(What’s Left of) Our Economy: U.S. Worker Pay (Momentarily?) Tops Inflation

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benefits, Biden administration, CCP Virus, Census Bureau, consumption, coronavirus, COVID 19, demand, ECI, Employment Cost Index, Immigration, labor force, labor market, labor shortage, Open Borders, Paul Krugman, production, productivity, recession, salaries, supply, Title 42, Trump administration, wages, workers, workforce, {What's Left of) Our Economy

American workers got some unambiguously good news this past week. Although it’s not all that high on the “good” scale. And it could well be short-lived.

Still, good is good, so it’s important to note that by one official measure, American workers’ earnings have at last caught up to the recent burst of inflation – and a little bit more. In the first quarter of this year, wages and salaries have risen by 0.1 percent over last year’s first quarter. (These are private sector wages and salaries, the ones economy watchers really care about. That’s because unlike public sector earnings, they’re driven predominantly by market forces, not politicians’ decisions.)

No, it’s not much, but it’s a better situation than prevailed as of the end of last year, when such compensation had fallen by 1.2 percent on year. In fact, these new results for the Employment Cost Index marked the first time since the first quarter of 2021 that, in real terms, wage and salary gains combined have moved back into the black.

This encouraging development, however, comes with two important caveats. First, when you add in the value of benefits and get numbers for total compensation for private sector workers, they’re still lagging inflation, and have since, again, the first quarter of 2021.

To be sure, by this gauge, workers are catching up. As of the first quarter of last year, total private sector compensation was down 3.5 percent on an annual basis, the worst such result in a data series going back to 2001. Now it’s trailing by just 0.2 percent. But it’s still trailing.

Second, although progress is being made on the earnings front, labor productivity growth remains weak. The best combination in terms of yielding sustainable prosperity is strong growth for both.

And like I hinted at the start, this progress may be just about over. Not only is the economy slowing – which will surely make employers more reluctant to hire than they have been, and thereby reduce the pressure they feel to keep and add workers by raising pay at whatever rate. A recession will of course leave workers with even less bargaining power.

But the supply of workers available to business, which had shriveled thanks largely to the effects of the CCP Virus, has rebounded past pre-pandemic levels. And much of this recovery stems from a strong rebound in net immigration inflows – which the U.S. Census Bureau believes have returned to pre-virus levels and to their levels before the advent of the Trump administration’s restrictive border policies.

Many immigration devotees, like Nobel Prize-winning economist and New York Times pundit Paul Krugman argue that the immigrant-driven loosening of the national labor market has kept employment up while preventing “runaway inflation” not by suppressing wages but by keeping production up – and thereby closing the CCP Virus-created gap between demand and supply.

But if you look at the economy’s growth over the year when immigration surged, that argument falls apart. It may become validated farther down the road, but in inflation-adjusted terms, but between the first quarter of 2022 and 2023, U.S. output rose a bare 1.56 percent Moreover, as I’ll be showing in a subsequent post, even this weak growth in the gross domestic product, along with the better performance of 2021-22, was led by unusually high levels of consumer spending, not by output.

As a result, the main effect to date of the immigration resurgence clearly has been undercutting wage pressures. And it’s certain to continue with the Open Borders-friendly Biden administration in office through the start of 2025 at least, with the pandemic-era Title 42 restriction program ending May 11, and the President so far deciding to respond with a plan featuring numerous provisions aimed at easing major current obstacles to legal immigration. 

So let’s all hope that American workers are enjoying this mini-near earnings recovery while they still can. For if they blink, they might miss it. 

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(What’s Left of) Our Economy: Can We Please Stop with the “Greedflation” Nonsense?

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Big Oil, business, Coca Cola, consumers, cost of living, Darden Restaurants, demand, economics, gasoline prices, General Mills, Greedflation, inflation, oil prices, Procter & Gamble, productivity, stimulus, Strategic Petroleum Reserve, supply, {What's Left of) Our Economy

More evidence has just come out debunking the seemingly reviving claims (e.g., here and here) that corporate greed is largely responsible for the inflation plaguing the U.S. economy. That matters crucially because if Americans don’t understand the paramount drivers of the cost-of-living crisis, it’s unlikely it’ll ever be resolved satisfactorily, or at least not anytime soon.

To begin at the beginning, charges of “greedflation” by the business sector really took off last year, when politicians almost entirely on the left began blaming U.S. and other big global oil companies (along with Russia’s Ukraine war) for the soaring energy prices that were igniting inflation at the gas pump and throughout the economy.

Once gasoline prices began going down, these claims naturally became harder to justify. Did the oil companies suddenly become less greedy? Of course not. What happened mainly was that demand for energy subsided because the economy was slowing, and both developments in turn stemmed from oil prices increasing enough to become less affordable for a critical mass of consumers and businesses.

Even the role played by the Biden administration’s decision to restrain prices by through unprecedented releases of oil from the Strategic Petroleum Reserve (SPR) ssupports the argument that demand and its flip side, supply, are the predominant drivers of prices over any significant period of time. The SPR release temporarily boosted the supply of oil relative to the demand, and so prices eased as long as that effect held.

