Now let’s dig into the data. Yes, the economy has bounced back. The trough was much deeper last year than it was in 2009, the nadir of the financial crisis, but the recovery has been much more rapid.
If you look at quit rates, vacancy rates and nominal wage growth, the U.S. labor market looks tight — very tight. Yet we are still around 4 million jobs short of where we were in Feb. 2020, and around 7 million short of where we would be had the pre-pandemic trend continued.
After plunging in March-April 2020, by August of last year the labor force participation rate had recovered half its decline. Since then, however, it has been flat, and even declined slightly in September. At the same time, the probability of moving from being unemployed to being employed is well below what it was before the pandemic.
The Beveridge curve, which plots the vacancy rate against the unemployment rate, suggests that the labor market is currently doing a worse job of matching unemployed workers — meaning people without jobs who have actively looked for work in the past month — with vacant jobs than at any time since the 1950s. It’s even worse than the 1970s.
Meanwhile, nominal wages are growing strongly — but (for most workers) not as strongly as consumer price inflation, which surged above 6.2% in October, the highest annual rate seen since December 1990.
Caveats first. There is still a case to be made that inflation is not a cause for panic. We’ve seen comparable monthly jumps in consumer prices more recently, in September 2005 and June 2008. The Census Bureau’s Current Population Survey shows real wages climbing, albeit slowly, in the last few months. As the University of Minnesota economist Aaron Sojourner pointed out last week in a cheerful Twitter thread (saying essentially that “the glass is way more than half full”), median wage growth for the youngest workers has accelerated sharply in recent months, and is accelerating for 25-to-34-year-olds, too. A new study by the Roosevelt Institute also finds evidence that real wages are growing for people in the bottom half of income distribution.
But the headline numbers from the Bureau of Labor Statistics tell us that real wages — weekly wages in the private sector adjusted for consumer price inflation (CPI) — are falling. First, compare nominal and real average weekly earnings, indexed to April 2020, so we can track the progress of each as the recovery proceeded. Interestingly, they start to diverge in Jan.-Feb. 2021.
Then take a look at the Employment Cost Index, deflating it with CPI. Divergence began earlier, but real ECI started declining in the first quarter of this year.
The modern economy is a complex system, in the sense they use that term at the Santa Fe Institute, one of the smartest places in American academia. As always, however, partisanship leads not just to oversimplification but to complete incomprehension in the media. “All the stuff you see about inflation in the news,” tweeted Sarah Jeong, an opinion writer at the New York Times, “is driven by rich people flipping their shit because their parasitic assets aren’t doing as well as they’d like and they’re scared that unemployment benefits + stimmy checks + 15 minimum wage + labor shortage is why.”
In reality, “rich people” are living higher on the hog than ever. Consumer prices may be up more than 6% year over year, but the S&P 500 is up more than 30%. Home prices, as measured by the Case-Shiller U.S. National Home Price Index, are up 17%. Average hourly earnings are up a meager 4.9%. In other words, in real terms wages are down for most workers. The people flipping about the economy are not the rich, I assure you. Nor is it just Republicans who are dissatisfied with the economy. Take a look at the survey data. Consumer sentiment has dipped among Democrats and independents, too.
Anyone under 40 — the Times’s Jeong is 33 — could be forgiven for underestimating the damage inflation does to a society. That group has lower expectations of future inflation than older cohorts, for the obvious reason that inflation has been so low throughout their adult lives. At 57, by contrast, I am old enough to remember double-digit inflation in the U.K. in the 1970s.
Not that age is always an advantage in economic matters. The seminal exchange of the week was between Zeitgeist Past and Zeitgeist Present. “We must demand that the extremely wealthy pay their fair share. Period,” tweeted Senator Bernie Sanders (80), Vermont’s Democratic Socialist. “I keep forgetting that you’re still alive,” replied Elon Musk (50). “Want me to sell more stock, Bernie? Just say the word …”
In the past week, Musk sold 8.2 million Tesla shares, realizing close to $9 billion. Meanwhile, in a sign of desperation, Joe Biden wrote the most economically illiterate presidential letter of the year, urging the chair of the Federal Trade Commission to investigate “mounting evidence of anti-consumer behavior by oil and gas companies” and to “consider whether illegal conduct is costing families at the pump.” I’d love to have seen Chairwoman Lina Khan’s face when she opened that attachment. Blaming wicked businessmen for inflation is medieval economics.
