What’s the Deal?
The Pitch: Economic Update for June 1st, 2023
Friends,
Victoria Guida writes for Politico about the tremendous gains that low-wage American workers have made over the last three years: “one of the lowest tiers of earners — people making an average of $12.50 per hour nationally — saw their pay grow nearly 6 percent from 2020 to 2022, even after factoring in inflation,” writes Guida. “That’s significantly bigger than what low-wage workers got during the entire administration of President Barack Obama, following the Great Recession.”
We can’t celebrate these gains without first recognizing that these same workers have suffered four decades of wage loss and stagnation under trickle-down economics. That 6% growth in wages is a drop in the bucket compared to the $50 trillion that the wealthiest Americans have siphoned away from paychecks of American workers since the 1970s. But it is at least a first good step in the right direction, and those wage gains undoubtedly helped workers get through the worst of the price increases.
But what happens next is absolutely critical. As Guida notes, the Federal Reserve’s relentless series of interest-rate hikes threaten those wage gains by putting millions of Americans out of work under the pretense of fighting inflation. “While the administration has been largely supportive of the Fed’s moves as households strain under the burden of inflation,” she writes, “progressive lawmakers and economists have questioned whether progress for low-wage workers is being sacrificed in pursuit of price stability.”
Despite all their recession fears, Corporate America is doing just fine—as we’ll discuss later on in this newsletter, they raised prices to take advantage of inflation panic, and reaped record-breaking profits for it. Even as tech giants laid off wave after wave of workers, their bottom lines continued to swell. The Biden Administration needs to keep the American worker at the very top of mind by fostering job growth and passing policies that grow paychecks. A good place to start would be finally raising the federal minimum wage to $15 per hour—or beyond.
The Latest Economic News and Updates
The Debt Ceiling Compromise: Deal or No Deal?
You can go anywhere on the internet to find political analysis of the debt ceiling compromise that’s currently being shepherded through Congress. My completely unoriginal take is that the Republicans holding the debt ceiling hostage was a disingenuous and dangerous piece of political theater, and that Democrats should make it a top priority in 2024 to win as many Congressional seats as possible in order to get rid of the debt ceiling so we never have to face this kind of foolish brinkmanship again. No other nation in the world goes through a regular battle over paying its bills, and this clown show puts our role as the world’s economic leader at risk.
If you’re looking for interesting reactions, I’d encourage you to read Harold Meyerson in The American Prospect: “The concessions that Biden made are not only much less damaging than those of the 2011 arrangement—which ensured that the recovery from the 2008 crash would take a full decade—but might provide some political advantages in battles yet to come.”
Josh Marshall at Talking Points Memo is always worth reading: “the deal is broadly what was leaked at the end of last week. It’s a much better deal for White House than I think almost anyone expected. It’s roughly what you would have expected if the two sides had engaged in a normal budget negotiation this fall.”
And also, Matt Yglesias here on Substack runs through the points of the deal and makes many cogent observations about what it all means politically for the Biden Administration and Congressional Republicans.
This isn’t a political newsletter, though—it’s a newsletter about economics in general, and middle-out economics in particular. And as Yglesias writes in his post, most of what Republicans won in the bargaining process is bad for the American people:
As I wrote last week, the deal’s work requirements are a terrible idea if your goal is to end poverty.
The decision to tighten up food stamp requirements only affects a small portion of the population—primarily single people under the age of 55—and it’s basically just cruelty for cruelty’s sake.
Republicans prioritized cutting IRS funding by a quarter from its $80 billion Inflation Reduction Act investment strictly to save wealthy tax cheats from paying the penalty for their bad behavior. Cutting $20 billion from the IRS will cost us untold tens of billions of dollars of revenue that agents would have been able to collect if the funding went through.
The Washington Post’s Abha Bhattarai notes that “the debt agreement would require some 43 million Americans to resume student loan payments in September, slightly earlier than expected. As a result, households could see a $40 billion reduction in disposable income.”
Bhattarai also reports that Moody’s Analytics expects the spending cuts to kill at least 150,000 jobs by the end of the year.
And as Meyerson writes, the deal’s “greatest cost was the omission of any permitting deal that would have sped the construction of electric transmission lines, absent which it could be a very long time before wind and solar power can light up distant cities and farms.”
That said, it could have been a lot worse. The 2011 debt ceiling confrontation basically forced the Obama Administration into an austerity posture for the rest of its time in office, while the Biden Administration preserved the vast majority of the trillions of dollars of investments it made in the American people over the past year. While the Obama Administration never managed to recover its economic footing from its debt ceiling debacle, the Biden Administration offers no signs that it’s about to give up on its push to invest in the middle and working classes. In the broadest middle-out terms, I call that a win.
Greedflation Hits the Mainstream
We have been writing since January of 2022 that the high prices Americans have been paying bear little relationship to the inflationary pressures we experienced in the 1970s. Instead, we argued, greedflation was to blame, with corporations using supply-chain disruptions as an excuse to jack up prices and reap record profits.
