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Biden and the Fed Wanted a Hot Economy. There’s Risk of Getting Burned. – The New York Times



So far, in a real-world test of a new approach to economic policy, prices have been rising faster than wages.

Seen at a U-Haul in Overland, Mo., earlier this summer. A “high-pressure” economy has brought more people into the labor market and pushed up wages at the lower end of the income scale. 
Whitney Curtis for The New York Times

There is a big idea in economic policy that has become ascendant in recent years: Great things can be achieved for American workers if the economy is allowed to run hot.

The notion of creating a “high-pressure” economy is that government should be willing to risk a bit of inflation in the near term to achieve conditions that will over the long run lift people out of poverty, prevent the scars of recessions from becoming permanent, and make the nation’s economic potential stronger.

This idea has origins in a 1973 paper by Arthur M. Okun, and was largely confined to think tank conferences in the 2010s. Now, it is the intellectual underpinning of American economic policy, embraced at the highest levels by the Biden administration and the Federal Reserve.

It makes for a real-world test of a new approach to economic policy. The results so far show that pushing the economic accelerator to the floor has trade-offs, specifically the combination of trillions in federal spending with interest rates held near zero.

While that combination has some created some important beneficial effects, the summer of 2021 has not produced quite the high-pressure economy its enthusiasts were hoping for.

The good news is that job openings are abundant, wages for people at the lower end of the pay scale are rising quickly, and it appears that the post-pandemic recovery won’t be like the long slog that followed the three previous recessions.

But consumer prices have been rising faster than average wages — meaning that, on average, workers are seeing the purchasing power of their paycheck fall. People looking to buy a car or build a house or obtain a wide variety of other products are finding it hard to do so. And while much of that reflects temporary supply disruptions that should abate in coming months, other forces could keep prices rising. These include soaring rents and the delayed effects of higher prices from companies having to pay higher wages.

“I don’t think of the last few months as either vindication or repudiation, yet,” said Josh Bivens, director of research at the Economic Policy Institute and a longtime enthusiast of policymakers seeking a high-pressure economy.

In effect, unlike the slow-moving developments of the 2010s, when the debates over running the economy hot took shape, things are moving so fast right now that it is hard to be sure how things will look as conditions stabilize.

Still, “I think the benefits of carrying on the go-for-growth strategy will come,” Mr. Bivens said, noting exceptionally strong job creation in recent months.

A more traditional view has been that it is unwise for policymakers to try to push unemployment too low, because doing so will generate inflation. That thinking lost credibility as the 2010s progressed — the jobless rate fell ever lower, with few signs of an inflation spike.

But while the tight labor market from 2017 to 2019 generated strong inflation-adjusted wage gains for workers, especially at the lower end of the pay scale, there is nothing automatic about that process. In a booming economy, if companies raise prices more rapidly than they increase worker pay — taking a higher markup on the products they sell — it will mean workers are effectively making less for each hour of work.

In the past, it has cut both ways. In the strong economies of the late 1960s and late 1990s, average hourly earnings for nonmanagerial workers persistently rose faster than inflation. In the late 1980s, the reverse was true.

And it is also true now. Wages and salaries in the private sector were up 3.6 percent in the second quarter from a year earlier, according to Employment Cost Index data, the strongest since 2002. But the Consumer Price Index was up 4.8 percent in that same span, meaning workers lost ground. Other measures of compensation and inflation tell a similar story.

One big question is whether elevated inflation is simply an unavoidable consequence of the reopening of the economy after a pandemic, or is at least partly a result of the aggressive use of fiscal and monetary policy to heat up the economy quickly.

For example, automobile prices are through the roof, which analysts attribute mainly to microchip shortages caused by production decisions made during the pandemic. But is part of the spike in prices also a result of high demand, spurred by stimulus checks the government has sent and low interest rates that make car loans cheap?

Jason Furman, a Harvard economist and former chairman of the White House Council of Economic Advisers, points out that the United States is experiencing significantly higher inflation than other countries that are facing the same supply problems. Consumer prices rose 2.2 percent in the year ended in July in the euro area, compared with 5.4 percent in the United States.

“My guess is that real wage growth is faring better right now in Europe than it is in the United States, and it’s faring better because there is less demand and thus less inflation,” Mr. Furman said.

The story is better when you look at how lower-paid workers in the United States are doing. The shortages of workers, especially in service industries, are translating into raises for people who don’t make a lot. Data from the Federal Reserve Bank of Atlanta shows that median hourly wages for people in the bottom 25 percent of earners have risen at a 4.6 percent rate over the last year, compared with 2.8 percent for the top 25 percent.

