Economic Policy – Page 8 – The Wrongologist

Saturday Soother – April 23, 2022

The Daily Escape:

North Landing River, near Virginia Beach, VA – April 2022 photo by Erik Moore

Our media ecosystem is overwhelming us. Some of the information is accurate, some is bogus, and much is intentionally misleading. And that’s a deliberate strategy. While it didn’t originate with Steve Bannon, he perfected it with his thought that:

“…the Democrats don’t matter….The real opposition is the media. And the way to deal with them is to flood the zone with shit.”

This is why the ongoing cultural war works so well for Republicans. There’s always some petty war going on between the Parties that’s stoked by the media. And it’s almost always about cultural issues since Republicans really don’t have a policy platform, and don’t want to go against large corporate America. When you go against corporations, you lose the money needed to get elected.

But we should see the big corporations as our common enemy. Time Magazine has an article about how overtime pay has disappeared:

“If it feels like you’re working longer hours for less money than your parents or grandparents did, it’s because you probably are. Adjusted for inflation, average hourly wages have actually fallen since the early 1970s, while average hours worked have steadily climbed. American workers are increasingly underpaid, overworked, and overwhelmed.”

One reason is the loss of overtime pay:

“If you’re under the age of 45, you may have no idea that overtime pay is even a thing. But…middle-class workers used to get a lot of it….That means that [for] every hour you work over 40 hours a week you work for free, contributing…a giant pool of free labor that modern employers have come to expect and exploit. Profits are up, real wages are down, and income inequality has soared to its highest level since the Gilded Age.”

Overtime pay was one of the great New Deal reforms. It was a core provision of the Fair Labor Standards Act (FLSA). The FLSA set the minimum wage at one-half the median wage and the overtime threshold at three times the minimum—an amount equal to 1.5 times the median wage.

But both the minimum wage and the overtime rules began to change in 1975, and rising income inequality since 1975 is responsible for a $50 trillion upward redistribution of wealth and income from the bottom 90% households to those in the top 1%. Here’s a chart showing the impact of losing overtime. Productivity goes up, but is completely decoupled from income:

Source: chartr

The Economic Policy Institute has a tool called “Company Wage Tracker” that allows you to select any big corporation and see what percentage of their employees make below a certain wage. For example, it shows that 51% of Walmart employees earn below $15/hr.

The NYT wrote about Mary Gundel, a manager at a Dollar General store in Tampa, FL who was fired for speaking out about the chain’s policies regarding overtime and short-staffing:

“The store used to have about 198 hours a week to allocate to a staff of about seven people….But by the end of last month, she had only about 130 hours to allocate….With not as many hours to give to her staff, Ms. Gundel often had to operate the store on her own for long stretches, typically working six days and up to 60 hours a week with no overtime pay.”

Ms. Gundel was working 60 hours a week and making $51,000 a year. That means she’s making only a little more than the minimum wage. Dollar General is one of the most profitable retail chains in the country.

Prices are going up everywhere across America, and corporations are making proportionately more income. This is what the Democrats should be focusing on, standing up for workers, doing what is right as opposed to groping for answers to the Republican’s culture war issues.

There’s plenty that’s wrong in America. But what’s wrong doesn’t see the light of day alongside all of the pissing contests about Critical Race Theory, or predator grooming or LGBTQ issues. These are ginned-up to make sure you won’t pay attention to what’s really going on.

Something seems to be brewing. We’re seeing halting attempts at unionization at Starbucks and Amazon. Those employees want a better life; they want to have a seat at the table about the future of the company.

We need to remember that without the “essential workers” the country grinds to a halt. We need to support those who try to organize. We need to wrest some economic power away from politicians and big businesses. And finally, some faceless people who are sick of being wronged are trying to do just that.

Enough for another week. It’s time to let go of the news. It’s time for our Saturday Soother. On the Fields of Wrong we’re preparing our vegetable garden, although it will be a few weeks before it’s warm enough for the plants to survive. We had an overnight temperature of 32° earlier this week.

Now, grab a seat by a large window and listen to violin soloist Soojin Han play Chopin’s “Nocturne No.20 in C# minor” in August 2019. She’s playing on a 1666 Stradivarius:

It sounds beautiful.

Chopin composed the piece in 1830, but it was published in 1875, 26 years after his death. It was featured in the movie “The Pianist” in 2002.

