Less Hoarding, More Building

The Pitch: Economic Update for August 10, 2023

Friends,

We at Civic Ventures have been writing about the danger of stock buybacks for years. Since the Reagan Administration legalized the practice of buybacks, corporations have offloaded trillions of dollars in profit that used to circulate through the economy directly into the hands of an elite shareholder class — including the CEOs and corporate board members who approve the buybacks. Buybacks are one of the primary ways that the wealthy few have expanded income inequality over the past forty years:

Contrary to the trickle-down claim that taxes kill economic growth, President Biden’s first-ever 1% tax on buybacks did nothing to discourage the buyback frenzy, with a record $1.05 trillion in corporate profits handed over to the wealthy few between June 2021 and June 2022.

But Harold Meyerson writes that for basically the first non-recession period since they were legalized in the 1980s, buybacks fell precipitously last quarter. “According to a new report from Bloomberg Daily, the amount that companies in the S&P 500 that have reported second-quarter earnings have spent on buybacks is actually down by 36 percent from this time last year,” Meyerson writes. “And where are those corporations redirecting the funds they’ve previously been shoveling into buybacks? To investments in plants and technology, which, for those same companies, have increased by an average of 15 percent.”

The claim from trickle-down apologists has always been that corporations only engage in buybacks when they have no other use for their profits, but that’s a disingenuous argument when you consider that wage gains basically collapsed in the same time period that buybacks exploded. The profits that have been handed over to shareholders for the last 40 years used to go to wages, customer experience, research and development…and manufacturing.

So why are corporations suddenly interested in reinvesting money back into manufacturing and R&D? Meyerson explains that President Biden deserves much of the credit. “Already, [the Biden Administration’s] three landmark pieces of legislation — the Infrastructure Investment and Jobs Act, the CHIPS Act, and the Inflation Reduction Act — have spurred companies to return to productive investment, lured by tax credits and grants.”

That means “the tax credits and subsidies the government is now offering have increased the funds that companies are spending on factory construction by 76 percent over last year, while corporate investment on plants and technology generally has increased by 56 percent.” Thanks to government investments in chip manufacturing and the green economy, American corporations finally remembered how to build something other than the wealth of the top one percent.

Still, we shouldn’t expect corporations to wean themselves off stock buybacks for good. The offloading of wealth will likely resume once this flurry of investments begins to taper off. We still need smarter, stronger buyback regulations in place, so that businesses can’t take money that used to go to workers and hand it away to the shareholder class with no strings attached.

The Latest Economic News and Updates

Inflation Numbers Bad, Inflation Report Good

Just this morning, we learned that the Consumer Price Index rose from 3 percent in June to 3.2 percent in July. But this is more of a month-to-month aberration than a troubling indicator. The New York Times’s Jeanna Smialek adds context to the report, beginning with the most important information: “inflation continues to cool — and the July details offered positive signs for the future. Rent prices have been moderating, a trend that is expected to persist in coming months and which should help to weigh down inflation overall. An index that tracks services prices outside of housing is picking up only slowly.”

In short, the indicators that Federal Reserve leadership looks at to determine whether they will raise the inflation rate or not next month are still strong. “There are a lot of seeds in this report that suggest more disinflation to come,” a senior economist at a research firm told the Times. “It probably means that we are at — or very close to — the peak on interest rates. We think we’re at the top.” We’ll have a lot more analysis of this report and what it might mean for the Fed’s decision in next week’s Pitch.

The Tech Layoffs Were a Wage-Suppression Maneuver

Remember back at the beginning of this year, when every major tech company seemed to be pushing through round after round of layoffs? Pundits at the time declared that all the lost jobs at Facebook, Microsoft, and other tech giants were a canary in the coalmine, signaling the dawn of an oncoming recession. Of course, that recession didn’t materialize — and neither did widespread layoffs.

Joseph Politano, at the excellent Apricitas Economics, published an investigation of what happened in the tech industry, beginning with an observation that the layoffs spiked at the very beginning of 2023 and then quickly receded to 2022 levels:

In fact, Politano notes, “America still has half a million more workers in tech industries than it did pre-pandemic, roughly as much growth as was seen from mid-2016 to the start of the pandemic.”

