Three Percent Inflation

The Pitch: Economic Update for July 13th, 2023

Friends,

The annual inflation rate rose just 3% in June and just .2% percent over May’s inflation rate — the lowest inflation rate we’ve seen in over two years.

“There is a ways to go, especially on major categories such as rent. But encouraging signs were scattered throughout the Bureau of Labor Statistics report,” write Abha Bhattarai and Rachel Siegel at the Washington Post. “Goods prices, from used cars to meats, saw declines compared to the month before. Categories that bulged over the past year, such as airfares and hotels, are also cooling off as demand settles back to normal.”

Perhaps most importantly, wages rose higher than inflation in June, meaning that Americans are seeing their paychecks grow, and that money is going further for the first time since March of 2021.

James Mackintosh at the Wall Street Journal points out that if the United States measured inflation by the same metrics as the European Union, our inflation rate would have hit 3% in May, and would be even lower now. A big factor keeping inflation numbers up using the American system is the price of rents, and the Center for American Progress published a piece explaining why, even though “prices of new rental leases have been falling for more than 12 months…those declines are not yet fully reflected in the rental price index” in our inflation measurements. For what it’s worth, consumers see a light at the end of the inflationary tunnel, with many of them expecting a lower inflation rate in the months and years ahead.

It’s very difficult to find bad news in this economic report, but that didn’t stop some pundits from trying. In response to the news, Michael R. Strain, a senior fellow at the preeminent conservative economic think tank American Enterprise Institute, issued a truly baffling statement on Twitter arguing that “The labor market and consumer demand remain too strong.” Former Mitt Romney advisor Oren Cass rightfully mocked Strain’s statement on Twitter. If your ideal economy has a weak job market and low consumer demand, you need to reinvestigate your economic priorities.

It’s not clear whether the Federal Reserve will consider this remarkable decline in prices to be good enough. As Nick Timiraos at the Wall Street Journal notes, the remaining percentage point between this month’s 3% and the Fed’s (basically arbitrary) 2% inflation target could prove to be stubborn, and the Fed might risk pushing millions of Americans out of work by resuming its series of interest-rate increases in an attempt to push inflation down to that goal.

But if I were the Biden Administration, I would put the vast majority of my policy-making resources into making sure that unemployment stays low and wages keep rising higher than inflation. American paychecks, after all, have stayed stagnant for more than four decades, so there’s a lot of ground to make up. And even though prices are coming down, a lot of Americans are still having trouble making ends meet.

This is the time to bet big on the American worker, encouraging their consumer spending to drive our economic growth to heights that we haven’t seen since the post-WWII recovery.

The Latest Economic News and Updates

How Are Workers Doing?

Our leaders have a lot of runway when it comes to improving conditions for American workers. Two years ago, wages were rising and workers had their pick of higher-paying positions. (In the conclusion of this week’s newsletter, I look at a new study that dissects the reality behind that post-lockdown workforce boom.) Now, many of those gains are slowing down.

For one thing, a growing number of workers are on a part-time schedule, even though they desire full-time employment. “The number of people who worked part time, but want to work full time, rose by 452,000 in June, the biggest jump in more than three years,” writes the Washington Post’s Abha Bhattarai. “In all, 4.2 million people were employed part time for economic reasons beyond their control, a 12 percent increase from the month before.”

And June’s jobs report, which was released last Friday, showed the economy added 209,000 jobs, a number which is down from the historic highs of the last couple of years. (Still, I should mention that these numbers are not final: recent reports for March and April were revised upward by roughly 50,000 jobs after the fact.) Almost every sector saw modest gains, though the total number of retail jobs shrank by 11,000 jobs last month.

But the jobs report did bring with it some record-breaking good news. Labor force participation for Americans in the “prime age” range of 25 to 54 climbed to 83.5% — the highest level since March of 2002. Paul Krugman notes that Americans were faster to go back to work than most other countries, and more Americans are willing to re-enter the workforce than at many other points in our history.

The number of American workers quitting their jobs is still higher than normal, but it’s declining from the record-breaking peaks we saw during the era of “no one wants to work anymore,” when workers were leaving their old jobs for better-paying employers down the street.

These numbers could indicate that the competitive upward pressure workers were putting on employers over the last few years has worked. People are now less likely to leave their job impulsively in the hopes of finding better wages elsewhere. But quits are still above pre-pandemic levels, which indicates that employers should still do everything they can to keep their workers happy, including higher wages and better working conditions.

The Roosevelt Institute has published a great piece that looks at the slowing-but-still-strong jobs numbers and concludes that the economy is on the path to a so-called “soft landing” from inflationary pressures. They advise the Federal Reserve to show some “patience” when it comes to letting prices ease on their own, and not continue the aggressive campaign of interest-rate increases it had been pursuing. At this point, the Fed runs the risk of overcompensating and blowing up the economy for nothing — even pushing us into a state of deflation.