And many of the benefits of a hot economy come in the form of pulling more people into the work force and enabling them to work more hours. Employers have added an average of 617,000 jobs a month so far in 2021, versus 173,000 a month in 2011, in the aftermath of the global financial crisis. If sustained, the United States is on track to return to its prepandemic employment level two years after the recession ended. Such a recovery took five years after the previous recession.

Advocates of running a hot economy emphasize that a rapid recovery is good for reducing inequality, in part by ensuring there are plenty of job opportunities so that people don’t have to be out of work for long stretches.

“We are seeing ongoing stimulus and expanded income support programs doing what they’re supposed to do,” said J.W. Mason, a fellow at the Roosevelt Institute and a longtime proponent of running the economy hot. “The numbers we should really be looking at are employment growth and wage growth, especially at the low end, and those trends are positive and encouraging. They’re the numbers we would have hoped to see at the beginning of the year.”

In the late years of the last expansion, employment gains were particularly strong for racial minorities, people with low levels of education, and some others who often have a hard time getting hired.

“The thing we know for certain is that when you run a hot economy, people get jobs who wouldn’t otherwise get jobs,” Mr. Furman said. “That by itself is sufficient reason to want to run a hot economy. You’re talking about some of the most vulnerable workers getting hired, and that’s a wonderful thing.”

Still, even some supporters of running the economy hot see risk that the scale and pace of stimulus actions have been too much.

“It’s not that my commitment to a tight labor market has weakened,” said Michael Strain of the American Enterprise Institute, one of the center-right voices who favored the approach. “It’s that the specific policy mix is a mistake, for a bunch of reasons. There is such a thing as too much stimulus, which becomes counterproductive, either because inflation eats away wage gains or the supply side of the economy can’t keep up.”

Even people who believe in a high-pressure economy, in other words, would do well to keep an eye on just how high that pressure is getting, and how sustainable it really is.

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Stagflation rocked the economy before. Is it coming back? – CNN



A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.

London (CNN Business)Mention the word “stagflation” to someone who followed the economy in the 1970s, and you can expect a strong reaction.

The phenomenon — which describes a period of high inflation and stagnant economic growth — was a nightmare for policymakers, leaving them with few options to rein in runaway prices without damaging the economy. Federal Reserve Chair Paul Volcker was ultimately forced to jack up interest rates to unprecedented levels to get inflation under control.
Now for the bad news: Decades later, talk of stagflation is back.
“One can make a case that ‘mild’ stagflation is already underway,” the economist Nouriel Roubini wrote in a recent column. “Inflation is rising in the United States and many advanced economies, and growth is slowing sharply, despite massive monetary, credit, and fiscal stimulus.”
Roubini has been dubbed “Dr. Doom” for his dark predictions about the economy. But the thrust of his point stands. In the United Kingdom, inflation rose at the fastest rate in at least 24 years in August. In the United States, consumer prices rose 5.3% for the year ended in August and 0.3% compared to July. That was better than recent months, but well above pre-pandemic norms.
Meanwhile, economists have been downgrading predictions for economic growth as they assess the impact of the highly contagious Delta variant of the coronavirus, which arrives as some stimulus measures start to wind down.
A prolonged period of stagflation is still not the baseline assumption among economists and Wall Street investors.
“Is that a permanent state, or is [it] more related to frictions around reopening? I think most of it is temporary,” Neil Shearing, group chief economist at Capital Economics, told me.
But there is reason to pay close attention to what’s unfolding. Although the Federal Reserve also maintains that recent inflation is transitory, and will pass once post-pandemic supply chain pressures and labor market disruptions ease, consumers are exhibiting growing anxiety.
Last week, the Federal Reserve Bank of New York released its latest survey of consumer expectations. It found that inflation expectations for the year ahead were at a record high, as were those at the three-year horizon. The data goes back to 2013.
Breaking it down: Economists closely watch inflation expectations because they could encourage workers to demand higher wages. If consumers are paid more, their purchasing power grows, and businesses may hike prices again — starting the entire cycle anew.
In a recent note to clients, Bank of America strategists Ohsung Kwon and Savita Subramanian also flagged concerns about energy prices. The 1973 oil crisis is widely seen as having exacerbated inflation problems.
“Although not our base case, stagflation has often been accompanied by oil shocks, and with crude prices recently jumping on supply chain disruptions, the risk of oil shocks has increased,” Kwon and Subramanian said.
What happens next: The economy is showing some signs of resilience in the face of the Delta variant. But Kwon and Subramanian are advising clients to consider stocks with healthy dividends and shares of smaller companies that are more protected from inflation.
Those in charge of managing the economy, meanwhile, must weigh a complex matrix of factors. Officials at the Federal Reserve and the Bank of England, who will meet this week, have to decide whether to stick to their assessment that the problem is fleeting.
That would allow them to start pulling back crisis-era support in an orderly fashion. But as stagflation chatter grows, these decisions won’t be easy.
“It’s going to be an uncomfortable few months for central banks,” Shearing said.