At the same time, as I’ve continually pointed out, U.S. inflation rates generally speaking have stayed far too high. I’ve argued (notably here) that the main reason is that U.S. consumer demand has stayed robust, too – that is, businesses have kept raising prices because enough American individuals and households have been able to pay and have kept retail cash registers ringing loudly. I’ve added that these inordinately (indeed, multi-decade) heated price levels have remained affordable because CCP Virus-period government stimulus packages have provided them with inordinate amounts of spending power, which has kept demand inordinately high.

And even though many consumers have already spent most of these extra resources, and consumer spending may be softening, other important supports for consumer demand have emerged, principally very low levels of unemployment and new government spending not explicitly tied to Covid stimulus – like the latest cost-of-living adjustment for Social Security recipients, expanded food stamp eligibility, and more generous veterans’ benefits. (See, e.g., this post.)

Moreover, I’ve contended (in that post linked immediately above and others) that more inflation fuel is likely, as government responds to the approach of a new presidential election cycle by opening the spending spigots wider to keep more likely voters reasonably happy, and because I’m expecting the Federal Reserve to chicken out in its fight against inflation – which has depended on slowing down economic activity (including consumer spending) by making business, individual, and household borrowing more expensive.

So what’s the new evidence that consumer demand remains vigorous and will probably stay strong enough to sustain inflation? Recent earnings reports from some of America’s biggest consumer products companies.

There’s Procter & Gamble, which has raised prices by double digits for two straight quarters, which grew its revenue largely because it not only increased prices, but also sold greater amounts of goods in its biggest market, the United States, and which maintained that the consumer “is holding up well.”

There’s Coca Cola, which – like P&G, beat estimates because of both “price hikes and higher demand,” and which also said that “consumers stayed resilient.”

There’s General Mills, whose “executives said inflation isn’t letting up, but customers are sticking with its products despite higher prices in grocery stores.”

There’s Darden Restaurants (think Olive Garden, Texas Roadhouse, Capitol Grille), which is building new establishments, and whose CEO said that (a paraphrase here) strong recent sales growth stemmed from “its strategy of pricing below inflation” (maybe a low bar nowadays?) but also that “consumers aren’t trading down.”

None of this means that strong U.S. consumer demand will continue indefinitely, or that living costs aren’t harming many Americans’ finances lately. Moreover, the relationship between demand and price isn’t the same for everything we buy. In particular, the prices of some goods and services, like necessities, tend to be what economists call “inelastic.” Their sales levels don’t change much, let alone in lockstep, when prices rise or fall. Even in these cases, however, some of the aforementioned trading down or cutting back is possible, along with some offsetting behavior changes (as with the gasoline example mentioned near the beginning here).

But keep in mind that the above companies couldn’t have become so big and successful if they weren’t good at judging the state of the American consumer and his or prospects – at least in the short and medium term. If they’re sounding confident about their customers’ wherewithal, chances are we should be, too.

And although no one should ever under-estimate corporate greed, no one should ever forget that without demand for a given product or service coming from somewhere, greed alone can’t produce it.

So despite all the efforts to blame companies for ongoing strong inflation, the best way to think of it is that timeless observation from the old “Pogo” comic strip: “We have met the enemy and he is us.” With a huge helping hand from Washington to be sure.

And the real remedy? Boosting the supply of goods and services relative to demand, either by reducing spending (and taking the short-term economic pain), increasing supply  (for example, through targeted initiatives like encouraging domestic energy production, or broader efforts like improving productivity), or some combination of these measures.      

(What’s Left of) Our Economy: The New Productivity Numbers Look Awfully Inflation-y

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consumers, demand, Federal Reserve, inflation, Labor Department, labor productivity, non-farm business, productivity, supply, {What's Left of) Our Economy

The new official U.S. figures on productivity growth are a good-but-mostly-bad news story.

The good news is that, at least for now, the American economy’s efficiency by this measure is no longer sinking like a stone – which was a real fear based on the absolute sequential declines recorded in the first and second quarter.

Further, even the feeblest improvement in productivity deserves applause because a more productive economy is (a) one better able to spur higher living standards on a sustainable basis; and (b) one less vulnerable to inflation (because it’s better able to close the gap between Americans’ demand for goods and services and the supply that’s available).

In addition, in the second quarter, labor productivity (which RealityChek regulars know is the narrower but timelier data tracked by Washington) sagged year-on-year by 2.06 percent. That figure for non-farm businesses (the Labor Department’s headline category) was slightly upgraded from the preliminary second quarter result, but that was still, as Labor reminded, “the largest [such] decline in the series, which begins in the first quarter of 1948.”

This morning’s data, the final (for now) numbers for the third quarter, show that  non-farm business labor productivity was off by just 1.25 percent on an annual basis. Moreover, on a sequential basis, labor productivity broke a two-quarter losing streak. After plummeting by 6.02 percent annualized in the first quarter and 4.13 percent at annual rates in the second, it grew by percent.