So what is really going on in Joe Biden’s America? In his inaugural address, Biden promised to “reward work” and “rebuild the middle class.” But it is to capital that the rewards are flowing — even as the share of households owning stocks continues to shrink — and the class that is being rebuilt is the plutocracy. The wealthiest 10% of American households now own 89% of all U.S. stocks, according to the Federal Reserve. The top 1% gained more than $6.5 trillion during the pandemic, as the value of their corporate equities and mutual funds soared. Corporate profits are up 17% in the last two years.
Welcome to the capitalist paradise, Bernie. You helped build it. And incoherent slogans like “Tax the Rich” may look chic on the designer dress worn by your more youthful and photogenic colleague Alexandria Ocasio-Cortez, but history shows that clumsy attempts to grab the wealth of the one percent — including deranged ideas like the tax on unrealized capital gains that was briefly floated this fall — just don’t work. Such measures can even exacerbate inflation by eroding business confidence and encouraging capital flight.
A great deal of the confusion about what is going on in the economy reflects the fact that, as I said, the pandemic is over and yet not over. It is over in the sense that the developed world now has abundant vaccines with exceptionally high if slowly waning efficacy (hence the need for boosters after six months). Vaccination does not prevent infection, but it does significantly reduce the risk of serious illness or death. Covid is also over in the sense that a great deal of normal life is already back. Americans are flying as usual, dining as usual, going to football games as usual.
But the pandemic is not over in that the seven-day moving average of Covid deaths only just fell below 1,000. It is not over in that, as my family experienced last week, dozens of children can still be sent home for two-week quarantines if a couple of classmates test positive. And it is not clear that it can truly be over so long as more than a quarter of adult Americans refuse to get vaccinated, and vastly larger numbers of people in the rest of the world are unable to get vaccinated.
Somewhere out there may lurk what I grimly call the “omega variant” of SARS-CoV-2: vaccine-evading, even more contagious than delta, equally or more deadly. According to the medical scientists I read and talk to — notably Nicholas Christakis and Larry Brilliant — the probability of this nightmare scenario is very low, but it is not zero.
Now things start to make a little more sense in our topsy-turvy labor market. First, Covid anxieties may be why as many as 1.5 million workers aged 55 and older have brought forward their retirements. Second, while Current Population Survey data suggest that child-care issues have not been a major driver of the slow recovery in the labor supply, 1.1 million households reported to the Census Pulse survey that an adult in the household did not look for a job in the past month because of child-care responsibilities. There are also still 1.3 million Americans who report that they did not seek work in the past month because of the pandemic. (Note: Don’t try to add all these numbers together. There’s a lot of overlap.)
While these Covid-related issues partially explain the slow recovery in labor-force participation in recent months, they can’t explain the nutty Beveridge curve — the mismatch between the job vacancy rate and the unemployment rate. One possibility is that the early retirements are leaving skill mismatches in their wake. Having read on the internet that robots with artificial intelligence were about to take over the world, or at least the transport system, not many of those leaving school have been learning to drive trucks. Turns out, it’s harder than it looks, which is why the robots are still crashing into one another in Google’s labs.
Another explanation for labor-market dysfunction is that normality is returning faster in some parts of the country than in others. Florida has reopened and recovered relatively quickly (to judge by my recent trip to Miami), but unemployed workers in more risk-averse California, where I live, can’t easily move to Florida to take open jobs. Maybe, too, the pandemic has changed workers’ expectations. Some people are demanding either monetary or in-kind premiums to return to pre-pandemic work arrangements.
Yet it’s impossible to attribute everything that’s going on in the economy today to the fact that the Covid-19 plague is ending but is not yet over. Equally important are some economic policy errors by the Biden administration.
Some of these mistakes may have had only marginal consequences. Maybe signaling that the 2017 cuts in marginal personal income tax rates will not be renewed has reduced the incentive for those early retirees to re-enter the labor force. True, the supplemental federal unemployment benefits introduced last year have expired. But since July, as part of Biden’s American Rescue Plan, households have been receiving an expanded child tax credit, the design of which (according to recent estimates) could lower employment if made permanent.
The administration’s much bigger miscalculation was to unleash an additional $1.9 trillion of fiscal stimulus earlier this year. To understand why this was a mistake, recall two things. First, there had already been massive fiscal support for the economy last year. Relative to the pre-pandemic trend, households accumulated more than $2 trillion in “excess” savings, thanks to multiple rounds of Economic Impact Payments, supplemental federal unemployment payments, and other pandemic-related fiscal transfers. Unlike in the wake of the financial crisis of 2008, American households entered the year immediately after the pandemic shock with their balance sheets in amazingly good shape.
