November 25, 2021
Okay, I’m an economist nerd, so don’t expect a rundown of all the good things and bad things we have seen in the last year. I will focus on the economy, but I have to say a few words about the pandemic.
No one can be happy about the resurgence of case numbers this fall, but there is an important point worth recognizing. As public health experts have repeatedly said, this is now a pandemic of the unvaccinated. I realize that many people who have been vaccinated are still getting the virus (including me).
But the people filling the hospitals, and especially the intensive care units, are overwhelmingly unvaccinated. The story is even more striking if people get booster shots. This further reduces the risk of serious illness, especially for older people and those with serious health conditions.
We can see how this story plays out by looking at Israel, which has been very aggressive in pushing boosters. Its seven-day average for new cases is 410, which would be the equivalent of 14,800 cases a day in the United States. Its average for Covid deaths is 4, the equivalent of 144 a day in the United States.
We might like to see these numbers go to zero, but that is not going to happen. It’s also worth pointing out that Israel has its share of anti-vaxxers as well, so these figures are not coming from a fully vaccinated population. (Also, it is worth repeating that the whole world could have been vaccinated far more quickly if the United States and other rich countries had not insisted on maintaining patent monopolies for the vaccines.)
Anyhow, if folks are vaccinated and get boosters, they can feel pretty well-protected against the pandemic. Those who have serious health issues will still be at some risk. Unfortunately, we have lots of loony tunes in this country whose definition of freedom means exposing these people to the pandemic, but thankfully most of us can now consider ourselves pretty safe in spite of these jerks.
Back to the Economy
With the booster rollout going at a pretty good pace, most people are getting back to normal and this shows up in the economic data. The 4.6 percent unemployment rate is still more than a percentage point higher than the pre-pandemic level, but already quite low by recent historical standards. We didn’t see an unemployment rate this low following the Great Recession until February of 2017.
In February, the Congressional Budget Office (CBO) projected that the unemployment rate would average 5.3 percent for the fourth quarter of this year. With the unemployment rate likely to fall further in November and December, we may average close to a full percentage point lower than the CBO projection for the full quarter.
The labor market has not looked so good, especially for workers at the bottom rung of the wage ladder, in more than fifty years. We just heard that weekly unemployment insurance claims for the week before Thanksgiving fell to 199,000, a level not seen since 1969 when the labor force was just half the current size.
Workers are quitting their jobs at record rates, especially in low-paying jobs like restaurant work. They feel confident that they can leave a job with low pay, bad working conditions, or an abusive boss, and find another one that is better.
And, this is showing up in higher wages. The real average hourly wage (this is the wage increase in excess of price increases) for production and non-supervisory workers has risen by 2.1 percent over the last two years. For the lowest-paid workers, the increase has been even larger. For restaurant workers, the increase in real pay has been 7.6 percent. For workers in convenience stores, the average real pay increase has been 19.6 percent.
The higher pay and the option to leave bad jobs means a huge improvement in the lives of tens of millions of workers. This has to be a good Thanksgiving for these people and their families. In fact, many of these workers will actually be able to spend Thanksgiving with their families since, in response to the tight labor market, Target, Walmart and many other major retailers will not be open on Thanksgiving this year.
But What About Inflation?
As I noted earlier, the media have been on anti-inflation Jihad. This has included distorting and even making up data to push their case. Nonetheless, inflation has clearly jumped to levels that few would find acceptable, and if they were to rise still further, we would definitely have a serious problem on our hands.
I have been and remain in the camp that sees this jump as a temporary phenomenon. The world economy reopened in a big way in the last six months, after being largely shut down in 2020. This led to serious disruptions in supply chains, which were not prepared for all the items being pushed through, especially since the demand was disproportionately on the goods side.
Compounding the problem, we had a fire at a major semiconductor factory in Japan, which led to a worldwide shortage of semiconductors. This led to a shortage of cars since semiconductors are an important component in new cars. The car shortage has been a major source of inflation over the last year, with new vehicle prices up 9.8 percent over the last year and used vehicle prices up 26.4 percent.
There are good reasons for believing that these price hikes will be temporary. Rather than leading to accelerating inflation, they are more likely to be reversed in the months ahead. In the case of car prices, we are seeing a rapid expansion in semiconductor production, which is allowing major manufacturers like Ford and Toyota to return to their normal production schedule.
We are also likely to see a falloff in demand in the months ahead. People who bought a car in 2021 are not likely to buy another one in 2022. This will be true for a wide range of products that saw a surge in demand both because of the pandemic checks people received at the start of the year and because they could not spend money on services like restaurants and concerts due to the pandemic.
These factors are now behind us. Restaurant spending is now above its pre-pandemic level, although spending on other services has not yet returned to its early 2020 pace.
Also, the pandemic checks, the paycheck protection program, the supplemental unemployment insurance supplements, and other pandemic programs are all in the rearview mirror. This means that any excessive spending attributable to these programs is history. People are spending now based on their current income.
In this respect, it is worth noting that the savings rate as a share of disposable income for October was 7.3 percent, just a hair below the 7.5 percent average for the three years prior to the pandemic. This is a big deal since it means that, to date, we are not seeing evidence that people are spending down the savings they accrued during the pandemic.
