The Pitch: Economic Update for November 21st, 2024
Friends,
Nobody on earth could credibly describe Peter R. Orszag as a raging progressive. He served under Obama at the Office of Management and Budget and at the Congressional Budget Office, heading up two organizations that tend to be very small-c conservative in their budget estimates and analysis. And now he serves as Chief Executive of Lazard, a global financial firm that oversees nearly a quarter of a trillion dollars in assets worldwide.
So, it’s noteworthy that Orszag published a piece in the Washington Post that analyzes the origins of the waves of inflation that swept the globe in 2021 and 2022. Many economists and pundits have blamed inflation on the stimulus spending programs promoted by President Biden — the American Rescue Plan, the Inflation Reduction Act, the CHIPS Act, and the Bipartisan Infrastructure Bill — and those claims have come to be adopted as conventional wisdom.
Orszag has taken the time to analyze those claims. “Along with Robin Brooks of Brookings and William Murdock of Lazard, I have parsed a variety of economic data through the arc of the pandemic,” he writes, “including a commonly used measure of demand, supply indicators such as delivery times, and a proxy for how firms manage their inventories.”
The inflation that every American felt, Orszag writes, was caused by “the pandemic itself — and the nearly unprecedented supply-side shock it caused, which extended beyond the crisis itself.”
When you dig down into the data, it couldn’t be any more clear. Orszag explains that “supply-chain variables directly accounted for 79 percent of the rise in underlying inflation in 2021. These effects then continued into 2022, with ongoing supply issues directly explaining 60 percent of the rise in inflation that year.”
You can see the broken supply chain reflected clearly in the delayed delivery times that American companies faced throughout the years following the arrival of the pandemic:
As you can see, those increased delivery times continued until the end of 2022, driven “by spillovers from the 2021 supply-driven inflation,” Orszag says, adding that this “leaves only a modest role for demand-driven effects like the Covid relief package” to figure into those rising inflation numbers.
How did Orszag’s team determine that government spending didn’t raise inflation? They looked at the inflation rates of countries around the world.
“If the American Rescue Plan caused inflation, we should see that countries that provided more of such covid relief experienced more inflation,” he writes. “Yet other countries, including Germany and Britain, did a lot less covid relief and experienced similar inflation to the United States.” The vertical axis below shows how high inflation climbed in each nation, and the horizontal shows how much each nation spent as a percentage of its GDP:
Additionally, Orszag and friends looked at NBER’s analysis of stimulus spending and inflation rates across each of the 50 states and found no relationship between the rates of government spending and inflation.
Why is this important? Firstly, it establishes that the vast majority of economists were wrong about the causes of inflation. Many people, including Obama Administration economist Larry Summers, called for the Federal Reserve to raise interest rates high enough to cause companies to lay off millions of Americans in order to bring prices back down. Instead, “Inflation largely wasn’t caused by demand, so it wasn’t necessary to slash demand to bring inflation back down,” Orszag writes, adding that “The stunning implication is that inflation would have fallen significantly even without the Fed’s tightening.”
Secondly, this is important because you can be sure that practitioners of conventional wisdom will make heinous threats of inflationary pressures the next time we enter into an economic crisis that requires government intervention. But the record shows that investing in the American people didn’t cause inflation — indeed, those investments helped mitigate the impact of inflation faster than just about every other nation on earth.
There is one major factor in which Orszag and I disagree, however. Throughout 2022 and 2023, a number of businesses took advantage of inflation to raise prices higher than their costs, resulting in record-breaking profit margins even as working Americans literally footed the bill.
Orszag tries to explain these additional price-hikes away as the actions of cautious actors: “companies did not want to get caught not having what consumers wanted in stock again,” he writes. “Increasing prices to dampen demand and extend inventory life meant that the prices charged to consumers rose further above the cost to the seller. This meant profit margins went up, not because of ‘greedflation’ but instead because of a rational response to businesses managing their inventories.”
Respectfully, this is an attempt to rewrite history and frame CEOs as heroes in an uncertain time. The truth is that big corporations were raising prices more than necessary and pocketing the record profits simply because they could get away with it. We know this because corporations bragged about doing this in their quarterly earnings calls.
Earnings calls are important indicators of corporate intent because lying on an earnings call is a serious crime. As a result, earnings calls are the one place where executives tend to tell the unvarnished truth. And in those calls throughout 2023, none of those corporate executives said that they were worried about “not get[ting] caught not having what consumers wanted in stock again,” as Orszag explains. Instead, they all talked about raising prices because the consumer base was primed to accept price increases due to inflation.