But the bad news is that this recent, ongoing annual decrease in non-farm business labor productivity has come on the heels of a long period of weakening U.S. performance on this front. Here are the numbers for total non-farm busnesses productivity growth presented for the last few stretches of American economic expansion (which generate the best apples-to-apples statistics):

1990s expansion (2Q 1991-1Q 2001): +23.53 percent

bubble expansion (4Q 2001-4Q 2007): +16.01 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 13.60 percent

And even though since the deep but brief pandemic-induced downturn ended in the second quarter of 2020, and the economy has remained massively distorted by the virus and its after effects, it’s still worth noting that since then, non-farm business productivity has sagged by 1.44 percent. This lower efficiency means, all else equal, that the economy has become less able to increase supply as fast as demand has grown, and therefore is more inflation-prone.

As also known by RealityChek regulars, the productivity statistics should be viewed at least somewhat skeptically, since especially when it comes to the service sector that dominates the U.S. economy, output per hour per worker (which yields the labor productivity numbers) is difficult to quantify. But the recent productivity deterioration has been so marked for so long that it can’t be seriously challenged. And until someone figures out how to get U.S. productivity growing vigorously again, expect too many dollars in the nation’s economy to keep chasing too few goods and services (a classic definition of inflation), and the price of these purchases to remain way too high for comfort – unless and until the Federal Reserve’s efforts to tame inflation really do succeed by crushing consumers’ buying power.      

(What’s Left of) Our Economy: More Evidence That Stimulus-Bloated Demand is the Main U.S. Inflation Driver

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CCP Virus, China, consumer price index, consumers, coronavirus, COVID 19, Covid relief, CPI, demand, inflation, Jobs, population, retirement, stimulus, Sun Belt, supply, supply chains, The New York Times, Ukraine War, workers, Wuhan virus, Zero Covid, {What's Left of) Our Economy

The New York Times just provided some important evidence on the big role played by super-charged consumer demand in super-charging inflation – this article showing that the Sun Belt has been the U.S. region where prices have been rising fastest.

The finding matters because a debate has been raging among politicians and economists over the leading causes of multi-decade high inflation rates with which Americans have been struggling over the last year and a half or so.

On one side are those who claim that overly generous government stimulus spending is the main culprit, because it’s increased U.S. buying power much faster than the supply of goods and services has grown. On the other side are those who focus on the inadequate amount of goods and services that companies are turning out, stemming from supply chain disruptions rooted in the stop-and-go nature of the American economy from successive waves of pandemic downturns and slowdowns to the Ukraine war to China’s ridiculously draconian Zero Covid policies.

Clearly, all these developments deserve blame, but the regional disparities in inflation rates provide pretty convincing support for emphasizing bloated demand.

Here’s the latest annual disparity in the headline Consumer Price Index as presented in the Times article:

U.S. total:    8.5 percent

South:          9.4 percent

Midwest:     8.6 percent

West:          8.3 percent

Northeast:   7.3 percent

It correlates roughly, by the way, with the data in this report last spring from the Republican members of Congress’ Joint Economic Committee.

And here’s a principal, demand-related reason: The Sun Belt states of the South and West have been the U.S. states that have gained the most population during the pandemic period. Indeed, according to the latest U.S. Census data, eight of the ten states with the fastest overall population growth between July, 2020 and July, 2021 was a southern or southwestern state, and the same holds for five of the ten states with the fastest population growth in percentage terms.

It’s true that population growth often increases supply, too – by boosting numbers of workers. The U.S. government doesn’t break out job creation along the above regional lines, but a look at individual state totals doesn’t conclusively brand the Sun Belt as an national employment leader. On average, relatively speaking, Arizona, California, Florida, Nevada, and Texas have created more jobs from the pandemic-period bottom in April, 2020 through last month, as shown in this table:

U.S. total:    +16.87 percent

California:   +17.98 percent

Florida:        +21.05 percent

Texas:          +17.31 percent

Arizona:       +16.02 percent

Nevada:        +30.92 percent

But don’t forget – many of these states have outsized travel and tourism sectors, and you know what happened to those activities during the worst of the pandemic. So in part, their employment bounced back so quickly because they had plummeted so dramatically as the CCP Virus’ first wave spread.

Moreover, many of these states are big retirement destinations, too, and as their overall population increase makes clear, this trend has intensified since the pandemic arrived. Of course, the workers in any given state don’t only sell goods and services to that state’s population, and a given state’s residents don’t only buy goods and services from providers in that state. Yet it’s certainly noteworthy that the number of the Sun Belt states’ consumers rose faster relative to the national average than the number of Sun Belt workers.

And in this vein, Sun Belt inflation probably is also particularly hot partly because so many of the newcomers are wealthy. Indeed, one recent study found that, early in the pandemic, “Of the 10 states with the largest influx of high-earning households, nine are located in the Sun Belt, including the six-highest ranked states, starting with Florida.”

Because they bring so much spending power to their new home states, these wealthier Americans naturally tend to drive prices up unusually fast.

As the Times article notes, some prominent reasons for scorching Sun Belt inflation are unrelated to population-driven demand growth – notably much lower population densities that generate more gasoline-using driving.  But the impact of population movement and all the disproportionately high inflation it’s clearly creating is hard to ignore.  And if a consumption shock has spurred so much inflation in the Sun Belt, why wouldn’t it be affecting prices this way in the rest of the nation, too?          

