Undercutting the Economy to Cut Inflation?

The Pitch: Economic Update for March 17th, 2022

(The Pitch is a weekly economics newsletter written by Zach Silk. Follow here on Medium or sign up for free on Substack to receive a new issue in your inbox every Thursday.)

Friends,

Yesterday, the Federal Reserve finally issued a long-awaited announcement: Because “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressure,” a press release explained, the Fed was raising interest rates by a quarter of a percentage point, with six additional interest-rate hikes coming this year. This first rate increase is a modest one, to be sure, but future increases will likely have an effect on everyday Americans: You can expect credit-card interest to rise, as well as car loan and student loan rates through private lenders. Mortgage rates are a little more complicated, but those will likely follow suit in the days ahead.

The Fed still predicts high inflation to continue, though given the uncertainty in the world right now I wouldn’t bet a large sum of money on the accuracy of their prediction of 4.3 percent inflation for the rest of the year. It’s important for everyone to understand that by making money more expensive for big financial institutions and anyone seeking a loan, the Fed is actively working to slow the economy down — and that means more economic hardship for ordinary Americans. If the interest hikes work as expected, the unemployment rate will rise and people will have less money to spend.

One thing the Fed only hinted at with its gesture toward “broader price pressure” is that much of America’s inflation woes don’t have to do with supply-chain issues at all: It’s a matter of corporate greed and price-gouging, with CEOs and executives hiking up prices to pad their record-high profit margins. At the same time that the Fed was preparing to announce their rate hikes, President Biden tweeted that crude oil prices are dropping by the barrel, but oil companies are still keeping prices high at the pump, meaning that they’re “padding their profits at the expense of hardworking Americans.” None of the Fed’s actions address this corporate greed, and there’s no sign that corporations are preparing to curb their artificial price hikes without some sort of government intervention. Thankfully, as we’ll see later in this newsletter, some smart folks are already coming up with bold ideas to rein in the corporate greed that’s exacerbating our inflationary problems, and there will no doubt be more policy proposals in the days and weeks ahead.

The Latest Economic News and Updates

What we can learn from the American Rescue Plan

This month marks one year since Congress passed President Biden’s American Rescue Plan, which invested nearly two trillion dollars into an American economy rocked by Covid. The Center for American Progress looked into the American Rescue Plan’s many successes, which include increasing the spending power of ordinary Americans and dramatically reducing poverty. I don’t know which is more remarkable: The fact that we reduced child poverty by nearly 40 percent last year, or the fact that Congress hasn’t acted to make universal investments like the Child Tax Credit which made that reduction possible a permanent policy:

Another important finding from this analysis of ARP investments: CAP finds that Americans had more disposable income last year than even in the year before the pandemic, and that spending is likely what drove our fastest-in-the-world economic recovery from Covid.

So one year later, what have we learned about government spending and investments in Americans? Alix Gould-Werth argues in the Democracy Journal that a new ideological line is developing surrounding government spending: Progressive leaders and economists are perfectly willing to argue for the decrease of market control and the increase of state involvement in care economy sectors like childcare. For too long, Gould-Werth argues, both Democratic and Republican leaders were captured by neoliberal thinking that the free market provided solutions more efficiently and cheaply than any government program ever could.

Now, for the first time since the Reagan era, a real discussion between two clear and distinct perspectives is brewing: “The left is no longer playing defense, seeking simply to insulate public investment from privatization. Instead, it is reexamining the care services so often constructed as belonging in the private domain — to be provided and purchased by families without public support or somehow done without — and delivering legislation signaling that investments in one person’s child or parent or family member with a disability serve all of society.”

In the same issue of Democracy, Roosevelt Institute CEO Felicia Wong offers three important steps that progressives need to take in order to complete this paradigm shift into an economic thinking built on middle-out ideals. Those policies include rejecting the race-blind policies of the past and instead purposefully building inclusive structures, investing directly in people rather than using vouchers or reimbursements or other indirect supports, and embracing democracy fully by including as many people as humanly possible in movements.

To boost economic recovery, pay government workers more

As the Economic Policy Institute notes, the Biden Administration is directing states and local governments to spend remaining federal ARP funds in a way that benefits ordinary Americans, with a special emphasis on equity and inclusion. They argue that the best way for state and local governments to do that would be to pay government workers more: “we estimate that 5.5 million state and local government employees are paid less than $20 an hour, accounting for about a third (32.7%) of the sector. About 2.6 million of them, or 15.6% of the sector, are paid less than $15 an hour.”

Giving those millions of underpaid government workers a raise would dramatically impact fields that traditionally employ a disproportionate number of women and workers of color, including childcare and education and manual labor positions in transportation and maintenance. When those workers earn more, they would spend that money, growing the local economy for everyone.

One way to deal with price-gouging: Tax corporate profits

David Dayen at The American Prospect spotlights a proposal to combat inflation and slightly reverse the flow of America’s yawning income inequality at the same time through a bold measure: A windfall profits tax on oil companies. By taxing the profits of oil companies and then returning those funds directly to Americans who earn less than $75,000 singly or $150,000 per household, the bill’s sponsors hope to deliver annual checks of $240 to $360 to ordinary Americans.

That doesn’t sound like a lot, but Dayen notes that “this rebate, which would go up or down depending on the price of oil, is essentially a shock absorber for inflation. When inflation is high, people would get a bigger rebate. When it recedes, the rebate would phase out.”

