The Fed Takes a Breath

The Pitch: Economic Update for June 15, 2023

Friends,

“Federal Reserve officials received an encouraging inflation report on Tuesday as a key price index slowed more than expected in May,” reported the New York Times earlier this week, adding that this is “news that could give policymakers comfort in pausing interest rate increases.”

The report is full of good news: Rents are about to slowly decline, car prices are on the way down, and the service prices that have been driving inflation over the past year are moderating. Fuel, airfare, and other transportation costs are also heading in the right direction, with big year-over-year declines.

One incredibly important metric has moved in the wrong direction. “Overall food prices rose 0.2 percent in May from the prior month, an increase after remaining flat the two months before,” Madeleine Ngo writes at the Times, “Prices for groceries rose 0.1 percent in May, up from April, when prices declined 0.2 percent. Prices for food at restaurants continued to climb, rising 0.5 percent over the month, an increase from 0.4 percent in April.”

The food price increases are uneven across the grocery store, with fruits and vegetables up 1.3 percent over last month and eggs and meat down 1.2 percent. (Egg prices have fallen most dramatically, marking the biggest price decline in nearly 75 years.) With the possible exception of gas pumps, grocery stores are where the majority of Americans most often interact with prices, so until those food prices get under control, Americans will continue to see and feel the pinch of inflation.

But as the Times wrote, this inflation report is mostly good news, and it arrived the day before the Federal Reserve announced that it was finally pausing the steepest series of rate hikes in its history. The Fed’s decision comes at a time both when the job market is notably strong — remember, the Fed is operating under the wrong-headed assumption that millions of Americans will have to lose their jobs in order to bring inflation under control — and when prices are continuing on a clear and recognizable path downward.

And more and more experts, economists, and laypeople have realized the role that corporate greed has played in those higher prices, both in the form of “greedflation” — executives taking advantage of supply-chain issues to raise prices and rake in record profits — and in the form of monopolies caused by corporate consolidation.

We’re going to talk much more about the Fed’s decision in this week’s newsletter, but if you only take one fact away from all the discussion, make it this one: The American worker has carried us through this recovery from the pandemic, and their consumer demand has powered unceasing job growth even as prices climbed to their highest levels in recent memory and the Federal Reserve relentlessly pushed interest rates higher. Don’t let anybody tell you different: centering workers and their well-being was the right call.

The Latest Economic News and Updates

Larry Summers Is Always Wrong

When the Federal Reserve announced yesterday that they were not going to raise interest rates this quarter, Fed officials made it crystal clear that this pause was just a momentary breather in an ongoing campaign. Americans should expect rates to continue to climb over the course of the year, as the New York Times notes, “to 5.6 percent by the end of 2023…That suggests policymakers expect to make two more rate increases, a clear signal that Fed officials remain concerned about inflation and think that they may need to do more to cool growth and control price increases.”

Lydia DiPillis at the Times explains that Fed Chair Powell yesterday emphasized “the role of the imbalance in supply and demand for labor in fueling inflation, since it has powered faster wage growth.” She thankfully fact-checked Powell’s claims, though, noting in the same paragraph that “economists have debated how much of a role wage growth has played in raising prices. A recent paper by the Federal Reserve Bank of San Francisco found that labor cost growth played little to no role in rising prices, for example.”

For the past two years, the economic mainstream was flatly wrong to blame the strong labor market and the growing paychecks of American workers for inflationary price increases. And nobody is a better barometer for the economic mainstream than former Obama economic official Larry Summers.

I encourage you to read and share this piece by New York Magazine’s Eric Levitz titled “Larry Summers Was Wrong About Inflation.” Levitz points out that Summers argued for the last two years that millions of American workers would have to lose their jobs in order to get price increases under control. Summers predicted that we’d need five years of unemployment above five percent to bring inflation down, or two years of 7.5% unemployment, or one year of ten percent unemployment.

“It is now clear that Summers was wrong,” Levitz writes. “His call for austerity was premised on the notion that only a sharp increase in unemployment could prevent a ruinous wage-price spiral. In reality, both wage and price growth have been slowing for months, even as unemployment has remained near historic lows.”

