Sunday, October 23, 2022

Addressing Inflation

Dean Baker notes

The media have largely ignored the story of workers quitting bad jobs for ones that pay better and/or offer better working conditions.

It’s not just workers at the bottom who are doing better today than they were before the pandemic, tens of millions of homeowners were able to take advantage of the low mortgage interest rates that we had until the Fed rate hikes started. They refinanced their homes at rates that were often a percentage point or more below the rate they paid before the pandemic.

This could mean $2000-$3000 a year in interest savings for a typical homeowner. Are we really supposed to believe that these interest savings won’t cover paying $1 more for a gallon of milk at the supermarket? Obviously, no one is happy about paying higher prices for food and other items, but the families that were able to refinance are almost certainly better off today, even with the higher prices, than they were before the pandemic.

There is a similar story with the tens of millions of people who are now able to work from home as a result of changes workplaces implemented in the pandemic. These people are saving thousands of dollars a year in commuting costs. Are we really supposed to believe that these people are all worse off due to inflation, in spite of these savings?

It is worth noting that the average hourly wage has almost kept pace with inflation since the start of the pandemic. It’s down by just 0.7 percent (it dropped 3.9 percent during the “Reagan Boom”), so there is not that much ground that workers need to make up through paying lower mortgage interest or savings on commuting costs.

So, given the economic reality, is it plausible that everyone feels they are being devastated by inflation? That one doesn’t seem to fit, just like the story that everyone believed Social Security was in a crisis back in the 1990s didn’t make sense.

However, he recognizes

We know politicians can’t stick their necks out and say that inflation isn’t that bad, the media will mercilessly trash them for being out of touch. But people whose jobs don’t prevent them from telling the truth can point out what the data show. Most families are not being devastated by inflation, and that fact will not change no matter how many times the media and Republican politicians assert the opposite. 

However, the vast majority of persuadable voters will blow off the fairly complicated message that the economy isn't as they keep hearing it is. As summarized by Robert Kuttner, Democratic strategist Mike Lux favors a multi-pronged approach in which Democrats emphasize:

1. Wealthy corporations with monopoly power are jacking up their prices, and their profits are going through the roof.

2. Drug prices and health insurance premiums are going to go down because of the Inflation Reduction Act … Republicans have no plan of their own.

3. Seniors will be getting the biggest increase in their Social Security payments in 40 years … Republicans are talking about ending Social Security.

4. Manufacturing jobs are coming back to the United States … and our infrastructure is being rebuilt. All of this will end our supply chain problems and create millions more good jobs.

5. I will fight for the Child Tax Credit, which will give parents up to $600 a month to help with groceries, gas, and housing. And I’m going to pay for it by taxing wealthy corporations and millionaires who are paying little or nothing in taxes right now. My opponent is against the Child Tax Credit

Falling just short of using the word "cut," Republicans have been clear that if put into power, they will reduce Social Security benefits, and it is political malpractice that Democrats have reduced this to nary an issue.  

But voters are in no mood to be informed that manufacturing jobs are returning, infrastructure is being built or rebuilt, and that the job market has been improving. They are simply in a sour mood, and don't want to hear that things are not as bad as they've been told they are.

Voters will blame someone for inflation and Republicans want them to blame Joe Biden. Yet, as explained by the Economic Policy Institute, the "main components of cost" 

include labor costs, nonlabor inputs, and the “mark-up” of profits over the first two components. Good data on these separate cost components exist for the nonfinancial corporate (NFC) sector—those companies that produce goods and services—of the economy, which makes up roughly 75% of the entire private sector.

Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFC sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth and labor costs over 60%, as shown in Figure A below. Nonlabor inputs—a decent indicator for supply-chain snarls—are also driving up prices more than usual in the current economic recovery.

As luck would have it, this was exactly Representative Katie Porter's point, that corporate greed is most responsible for inflation.

Don't defend; accuse. That's why Porter's argument and Lux's point #1 constitute the best approach.  It's a message that doesn't have to be- or because Election Day is almost upon us- didn't have to be wonky or complicated.  Everyone understands gluttony, and resents it in others. A message attacking corporations for disagreeable inflation would have been in keeping with the great American tradition- perhaps even of human nature-  of blaming someone.


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