Monday Wake Up Call – April 3, 2022

The Daily Escape:

Makapu’u Lookout, Oahu, HI – January 2022 photo by TwoBongs on Tour

Let’s talk about the “Wealth Effect”. It’s the notion that when households become richer as a result of a rise in asset values, such as stock prices or home values, they spend more and stimulate the broader economy. The idea is that consumers feel more financially secure and confident about their wealth, even if their income and costs are the same as before.

This concept has been endorsed by two recent former Fed Chairs, Janet Yellen and Ben Bernanke. It’s simply another term for trickle-down economics.

In 2019, after nearly 11 years of the Fed’s policy of adding money to the economy, by “Quantitative Easing” (QE), the National Bureau of Economic Research (NBER) did a study on the Wealth Effect, to quantify how much richer the rich would have had to become to have x% impact on the overall economy, and how long this boost lasts before it fades.

They found that QE makes 10% of the population a lot richer, producing immense concentration of wealth at the top 1%, and mind-boggling concentrations of wealth at the billionaire level. After which, there were some very muted trickle-down effects on the economy.

Wolf Richter used the Fed’s wealth distribution data to create a chart he calls the Wealth Effect Monitor. The Fed divides the US population into four groups by wealth: The “Top 1%,” the “2% to 9%,” the “next 40%,” and the “bottom 50%” to report on wealth.

Richter divides this data by the number of households in each category, to obtain the average wealth per household in each category. Here’s his chart for the past 21 years:

Note the immense increase in the wealth for the 1% households after the Fed’s latest QE effort that began in March 2020. They have been the primary beneficiaries of the Fed’s policies since 2020.

True to the Wealth Effect’s concepts, the Fed’s policies helped to inflate asset prices, and thus only asset owners benefited: The more assets held, the stronger the benefit. Here’s Richter’s analysis of average wealth (assets minus debts) per household, by category in the 4^th quarter, 2021:

“Top “1%” household (red): $36.2 million
The “2% to 9%” household (yellow): $4.68 million
The “next 40%” household (purple): $775,000
The “bottom 50%” household (green): $59,000

The Fed doesn’t provide separate data on the 0.01% and the Billionaire class, but they were the biggest beneficiaries of the Fed’s monetary policies. The top 30 US billionaires have a total wealth of $2.12 trillion, sliced into 30 slices for a wealth of $70.8 billion per billionaire, according to the Bloomberg Billionaires Index.

Compare that to the bottom half of the US population (the “bottom 50%”) who have a combined wealth of just $3.7 trillion, divided into 165 million slices for each individual. The way percentages work, you would think that households in the bottom 50% would have the largest percentage gains since they start from a lower base. But because they own fewer assets, when adjusted by population, they stay mired in last place. From Richter:

“When the wealth of the bottom 50% increases by 5%, they gain about $3,000. And when the average wealth of the top 30 billionaires increases by 5%, they on average gain $3,500,000,000.”

Sunday Cartoon Blogging – April 3, 2022

The latest monthly jobs report shows 431,000 jobs were added. The report marked the 11th straight month of job gains above 400,000, the longest such stretch of growth in records dating back to 1939. So far in 2022, the economy has created 1.69 million jobs. That’s in just three months. By any fair measure, it’s an extraordinary total.

We are still about 1.6 million jobs below the number of employees in the workforce in February 2020 just before the pandemic hit. At the current average rate for the past six months, it will take three more months to get back to that level.

Leisure and hospitality jobs, which were the hardest-hit during the pandemic, rose by 112,000, but are still 1.5 million below their pre-pandemic peak. They comprise most of the jobs that are still missing in the economy.

Wage growth, which averaged 5.9% in the 2nd half of 2021, was up again, now showing a 6.7% year over year gain. Aside from April 2020, this is the highest wage growth in 40 years. And aside from three months in 2019 and 2020, the unemployment rate was the lowest (or equal to the lowest) in over 50 years.

The blemish is inflation. Most likely, inflation-adjusted wages have risen by 1% or less in the last year. On to cartoons.

A brief history of recent misspeaks:

Biden tries a different way to get Putin:

Florida’s Governor DeSantis says the mouse is the real enemy of kids:

This Thomas’s dinner conversation is straight-up ok:

Fox hires Caitlyn Jenner, but there were unforeseen issues:

Free Brittney:

Will Sanctions Hurt the Dollar’s Role in Trade?

