podium after he announced that the Fed would not be raising interest rates this month. He explained that immigration levels are back up to pre pandemic levels, and noted that the labor force growth spurred by immigrants seeking work has not pushed inflation higher. And we learned this week that wages are still rising, though they’re not climbing as high and as fast as they did last year.

“Fed officials noted in their statement on Wednesday that the economy has been expanding at a ‘strong’ pace, an upgrade from ‘solid’ previously,” explains Jeanna Smialek at the Times. She adds, “That strength could become a problem for central bankers, should it persist. If consumers remain ravenous for goods and services, companies may continue raising their prices, making it more difficult to stamp out what is left of rapid inflation.”

Smialek’s mechanistic explanation of how inflation works correctly characterizes how the Fed sees its responsibility: By keeping rates high and making it more expensive to borrow money, the Fed hopes to cool the economy down, lowering wages and slashing jobs and making people less likely to spend money, which in turn supposedly would inspire companies to lower prices in order to lure in additional consumers.

The problem is that 40 years of corporate greed has essentially decoupled price and value for the biggest American companies. Many of the price increases we saw over the past few years were because of greedflation — corporations charging consumers more in order to pad their profit margins to record levels.

While the poorest Americans had to tighten their belts and shift from grocery stores to dollar stores to do their weekly food shopping, companies like Pepsi and Chipotle basically decided to become luxury brands that cater to upper middle class consumers, completely abandoning poorer Americans in exchange for consumers who can afford to pay more money. Their sales decreased, but their profits skyrocketed. There is no evidence to confirm the Fed’s belief that companies will stop raising prices if the economy cools, and in fact recent history seems to indicate otherwise.

The Fed has yet to propose a plan that could meaningfully address this greedflation, or keep it from getting worse as fewer and fewer Americans are unable to pay the exorbitant prices that companies are charging. The question left in my mind after the most recent Fed meeting is this: What happens if the Fed does successfully tank the economy by raising rates, putting millions of Americans out of work, and businesses don’t respond by lowering prices, as the Fed expects? Does the Fed have a plan B?

New Solutions for Child Care

“Pinched by a worsening child-care crisis, employers around the country are opening day-care centers in unexpected places,” writes Abha Bhattarai at the Washington Post, citing workplaces like “a chicken-processing plant in Tennessee, an airport in Pennsylvania and a Wisconsin charter school.” Bhattarai continues, “today’s employer-run day cares are increasingly being built not for white-collar executives, but elementary school teachers, airport luggage handlers and hourly workers who toil on assembly lines.”

This is one of those stories that trickle-down think tanks love to point to as a perfect example of the free market solving a problem by itself, without the meddling hands of government intruding. But just because the Post can cite a handful of anecdotes of companies that have been driven by tight labor markets to devise child care solutions doesn’t mean that the child care crisis in America has been solved. In fact, Bhatttarai notes in the story that a recent study found “Employers lose an estimated $23 billion a year because of child care-related complications, resulting in a $122 billion hit to the U.S. economy.”

A new report from the Washington Center for Equitable Growth helps to visualize the actual size of the child care crisis that America has been facing since the dawn of the pandemic. There are still fewer child care workers in the United States now than there were in January of 2020, while demand for child care workers is up more than 150% over the same time.

So while it’s great that a handful of employers are creating child care options in an effort to attract workers, the simple fact is that across the economy, child care workers aren’t coming back because the wages are too low. And the one surefire way that wages of child care workers has actually increased is through government investments.

It’s clear that a few child care centers in blue-collar job sites aren’t going to solve the problem. The Center reports that “Supply-side grants, similar to the American Rescue Plan, or the emergency supplemental child care funding recently proposed by the White House,” would help create child care jobs across the country, while “higher and more streamlined reimbursements for subsidized care — a change currently being contemplated by the U.S. Department of Health and Human Services — would help ensure that subsidized families can access the child care of their choosing,” they write.

