The Price of Bad Economics

The Pitch: Economic Update for November 22nd, 2023

Before we dig into this week’s issue, l’d like to wish you and yours the happiest of Thanksgivings. As always, I’m so grateful for your time and attention, week after week. Please make sure to take the time to relax and recharge your batteries this weekend before the wild scramble for the end of the year begins on Monday.

Friends,

In the opening of the Thursday edition of his The Morning newsletter last week, New York Times reporter David Leonhardt travels back in time to 2015, when the Roosevelt Institute issued an economic report that turned out to be quite consequential.

“The report called for higher taxes on the rich, a higher minimum wage, more regulation of Wall Street, more support for labor unions, more aggressive antitrust enforcement and more government investment in economic growth,” Leonhardt writes. “National news outlets covered the report while also noting how much of a break it represented with decades of economic policy by both the Democratic and Republican Parties.”

He’s talking, of course, about middle-out economics, and while that Roosevelt report was a significant moment in the history of middle out, that wasn’t the beginning of the concept.

Civic Ventures founder Nick Hanauer coined the phrase “growing the economy from the middle out” with his co-author Eric Liu in their 2011 book Gardens of Democracy. It was then further explored in a special issue of The Democracy Journal entitled “The Middle-Out Moment” published in 2013. The opening of that issue declared, “The point is to make what we call ‘middle-out’ economics the operating progressive theory of economic growth: That is, we must promote middle-out economics not just as a nice-sounding idea, but as the direct alternative to trickle-down economics.”

The idea then took shape in the early Fight for $15 in states and cities around the country, and many hands have worked to build on the concept in the years since. For more insight into that process, I’d recommend journalist Michael Tomasky’s excellent book The Middle Out: The Rise of Progressive Economics and a Return to Shared Prosperity.

Leonhardt is writing about all this because the Roosevelt Institute has just released a major new report. Titled “Sea Change,” the full report stands with Tomasky’s book as one of the most thorough overviews of middle-out economics to date, from the Green New Deal to the push against corporate consolidation to a proposal to rebuild America’s tax structure to support bold new investments in the middle class. The report suggests that President Biden has brought the concept of middle-out economics into the mainstream by embracing “policymaking with the North Star of rebalancing power in the economy by fostering the industries we need and supporting workers’ demands for higher wages and more economic security.”

What inspired this dramatic shift in our understanding of how the economy really works? “The simplest explanation for the shift is that the old economic approach hasn’t worked very well for most Americans,” Leonhardt writes. “Starting in the 1980s, the U.S. moved toward an economic policy that’s variously described as laissez-faire, neoliberal or market-friendly.” He’s talking about trickle-down economics, which “involved much lower taxes for the wealthy, less regulation of business, an expansion of global trade, a crackdown on labor unions and an acceptance of very large corporations.”

The end result of those policies? “Incomes for the bottom 90 percent of workers, as ranked by their earnings, have trailed economic growth, and wealth inequality has soared,” Leonhardt explains. And as a consequence, “For years, Americans have told pollsters that they were unhappy with the country’s direction.”

Leonhardt is clear that though Biden has centered the American middle class in a way that no American president has in over 40 years, trickle down still holds a tremendous amount of sway: “In many ways, Americans are still living in the Reagan era. Taxes on the rich remain low. Corporations are much larger than in the past, and they can often prevent workers from forming unions even when most employees at a work site want to join one. Many progressive proposals, like universal pre-K, remain dreams.”

Correctly, Leonhardt notes that middle-out economics “has made surprising progress over the past decade and remains vulnerable to reversal” — specifically, its future hinges on President Biden’s reelection. If voters give Biden another four years to continue prioritizing American workers over the wealthy few, trickle down’s decline seems likely, while a loss would set the adoption of middle out back by years. At the moment, Americans are still stinging from high prices, and while voters say in polls that they like Biden’s “specific policies, like the investments in infrastructure and semiconductors,” inflation is making it hard to see the big picture.

But Sea Change offers a broader view that shows middle out isn’t about just one president — or one party. “Conservative Sen. J.D. Vance (R-OH) has joined progressive Sen. Elizabeth Warren (D-MA) in calling for stronger oversight of big banking. Conservative Sen. Marco Rubio (R-FL) directly cites the Roosevelt Institute’s work on stock buybacks,” the report notes, adding that “It is an encouraging sign for a broader expansion of good economic ideas that some newer conservative think tanks are creative with respect to climate and immigration, and explicitly pro-worker and pro-industrial policy.” We could be seeing the beginnings of a political realignment along economic lines.