The Daily Escape:

Cherry Blossoms, Univ of Washington, Seattle, WA – March 2022 photo by Erwin Buske Photography

One of the most important elements in the undeclared war between the West and Russia is how sanctions are changing both international trade and the international payments system.

The West has basically frozen Russia out of both. First, by taking Russia out of the SWIFT payments messaging system, and second, by sanctioning Russian banks and the Russian Central Bank. Third, by seizing Russia’s currency reserves that were held in the West.

All of this means that Russia can’t easily accept dollar/euro payments for exports and then convert them into rubles for use at home. By losing access to the international currency markets, it’s become impossible for Russian businesses exporting their energy, goods, or commodities to get paid. This may be a historic moment in economic history.

By freezing hundreds of billions of dollars of Russian reserves, the Russians no longer can access those dollars or euros. Sanctions mean that even the dollars and euros they could create through trade cannot buy much in the countries that support the sanctions.

Naturally Russia is looking for work-arounds for this dilemma. Selling the West anything in dollars or euros no longer makes sense: They can’t use them at home without exchanging them for rubles. And sanctions make that very difficult, since they’re closed out of our banking system.

There are two ways around this. Either use Russian banks that are not banned from SWIFT or go through an informal third-country currency exchange. Russia’s first effort is to only accept payment in rubles for its exports to “hostile nations”. That is, those nations who have imposed sanctions because of Ukraine.

In order to buy Russian oil and gas which they desperately need, Europeans will have to pay in rubles. That means either selling dollars/euros for rubles or selling them for yuan (China) or rupees (India), two countries that are not part of the sanctions regime.

The West’s move has the potential to upend the world’s trading system which today relies on payments in dollars. The dollar has been the world’s principal reserve currency since the end of World War II and is the most widely used currency for settling international trade. The dollar represents about 62% of global trade, down from much higher levels before the euro was established. The other important currencies are the euro at 20.1% and the Japanese yen at 5.7%. China’s yuan is at just 2.0% of trade settlements.

It is increasingly likely that Russia’s move will result in a further “de-dollarization” of trade. Recently, there have been new attempts to abandon the dollar. Saudi Arabia and China are planning to use the yuan in a new oil deal. Russia and India are negotiating to pay for trade in rupees.

China’s energy trade with Russia uses the dollar. Chinese energy imports from Russia soared 47.4%, an increase of more than $52.9 billion from 2021. This accounts for more than 65% of China’s total imports from Russia. Since the sanctions, both countries have stated their intention to move more of this trade to yuan.

A new multilateral financial system is emerging before our eyes. Who the participants will be, and what rules they will follow, are up in the air. The dollar will remain primary between the US and its allies, but alongside it, there could develop Russia-yuan, Saudi-yuan and India-yuan arrangements for trade in oil, minerals, and industrial products. Shifting just part of the global oil trade into the yuan is potentially huge. Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s GDP last year.

We’re likely to see more trade occurring in more currencies, probably on a number of exchanges. We will see the world realign into different trading and monetary blocs, like there were in the past.

However the Ukraine war is settled, the Russian claims that the US has shot itself in the foot about the dollar’s dominating role in trade has a ring of truth. In the past, the US took Iran’s reserves after the Shah was overthrown. We froze Afghanistan’s foreign reserves earlier this year and now the West has done the same to Russia. A few years ago, the UK froze Venezuela’s gold in the Bank of England.

These systems are built on trust, and for the next few decades, trust may be lacking. So we’re looking at the possibility that there will be two quite different geo-political philosophies operating as trading partners as the non-US world develops its alternatives to the dollar as the world’s dominant trading currency.

China’s Reaction to Putin’s War

The Daily Escape:

Snow on the Fields of Wrong, March 10, 2022 Sand on the beaches of Florida, March 2022

(This is the last column for the week. New content next week will be light and variable as Wrongo and Ms. Right make our annual pilgrimage to Florida to visit Wrongo’s sisters.)

Subsequent to the meeting between Putin and Xi Jinping in Beijing at the start of the Winter Olympics, the Chinese government’s statements and actions about Putin’s War in Ukraine have been a kind of doublespeak.

With its public statements, China’s been supportive. The foreign minister has referred to Russia as its “most important strategic partner.” China hasn’t endorsed Russian sanctions and its state media seems to repeat a lot of Russian disinformation about Ukraine.

