The Second Great Compression?

The Pitch: Economic Update for November 16th, 2023

Friends,

The National Bureau of Economic Research has released a groundbreaking new paper (PDF) from economists Arindrajit Dube, Annie McGrew, and David Autor that measures the wage gains working Americans — especially the poorest working Americans — have made over the last three years.

On Twitter, Dube explained that after four decades of super-rich Americans getting richer and everyone else’s paychecks remaining stagnant, wage inequality has dropped significantly over the past three years. And while skyrocketing prices absorbed most of those wage gains in 2022, the last year has seen the paychecks of the bottom 2/3rds of the economy growing faster than inflation.

This isn’t the only time we’ve seen wage inequality dip in the United States. From 1940 to 1950, the so-called “Great Compression” saw income inequality tighten remarkably, setting the stage for the unprecedented growth of the American middle class throughout the middle of the 20th century. This report indicates that from 2021 to 2023, income inequality has dropped about 46% percent as much as it did during the entire Great Compression.

These remarkable wage increases, Dube writes, “reversed 38% of the inequality rise in 1979–2019,” meaning that Americans have recovered 40 cents out of every dollar in their paychecks that they’ve lost during the last four decades of inequality. And how did workers reverse the tide of wage inequality? “Workers left the worst paying jobs to better paying ones, and the market became more competitive,” Dube explains. Remember the Great Resignation? Turns out, that was an astounding tool to raise wages.

Best of all, those bigger paychecks especially benefited the workers who have been left behind the most. Remember in the postscript to the 2016 election, when the media (incorrectly) argued that President Trump won on a wave of support from working-class Americans who graduated high school but didn’t attend college? Those workers have finally started to make progress: “Wage growth has been especially strong among those without a college degree, under 40 years of age,” Dube explains.

Now we have to make sure that we include the usual economic caveats. First and foremost, even though wages are rising higher than prices many Americans are still suffering from high grocery bills and rising rents. And rising wages alone aren’t enough to fix all of America’s economic problems: We still need a robust series of investments in Americans in order to fight poverty and ensure that all Americans have access to food, housing, and other essentials.

But this report helps explain exactly why America’s economy has far outperformed the economies of Europe and other leading nations around the world in terms of economic recovery from the pandemic and the global wave of inflation that followed. It also explains why we didn’t fall into that recession everyone was predicting at this time last year: Working Americans finally saw growing paychecks, and they held the economy up with their spending. This report is one of the most significant developments in understanding the power of a strong labor market as the core of middle-out economics to date, and it offers a roadmap for future economic leadership: When working Americans have enough money to spend in their local economies, everyone does well.

The Latest Economic News and Updates

Inflation Eases in October

On Tuesday, the Bureau of Labor Statistics released the Consumer Price Index numbers for October, and the news was roundly good.

“Prices rose 3.2 percent over the year ending in October,” writes Rachel Siegel at the Washington Post. “That’s down from the 3.7 percent annual figure notched in September and August, but still above the 2 percent considered to be the normal rate. Compared with the prior month, prices in October were flat. The last time that happened was July 2022.”

Economists greeted this positive news with renewed hopes that the economy is approaching a so-called “soft landing,” meaning that inflation can come down without widespread layoffs and a recession. (Of course, some of those same economists also predicted with absolute certainty that we’d be in a recession by now, so remember to treat all predictions with a healthy dose of skepticism.)

Mike Konczal at the Roosevelt Institute dug deeper into the numbers to look at the signals that Federal Reserve Chair Jerome Powell is likely to take into account when considering whether or not to raise the interest rate any further. “Pay particular attention to the 6-month trend, which Powell had emphasized was stuck throughout 2022,” Konczal writes. “At the beginning of this year, the 6-month core CPI reading was 5.3 percent; it’s now 3.2 percent, even as the economy added 1.9 million jobs.”

The inflation rate was cooled by decreased energy costs, but “Housing costs, namely rent, continue to be the largest contributor to overall inflation,” writes Rachel Siegel at the Washington Post. “Rent costs rose 0.5 percent in October over September, the same rate as it’s been since the summer. Policymakers are generally optimistic that rent costs will ease as roughly 1 million multifamily rental units come online later this year and next. Already costs for new leases have cooled off,” she writes. (Again, treat those predictions with extreme caution.)

If, as many economists predict, grocery prices stay flat and the inflation rate continues its downward trend, it seems as though housing costs will be the number one economic complaint of American consumers for the next year or so — especially for young Americans. The Washington Post reports that “This year, the median age for a repeat buyer — someone who has bought a home before — was 58, according to data released Monday by the National Association of Realtors. That’s down just a smidgen from last year’s record of 59, but it’s up significantly from 36 years old in 1981, when NAR began conducting its survey.” Americans are buying homes later in life than they did 40 years ago, effectively cutting young Americans off from one of the primary sources of wealth and economic stability.

