Two Percent Inflation or Bust?

The Pitch: Economic Update for December 8th, 2022

Friends,

Larry Summers is at it again. President Obama’s former Treasury Secretary has been on a gloom-and-doom media tour for a solid year now, bemoaning runaway inflation and calling for massive unemployment in order to curb high prices. When he’s not ridiculously hedging his bets by offering three equally possible, but completely disparate, inflationary outcomes, many of Summers’ predictions have failed to materialize — or turned out disastrously wrong. For example, Matt Stoller points out that Summers predicted in October that rents would continue to rise, when in reality they have fallen.

But accuracy doesn’t get ratings and clicks — apocalyptic takes do. So Summers has been a perennial guest on 24-hour news networks lately, falsely blaming inflation on workers and cheering on the prospect of millions of Americans losing work. The fear he’s stoking in his media appearances then spreads across social media in economic communities, encouraging decision makers to be more fearful — and therefore conservative — in their actions.

In her excellent Stay-At-Home Macro newsletter, Claudia Sahm takes Summers to task for a recent appearance in which he warned that consumer spending was about to plummet in the manner of Wile E. Coyote running off a cliff: The minute consumers look down and see that they’re running on nothing, Summers argued, the economy will freefall and a recession will broadside the economy.

Sahm makes a convincing case that consumer spending is very solid at the moment. “The bottom half of families have a financial cushion like never before,” she writes. And it’s true: The poorest half of the economy currently possesses $4 trillion in wealth, which is by far the highest number the bottom half has held in American history. But before anyone tries to declare mission accomplished in the war on income inequality, we have to take a moment to acknowledge the fact that the wealthiest .1 percent possesses more than four times the wealth of the bottom half of the economy, and that still represents an unsustainable amount of inequality:

So, no: Nobody is arguing that the economy is perfect, or that everything is running exactly as it should. Inflation is a very real problem, and we could very well enter a recession next year. The thing that grates about Summers is the certainty with which he makes his pronouncements — especially when the record clearly shows that he has anything but a perfect record when it comes to economic predictions.

As we’ve said before, the cardinal rule of economics in 2022 is that nobody knows anything — particularly not the experts. We’ve never shut the world’s economy off and started it again, all while combating a global pandemic. All the models and predictions are based on suppositions about how the world once worked but they simply can’t account for how the world is now.

That’s why we should be wary when a prominent figure from the past goes on a media tour to advance their neoliberal agenda under a thin veil of concern. People like Summers work in favor of the status quo, which enriches the wealthy at the expense of everyone else while simultaneously blaming ordinary Americans as the cause of all our economic problems. We should vow to leave figures like this in the past as we move forward into the new year — no matter what 2023 has in store for us.

The Latest Economic News and Updates

A note to readers: The Pitch this week was published in the middle of a 24-hour strike by New York Times journalists who are calling for management to stop stalling and begin negotiating in good faith with the union. Striking journalists are asking Times readers to boycott the paper, website, and app for 24 hours to show solidarity with workers. This issue of The Pitch was largely written on Wednesday and does contain information from Times pieces that were written and published earlier in the week.

Out of respect for striking workers, I’m not crossing that digital picket line. I have removed all links to the Times from this issue of The Pitch. Tomorrow, once the strike has ended, I’ll reinsert those links into the online edition of this newsletter. Good journalism is hard work, and workers deserve to be compensated for their labor. I support the striking Times workers, and I encourage you to do the same.

Inflation is declining, but how far down do we want it to go?

The Washington Post’s David J. Lynch offers a comprehensive view of why inflation seems to be easing, with the prices of varied leading indicators like chicken wings and used cars on a steady progression downward. Prices of goods are almost all pointing in the right direction now that supply chain problems have generally been ironed out.

But another factor of high prices could be slower to decline. “Rising demand and limited supply — think short-staffed restaurants — has services inflation running at an annual 6.7 percent rate, more than twice the year-ago figure,” Lynch writes. So we could continue to pay higher prices for massages, fancy coffee drinks, in-restaurant dining, and other experiences through the beginning of the new year.

