Whose Side Is the Federal Reserve On, Anyway?

The Pitch: Economic Update for July 27, 2023

Friends,

The Federal Reserve went through with its promise — some might call it a threat — to raise interest rates by another quarter of a percentage point, raising rates to 5.5% — a 22-year high.

“Last month, officials left rates unchanged so they could understand what was happening in the economy, including with the job market, inflation and wages,” writes Rachel Siegel at the Washington Post. “The Fed is essentially trying to tweak rates gently so they don’t go too far and send the economy into a recession. But no one knows exactly what the right pace and rate levels are to avoid that.”

In another piece from earlier this week, Siegel digs even deeper into the central problem behind the Fed’s rate hikes: “it’s an open question exactly how much their aggressive moves have tamed prices and how much credit should go to other factors beyond the central bank’s control.”

Just to catch you up: The Fed is trying to lower prices by ‘cooling the economy down’ with higher interest rates, making it harder for businesses and consumers to borrow money, thereby killing consumer demand. Because Econ 101 argues that previous inflationary crises were caused by excess consumer demand, a loud group of commentators and economists have argued that millions of Americans would have to lose their jobs in order to bring prices down.

But the inflationary price increases in 2021 and early 2022 were largely the result of the supply-chain strain caused by turning the global economy off and then back on again during the worst days of the pandemic, and those supply-chain pressures have mostly been fixed. The other big contributor to high prices: greedflation. This is when corporations take advantage of the economic confusion by raising prices and pocketing the profits.

None of the Fed’s actions have any effect on lowering greedflation or improving supply chains. Instead, they are risking throwing the economy into a recession by aggressively raising rates. And it’s not over yet — the Fed has warned that at least one more rate increase is likely to happen this year. No one knows when, but at some point they risk making money too expensive for most people and businesses to borrow and throwing us into a recession.

One of the leading indicators that the Fed is watching are worker wages — and they’re doing so for all the wrong reasons. The Wall Street Journal reports that the Fed wants to see smaller paychecks in tomorrow’s wage report. This is not only a wrongheaded understanding of the economy — it’s also the opposite of Fed leadership’s stated goals. For the New York Times, Jeanna Smialek notes that Fed Chair Jerome Powell has long wanted to improve the job market. “The labor market has recovered by nearly every major measure, and the employment rate for people in their most active working years has eclipsed its 2019 high, reaching a level last seen in April 2001,” she writes. “Yet one of the biggest risks to that strong rebound has been Mr. Powell’s Fed itself.”

The Onion perhaps put it best with a video yesterday titled “Federal Reserve Calls for More Poverty.” These rate increases make it harder to borrow money, and at some point they’re going to have a serious negative impact on consumer spending — and when consumer spending dips, so does job creation. At the moment, it seems that the Fed is going to barrel forward with the plan its leaders devised back in the days before we understood the cause of the inflation that plagued the American economy.

Still, it’s very interesting that the Fed’s solitary blunt instrument of interest rate adjustment just doesn’t have the impact it once did. There’s a lot of velocity in the economy that thus far hasn’t been affected by the increase in interest rates, thanks to the spending inspired by growing paychecks and big federal investments in manufacturing and infrastructure. Or, put another away: Middle-out economics has scrambled the old trickle-down understanding of how the economy really works, and the status quo simply doesn’t have any idea how to respond.

The Latest Economic News and Updates

GDP Rises Higher Than Expected

We try not to emphasize the Gross Domestic Product here in this newsletter because the GDP doesn’t measure many parts of the economy that have direct effects on ordinary Americans. While a strong GDP report might raise the spirits of CEOs and other corporate executives in corner offices, it doesn’t generally correlate to the size of worker paychecks, which is the most important economic indicator for shared prosperity. It’s long past time for our leaders to reimagine the way we measure our economy.

But because Econ 101 classes have remained loyal to outmoded economic paradigms for far too long, a shocking number of business and political leaders still look to the GDP as the gold-standard of economic measurement. That’s why today’s Commerce Department announcement that the GDP beat expectations is important.

“GDP, the sum of all goods and services activity, increased at a 2.4% annualized rate for the April-through-June period, better than the 2% consensus estimate from Dow Jones. GDP rose at a 2% pace in the first quarter,” writes CNBC.

This is important because it provides meaningful evidence that the economy isn’t in a recession, and it should dampen recession fears even more as the economy heads into the second half of the year. Businesses will interpret this report as a green light to take some more risks, and workers should take the news as a sign that they should continue to ask for those raises or consider moving to the company down the street that’s offering higher wages.

