Regulations are Cool Again

The Pitch: Economic Update for December 15, 2022

Friends,

On Tuesday, the U.S. Bureau of Labor Statistics issued its final Consumer Price Index report of the year, and the news was good. “Prices cooled again in November, rising 7.1 percent compared with last year, the smallest year-over-year increase since last December,” writes Rachel Siegel at the Washington Post, adding that “a measure known as ‘core inflation,’ which strips out volatile categories like food and energy, rose 0.2 percent — the smallest increase since August 2021.”

This is great news for American consumers who have been squeezed relentlessly at grocery store checkout lines for the entirety of the year, but it’s important to not spike the football just yet. Inflation dipped in July this year before rising again in August, and the same thing could easily happen again here.

But the experts are sounding a little more hopeful about this report than they were even in July. Mark Zandi, chief economist at Moody’s Analytics, said that the November report was significant because “Across the board, we saw a moderation of inflation. That’s what’s most encouraging. It’s not one or two special factors” but rather a decline in every measured category.

The New York Times’s Jeanna Smialek notes that this decline seems more sturdy because supply chains are finally healing from the damage caused during the pandemic, and rents — a leading inflationary indicator — are cooling down. But she also argues that a number of geopolitical events, most notably the invasion of Ukraine and pandemic uncertainty in China, could tip inflation back into the danger zone again.

The rule of economic certainty stands: Anyone confidently making a prediction about what happens next is not to be trusted. But for the Wall Street Journal, Matt Grossman notes that investors seem to be preferring bonds as an investment, rather than stocks, which is a sign that a looming recession or economic slowdown has become a greater concern to Wall Street than inflation. I don’t know if it’s good news or bad that the fickle traders of Wall Street are moving on to fretting over the next crisis. But either way, the development is certainly noteworthy.

The Latest Economic News and Updates

The Fed Eases Up, but Only a Bit

Yesterday, the Federal Reserve raised interest rates by half a percentage point, finally breaking its unprecedented streak of steep .75 percent increases.

The Fed signaled that we’re unlikely to see a decline in interest rates until 2024, meaning that we can expect a series of smaller interest rate increases next year. This suggests that the Fed does agree with the experts that inflation is starting to decline, but they’re still trying to cool the economy down by making money expensive to borrow.

Indeed, Neil Irwin and Courtenay Brown write at Axios that the Fed is expecting unemployment to rise in 2023:

Officials also revised up their expectation for how high the unemployment rate will rise as the impact of tighter money ripples through the economy. The median Fed leader now expects a jobless rate of 4.6% by late next year, up from 3.7% now and 4.4% forecast in September.

To put that prediction into perspective, a 4.6% unemployment rate in December 2023 would mean something like 1.5 million Americans would lose their jobs over the course of the next year. That’s a lot of pain in the real world.

And even though inflation is down, economists will likely begin 2023 in much the same way they spent most of this year — on recession watch. Here’s another number for the pessimists to chew on: Despite all the press releases announcing record-breaking Black Friday sales, retail sales dipped .6 percent in November.

Jordyn Holman at the New York Times writes, “Spending increased in some areas, including at grocery stores, health and personal care stores and restaurants and bars. But categories like motor vehicles, furniture, consumer electronics, clothing and sporting goods all declined.”

So consumers are spending more on food and essentials, but they may be less likely to buy gifts and non-essential items this month, unless they’re on a deep discount. If that sentiment continues through the holiday shopping season, the usual experts will likely be entering 2023 in a dour mood.

Are We Entering a New Era of Economic Uncertainty?

This week, the New York Times’s Ezra Klein interviewed economist Mohamed A. El-Erian about his theory that we’re entering a new economic era and that the old rules simply will not apply for the global economy anymore. This is a rare case where I recommend reading the transcript rather than listening to the podcast because the conversation is so substantive that it’s hard to follow in audio format.

El-Erian offers three ways the global economy has changed. First, he believes that while economic conflicts used to revolve around building up enough demand to create economic growth, we’ve now reached a moment in which supply is now the problem — the labor market favors workers over employers for the first time in recent history, supply chains are less responsive, and systems are less efficient than they were in the roaring 1990s and early 2000s.

Second, he argues that due to inflation, the days of “boundless, easy money from central banks” that reigned after the Great Recession are over and that corporations will no longer have access to what seemed like unlimited frictionless capital.

And third, he says that financial markets will be much more brittle in years to come, with bumpier economic progress for nations and more turbulence and risk for the investor class.