And housing costs, which are one of the leading indicators for inflation, are starting to decline. Gwynn Guilford at the Wall Street Journal says that the Zillow Observed Rent Index, which tracks rent prices in real time, grew by just .3 percent last month — a significant decline from the last two years of skyrocketing rents. Several experts Guilford interviewed for the piece claim that if rents stay on track, inflation will be down to 2% by 2024.

Paul Krugman sees similar signs that rent is declining from another source, Apartment List, which serves as a “rent concierge” for apartment-seekers around the country.

But Krugman takes issue with the idea that we should be aiming for 2% inflation. “As it happens, a number of economists, myself included, have long argued that the 2 percent target is too low,” he writes. “This isn’t a radical position; many of the advocates of a 3 or even 4 percent target are as mainstream as they get.”

Inflation, Krugman explains, serves as a “lubricant” for the economy, and he believes that an economy with 2% inflation isn’t dynamic enough to support strong economic growth. Because the Fed tends to raise interest rates when inflation is too low, interest rates tend to be at their lowest under an inflation rate of 3 to 4%, making it less difficult to invest in the economy than times when inflation is so low that it’s not a concern. “The financial crisis [of 2008] would have been easier to deal with if we’d come into it with 4 percent inflation, the rate during Ronald Reagan’s second term,” Krugman says.

But that’s a policy debate to have at a later date. For now, we should just keep our eye on inflation rates to make sure things keep moving in the right direction, and directing our efforts to passing policies that benefit the majority of working Americans who have been struggling with higher prices over the last year.

Digging into the jobs numbers

Last Friday, we learned that the economy added 263,000 jobs in October, another sign that the labor market is booming. Even better, wages increased by .6 percent last month, meaning that American paychecks are 5.1% higher than this time last year. This bump in wages is higher than experts predicted, but American paychecks are still losing ground to inflationary price increases.

Plenty of outlets framed this strong jobs report as bad news for the economy, using the typical “up is down, down is up” economic framing we’ve seen over the last year. But that’s just bunk, of course. More jobs and higher wages are great news for the economy because it means more Americans have more money to spend in their communities.

The only true downside to this jobs report is that it might send the Federal Reserve into a panic and cause them to raise interest rates again. Abha Bhattarai writes at the Washington Post: “Economists say they are encouraged by the labor market’s durability, but they worry that continued momentum — and rising wages, in particular — will force the Fed to more aggressively raise interest rates in its quest to slow the economy for longer, increasing the risk of a recession.”

Hopefully, the Fed will recognize that inflation is already heading in the right direction so there’s no need to raise rates and imperil the jobs of millions of Americans for nothing. They’ll announce the last rate change of the year next week.

The jobs data is not entirely happy, though: Economists at the Economic Policy Institute are sounding a warning that the household jobs survey–which polls ordinary Americans about their employment status, as opposed to the employer survey which informs the monthly jobs report — shows that 136,000 Americans lost their jobs last month, which is the third straight month of reported job losses for that particular poll.

EPI President Heidi Shierholz helps to put that disturbing number in context: “when the surveys tell two different stories, the rule of thumb is to put much more weight on the [employer] survey, since it has a bigger sample size. But when there is a different story three months in a row, we should start paying real attention,” she warns, adding that “it’s possible that the household survey is picking up a downturn that is not yet showing up in the [employer] survey.”

It’s also important to recognize, though, that the employment market is very lumpy right now. Tech and media employers are laying workers off after a series of bad quarterly reports, for instance, but restaurants and other service industries can’t seem to hire employees fast enough to meet consumer demand. And public sector employers at the state and local level still have a long way to go to catch up to pre-pandemic employment levels.

So it’s possible that the household survey, which is smaller, is catching some of those small whirlpools of employment weirdness that the larger employer survey is putting into a broader context. As Shierholz writes, “Only time will tell.”