But overall, Orszag’s editorial is an important and clear-headed look back at what we did right during the pandemic, and what orthodox economic analysis got wrong and continues to get wrong about the origins of inflation. This is one to bookmark for the inevitable next fight with trickle-downers over government spending during times of economic crisis.
The Latest Economic News and Updates
Where the Economy Stands Right Now
“Jerome H. Powell, the chair of the Federal Reserve, said that a solid economy with low unemployment, robust consumer spending and strengthening business investment gave the central bank room to take its time in cutting interest rates,” writes Jeanna Smialek at the New York Times.
Powell could have been sending a signal that the Federal Reserve might hold back on lowering interest rates any further at its December meeting. After all, the job market is proving to be sturdy, though not as exceptional as it was two years ago, and inflation is mostly where it needs to be after years of slowly lowering prices.
But for the Wall Street Journal, Matt Grossman explains that “Complicating the Fed’s December rate-cut decision is the growing divide between the bulk of the economy that has sailed smoothly through the central bank’s anti-inflation campaign and the important corners of the landscape that haven’t.”
Specifically, while Wall Street and the wealthy have been doing fine for the last few years, ordinary Americans have been feeling the pinch as housing prices stay unnaturally high and other prices have kept many working Americans from feeling as though the economy is working for them.
Even more complicated is the fact that positive economic signs are easy to find: For instance, the number of Americans without access to a bank account has hit a record low this year.
Emily Peck at Axios explains that the majority of Americans without a bank account are living in poverty. “Unbanked rates are higher for lower-income households and for Black, Hispanic and Native American people. 42% of those surveyed who didn’t have a bank account said they don’t have enough money to meet the minimum balance requirements,” Peck writes, while “Nearly 16% of those without an account said they don’t trust banks.”
Bank accounts are a strong economic signal of stability — if workers have enough money to set up and keep bank accounts, then they’re likelier to participate in the economy.
Joey Politano delivered some good news for housing this week: “Multifamily housing completions continue to surge as the backlog of projects started earlier in the pandemic steadily complete — so far this year, nearly half a million apartments have come online, the highest level since 1986,” he writes.
Housing prices and rents are very high, and new apartments offer consumers a little more choice in constricted housing markets. But Politano notes that housing starts — meaning, people and organizations building housing — “remain depressed below pre-COVID levels,” which indicates that there will be very few new housing units on the way for the next few years.
All of this ties back to the Fed’s upcoming decision on interest rates: While Chair Powell seems to believe that he’s in no hurry to bring interest rates down, the truth is that those high interest rates are keeping housing prices and credit card rates sky-high, and that’s putting a lot of pressure on working Americans. And we know that working Americans are the true engines of the economy, creating jobs with their consumer demand.
All of which is a long way of saying that the economy might not be as strong as the Fed thinks it is.
Also Driving Up Prices: Swipe Fees
On Tuesday, Senator Dick Durbin chaired a Judiciary Committee hearing to discuss exorbitant so-called “swipe fees” charged to retailers by Visa and Mastercard. Every time you use a credit or debit card at a business, the credit card companies charge retailers to process the transaction. Those fees have increased tremendously over the past few years, from a total of $20 billion in 2001 when industry groups began calculating them to an eye-watering $172 billion last year.
Small business advocacy group Small Business Rising has highlighted what those higher fees mean for retailers around the nation: A bookstore in California paid nearly $300,000 in swipe fees last year. A representative for the National Association of Convenience Stores says that “Swipe fees are the second-highest operating cost, on average, for these businesses. Only labor is a higher cost.”
The money that now goes into the profits of the world’s two largest credit card companies could instead have gone to keeping prices lower and raising the wages of employees. We’re all paying the price for these fees, even if customers don’t directly pay them.
Regular readers of The Pitch know what’s going on here: This is a clear case of a lack of competition in the marketplace. “Together, Visa and Mastercard control more than 80% of the credit card market,” Small Business Rising notes. “Their dominance allows them to extract a monopoly tax of 2–4% of every merchant transaction.” As more and more consumers go cashless, these retailers and restaurants have no choice but to pay the fees or go out of business.
Durbin has sponsored a piece of legislation called the Credit Card Competition Act of 2023, which Nerdwallet’s Sarah Rathner explains “would require large banks to allow more choice in terms of what payment network can be used for processing transactions that involve their credit cards.” Rathner elaborates, “So if, for example, a shopper used a Visa card to make a purchase, the merchant could choose Visa as the payment network to process the transaction, or it could opt for another (and possibly less expensive) network.”
“Supporters of the measure hope that adding this element of competition would bring down interchange fee rates,” Rathner concludes.