 

(What’s Left of) Our Economy: Demonization and Double Standards on Gas Prices

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Biden, demand, Democrats, Elizabeth Warren, energy, gas prices, inflation, oil, oil prices, sanctions, supply, Ukraine-Russia war, Vladimir Putin, {What's Left of) Our Economy

According to the reasoning of President Biden, Massachusetts Senator Elizabeth Warren, and many other Democrats and progressives, Vladimir Putin, or Big Oil, or American gas station owners, or some combination of those three, have been getting nicer or less greedy and/or more patriotic (when speaking of the domestic actors). What’s the evidence? The average price of a gallon of gasoline in Anerica has fallen during this period.

After all, the President and his fellow Democrats have been saying since at least mid-spring March that prices at the pump had been soaring because the Russian dictator’s invasion of Ukraine (and resulting sanctions) has pushed up world oil prices, because the world’s oil companies have been earning “windfall profits,” and because U.S. gas station owners have been (unpatriotically) price-gouging.

Since mid-June, though, as Mr. Biden has just noted, gas prices are down. So the above culprits must have become less villainous. In fact, since several authoritative sources track these prices, it’s possible, depending on which one is considered most trustworthy, to know exactly how much less villainous.

Specifically, according to the GasBuddy.com website, national average pump prices are down 6.87 percent over the last month. So clearly, Putin, Big Oil, and gas station owners have collectively become 6.87 percent less heinous and/or avaricious and, in the case of U.S.-owned oil companies and the gas station owners, less unpatriotic.

The widely followed Lundberg survey says regular grade gasoline has become 4.14 percent cheaper during this period – so the Democrats’ culprits in its view haven’t become quite so benign.

They look better in Triple A’s eyes, though, since that organization calculates that pump prices are off by 6.74 percent.

Of course, the above analysis is the most childish and even self-serving form of nonsense. Gas prices, like prices of practically everything, depend on numerous interacting factors having nothing to do with foreign strongmen or corporate iniquity. World oil prices are the biggest single determinant, but these in turn are affected by national and global demand, which in turn results from the overall state of the economy, which in turn can be strengthened or weakened by fiscal policy (e.g., stimulus bills) and monetary policy (e.g., interest rates). Don’t, however, forget refining and pipeline availability, and even weather (as in bad hurricane seasons shutting down oil facilities in the Gulf of Mexico in particular).

Complicating matters further, these and other oil price determinants don’t affect retail gas prices all at once, as they understandably take varying amounts of time to work their way through a lengthy production and distribution system. Meanwhile, future supplies depend on private investors examining this multi-faceted and highly fluid landscape to judge whether committing capital to the oil industry is their best bet for maximum returns. And these calculations are inevitably highly uncertain given that any payoffs will inevitably be years off.

So it’s indeed childish to ignore the complicated and constantly interacting dynamics of an enormous industry that at bottom needs to keep wrestling with inevitably fluctuating supply and demand conditions. And it’s self-serving because for years the President and his party have clearly worked hard to reduce the role played by a fossil fuel like oil in the U.S. energy picture.

If you doubt that self-serving claim in particular, or any of the above analysis, ask yourself this: Are these oil industry critics remotely as likely to start praising the producers and the gas station owners (or Putin) for reducing prices as they’ve been to slam them for the price increases?

(What’s Left of) Our Economy: You Bet that Mass Immigration Makes America Less Productive

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amnesty, Bureau of Labor Statistics, construction, demand, Donald Trump, economics, Forward.us, hotels, illegal aliens, immigrants, Immigration, labor productivity, productivity, restaurants, supply, total factor productivity, wages, {What's Left of) Our Economy

An archetypical Washington, D.C. swamp denizen thought he caught me with my accuracy pants down the other day. Last Sunday’s post restated a point I’ve made repeatedly – that when countries let in too many immigrants, their economies tend to suffer lasting damage because businesses lose their incentives to improve their productivity – the best recipe for raising living standards on a sustainable, and not bubble-ized basis, as well as for boosting employment on net by fostering more business for most existing industries and enabling the creation of entirely new industries.

The reason mass immigration kneecaps productivity growth? Employers never need to respond to rising wages caused by labor shortages by buying labor-saving machinery and technology or otherwise boost their efficiency. Instead, they continue the much easier and cheaper approach of hiring workers whose pay remains meager because immigrants keep swelling the workforce.

It’s a point, as I’ve noted, strongly supported by economic theory and, more important, by evidence. But Todd Schulte, who heads a Washington, D.C.-based lobby group called Forward.us, wasn’t buying it. According to Schulte, whose organization was founded by tech companies like Facebook with strong vested interests in keeping U.S. wages low, “the decade of actual [U.S.] productivity increases came directly after the 1986 legalization AND 1990 legal immigration expansion!”

He continued on Twitter, “giving people legal status and… expanding legal immigration absolutely has not harmed productivity in the last few decades in the US.”

So I decided to dive deeper into the official U.S. data, and what I found was that although there are bigger gaps in the productivity numbers than I’d like to see, there’s (1) no evidence that high immigration levels following the 1986 amnesty granted by Washington to illegal immigrants and the resulting immigration increase mentioned by Schulte improved the national productivity picture over the pre-amnesty period; and (2) there’s lots of evidence that subsequent strong inflows of illegal immigrants (who Schulte and his bosses would like to see amnestied) have dragged big-time on productivity growth.