This Week in Middle-Out

The Consumer Finance Protection Bureau has ordered Bank of America to pay its customers $100 million and to pay $150 million in fines because the institution “wrongfully withheld credit card rewards, double-dipped on fees, and opened accounts without consent.”

The laundry list of Bank of America’s wrongdoings makes a bracing case for increased banking regulations. The giant financial institution repeatedly charged multiple $35 fees for overdrafts, refused to pay rewards it had promised, and opened credit card accounts in their customer’s names without permission, thereby putting their credit scores at risk.

Still, this paragraph in the CFPB’s press release gave me pause:

This is not the first enforcement action Bank of America has faced for illegal activity in its consumer business. In 2014, the CFPB ordered Bank of America to pay $727 million in redress to its victims for illegal credit card practices. In May 2022, the CFPB ordered Bank of America to pay a $10 million civil penalty over unlawful garnishments and, later in 2022, the CFPB and OCC fined Bank of America $225 million and required it to pay hundreds of millions of dollars in redress to consumers for botched disbursement of state unemployment benefits at the height of the COVID-19 pandemic.

Given that Bank of America has already paid over a billion dollars in fines for illegal activity in the past and continued to violate regulations with impunity, perhaps the CFPB ought to add one or two zeroes to its current slate of fines?

In better news, the Biden Administration just announced that they would offer relief for out-of-control childcare expenses for 900,000 families. “The US Department of Health and Human Services announced on Tuesday that it has proposed a new rule to reduce the out-of-pocket costs for families who receive federal childcare subsidies while offering financial support to providers who accept those subsidies,” writes Bryce Covert at the Nation. It’s not going to improve the affordability of childcare for every American, but it’s a good start that could inform future childcare policy proposals.

Meanwhile, the FTC’s antitrust case for an injunction against Microsoft’s purchase of video game developer Activision was denied by a California judge. This has not been the best week for FTC head Lina Khan, who today is testifying before a hostile House Judiciary Committee. She’s facing a panel of trickle-downers headed up by Representative Jim Jordan, who has demonstrated in his past actions against Khan’s FTC that he is in the pocket of big corporations who feel challenged by her anti-monopolistic practices.

But politics is a game of ups and downs, and Khan should pivot from the court loss and Jordan’s aggressions by challenging a huge private equity acquisition. PE firm Thoma Bravo recently made a $2.3 billion offer to buy digital identity firm ForgeRock, and if it succeeds it may merge the firm with one or two other digital identity companies in its portfolio, giving it tremendous power over online identity management. Private equity is largely unpopular with the American people, and by directing the FTC to take on Thoma Bravo, Khan would have an opportunity to make a big splash in a public fight against a villain.

In L.A., Hot Labor Summer Continues

On Tuesday, Dominic Patten published a piece on Deadline that outlined major movie and TV studio executives’ strategy for combating the WGA strike that has seen thousands of screenwriters take to the streets of Hollywood.

“The endgame is to allow things to drag on until union members start losing their apartments and losing their houses,” a studio executive told Deadline. Acknowledging the cold-as-ice approach, several other sources reiterated the statement. One insider called it “a cruel but necessary evil.”

Virtually everyone has recognized this as a ghoulish strategy, but very few people have noted that this is essentially a miniature version of the Fed’s trickle-down approach to interest rates — keep going until there’s enough widespread economic pain among workers to achieve your goals.

Screenwriters dismissed the Deadline piece as basically pro-studio propaganda intended to weaken the morale of striking workers and to warn the Screen Actors Guild away from their impending strike vote, but the piece actually inspired a spike of donations to the WGA strike fund, and it has reminded striking workers why they took to the picket lines in the first place.

Rather than intimidate them, it’s quite likely that those anonymous studio executive quotes are the final straw that pushed the 160,000 actors of SAG-AFTRA to join the 11,000 writers of the WGA on the picket lines.

Elsewhere in Los Angeles, hotel workers are now on strike. Their demands are simple, according to Mark Kreidler at the Prospect: “The truth is that the cost of housing in the area has soared so far beyond the reach of most lower wage workers that only aggressive, sustained increases will enable them to live anywhere near where they work.” If workers can’t afford to live where they work, the entire economy is at risk of crumbling.

And UPS executives are still failing to negotiate in good faith with the Teamsters union that represents their drivers. Peter Coy writes at the New York Times: “The world is watching what happens at the UPS-Teamsters negotiating table because a strike would cause real problems. The company says it transports more than 3 percent of global gross domestic product and about 6 percent of U.S. G.D.P. daily.”

Coy focuses solely on the damage the strike would do for the economy without considering the economic damage that low wages and poor working conditions have inflicted upon UPS’s thousands of workers. And he also doesn’t note that earlier this year, UPS’s CEO and board approved to give away $5 billion in profits to wealthy shareholders with no strings attached in the form of stock buybacks — a small portion of which could have been put toward increasing wages and avoided this whole impasse.