Catch up on the WSJ’s blockbuster Facebook investigation

Last week, the Wall Street Journal released a series of damning articles about Facebook (FB), citing leaked internal documents that detail in remarkably frank terms how the company is not only well aware of its platforms’ negative effects on users, but also how it has repeatedly failed to address them.
There’s a lot to unpack from the Journal’s investigation. But one thing that stands out is just how blatantly Facebook’s problems are documented, using simple, observational prose not often found in internal communications at multinational corporations, my CNN Business colleague Allison Morrow writes.
She’s combed through the series and identified some highlights.
On teen health: In the Journal’s report on Instagram’s impact on teens, reporters cite a slide deck from Facebook’s own researchers.
“We make body image issues worse for one in three teen girls,” said one slide from 2019, according to the WSJ. Another reads: “Teens blame Instagram for increases in the rate of anxiety and depression … This reaction was unprompted and consistent across all groups.”
Facebook’s whitelist: Facebook CEO Mark Zuckerberg has repeatedly, publicly maintained that Facebook is a neutral platform that puts its billions of users on equal footing. But in another report on the company’s “whitelisting” practice — a policy that allows politicians, celebrities and other public figures to flout the platform’s rules — the WSJ found a 2019 internal review that called Facebook out for misrepresenting itself in public.
“We are not actually doing what we say we do publicly,” the review said, according to the paper. “Unlike the rest of our community, these people” — those on the whitelist — “can violate our standards without any consequences.”
Getting angrier: In 2018, Zuckerberg said a change in Facebook’s algorithm was intended to improve interactions among friends and family and reduce the amount of professionally produced content in their feeds. But according to the documents published by the Journal, staffers warned the change was having the opposite effect.
A team of data scientists put it bluntly: “Misinformation, toxicity and violent content are inordinately prevalent among reshares,” they said, according to the Journal’s report.
Scrolling on your couch? The full investigation is more than worth your time.

Up next

Monday: NAHB Housing Market Index
Tuesday: OECD economic outlook; US building permits and housing starts; AutoZone (AZO), Adobe (ADBE), FedEx (FDX) and Stitch Fix (SFIX) earnings
Wednesday: Bank of Japan and Federal Reserve policy decisions; US existing home sales; General Mills earnings
Thursday: Bank of England policy decision; Darden Restaurants (DRI), Rite Aid (RAD), Nike (NKE) and Costco (COST) earnings; US initial jobless claims
Friday: New US home sales

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Opinion | The Economic Mistake Democrats Are Finally Confronting – The New York Times



The words “supply side” are coded, in American politics, as right wing. They summon the ghost of Arthur Laffer, the history of Republicans promising that cutting taxes on the rich will encourage the nation’s dispirited John Galts to work both smarter and harder, leading economies to boom and revenues to rise. This has made it vaguely disreputable to worry about the supply side of the economy. It’s as if the nonsense of phrenology had made it sordid for doctors to treat disorders of the brain.

But look closely and you can see something new and overdue emerging in American politics: supply-side progressivism.

Many of progressivism’s great dreams linger on the demand side of the ledger. Universal health care promises insurance people can use to buy health care. Food stamps give people money for food. Housing vouchers give them money for rent. Pell Grants give them money for college. Social Security gives them money for retirement. The child tax credit gives them money to care for their children. The minimum wage and the earned-income tax credit give workers more money. A universal basic income would give everyone more money.

This is the driving theory of most of the progressive policy agenda, most of the time: give people money or a money-like voucher they can use to buy something they need or even just want.

I don’t mean, in any way, to diminish the importance of those policies. There is little Democrats could do that will help as many people right now as making the expanded child tax credit permanent. The rumblings that it may be allowed to expire, or restricted only to those who pay federal income taxes, are worrying. If Democrats do nothing else this session, they should delete the expiration date from the biggest anti-poverty legislation they’ve passed since the Great Society.