Who’s working and who’s not

“About 89.7 percent of men ages 35 to 44 were working or looking for work as of November, down from 90.9 percent before the pandemic,” write Jeanna Smialek, Lydia DePillis and Ben Casselman at the New York Times. And that’s already a drop from the male labor participation rate of 92.5 in 2001, meaning that millions of middle-aged men have dropped out of the labor force since the pandemic began, and tens of millions of middle-aged men have left the labor force in the 21st century.

Middle-aged men without a college degree, in particular, have not re-entered the labor market over the last year in comparison to other groups. While in the early days of the pandemic women fell out of the labor market in alarming numbers, now male labor force participation is falling far behind their female counterparts. The authors write:

Some economists speculate that the disproportionate decline could be because the age group has been buffeted by repeated crises, making their labor market footing fragile. They lost work early in their careers in 2008, faced a slow recovery after and found their jobs at risk again amid 2020 layoffs and an ongoing shift toward automation.

If this theory is true, it’s not a new story — non-college male workers have been falling behind for decades. Their economic plight was exploited as rocket fuel for Trumpism in 2016. And now, the problem keeps getting worse.

And for those workers who have been in one of the industries rocked by layoffs, Emily Stewart at Vox reports, the unemployment system is just as badly broken as it was in the years before the pandemic. Michele Evermore, a senior fellow at the Century Foundation and one of the leading thinkers on unemployment in the US, characterizes the cynicism surrounding unemployment reform as an ongoing cycle: “At the very start of it, people are pretty sympathetic to people who suddenly became unemployed, so we temporarily add benefits and add temporary fixes,” and “By the end of it, it’s all the unemployed people’s fault, they just don’t want to work, we’ve got to take away their unemployment benefits.”

The kind of hardened, seen-it-all attitude that Evermore is characterizing above has never once solved a problem. Several senators have proposed ideas that would reform unemployment from the top down and bring it more in line with the generous unemployment insurance programs that we established in the heart of the pandemic.

After all, those policies worked — they kept workers housed and spending money in their local communities during the pandemic, and made it possible for tens of millions of workers to rejoin a bustling workforce as soon as it was safe to do so. We have a wide-scale example of a policy that encourages economic growth and reduces personal misery. Now all we have to do is communicate how those policies will benefit the majority of Americans, perhaps by making it a part of the Democrats’ 2024 middle-out economic platform.

Who’s not getting paid

In addition to striking New York Times workers, this week has seen several important developments on the labor front:

• Some 300 quality-assurance testers at Microsoft’s video game studios will vote on whether or not to unionize — the largest such vote in the video game industry to date.
• And adjuncts at the New School in New York have gone on strike for higher wages.

These are both labor actions in fields that ordinary Americans assume offer good-paying jobs and benefits, but workers tell a very different story that upends public perception. Some part-time professors at the New School — highly educated young people, mind you — have had to go on food stamps and other financial assistance programs in order to make ends meet. And game testers report that they work long hours and weekends in exchange for wages that are far below their peers in the tech industry.

And some workers aren’t even getting paid for their labor at all. Trevor Noah at the Daily Show did a great piece this week on wage theft:

As Heidi Shierholz tweeted, an Economic Policy Institute study of data from the FBI shows that American workers are robbed of more than $15 billion per year in wage theft. That’s a higher price tag than all the “car thefts, burglaries, and other larcenies” committed in the United States this year combined.

Though American workers saw a more than 5% increase in paychecks this year, the fact is that wages have a long way to go before they reach parity with productivity, as it was in the 1970s. The idea that workers should be paid enough money to afford living in the same city where they work isn’t a controversial one, but that’s not the lived experience of young workers across the economy.