First, let’s examine the productivity of the pre-1986 amnesty decades, which provides the crucial context that Schulte’s claim overlooks.

According to U.S. Bureau of Labor Statistics figures, during the 1950s, a very low immigration decade (as shown by the chart below), labor productivity grew by an average of 2.63 percent annually. Significantly, this timespan includes two recessions, when productivity normally falls or grows unusually slowly.

Figure 1. Size and Share of the Foreign-Born Population in the United States, 1850-2019

During the 1960s expansion (i.e., a period with no recessions), when immigration levels were also low, the rate of labor productivity growth sped up to an annual average of 3.26 percent.

The 1970s were another low immigration decade, and average labor productivity growth sank to 1.87 percent. But as I and many other readers are old enough to remember, the 1970s were a terrible economic decade, plagued overall by stagflation. So it’s tough to connect its poor productivity performance with its immigration levels.

Now we come to the 1980s. Its expansion (and as known by RealityChek regulars, comparing economic performance during like periods in a business cycle produces the most valid results), lasted from December, 1982 to July, 1990, and saw average annual labor productivity growth bounce back to 2.24 percent.

As noted by Schulte, immigration policy changed dramatically in 1986, and as the above chart makes clear, the actual immigant population took off.

But did labor productivity growth take off, too? As that used car commercial would put it, “Not exactly.” From the expansion’s start in the first quarter of 1982 to the fourth quarter of 1986 (the amnesty bill became law in November), labor productivity growth totalled 10.96 percent. But from the first quarter of 1987 to the third quarter of 1990 (the expansion’s end), the total labor productivity increase had slowed – to 5.76 percent.

The 1980s are important for two other reasons as well. Nineteen eighty-seven is when the Bureau of Labor Statistics began collecting labor productivity data for many U.S. industries, and when it began tracking productivity according to a broader measure – total factor productivity, which tries to measure efficiency gains resulting from a wide range of inputs other than hours put in by workers.

There’s no labor productivity data kept for construction (an illegal immigrant-heavy sector whose poor productivity performance is admitted by the sector itself). But these figures do exist for another broad sector heavily reliant on illegals: accommodation and food services. And from 1987 to 1990 (only annual results are available), labor productivity in these businesses increased by a total of 3.45 percent – worse than the increase for the economy as a whole.

On the total factor productivity front, between 1987 and 1990 (again, quarterly numbers aren’t available), it rose by 1.23 percent for the entire economy, for the construction industry it fell by 1.37 percent, for the accommodation sector, it fell by 2.30 percent, and for food and drinking places, it increased by 2.26 percent. So only limited evidence here that amnesty and a bigger immigrant labor pool did much for U.S. productivity.

As Schulte pointed out, the 1990s, dominated by a long expansion, were a good productivity decade for the United States, with labor productivity reaching 2.58 percent average annual growth and total factor productivity rising by 10.87 percent overall. But when it comes to labor productivity, the nineties still fell short of the 1950s (even with its two recessions) and by a wider margin of the 1960s.

But did robust immigration help? Certainly not in terms of labor productivity. In accommodation and food services, it advanced by just 0.84 percent per year on average.

Nor as measured by total factor productivity. For construction, it actually dropped overall by 4.94 percent. And although it climbed in two other big illegal immigrant-using industries, the growth was slower than for the economy as a whole (7.17 percent for accommodation and 5.17 percent for restaurants and bars).

Following an eight month recession, the economy engineered another recovery at the end of 2001 that lasted until the end of 2007. This period was marked by such high legal and illegal immigration levels that the latter felt confident enough to stage large protests (which included their supporters in the legal immigrant and immigration activist communities) demanding a series of new rights and a reduction in U.S. immigration deportation and other control policies.

Average annual labor productivity during this expansion grew somewhat faster than during its 1990s predecessor – 2.69 percent. But annual average labor productivity growth for the accommodation and food services sectors slowed to 1.19 percent, overall total factor productivity growth fell to 1.19 percent, and average annual total factor productivity changes in accommodations, restaurants, and construcion dropped as well – to 6.36 percent, 2.67 percent, and -9.08 percent, respectively.

Needless to say, productivity grows or shrinks for many different reasons. But nothing in the data show that immigration has bolstered either form of productivity, especially when.pre- and post-amnesty results are compared. In fact, since the 1990s, the greater the total immigrant population, the more both kinds of productivity growth deteriorated for industries relying heavily on illegals. And all the available figures make clear that these sectors have been serious productivity laggards to begin with.

And don’t forget the abundant indirect evidence linking productivity trends to automation – specifically, all the examples I’ve cited in last Sunday’s post and elsewhere of illegal immigrant-reliant industries automating operations ever faster — and precisely to offset the pace-setting wage increases enjoyed by the lowest income workers at least partly because former President Trump’s restrictive policies curbed immigration inflows so effectively. 

In other words, in the real world, changes in supply and demand profoundly affect prices and productivity levels – whatever hokum on the subject is concocted by special interest mouthpieces who work the Swamp World like Todd Schulte.