On the actions side, the Chinese government has called for an end to violence and has promised to send humanitarian aid to Ukraine.

One thing that hasn’t been public is Chinese financial institution’s hesitancy about new deals with Russia. Chief Investment Officer magazine (CIO) quotes Yuan Jiang, a Chinese PhD candidate at Queensland University who specializes in Russia-China relations:

“Currently, the risk is simply too huge…”

Jiang said that traditionally, only state-funded institutions or large corporations would transact or directly invest in Russia, but even these institutions were wary of Russia:

“Russian markets are full of political corruption and other dangers…”

China’s financial sector has been leery of being caught up in the Western sanctions. Two major Chinese state-owned banks are now restricted from financing Russian commodities, according to Bloomberg. Reuters reports that the Bank of China in Singapore stopped financing Russian oil trades.

CIO also reports that some banks with partial Chinese state ownership have also been backing out of Russian deals. The Asian Infrastructure Investment Bank, which has many Asian governments as shareholders, suspended its business in both Russia and Belarus after the invasion. Similarly, the Shanghai-based New Development Bank, which has China as one of its founding members, also has terminated its business with Russia.

Now Russia is barred from participating in SWIFT, the global financial messaging system. In the past, China’s large banks have complied with American sanctions against Iran and North Korea because of the importance of clearing via SWIFT. The Chinese distancing from Russian transactions makes it clear that Beijing intends to continue complying with this Western sanction.

The Russians are looking to China as a lifeline in the midst of the sanctions. And the Chinese government is providing some help. China’s UnionPay card service will serve as an alternative for credit and debit card holders now that MasterCard and Visa have ended the ability of Russian citizens to use their cards abroad. UnionPay is accepted in 180 countries.

But China is shying away from a full rescue. Former US Treasury official Peter Piatetsky said in an interview with RadioFreeEurope:

“China can essentially do one thing here, which is to buy more Russian goods, but they don’t seem to be willing to do that….Russia doesn’t have that many different goods that China is willing to buy….The relationship between Russia and China is very transactional….They both dislike the US and dislike the US-led world order, but aside from that, I don’t think there’s much there.”

China could buy up Russia’s oil that’s no longer going to Europe if it wanted, but it doesn’t appear to be doing so, at least not yet. According to Jiang, ultimately the US has much more to offer China economically:

“Investing in the West is much simpler and more secure. No more unnecessary economic risk, not many political factors, and more transparent…”

And importantly, the US is China’s largest trading partner. The US buys 16.75% of all Chinese exports, creating a relationship that the Chinese government can’t afford to lose. Although ideological differences might dominate headlines, the US-China relationship is strategic for both.

It’s likely China will continue to keep Russia close and expand the relationship should relations with the West shift. And since the stated US strategy is to use Ukraine to destabilize Putin’s hold on power, China worries that it’s next.

Jiang says that Beijing is particularly afraid of “color revolutions,” a phenomenon in which popular uprisings result in regime change:

“Moscow and Beijing share almost indistinguishable views on the potential domestic and international security threats posed by color revolutions, and both nations view these revolutionary movements as being orchestrated by the US and its Western democratic partners to advance geopolitical ambitions.”

Despite the havoc that Western sanctions have brought on the financial system, China’s strong economic relationship with the West will help it keep Russia at arm’s length. If anything, the Ukraine war has shown just how much China relies on the West for its economic prosperity.

China and the US are particularly intertwined financially, and despite ideological differences, China will continue to prioritize its economic relationship with the US.

Russian Sanctions: Who Blinks First?

The Daily Escape:

Secret Canyon, Moab, UT – February 2022 photo by Klaus Priebe Photographer

Collateral damage from the US and European sanctions is growing. One question is whether the West will blink before Russia.

First, a few words about Putin’s strategy. It doesn’t seem that Putin was intent on “recreating the Russian Empire” as many pundits said. Instead, he’s going to partition Ukraine, with Russia controlling Ukraine east of the Dnieper River. That includes much of Ukraine’s industrial base. The southern part of Ukraine contains 13 seaports. In 2021, they exported over 150 million tons of cargo, representing 60% of exports and 50% of imports for Ukraine. Russia has already ended Ukraine’s access to the Black Sea.

When hostilities end, Ukraine will be a land-locked country.