Finally, the First Regulations on Artificial Intelligence Arrive

You can’t go anywhere online without bumping into a conversation about artificial intelligence. Here in the economic space, workers are intensely concerned that their jobs could be automated by an AI chatbot. On the politics side, politicians are sounding alarm bells that images and audio could be manufactured to create chaos in elections and international relations. And everybody is trying to figure out if the current AI craze is the opening salvo in a technological revolution akin to the debut of the first iPhone, or just another overblown fad like cryptocurrency.

Just about everyone — including AI companies themselves — have argued that AI needs to be regulated before it can become a part of the day-to-day lives of Americans. But with the House tied up in a partisan snarl, it seems unlikely that Congress could take the lead on regulating this whole new industry. And as we all know, when government fails to establish regulations on an industry, they’re really just allowing the industry to regulate themselves.

On Monday, the Biden Administration hosted a high-profile event to trumpet the release of its first real set of regulations on AI. At his excellent Platformer newsletter, Casey Newton offers an overview:

Over the course of more than 100 pages, Biden’s executive order on AI lays the groundwork for how the federal government will attempt to regulate the field as more powerful and potentially dangerous models arrive. It makes an effort to address present-day harms like algorithmic discrimination while also planning for worst-case future AI tools, such as those that would aid in the creation of novel bioweapons.

As an executive order, it doesn’t carry quite the force that a comprehensive package of new legislation on the subject would have. The next president can simply reverse it, if they like. At the same time, Biden has invoked the Defense Production Act, meaning that so long as it is in effect, the executive order carries the force of law — and companies that shirk their new responsibilities could find themselves in legal jeopardy.

The White House isn’t just in front of Congress on this. President Biden called the executive order the “most significant action any government anywhere in the world has ever taken on AI safety, security, and trust.”

First, the order tries to address the immediate dangers that AI presents right now: It requires companies to watermark their AI-created images, video, and audio so that they can be easily identified, lessening the potential for a faked story to trick the news media into repeating harmful fictions The order also requires AI companies to run safety tests on their products and transparently publish the results of those tests, so the public understands the capabilities of the new technology.

Most intriguingly, the order also tries to direct the focus of AI companies, to direct artificial intelligence to work toward the common good, “to defend against cyberattacks; developing cheaper life-saving drugs; and exploring the potential for personalized AI tutors in education.”

This is a modest start, but it’s a polar opposite of the federal government’s laissez-faire, do-nothing response to the dawn of the social media age, which eventually snowballed into election misinformation and genocide. And it’s important to lay down the first set of regulations because that precedent makes the next round of rules infinitely easier to conceive of and pass.

There are a lot of actions the government could take to redirect the bearers of AI’s economic impacts, including making AI companies liable for errors their chatbots provide and taxing AI automatons who put human employees out of work. Now is the time for economists and policymakers to put their heads together and imagine the best ways to ensure that AI works in everyone’s best interest. Our economic goals for AI should be to encourage the best ways it can help the American middle class become more productive. We don’t want CEOs and executives to be the sole beneficiaries of the AI revolution.