It seems clear that economic leaders should focus their attention on investments into housing: Helping Americans pay for housing and directing resources toward making rents and mortgages more affordable to working Americans, in addition to directing resources to bringing as much affordable housing online as possible as quickly as possible. Investment banker Daniel Alpert wrote an op-ed for the New York Times explaining how the Fed could lower mortgage rates without affecting their campaign to keep interest rates high.

Thanks to the Fed’s aggressive interest-rate increases, Alpert writes, “Recently, the average interest cost on a 30-year, fixed-rate mortgage neared 8 percent. Less than two years ago, it was about 3 percent, and most homeowners refinanced then or at earlier lows around 2016.”

“The jump in rates has been so unusually large and came on so unusually fast that many homeowners who may want to move suddenly cannot do so because even downsizing could result in a substantially higher monthly mortgage payment,” Alpert explains. “As a result, the U.S. owner-occupied housing market is now experiencing both a mobility and an inventory crisis.”

So the Fed caused this crisis, but what can they do to help solve it? The process is a little complex, but basically Alpert calls for the Fed to strategically resume its purchasing of mortgage-backed securities in an effort to bring the mortgage rate down. “To get rents down, we must restabilize and reopen the owner-occupied-housing market,” Alpert explains. “If there were more affordable mortgages for those seeking to move, there would be a greater inventory of homes for sale, which would moderate housing prices. This would ultimately flow into the rent prices that have been stubbornly rising and could continue to rise if the housing market remains locked up.”

Retail sales fell .1 percent last month — the first drop since March. Economists believe the dip is largely due to falling car sales, which is itself tied to the high interest rates that the Fed has been pushing, which add considerably to the sticker price of a car. But in a promising sign for consumers, airfare prices are finally dropping from their post-lockdown-era highs, reports Niraj Chokshi at the New York Times. “Early this month, the average price for a domestic flight around Thanksgiving was down about 9 percent from a year ago. And flights around Christmas were about 18 percent cheaper,” he writes.

Probably the worst economic news of the week, in fact, had nothing to do with inflation: Last Friday, Abha Bhattarai reports, Moody’s “offered a sharp rebuke of political dysfunction in the United States, with the credit-rating agency changing its outlook for U.S. sovereign debt to negative from stable and warning that ‘continued political polarization’ in Congress threatens the country’s fiscal strength.”

There’s a bit of a silver lining to this story: It does seem as though House Republicans have temporarily given up on the idea of shutting the government down. But the fact that Republicans are seemingly on the verge of getting into fistfights in the halls of Congress probably won’t allay Moody’s fears about their stewardship of the economy.

Here’s How All Elected Leaders Should Talk About the Economy

Last week, Senator Bob Casey published (PDF) an exceptional Special Report that every American should read. Titled “A Special Report on Greedflation: How Corporations Are Making Record Profits on the Backs of American Families,” the report walks the reader through the role that corporations have played in the price increases American families are paying every day. Senators release reports all the time, but this report stands apart — the language is clear, the facts are well-documented, and it offers solutions that directly address the problem of greedflation.

Casey’s report shows how greedflation affects the daily life of “Anne,” a Pennsylvania mom with two kids. The report lists the various groceries that her family uses over the course of her day — toothpaste in the morning, chicken for dinner, dish soap for cleanup — and tracks the price increases that she paid for the products, which hugely outpace the inflationary price increases caused by pandemic-era supply chain disruptions.

For instance, Casey’s report argues, the price of Clorox Multi-Surface cleaner has increased 16% since 2021. At the same time, “Clorox’s CEO has noted that its products are ‘household essentials that can withstand’ inflation. On an investor call, she discussed how the company is ‘coming off four rounds’ of ‘significant price increases.’ When asked if Clorox might roll back price increases as commodity prices fall, the company admitted it ‘anticipate[s] the pricing increases will stick.’”

And the straightforward graphics in the report make it clear that these increasing prices and rising profits are not two distinct phenomena: They are tied together:

The report concludes:

In total in 2021 and 2022, Anne paid $6,740 more as a result of greedflation. That $6,740 could have gone to new winter coats for her kids, or to enroll her oldest in after- school activities, or even a few family dinners out so that Anne could take a night off from cooking. Instead, it lined the pockets of corporate executives and wealthy shareholders. Corporate profits in 2023 remain well above their pre-pandemic levels. That means Anne will continue paying at least $3,546 for corporate greed this year.

Casey offers a number of simple solutions to help Americans weather the rising prices, while at the same time ensuring that corporate greed doesn’t keep wringing the cash out of their wallets. Readers of The Pitch are familiar with most of the solutions: reviving the Child Tax Credit, changing the corporate tax code, and passing legislations that make corporate price-gouging illegal. They’re simple, straightforward policies that would directly address the problem of rising prices and corporate greed.