This means that we have little reason to believe that we will be creating new stress on supply chains going forward. We have a backlog of items that have to be shoved through the supply chain, but new demand should be close enough to pre-pandemic levels that our supply chains should be able to deal with them.
There is some evidence that we are already seeing price declines in many of the items that had pushed up inflation earlier this year. For example, lumber futures, which typically traded in a range of $300 to $500 before the pandemic, soared to a peak of almost $1,700 in May. They then fell back to under $500 in August. (More recently, they have bounced up higher, but still have generally remained at prices that are less than half the May peak.)
There is a similar story with a number of other commodities. The Baltic Dry Goods Index, which is a worldwide index of the spot prices for a number of widely traded commodities, soared earlier this year, peaking at over 5,500 at the start of October. Its more normal range would be between 1,400 and 1,600. In the last month and a half, it has fallen back sharply to 2,650.
It is worth noting that these price rises reflect worldwide conditions, not just the U.S. market. This point is important because other countries didn’t get the same boost to their recovery as we saw here with the American Recovery Plan (ARP) that President Biden pushed through Congress. This indicates that much of the inflation we are now seeing had little to do with the ARP, but rather was due to problems with reopening that would have been present regardless of the extent to which we boosted the U.S. economy.
The other point is that the price declines recently seen for many commodities support the argument for the price burst being a temporary one, which will be reversed in many areas. I have used televisions as a canary in the coal mine for this story. After rising by 10.2 percent from March to August (a 26.3 percent annual rate), television prices have since fallen by 2.8 percent in the last two months. They still have a way to fall to get back to their March level, but my guess is that this decline will continue and that we will see a similar story with many other products that had pushed up inflation earlier this year.
There is one other point worth making on the temporary side. Contrary to the prediction of Larry Summers and other inflation hawks, the dollar has not fallen in value in the wake of the ARP. In fact, it has risen sharply. The dollar is up by almost 10.0 percent against the euro since the start of the year.
This matters not only because it suggests that financial markets don’t see a story of spiraling inflation (the continued low interest rate on 10-year Treasury bonds also supports the temporary story), but it also means that imports should be falling in price in the months ahead. To take a simple case, if a car or television set sells for the same price in euros in Germany or the Netherlands as it did at the start of the year, it would now cost 10 percent less in dollar terms.
As noted earlier, other countries have seen some issues with inflation as well, but if we assume that Biden’s ARP did not set off a worldwide inflationary spiral, these price increases will slow or reverse. At that point, we should be seeing cheaper imports coming into the United States. While imports typically have a limited impact on inflation in the U.S. (they are equal to a bit less than 15 percent of GDP), in this case, they account for a large share of the items that have been pushing up inflation. This means that lower-priced imports should be an important factor countering inflation here in the months ahead.
The Labor Market and the Problem of Not Being Able to Get Good Help
The most important issue for the future course of inflation is what happens in labor markets. As noted earlier, many workers at the bottom end of the wage distribution have seen double-digit pay increases in the last year. This is great news for these workers, many of whom would have been living near the poverty level, especially if they were supporting children. (The $3,000 child tax credit, $3,600 for kids under age six, is also a huge deal.)
But double-digit pay increases are not sustainable in an environment of moderate inflation. If wage growth continues at that pace we have seen at the lower end of the wage distribution, we will certainly see serious problems with inflation going forward.
In fact, the situation is not so dire from the perspective of inflation. As Arin Dube has shown using data from the Current Population Survey, the rapid wage growth has been disproportionately at the bottom end of the wage distribution. Workers at higher points of the distribution have seen stagnant or even declining real wages.
This matters not only from the standpoint of seeing greater equality, but it also means there is less inflation pressure here than may first appear to be the case. When workers getting $100,000 or $200,000 a year get a ten percent pay increase, that means a big increase in labor costs in the economy. When workers earning $20,000 a year get a ten percent pay increase, the impact on aggregate labor costs is much smaller.
This is largely the story we are seeing today. The occupations where real wages have been stagnant or declining over the past four decades have been seeing strong wage growth due to the tightness of the labor market. There is room for their pay to rise with a limited impact on inflation.
The price of the goods and services that these low-paid workers produce may rise, but so what? It may cost 10 percent more to get a cappuccino at Starbucks, but that is hardly an economic crisis. Truck drivers have seen their real pay fall by close to 30 percent since the 1970s. If we want enough truckers to move the country’s freight, their pay may have to return to 1970s levels, and maybe even go higher.
These pay increases will mean reversing some of the upward redistribution of the last four decades. This is just the market working its magic.
Of course, if those at the top, including professionals like doctors and lawyers, as well as Wall Street types and high-level corporate executives, are able to exert their political power to ensure that they can still afford to get good help, then we will have an inflationary spiral. That battle is still several steps down the road. The fact that the media won’t even countenance a discussion of the impact of intellectual property on income distribution, or the corruption of corporate governance on CEO pay, is not encouraging.
But we can leave this one for another day. For this Thanksgiving, we can be happy that the tight labor market is allowing tens of millions of people to have much better pay and working conditions than they had before the pandemic.