After 40 years of trickle-down economics, some basic fundamentals of the economy seem to be under attack — including uncontroversial concepts like “workers should be compensated for the time they work, and they should be paid enough so that they don’t have to be subsidized by the government to survive.” All these labor actions and public shaming of bad employers represents the edge of a movement that builds on the Fight for $15 to raise wages for workers across industries. Take a look at the headlines across 2022 and it couldn’t be clearer that American workers need a raise, and they’re done asking politely.

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 Civic Action Live this week, we’ll be discussing why the media should stop giving so much attention to Larry Summers, the deeper meaning behind the latest inflation and employment numbers, and how the midterms were really won. Join us at 10:30 am PST tomorrow.
• On the Pitchfork Economics podcast, Nick and Goldy talk with NYU professor, popular podcaster, and economic bomb-thrower Scott Galloway. This conversation, about Galloway’s new book Adrift: America in 100 Charts, gets at the heart of why inequality is the biggest problem facing America today. And while Galloway has slightly different ideas about how to fix rampant inequality than Nick does, the two manage to find a lot of common ground.

Closing Thoughts

This week the midterm elections finally came to a close with Georgia Democrat Raphael Warnock’s reelection to the Senate, giving Democrats a 51–49 majority and marking the first time in almost a century that the incumbent president held every single Senate seat in the midterm elections.

In the final days of the Warnock-Walker runoff election, pundits argued that the contest came down to a matter of character. They said Walker’s unseemly comments and behavior inspired many middle-of-the-road voters to hold their noses and vote for Warnock despite the high inflationary prices they were paying at grocery stores.

That’s not just bad analysis — it’s out and out wrong. Post-election reports found that Democrats ran 200,000 more ads on pocketbook issues than Republicans, and those ads were instrumental in Democrats outperforming expectations. The linked report found that even as Democrats talked repeatedly about economic issues, “Republicans barely mentioned pocketbook issues like jobs, health care, social security and prescription drugs.”

Let’s look back to Reverend Warnock’s very first ad of the 2022 election cycle, a straight-to-camera mission statement that was all about the economy. Here’s the transcript:

People are hurting. People are tired. People have seen what they’ve worked their entire lives to build turned upside down at a moment’s notice. They’re wondering when things will get back to normal and at the same time not knowing what normal even means anymore. At my heart I am, and will always be, a pastor. That means going to work for my congregation. It means understanding the challenges you face, and then doing my best to make a difference. Every day I carry your concerns with me. That’s why I’ve worked so hard to protect and create jobs. That’s why I know we must make healthcare more affordable. That’s why I’m cracking down on the corporations who are raising prices out of control. What I want the people of Georgia to know is that I see you, I hear you, I am you. I understand the work I was sent to the Senate to do and that’s what I intend to keep doing for Georgia. I’m Raphael Warnock and I approve this message.

At the very heart of Warnock’s opening statement was a clear and cogent economic theory of the case, an argument for middle-out economics and an acknowledgement of the true source of inflationary high prices. Democrats made this case repeatedly in campaigns that pundits have since chalked up to candidate-quality issues.

For instance, Senator-Elect John Fetterman, in his victory speech, announced that his campaign was for “every small town or person that feels like they’ve been left behind, for every job that’s been lost, for every factory that’s ever closed, for every person that works hard but never got ahead,” and he specifically cited a higher minimum wage, unions, affordable health care and “standing up to corporate greed” as the solution to those problems. This is a strong middle-out campaign statement, but I’ve already heard pundits blame the loss entirely on Dr. Oz’s inept campaign, as though Fetterman would have lost against a generic Republican promising tax cuts for the rich like normal. I don’t believe that for one second.

Don’t let anyone memory-hole the significant middle-out messaging that all these candidates employed as they made their cases to voters. It’s easy to see their victories as inevitable in hindsight, but the truth is that they worked hard to make a case for improving outcomes for ordinary Americans and fixing the systems of corporate greed that got us into this inflationary mess. This is how you win an election.

Be kind. Be brave. Get vaccinated — and don’t forget your booster.

Zach