Is this likely to pass anytime soon? Probably not. But it’s good to see the sponsors of this bill, Rhode Island Senator Sheldon Whitehouse and California Representative Ro Khanna, proposing policy solutions that aim directly at the true cause of runaway inflation — corporate price-gouging. If our leaders don’t act somehow to protect the American people from corporate greed, we’re simply relying on the humanity of CEOs to put an end to this crisis.

It’s a workers’ market — but employers still have too much power

The labor market is still remarkably tight, with 4.3 million Americans quitting or switching jobs in January, a condition which Zip Recruiter’s chief economist described to the Washington Post as “by many measures, the tightest labor market ever,” and adding that “Employers are having to play tug-of-war to get half an employee.” Unemployment is low, and job openings are plentiful:

Workers are using their power to find new employment with higher wages — though the average wage increase is still not enough to outpace inflation — and also to organize their workplaces in union drives. Unions see this moment as an opportunity to expand the playing field for unions to traditionally hostile employers like Whole Foods and McDonald’s. But they’re trying to expand in an environment that 40 years of trickle-down legislation has made toxic for labor organizations.

This month, the Supreme Court is hearing a case that could overturn the onerous practice of “forced arbitration,” a practice that Vox’s Ian Millhiser explains “allows an employer to order its workers to sign away their right to sue the company, or lose their jobs. Instead, any disputes must be resolved in a private arbitration process that gives extraordinary advantages to corporate parties over individuals.”

It’s probably a fool’s errand to expect the Supreme Court in its current configuration to come out strongly in favor of workers and in opposition to corporations. But the Court doesn’t hear arguments in a vacuum — this case is elevating the fact that American workers have startlingly few rights, and spotlighting the importance of organizing together to confront that balance of power.

Most Americans have lost housing wealth over the last decade

Also in The Prospect, Robert Kuttner explains that the high housing and rent prices that Americans are facing right now are the result of a long-brewing crisis that is largely separate from the current inflation crisis. We’ve seen a rapid decline in housing wealth over the last decade, Kuttner argues:

The share of housing wealth held by middle-income households fell from 43.8 percent in 2010 to 37.5 percent in 2020. For low-income households, whose only source of net worth is typically their home, the share fell even faster, from 28.8 percent of the total in 2010 to just 19.8 percent in 2020.

This isn’t a problem that the Fed can resolve by raising interest rates. Kuttner argues for lessening the power of the free market in the housing sector to keep rents permanently affordable and to invest in first-time homebuyers rather than supporting owners of exorbitantly expensive housing through tax breaks. He points to a great new paper, “Social Housing the United States,” (PDF) for readers looking for a deep dive into the cause of the housing crisis, and a suite of recommendations to make housing access universal.

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.

• I read some great feedback from Pitch readers for Nick Hanauer and Eric Beinhocker’s piece on President Biden’s embrace of middle out economics. Many of you asked how we can speed up the political shift toward a middle-out economic theory, and several pieces in this week’s newsletter reflect on just that subject. Changing 40 years of economic thought isn’t the kind of thing you can do overnight — though I have to say, as someone who has watched Nick and Eric challenge trickle-down thinking up close for the better part of the last decade, this new economic thinking has taken hold much faster than any of us would have guessed.
• On Civic Action Live this week, we’ll be discussing the Fed’s decision to raise interest rates, how our leaders can combat the corporate price-gouging that’s driving up a significant share of American prices, what we can do about skyrocketing house prices and rents, and how to change 40 years of ingrained economic thought. Join us at 10:30 am on Friday.
• The Pitchfork Economics podcast this week features an interview with Tom Bergin, an investigative financial journalist for Reuters whose latest book surveys eight commonly held economic truisms that are not at all based in reality. This one is a densely packed exploration of why economists are motivated to promote economic concepts that do not hold up under scrutiny.
• Senator Manchin used costly Congressional Budget Office projections as a leading reason why he refused to vote for the Build Back Better legislation. But what if those projections were wrong? In his Business Insider column, Paul explores the flaws intrinsic to the Congressional Budget Office’s projections on spending bills, and why they incorrectly assume that government spending is inherently half as efficient than private-sector spending.

Closing Thoughts

As I’ve said repeatedly in this newsletter, and as President Joe Biden stated in his State of the Union speech, ordinary Americans are the true beating heart of the economy. It’s their spending that creates jobs, bolsters small businesses, and generates the consumer demand that the world’s biggest corporations need to survive. For four decades in the 20th century, the American middle class was the greatest generator of prosperity that the world has ever known. And for the last 40 years, the middle class’s spending power has been slowly eroded and transformed into an ever-growing mound of profits for the wealthy elite.

The Economic Policy Institute has created a new online tool to help you visualize how much income a typical American family needs just to break even. The Family Budget Calculator reports on how much it costs for a family of any size to live in the United States, taking regional cost-of-living into account. For instance, I looked at what it would cost for a family of four to survive in my home, the Seattle metropolitan area, and the annual total, $107,916, looks about right. And remember — that total is just what it costs to maintain “a modest yet adequate standard of living,” including housing (about $2000 monthly) childcare (roughly $1800 a month) and food (about $950 a month.) Those estimates are generally conservative — the childcare price, in particular, is lower than anything our team is experiencing on the ground here in Seattle — and of course they don’t include emergency expenses, retirement funds, or any of the other real-world costs that happen when you’re just treading water.

That budget is the absolute bottom line — it’s the single metric that matters most when measuring the health of America’s economy. Right now, expenses are rising too high and income is not coming close to matching it. When we get those expenses under control and Americans have not just enough money to spend on the essentials but also have some money left over for vacations, educational opportunities, and small businesses of their own, that’s when the economy will be working for everyone again. Those other numbers you see on 24-hour cable business channels are just distractions.

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

Zach