inflation – Sheila Kennedy

The Data And The Public

Axios has an annual Thanksgiving feature in which the publication looks at (verifiable) economic evidence for which we should be grateful. Given the mountains of misinformation and outright propaganda about the economy being promulgated for political purposes, it’s worth taking a look at what the numbers actually show.

First of all, the article says we should be grateful is that lots of Americans are working. Predictions that workers wouldn’t return to the labor force after the pandemic were simply wrong.

Workers have joined the job market in droves. The rebound in supply, lifted in part by an immigration surge, has helped the labor market come into better balance amid continued low unemployment.

The share of workers aged 25-54 who were employed was 80.6% in October — down slightly from a multi-decade high reached over the summer but higher than was seen in any month between June 2001 and January 2020.

For women aged between 25 and 54, the share who are in the labor force is near its highest level ever. So much for pandemic-era fears of a prolonged “she-cession.

Not only are people working, real wages are rising.

No matter your preferred wage growth measure, the data tells a similar story. While pay isn’t rising quite as fast as 2022’s breakneck pace, inflation has cooled much faster.

Not only that, wages finally began to outpace inflation this year; average hourly earnings for rank-and-file employees are up 4.4% over last year, and inflation is down to 3.2%. That should help keep consumer spending —a bedrock of the U.S. economy– healthy.

There are other grounds for gratitude:

The banking crisis that wasn’t. Eight months ago, the collapse of Silicon Valley Bank and two other large regional banks looked like the start of a banking crisis that risked choking off lending economy-wide. It hasn’t happened.

There have been no further major bank failures, and credit availability has generally remained stable.The government’s decision to use emergency authorities to make even the largest depositors in SVB whole instilled confidence in the banking system and prevented both mass outflow of deposits and large-scale contraction of bank lending.

If you are an enthusiast of the Fed’s H.8 report (Assets and Liabilities of Commercial Banks in the United States, as it is known) — and who isn’t — you will see that banks’ aggregate real estate loans, consumer loans and most other forms of lending are higher now than a year ago.

Commercial and industrial loans are down only very slightly, to $2.775 trillion in October from $2.777 trillion a year earlier.

And gas prices are coming down.

We need more media reports based upon economic reality, because there is a persistent difference between that reality and the public’s perception of the economy, which is much more sour than it should be in some areas, and far too sanguine in areas that ought to be seen as deeply troubling.

Take opinions about inflation. Polls show that Americans believe inflation to be much higher than the statistics show. There is scant media attention to the fact that the U.S. brought the rate of inflation down more rapidly than Europe (we won’t even discuss Argentina…)The annual inflation rate in the EC was 4.3% in September 2023, which was down from 5.2% in August. A year earlier, the rate had been 9.9%.

What is truly ironic is that Americans hold these negative beliefs about what has been genuinely positive performance at the same time that most are blissfully ignorant of far more worrisome aspects of the economy.

According to a 2015 article in Scientific American,

The average American believes that the richest fifth own 59% of the wealth and that the bottom 40% own 9%. The reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry 0.3%.

That gap has not narrowed.

I have spent the last 30 years warning about the consequences of the low levels of civic literacy in this country. My focus has been on the nation’s constitutional framework–the Constitution, the Bill of Rights, and the philosophical premises that undergird those documents. I now realize–thanks to the persistent disconnect between economic reality and public opinion about the economy– that the country has major problems with economic literacy as well.

Our economy has problems. They just aren’t the ones a majority of our citizens recognize or understand. We aren’t going to be able to address those problems unless a majority of our citizens can accurately identify them. Basic economic literacy is just as necessary as constitutional literacy if the voting public is going to install public officials who understand those basics.

I’m beginning to understand why we have so few citizens who cast truly informed votes.

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Meanwhile….

As House Republicans noisily demonstrate their utter lack of interest in governing, other parts of the federal system continue to operate. The Fed, for example, continues to battle inflation.

In a lengthy October essay in the New York Times, Ezra Klein provided an overview of the causes of inflation and the choices policymakers face when trying to control it.

Inflation often begins as a mismatch of supply and demand. But if people get accustomed to prices rising, then inflation becomes about expectations. And so the task of ending it grows fuzzier: You need to use policy not just to manage the economy but also to alter psychology. The arid language of economics obscures the brutality this demands. You need to hit the economy hard enough to cow everyone who makes decisions within it.

Because that’s what prices are: decisions. Those decisions, even when mediated by algorithms, are made by people trying to predict the decisions other people will make. When people start to believe that other people are raising prices, they will raise prices. If they think other people are raising prices even faster, they will raise prices even faster than that. “How can you persuade people to expect differently?