The history of labor is as old as humanity, and we can learn to adapt to new changes by looking at how workers responded to changes in the past. For Vox, Oshan Jarow speaks with authors Daron Acemoglu and Simon Johnson about their new book Power and Progress: Our 1000-Year Struggle Over Technology & Prosperity, and they discuss how workers should adjust to advances in artificial intelligence that threaten many white-collar jobs.

Both authors suggest that unions have a major role to play in the adoption of AI and the future of work. But Acemoglu offers a simple policy solution that would encourage businesses to keep on human workers rather than make the switch to automation:

One that I will put on the table is evening out the taxation of labor and capital. Our tax code creates artificial incentives for firms to use capital instead of labor. You can have bipartisan support if it’s presented the right way: not taxing businesses more, but trying to create more opportunities for labor. Corporate income taxes would be one channel. But first, I would start with removing some of the most aggressive depreciation allowances [a tax deduction that allows businesses to recover the annual cost of property or equipment use] which essentially enable firms to write off a lot of their digital and equipment investments.

In other words, our tax code right now actually incentivizes employers to lay workers off and replace them with automated technology. For instance, economic policy incentivizes a supermarket chain to invest in a whole new fleet of self-checkout machines — but it penalizes them for hiring a fleet of workers at a living wage. If we want employers to hire people, we should consider tax codes and policies which reward them for hiring people. That’s not a cure-all solution, but it does seem like a simple and achievable solution to helping the current good employment numbers stay aloft.

Real-Time Economic Analysis

Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.

• On the Pitchfork Economics podcast this week, Nick and Goldy talk with Zeynep Ton about the vast and growing body of evidence that proves higher wages aren’t just good for workers — bigger paychecks also create more prosperity for the employers who sign them. This is a great conversation, and Ton offers some surprising evidence of real progress in her fight for bigger paychecks.

Closing Thoughts

Remember this time last year, when signs posted on fast-food restaurant doors lamented the fact that “no one wants to work anymore?” The economic media called this “the Great Resignation,” and it caused plenty of consternation among trickle-downers who argued that lazy Americans were somehow leaving the workforce and living off government benefits.

But in a new report from NBER, authors David Autor, Arindrajit Dube, and Annie McGrew examined the data and discovered where those workers who seemingly didn’t want to work anymore actually went.

“Following the pandemic, substantial nominal wage growth at the bottom of the distribution reversed approximately one-quarter of the rise in 90–10 wage inequality since 1980 and led to a fall in the college/high school wage premium,” the authors write. So the lowest end of the wage scale, which has been losing income since Ronald Reagan was inaugurated, suddenly made back nearly a quarter of those wages that they lost in the last forty years. Even better, the authors find that “This wage compression was accompanied by a rise in the rate of job-to-job transitions — especially among young non-college workers.”

The answer isn’t that workers decided they didn’t want to work anymore. Those workers simply realized that they could earn a lot more money if they quit and took another job at the business down the street.

“Autor, Dube, and McGrew attribute this entirely unexpected boost to the fortunes of the working poor to the equally unexpected conditions of full employment that followed the economic collapse brought on by the COVID pandemic,” writes Harold Meyerson at the Prospect. “It was only under those conditions that the job-quitters could feel assured that they’d find better-paying work.”

In a way, those people who blamed “government handouts” for the Great Resignation had it half-right. Meyerson notes that the $1.9 trillion pandemic recovery bill that was passed and signed into law by President Biden in late 2021 gave many Americans extra spending power, in the form of cash payments, Child Tax Credit checks, and loans to businesses to keep operating through the worst of the lockdowns.

“And with so much very needed money suddenly traversing the economy, the rate of unemployment dropped quickly to historic lows (it’s currently at 3.6 percent), far faster than in the previous two sluggish recoveries,” Meyerson writes. “As a result, workers in jobs that were unrewarding found a host of offers from employers desperate to staff up. Autor, Dube, and McGrew document that the workers who quit their jobs didn’t just quit; they overwhelmingly found new employment that paid better.”

Many people suspected that this was true — that people were simply refusing to work awful jobs for insultingly low wages. But now the data has confirmed that working Americans were trading bad jobs for better jobs. And in fact, the study has proven that the wages of the bottom-earning quarter of all American workers rose even faster than inflation — the only segment of the economy for whom that was true.

Wages are still higher than they were before the pandemic, but they’re not rising as sharply as they once were. And while the unemployment rate is still hovering near historic lows, the number of jobless Americans is slightly increasing over where it was in the last two years. But this study offers yet another data point — an especially compelling one at that — proving that it’s working Americans, not the wealthy few, who create true economic growth. When we centered the majority of Americans in our recovery plans, the wages of workers at the bottom of the economy recovered roughly a quarter of the wages that they’d lost in the 40 years before, when we prioritized the wealthy 1% over everyone else. It couldn’t be any clearer: Building the economy from the middle out and the bottom up is better for everyone.

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

Zach