Does Anyone Know What's Going on in This Economy?

And more from this week...

Assessments of wage growth and household finances have taken on a Rashomon-like quality, with the same objective situation shape-shifting into a range of subjective narratives. In one telling, “wage gains have kept full-time workers’ weekly median earnings roughly steady since early 2020, when taking price hikes into account.” In another, “the U.S. job-creation machine has boosted wages, recently outpacing inflation.” Some would say “wage gains are moderating” while others emphasize that “wage gains continue outpacing inflation.”

ONE THING TO READ THIS WEEK

Remarkably, all four of those quotes come from the same Wall Street Journal story, which is your one thing to read this week: The Haves and Have-Nots at the Center of America’s Inflation Fight.

I’m not recommending the article because it’s especially good. To the contrary, it’s a mess. The wage issue is just one example. Are “household finances are largely holding up” or have “excess savings accumulated during the pandemic been fully depleted for the bottom 40%”?

Are “delinquency rates for credit cards higher than at any point since the aftermath of the Great Recession” or is “overall debt still low by historical standards” and “an uptick in delinquencies stems from tighter lending standards rather than consumer weakness”?

Does “low-income customers’ spending remain robust” or is “spending by high-earners” needed to “counteract slowdowns elsewhere”?

These dueling quotes are not presented side-by-side in the story, with the conflicts then adjudicated. To the contrary, they are scattered throughout and presented uncritically, as if one can arrive at the story’s end with a better understanding of what is going on in the economy.

Instead, what one learns is that modern economic data and analysis are woefully ill-equipped to capture the more complicated and textured realities of American households. Especially when it comes to inflation, the technical concept of a rising economy-wide price level studied by macro-economists turns out to do a terrible job capturing the economic pressures that households face. It turns out to be quite hard to say whether wages are up or down relative to inflation and, even resolving that question, to know which households will be squeezed or prospering.

One obvious problem that somehow went overlooked until recently is that borrowing costs are not incorporated into formal inflation measures. This is especially dangerous because policymakers respond to rising inflation by raising interest rates, driving up costs especially for lower-income households more dependent on borrowing at the very moment everyone is focused on slowing the increase in prices. Larry Summers and colleagues published a remarkable paper in February pointing out what should have been understood and accounted for long ago: “The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers.”

At this point, it’s worth questioning, respectfully of course, whether economists have any idea what the hell they’re measuring or talking about. The insistence on using whatever data they happen to have on hand as the proper measure of human flourishing brings to mind the metaphor of the drunk looking for his car keys under the streetlight. But at least the drunk knows he has not found them. Economists just pick up whatever rock they find illuminated in a puddle and declare success.

A better project for economists in the coming years would be to take seriously their claim that they are engaged in a scientific enterprise and get back to the basic task of observation. Rather than rejecting facts that fail to align with their theory, they should be studying the actual experiences of actual households and then considering what metrics they need to create and what data they need to collect if they want to track and analyze actual well-being. This would put them back in the role of serving, rather than dictating to, the public. Maybe that sounds less fun. It would be a lot more useful.

BONUS LINK: If you’re not familiar with American Compass’s Cost-of-Thriving Index, it’s a really interesting attempt to address some of these shortcomings in the standard economic data by constructing a measure of family affordability built around the real costs and constraints that families face. It shows that while the “real value” of wages, adjusted for inflation, has at least held constant in recent decades, the cost of basic middle-class security for a family of four has risen much faster, so supporting a family on one income has become much harder. I explained the approach in detail in this American Affairs essay, and had a good debate about the methodology at the American Enterprise Institute.

THIS WEEK AT AMERICAN COMPASS

The Compass Point is from Jonathan Berry, managing partner at Boyden Gray PPLC, on the right and obligation of government to constrain the corporate form, which represents a “concession” of sovereignty and exists only at the pleasure of the public: The Sovereign and the CEO:

Put simply, much of corporate America has become like a private, parallel government that reliably advances progressives’ anti-American agenda when it truly matters. Against conservative political power, corporate America is a “sanctuary” for nullification and resistance, creating strongholds from which conservative policies are blocked, weakened, and, ultimately, rolled back.

