Tea robust job growth of 528,000 in July, reported Friday, surprised forecasters and confirmed that we are not in a recession—yet. But the Fed seems determined to push us into one.
Despite the victory lapse taken by Larry Summers, Jason Furman, and others who blame inflation on the stimulus of the relief spending of 2020 and 2021, most of the economy’s short-term price pressures do not reflect excess demand. Other large economies with no comparable stimulus programs are experiencing comparable rates of inflation.
Labor has far less bargaining power today than in the stagflationary 1970s. As my colleagues at the Economic Policy Institute observe, anytime wages lag far behind inflation, they can’t be driving it.
The supply chain crisis, exacerbated by Russia’s invasion of Ukraine, is compounded by the ability of large companies to extract price hikes not justified by their own increased costs. All this is intensified by long-term policy failures. These include America’s failure to build adequate affordable housing, or to contain price-gouging by drug companies, as well as its half-century freeze on antitrust enforcement.
In this context, the Inflation Reduction Act (IRA) is a huge step in the right direction. It will cap drug costs to seniors, reduce health care costs, and cut energy costs to consumers via tax credits, as well as investing in renewable energy for the long term. One splendid new provision, added to make up for the revenue losses of the corporate concessions to Kyrsten Sinema, adds a 1 percent excise tax on corporations that buy back their own shares to drive up the stock price.
Why is this anti-inflationary? Because an inflated stock price creates “wealth effects” that make people feel richer and spend more. That in turn bids up prices of housing and other scarce goods.
Because of concentrated wealth, the new stock buyback tax hits mainly the top brackets, not ordinary people. It’s a powerful example of how the menu of measures to constrain inflationary pressures are not distributively neutral.
By contrast, the worst kind of anti-inflation medicine is the Fed’s blunderbuss policy of raising interest rates. It is not targeted at all. It hurts workers, small businesses, and people seeking to buy homes or those relying on credit card borrowing. It helps banks, and creditors generally, at the expense of debtors.
The Federal Reserve can’t affect the supply side or achieve structural reforms. Our central bank has only one tool: interest rates. And if your only tool is a hammer, then everything looks like a nail. But while the Fed has only one tool, the rest of the government has multiple tools.
The Inflation Reduction Act provides several examples. The political problem is that many of them do not take effect in time for the November midterms. For instance, the provision allowing Medicare to negotiate drug prices does not become operative until 2026, and only for ten major drugs.
Other things that the government might do to damp down price pressures would require even more far-reaching action. These all reflect structural factors in the economy that add to price pressures and cannot easily be categorized as “supply” or “demand,” such as monopoly pricing power and our need to produce more inputs domestically to protect against supply chain shocks. (Some progress was made on that front in other legislation enacted last week to promote domestic semiconductor productionan achievement upstaged by the breakthrough on IRA.)
While the Fed has only one tool, the rest of the government has multiple tools.
Here’s one example that has largely missed public attention. One number in the jobs report not as strong as the others was labor force participation. While the total number of jobs has returned to its pre-pandemic level, the percentage of working-age people seeking work actually declined slightly in July. What might account for that?
In case you’ve been on Mars lately and missed the trend, America is experiencing a crisis of caregiving. Child care facilities, nursing homes, and hospitals are all ravaged by the intersection of the pandemic and their failure to treat their staff decently. With less reliable caregiving options, more Americans can’t work because they have to stay home caring for the old, the sick, and the young.
Sure enough, the numbers bear that out. In July, according to the Bureau of Labor Statistics, about 850,000 people who were not in the labor force cited factors such as “family responsibilities” or other factors including child care. This number has scarcely dropped since July 2021 despite a strengthening economy. And while some people can work from home, that does not include those in the human service sector, which has the most unfilled positions seeking workers.
The irony is that the very sectors most short of workers (such as child care, day care, and nursing home care) would attract more workers and free up family caregivers to take other jobs, if they had decent pay and working conditions. To contend that raising pay or improving staffing ratios in the care sector would be “inflationary” is to miss the point entirely. It’s a classic case of a structural factor that doesn’t neatly fit the simple “supply” and “demand” categories of standard macroeconomics.
As it happens, the full-blown version of President Biden’s Build Back Better Act had hundreds of billions of dollars for care work and caring facilities. And legislation has been introduced, the Raise the Wage Act, which would raise wages for essential workers in the caregiving sector from $7.25 to $15.00. But these measures will not pass Congress this year, or any year until Democrats have a larger working majority.
A related complication in understanding this economy and the policy options is the fact that several factors that make people feel better or worse about their own economic condition cannot be understood simply as more inflation or less inflation. For instance, the 2021 American Rescue Plan Act gave all parents of children under age 18 what amounted to a universal basic income. This policy improved these families’ personal economic situation.
Was it an anti-inflation policy? Strictly speaking, no. But it made them better off, and it offset other rising costs in household budgets. By the same token, policies to subsidize child care and health care and the cost of drugs are “inflation reduction,” in the sense of reducing final prices to households. But they are best understood as targeted structural policies. As such, these are the alternative to the general economic contraction favored by the Fed.
In the current climate, it’s defensible poetic license to call the Schumer-Manchin-Biden bill the Inflation Reduction Act. But let’s be clear about what we are doing, and why. These policies, intended to put more money in the pockets of struggling people and offset other price hikes, are a blend of subsidies and structural reforms.
For the most part, more intensive and comprehensive policies await a larger Democratic legislative majority. One area that requires only executive action is student debt cancellation. Now that the IRA is on track to final passage, we can expect Biden to get on with it.