It’s important to note that these three new conditions for the global economy going forward wouldn’t necessarily be bad news for ordinary people. For one thing, workers have consistently lost power over the past 40 years, so a period of strong labor markets with increased worker power could help to rebalance the scales a little. And if central banks aren’t as eager as they have been to give money to big banks and huge corporations, we might not see more of the rising global corporate dominance that occurred over the last 15 years — we could see scrappy smaller businesses rising up in regions around the world to compete with the corporate dinosaurs for resources.

Regardless of how El-Erian’s predictions pan out, he’s definitely thinking in the correct direction. The global economy of 2023, 2024, and 2025 will absolutely not be the same economy that we were living in before the pandemic — for good and for ill. The sooner our leaders realize that what’s past is gone, the easier it will be for us all to transition to our bold new world.

Will 2023 Be the Year of Strong Regulations?

This week, leaders around the country started to address the huge need for strong government regulation. If they can carry this momentum into the new year, we could see the dawning of a new era of protections against corporate malfeasance. Some promising signs:

• Senator Marco Rubio and Rep. Ro Khanna have crossed the aisle to sponsor new legislation that will help strengthen the supply chain and prepare us for future crises. “The legislation, which is entitled the National Development Strategy and Coordination Act of 2022, would require Cabinet-level agencies to identify weaknesses in supply chains that could impact national security and domestic manufacturing,” reports the Wall Street Journal, while also spotlighting areas that could benefit from increased government investments.
• Federal prosecutors charged crypto exchange FTX ‘s former CEO, Sam Bankman-Fried, with multiple counts of fraud this week. Considering that Bankman-Fried himself was publicly speculating earlier this week that he would not be arrested for the collapse of FTX, this is an important development. Leaders could write the best regulations in the history of the world, but that wouldn’t matter if people who violate the rules don’t suffer any consequences for their actions. This is a sharp warning fired over the heads of the next crypto fraudster.
• The Department of Labor is writing new regulations to stop employers from misclassifying their workers as independent contractors. This is important because employers aren’t required to provide benefits, a minimum wage, or follow other rules for independent contractors. A stronger protection could put an end to the most exploitative practices from gig economy employers like Uber.
• The National Labor Relations Board voted on Tuesday to increase “employers’ liability when they violate the National Labor Relations Act by illegally firing workers, as very often happens to workers involved in unionization campaigns,” writes The American Prospect. The board’s new ruling means that employers who are found to have wrongfully terminated workers for union activity will not just be responsible for compensating the worker for back pay that they are owed, but also “out-of-pocket medical expenses, credit card debt, or other costs that are a direct or foreseeable result of the unfair labor practices.” By raising the potential cost of a wrongful termination from hundreds of dollars to tens of thousands of dollars, employers might think twice before penalizing workers for union activity from now on.

State of the Unions

Workers at an electric car battery plant in Ohio have overwhelmingly voted to unionize, reports Noam Scheiber for the New York Times. “The outcome appears to create the first formal union at a major U.S. electric car, truck or battery cell manufacturing plant not owned entirely by one of the Big Three automakers,” Scheiber explains.

Importantly, that vote was not even close: Workers approved a union by a staggering 710-to-16 margin. Even in deep-red Ohio, workers understand that unions are an important part of creating and protecting high-wage manufacturing jobs in the burgeoning green economy.

And over the weekend, Scheiber and Julie Creswell at the New York Times provided some insight into why returning Starbucks CEO Howard Schultz has been so resistant to recognize unionized stores. On the one hand, it’s a matter of ego: “​​friends and longtime colleagues say Mr. Schultz’s opposition to the union isn’t primarily about the bottom line. It’s emotional. A union clashes with his image of Starbucks as a model employer,” they explain. (And if you think that a billionaire wouldn’t defy reality in order to maintain their own fragile self-image, look no further than one Mr. Elon Musk’s stand-up comedy debut to find the depths of self-delusion that some CEOs are willing to entertain.)

But the fight against unions in Starbucks stores is also strategic, and the entire balance of power in the service industry is at stake. “The union campaign has helped give rise to labor organizing at a variety of other companies, including Apple, Trader Joe’s and REI. If the union manages to wring significant concessions from Starbucks,” the authors write, “it could accelerate organizing elsewhere and help change the relationship between management and labor across the country.”