Second, the economists advising Biden decided they were smarter than former Treasury Secretary Lawrence Summers. Now, I’m not saying Larry Summers is always right, because no one is. But he is smarter than nearly everyone, especially when it comes to macroeconomics. He was essentially right in 2014 that we had a problem of “secular stagnation” after the financial crisis, and that more aggressive fiscal and monetary stimulus would be needed to get out of it. (I was on the wrong side of that debate.) What Summers did not recommend was insanely disproportionate fiscal and monetary stimulus.
Back in February, Summers published a stark warning in the Washington Post, which is well worth revisiting. “The proposed stimulus,” he argued, “will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. … Whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large.”
Moreover, Summers continued:
Unemployment is falling, rather than skyrocketing as it was in 2009, and the economy is likely before too long to receive a major boost as Covid-19 comes under control. …. Monetary conditions are far looser today than in 2009. … [And] there is likely to be further strengthening of demand as consumers spend down the approximately $1.5 trillion they accumulated last year.
Wage and salary incomes are now running about $30 billion a month below pre-Covid-19 forecasts, and this gap will likely decline during 2021. Yet increased benefit payments and tax credits in 2021 with proposed stimulus measures would total about $150 billion — a ratio of 5 to 1. … Congress will have committed 15 percent of GDP with essentially no increase in public investment.
Then came the punchline: “There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”
The responses of the administration and its supporters to Summers’s warning ranged from dismissive to derogatory. “Worrying about ‘overheating’ when the job market recovery has stalled out is foolish in the extreme,” an unnamed Biden administration official told the Financial Times. “Of course there are risks associated with going big, but as we’ve said all along, those risks pale compared to the risks of going small. As Summers himself should remember.”
The White House economist Jared Bernstein declared that Summers was “flat out wrong” in suggesting the administration was underplaying inflation dangers. “Janet Yellen is our Treasury secretary, OK?” he said, not very subtly implying that Summers was angling for his old job back. “She knows a little something about inflationary risks and has tracked that economic issue forever.”
“Why would we listen to the economist who admits he went too small last time if he’s warning us to go small again?” asked Brian Schatz, the Democratic senator from Hawaii. “I swear this town is nuts. It’s like people can only remember 30 names and so they just keep going back to the same people.”
Well, lo and behold, Larry Summers was right. Adding $1.9 trillion of additional stimulus on top of the $900 billion passed in December 2020 was an act of economic-policy insanity. And uncritically accommodating the fiscal stimulus with asset purchases — while explicitly telling consumers that the Federal Reserve wanted higher inflation (as Fed Chairman Jay Powell did) — was monetary-policy madness.
Far more than the supply side bottlenecks that can be found all around the global economy, these policy errors are why consumer price inflation in the U.S. is currently running far hotter than in any other major developed economy. The latest comparable figures are 4.2% for the U.K., 4.1% for the Euro area, and 0.2% for Japan. To put it crudely: same pandemic; different scale of fiscal response.
By ignoring Summers (not to mention Olivier Blanchard and John Cochrane, who also called this) and instead heeding the likes of Paul Krugman, not to mention the lunatic fringe of “modern” monetary theorists, the Biden administration has caused a recovery that was doing well to go off the rails, alienating precisely the voters who gave Democrats victory a year ago. Along with their unforced errors on violent crime, illegal immigration and wokeism in education, this inflation blunder could end up costing the Democrats not just the House but also the Senate in the 2022 midterms.
History tells us that, judged narrowly in terms of the premature mortality it has caused, Covid-19 has fallen short of being one of history’s epoch-making pandemics. In terms of the proportion of the world’s population it has killed, it is an order of magnitude smaller than the 1918-19 influenza pandemic, even if one accepts the Economist’s maximum estimate for the true death toll of Covid, and two orders of magnitude smaller than the Black Death of the 1340s. (The Black Death had all kinds of remarkable effects on the medieval European labor market because of the drastic labor shortage it created, but this is not relevant here.)
Nor, I suspect, will the social changes of the last two years prove very enduring, except maybe that a significant proportion of the socioeconomic elite will be able to work from home (including vacation home) more than they used to, and that our kids entered the metaverse of online entertainment and psychological destruction even faster than would otherwise have been the case.
The pandemic’s real historical significance lies (as I argue in my latest book, “Doom”) in the realm of economics, as well as politics and geopolitics.
