The Fed’s “Mission Accomplished” Moment

The Pitch: Economic Update for May 4, 2023

Friends,

Yesterday, the Federal Reserve raised interest rates for the tenth time in a row. This quarter-point increase to 5.25% was noteworthy because the Fed delivered with it a signal that they might pause their relentless campaign of rate increases. The accent there is on “might.”

“Still, the Fed said it would react to changes in the economy if need be,” Rachel Siegel writes at the Washington Post, “and that it would pay attention to the cumulative toll of interest rate hikes, lags that come with monetary policy and any other shifts ‘in determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time.’”

In other words, the Federal Reserve believes that the widespread price increases of the last two years might be on a steady decline. The Fed has been raising interest rates to make money more expensive to borrow in order to slow down the growth of businesses and to cool down the economy. But you should always remember that “cooling down the economy” is a polite euphemism for “causing a recession.”

At the press conference announcing the rate increase, Fed Chair Jerome Powell again blamed those persistent inflationary price increases on the strong labor market and widespread wage increases that Americans have been seeing over the same period. The Fed believes that your wages are raising prices, so they have raised interest rates in an effort to, as economist Larry Summers has argued, put ten million Americans out of work to rein in inflation. At yesterday’s press conference, Powell specifically cited wage growth as being “a couple percentage points above” where the Fed wants it to be in order to get inflation in line.

The problem is, the Fed has misunderstood the causes of inflation this whole time. Prices increased at first because of snags in the supply chain caused by the pandemic, and because of other economic problems caused by turning the world’s economy off and then back on again to combat COVID.

But a large and growing body of evidence suggests that the majority of the price increases we have been paying are the result of corporate greed. If you examine this FRED chart of corporate profits, you’ll notice that the profits stayed largely flat since the end of the Great Recession in 2009 all the way through 2020. Profits spiked dramatically after the lockdowns of 2020, and then they continued to climb higher and higher in lockstep with the higher prices Americans were paying across the economy.

Juliana Kaplan at Insider writes that “a new paper from the University of Massachusetts Amherst economists Isabella Weber and Evan Wasner argues that our current bout of inflation is what they call sellers’ inflation.”

In seller’s inflation, “Bottlenecks — like those rampant supply-chain shortages — give firms what the economists call ‘temporary monopoly’ status. Competition between firms in the industry, as well as the possibility of new companies trying to edge in on their territory, dwindles.” In this monopolized environment, Kaplan explains, “with just a handful of companies dominating the market in any given area, it’s easier for firms to reach an implicit agreement that, yes, they’re all going to raise their prices.”

“Much of the surge in food prices since the middle of last year stems from higher costs, particularly for energy, since most food production is quite energy-intensive,” adds Paul Hannon at the Wall Street Journal. “But economists at insurance company Allianz have calculated that about 10% of the rise reflects the search for higher profits. They suggest that is possible because key parts of the food-supply chain are dominated by a small number of firms.”

Back when we first started talking about corporate greed as a leading cause of inflation in this newsletter, the economic mainstream roundly mocked the idea. But now, analysis from economists in both the public and private sectors are finding that greedflation and corporate consolidation are the two leading causes of the recent persistent price increases.

At his press conference yesterday, Powell signaled that he believed the American economy might be entering a mild recession. Let’s be clear about one thing: A recession has been the Fed’s prescription for combating inflation from the start, despite a growing flood of evidence indicating that the Fed has been continually misdiagnosing the problem. America’s rising wages were the cause of our nation’s strong economic rebound from the pandemic — not a disease for the Fed to cure.

The Latest Economic News and Updates

The Good Kind of Bank Consolidation?

On Monday, JP Morgan Chase, the largest bank in the nation with over three trillion dollars in assets, announced that it had worked together with the federal government to buy flailing mid-size financial institution First Republic Bank. While the sale has helped to quell the possibility of another widespread bank run, let’s be clear that Chase didn’t do this deal out of some sense of civic duty: Emily Flitter writes at the New York Times that “JPMorgan’s agreement to buy First Republic is expected to boost the bank’s profits by $500 million this year and will give it access to a stable of wealthy clients.”