The Russian army will ensure that what is left of Ukraine west of the Dnieper is a broken, third-world country. The indiscriminate missile, artillery and bombing in Ukraine’s west shows that is their intent. Whatever remains of western Ukraine will be the buffer state that Putin wanted prior to the start of his war. In the end, NATO will be forced to agree to a buffer state that is smaller and much weaker than the one NATO originally refused to agree to.

The US strategy for Ukraine had several elements. First, to make the cost of Putin’s War so harsh that he wouldn’t proceed, or after proceeding, would cause him to look for an early way to end hostilities before both were badly damaged: Ukraine by Russian weapons, and Russia by Western sanctions.

Another strategy was to get Germany to reduce its dependence on Russian gas. That has begun. Last week Germany unveiled plans for a terminal to import liquefied natural gas (LNG). Germany currently has no LNG import terminals.

It shouldn’t be a surprise then to learn that the US is the prime producer and exporter of LNG, ahead of Qatar and Russia. But LNG delivered to Europe is 50% more expensive than the gas delivered by pipeline from Russia. It’s true that there’s plenty of European LNG capacity besides Germany’s new planned facility. From the National Law Review: (emphasis by Wrongo)

“The current large-scale LNG receiving countries in Europe are Belgium (one terminal), France (four terminals), Greece (one terminal), Italy (three terminals), Lithuania (one terminal), Malta (one terminal), the Netherlands (one terminal), Poland (one terminal), Portugal (one terminal), Spain (six operational), Turkey (four terminals) and the UK (three terminals). Collectively, their overall LNG capacity is 237 billion cubic meters (of gas)…which is sufficient to cover approximately 40% of Europe’s gas demand.”

It’s possible to reduce German reliance on Russian gas imports, but they can’t easily achieve total independence. Substantially higher gas prices would definitely hurt the competitiveness of German industry, and slow global economic growth. It could become German economic suicide.

A third US strategy was that Putin’s rush into Ukraine would lead to a stalemate on the ground, and that sanctions would lead to a change of government in Russia. Then the new government might turn more towards the West.

The calculation was that Russia can’t win a major (non-nuclear) war without the economic support of the West through purchases of gas, and exports of technology. We’ve discussed natural gas. Protocol’s report on Russia’s dependence on foreign chips found that European and US companies sell them a lot of microprocessors, while their memory chip imports come mostly from South Korea and the US. All are now embargoed.

It’s possible that in executing these strategies, we’re burning up the world’s economy at the same time. These strategies have helped push oil prices above $130 a barrel. Natural gas prices have shot up to over $3,900 per 1,000 cubic meters for the first time in history. This will destabilize more than a few EU countries. As we wrote, the Ukraine war has slashed wheat exports, which will lead to high food prices and shortages in countries that rely on wheat from Russia and Ukraine.

We must be careful that we aren’t sanctioning ourselves. We already have a blowback effect on the sanctions inflicted on Russia. We may see double-digit inflation globally before the end of the year.

It’s possible that every dollar of Republican and Democratic campaign spending for the November mid-terms will be spent on stickers for gas pumps: The Republican sticker will feature Biden saying “I did this” while pointing at the price on the gas pump.

The Democrats’ sticker will feature Putin pointing at the gas prices and saying, “I did this”.

Then campaign workers will spend all of their time pasting one over the other’s sticker.

Pick your poison.

Monday Wake Up Call – March 7, 2022

The Daily Escape:

Watson Lake, near Prescott, AZ – February 2022 photo by Steve Matten

Last week, the Labor Department released its monthly Nonfarm payroll report. It showed strong hiring, and a substantial decrease in unemployment. Employment rose by 678,000 in February, the unemployment rate fell to 3.8%, wages rose by just 1 cent to $31.58 per hour, although wages have risen 5.1% over the past 12 months.

We still have 2.1 million fewer jobs (1.4%) than we had in February 2020 just before the start of the pandemic. At the average rate of jobs growth for the past 6 months, it’s about 4 more months before we get back to where we were. From Krugman:

“…what people are actually experiencing in their daily lives is a very strong job market. For example, according to the latest survey from the Conference Board, 53.8% of consumers said that jobs were “plentiful,” a near-record, while only 11.8% said that jobs were hard to get.”