Hopefully, Congresspeople and their staff are reading this report and taking copious notes. Economic communication doesn’t have to be complicated, confusing, or full of equivocations. As Casey’s office has shown, you can tell simple and straightforward economic stories that tie directly into people’s lives, and you can be optimistic about providing real solutions to those problems. This should be the gold standard for elected leaders going forward.

Winners at Work

The top labor story of the week, in three words or less: Unions keep winning. In Las Vegas, two unions got the city’s three biggest resorts to buckle before a strike deadline. Warner Bros Discovery CEO David Zaslav just admitted that the screenwriters who struck against big Hollywood studios earlier this year were “right about almost everything.” The United Auto Workers’ union just moved closer to finalizing a deal with General Motors, at the same time that non-union auto manufacturers are giving their workers huge raises in an effort to prevent them from unionizing.

And while the full details of the Screen Actors Guild’s tentative agreement with major studios has yet to be released, On Labor provides some details that show the studios largely gave in when it came to the use of actors’ digital images, which was the most-heated topic of contention between the workers and bosses:

Under the tentative agreement, studios must first gain informed consent from an actor to use their AI-generated “digital replica” in any covered production. In addition, the studio must pay that actor, or their estate, as if that actor was on set doing whatever their digital replica is made to do, according to a specific compensation standard depending on the type of media. Studios cannot simply put boilerplate language in an actor’s contract giving them use of the actor’s digital replica forever. For multi-picture deals, studios can gain consent for multiple uses of an actor’s digital replica, but they have to provide “specific descriptions” of how the replicas will be used. In some unsettling circumstances studios use “synthetic fakes” instead of digital replicas, which are basically AI-generated mish-mashes of different human parts to create human forms for scenes where lots of bodies are needed, like a stadium shot. In those situations, as Crabtree-Ireland described it, if a synthetic fake used Jennifer Aniston’s eyes, then Aniston would still need to give her informed consent and receive (some sort of) compensation.

You’re receiving this email on “Red Cup Day,” the wildly successful promotional event in which Starbucks gives away free reusable red cups to celebrate the launch of their holiday season. Michael Sainato at the Guardian reports that last year’s Red Cup Day was Starbucks’ biggest sales day ever. Sainato explains that Starbucks workers have started to engage in walkouts on Red Cup Day to protest the company’s treatment of unionized workers. He adds, “This year, thousands of Starbucks workers are expected to participate in walkouts at hundreds of Starbucks stores as part of an escalated effort to expand the strikes, including actions at non-unionized Starbucks stores. The union has dubbed the day of action the ‘Red Cup Rebellion.’”

Employers are still struggling to accept the fact that workers simply have more power now than they did four years ago. Though unemployment has slightly climbed over the past year, workers in many fields including retail and hospitality have plenty of options for better wages and working conditions.

To offer a peek at the future of work in America, the New York Times’s Ben Casselman and Jeanna Smialek surveyed the labor market in Vermont, which currently has a super-low 1.9% unemployment rate due to an aging population entering retirement, low immigration rates, and low birth rates. The authors argue that while Vermont is aging faster than tother states, a large swath of the American workforce will soon begin aging out and retiring, which means the rest of the United States will soon have a labor market that resembles Vermont’s:

Long-run labor scarcity will look different from the acute shortages of the pandemic era. Businesses will find ways to adapt, either by paying workers more or by adapting their operations to require fewer of them. Those that can’t adapt will lose ground to those that can. ‘It’s just going to be a new equilibrium,’ said Jacob Vigdor, an economist at the University of Washington, adding that businesses that built their operations on the availability of relatively cheap labor may struggle.

“The winners are the workers,” the authors conclude. Employers who invest in their workers with high wages and good benefits now will likely be ahead of the demographic curve.