Judged by its economic consequences, Covid really has been epoch-making — closer in its impact to a world war than to any past pandemic. If you don’t believe me, just look at the trajectory of the federal debt in relation to GDP. Not since the early 1940s have we seen as steep an increase as we have seen in the past two years.
For American workers, however, there is less to be learned from previous periods of war-related inflation than is sometimes claimed. One mistake Krugman made in arguing that we should “not panic about inflation” was to serve up some undercooked economic history. The post-Covid inflation spike, he argued, was like the post-World War II inflation spike of 1946-48 — “a one-time event, not the start of a protracted wage-price spiral”:
Then as now there was a surge in consumer spending, as families rushed to buy the goods that had been unavailable in wartime. Then as now it took time for the economy to adjust to a big shift in demand — in the 1940s, the shift from military to civilian needs. Then as now the result was inflation. … But the inflation didn’t last. It didn’t end immediately: Prices kept rising rapidly for well over a year. Over the course of 1948, however, inflation plunged, and by 1949 it had turned into brief deflation.
Back at the beginning of this debate, I don’t recall Team Transitory defining transitory as “two years,” but leave that aside.
There are, of course, many differences between the 1940s and now. The lifting of price controls then is not analogous to today’s easing of nonpharmaceutical public health restrictions. Nor is the demobilization of servicemen remotely like what we are seeing in the labor market today. As for the transitory nature of inflation after the war, that was because a) the Treasury ran primary surpluses between 1947 and 1949 and b) the Fed increased reserve requirements in February, June and September 1948.
In any case, inflation was soon back, thanks to the Korean War. By February 1950, prices were rising again, and by March 1951, inflation was running at 9.5% year-on-year. In 1951, three-quarters of University of Michigan consumer survey respondents expected an increase in prices, compared with 15% the year before. Price stability was not re-established until 1953.
My view is that the late 1960s provide a better analogy, as I have argued on these pages before. But let’s focus on labor. Back then — in the 1940s and in the 1960s — it was organized. The percentage of workers belonging to a union in the U.S. peaked in 1954 at 34.8%. In 1983, it was still as high as 20%. By comparison, in 2019, on the eve of the pandemic, it was 10.3%, according to the Bureau of Labor Statistics, and just 4.4% among workers younger than 25.
In the 1940s or the 1960s, it would have been a big news story if a major manufacturing employer such as Deere & Co. had granted an immediate 10% pay increase to is employees — plus an $8,500 ratification bonus — after a month-long strike called by the United Auto Workers. The labor secretary of the day would have been huddled in a smoke-filled room with management and union bosses. The president would have been waiting nervously for the outcome, worried about setting off a wage-price spiral.
I would be very surprised if we saw a wage-price spiral in the next few years, not only because labor today is so much less organized, but also because the pandemic really is ending.
As the death numbers continue to fall, and as the antivaccine sentiment gets chipped away by the harsh reality that nearly all the people dying of Covid are unvaccinated, at least some of the those hesitating to return to work are going to overcome their hesitancy.
Meanwhile, as both the Fed and the Treasury scramble to correct the mistakes they have made this year — with the White House calling every other morning to yell at them about inflation and the administration’s lousy polling numbers — there is going to be a significant cooling of the economic temperature. Even as things stand, the Fed is set to taper its asset purchases aggressively next year, while the federal deficit is forecast to shrink sharply, leading to a “fiscal drag” that will take its toll on aggregate demand.
Last week, my friend William Silber of New York University half-jokingly urged Biden to appoint Summers as Fed chair, just as Jimmy Carter bit the anti-inflation bullet by appointing Paul Volcker to the position in 1979. It’s not going to happen, of course. But progressive Democrats will one day look back and ask themselves if they really were so smart to torpedo Summers’s appointment to that position in 2013, when President Barack Obama came so close to picking him. In Powell, they have ended up with the worst of both worlds: a Republican chair who turned out to be an inflation dove.
They thought Larry Summers was over back then. But he was not over. The pandemic, by contrast, really is ending, albeit slowly. Inflation, I assume, will come down too, as policy tightens and the labor market gradually returns to normality. Ah well, at least the youngsters will know a bit more about inflation by the end of it all.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Niall Ferguson is the Milbank Family Senior Fellow at the Hoover Institution at Stanford University and a Bloomberg Opinion columnist. He was previously a professor of history at Harvard, New York University and Oxford. He is the founder and managing director of Greenmantle LLC, a New York-based advisory firm. His latest book is “Doom: The Politics of Catastrophe.”
More stories like this are available on bloomberg.com/opinion
©2021 Bloomberg L.P.