Trickle-Down’s Lost Decade

The Pitch: Economic Update for August 3rd, 2023

Friends,

In this week’s column by Paul Krugman at the New York Times, Krugman introduces a longstanding economic conversation into the mainstream: The fact that America’s economic recovery from the Great Recession took unnecessarily long and it left too many Americans behind. “The U.S. economy remained significantly depressed for many years — indeed, a decade or so, after the financial crisis,” Krugman writes, “and this lost decade could have been avoided with the right policies.”

Specifically, Krugman argues, rather than cutting investments into the American people, our leaders should have invested more stimulus funds to help the American people weather the impacts of the Great Recession — a lot more. Krugman calls the ten years following the Great Recession a “lost decade,” and that characterization is appropriate.

Krugman illustrates his case for a “lost decade” with a number of charts, but none tell the story as clearly as this illustration of how long it took the economy to recover from the job losses of the Great Recession:

You can see that in terms of the percentage of employed Americans, we had only just recovered to pre-Great Recession numbers around the start of the pandemic — and by contrast we bounced back from the pandemic recession remarkably quickly.

The difference in responses is clear: After the Great Recession, President Obama was squeezed from the right by Tea Party Republicans (and by the neoliberal Democrats who made up his economic team) to slash budgets and cut funding for programs that benefit working Americans. But throughout the pandemic, Congress and President Biden continued to invest in working Americans, and that broad-based increase in consumer spending held the economy aloft.

Within the context of that chart, we can see the two dominant economic philosophies in America at work: The Great Recession’s recovery was undercut for a decade by trickle-down economics, which pumped money to the big financial institutions and CEOs who caused the economic collapse in the first place, and ordinary Americans were left behind. The pandemic recovery was supercharged by middle-out economics, which is focused around growing the paychecks of ordinary Americans.

In economic terms, Krugman calculates how much our trickle-down response from the Great Recession cost the economy:

So how much did this lost decade cost? I’ve argued that we could and should have returned to full employment by the middle of 2011. If we sum up the gap between actual and potential G.D.P. between then and the end of 2019, it comes to $3.5 trillion in 2012 dollars, or $4.5 trillion in today’s prices. That’s an immense waste of human and economic potential — but it happened quietly, so that hardly anyone noticed.

I have to take issue with the conclusion of that paragraph — Krugman’s assertion that “hardly anyone noticed” all that lost economic potential. While it’s true that mainstream economists and politicians seemed to have not noticed that $4.5 trillion should have been circulating through the economy, the American people felt it in the form of smaller paychecks and longer periods of unemployment. They saw the prices rising much faster than their wages, and they saw their future tossed into what felt like permanent uncertainty. And over the last ten years, politicians on the extreme right were able to take advantage of that widespread economic unrest and use it for their own gain — the consequences of which we’re still living with today.

These policy choices have effects that touch every single American, and that’s why it’s so crucial that we remember the economic lessons of these two crises and their aftermaths.

The Latest Economic News and Updates

New Economic Metric Just Dropped

It’s not every day that a new way to measure the economy is launched into the world, but earlier this week, the Upjohn Institute for Employment Research did just that. Specifically, Upjohn announced the “Interactive Labor Leverage Ratio,” which they say “measures worker versus employer bargaining power by indicating the number of quits initiated by workers per employer-initiated layoff or discharge.”

The LLR takes two pieces of existing data — quits and layoffs — and combines them into something new, in order to get a clearer picture of what the labor force is really like for workers right now. Low unemployment feels like a strong economic metric, for instance, but what good is that for workers if they are unable to use the strong labor market to leverage bigger paychecks for themselves — either by negotiating with their employers or by taking a higher-paying job elsewhere?

The inaugural Labor Leverage Ratio shows that worker power is still relatively high when compared to the last few decades, but it is declining from pandemic highs:

And when you break out the numbers by industry, you can see that workers in two of the fields most impacted by the pandemic — hospitality and healthcare — are near the height of their powers.

Time will tell if the LLR becomes as important a monthly metric as the other labor reports that the experts pore over every month. And perhaps some tweaking of the formula would make the LLR even more informative. (I would like to see wage growth overlaid with these other measurements, for instance.)

But directionally, it’s heartening to see economic institutions like Upjohn focus on measuring the economy through worker experience, rather than extrapolating the health of the economy by measuring just its tippy-top using metrics like corporate profits.

The Media Celebrates the American Economy’s Strength

“The U.S. economy is now pulling off what all these experts said was impossible: strong growth and record employment amidst plummeting inflation,” write Jeffery Sonnenfeld and Steven Tian at Fortune. “And just as importantly, thanks to Bidenomics, the fruits of economic prosperity are inclusive and broad-based, amidst a renaissance in American manufacturing, investment, and productivity.”