This isn’t the first time Chase has worked with the government to buy a troubled financial institution. Chase bought two struggling banks in the run-up to the 2008 financial crisis, and turned a tidy profit from those purchases. The argument in favor of the First Republic sale goes that not too many banks in the world have the resources to scoop up a troubled institution holding $200 billion in loans and securities. But those of us who white-knuckled our way through the age of “Too Big to Fail” will likely find that to be an unconvincing argument.

And while the Biden Administration has done a good job of stopping bank runs before they get out of hand, the stock prices of many midsize regional banks are floundering. Last night, PacWest Bancorp’s shares fell precipitously on the news that the bank was considering a sale.

At Vox, Nicole Narea examines the possibility that more midsize banks might collapse in the days and weeks to come. “While other mid-sized banks may look healthy, however, many have recently suffered major unrealized losses — including on investments in Treasurys and mortgage bonds — since the Fed started hiking interest rates to combat inflation,” she writes. So more banks could face solvency crises and kick off more bank runs. Even mighty Chase would not be able to buy three or four First Republic-sized banks in the face of such a crisis.

So what exactly happened? Why are so many banks of this size so vulnerable? A new report from the Federal Reserve blames…the Federal Reserve. “Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” wrote Fed Vice-Chair for Supervision Michael S. Barr.

The New York Times hails the report as “a rare instance of overt self-criticism from the Fed.” David Dayen provides some excellent analysis of the Fed report at the American Prospect, but the nutshell takeaway is that we need new regulations for the entire midsize regional banking system. And those regulations probably need to be even stronger than the Dodd-Frank midsized bank regulations that were repealed during the Trump Administration.

Banks need to be able to withstand periods of high interest rates, and that means not taking on too much risk. Senator Elizabeth Warren got a lot of criticism from mainstream pundits when she said that banking should be boring, but the third bank collapse in less than six months seems to have proven her right.

One thing is certain: Bank executives should not be able to reap huge paydays from the failures of their own institutions. Timothy Noah at the New Republic looks at the leadership of First Republic Bank and finds that they may have fled the sinking ship just in time. “James Herbert, First Republic’s founder and executive chairman, had sold $4.5 million worth of shares since the start of the year. Chief executive Michael J. Roffler, private wealth management president Robert L. Thornton, and chief credit officer David B. Lichtman sold a combined $7 million worth of shares during the same period,” Noah writes. “In November and December, Lichtman and his spouse sold an additional $2.5 million, and in November Roffler sold an additional $1.3 million. Thornton’s sell-off, on January 18, represented 73 percent of his outstanding shares.”

After the last big banking crisis, Congress expressly gave regulators the authority to prevent executives from profiting on big bank failures, but those regulations were just somehow never written. I’m willing to bet polling data would prove that most Americans across political parties would favor regulations that don’t allow wealthy executives to profit from the collapse of their own financial institutions like this.

Is a Recession Really Right Around the Corner This Time, for Real?

For the last two years, business leaders, economists, and other pundits have predicted that a recession was imminent. By any definition of the word “imminent,” they were wrong. But because perception can affect reality in economics, the odds of a recession actually happening increased a little bit yesterday when the Federal Reserve seemed to indicate that a mild recession was on the horizon. (Fed Chair Jerome Powell, for what it’s worth, disagreed with that prediction and argued that while the economy would slow down, a recession might not happen.) So where are we right now? Let’s take a look at the numbers:

• As we discussed last week, GDP growth slowed in the first quarter of this year. GDP is not a great measurement of the economy — it’s a trickle-down tool that takes America’s temperature by measuring the wealth of corporations and other corner-office metrics. But it is the measurement that almost everyone watches.
• Unemployment is still low, but the Wall Street Journal warned that job openings are nearing a two-year low. The Journal does grudgingly admit that the number of job openings are “well above levels before the pandemic and exceed the 5.8 million unemployed people looking for work in March,” meaning there is still more than one job available for every person currently looking for work.
• The Journal also notes that there are plenty of open construction jobs available to meet the demands of the housing market — but it tries to frame that as bad news, too.
• Inflation is still cooling, though several sectors remain stubbornly high. But in those sectors with high prices, like food, customers finally seem to be pushing back. Lora Kelly at the New York Times says customers are refusing to absorb the higher food prices caused by corporate consolidation and greedflation over the last two years. Businesses might threaten long-term damage to their brands if they keep on the greedflation trend
• Small businesses are having a much harder time getting loans and credit from banks, reports Rachel Siegel at the Washington Post: “A Fed survey released April 19 said more businesses were contending with tighter lending standards and growing uncertainty about liquidity.”
• The US manufacturing industry, which boomed after the pandemic, has declined in recent months, with retailers slowing orders and fewer job openings.