But progressives are often uninterested in the creation of the goods and services they want everyone to have. This creates a problem and misses an opportunity. The problem is that if you subsidize the cost of something that there isn’t enough of, you’ll raise prices or force rationing. You can see the poisoned fruit of those mistakes in higher education and housing. But it also misses the opportunity to pull the technologies of the future progressives want into the present they inhabit. That requires a movement that takes innovation as seriously as it takes affordability.

The first problem is explored in “Cost Disease Socialism,” a new paper by the center-right Niskanen Center. “We are in an era of spiraling costs for core social goods — health care, housing, education, child care — which has made proposals to socialize those costs enormously compelling for many on the progressive left,” Steven Teles, Samuel Hammond and Daniel Takash write.

There are sharp limits on supply in all of these sectors, either because regulators make it hard to increase supply (zoning laws make it difficult to build new housing), because training and hiring workers is expensive (adding classrooms means adding teachers and teacher aides, expanding health insurance requires more doctors and nurses), or both. “This can result in a vicious cycle in which subsidies for supply-constrained goods or services merely push up prices, necessitating greater subsidies, which then push up prices, ad infinitum,” they write.

The paper is largely an appeal to Republicans to rethink their approach. Instead of focusing on “backward-looking deficit reduction strategies based on budgetary gimmicks or dead-on-arrival cuts to existing entitlements,” the authors urge conservatives to tackle costs directly. Too often, Republican proposals to cut government spending are just shell games that shift costs onto individuals. The conservative enthusiasm for moving Medicare beneficiaries onto (often more expensive!) private plans “risks being little more than an accounting trick — a purely nominal change in ‘who pays’ that would do little to address the underlying sources of cost growth.” Preach!

It would be nice to have the Republican Party the Niskanen Center imagines, one more focused on making a decent life affordable than on making vaccination optional, and I wish it well in its effort to white paper it into existence. For now, though, it’s Democrats who are starting to take supply-side concerns seriously.

But before we get to that, I want to widen the definition of “supply,” a dull word within which lurks thrilling possibilities. Supply-side progressivism shouldn’t just fix the problems of the present, it should hasten the advances of the future. A problem of our era is there’s too little utopian thinking, but one worthy exception is Aaron Bastani’s “Fully Automated Luxury Communism,” a leftist tract that puts the technologies in development right now — artificial intelligence, renewable energy, asteroid mining, plant and cell-based meats, and genetic editing — at the center of a post-work, post-scarcity vision.

“What if everything could change?” he asks. “What if, more than simply meeting the great challenges of our time — from climate change to inequality and aging — we went far beyond them, putting today’s problems behind us like we did before with large predators and, for the most part, illness. What if, rather than having no sense of a different future, we decided history hadn’t actually begun?”

Bastani’s vision is bracing because it insists that those of us who believe in a radically fairer, gentler, more sustainable world have a stake in bringing forward the technologies that will make that world possible. That is a political question as much as a technological one: Those same technologies could become accelerators of inequality and want if they’re not embedded in thoughtful policies and institutions. But what Bastani sees clearly is that the world we should want requires more than redistribution. It requires inventions and advances that render old problems obsolete and new possibilities manifold.

Climate change is the most pressing example. If the Biden administration gave every American a check to transition to renewables, the policy would fail, because we haven’t built that much renewable capacity, to say nothing of the supply chain needed to deploy and maintain it. In a world where two-thirds of emissions are now coming from middle-income countries like China and India, the only way for humanity to both address climate change and poverty is to invent our way to clean energy that is plentiful and cheap, and then spend enough to rapidly deploy it.

Or take health care. House and Senate Democrats are squabbling over dueling policies to let Medicare set the prices it pays for drugs. Europeans and Canadians pay far less for the same prescription drugs that we buy, and so House Democrats want to let Medicare set the prices of at least some drugs at 120 percent what our peer countries pay. Senate Democrats, according to STAT, seem to be moving toward directing Medicare to set prices based on what the Veterans Health Administration pays, which is lower than before but still higher than abroad. (It’s darkly comic that neither chamber has simply taken the position that Americans shouldn’t pay more than Canadians for prescription drugs.)

The counterargument here is frustrating, but important. Yes, Americans overpay compared to peer countries for drugs. But truly curing, managing or preventing disease is of extraordinary value to humanity. Pfizer and Moderna will make billions from their coronavirus vaccines, but they’ve created trillions of dollars in economic value by unfreezing economies, to say nothing of the lives saved. It is true that European countries free-ride off the high cost we pay for drugs, because it’s the U.S. market that drives innovation. But that doesn’t mean we’d be better off paying their prices, if that meant new drug development slowed. We don’t just want everyone to have health insurance in the future. We want them to be healthier; freed from diseases and pain that even the best health insurance today cannot cure or ease.