This is one of the few policies that has a chance of garnering bipartisan support in these hyperpartisanized times. After all, the American people are laser-focused on higher prices right now, and these fees are a clear and direct cause of higher prices at stores and restaurants.
This Week in Trickle-Down
As the incoming Trump Administration fills out its cabinet and Congressional Republicans start to discuss their agenda for the coming year, we’re seeing more and more stories about the consequences of their plans. There are some especially loud warning sirens that the Administration intends to bring back trickle-down economics with a vengeance — slashing regulations, cutting taxes on the rich, and stripping investments that grew the paychecks of working Americans. Just a few of the stories that caught my attention this week:
- “Trump aides are exploring plans to challenge a 1974 budget law in a way that would give the White House the power” to slash the budgets of, and potentially just outright defund, government agencies without Congress’s approval. “That effort, if successful, could give Trump far greater authority to remake the federal budget on his own, altering the balance of power among the branches of government,” writes The Washington Post.
- While the Trump Administration prepares to follow through on their promises to cut government jobs, the Wall Street Journal helps to explain the federal workforce in a series of charts. Some 2.3 million American civilians work for the government across 18 agencies, and the median pay for those workers is $97,204. Should those jobs be cut, the entire economy will feel the loss of those paychecks. As you can see in the chart below, the federal workforce has, for the most part, only decreased in times of economic contraction over the past four administrations:
- Retailers are preparing for Trump’s promised tariffs, and they all agree that consumers will face higher prices if the tariffs go through. “Autozone CEO Philip Daniele said on an earnings call, ‘If we get tariffs, we will pass those tariff costs back to the consumer,’” reports Axios. The Washington Post says that the European Union would be willing to enter into a trade war with the U.S. if the tariffs are too aggressive.
- “With Republicans set to control Washington, conservative lawmakers and policy experts who could advise the next Trump administration are discussing long-sought cuts to Medicaid, the government health program that covers roughly a fifth of all Americans and makes up about 10 percent of the federal budget,” writes the New York Times.
- “The new administration is widely expected to resume a push to remove Fannie Mae and Freddie Mac, the two national mortgage behemoths that buy up huge quantities of loans, from government control,” Rachel Siegel writes at the Washington Post, adding that, “economists and housing experts say the government has to be especially careful not to reshuffle the companies in a way that raises uncertainty or spooks investors, with mortgage rates already high and affordability at a crisis point.”
- And in another potential blow to the housing markets, Axios looked into which industries would likely be hardest-hit by the Trump Administration’s plans to deport undocumented immigrants. First and foremost, the construction industry would be decimated:
This Week in Middle Out
- “The Biden administration said on Friday that it had completed an agreement to award Taiwan Semiconductor Manufacturing Company up to $6.6 billion in grants, as federal officials race to put in place their plans to boost U.S. chip manufacturing before the end of President Biden’s term,” reports the New York Times.
- “The Justice Department will ask a judge to require that Google divest its Chrome browser” after a judge found that Google was guilty of violating antitrust law, writes Axios. This would be a monumental moment in antitrust law, but it remains to be seen if the Trump Administration will follow through.
- Danielle Kaye at the New York Times writes that “The National Labor Relations Board ruled on Wednesday that companies may not compel workers to attend meetings on the downsides of unionization, a tactic that unions say stifles worker organizing.”
- “Ford Motor will pay a fine of up to $165 million for not recalling cars with defective rearview cameras in a timely manner,” writes Neal E Boudette at the New York Times.
- The Center for American Progress has issued a report on state programs that are working to reduce climate pollution in the construction industry, which is responsible for producing 15% of all gasses that cause climate change.
- President Biden issued a statement congratulating the International Association of Machinists for a successful end to their strike at Boeing manufacturing plants. “This contract provides a 38% wage increase over four years, improves workers’ ability to retire with dignity, and supports fairness at the workplace. This contract is also important for Boeing’s future as a critical part of America’s aerospace sector. And it was achieved with the support of my economic team, including Acting Labor Secretary Julie Su and National Economic Advisor Lael Brainard,” President Biden wrote. “Over the last four years, we’ve shown collective bargaining works. Good contracts benefit workers, businesses, and consumers — and are key to growing the American economy from the middle out and the bottom up.”
This Week on the Pitchfork Economics Podcast
Faiz Shakir, Executive Director of More Perfect Union, joins Nick and Goldy this week to relay a truly remarkable story. As I noted earlier in this email, a good share of the price increases that we all paid over the last two years was the result of corporate greedflation — that is, corporations raising prices even higher than inflation and pocketing the millions of dollars of profits that roll in. Shakir explains that American oil manufacturers colluded with the foreign nations of OPEC to take advantage of inflation by jacking up the price of oil, and that these unnecessary price increases — which, again, went straight to profit margins — cost the average American family somewhere between $500 and $1000 per year.