All this matters because the rise of middle out is one of the most important stories of the presidential election next year: With all the noise and chaos of modern American politics, can President Biden tell a convincing economic story of the source of true prosperity? It seems to me that progressives need to become better economic storytellers, explaining that the economy grows from the middle out, not the top down, and talking about the importance of economic inclusion as a driver of growth and prosperity. This is not just a positive, uplifting story arriving at a time when we could certainly use more positive, uplifting stories — it also has the benefit of being an absolutely true account of how the economy actually works.

The Latest Economic News and Updates

Just in Time for the Holidays, Prices Are Declining

Federal Reserve Chair Jerome Powell has started to signal that the Fed might not raise interest rates any further — a promising sign for Americans who have shied away from taking on new mortgages, paid more in interest on credit cards, or tried to secure business loans. The Wall Street Journal’s Nick Timiraos writes that the most promising signal for Powell is “The U.S. economy’s speed limit, known as potential growth, appears to have temporarily moved up thanks to easing bottlenecks and a boost in the number of people available to work and, possibly, in productivity, or the output that each worker produces.”

Even though the Fed’s stated plan with interest-rate increases was to slow the economy down and raise the unemployment rate by making it harder for businesses to borrow money, now Powell acknowledges that America’s resilient and productive workforce has become central to the economy’s recovery. The supply chain has largely healed from the pandemic-era shutdowns that rocked the global economy, and the stage has been set for inflation to level out without mass layoffs and economic hardship.

Walmart CEO Doug McMillon agrees with the Fed’s seeming assessment that inflation is leveling out, and he reports seeing prices for groceries and merchandise actually going “down a little more aggressively in the last few weeks or months.” He’s not alone: American retailers are aggressively slashing prices even more than usual ahead of the holiday shopping season.

In terms of online holiday sales, “Promotions across a range of categories, including apparel, appliances and computers, were significantly higher last month than in 2021 and 2022,” writes Gabrielle Fonrouge at CNBC. “For example, the price of apparel online was 9% lower throughout October compared to the beginning of the month, but in 2021 and 2022, it was just 2% and 5% lower, respectively, the data show.”

It’s not just holiday bargains that are driving prices down. Check out this chart showing the dramatic increase and decrease in a few select home goods over the past two years:

To be clear, it is too early to declare victory in the war on inflation. A few promising price signals are no match for monthly inflation numbers that take the whole economy into account. But these are exactly the signals that you’d like to see heading into the busiest retail month of the year after two years of inflationary pressures.

Worker Power Is Increasing — but Some Are Being Left Behind

It’s interesting to see Fed Chair Powell come around to recognizing American workers as essential to our recovery from inflation. Those of us who know the truth about the American economy — that a thriving middle class is the source of economic growth and prosperity — have been arguing this all along. When workers spend their paychecks in their local communities, they create jobs and grow the economy for everyone.

Rachel Siegel at the Washington Post writes about one of the biggest potential problems for American workers right now: Housing prices. “No one thinks a lack of housing is enough to spoil momentum in the labor market. Employers have added workers for 34 consecutive months, after all, and the job market is still churning,” Siegel writes. “But some economists still worry about the knock-on effects of the country’s housing challenges. Until enough homes get built in the places that need it most, more companies will have to get creative — through higher pay, remote work options or other perks — to ensure their workers can find a place to live.”

Also for the Post, Abha Bhattarai reports that new college graduates are having a harder-than-usual time finding work. The recent graduate unemployment rate often runs lower than the unemployment rate for the general population, but lately it has run almost a full percentage point higher than the unemployment rate:

“Part of the problem is that the industries with the biggest worker shortages — including restaurants, hotels, day cares and nursing homes — aren’t necessarily where recent graduates want to work,” Bhattarai explains. “Meanwhile, the industries where they do want to work — tech, consulting, finance, media — are announcing layoffs and rethinking hiring plans.”

Many fields that have been considered on the wane during decades of trickle-down dominance are suddenly showing strong vital signs, thanks to union power. Members of the United Auto Workers union, for instance, have officially ratified contracts that will earn many of them 25% raises over the next four and a half years. And President Biden noted that non-union auto manufacturers have quickly followed this agreement with raises of their own: “These contracts show that when unions do well, it lifts all workers. Following the UAW’s historic agreements, we’ve seen Toyota, Honda, Hyundai, and Subaru announce significant wage increases as well.”

With these big wins grabbing attention, we can expect to see workers in other industries begin to explore the possibility of unionization. For instance, workers at two Wells Fargo branches announced that they were starting a union drive on Monday. Union actions are relatively rare in the financial sector — but banking is hardly a lucrative business for tellers working in local branches. A 2014 study showed that one-third of all bank tellers were on public assistance like Medicaid or SNAP because their wages were so low, for instance, and Comparably reports that the average American bank teller makes just $27,144 per year. This seems like an industry that’s ripe for unions to sweep in and demand a bigger cut of the bank’s mammoth profits.