(What’s Left of) Our Economy: Will Americans Need “That Seventies Show” to Tame Inflation?

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consumer price index, consumers, CPI, demand, economics, elasticity, energy, Federal Reserve, food, inflation, interest rates, Jerome Powell, monetary policy, Paul A. Volcker, recession, retail sales, supply, {What's Left of) Our Economy

I haven’t commented much in detail on dccisions by the Federal Reserve to fight inflation, mainly because they’re so thooughly covered in the press. But yesterday’s announcement by the central bank that it would raise the short-term interest rate it controls by an amount not matched in nearly thirty years could loom especially large over the nation’s economic future, and some of its ramifications deserve more attention than they’ve received.

First, as widely noted, the Fed could be tightening monetary policy – in an effort to slow and eventually reverse price increases by slowing economic activity – even though a recession sooner rather than later looks likely. In fact, the timing of yesterday’s interest rate hike and seemingly solid assurances that increases will continue for the foreseeable future may be even stranger, because the recession may already be here.

Some important signs:  Yesterday also saw the release of a Census Bureau report indicating that U.S. retail sales dipped on a monthly basis in May.  If this result holds (and we’ll find out on July 15), that would mark the first such decrease since December, and the news would be ominous given the dominant role played by personal spending in the American economy. 

In addition, on top of the economy’s shrinkage during the first quarter of this year, a well regarded source of forecasts on the path of the gross domestic product (GDP – economist’s main measure of the economy’s size and how it changes) is predicting no growth whatever in the second quarter. That result would enable the nation to skirt a recession according to one popular definition of the term holding that such slumps only occur when GDP adjusted for inflation falls for two consecutive quarters.

At the same time, a flat-line real GDP for the second quarter would mean that, on a cumulative basis, the economy has contracted over a two-quarter stretch. That sounds like a pretty good approximation of a recession to me. In fact, this cumulative shrinkage could still take place even if after-inflation GDP eaks out a small gain between April and June. (We’ll get the first official read on the subject on July 28.)

And maybe more important, when it comes to the lives of most Americans, what’s the difference between a recession (especially if it’s modest) and very slow growth? Indeed, for the record, the Fed itself yesterday lowered its own projection for real U.S. growth for this entire year from 2.8 percent to 1.7 percent.

Second, examining the Fed’s inflation-fighting record during the late-1970s – which it’s also been widely noted bears some strong resemblances to the present – raises immense questions regarding the central bank’s chances of making major inflation progress without triggering a recession that would be anything but modest.

In case you’re not old enough to remember that historical episode, inflation was actually higher during the late-1970s, and also stemmed partly a combination of oil price shocks generated by overseas events plus a development that’s too often ignored nowadays – a substantial deterioration in the nation’s international financial position. Though this current account deficit back then was tiny by today’s standards, it had just become a noteworthy shortfall as a share of GDP after years of small surplus or balance, and was broadly interpreted as a sign that Americans’s spending was spinning out of control (You’ll find a great account of this period here.)

As current Fed Chair Jerome Powell is fond of recalling, that towering late-1970s inflation was broken mainly by the steadfastness of that period’s Chair, Paul A. Volcker – who raised interest rates to levels that were as astronomical as they were wholly unprecedented. But although Volcker took the helm of the Fed when inflation (as measured by the headline Consumer Price Index, or CPI) wasn’t that much higher than today’s rates, it took a near-doubling of these rates from levels that also were much higher than today’s to bring price increases down to acceptable levels, and even this effort took three and a half years and dragged the economy into not just one, but two recessions – and severe ones at that. (My sources for the interest rate infomation is here. For the inflation and growth data, I’ve relied on the official government data tables I always use.)

Specifically, on Volcker’s first day as Fed Chair (in August, 1979), the federal funds rate it controls stood at 11 percent – versus the 1.75 percent ceiling to which the Powell Fed just approved. The annual inflation rate was 11.84 percent – versus the 8.52 percent recorded last month. And the economy was growing by three percent annually – versus the current rate of probably one percent at best.

Volcker engineered rate hikes to the 20 percent neighborhood – three times! (as depicted in the chart below) – and recessions that produced real GDP nosedives of eight and 6.1 percent (in the second quarter of 1980 and the first quarter of 1982), but the CPI didn’t retreat back into the single digits until May, 1981, and it took until the end of 1982 for a read of 3.8 percent to be recorded.

 

That history doesn’t seem to warrant much optimism that the Powell Fed can cut headline inflation to 5.2 percent by year end while increasing rates only to 3.4 percent (as it’s now expecting).

Third, at his press conference following the rate hike announcement, Powell echoed the conventional wisdom: that although the Fed can cut excessive levels of economic demand enough to tame inflation, it can’t address inflation by affecting economy’s ability to create enough supply to meet that demand, and thereby restore a satisfactory inflationary balance between the two.

But supply and demand are actuallly very closely connected. As I’ve discussed when posting about possible tariff cuts on imports from China, when consumer demand is strong enough, companies can pass along increases in their prices because their customers literally are willing to pay. When consumers are cautious, however, such price hikes become much more difficult.