And as the railroad workers strike continues to make national headlines, workers are calling on the Biden Administration to step in on their behalf. As you may recall, railroad companies only offered their workers one single paid sick day in the latest contract, and paid sick time has become the biggest bone of contention as Congress voted to bar the workers from striking.

Last Friday, 60 Congressional Democrats wrote a letter asking the Biden Administration to sign an executive order giving the workers the seven paid sick days per year that they were requesting. Here’s an excerpt from the letter:

​​Over 115,000 rail workers in this country are looking to you to guarantee them the dignity at work they deserve and to ensure that our rail system is safe for its workers and for millions of Americans who cross rail tracks every day. Through executive order, agency rulemaking, and any other applicable authority, we ask that you take quick and decisive action to guarantee these workers paid sick leave.

If the Biden Administration comes through, that would be one hell of a Christmas present for railroad workers who have fought hard all year long for the paid sick leave that workers in so many other nations around the world automatically enjoy.

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 Friday, we’ll be discussing the latest inflation numbers, the Fed’s latest rate hike, and whether 2023 will be the year that regulations become sexy again. Join us at 10:30 am PST tomorrow.
• On the latest episode of Pitchfork Economics, Nick and Goldy do a deep dive into why and how CEO pay has grown at such an exponential rate. Journalist Mark Kreidler joins the podcast to explain how CEO pay has grown an astonishing 1,460% from 1978 to 2021, while workers during that same period only saw a raise of 18.1%.

Closing Thoughts

Visit the comments section of any news story about inflation and you’ll likely find at least one troll trying to blame higher prices on the bigger paychecks that American workers have been taking home this year, and (perhaps even more ridiculously) on the stimulus checks that American households received last year. This is not a new development in economic commentary: There’s always a crank trying to blame everything wrong with the American economy on ordinary people.

Joseph Stiglitz at the Roosevelt Institute co-authored a report with Ira Regmi last week that takes this claim head-on, debunking once and for all the idea that your higher wages caused inflation. The first finding in the report lays out the economic roots of the global rise in inflation:

Today’s inflation comes mostly from sectoral supply side disruptions, largely the result of the COVID-19 pandemic and its consequent disturbances to supply chains; and disruptions to energy and food markets originating from Russia’s invasion of Ukraine. Demand patterns too have undergone significant changes, again largely induced by the pandemic. In some sectors, these effects have been amplified as a result of the exercise of market power. But today’s inflation, for the most part, is not the result of significant excesses of aggregate demand such as might have arisen from excessive US pandemic spending.

The full report also looks into the corporate greed that’s helped to raise prices for consumers: “Between 1960 and 1980, markups averaged 26 percent above marginal costs and have been on a slow and consistent rise ever since. The average markup charged in 2021 was 72 percent above the marginal cost,” the authors write. This chart shows the striking rise of profits over cost of goods in the past four decades, with an especially alarming spike in the last two years:

The authors also warn the Federal Reserve that raising interest rates too high too fast would kick the economy into a recession, which they argue would be “a cure worse than the disease.”

Which leads to the million-dollar question: If raising interest rates is the wrong response to fight inflation, what do the authors recommend our leaders do instead?

Increasing pay, improving working conditions, making employment more flexible (more working from home, more flexibility in hours), and providing better childcare are among the ways to increase labor force participation. And maintaining a tight labor market is a way to induce employers to offer workers good wages and working conditions. Slowing the economy down will have the opposite effect, reinforcing wage and income inequalities — including across races, ethnicities, and genders — and likely further reducing labor force participation.

In other words, the authors argue that a middle-out approach which invests in the broad majority of workers would help Americans get through this period of inflationary pressure while the supply chain works itself out. Their policy prescriptions honestly don’t seem too far off from the Biden Administration’s inflation response.

It’s remarkable to think that just a few years ago, we would have seen a very different response to this inflationary pressure. When leaders on both sides of the aisle were in the thrall of trickle-down economics, we might have seen a president and Congress marching together with the Federal Reserve to force millions of Americans out of work. The trickle-down understanding of the economy is that wealth and prosperity comes from the very top. Trickle-down policies would have sacrificed the many so that the wealthy few — the top 1% who were erroneously considered to be the job creators — could be protected from the worst of inflation.

It has not been an easy year. Americans have had to sacrifice too much to make ends meet as prices soared. But had this moment arrived earlier in our history, it’s alarming to consider exactly how disastrous the economic response might have been, and how much more Americans would be suffering right now.

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

Zach