To this, progressives will note that pharmaceutical companies pump money into me-too drugs, spend gobsmacking amounts on advertising and administration, and make billions and billions in profits. And they’re right. It’s ludicrous to say that the pharmaceutical system we have now is oriented toward innovation. It’s oriented toward profit — sometimes that intersects with innovation and sometimes it doesn’t.

Too often, though, progressives let their argument drop there. They need to take the obvious next step: We should combine price controls with new policies to encourage drug development. That could include everything from more funding of basic research to huge prizes for discovering drugs that treat particular conditions to more public funding for drug trials. Years ago, Bernie Sanders had an interesting proposal for creating a system of pharmaceutical prizes in which companies could make millions or billions for inventing drugs that cured certain conditions, and those drugs would be immediately released without exclusive patent protections. Focusing on the need to make new drugs affordable while ignoring the need to make more of them exist is like trimming a garden you’ve stopped watering.

But this is a lesson progressives are, increasingly, learning. This is clearest on climate. Much of the spending in the Biden agenda is dedicated to increasing the supply of renewable energy and advanced batteries while building the supply of carbon-neutral transportation options. Democrats have realized that markets alone will not solve the climate crisis. And the same is true for much else on the progressive docket.

In a blog post, Jared Bernstein, a member of President Biden’s Council of Economic Advisers, and Ernie Tedeschi, a senior policy economist for the council, framed the Biden agenda as “an antidote for inflationary pressure” because much of it expands the long-term supply of the economy.

“The transportation, rail, public transit, and port investments will reduce efficiency-killing frictions that keep people and goods from getting to markets as quickly as they should,” they wrote. “The child and elder care investments will boost the labor supply of caretakers. The educational investments in pre-K and community college will eventually show up as higher productivity as a result of a better-educated work force.”

A list like this could go on. It’s not clear whether it’ll be in the reconciliation bill, for instance, but Biden has proposed an expansive plan to increase housing supply in part by pushing local governments to end exclusionary zoning laws. And in California, that’s exactly what’s happening, as I wrote a few weeks back. A decade ago, progressives talked often of making housing affordable, but they didn’t talk much about increasing housing supply. Now they do. That’s progress.

I don’t think these various policies have cohered into a policy faction, a way progressives think of themselves, at least not yet. But I’d like to see that happen. Political movements consider solutions where they know to look for problems. Progressives have long known to look for problems on the demand-side of the economy — to ask whether there are goods and services people need that they cannot afford. That will make today fairer, but to ensure tomorrow is radically better, we need to look for the choke points in the future we imagine, the places where the economy can’t or won’t supply the things we need. And then we need to fix them.

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Swedish Economy Can Withstand Surging Energy Prices, Lofven Says – BNN



(Bloomberg) — The Swedish economy is robust enough to withstand the effects of the energy crunch that has gripped Europe and filtered into Scandinavia, Swedish Prime Minister Stefan Lofven said.

“We have a very, very strong economy,” Lofven said in an interview in New York on Sunday. “If we have dramatically higher prices in the long term that will affect consumption, but I don’t think we’re there.”

Sweden’s debt to gross domestic product ratio has held below 40% even during the Covid-19 crisis and remains one of the lowest in Europe. That measure is set to fall to about 35%, Lofven said.

Natural gas prices in Europe have more than tripled this year, sparking fears of surging inflation across the continent and even prompting the U.K. government to hold emergency talks with power suppliers. 

While natural gas isn’t widely used in Sweden, it has spurred a jump in other energy costs, which have historically been among the lowest in the region. Consumer prices climbed more than expected in August, and Swedbank AB warned last week that inflation could reach the highest level since the global financial crisis in 2008.

One simple solution, according to Lofven, is to produce more power. The country normally has an annual surplus of about 25 terawatts that it sells to Europe — hydro power accounts for the biggest proportion of Sweden’s electricity production, followed by nuclear. By 2040, it plans to double electricity output from current levels, he said.

The current crisis reinforces the need for the European Union to work out how best to produce more electricity in the longer term, according to Lofven, who said last month he was stepping down as prime minister. 

“We need to watch out,” he said. “The whole European Union needs to think this through.”

©2021 Bloomberg L.P.

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