Continue reading…

Also on The Commons:

• Unleash the Techno-Industrial State: Kelvin Yu and Anson Yu describe the most important policy levers for the federal government to advance technological innovation.

• American Shuntō: Chris Griswold draws on his experience in Japan to describe the limits of symbolic conservative outreach to labor.

• Making Sense of the China Problem: Micah Meadowcroft elaborates on Senator JD Vance’s view of the U.S.–China relationship.

And, on the American Compass Podcast this week: The incomparable Michael Lind joins me to discuss the foundations of his economic worldview, including the importance of countervailing power and the appeal of contributory programs of social insurance.

WHAT ELSE SHOULD YOU BE READING?

As I noted recently in Politico, the Democratic Party’s economic framework is in flux. The Biden administration’s embrace of industrial policy, for instance, remains deeply unpopular with the economic advisers of the Obama era, like Larry Summers and Jason Furman. Even within the administration, long-running battles have raged between free traders like Janet Yellen who sought closer ties with China and economic realists like Katherine Tai who recognized globalization’s failures. Are Democrats prepared to take seriously the importance of immigration enforcement to tight labor markets that raise wages at the low end? Is Big Tech the keystone in their coalition or do they agree with FTC Chair Lina Khan’s indictment of it?

In a competitive primary process, these issues would have been litigated in public and the views of whoever emerged victorious would have earned legitimacy as the party’s path forward. Instead, Kamala Harris is assuming that title without having given any indication of her vision (if she has a vision at all), and without reference to the different set of experts who would advise her. Thus far, there’s no indication Harris has thought deeply about economic issues at all, or that she would carry forward Biden’s policy vision rather than backslide to Obama-style neoliberalism. As Matt Stoller asks at Compact: Will Kamala Be Hillary 2.0?

Unlike most of the disingenuous misreading of Senator JD Vance’s political philosophy from progressives interested only in scoring points, New York Times columnist Farah Stockman takes a serious and sympathetic look at Vance’s emphasis on America as a “homeland” rather than an “idea.” Political commentary done right, and well worth a read: Decoding J.D. Vance’s Brand of Nationalism

Economic commentary often falls victim to a blind reliance on models whose key outputs are just the result of the programmed assumptions. A famous example of this problem is the National Academy of Sciences report on the economic effects of immigration, which declares that the negative effects on wages “tend to be smaller (or even positive) …in the case of structural studies,” with a footnote then acknowledging “this result is built in by theoretical assumptions.” Trade models, likewise, make assumptions that workers will always find new jobs and ignore the likelihood that new capital investment would flow to the domestic production of goods whose import is obstructed by tariffs. No surprise, they conclude that free trade is ideal and tariffs pointlessly inefficient. But an important new study by the Coalition for a Prosperous America takes one of the traditional trade models and modifies it to account for the real-world effects that tariffs would have. The result? Global 10% Tariffs on U.S. Imports Would Raise Incomes and Pay for Large Income Tax Cuts for Lower/Middle Class

And finally, Bloomberg has an in-depth report on the scam that the H-1B program has become. In theory, the program is supposed to provide temporary work visas to highly skilled workers doing jobs that cannot otherwise be filled by American workers. Of course, if that’s how the visas were used, we’d expect to see them going to workers earning the very highest salaries. Instead, they go mostly to entry-level workers doing jobs that Americans of course could do, just not jobs that they will do at the wages the tech companies want to offer. Increasingly, the program has become a mechanism for facilitating the outsourcing of tech work to other countries: How Thousands of Middlemen Are Gaming the H-1B Program

BONUS LINK: If you haven’t read it before, please take a look at one of my favorite essays, Jobs Americans Would Do, on rethinking and rejecting the notion of “labor shortages” and ending immigration programs designed to relieve the pressure on employers to create good jobs.

Enjoy the weekend!