At the same time that workers are realizing their power, employers are trying to find new ways to exert power over their employees. For the New York Times, Robin Kaiser-Schatzlein writes about the pernicious practice known as “Stay-or-Pay Clauses.” Employers are forcing new workers to sign a contract guaranteeing that if they don’t stay on the job for a specified amount of time, they owe the employer compensation for financial damages. The story opens with an elder care worker who was told he would have to pay the nursing home that employed him $20,000 if he left his job.

The use of stay-or-pay clauses has grown rapidly over the past decade, and it has seemingly exploded since the start of the pandemic, as companies try to retain workers in a tight labor market. The clauses have spread far beyond the handful of roles and industries where they originated and are now used by thousands of mid- and low-wage employers — something that came to light when workers began filing lawsuits challenging the practice. These contract terms have been applied to bank workers, salespeople, dog groomers, police officers, aestheticians, firefighters, mechanics, nurses, federal employees, electricians, roofers, social workers, paramedics, truckers, mortgage brokers, teachers and metal polishers. Legal experts believe stay-or-pay clauses might now be in industries that employ a third of all American workers.

Kaiser-Schatzlein correctly compares Stay-or-Pay Clauses with another form of extractive employment agreement: the noncompete clause, which hair salons and sandwich shops were abusing to keep workers trapped in their jobs unless they either switched fields or moved to another part of the country. Thankfully, state attorneys general around the country are starting to step in to fight Stay-or-Pay the same way they combated noncompetes, and the Federal Trade Commission is signaling that it will move to outlaw Stay-or-Pay Clauses.

Truckers Deserve Overtime Pay

At President Biden’s urging, a new bill introduced in both houses of Congress would finally make millions of truck drivers around the country eligible for time-and-a-half overtime pay. Truck drivers were exempted from the original 1938 law that established a national overtime threshold.

Predictably, the trucking industry responded to the bill with the expected volley of corporate BS, warning making truckers eligible for overtime “would reduce drivers’ paychecks and decimate trucking jobs by upending the pay models that for 85 years have provided family-sustaining wages while growing the U.S. supply chain.”

Like all trickle-down arguments from corporate lobbying groups, this is untrue. Rachel Premack at Freightwaves writes that according to BLS data, “heavy and tractor-trailer truck drivers earned a median annual salary of $49,920 in 2022,” which is hardly enough to sustain a family of four in most parts of the United States — especially considering how long truckers work for that pay. Most truckers put in 14-hour days and even though federal regulations cap them at 60-hour weeks, many truckers admit working even more. The low pay in exchange for long hours has inspired an epidemic of resignations. Premack writes that employee turnover rates “averaged 94% at large truckload carriers from 1995 to 2017.”

In the middle of the 20th century, trucking was considered a solid career for workers with high school diplomas, but wages have stayed flat in the decades since. Overtime pay would make trucking an enviable job again, raising wages for workers and lowering turnover rates. And if trucking companies didn’t want to foot the overtime bill for a culture that normalizes 60-hour workweeks, they could simply hire more workers and distribute the schedules more humanely, thereby making the job more desirable to a larger pool of prospective employees.

All this is why Civic Ventures founder Nick Hanauer is so fond of saying that overtime is the minimum wage for the middle class: It ensures a baseline salary for middle-class workers while also putting the brakes on the endless exploitation of workers’ time and attention that has become the hallmark of salaried work in America.

This Week in Middle Out

• Tony Romm at the Washington Post highlights the work that lobbyist groups are doing to fight President Biden’s campaign against junk fees. “Behind the scenes, these corporations have fought vigorously to thwart even the most basic rules that would require them to be more transparent about hidden charges, according to a Washington Post review of federal lobbying records and hundreds of filings submitted to government agencies,” Romm writes. “The fees together may cost Americans at least $64 billion annually, according to a rough White House estimate, underscoring its efforts to deliver financial relief to families grappling with high prices.”
• Thankfully, the Biden Administration is resisting these efforts. Ed Mierzwinski, the senior director of the Federal Consumer Program for the US Public Interest Research Group, laid out in an editorial for MarketWatch what the Biden Administration has done to combat the creeping problem of junk fees, and what Americans can do to help: The Federal Trade Commission, he writes, “has taken a series of actions against non-bank junk fees, primarily in the travel and entertainment sectors, as well as against unfair online subscription practices. As the FTC develops its rules, it is seeking public comment on these topics: necessary charges for worthless, free, or fake products or services; unavoidable charges imposed on captive consumers, and surprise charges that secretly push up a product’s or service’s purchase price.”
• The Biden Administration won a major victory in their fight to get cryptocurrency under control yesterday “Billionaire Changpeng Zhao and leading cryptocurrency exchange Binance pleaded guilty on Tuesday to federal charges in a watershed moment designed to bring order to the often-lawless crypto industry,” reports CNN. “As part of a coordinated settlement across the federal government, Binance has agreed to pay more than $4 billion in fines and other penalties. Zhao, one of the most powerful figures in crypto, has agreed to step down as CEO from the exchange that he founded.”