This Week in Middle Out

• “A Missouri jury on Tuesday found the National Association of Realtors, a real estate industry trade group, and some residential brokerages liable for nearly $1.8 billion in damages after determining they conspired to keep commissions for home sales artificially high,” reports Elisabeth Buchwald of CNN. This ruling — against one of the largest lobbying groups in the United States — suggests that home buyers across the country are likely being bilked out of hundreds or thousands of dollars of commission fees, and the landmark fine that this jury levied suggests we could see more cases like this in states around the union.
• Did you know that financial advisers are not required by law to offer advice that serves the clients’ best interests? They can instead divert the retirement funds of ordinary Americans over to investments that net the advisers a much larger commission fee and which offer a much lower rate of return. The Biden Administration issued a new set of regulations that would, when enacted, require retirement advisers to act in the client’s best interest. Doing so “can increase retirement savers’ returns by between 0.2% and 1.20% per year. Over a lifetime, that can add up to 20% more retirement savings — potentially tens or even hundreds of thousands of dollars per impacted middle-class saver that could otherwise have been lost to junk fees.”
• You’ve probably heard that certain Kia and Hyundai models are notoriously easy to steal, and that a spate of social media posts revealing these vulnerabilities have kicked off a nationwide epidemic of car thefts. For Vice, Aaron Gordon reports that “None of this is happening in Canada, despite many of the same Kias and Hyundais being sold north of the border. This is because, in 2005, Canada enacted a simple regulation that made all cars harder to steal.” Canada required all auto manufacturers to equip all new cars with a $25 device called “an engine immobilizer, a basic anti-theft device that uses an electronic signature in the key to unlock the engine. If the key isn’t present, the car can’t be started.” If the United States had followed Canada’s lead, thousands of auto thefts would have been prevented.
• Kevin Rinz at Briefing Book offers a suggestion for government agencies to collect more data about what duties Americans perform at work. Doing so, he suggests, would make it much easier for the government to issue smarter regulations surrounding overtime pay and employment classification that would ensure Americans are being fairly compensated for the work they actually do.

This Week on the Pitchfork Economics Podcast

Nick and Goldy have a great, in-depth conversation with one of their favorite thinkers, Peter Turchin, on this week’s episode of Pitchfork Economics. Turchin discusses the hard lessons in his latest book, End Times: Elites, Counter-Elites, and the Path of Political Disintegration, which explores how nations and political parties fall apart. Turchin explains how the current moment in American politics follows, and diverges from, these past examples of collapse.

Closing Thoughts

As the Biden Administration has popularized the concept of middle-out economics, it’s become clear that trickle-down economics is experiencing a crisis of public image. When President Biden basically tricked Republicans into publicly promising that they wouldn’t cut Medicare or Social Security in his State of the Union Address earlier this year, he put a few additional nails in trickle-down’s coffin. Even Republican standard-bearers like Marco Rubio and Ted Cruz who once continually trumpeted the trickle-down tenets of tax cuts for the rich, deregulation for the powerful, and wage suppression for the majority of American workers have largely stopped talking about their economic policies in public spaces.

As a response to the waning public support for trickle-down economics, the conservative Club for Growth’s non-profit organization issued a mind-boggling report titled “Reaganomics for the 21st Century.” It’s framed as a way to bring President Ronald Reagan’s economic policies back to the forefront, but it’s really just a rebranding exercise for trickle-down economics.

The Club for Growth promoted the report with this jaw-dropping quote, which I am honor-bound to remind you is not from The Onion:

By bringing zombie Reaganism back, we can suffocate government spending, massacre marginal tax rates, slash red tape, and return to monetary policy that will bring our economy back from the dead.

Yikes!

You can read the whole report if you want, but the secret of this rebranding exercise is that Club for Growth doesn’t seem to believe that trickle-down economics needs any rebranding. They believe that taxes on the wealthy and corporations are too high, corporations have been hamstrung by regulations, and Social Security and Medicare are burdens on the government that should be replaced with free-market solutions.

If all of that sounds familiar to you, it’s because that is the exact same trickle-down framing that organizations like the Club for Growth have promoted for the past forty years. Aside from some bows to Trumpish anti-immigration policies, I can’t really find any meaningful difference between Reagan’s Original Recipe trickle-down and the Club for Growth’s trickle-down 2.0.

You really have to be an out-of-touch elite to believe that, in the year 2023, the American electorate is thirsty for less Medicare, more tax cuts for the rich, and fewer regulations for giant corporations. It would all be hilarious, if it weren’t so painfully dumb.

Just as it took decades for middle-out economics to really come into its own, I expect that there is a thoughtful conservative alternative to middle-out economics out there somewhere, waiting to be articulated. But this is just a fresh coat of paint on a 40-year-old clunker. The Club for Growth’s report hammers home how thoroughly antiquated trickle-down now feels — something so unserious that even its most ardent proponents can’t argue it with a straight face in mixed company. There are no resurrections in store for this particular zombie.

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

Zach