For most of the past two years, corporate interests have ridiculed the greedflation claims, but the mainstream media has recently started to notice the unmistakable connection between rising prices and rising corporate profit margins.
Now, greedflation has taken the spotlight in two of the biggest mainstream newspapers in the United States. The New York Times’s Talmon Joseph Smith and Joe Rennison this week published an overview of this phenomenon: “The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip,” they write.
The Times story continues: “Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.”
And here’s the punchline: “That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.”
I urge you to read the whole story, which is packed with examples from price-gouging corporations, including PepsiCo, McDonald’s, and Colgate-Palmolive, and which also argues that this corporate greed is endangering the whole economy. The Federal Reserve will continue to raise interest rates as long as prices stay high, but that is unlikely to faze corporations, which have learned they can pad their profits by bilking a small but durable group of consumers through higher prices.
The Wall Street Journal also acknowledged the existence of greedflation late last week. Their graphic showing the relationship between sales and profits is a must-see. Ordinarily, as you can see in the bottom chart, prices and sales are mostly synchronized. But the last three years have seen declining sales and ridiculously high prices:
Hilariously, the WSJ tried to frame this spate of greedflation as a societal good. The headline to the story feels like the punchline to a bad joke:
Here’s how the WSJ tries to justify this unprecedented greed in the boardrooms of corporate America: “In preserving corporate profit margins, the surprisingly strong spending patterns seen during and since the pandemic have also averted layoffs and budget cuts,” Sindreu writes. “Yes, inflation may be higher as a result of corporations flexing their pricing muscle. But it is probably also the reason why the recession everyone expects always seems to be six months away,” he concludes.
Respectfully, this is an absolutely backwards understanding of the economy. It’s a trickle-down take which assumes that CEOs and executive boards are the real job creators in the economy. The truth is that jobs aren’t handed down to the American people out of the kindness of the wealthiest 1 percent’s hearts. Jobs are created through increased consumer demand, and it is that consumer demand which powered our astonishing recovery from the global pandemic.
Consumers are creating those jobs in spite of skyrocketing prices from greedflation, not because of them—in fact, if corporations lowered prices, the economy would be doing better now, not worse. You have to give Sindreu and the WSJ credit, though, for trying as hard as they did to pretzel a pro-business take out of greedflation news. You can practically smell the trickle-down desperation wafting off that headline.
How’s the AI Automation of the American Workforce Going?
Here’s a story in two headlines. The first is from Vice News on May 25th, 2023:
And the second is from Vice News on May 30th, 2023:
It’s important to remember that a lot of the AI hype you’re hearing is nothing more than that—hype. This doesn’t mean that workers aren’t going to suffer—in this case, real, trained helpline workers lost their jobs. But those employees are suffering because employers are eagerly buying into the claims of the tech industry, which famously overpromises and underdelivers on early advances. A lot of employers in the weeks and months to come are going to realize that they’ve been fleeced by AI con artists when they realize that the new technology isn’t capable of successfully navigating the muddy waters of human interaction.
You’ll also see a lot of trickle-downers in the months ahead threatening to lay workers off and replace them with AI if they demand higher wages. But the truth is that there’s no wage low enough to convince employers to keep workers on if they believe technology can do the job cheaper. That’s why a race to the bottom on wages is bad for everyone.
Here’s an important stat to keep in mind with technological advancement. Many fast-food restaurants and grocery stores have moved to self-serve kiosks all over the country, but more people work in grocery stores now than in 2002, and more people work in fast-food restaurants now than in 2005—and all those workers in high-wage states are making much more money than their peers in low-wage areas. Technology has changed the way they work, but it hasn’t eliminated the need for their work. Our job is to make sure that they’re paid well for their work.
A Competition to Ban Noncompetes
Back in January, the Federal Trade Commission moved to ban noncompete agreements. The agreements, which at least one in five American workers have signed, crush competition in the labor market by prohibiting workers from finding new employment in their field. While many people associate noncompetes with high-power jobs like CEOs, most noncompetes apply to jobs like janitors, hairdressers, and employees of restaurants like Jimmy John’s.
This week, another branch of the Biden Administration has moved to make noncompetes a thing of the past: “National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo, in a memo to agency lawyers, said so-called ‘noncompete agreements’ discourage workers from exercising their rights under U.S. labor law to advocate for better working conditions,” writes Daniel Wiessner at Reuters. Abruzzo’s “memo said noncompetes violate labor law ‘unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights.’”
Abruzzo has specifically requested that NLRB staff send her noncompete cases so she can argue their illegality to the board and make the case for a national prohibition. Given that the Supreme Court has become increasingly emboldened to rewrite federal policy on behalf of corporations and the wealthy in its decisions, it’s smart for the Biden Administration to argue against noncompetes through two different channels. While one single push to ban noncompetes might not survive the current arch-conservative Supreme Court, two separate cases at two agencies increase the chances of the ban’s survival.