The biggest question is how the Federal Reserve will interpret this better-than-expected result. With inflation slowing and GDP rising, it seems absurd to argue that the economy needs to be slowed down with another interest-rate increase. In the New York Times’s The Morning newsletter, the authors make a case for raising interest rates again later this year: The “annual inflation remains at 3 percent, above the level the Fed prefers. Unless Fed officials add at least one more interest rate increase in coming months, consumers and business may become accustomed to high inflation, making it all the harder to eliminate,” they write.

Of course, the 2-percent inflation target that the Fed has set is an artificial one with no bearing in history. Throughout the 20th century, including when the economy was growing at its fastest, a 3% inflation rate was not considered exceptionally high. It’s only in the past few decades that the 2% rate became the gold standard. And if we’ve learned anything over the last few years, it’s that the commonly held beliefs of the economic mainstream should always be questioned.

The Economy Is Strong. When Will It Feel Strong?

For the Atlantic, Annie Lowrey writes about why the US economy is the best it’s been for decades, and why so few Americans report feeling satisfied with the economy. There are multiple reasons, but she thinks the high cost of housing is obscuring all the positives. “Yes, we have more income, more disposable cash, and a better standard of living than at any other point in our history,” Lowrey writes. “But millions of us can’t live in the neighborhoods we want. We’re stuck in too-small, too-far-away accommodations, giving up on the dream of having a second bathroom or a third kid.”

It’s probably good news, then, that home prices fell by half a percentage point year-over-year in May. However, that’s not likely to help consumers feel better about the economy because the drop is due to the Fed’s persistent campaign to raise interest rates and not thanks to increased housing supply.

Consumer spending is still increasing, according to the Census. “Advance estimates of U.S. retail and food services sales for June 2023…were $689.5 billion, up 0.2 percent from the previous month, and up 1.5 percent above June 2022,” the bureau reported. Restaurants saw the biggest spike in consumer spending: “food services and drinking places were up 8.4 percent” over June 2022.

All this data is enough to cause the New York Times to reconsider all those cries from economists that a recession was just around the corner. Ben Casselman and Jeanna Smialek write, “the year is more than half over, and the recession is nowhere to be found. Not, certainly, in the job market, as the unemployment rate, at 3.6 percent, is hovering near a five-decade low. Not in consumer spending, which continues to grow, nor in corporate profits, which remain robust.”

We can’t forget which economic policies brought us to this place of growing shared prosperity. The US has the strongest economy among the G7, with the lowest inflation rate of any of the world’s leading nations, and among the lowest unemployment and long-term unemployment rates. We lead the world in our economic recovery from the pandemic.

And we are in that enviable position because our response to the pandemic invested directly in the vast majority of Americans, allowing us to come roaring back from pandemic lockdowns at a rate that is now the envy of the world. It’s that middle-out economic policy that has built this resilient, strong economy, and Bryce Covert writes for the New York Times that we run the risk of forgetting all that we’ve achieved.

She warns that trickle-downers are trying to use the inflationary pressures of 2021 and 2022 as a cudgel to convince economists that middle-out economics doesn’t work, but the inflation is a separate issue from the government investments into working Americans, and without those investments, we would be in very bad shape right now: “Moody’s Analytics estimates that without federal aid, economic output would have fallen three times further in 2020 and we would have experienced a double-dip recession the following year,” Covert writes. “Jobs wouldn’t have recovered until 2026 and unemployment would have stayed in the double digits well into 2021. Wage growth would have crawled along at a record low. Poverty would have hit record highs.”

Moody’s estimations aren’t simply theoretical — that glacial crawl out of high unemployment and low wages is a fair description of America’s slow recovery from the Great Recession, when the government failed to invest in ordinary Americans.

Sing it from the mountaintops — middle-out economics is what powered our best-in-the-world economic recovery. Anyone who argues otherwise is ignoring reality.

The Economy Is Still Tipped in Workers’ Favor

Last month was a big one for American workers. June 2023 marked the first time since prices started skyrocketing two years ago that American paychecks grew faster than inflation. In fact, economist Arin Dube notes that “median real wage in June ’23 was not only higher than pre-pandemic level, but about where it would be based on pre-pandemic trends.”

The Wall Street Journal had an interesting spin on this news, celebrating the advance while also twisting it through the lens of the Fed: “Americans’ growing paychecks surpassed inflation for the first time in two years, providing some financial relief to workers, while complicating the Federal Reserve’s efforts to tame price increases.” Earlier in this email, we acknowledged that the Fed’s understanding of its own relationship with inflation is wrong to the point of actively harming the economy, and the Journal’s rote recitation of the Fed’s perspective is a reminder of how deeply ingrained this misunderstanding is in the economic mainstream.

