The week of May 20, 2024: An economic boom (?), Section 230, ESG, AI, and much, much more.
The week of May 20, 2024: An economic boom (?), Section 230, ESG, AI, and much, much more.
The second sentence in the opening paragraph of a recent article in The Atlantic by Annie Lowrey caught my eye:
Joe Biden is, at the moment, losing his reelection campaign. And he is doing so while presiding over the strongest economy the United States has ever experienced.
“Caught my eye,” I should say, is an understatement, but back to Lowrey:
The jobless rate is below 4 percent, as it has been for nearly two and a half years. Wage growth is moderating, but it is higher than it was at any point during the Obama administration; overall, Biden has overseen stronger pay increases than any president since Richard Nixon. Inflation has cooled off considerably, meaning that consumers’ purchasing power is strong.
Well, it’s certainly true that the unemployment is low. It stands at 3.9 percent, and has been bouncing around there for a while. That’s not the record low — anything like — but it’s still a decent figure.
Scratch a little below the surface, however, and there are longer term trends — long predating the current administration — that indicate that that number is not as good as it might be. In a report from February, the Bipartisan Policy Center noted that male labor force participation in the prime age (25-54) was 89 percent in January, a high number, but not as high as the 98 percent in September 1954. This reflects a growth in the number of men whose detachment from the labor force is more extreme than “conventional” unemployment. These are men who are not even trying to look for work.
This is a longstanding phenomenon, certainly not attributable to any one administration, and the reasons for it vary — this is not necessarily a tale of sitting around in basements playing video games — and it is an imperfect measure of the overall health of the economy, but it is a smudge on the picture of the strongest ever economy.
I doubt if it has much or any effect on the president’s popularity, but, just possibly, underemployment may. To be clear, this too is a problem that has been around for a long time, easily predating the Biden and Trump administrations.
Inside Higher Ed (February 2024):
More than half of recent four-year college graduates, 52 percent, are underemployed a year after they graduate, according to a new report from Strada Institute for the Future of Work and the Burning Glass Institute. A decade after graduation, 45 percent of them still don’t hold a job that requires a four-year degree.
In no small part, this reflects the enormous expansion of university education in recent decades. For many, many, people this has been a welcome (and often long overdue) expansion of opportunity, but it has come with a downside: the creation of a class of graduates (not all of whom have studied, say, puppetry) who will never get the sort of jobs for which, rightly or wrongly, they feel they are entitled. Some would have done better to have foregone a college education, and gone down a different training or educational path, but the cult of college is what it is.
I discussed the dangers caused by this phenomenon (labeled by the wildly cross-disciplinary Peter Turchin as “elite overproduction”) in a National Review article back in 2016, highlighting the threat that it posed to social stability. Among the ranks of a “surplus” elite will be those who have the capacity to cause trouble if they so choose. This surplus has partly (and destructively) been absorbed within the empires of DEI, “HR” (broadly defined), and other parasitic domains, but its persistence may account for some of the current wave of student radicalism. This is a topic to be discussed at more length another time, but underemployment may be another reason that the economy is not paying the expected political dividends. Then again, it may be embedding some within the left for the foreseeable future, so it may not be all bad for the administration.
Back to Lowrey:
Wage growth is moderating, but it is higher than it was at any point during the Obama administration; overall, Biden has overseen stronger pay increases than any president since Richard Nixon. Inflation has cooled off considerably, meaning that consumers’ purchasing power is strong.
The data she links to shows strong nominal wage growth, no great achievement in a time of high inflation. Money illusion can be a palliative of sorts (for a while), but it’s real wage growth that counts in the end. Click onto the St. Louis Fed chart showing Median usual weekly real full-time earnings (seasonally adjusted). These are based on 1982-84 CPI adjusted dollars.
Looking at the last ten years, the numbers start to run up from the end of 2014 ($330) dipping in the first quarter of 2017 ($345), and then picking up again, reaching $362 in the final quarter of 2019, and then $367 the next quarter, before shooting up, presumably to reflect various Covid relief programs. Once the Covid distortion fades and inflation kicks in, real wages fall sharply, before bottoming in the first quarter of 2022 ($359). They then advance at a brisk pace, finally overtaking the “normal” 2019/20 peak in the last quarter of 2023 ($371) and then slipping back again in the first quarter ($365). That’s all healthy enough, but not enough (I reckon) to justify a claim of historic economic strength. The same can be said of 2023’s real GDP growth of 2.5 percent in 2023, despite an impressive final quarter (3.3 per annualized).
To be sure, the stock market has done well, and median household wealth is up strongly lately. Inflation has certainly been “cooling off considerably,” but it is still well above the figure for January 2021, when the twelve-month CPI-U stood at 1.4 percent, before seasonal adjustment, less than half April 2024’s 3.4 percent. There has been no return (yet, anyway) to the status quo.
The focus of Lowrey’s article is the “panic among many Democratic campaign operatives” that Biden isn’t doing better campaigning “in an economy like this…when most Americans say the economy is the most important issue to them?”