To be sure, these rules don’t always hold. The big exceptions are products on which consumers will cut spending only as a last resort – like food and energy. They’re (rightly) seen as so important that demand for them is called “inelastic” by economists.

Since food and energy prices have been so central to today’s inflation, it’s easy to see why the conventional wisdom on the Fed and the economy’s supply side is generally accepted. But it’s also true that if consumers become stressed enough (for example, by interest rate increases high enough to slash growth, employment, and income levels), they’ll cut their overall spending even if they keep paying higher prices for those staples. Further, they can in principle reduce their purchases on non-staples enough to bring demand down substantially, and with it, inflationary pressures.

No one could reasonably relish this kind of outcome. But if the 1970s experience teaches any lessons for today, it’s that serious hardship for much of the population can’t be avoided if the inflation war is to be won. In my view, Powell has rightly stated that this victory is essential for America’s long-term prosperity. And President Biden deserves credit for endorsing such priorities. But will the Fed Chair actually take the Volcker-like steps needed to beat down inflation? Will a U.S. President still declaring he wants to be reelected remain a fan if he does? Because I can’t yet bring myself to believe either proposition, I can’t yet bring myself to be optimistic that inflation will drop significantly any time soon.

Im-Politic: In Case You Doubt Biden’s Immigration Plans Will Hammer U.S. Wages

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Biden, Biden border crisis, Breitbart.com, budget reconciliation, chain migration, Council of Economic Advisers, demand, economics, Im-Politic, Immigration, Jobs, labor market, labor shortage, migrants, Neil Munro, supply, wages, workers

We’ve just gotten a bright, flashing sign that, despite some recent stopgap steps (like this and this) obviously meant to convey the impression that the Biden administration hasn’t completely and dangerously lost control of America’s southern border, the President is just as determined as ever to open the floodgates to seemingly unlimited numbers of foreigners.

Worse, the development I’m writing about also makes clear that the President cares not a whit about the likely economic harm his policies will inflict on workers legally in the country at present – too many of whom haven’t exactly been killing it economically for decades now.

That sign consists of a post on the White House’s website by the Chair of the President’s Council of Economic Advisers (CEA) and three other government economists touting “The Economic Benefits of Extending Permanent Legal Status to Unauthorized Immigrants.” Just so we’re totally clear on their intent, in plain English, the title would read, “The Economic Benefits of Giving Amnesty to Illegal Aliens.” And the strength of the administration’s Open Borders ambitions is clearest from the utterly threadbare manner in which the authors deal with a central question: whether amnesty would drive down the wages of workers who live in America legally now.

This question of course is especially salient now because, due to the labor market turmoil generated by the CCP Virus pandemic and resulting behavior changes and official responses, U.S. employers are experiencing problems hiring enough workers, and consequently, these workers are enjoying major new leverage in bargaining for higher wages.

As pointed out in the CEA post, “Permanent legal status is likely to increase the effective labor supply of unauthorized immigrants” and that, “Given that providing legal status to unauthorized immigrants would increase their effective labor supply, critics of legalization argue there could be adverse labor market consequences for native and other immigrant workers.”

Here of course is where you’d expect the highly credentialed experts who wrote this post to respond with reams of evidence (or at least citations of scholarly works), decisively proving that, however commonsensical it seems to conclude that increasing the supply of anything (including labor) all else equal will reduce the supply of that thing, it ain’t so in the case of illegal aliens.

But as initially (at least to me) pointed out by Breitbart.com‘s Neil Munro, nothing of the kind happened. Here’s what the CEA said:

“While there is not a large economics literature on the labor market effects of legalization on other workers, in a well-cited National Academies report on the economic and fiscal impact of immigration, a distinguished group of experts concludes that in the longer run, the effect of immigration on wages overall is very small.”

I could write an entire blog post on what’s jaw-droppingly wrong with this sentence’s methodology. Chiefly, it’s not only an appeal to authority – which logically is an implicit confession that the appealers don’t know much themselves about the subject they’re writing about. It’s an appeal to authorities who themselves don’t seem to know much about their subject, or can’t cite any evidence. Therefore they can only offer an evidently unsupported conclusion.

But what’s most important to me about this CEA point is that it never challenges the wages claim made by those “critics of legalization.” All the authors can counter with is a contention that, at some unknown point, the wage depression resulting from amnesty will become “very small.” That’s some comfort to Americans workers today. And for possibly decades.   

Also crucial to point out is how narrow and thus misleading the post’s analytical framework is. It clearly assumes that amnesty won’t stimulate ever greater inflows of foreign laborers who compete against the domestic worker cohort that exists at any given time – which would include the millions of amnestied illegals. Yet everything known about the impact of looser immigration policies – and even official announcements thereof – demonstrates that they exert a powerful magnet effect on other foreigners. Nor do you need to take my word for it. That’s what many migrants themselves have said about the Biden administration’s approach. (See, e.g., here and here.)