So let’s be clear: The fact that American paychecks are growing is an absolute good for the economy. And those bigger paychecks are giving workers the freedom to fight for other benefits that have fallen by the wayside over the last 40 years of trickle-down economics. If wages surpassing inflation is a bad thing in your economic worldview, you are effectively arguing that the American standard of living must decline in order to save the economy — in other words, you think ordinary Americans must suffer so that a handful of wealthy people must prosper.

A case in point is the week’s biggest labor story — a tentative agreement between UPS executives and the Teamsters union that represents their drivers. In addition to air conditioning for UPS drivers, “all UPS union employees would receive a $2.75-an-hour raise this year and a $7.50-an-hour pay increase over the next five years,” writes Lauren Kaori Gurley at the Washington Post. Further, “Pay for UPS’s part-time workers, who make up about half of the workforce, would start at $21 an hour, a notable boost from the current $16.20-per-hour starting wage though less than the $25 an hour that a vocal reform group composed of Teamsters members had demanded.”

Had the workers gone on strike on August 1st as planned, it would have represented the biggest American labor action in decades. But assuming this tentative agreement holds, it represents a huge win for UPS workers, and likely other workers in the delivery industry who will look at these gains and demand raises of their own. It’s highly unlikely that a victory of this size and scope would have been possible in a shaky job market.

Meanwhile, in Los Angeles, strikes continue apace. With the American movie theater industry coming off of a triumphant record-breaking box-office weekend, movie studios’ reluctance to bargain with striking WGA and SAG-AFTRA unions could throw the 2024 movie slate into turmoil. In this case, too, it seems that the workers could have the upper hand. Corporate movie and TV production companies are required by shareholders to create profits every quarter, while actors and writers are more likely to be able to wait out the studios because they see the encroachment of artificial intelligence as an existential threat to their careers. For every week that actors and screenwriters strike, studios lose tens of millions of dollars in profits from next years’ slate of movies, and all the moviegoer goodwill garnered from last week’s historically successful “Barbenheimer” double-feature will dissipate.

(It’s also interesting that hotel workers in Los Angeles are using more surgical striking techniques to protest the giant corporations that employ them, even as the entertainment unions are using widespread, shock-and-awe protest lines. A whole generation of young workers are getting a crash course in bargaining tactics this summer, and these different approaches are likely to inform how workers will fight for higher wages and better benefits in decades to come.)

Not every fight is falling in workers’ favor. Megan Stack writes at the New York Times that Starbucks corporate leadership has “illegally repressed employees’ rights” to organize. “In 100 cases, many of which consolidate a number of incidents, regional [National Labor Relations Board] offices have decided there is sufficient evidence to pursue litigation against Starbucks,” Stack writes. “That includes a nationwide complaint, consolidating 32 charges across 28 states, alleging that Starbucks failed or refused to bargain with union representatives from 163 cafes.”

And graduate students say that executives at the University of California, San Diego are refusing to implement agreed-upon raises and workplace improvements, as well as retaliating against academic workers in response to a successful strike held last year. University officials are filing charges against dozens of strikers with charges of “physical assault,” “physical abuse and threats to health and safety,” and “disruption of university activities” during protest activities. The Intercept’s Peter Lucas writes that “Almost half of the people accused deny even being in attendance.” But the charges keep coming: “Most recently, two UC San Diego graduate student workers and one post-doc were arrested by university police at their homes for writing pro-union slogans on the sidewalk during an action a month prior,” Lucas writes.

But despite the startlingly dishonorable and illegal actions of a few employers, this “Hot Labor Summer” looks set to continue into the fall. “The United Auto Workers (UAW) union has been threatening a strike as it begins contract negotiations with GM, Ford and Stellantis for deals that expire in mid-September,” writes Nathan Bomey at Axios. If they’re smart, auto manufacturers will follow UPS’s lead in raising wages for workers, rather than risking the loss of an experienced, trained workforce.

And workers in the fossil-fuel industry are facing a potential disruption of their own as the Biden Administration encourages a widespread shift to the green economy. “The Biden administration is trying to mitigate the impact, mostly by providing additional tax advantages for renewable energy projects that are built in areas vulnerable to the energy transition,” writes the New York Times’s Madeleine Ngo, “But some economists, climate researchers and union leaders said they are skeptical the initiatives will be enough.”

Experts interviewed by the Times offered several other policies to support displaced fossil fuel workers, including increased unemployment benefits and even more investments to promote clean energy and manufacturing in regions that used to economically rely on fossil fuels for shared prosperity.

The lessons we learned from the trickle-down era are clear: tax breaks, deregulation, and other policies that benefit the wealthy few won’t improve outcomes in regions that were propped up by the oil industry. Instead, we need policies that invest directly in workers that encourage spending in their communities, creating jobs and building a more diverse, prosperous economy that doesn’t rely on one big employer to prop everything up.