Even more telling about Summers’ wrong predictions is how and where he made them. As Levitz writes, Summers called for massive unemployment at the prestigious London School of Economics. He erroneously argued on cable news networks that the so-called “natural unemployment rate,” meaning the amount of unemployment that fuels the healthiest economy, is 5%. Summers strolled through the halls of power, in other words, and casually explained that Americans outside those halls needed to pay the price for inflation — even as CEOs and corporations raked in bigger profits than at any other moment in history.

And Summers took time out from what appears to be a very expensive vacation in order to call for millions of working Americans to suffer serious financial loss and hardship:

Let’s be clear about one thing: If you’re a working American, Larry Summers is not on your side. His job is to explain to corporate executives, bankers, and other wealthy elites that they are everything good about the economy and their wealth must be preserved and enhanced at any cost. Then he explains that in order for the economy to be strong, working Americans must pay the price, and everyone thanks him for his bravery and his incisive economic brilliance.

Except it’s not true, and it never has been true. Summers is the high priest of trickle-down economics. His job is to sound serious and intelligent, and to explain why rich people need more money for the economy to thrive, while everyone else fights over their table scraps. And now we’re seeing in real-time that the economy simply doesn’t work that way. Prosperity grows from the middle out, and the bottom up, and consumer spending is what powers the economy — not executive bonuses.

And Summers isn’t the only trickle-downer out there — he’s just the tip of the spear. Jason Furman, the former Obama Director of the National Economic Council, called last week for 6% employment to get inflation down to 2%, which would put four million Americans out of work.

Furman cuts a more sympathetic figure than Summers. And in this exchange he’s arguing there are other ways to address inflation but interest-rate increases are “the only lever” that the Fed has. This is sorta right. But still he’s making the exact same argument that Summers is: working people must suffer for the good of the economy. He’s just as wrong as Summers is, too.

A Deeper Dive into Prices

Now that we’ve spent so much time talking about the Federal Reserve and its boosters, it’s important to go back to the beginning of this week’s newsletter and focus on prices, which are the real economic impact that Americans feel in their day-to-day lives. For the Wall Street Journal, Will Parker notes that rents are about to fall on an annual basis for the first time since the Great Recession. That’s good news, of course, but the news isn’t as great for renters as it may sound at first — rents went up by an eye-watering 25% during the first two years of the pandemic, so renters will still be paying much more than they did four years ago.

It’s important to remember that a lot of the economy is still suffering pandemic-era distortions. Jeanna Smialek reports that recreational spending on airfare, resorts, and other travel expenditures that weren’t possible during pandemic lockdowns skyrocketed over the last year but are largely returning to normal this summer. And Abha Bhattarai at the Washington Post writes that there’s a huge generational gap in recreational spending, with baby boomers going big on travel, restaurants, and other leisure activities, while “Among younger adults, spending on airlines and hotels fell 5 percent in April from a year ago, according to Bank of America credit card data.”

And finally, Paul Krugman is raising a question that a lot of economists have been discussing lately. The Fed has claimed again and again that it is aiming to bring inflation down to an annual target of 2%. But that 2% figure is arbitrary, established simply because it’s where the inflation numbers were at during the 1990s when central bankers and big corporations believed the global economy was strong.

But what if the current global economy grows better and shares more of that prosperity when inflation is at 3%? Krugman makes an argument that a slightly larger inflation rate might be better at warding off recessions. The most important metric, he argues, is whether inflation is high enough for the average person to feel the pain of higher prices. The current inflation rate of 4%, he argues, is above that threshold, but Americans might not notice an annual inflation rate of 3% in their everyday expenses.

Krugman misses one important point in this piece: Wages. For most of the past 40 years, wages have stayed stagnant while inflation took 2% bites out of everyone’s paychecks with each passing year. But if Americans’ paychecks are rising faster than the inflation rate, they’re less likely to notice the difference between 2% and 3% inflation.