I’ve been saying for years, though, that the most important metric is the American worker. That boils down to two questions: First, can the majority of workers find a job? And second, are their paychecks growing? As we saw above, the answer to the first question is still “yes.” And the answer to the second question is “hell, yes.” Ben Casselman writes at the New York Times, “Wages and salaries for private-sector U.S. workers were up 5.1 percent in March from a year earlier, and up 1.2 percent from December, the Labor Department said Friday…A broader measure of compensation growth, which includes the value of benefits as well as pay, actually accelerated slightly in the first quarter.”

The Cutting Edge of Regulation

“President Biden’s signature climate law appears to be encouraging more investment in American manufacturing than initially expected, powering what’s expected to be a surge in new factory jobs and domestic clean energy technologies,” The New York Times noted yesterday. These investments in batteries, wind, and solar energy are creating a boom in the clean energy sector.

The authors warn that business’s increased interest in the green economy is “driving up costs for taxpayers, who are subsidizing the investments,” but those tax breaks are a small price to pay in exchange for good-paying jobs, American factories, and the green economy booming forward at five times the speed it was before. It’s a worthy investment in the future of the American economy, and those jobs are going to foster economic growth in countless other sectors through consumer demand, returning on the investment many times over.

Meanwhile, FTC Chair Lina Khan wrote an editorial warning that another technological advancement is in dire need of regulation: Artificial intelligence. Khan warns that without smart, timely regulations, AI poses several risks to the general public: It could further consolidate the power of a handful of large corporate titans in the tech sector; AI-powered pricing algorithms could create a nightmare inflation scenario if they continue unchecked; AI hiring and loan-approval programs could exacerbate human patterns of discrimination; and fraudsters could use AI chat programs to supercharge their scams through email and social media.

Khan’s observations are smart, but our economic leadership also needs to devise its own regulations to counter the rise in AI technologies. IBM CEO Arvind Krishna projected that he would replace up to 30 percent of this workforce — some 7,800 people — with AI over the next five years. If our leaders don’t have plans in place for white-collar workers who are displaced by AI chatbots, the whole economy will suffer.

And as we’re preparing for tomorrow’s economic threats, Brendan Ballou warns of a huge threat to workers and American consumers today: Private equity firms. Here, Ballou frames the size of the threat that PE poses:

Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone. In nursing homes, where the firms have been particularly active, private equity ownership is responsible for an estimated — and astounding — 20,000 premature deaths over a 12-year period, according to a recent working paper from the National Bureau of Economic Research. Similar tales of woe abound in mobile homes, prison health care, emergency medicine, ambulances, apartment buildings and elsewhere.

Ballou’s essay was adapted from his brand-new book about private equity, Plunder: Private Equity’s Plan to Pillage America. After reading this article, the book has rocketed to the top of my must-read list.

The Screenwriters Strike Back

I couldn’t let this newsletter end without acknowledging the Writers Guild of America strike, which began this week. In addition to demanding better and more stable working conditions, writers of movies and television shows are demanding that the wealthy CEOs of studios and streaming companies cut them a bigger piece of the action, and they’re also calling for some protections against technology like AI.

While not many Americans would categorize screenwriting as an essential job, the fact is that we all love movies and TV, and this strike is a high-profile opportunity for unions to make the case that every worker deserves basic protections and a decent wage. Workers in the tech sector, which has been riddled in recent months with layoffs and uncertainty, should take special notice of the WGA’s case.

And screenwriters aren’t the only people taking their cause to the streets. Rachel M. Cohen at Vox explains how tenants in grassroots movements around the country are pushing for “good cause” legislation. “In July 2021, local lawmakers in Albany approved New York’s first ‘good cause’ eviction law — a city ordinance affirming tenants’ right to renew their leases, defining what could lead to eviction, and protecting them against ‘unconscionable’ rent hikes exceeding 5 percent.”