This Week in Middle-Out Policy

• In what could one day be considered among the most consequential Biden Administration policies, the Federal Trade Commission and the Department of Justice are working to rewrite antitrust law, making it harder for giant corporations to gobble each other up and kill competition in the marketplace. “The guidelines — which generally provide a road map for whether regulators block or approve deals — show the Biden administration’s commitment to an aggressive antitrust agenda aimed at curtailing the power of companies like Google, Meta, Apple and Amazon,” writes the New York Times.
• As if that weren’t enough, the FTC is also looking into potential data leaks and disinformation in the field of artificial intelligence, forcing rising stars Open AI and Chat GPT to be accountable for the flaws in their products. “If the FTC finds that a company violates consumer protection laws, it can levy fines or put a business under a consent decree, which can dictate how the company handles data,” notes the Washington Post.
• For the American Prospect, David Dayen writes that the Biden Administration’s war on junk fees has made some big gains for renters who have been slammed with a series of hidden fees while apartment hunting. Dayen also discusses some state policies that make the renting process easier for people looking for housing.
• The New York Times details how Big Pharma is trying to fight Medicare drug price negotiations written into the Inflation Reduction Act. “On Tuesday, Johnson & Johnson became the latest drugmaker to take the Biden administration to federal court in an attempt to put a halt to the drug pricing program,” the Times notes. “Three other drug companies — Merck, Bristol Myers Squibb and Astellas Pharma — have filed their own lawsuits, as have the industry’s main trade group and the U.S. Chamber of Commerce.”
• And our friends at the Economic Policy Institute explain how the Raise the Wage Act of 2023, which would gradually raise the federal minimum wage from $7.25 to $17 an hour, would benefit the economy. Specifically, it would raise the wages of 27,858,000 American workers — nearly 20% of the workforce — by an average of $3100 per worker every year, pumping some $86 billion through local economies in the form of bigger paychecks. That’s a policy that would grow the economy and increase prosperity for everyone.

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 federal prosecutor Brendan Ballou about how private equity has put hundreds of thousands of Americans out of work and bankrupted hundreds of perfectly profitable American brands, including Toys R Us, Payless Shoes, and Bed, Bath & Beyond. Private equity’s reach extends far beyond retail, though — PE firms have pillaged and destroyed businesses in housing, health care, pet care, and many other businesses, too.

Closing Thoughts

Bearing in mind everything I said earlier in this newsletter about GDP as a seriously flawed measurement for the economy, I did want to highlight a report from Morgan Stanley that revised current GDP estimates for the first half of the year, and increased predictions for the second half of 2023. According to CNBC’s Christina Wilkie, analysts from Morgan Stanley now project that America’s GDP will grow by 1.9% “for the first half of this year. That’s nearly four times higher than the bank’s previous forecast of 0.5%,” she writes. That forecast proved to be low.

But Morgan Stanley also made a bold prediction, “doubl[ing] their original estimate for GDP growth in the fourth quarter, to 1.3% from 0.6%. Looking into next year, they raised their forecast for real GDP in 2024 by a tenth of a percent, to 1.4%.”

But I’m less interested in the GDP numbers as I am in the reasoning behind this upward revision:

Morgan Stanley is crediting President Joe Biden’s economic policies with driving an unexpected surge in the U.S. economy that is so significant that the bank was forced to make a “sizable upward revision” to its estimates for U.S. gross domestic product.

Biden’s Infrastructure Investment and Jobs Act is “driving a boom in large-scale infrastructure,” wrote Ellen Zentner, chief U.S. economist for Morgan Stanley, in a research note released Thursday. In addition to infrastructure, “manufacturing construction has shown broad strength,” she wrote.

This is a huge turnaround for Morgan Stanley, which in October of last year released a huge report with the title “2023 U.S. Recession Risks Rising.” Morgan Stanley analysts put the risk of recession this year at 55%, citing “a perfect storm for the U.S. economy” between inflation, the Russian invasion of Ukraine, and other pressing concerns.

So let’s be clear about what these two reports are telling us about the economy. Big financial institutions like Morgan Stanley didn’t avert a potential recession. Neither did corporations, which spent most of last year driving up prices in an effort to amass record-breaking profits. No, working Americans saved the economy from what looked to all the economic experts like unavoidable impending doom, and President Biden’s economic policies helped bolster that worker-powered recovery.

It’s frankly remarkable that Morgan Stanley issued this report. A near-unanimous group of economists predicted that the American economy was hurtling toward recession, and we avoided that recession through the intervention of policies that empowered working Americans rather than the wealthy few at the top of the economy. When the long economic journey of the last few years is viewed in total, it presents a clear picture of how the economy really works — a road map for building prosperity in the years and decades to come. These are exciting times.

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

Zach