“The credit for this stunning economic recovery surely does not belong to the Fed,” they write. Instead, the economic growth we’ve seen has happened in spite of the Federal Reserve’s consistent increases of the interest rate in an effort to cool the economy down and lay off millions of workers. The Fortune authors add, “Bidenomics is proving to be the most impactful and transformative public investment program since FDR’s New Deal, with even Morgan Stanley acknowledging that economists broadly underestimated the positive effect of Bidenomics.”

Aside from a few Wall Street holdouts, most experts are becoming more optimistic in their economic outlook. The American economy is doing so well that Bank of America had to publicly retract its previous prediction that a recession was imminent. In fact, one of the last stubbornly high prices to emerge from the pandemic — rents — are finally starting to cool, according to the Washington Post, which offers a pretty neat tool allowing you to see how rents have moved in every county in the United States. “Rent growth around the country is back at pre-pandemic norms — growing about 1 to 3 percent per year,” the Post writes. “In some recent hot spots, including Austin and Atlanta, prices are actually falling.”

It’s worth noting that new apartment construction is right now higher than at almost any point in our lifetimes. As it comes online, the new supply could bring increased market power for renters — but only if a good chunk of those new units are priced at affordable levels for working families.

Even though the media is finally taking notice of America’s economic strength, it’s important to keep an eye on the problem areas. Specifically, gas prices are creeping back up again, spiking by 15% last week alone. Axios notes that gas prices rise every time there’s a heat wave, and Americans traditionally measure the economy’s health by the price of gas. So if gas prices happen to skyrocket as high as they did last year, you can instantly expect to see more headlines trumpeting widespread economic woe.

Bidenomics Is Working

“A surge in government funding and related private investment is beginning to make its way to businesses and communities across the country,” writes Abha Bhattarai at the Washington Post. These investments are “building electric vehicles, new bridges, airport upgrades and a host of other infrastructure and green energy projects that are juicing the economy — just when it needs it most.”

The Post notes that the $299 billion that the government has put into infrastructure and the green economy has spurred the addition of $503 billion in private-sector investment. (This fact proves that the Congressional Budget Office’s formula for measuring economic impacts of legislation, which dictates that every dollar in federal funds spent on a project crowds out a similar amount of private investment, is totally wrong.)

Harold Meyerson at the American Prospect says that these big investments in the economy are helping to refute the old conservative canard that government moves too slowly to get anything done: “The Infrastructure Act, the CHIPS Act, and the Inflation Reduction Act have spurred the economy, which grew by 2.4 percent in the last quarter, well beyond anything the private sector could have accomplished by itself, and in less time than establishment economists thought possible. “

In fact, the only thing potentially holding back the manufacturing industry from a Biden Boom is a tight job market. “The Semiconductor Industry Association warned last week that there aren’t enough workers to meet the demand spurred by the CHIPS Act,” writes Axios’s Emily Peck.

There’s only one surefire way to attract worker attention in a tight labor force like this: Raise your wages. The Center for American Progress explains that government has the power to encourage higher wages and better working conditions by “encouraging more recipients of public funding to adopt project labor agreements (PLAs) and community workforce agreements (CWAs),” which they explain “are pre-hire collective bargaining agreements negotiated by project owners and workers that govern wages, benefits, and other work conditions.”

Along with PLAs and CWAs, the Biden Administration could make a huge difference in the lives of American families by bringing back the Child Tax Credit, which delivered checks to American families during the pandemic. A report from the Washington Center for Equitable Growth finds that most of those checks went to paying off monthly bills, and they caused a net decrease in child poverty of 17 percent.

One area in which the Biden Administration is falling behind, however, is in cryptocurrency. The Treasury Department has delayed the implementation of regulations for cryptocurrency for over two years, and it will likely be another year before those rules are in place. “Closing a gap that can make it easier for cryptocurrency investors to dodge taxes was projected to raise $28 billion over a decade, but declining cryptocurrency prices might have altered that figure,” writes the Wall Street Journal. Now Democratic senators including Elizabeth Warren are calling on the Biden Administration to pick up the pace.

Working in Bidenomics

“Employers added 324,000 jobs in July, with the service sector of the economy leading the way, private payroll firm ADP said on Wednesday,” writes Tim Smart at US News & World Report. “The leisure and hospitality industry posted the largest increase, with an increase of 201,000 jobs while manufacturing was the laggard, losing 36,000 jobs. Gains were broadly spread across small and mid-sized businesses while larger firms recorded the bulk of the job losses.” (Sectoral ups and downs are standard in monthly job reports, which is to say that those lost manufacturing jobs are likely to rebound as American manufacturing growth increases over the next three years.)