Bad Economists Cause Real Problems

For the Guardian, Gene Marks notices that American economists have a terrible track record when it comes to predicting how the economy will actually behave:

In 2021, 16 of the 36 living American Nobel economists declared, incorrectly, that “whatever upward pressure on prices all this new money (ie government stimulus) might bring there was no threat of inflation”. According to a recent report, 70% of economists polled by Bloomberg expected a US recession in 2023 and at the same time another poll from the National Association for Business Economics (NABE), found that 58% of economists believed there was a more than 50% chance of the US entering a recession this year. Never happened. GDP growth rate in the third quarter (4.9%) rivaled some of the strongest post-war periods in American history.

Rather than relying on economists, Marks offers the metrics that he advises American consumers to observe if they actually want to understand how the economy will perform. Unfortunately, a lot of those metrics — including statements from retail and bank CEOs — have their own prejudices that come baked into their pronouncements, and those prejudices can create a deeply skewed understanding of how the economy really works.

The one metric for measuring the economy’s health that Marks and I deeply agree on, though, is the paychecks of American workers. He specifically cites PAYCHEX and ADP data for taking the economy’s temperature. “These are the two largest payroll service providers in the country and every month they release data about employment and wages. Their data is based on actual payroll from actual companies. When wages are growing that’s a sign of strength in the job market,” he writes. Those metrics, he writes, indicate that currently “wage growth is still pretty strong and unemployment remains low, both good signs.”

But while we can protect ourselves from the awful predictions of economists by looking for our own signals in all the noise, the fact remains that bad economists can cause a lot of damage. For the American Prospect, David Dayen explains how Larry Summers’s fear-mongering over inflation has actively harmed our investments into the green economy. “The clean-energy transition has been stunted to varying degrees because the much-needed subsidies for green development came at the same time that financing costs soared” due to the Federal Reserve’s push to raise interest rates, pulling the plug on billions of dollars of potential investments in green energy.

We can make light of economists like Summers for making bad predictions all we want, but the truth is that these bad predictions have dramatic impacts on the real world. We all pay the price when economics is applied poorly.

This Week on the Pitchfork Economics Podcast

If you spend any time in economic discussion groups on social media, you’ve likely seen a lot of discussion about the Sahm Rule — an economic indicator named after former Federal Reserve member Claudia Sahm that predicts economic downturns. Lots of people have tried to use the Sahm Rule to claim that the United States is in the throes of a recession. This week, Paul and Goldy take their questions about the Sahm Rule directly to the source: Claudia Sahm joins the podcast to talk about the methodology behind her rule, what it says about the country’s current economic status, and what lawmakers could do to improve outcomes for working Americans when a recession eventually does hit.

Closing Thoughts

I want to talk for a moment about my home state of Washington’s first-ever capital gains tax, which was finally adopted this year. It’s a 7% tax on annual profits from the sale of stocks and bonds over $250,000 — so if you’re a Washingtonian who pulled in less than a quarter-million dollars in profits from selling Apple stock last year, you won’t pay a penny in taxes.

When the tax was proposed, experts predicted it would raise $250 million annually in revenue for the state. Those predictions were later upgraded to $1 billion over two years — a dramatic increase. But even those estimates proved to be shockingly low: The official tally now indicates that Washington has collected $890 million dollars from 3,765 state residents through the capital gains tax this year alone.

A little back-of-the-envelope math suggests that fewer than four thousand Washingtonians pulled in more than $12 billion in taxable profit from the sale of stocks and bonds last year alone. Until this year, all those billions of dollars were completely untaxed by Washington state. It’s a shocking reminder that our estimates of the wealth held by the super-rich .01 percent are just that — an estimate.

But most importantly, Washington state now has the better part of a billion dollars to invest in its education system. Joseph O’Sullivan explains at Crosscut that “The first $500 million of the tax is directed toward a state fund that pays for K-12 education and child-care programs. The additional dollars are then expected to go into a state account that pays for school construction.”

Now, O’Sullivan explains, Washington could collect $770 million more than initially expected over the next four years. The super-rich few have accrued even more wealth than even the experts could have predicted.

That revenue is now being invested in the future of our economy, and it’s also growing the paychecks of child care workers, teachers, and construction workers who are making that education possible. Those paychecks will circulate through Washington’s economy in the form of increased spending, creating jobs and supporting local businesses. That tax revenue isn’t being pulled out of the economy, as many trickle-downers argue — instead, it’s creating prosperity, and the handful of people who pay the capital gains tax will also benefit from that prosperity. That’s a middle-out happy ending.

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

Zach