One way is by increasing supply., but that usually can’t be done quickly. Another is by cutting demand by raising interest rates–but that makes it harder to borrow money or afford homes, and inevitably throws people out of work.

Klein reminded readers of Paul Volker’s approach to “stagflation” in the 1970s.

Volcker forced a recession so deep that the entire psychology of the American economy changed. Today he is celebrated for his steel. Powell invokes him as inspiration. In a speech at a Fed conference in Jackson Hole this summer, he mentioned Volcker twice and said, of the intended rate hikes, “we must keep at it until the job is done,” presumably a reference to Volcker’s memoir, “Keeping At It.”

Using interest rate hikes to manage inflation operates like a sledgehammer: it reduces demand, but also cuts supply.

When people lose their jobs, they stop producing the goods and services the economy needs. When mortgage rates spike, developers build fewer houses, despite the fact that high housing costs are often caused by too few houses. When borrowing money becomes expensive, people stop borrowing it and cease to make the investments that create future productivity.

Klein documents the various ways in which interest rate hikes disproportionately harm the poor and the jobless, and says that it would be “nice to have a policy that targeted the rich rather than the poor and did so in a way that didn’t hurt long-term investment.”

He asserts that “such a policy exists.” It’s a progressive consumption tax.

Here’s how it works. Instead of reporting your income to the I.R.S. and being taxed on that, you report your income minus your savings, and you’re taxed on that. That’s a consumption tax: Your taxable income is what you spend, not what you save. Congress can make it progressive by adding a hefty standard deduction and applying a much higher tax rate to people making much more money, just as we do now.

The economist who proposed this approach wasn’t concerned about inflation. He thought rich people’s spending wasn’t just wasteful, but harmful. Whether one accepts his definition of “harmful” or not–I’m dubious–Klein points to a truly useful aspect of a progressive consumption tax: it can be dialed up and down to respond to different economic conditions.

In a time of recession, we could drop taxes on new spending, giving the rich and poor alike more reason to spend. In times of inflation, we could raise taxes on new spending, particularly among the wealthy, giving them a concrete reason to cut back immediately and to save and invest more at the same time.

Ideally, adjustments could also be made automatic.

Perhaps for every percentage point increase in unemployment above 5 percent, the tax rate would fall by three points, and for every percentage point increase in inflation above 3 percent, it would rise by four points. Other rules could apply for periods when unemployment and inflation moved together. The tax code would become responsive to the economy by default, rather than only through new acts of Congress.

Given the GOP’s semi-religious objection to taxes, and the current domination of the House by people who can barely spell “economic policy,” let alone leave their preoccupations with culture war issues long enough to consider the operation of the economy, I don’t hold out much hope for passage of a progressive consumption tax in the near future, but it’s an intriguing idea.

We should file it away with other good ideas that await a (hoped-for) return of political sanity and lawmaker interest in actually governing.

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Messaging

As the midterms get closer, the punditry gets more predictable. For the past several weeks, not a day has gone by without at least one column–usually more– bemoaning the Democratic Party’s lack of effective messaging.

To which I say bull-feathers.

The problem with “messaging” isn’t that candidates aren’t choosing to emphasize arguments likely to move voters; the problem is the civic ignorance of those voters and the siloed information environments they inhabit.

Take inflation. Republicans are convinced that an emphasis on inflation is a winner for the GOP, and they may well be right. If they are, it will be because the average voter has absolutely no understanding of economics–and is totally unaware that inflation is currently a global phenomenon (much worse elsewhere, actually) with multiple causes.

Progressives have been pointing to several of those causes–“messaging” about the effect of the war in Ukraine, the Saudi’s outrageous decision to cut production so as to raise gas prices (a transparent effort to help Putin by helping Trump’s MAGA base), the persistence of pandemic supply chain problems, and a healthy dose of corporate greed.

That last item has led to calls by some economists for a one-time windfall profits tax–but again, how many American voters understand how price gouging occurs, or what a windfall tax is or does?

American voters have historically blamed the President–no matter who is in office and no matter what his party–for economic conditions a President cannot and does not control. Those voters have historically gone to the polls in midterm elections and ousted members of the President’s party–despite the fact that the opposing party is generally offering zero credible policies to address the economic problem of the moment.

Right now, the GOP’s proposal to “fix” inflation is to cut spending on Social Security and Medicare, and stop supplying arms and humanitarian aid to Ukraine. How many voters know that, or are aware of the various statements to that effect made by Republican members of the House and Senate?

For that matter, how many voters understand how the filibuster works, and how its deployment by the GOP has doomed popular legislation?