Things are still strong enough in the job market — remember the LLR rating from earlier in this newsletter — that truck drivers, who are currently facing slumps in workloads and pay, are leaving the industry in droves for better-paying, more secure lines of work. David J. Lynch reports for the Washington Post that the trucking industry is coming down from a pandemic-era sugar high, which saw thousands of drivers hired to meet the challenges of the healing supply chain. “As soon as Monday, Yellow Corp., the nation’s third-largest trucking company, is expected to file for bankruptcy in the industry’s largest failure to date, a development that would idle 30,000 workers,” Lynch writes.

The competitive job market is also making it harder to fill public-sector positions, notes Lydia DiPillis at the New York Times. “While private-sector employment fully regained its prepandemic level a year ago — and now sits 3 percent above it — state and local governments remain about 1 percent below the 20 million people they had on staff in February 2020,” she writes.

It’s often hard to get the attention of qualified workers who have never before considered working in the public sector, even if the pay is comparable to or even higher than private-sector wages. That’s why labor unions are stepping in to help with the job search:

…the American Federation of State, County and Municipal Employees, known as AFSCME, decided it needed to pitch in on a function usually reserved for human resources departments: getting people in the door. The union has started a national campaign to generate buzz around frontline positions, while locals are contacting community organizations and even families of union members to spotlight opportunities.

Meanwhile, states around the country are improving the working conditions and pay of workers who have been stripped of protections over the last few decades. Illinois lawmakers passed a suite of protections for temp workers, including better training and safety regulations, better pay for temps who stay in their roles for more than three months, and the right to refuse work that would result in strikebreaking.

At Vox, Rani Molla explains all the different factors that are at root in the resurgence of labor unions and activism that we’ve seen over the past two years.

Rising wages haven’t kept up with inflation, which means that working people don’t have the same spending power they once did, making workers’ situations more tense. At the same time, companies have raked in record profits, which is not sitting well with their employees.

Meanwhile, unemployment rates have stayed at or near-record lows, emboldening employees to strike since they have other options. The pandemic also made many realize what was important in life, pushing them to “work to live” rather than “live to work.” Indeed, many of the same factors that fed the Great Resignation are fueling the strikes.

Regular readers of The Pitch know all this, of course, but Molla’s article provides an excellent overview of the current situation in labor. It’s worth forwarding this one to friends and family who might be asking questions about the strikes in Hollywood, or commenting on all the help wanted signs they’re seeing around town. As one of the tenets of middle-out economics makes clear: We all do better when we all do better.

This Week on the Pitchfork Economics Podcast

Industrial Policy is the hot topic in and around the Beltway in Washington DC, and though the phrase might sound opaque and possibly a little bland, it’s actually a crucial factor in America’s economic future. Development economist Isabel Estevez joins Goldy and Nick to argue that Industrial Policy should be more than just a discussion about building factories and managing international trade — it should incorporate net benefits for all Americans like cleaning drinking water and reducing child poverty.

Closing Thoughts

Former Obama economic chief Larry Summers has been aggressively defending his title of The High Priest of Trickle-Down Economics this year. He started 2023 by demanding that the Fed keep raising interest rates with the end result of putting millions of Americans out of work. When inflation started to cool down without the massive job losses that Summers said were necessary, he pivoted to concern-trolling about the national debt, falsely arguing that cuts to Social Security and Medicare are necessary.

And last month, Summers complained about the Federal Trade Commission’s plan to team up with the Department of Justice to combat corporate monopolies on Bloomberg Television. He went so far as to say the plans to end giant mergers and foster competition in the marketplace “seems almost like a war on business.”

“These guidelines — by moving away from an emphasis on lower prices for consumers to broader abstractions — are a substantial risk,” Summers said. Like virtually everything Summers declares in public, this quote is built on a false assumption — in this case, the idea that monopolies and giant corporate mergers lower prices for consumers.

Multiple studies have shown that monopolization and the erosion of competition in the marketplace drives prices up. By making it harder for one giant corporation to buy another giant corporation, the FTC and DOJ will actually lower prices for consumers. In fact, by arguing on behalf of corporate monopoly power, Summers is instead arguing for bigger paychecks for CEOs and corporate boards, as well as lower wages and fewer jobs for the vast majority of Americans.

None of this is new for Summers, of course — scratch any of his policy proposals and you’ll find a trickle-down payday for CEOs and the super-rich lying just underneath. But this baldly pro-monopoly turn feels like a bit much, even for him.

Trickle-downers used to argue that allowing businesses to swallow each other up was good for competition, and that the free market would bring prices down. Those days are pretty much over. Now that every American has interacted directly with monopoly power — consider those millions of Taylor Swift fans who revolted when Ticketmaster failed to do its job. The line right now couldn’t be clearer: If you’re pro-monopoly, you are against the American people.

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

Zach