This Week in Middle Out

• The enforcement arm of the Securities Exchange Commission reported that this year it “filed 784 enforcement actions in the fiscal year that ran through September, garnering $4.95 billion in penalties and other financial remedies,” which is the second-highest amount of penalties collected from financial institutions by the agency in history. (The record was set last year, when the SEC pulled in $6.4 billion.) The SEC has ramped up its efforts to police America’s financial institutions under President Biden, and these record-breaking hauls are undoubtedly encouraging other banks and crypto exchanges to follow the rules.
• But while the SEC has stepped up its game to catch lawbreakers in the financial space, former federal prosecutor Ankush Khardori argues that the Department of Justice needs to do more to combat financial fraud: “​​The Justice Department has been losing ground in the fight against financial fraud, notwithstanding the laudable pursuit of Mr. Bankman-Fried. The situation hit an undeniable low point during Donald Trump’s administration, when I worked at the Justice Department, but the overall trend has continued under President Biden and Attorney General Merrick Garland. Simply put, we are still not making nearly enough headway, even as Americans continue to suffer enormous financial losses at the hands of financial fraudsters.”
• The Biden Administration announced this week that it was releasing $6 billion in funds to strengthen climate resilience around the country, “including by strengthening America’s aging electric grid infrastructure, reducing flood risk to communities, supporting conservation efforts, and advancing environmental justice.”
• You know the old absurd trickle-down argument that giving people SNAP benefits and other assistance programs will only make them lazier? A new study proves that SNAP recipients are no less likely to find work than anyone else: “Comparing those who received SNAP benefits because of the caseworker they were assigned to those who did not receive it because of the caseworker they were assigned, they see no difference in the likelihood of working following successfully applying for SNAP.”
• Some of artificial intelligence’s best and brightest advocates have admitted that if they actually had to pay for the use of all the words, video, and images they’re training their AI models with, the costs “will either kill or significantly hamper” the development of AI. But if you have to pay for a book or movie, why shouldn’t ChatGPT? You should read this New Republic piece that theorizes simply enforcing copyright laws would slow the development of AI to a more human-friendly pace.
• Here’s a tale as old as time: The Biden Administration is establishing a new rule that would punish companies releasing soot particulates into the atmosphere. As a response, the polluting companies have argued that if they weren’t allowed to pollute, “no room would be left for new economic development.” In other words, as Nick Hanauer wrote in his new book with Donald Cohen and Jane Walsh, Corporate Bullsh*t, the corporations want you to think that regulations will kill jobs and wipe out businesses. It’s not true, and it’s never been true.

This Week on the Pitchfork Economics Podcast

Nobel laureate Angus Deaton joins the podcast this week to discuss America’s unique relationship with income inequality, which he explores in his latest book, Economics in America: An Immigrant Economist Explores the Land of Inequality. Deaton offers a unique perspective on the failings and successes of the economics mainstream, and his eyewitness account of American inequality is deeply moving.

Closing Thoughts

Generations of kids grew up entertained by the Looney Tunes cartoons featuring Wile E. Coyote being continually stymied in his pursuit of the Road Runner. I was one of those kids myself. With so many millions of Americans with kids of their own already bought into the characters, it was surprising to hear last week that Warner Bros Discovery was shelving a new kids’ film starring the comedy duo, Coyote Vs. Acme. Even more surprising was the fact that the movie had already been filmed and animated and was ready for release, complete with glowing reviews from pre-release test screenings.

Why would Warner choose to invest $70 million dollars into the making of a family-friendly movie and then scrap it months before release? Apparently, the studio decided that the $30 million tax write-off they could claim for shelving the movie was worth more than whatever profit they might make from releasing the film to audiences.

When the news broke that they’d axed the movie, fans and movie stars alike responded with a wave of outrage. Hundreds of people had worked for months and years on Coyote Vs. Acme, and now the studio was basically erasing the film in order to get a break on its taxes? The response was so overwhelming that Warner Bros announced they were reversing course and would shop the film to other studios for a potential release.

Why am I writing about a cartoon movie for kids in an economics newsletter? Texas Representative Joaquin Castro deftly explained in a post on social media that “The WBD tactic of scrapping fully made films for tax breaks is predatory and anti-competitive.” He called on the Biden Administration to “revise their antitrust guidelines [and] review this conduct. As someone remarked, it’s like burning down a building for the insurance money.”

Something is wrong with your brand of capitalism when a company decides it makes more financial sense to kill a completed product than to release it to market. It’s the end result of several overlapping failures. As Castro pointed out, this waste wouldn’t happen in a truly competitive market — only a too-big-to-fail entertainment conglomerate could afford to flush all that time and money in exchange for a line item on a balance sheet. And a corporate tax code that rewards businesses for not taking completed products to market is clearly not working in the public’s best interest.

Perhaps most importantly of all, the decision to scrap the film was a sign of contempt for workers. All those animators, artists, and other below-the-line filmmakers would essentially have years’ worth of their work completely erased, harming their future prospects to get work by deleting a huge swath of their resume, thereby costing them untold tens of thousands of dollars of prospective income.

What started as an online kerfuffle over a kids’ cartoon has turned into a larger conversation about capitalism. Nobody can look at this mess and argue that this is exactly how capitalism should operate. Nobody except a handful of executives benefits from an inefficient system that rewards huge companies for not releasing products. It’s a clear sign that we need systemic economic reform — from strengthening the FTC to combat big mergers like the Warner Brothers/Discovery deal that set this folly into motion to changing the corporate tax code to reward makers, not takers.

In short: We love it when movie studios make millions of dollars in exchange for releasing entertaining blockbusters to the American public. But when the government starts subsidizing those moguls for not releasing films, the whole system is in need of reform. That’s all folks.

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

Zach