House prices are out of reach for a number of Americans, and because it will take years for home construction numbers to reach the level of demand, renters are demanding the passage of laws that provide them with a sense of housing stability. Cohen reports that these good cause laws are a first step toward providing that kind of security for renters: “One study found local ‘good cause’ ordinances in four California cities lowered eviction rates between 2000 and 2016. The researcher concluded the measures ‘have a significant and noticeable effect on eviction and eviction filing rates’ and provide a low-cost policy solution for other states and cities.”

From Hollywood screenwriters to renters in Albany, people are standing up to demand the same kind of economic stability that previous generations of Americans enjoyed. Those demands have broad appeal, across party lines — a bracing reminder that a new economic day is dawning.

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.

• This week’s episode of Pitchfork Economics features a delightful conversation with Swedish economist Erik Angner about how economics can save the world. Angner offsets Nick and Goldy’s natural cynicism about mainstream economics by pointing out all the amazing progress that has been made in the economics profession.

Closing Thoughts

Let’s close out this week with a little thought experiment. Suppose an employee of a Marriott Hotel in San Francisco was found to have diverted funds from the hotel into his own bank account over the course of years. Now imagine what might happen when officials announce that the amount of money illegally transferred from the company to the employee totaled a staggering sum of 9 million dollars.

Can you imagine what the headlines in the local newspaper might say when this case finally came before a judge? “Employee Accused of Embezzling $9 Million from Local Hotel,” perhaps, or “Judge Speaks Out Against Employee’s $9 Million Theft.”

Now, let’s see a real headline that ran in the San Francisco Chronicle this week for a slightly different situation:

So from 2012 through 2017, San Francisco Marriott management withheld $9 million in “service charges” from banquet hall employees, even though customers believed they were directly tipping employees by paying those charges. We already have a very clear, headline-ready term to describe this behavior: Wage theft. But the Chronicle headline is a softball: “illegally kept” is such a weird, passive term that it diminishes the crime in a cloud of mushy language. Had the tables been turned as in our thought experiment above, with an employee stealing millions from the employer, I have no doubt in my mind that the headline would have been much more direct.

I’m using the Chronicle as an example here to point out the imbalance of power in the American workplace. If an employee steals funds, they are a criminal committing a crime, and they’re likely to go to jail. Employers who steal from their individual employees’ paychecks are “illegally keeping” wages, and it takes years for those workers to get those funds back — if, in fact, they’re ever made whole.

Wage theft is theft, but it’s not treated with the same seriousness as other kinds of theft. Only ten employers were prosecuted for wage theft in America between the years of 2005 and 2016, even though at least $50 billion in wage theft occurs every year. Just as middle-out economics calls on our leaders to raise the wages of American workers to benefit everyone in the economy, the flip side is that our leaders (and our media) need to start focusing on wage theft and wage loss as real harms to our nation’s economic health.

Case in point: A new report from Ben Zipperer at the Economic Poilcy Institute finds that if the merger between Kroger and Albertsons does go through, the resulting mega-grocer will result in an eye-popping annual $334 million loss for grocery worker wages.

Zipperer finds that “The expected earnings losses are a pure windfall for the employers,” representing “a significant transfer of income from wages to profits: The decrease in wages is equivalent to 2% of Kroger and Albertsons’ profits or three times the companies’ CEO compensation.”

This is terrible news for the economy. Those wages are now spent in local communities, supporting businesses and creating jobs through increased consumer demand. Instead, more than a third of a billion dollars in wages will be airlifted away from local economies every year and transformed into yet more profit for Kroger executives and the shareholder class. But it’s fair to say that the EPI report didn’t make the splash in the national media that, say, a corporation overstating the economic harms of shoplifting losses did.

We now understand that the middle and working classes are the center of America’s economy. Policies that grow their paychecks are better for everyone, from the wealthiest to the poorest. Just as we’ve had to readjust our economic understanding of the world to address this new understanding of reality, we also have to readjust the way we talk about wage theft and wage loss.

Taking $9 million from hotel workers doesn’t just harm those workers — it’s stealing $9 million that would otherwise have circulated throughout the community. And taking $334 million from the annual paychecks of grocery store workers isn’t just bad news for those workers — it hurts everyone in the economy. That’s how the economy really works, and it’s time for our media to recognize that we all do better when we all do better.

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

Zach