Until the most recent session of the U.S. Supreme Court, few voters understood the connection between the politics of the Senate majority and the placement of qualified jurists on that Court. (Most still don’t understand how we got the current, highly politicized and retrograde Court majority.)

A number of the pundits decrying the inadequacy of Democratic messaging are convinced that the upcoming election is about saving American democracy–a point with which I agree–and that effective messaging should focus on that threat. They never seem to explain just how they would address the loss of American democracy in those 30-second TV ads or glossy mailed flyers.

If American voters understood how our government is supposed to work–if they all knew, for example, that we have three branches of government (a fact that was evidently a revelation to Tommy Tuberville, elected to the U.S. Senate from Alabama presumably because he was a good athlete), and how those branches are supposed to operate, perhaps it would be possible to make the case in a way that would resonate with those voters. Without that public understanding, Democrats (and disaffected Republicans like Liz Cheney) are reduced to making the accusation–and an accusation is not an explanation.

For that matter, even excellent messaging must be heard to be effective.

If American voters all tuned in to the same media outlets, it might be possible to educate them about these matters, but of course, they don’t. Democratic messaging–no matter how brilliant–isn’t likely to reach the legions of voters glued to Fox News and its clones.

What do American voters know?

Most know that an illegitimate Supreme Court has–for the first time in American history–withdrawn a constitutional right. Most know that the right to reproductive autonomy is critical to women’s health and equality, and a significant number know that Republicans are very likely to continue to chip away at other rights previously protected by the constitutional right to privacy.

Some portion of the electorate knows that the President doesn’t control gas prices, and that Republicans will continue their assault on the social safety net. Growing numbers recognize that the MAGA movement is dangerous; they may not be able to define fascism but–like pornography– they know it when they see it.

Will what American voters do know be enough to upend the history of midterm elections–a history that favors the party not currently in control of the White House? Will what they do understand motivate sufficient numbers to turn out to VOTE BLUE NO MATTER WHO?

I guess we’ll find out.

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Follow The (Lack of) Money

After the West Virginia teacher’s strike, Vox published a fascinating graphic–an interactive database.

The article itself focused on the pay of teachers in West Virginia, and demonstrated how the buying power of those salaries–which remained essentially flat– had been eroded over the years by inflation. Accompanying the article was an interactive feature that allowed readers to see how their own states measured up.

I looked at Indiana.

The first graph showed average teacher pay (both elementary and secondary) over a fifteen-year period, in dollars, and not adjusted for inflation, both for Indiana and nationally. At the beginning of the fifteen years, national pay averaged $46,752 annually, and Indiana’s teachers came close to that average, at $45,791. By 2016, a significant gap had developed: national salaries averaged $58,950, but the average in Indiana was $50,554.

The graph that really “told the tale,” however, took the same time period and adjusted those numbers for inflation. That graph showed that teachers in Indiana have actually sustained a 15.1% pay cut over the past 15 years.

This is worse than the nation as a whole, where teachers have had their pay cut by an average of 3 percent when we adjust for inflation.

And since 2009, teachers in Indiana had their pay cut by 9.7 percent.

The interactive graph was followed by a table showing where each state’s education funding comes from. In Indiana, 9.8% comes from the federal government, 59.1% from the state, and 31.1% from local government.

There’s an old adage to the effect that “You get what you pay for.” Here in Indiana, the General Assembly came close to passing a bill that would have allowed school systems to hire classroom teachers who lack education credentials. As local media reported,

Like the rest of the country, Indiana is struggling to find enough qualified teachers to fill its public school classrooms. Lawmakers have proposed a possible solution: unlicensed teachers.

Right now, traditional public schools can only hire teachers who’ve met the state’s licensing requirements. While there are alternative paths to teaching, the traditional route to a license is a college teacher preparation program, student teaching and licensing exams in content and pedagogy, the actual practice of teaching.

Several recent studies have told us what most Americans already know: pay matters. The scholarship confirms that teacher salaries are linked to employee retention and that higher pay draws smarter people to the field and the classroom.

In most states, teachers are required to obtain a master’s degree. People with such credentials have options beyond the classroom. Very few of them are in a position to forego thousands of dollars annually in order work at jobs they may love, but that’s what we are asking them to do.

We shouldn’t be surprised if teachers in many (if not most) states who want to stay in the classroom follow the lead of West Virginia.

At some point, our slavish devotion to unrealistically-low tax rates has to give way to the need to pay for effective governance and necessary public services, including but not limited to education.

It’s like the old bumper sticker used to say: “Think education is expensive? Try ignorance.”

We’ve been trying ignorance for far too long, and thanks to the Trump Administration, the GOP and the NRA, among many others, we’re learning just how expensive it can be.

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