These layoffs happened at the same time that the tech industry was correcting from a period of explosive growth during the pandemic. With Americans locked down at home and many in-person entertainment options closed during Covid, we turned to the internet for social interactions and entertainment. Throughout 2022 and especially at the beginning of 2023, many Americans began resuming their pre-lockdown lives, and so tech earnings began to fall back to the pre-pandemic baseline.

What has fallen considerably in the tech industry are wages. Politano says that tech companies hired aggressively by offering high wages during the pandemic to keep up with demand, and the layoffs were partially an attempt to bring wages back down: “aggregate total compensation across tech industries grew at rates between 15 and 20% in 2021 before turning deeply negative at the end of 2022,” he writes. “With employment staying roughly the same and aggregate compensation tanking, per-employee pay was falling rapidly as well.”

Wages fell so much in the tech industry over the past year that Politano says California’s total private-sector compensation for the last quarter of 2022 fell by 4.3%. So while tech workers benefited from a boom cycle during the pandemic, CEOs at tech companies took advantage of the bust cycle to cut compensation pretty much across the board for new workers.

Tech jobs still pay very well, but they’re no longer the coveted golden ticket that they appeared to be in the first two decades of the 21st century — and if you’re a tech worker who is concerned about the treatment that your bosses have offered to you and your peers over the past year while still raking in record profits, you should be advised that it’s never too late to join a union.

Good News About Good News

On Friday, we learned that the economy added 187,000 jobs in July, a strong showing that is down from the peaks of 2021 and early 2022.

The unemployment rate hovers near record lows, at 3.5%. Black unemployment also went down, and labor force participation is near recent record highs.

But the Washington Post’s Lauren Kaori Gurley delivers the best news from Friday’s report: “wages are still rising. Average hourly wage growth remained steady in July, rising 4.4 percent over the year, to $33.74 per hour.” That means that wages have maintained their lead over inflation for the last few months, allowing workers a little bit of breathing room after more than a year of skyrocketing prices.

All this good news has led the New York Times to publish one of the funniest headlines I’ve seen from them in a while:

You may remember that for a year there, every positive piece of economic news was treated by economists and reporters as a negative economic indicator. “If you go back six months, we were in the ‘good news is bad news’ kind of camp because it didn’t look like inflation was going to come down,” Jay Bryson, Wells Fargo’s chief economist, admitted to the Times. “Now, he said, inflation is cooling faster than some economists expected — and good news is increasingly, well, positive.”

Still, some experts do tell the Times that they hope to see wage growth and employment rates decline slightly in order to convince the Federal Reserve to end its campaign of interest rate increases. Those experts are conveniently ignoring the fact that wages have grown and unemployment has fallen throughout this period of rising and falling prices. But then, some economists will always struggle to find the clouds in the silver lining. Cheerleading for job losses and smaller paychecks is like going to a NASCAR race and rooting for a crash.

It’s not just a few economists who don’t see the economic good news in front of them — if you look at President Biden’s approval ratings on economic matters, you’ll see that the American people still feel unhappy about the economy. David Dayen explains why those falling inflation levels haven’t resulted in widespread joy:

When inflation “goes away,” that doesn’t mean that every price reverts back to its previous level. For the most part, the rate of price increases just levels off. Anyone pissed off about prices at the grocery store is still going to be pissed off, because they’re still high relative to where they were in 2021. In fact, companies continued to raise prices on food in the second quarter of this year, even as supply disruptions eased…Meanwhile, interest rates have remained at levels mostly unseen in the past couple of decades. They almost certainly will either stay there or go higher for the remainder of the year. If you are in the market for a car, you’re going to pay much more to finance it. If you’re buying a house, there isn’t much inventory for sale, because those selling don’t want to get a new mortgage at these rates. If you do find something to buy, the interest costs are eye-watering. The same is true for ordinary consumer loans. Anyone trying to get a home equity loan or refinance their mortgage, to pull money out of their real estate, will pay a stiff penalty. One amateur model of consumer sentiment sees high interest rates as the biggest single factor in public pessimism.