Robert Kuttner agrees with Krugman’s take on 3% unemployment, and he turns the take into a plea for the Fed to stop raising rates altogether: “The inflation rate should be under 3 percent for all of 2023. To get it below that using more rate hikes, in the hope of reaching the Fed’s entirely arbitrary target of 2 percent, would create a needless recession.”

The Value of Work

“A group of contract workers tasked with training Google’s new AI chatbot said they were fired for speaking out about low pay and unreasonable deadlines they believe have left them unable to properly do their jobs and ensure the bots don’t cause harm,” writes Garrit De Vynck at the Washington Post. This is the latest in a recent string of highly publicized worker abuses by the tech industry.

For instance, a protest by moderators of online message board Reddit this week has drawn attention to that company’s unethical practices. As Reddit prepares for its IPO, this strike reminds the world that much of the site’s value is created and maintained by an army of volunteer moderators, who do at least $3.4 million dollars of unpaid work for Reddit every year.

One solution for sites like Reddit that profit from unpaid labor is to reclassify how billion-dollar companies can and cannot identify an employee. The National Labor Board issued a ruling this week which “makes it more likely for workers to be considered employees rather than contractors under federal law,” according to the New York Times. This ruling makes it easier for gig workers and contractors — including the Google employees above — to unionize or collectively protest unsafe or unfair labor practices.

We saw this week how collective action can create real benefits for workers. After months of negotiation, Teamsters and UPS finally came to an agreement that will see most UPS vehicles equipped with air conditioning. “The issue drew heightened attention last summer, as UPS drivers shared photos of thermometer readings inside their trucks going as high as 120 degrees or more, and they went viral,” writes Axios’s Emily Peck.

And for Time, Zeynep Ton explains that good wages and excellent working conditions aren’t just a labor issue. Businesses that treat their employees well also profit more in the long term. “Low pay drives high employee turnover, including for K-12 teachers. In low-wage settings, including senior living, call centers, warehouses, retail stores, and restaurants, we have seen some companies replacing their entire frontline workforce annually, with more than 100% employee turnover,” Ton writes.

“Rather than seeing employees as a cost to be minimized, companies like Costco and H-E-B view them as human beings who can drive profitability and growth, paying them significantly more than market,” he adds.

But these companies don’t just pay more — they design a system that increases productivity and sets up employees to succeed. They eliminate wasteful activities (such as constant changes to displays), stagger new product introductions to smooth workload, cross-train employees, empower them to make decisions, and give them enough time to serve the customer well and engage in improvement.

This is one of those rare cases where a headline perfectly summarizes the contents of the piece: “Good Jobs Are Good Business.” This is a piece that should be shared widely.

This Week in Regulations

This week, after the Securities Exchange Commission sued the world’s largest cryptocurrency exchange, Binance, the company stopped allowing U.S. dollars to be traded on its exchange.” One of the main functions of an exchange is allowing users to convert their traditional money into digital currencies like Bitcoin or Ether,” explains the New York Times’s David Yaffe-Bellany. “Binance will no longer be able to offer that service in the United States.”

While a few libertarians will undoubtedly shout about your right as a human to buy crypto wherever and in whatever denomination you choose, this move is a good one for American consumers. If you want to buy crypto in American dollars, you should do so under the understanding that the exchange is following American laws — that your investment is protected by the same regulations as any other investment.

The Federal Trade Commission is also currently suing to block Microsoft’s $69 billion acquisition of video game producer Activision before a July 18th deadline for the deal. “Microsoft has already shown that it can and will withhold content from its gaming rivals,” the FTC said last year. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

The American Prospect’s Ryan Cooper is calling on the government to take action on the heels of a report that electric car manufacturer Tesla’s so-called “Full Self-Driving” feature has led to the death of 17 people and 736 crashes since 2021. Cooper writes,” it is long since time that the [National Highway Traffic Safety Administration] and other regulators took a much harder line with automakers.” He adds, “We need more regulations to protect pedestrians from oversized trucks, stricter ways to control rampant speeding, and a great deal more skepticism about whiz-bang computer gimmicks.”