That said, Lowrey accepts that in some areas the economy will be disappointing voters:
[T]he sunny numbers about the economy—the low jobless rate, strong wage growth, soaring wealth accumulation, and falling inequality—fail to account for some cloudier elements. Americans remain stressed by, and ticked off about, high interest rates and high prices. Homes and cars, in particular, are unaffordable, given the cost of borrowing and insurance. And inflation has moderated, but groceries and other household staples remain far more expensive than they were during the Trump administration.
She’s right to mention some of those “cloudier elements,” some of which will cast a shadow for a while. The transition to electric vehicles (EVs), particularly now American models are sheltered behind a much higher tariff wall will mean, for now, that their prices will remain high other than for the significant respite provided by price cutting by desperate manufacturers unable to sell EVs otherwise. That’s a welcome break for EV buyers, but it is not a sustainable model for manufacturers. Regulatory efforts to discourage the sale of the new conventional cars that consumers actually want to buy will push up their prices. That in turn will drive up the price of used conventional cars too. The growing disarray in the auto sector, a key part of the U.S. economy, is (or, if the green transition continues on its current path, soon will be) hard to square with the picture of an American economy firing, so to speak, on all cylinders.
As a corollary of a sort to that, energy costs are (broadly, piped gas is down a little) moving up (whether for the household or car), and while they may bounce about for a while, my best guess is that the effect of decarbonization will be to keep them elevated for quite some time to come.
A part of the problem for the administration (hinted at by Lowrey) is that the inflationary surge was recent enough for Americans not to have become conditioned to it. This is good (a belief that inflation is here to stay would itself be inflationary), but it means that most people can remember what things cost in 2021. Few visits to the supermarket are complete without sticker shock or at least a wince. That’s not good for an incumbent. And nor, as Lowrey refers to, is the steep cost of housing, whether to buy or to rent.
Higher interest rates don’t help the voter mood, even more so because of how low they fell in the previous decade. More on interest rates below, but while I don’t know how interest rates are going to move in the next few quarters (not much, I’d guess) or the next year, it seems reasonable to expect that we are entering a period in which they will be subject to sustained upwards pressure, due to the spiraling U.S. debt (which is increasing by about $1 trillion every three months (and now stands at roughly $35 trillion, of which around $28 trillion is publicly held), the immense costs of net zero and, almost certainly, substantially increased military expenditure.
As discussed in recent Capital Letters, the debt is a problem that cannot be wished away. It is, to use (not for the first time) policy analyst Michelle Wucker’s excellent metaphor, the largest of the “gray rhinos” lumbering our way:
A “gray rhino” is a highly probable, high impact yet all too often neglected threat: kin to both the elephant in the room and the improbable and unforeseeable black swan. Gray rhinos are not random surprises, but occur after a series of warnings and visible evidence.
The growing debt is, by itself, is good reason to question whether this really is “the strongest economy the United States has ever experienced.”
And it is not the only gray rhino out there. There is the crisis in the office property sector, which may be about to come to a moment of reckoning. In a nutshell, the fall in the value of office property following the return of some sort of normality to interest rates has been exacerbated by the pandemic-induced shift to remote work, which may not be fading fast enough to save the day. Billionaire real estate investor Barry Sternlicht recently warned that this sector could be headed for more than $1 trillion in losses. If he is correct, that is a number that will not safely be confined to one sector and it may wreak havoc on the banks. This will then have knock-on effects elsewhere. This grim narrative is hard to reconcile with the idea of an economy in fundamentally rude health.
There are, of course, other question marks hovering over the U.S. economy, ranging from the potential effects of a trade war with China to other consequences of the green transition (as matters currently stand, the latter will slow down growth for years to come — and that may not be the end of the troubles it causes).
For now, Lowrey concedes that the economy is beginning to slow down:
At least some leading indicators are declining, pointing to a “fragile—even if not recessionary—outlook,” according to the Conference Board, a nonprofit think tank. Debt is rising; fewer building permits are being issued; in some states, unemployment is up. (California’s jobless rate has increased 0.8 percentage points in the past year.)
And she has various psephological and psychological explanations (negative biases of one sort or another, the effects of affluence) for why the administration is not benefiting more from the economy. She does not, however, include the findings of a team from Harvard University and the International Monetary Fund (IMF) led by former Treasury Secretary Larry Summers, which may go some way to explaining the difference between the way that inflation is currently felt and the way it is (currently) measured. Both are, albeit in different ways, subjective, something not always understood, at least when it comes to inflation.
Writing in Forbes, Avik Roy explains:
What goods and services should be included in the “basket” of prices in the formula? How should those goods and services be weighted against each other? How do we account for the fact that poor people consume different things than rich people, or that people in different parts of the country may consume different things in different proportions?
And, most relevant to the new research: What is the best way to measure changes in the price of important things like housing?
To put it simply, in 1983 the BLS stripped out interest costs from its calculation of the “basic” CPI-U number, a change that excluded mortgage interest (housing costs were measured in a different way) and by extension car loan costs and interest paid on credit cards, costs that matter to the consumer. A team from Harvard and the IMF has calculated that using the pre-1983 approach would have shown inflation peaking at 18 percent in November 2022 rather than 9 percent a few months earlier. Following their logic, that “old” measure of inflation would, I imagine, still be higher than today’s 3.4 percent.