Leaders can’t make people feel better about economic conditions. They can only work to improve the economic conditions for ordinary Americans (primarily in the form of higher wages and lower costs) so that the majority of people feel that things are working out in their favor. For the Biden Administration, that means continuing to grow peoples’ paychecks and encouraging business investment in manufacturing at home.

This Week in Middle Out Policy

• Speaking of growing paychecks, Lee Harris at the American Prospect reports that the Biden Administration is working on strengthening “the Davis-Bacon Act, which sets a wage floor for construction workers on public-works projects. Davis-Bacon is often known as a ‘prevailing wage,’ as it refers to the going rate for laborers in a given area.” The Washington Post explains that under this strengthened rule, “employers would be required to pay construction workers the equivalent of wages made by at least 30 percent of workers in a given trade and locality.”
• Jacob Bobage at the Washington Post reports that we’re starting to see the shape of new regulations for pregnant workers as part of a civil rights package signed into law last December. “Pregnant workers or those who recently gave birth would be entitled to new on-the-job accommodations — including longer, more frequent breaks, schedule changes, teleworking privileges and temporary job restructuring — under new employee protections proposed by the Equal Employment Opportunity Commission on Monday,” he writes.
• The New Republic’s Grace Segers writes about the farm bill discussions that are heating up in Congress. This September, politicians will spar over the Supplemental Nutrition Assistance Program, which makes up a big part of the farm bill. Republicans will likely want to slash nutritional assistance funding and include even more work requirements to access SNAP benefits. Trickle-downers will try to frame SNAP as wasteful government spending, but the middle-out case is that every dollar in SNAP investments creates $1.79 in economic activity, spurring job creation in local communities.
• Funding from the American Rescue Plan has spurred several dozen guaranteed basic income programs across the country. As the conversation around artificial intelligence continues through the fall, you can expect GBI advocates to make the case that these programs could be necessary to combat job losses from automation. The results of these GBI test runs will prove pivotal to those discussions.
• A federal court in New Orleans has shut down another Biden Administration attempt to cancel student loan debt. This time, the court put a temporary pause on the Borrower Defense to Repayment, which “allows students who have been misled by schools about job prospects or are victims of other types of fraudulent behavior and aggressive recruiting to have their federal debt canceled in full by the Education Department.”
• And Robert Kuttner makes the case for the federal government to use eminent domain to license privately owned pharmaceuticals like the EpiPen. He opens his case with the story of a woman who nearly died of an allergic reaction on an airplane. Airlines used to have EpiPens on every flight in case of emergencies, but Big Pharma has jacked up the prices of individual EpiPens by hundreds of dollars, putting the lifesaving technology out of the reach of most First Aid kits.

As Hot Labor Summer Continues, Workers Are Gaining Ground

On Tuesday, thousands of municipal workers took to the streets of Los Angeles for a one-day action to protest staffing shortages and low wages. The garbage collectors, bus mechanics, and airport workers joined the thousands of writers, actors, and hotel workers who are already striking across Los Angeles.

“In the city’s sanitation department alone, [SEIU Local 721 President David Green told the New York Times,] more than 900 jobs are open and there are scores of additional vacancies in other city departments.” Green explained that “the office that processes job applications was also severely understaffed, and that it often took six months or more to respond to applicants, who by then had found other jobs.”

In this Hot Labor Summer. each individual protest informs the next. It’s unlikely that actors would have gone on strike against big Hollywood studios had the screenwriters not already been on strike. And those hundreds of thousands of workers were closely coordinating with hotel workers across LA. UPS drivers recently won a big victory for better pay and staffing across the country, and Harold Meyerson says that the Teamsters are hoping to use that victory to unionize Amazon workers. Meyerson writes that the pay isn’t as compelling to Amazon workers as the working conditions that UPS drivers fought for and won.