You’ve likely seen several stories like this one from the New York Times’s Lydia DiPillis which lament the fact that many green-energy manufacturers won’t be able to take advantage of the Inflation Reduction Act’s tax credit program. “There’s not a single solar manufacturer who fully qualifies for this at this moment in time, which makes it difficult and is actually starting to cool investment,” one manufacturer complained to the Times.

But here’s the thing: Those tax credits are to incentivize companies to manufacture green energy technology here in the United States, and to hire American workers to make them.

No regulation is perfect, of course, but most of the complaints in the Times piece are from manufacturers who want to tilt the credits in their favor in exchange for less of a commitment to American workers, or to American manufacturing — in other words, some of the manufacturers in this piece are demanding outcomes that are entirely contrary to the stated goals of the regulations.

If the Biden Administration were to loosen the rules around those tax credits to make it easier for companies to invest in factories and workforces abroad, that would completely undermine the reason for creating the regulation in the first place. It’s important to read pieces like this with the profit motive in mind — if the complainer would profit at the expense of others, their complaints should probably not be implemented into regulation.

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.

• Through much of the 20th century, franchisors sold their business model as a kind of small-business-in-a-box to prospective business owners. The idea was that in exchange for a fee, franchisees could launch a business with minimal risk and the brand awareness of a large corporation. But over the years, the franchise model has become much more extractive, sucking money out of franchisees and workers in exchange for bigger profits at the top. Economist Marshall Steinbaum joins the Pitchfork Economics podcast this week to talk about how the franchise game has become rigged.

Closing Thoughts

Anyone who has traveled to Disney World since the pandemic began has noticed that the theme park is increasingly a land of haves and have-nots, with wealthy patrons paying extra to skip long lines for rides and other luxury perks that are available only to a handful of elites.

For Slate, Henry Grabar reports that this is not only a Disney problem. As the headline of his piece, asks, “When Did All the Fun Stuff Go Upscale?” From Las Vegas to movie theaters to ski resorts, he argues, corporations tend to be pricing up their experiences and aiming for a luxury market. Rather than selling escapism to the masses, these firms are selling to a smaller group of wealthy clients, driving up profits by raising prices to exorbitant levels.

Yes, income inequality has taken over theme parks, tourist destinations, and other classic middle-class vacation getaways, and sellers have decided to forego the millions of have-nots in order to fight over the wealthiest ten percent of the haves:

Business leaders have simply decided it makes more sense to prioritize fewer, higher-margin transactions than compete for market share, in some cases abandoning their low-price offerings entirely. U.S. automakers, for example, started years ago to prioritize larger, heavier, more expensive vehicles and discontinue smaller, cheaper cars. (The phenomenon is even more pronounced with electric vehicles, where the only low-cost American-made model, the Chevy Bolt, was eliminated by GM in April.) Homebuilders, too, increasingly aim at a higher-end clientele, with the median new home about 40 percent larger than it was a generation ago.

We’ve seen this happen on a smaller scale in grocery stores, with brands like Pepsi and General Mills contenting themselves with raising prices and selling fewer items to a smaller group of consumers, in exchange for record profits. Last year, the theme park industry regained the profitability that it lost during the pandemic, but they did so by attracting smaller crowds who paid more.

A small handful of luxury brands have always existed, of course: Rolex and Mercedes built their names on being aspirational products and signifiers of wealth. But when goods and services that used to be open and available to everyone, from vacation destinations to movie theaters to energy drinks and junk food, have transformed from shared experiences into class-segregated thrills for the wealthy few, doesn’t the economy begin to look and behave a little differently than it always has?

In the long term, this kind of growing divide is bad for everyone — which means it’s also bad for business. Self-selecting for only well-to-do audiences is dangerous for mass-market businesses because it shrinks prospective buyers and puts them on a razor’s edge of profitability. But business leaders tend to be short-sighted pack animals, and so this move to the luxury markets has taken hold for now. Let’s hope that enough entrepreneurs remember that catering to a broad and diverse audience is the best path toward long-term profitability and success in American business.

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

Zach