The rights and wrongs of this older approach can be debated (in a post well worth reading, economist John Cochrane examines the topic here) but there are a number of reasons why this is (as Roy discusses) of more than academic interest. The most significant may be that consumer sentiment correlated far more closely with contemporary inflation recalculated on the old basis than the inflation number arrived at using the method we use today. The claim that this economy has been the strongest the U.S. has ever seen is (to me) not credible, but if we take consumer sentiment as a rough proxy for voter sentiment — at least so far as the economy is concerned — looking at today’s inflation calculated using yesterday’s methods could go quite some way to explain why the White House is getting less credit for an improved economy than it hopes.
Of course, it is hardly news that the idea that high interest rates make for unhappy voters, and nor too is the fact that the fight against inflation is politically as well as economically complex. But that doesn’t mean that fight should be dodged.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 171st episode, David is joined by Dr. David Legates and Dr. Cal Beisner for a discussion of their new book, Climate and Energy, and a discussion of the very subjects of climate and energy. What will the impact be on the poor if environmental extremists get their way? Why has the scientific community become such a strong advocate of censorship versus open debate on this issue? What do we think about coal, natural gas, and nuclear when thinking about energy policy? This is a comprehensive, balanced, well-reasoned discussion on one of the most important topics in contemporary society.
The Capital Matters week that was . . .
Economics
The always diligent Sam Gregg (unlike the not particularly diligent Andrew Stuttaford) read Joseph Stiglitz’s new book, The Road to Freedom: Economics and the Good Society, and, writing in Law & Liberty, reported on what he found. Let’s just say that he’s not impressed.
Section 230
The House Energy and Commerce Committee released a draft bill to sunset the online liability shield commonly known as Section 230. The proposal is only about 50 words long, but if enacted, it would wreck the internet as we know it…
Corporate Promotions
The idea that Red Lobster (a place I have always liked, although it’s no Long John Silver’s) has run into difficulties because of a poorly thought-through, all-you-can-eat shrimp scheme is sad, symbolic, and hilarious. Sad for the thought of lost jobs, symbolic for reasons that ought to need no explaining in our age of all-you-can-spend government, and hilarious, well, for yet more reasons that need no explanation.
Bloomberg’s Matt Levine has reported the story with all-you-can-write-gusto and has some fun speculating, not altogether seriously, on what might have gone wrong, an exercise which is also a reminder of the different interests that can come into play when a company gets into trouble. If you can get behind the paywall, do take a look…
ESG
The continued decline of ESG’s popularity since it peaked around 2021 is documented in two recently published reports. Both are worth recapping…
The FDIC:
The Federal Deposit Insurance Corporation is supposed to do the rather boring (and possibly ineffectual) work of insuring bank deposits. Instead, it has cultivated a culture of heavy drinking, strip clubs, and harassment of female employees…
Monetary Policy
Ramesh points out a problem with central-bank independence, that it is severed from typical mechanisms of democratic accountability. He acknowledges that we do this for very good reasons, because politicians face bad incentives that virtually guarantee they will make poor decisions. We know from economic theory and from the examples of countries around the world that shifting from politician-controlled monetary policy to independent monetary policy corresponds with lower inflation.
I think of it this way…
The Economy
Judge Glock of the Manhattan Institute writes for City Journal about one of the things that seems to be missing from the “economic realignment” that is supposed to be happening in Washington: people actually voting as if such an alignment is taking place. “If anything, congressional votes and polling show that Republicans are more and more opposed to the left-wing economic drift of the Democratic Party,” he writes…
AI
One variety of fearmongering about artificial intelligence was really just a subset of the media’s fearmongering about “misinformation,” i.e., that some voters might be duped into believing things that aren’t true in such a way that it would affect their voting.
A cynic might say we already have a word for that phenomenon: “campaigning.” …
The story that OpenAI may have “borrowed” the voice of Scarlett Johansson is not an edifying one…
Antitrust
Kanter is part of the Biden administration’s attempts to alter antitrust law in the United States. Federal Trade Commission chairwoman Lina Khan is also part of that effort. The antitrust laws have not changed, but the FTC and DOJ have wide latitude to interpret them. Since the 1980s, antitrust enforcement during Republican and Democratic administrations has sought to adhere to the consumer-welfare standard, which says mergers should be blocked if it can be demonstrated that they would hurt consumers through higher prices or lower quality. Kanter and Khan support a neo-Brandeisian approach that mostly opposes mergers for their own sake.
Kanter went on in his speech to brag about mergers he and his attorneys have prevented. He couldn’t brag too much about winning court cases, since he and Khan have had a hard time persuading federal judges they are correct…
McDonald’s
Filmmaker Morgan Spurlock has died of cancer at the terribly early age of 53. His movie Super Size Me (2004) played an important part in the obesity panic of the early 2000s, particularly because it was a lively (if sometimes grim) watch, and because it came with a suitably anti-corporate spin. McDonald’s was bad! Helpless consumers had succumbed to the firm’s lures and so on. The idea of humans as helpless has, of course, been a trick deployed by prohibitionists and lesser scolds over the years…
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