The so-called magnet effect of the Biden roll-back of its predecessor’s immigration policies isn’t the only reason to expect the White House’s current approach to supercharge the supply of American workers. To mention just one example, his immigration reform bill and budget reconciliation bill would ease Trump-era limits on “chain migration” – a policy that enables immigrants into the country legally if a spouse, parent, child, or sibling already lives here legally. Further, once these chain migrants arrive, their own relatives receive the same easy entry. And so on. Special bonus: The restrictions on chain migration-related visas granted for employment reasons will be eased even further.

If a better way to keep a huge share of American workers underpaid (especially those in low-wage portions of the economy, which heavily rely on the kinds of low-skill employees who dominate the illegal alien population), let me know. And of course in the cruelest irony of all, as the CEA post shows, among the leading advocates of these wage-hammering measures are the very liberals and progressives that have for decades claimed to be champions of Americans left behind. 

(What’s Left of) Our Economy: State of the Union Fakeonomics on Immigration

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demand, economics, free trade agreements, Gillian B. White, Goldman Sachs, illegal immigration, Immigration, Jan Hatzius, Jobs, Obama, offshoring, State of the Union, supply, The Atlantic, TPP, Trade, Trans-Pacific Partnership, wages, workers, {What's Left of) Our Economy

The more I go over the economic thinking behind President Obama’s final State of the Union address, and some of the commentary it’s generated, the weirder both get. Here are two especially noteworthy examples, and they both flow from the president’s claim that: “Immigrants aren’t the principal reason wages haven’t gone up; those decisions are made in the boardrooms that all too often put quarterly earnings over long-term returns.”

Actually, Mr. Obama’s starting point is a straw man. I don’t know of anyone whose views have attracted significant attention who solely blames immigrants for wage stagnation. I don’t even know anyone who blames illegal immigrants. I do know lots of folks who believe that the levels (too high) and mix (too many uneducated and unskilled) of legal and illegal immigration have contributed meaningfully to this problem. But I guess States of the Union are no place for nuance.

Even stranger about the president’s contention, though, was his defense of mass immigration’s role in the American employment picture was its contrast with his treatment of trade deals like his Trans-Pacific Partnership and their own destructive impact on jobs and pay. This issue went unmentioned.

No one blames these agreements and related policies for the entire wage problem, either. But does the president genuinely suppose that trade deals, and the job and production offshoring to very low-wage countries they’ve encouraged, have been totally unrelated to the pursuit of those “quarterly earnings over long-term returns,” and by extension to wage woes? In fact, can he or anyone else reasonably doubt that these same shortsighted boardroom denizens have lobbied so hard to push these deals through Congress precisely because they help maximize short-term earnings so effectively at American workers’ expense?

Just askin’.

The second example of State of the Union-related economic weirdness comes from an Atlantic post making the case for the president’s views on immigration and wages. It was perfectly conventional – to the point of predictability – for Atlantic staffer Gillian B. White to trot out the usual studies showing that most economists strongly deny any immigration responsibility for U.S. wage stagnation.

What was a lot less conventional was her neglect of the obvious immigration- (and trade-) related implications of this point from another leading economist that she quoted and then paraphrased:

“‘The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment’” Jan Hatzius, the chief U.S. economist at Goldman Sachs wrote in a 2014 research note. That’s because many companies have learned to be leaner, they hire fewer employees, and still benefit from continually growing productivity. And because the country is still not at full employment, they can keep paying workers less. All of this serves to boost the company’s bottom line, while workers are unable to participate in those benefits.”

It’s clear to any thinking person that Corporate America has gotten much leaner (although this greater efficiency isn’t showing up in the productivity data any more). And it should be equally clear, as Hatzius notes, that this development has increased the supply of labor more than the demand for workers (the ultimate reason full employment hasn’t been reached), and therefore reduced the price of labor (as over-supply will do for anything in a reasonably free market, human or otherwise, that’s in surplus).

Hatzius wasn’t quoted on the link between this labor market mismatch and American immigration flows, but White is confident that “Obama is right” (about immigration – not trade, which she also ignores) and that “the level of wage dampening that immigration is actually responsible for in the broader scope of the problem pales in comparison to the wage suppression that has occurred since multi-billion dollar companies decided to prioritize rewarding shareholders first and workers last.”

Indeed, she states, the immigration effects are so slight compared with the supposedly entirely separate corporate governance and strategy changes that discussing the former is “a bit beside the point.”

But by definition, if she’s right, here’s what’s a bit beside the point, too: At a time of subpar employment levels that themselves are undermining workers’ bargaining power, the United States keeps admitting roughly one million legal immigrants each year. Moreover, it has enforced its borders so poorly that the illegal population stands at more than 11 million.

In turn, White’s reasoning implies, significantly reducing either the illegal population, or the legal flow (or both), and accordingly improving the labor supply-demand balance, would leave the bargaining power and wages of current, legal workers virtually the same.

It sounds like White doesn’t really believe that the laws of supply and demand apply to labor markets at all, or at least not to those with significant immigrant participation rates. Same for that majority of economists she cites. Who’s to say “No”? After all, economics isn’t a real science. But if this is the case, couldn’t these analysts declare their heresy openly, or at least tell the rest of us where supply and demand still matters, where it doesn’t, and why? While they’re at it, of course, they could let the rest of us in on what other venerable maxims of economics they’ve now decided we can do without – and when.