Investments in Green Energy Will Prevent Much Bigger Costs Later On
Former National Economic Council Director Brian Deese wrote an editorial for the New York Times outlining the amazing work that the Biden Administration has done to support green energy and to create green-energy jobs. “Companies have announced at least 31 new battery manufacturing projects in the United States. That is more than in the prior four years combined,” Deese explains. “The pipeline of battery plants amounts to 1,000 gigawatt-hours per year by 2030 — 18 times the energy storage capacity in 2021, enough to support the manufacture of 10 million to 13 million electric vehicles per year.”
Deese continues, “In energy production, companies have announced 96 gigawatts of new clean power over the past eight months, which is more than the total investment in clean power plants from 2017 to 2021 and enough to power nearly 20 million homes.”
It’s important that we’re finally making big strides toward green energy because with each passing day, climate change has bigger effects on day-to-day life in the United States. The New York Times reports that insurers have pulled out of markets that are deeply affected by the growing wildfires, storms, and flooding that accompany global warming.
State Farm, the biggest provider in California’s homeowner insurance market, “announced that it would stop selling coverage to homeowners. That’s not just in wildfire zones, but everywhere in the state.” And it’s not just California:
In parts of eastern Kentucky ravaged by storms last summer, the price of flood insurance is set to quadruple. In Louisiana, the top insurance official says the market is in crisis, and is offering millions of dollars in subsidies to try to draw insurers to the state.
And in much of Florida, homeowners are increasingly struggling to buy storm coverage. Most big insurers have pulled out of the state already, sending homeowners to smaller private companies that are straining to stay in business — a possible glimpse into California’s future if more big insurers leave.
Some of America’s highest-population areas are becoming uninsurable thanks to climate change. If this continues, home values will plummet, and local economies will become unstable. Leaders around the country are trying to devise different solutions to this problem, but the biggest thing we should be doing right now is to work on creating a resilient green economy that can reverse the damage humans have done to the planet.
Real-Time Economic Analysis
Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.
We know that inclusion drives economic growth—the more broadly you include people in shared prosperity, the better off everyone in the economy is. But America’s economy has always purposefully excluded Black people and other communities of color through racist policies that prevent the creation and transferal of intergenerational wealth. In this week’s episode of Pitchfork Economics, Nick and Goldy talk with Jeremie Greer, the Co-Founder and Co-Executive Director of Liberation in a Generation, about how to liberate the economy in such a way that all people of color can participate and thrive. Greer is an optimistic economic thinker, and this conversation is a valuable reminder that we all do better, economically speaking, when we all do better.
Closing Thoughts
Frequent readers of The Pitch know that Washington State lawmakers recently passed a 7% tax on annual capital gains profits from sales of certain assets over $250,000. Due in part to the fact that it has a sales tax and no income tax, Washington has for years had the most regressive tax system in the nation—one in which the wealthiest residents pay exponentially less than their less-wealthy neighbors.
After the Washington State Supreme Court ruled in favor of the new capital gains tax this spring, the state officially started to collect the tax. And the results, report Seattle Times columnist Danny Westneat, have been amazing. While official estimates predicted that some 7000 people would pay $440 million in the first year of the tax…
“According to the state, 3,190 people have paid a total so far of $849 million — nearly twice what was expected,” Westneat writes. “That reflects about $13 billion in underlying capital gains booked by these 3,000-plus people in 2022. That’s fewer people than expected. But they turned out to be far richer.”
Some of the wealthiest people in the world live in Washington State, and their day-to-day lives will not be affected by this tax at all. But that $849 million collected so far—with a smaller amount yet to follow from people who have filed for extensions—will be put toward public education, building schools in lower-income parts of the state, funding early education programs, and investing in the next generation of Washingtonians.
This will improve Washington state for everyone—not just the kids who will attend better schools and enjoy a higher-quality education. Thanks to the early-education program and extended school programs, parents will be able to invest more time and energy in work, knowing their kids are cared for. And it’s not a stretch of the imagination to suggest that many of these kids will one day work for companies that Washington’s wealthiest residents have founded. This is the very definition of an economic virtuous cycle.
I’ll also note that the column ends with an observation by Civic Ventures founder Nick Hanauer, who Westneat explains “has been arguing for years that Seattle’s tech plutocrats are fantastically wealthier than your mind can even comprehend.” He quotes a piece Nick published in Seattle-area tech news site Geekwire back in March: “If I have a $1 million windfall in stock profits, I’ll owe the state $52,500 — a pretty measly sum to superrich folks like us.”
We need to do a lot more work to fix Washington’s upside-down tax code. A billionaire shouldn’t pay less of their wealth in taxes than the people who mow their lawns and teach their children. This capital gains tax has already shown that despite the trickle-down threats warning that wealthy people would flee Washington for a low-tax red state, a well-designed tax simply isn’t a big deal for the wealthy people who pay it. But it is a huge deal for the families that will benefit from this new source of revenue. That’s exactly how it’s supposed to work.
Be kind. Be brave. Take good care of yourself and your loved ones.
Zach