Closing Thoughts
On Friday, a federal judge in Texas singlehandedly blocked a Biden Administration rule that would have expanded overtime benefits for four million American workers.
“U.S. District Judge Sean Jordan sided with the state of Texas and a group of business organizations that argued the Labor Department exceeded its authority when it finalized a rule earlier this year to significantly expand overtime pay for salaried workers — ruling that the department could not prioritize employee wages over job duties when determining eligibility,” reports the Associated Press.
As a reminder, the overtime threshold is the level at which employers are legally required to pay their workers time-and-a-half for every hour over 40 worked in a week. When the American middle class was at its strongest, the threshold covered 60% of all salaried Americans — the equivalent of $95,000 in today’s dollars — which is why Civic Ventures founder Nick Hanauer is fond of calling overtime “the minimum wage for the middle class.”
Strong overtime protections ensure that employers have to honor their workers’ time. If there’s more work that needs to be done, those workers will be compensated fairly for the personal time that they sacrifice to do the job.
The Biden Administration raised the threshold to “$43,888 a year in certain executive, administrative and professional roles as of July 1” of this year, and next year the threshold would have been bumped to $58,656. But with this judge’s decision, the federal overtime standard now reverts to the old overtime threshold, which was established at $35,568 by the Trump Administration in 2019.
David French, speaking for the National Retail Federation, which brought the overtime standard to court, argued that raising the threshold “would have curtailed retailers’ ability to offer the most flexible, generous and tailored benefits packages to lower-level exempt employees across the industry.”
This is a completely false, trickle-down assertion. No employer is required to pay out overtime. If a big retailer like Walmart doesn’t want to pay their workers time-and-a-half for extra work beyond the 40-hour workweek, they can simply hire more workers to do the extra work within normal working hours. (Or they could divert a tiny cut of the over $157 billion in profits they made last year into payroll to make up the difference.)
In 2016, another Texas judge killed the Obama Administration’s previous attempt to raise the overtime threshold to $47,476 per year. The pattern is clear: Overtime changes advanced by Democratic leaders that would benefit millions of workers get challenged in Texas and killed by Republican-appointed judges, while tiny Republican increases that benefit a handful of workers aren’t challenged by the usual business interests and are allowed to pass into law.
There are several takeaways for future action toward establishing a more middle-out overtime standard. First, we need judicial reform to end the practice of “judge shopping,” in which high-paid corporate attorneys find the most sympathetic trickle-down activist judges to unilaterally kill legislation that benefits American workers. One judge shouldn’t have the power to unilaterally take away the overtime pay of millions of workers around the country.
Second, more states should follow the lead of my home state of Washington, which has significantly raised its overtime standard and pegged it to the minimum wage. In 2028, when the new standard is fully established, virtually any employee who makes less than 2.5 times the state minimum wage in 2028 will be eligible for overtime. To give you an idea of what that threshold would be, 2.5 times Washington’s 2025 minimum wage of $16.66 an hour equals out to $1,666 per week, or $86,632 per year.
Tying the minimum wage together with overtime standards is smart policy because it ensures that when low-wage workers do well, so do workers in the middle class. Every time the minimum wage increases, so do overtime protections for office workers and other salaried professionals.
And with all due respect to the Obama and Biden Administrations, it’s fairly clear in retrospect that bumping the overtime threshold a little bit at a time isn’t going to placate the business lobby, or cause trickle-downers to roll over and allow the threshold to be passed. In other words, if you’re going to fight for workers, you should take big swings. If your overtime threshold benefits the vast majority of the workforce, those tens of millions of workers around the country are going to be furious when someone tries to take those benefits away, and elected officials will understand that there are likely to be consequences for their actions.
Overtime is a policy that we at Civic Ventures have been supporting and promoting for a decade. We believe it’s central for the well-being of the American worker to shore up the 40-hour workweek that people fought and died to win, and it’s another big step toward returning some of the $50-odd trillion dollars that big corporations have sucked out of worker paychecks since the 1970s. I’m not going to lie — it’s disheartening to see these common sense middle-out economic policies taken down in such an incredibly undemocratic fashion.
But failures are a part of the political process. And the good news is that we can learn from these losses and come back better prepared the next time. We can dream bigger, act smarter, and build stronger. The American people deserve nothing less.
Onward and Upward,
Zach
Government Spending Didn’t Cause Inflation was originally published in Civic Skunk Works on Medium, where people are continuing the conversation by highlighting and responding to this story.