The first is the company’s agreement to air-condition its trucks, which one driver memorably compared to microwave ovens. The heat in Amazon warehouses has long made work there gratuitously uncomfortable and frequently dangerous, so the Teamsters’ ability to compel UPS to invest in AC can only bolster the union’s cred. More significant still is the contract’s elimination of the company’s surveillance cameras trained on the drivers, whose every move had been monitored by UPS supervisors. That, I’d think, would hold particular importance in Amazon warehouses, where workers’ every step, every pause, and overall speed rates are continually monitored and recorded by Amazon’s high-tech system of cameras — a Yeatsian rough beast with “a gaze blank and pitiless as the sun.”

Now, some 150,000 auto workers at the big 3 car manufacturers in Detroit are threatening to go on strike. Again, working conditions matter to the union members just as much as wages:

In addition to higher pay, the demands include regular cost-of-living wage increases, pension plans for a greater number of workers and a job security plan for workers when plants are shuttered…And it wants a workweek comprising four eight-hour days on the assembly line and a fifth day with eight hours of paid time off — essentially a 32-hour week.

We could see arrangements like four-day workweeks become a standard request of workers who are bargaining with their employers. The Wall Street Journal reports that potential employers are offering remote work arrangements to lure workers in tight job markets. One hiring research company found that “head counts at firms allowing at least one day of remote work increased 5% in May 2023 from June 2022, while those at fully in-person companies gained 2.6%, on average.”

Another study found that “most employers have given up on prodding staff to return to the office full time. According to the Society for Human Resource Management (SHRM), 62% of employers offer the option to work remotely at least some time. The Census Bureau finds that 39% of workers are teleworking from home, half of them five days a week.” In a job market with low unemployment and increasing wages, that flexibility is more than just a nice bonus for some office workers — it has to be a standard part of the work agreement.

This Week on Pitchfork Economics

Michael Lind joins the podcast to discuss his new book Hell to Pay, which argues that America is in need of a revolution in the way we think about work and wages. Lind’s book claims that an ongoing campaign of wage suppression is the cause of most of America’s problems, from declining birth rates to the radicalization of far-right extremists.

Closing Thoughts

At the New York Times, Jeanna Smialek interviews John C. Williams, the president of the Federal Reserve Bank of New York. Williams offers a clear window into his thinking about the Fed’s recent actions and next steps.

He tells Smialek, “My outlook is really one where inflation comes back to 2 percent over the next two years, and the economy comes into better balance, and eventually monetary policy will need over the next few years to get back to a more normal — whatever that normal is — a more normal setting of policy.” In other words, if inflation hits 2 percent, he believes that the Fed will begin lowering interest rates.

Smialek doesn’t directly ask what Williams thinks the Fed will do if inflation remains at 3% — a rate that has historically been acceptable to economists. The 2% inflation target is a recent development, as economists who came of age in the 1970s and 1980s became rigidly inflation-averse, but Williams seems to accept it as a written-in-stone requirement for a healthy economy.

Williams also subscribes to the belief that the unemployment rate right now is too low. This is a common thought among economists who believe, with zero evidence, that there is a “full employment” rate that is ideal for economic growth. Williams predicts that unemployment will rise “to a more normal level. Will it rise above that, in order to really get inflation back to 2 percent? I don’t know the answer to that.” When pressed, Williams says “I expect that the unemployment rate will rise above 4 percent next year, but I can’t say with any conviction how much will that need to happen.”

It’s fascinating that Williams thinks there is a direct line between the unemployment rate and inflation, and that unemployment needs to rise in order to bring inflation down. Reality doesn’t seem to support his analysis. The unemployment rate has shrunk over the last year, at the same time that inflation has rapidly slowed down, but Williams doesn’t seem to notice or care about that correlation.

One of the most telling quotes in the interview comes when Smialek asks Williams about wages. His response: “I view wage growth, in terms of your question, as more of an indicator, rather than a goal or a target. So I don’t sit there thinking: We need to see wage growth do one thing or another in the next year or two.”

In an economy like ours that is powered by consumer demand — spending makes up 70% of the annual Gross Domestic Product, remember — it’s downright wild to see one of our leading economic policymakers announce that wages are merely an economic indicator. The whole interview is a bracing reminder that the people in charge of the levers of power don’t often share a worldview with the people their decisions impact. Sometimes, it even feels like they’re phoning in their decisions from a completely different planet.

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

Zach