Biden’s State of the Union Speech

The Daily Escape:

Garden of the Gods Park, Colorado Springs, CO – February 2022 photo by Daniel Forster

Biden will give his first State of the Union (SOTU) address to the nation tonight. If you read Wrongo’s column yesterday, it’s no surprise that he will address a country that remains sharply polarized about America’s priorities:

“According to a Pew Research Center survey, 71% of US adults rated strengthening the economy as a top policy priority, followed by reducing health care costs (61%), addressing the coronavirus (60%), improving education (58%) and securing Social Security (57%).”

Americans are concerned about the state of the economy (71%), with 82% of Republicans and 63% of Democrats agreeing it is a top political priority.

Anyone outside of the Right-wing bubble knows that Biden is already committed to tackling inflation, but Americans remain anxious about the economy, despite record job growth in 2021 and solid wage gains.

So Biden is vulnerable on inflation, particularly since Republicans will stress high gas prices. They will also make the point that excessive spending on Covid relief added to inflation while increasing the budget deficit. In the Pew study, 63% of Republicans said that the budget deficit should also be a top priority.

Biden’s administration hasn’t touted its successes very well. The NYT’s Jamelle Bouie said that Democrats did little to publicize their few successes:

“…rather than go on the offensive, infrastructure spending in hand, they sat quiet. There would be no publicity blitz, no attempt to capture the nation’s attention with a campaign to sell the accomplishments…no attempt to elevate members who might shine in the spotlight and certainly no serious attempt to push back on the right-wing cultural politics that helped Republicans notch a win in Virginia.”

This is an opportunity for Biden to recount his accomplishments. The pandemic is (again) trending in the right direction; the economy is roaring (even though inflation must be addressed); respect of our foreign partners continues to be restored around the world (just when US leadership was urgently needed).

He’s probably had to rewrite the speech a few times since Putin invaded Ukraine, so it’s anybody’s guess what will be emphasized about that.

Biden faces strong political opposition from Republicans, who will fault him for a chaotic withdrawal from Afghanistan, and the surge in migrants at the US-Mexico border. Some Republicans see Biden’s nomination of Ketanji Brown Jackson to the Supreme Court, as a wedge issue to keep Whites from voting for Democrats in November.

But as John Harris says at Politico, Democrats shouldn’t beat themselves up. They should remember:

“…that the modern presidency offers its occupants nearly inexhaustible capacity for political revival. While Biden faces a growing roster of doubts and doubters — including within his own party — his two immediate Democratic predecessors offer vivid examples showing that the tools for him to reverse perceptions and regain control of his presidency are within his grasp.”

Harris says that the Biden administration has failed to tell a compelling story to Americans:

“By outward evidence, Biden and his aides have either not settled on a narrative or have not effectively promoted it. It is on this score that the Obama and Clinton examples are especially notable. Since both Obama and Clinton recovered from midterm blowouts for Democrats to win second terms, why can’t Biden employ their strategies for recasting their presidencies before being blown out?”

The goal of the SOTU should be to give those voters who have open minds a chance to see Biden in new light. We’re always interested in success stories that show the main character growing from start to finish, discovering new ideas and new energy while amplifying his/her original values.

Biden ran and won on “Build Back Better”. It was a practical approach for dealing with the pandemic and the economic catastrophe that came with it. It encompassed straightforward solutions, many of which have been enacted into law.

He ought to use the SOTU as the start of the 2022 mid-term campaign. He’s not an agile politician like Obama, Clinton, or Trump. But he is easily their equal and possibly their superior in terms of understanding the day-to-day practical burdens and aspirations of the voters he needs to sell on staying with Democrats in 2022.

He needs to show America that he’s managing an office with unmatched power in a successful manner. He should work every day to tell the story about who he is and what he’s trying to achieve for the country.

Tonight, we’ll see in what direction he’s taking both the country and the Democratic Party.

NYT Editorial Board Misunderstands Economic Concept

The Daily Escape

Santa Catalina Mountains, Saguaro NP, Tucson AZ – December 2021 photo by Paul J Van Helden

Last Saturday, the NYT had an editorial called “President Biden’s Economy Is Failing the Big Mac Test”. The Times said that when the average worker’s paycheck doesn’t buy as many hamburgers from McDonald’s as it did last year, Biden’s in trouble.

Unfortunately for the NYT, that isn’t what the “Big Mac test” is about. They properly credit the idea to The Economist magazine, which originated it in 1986. It was intended as a semi-humorous illustration of Purchasing Power Parity (PPP). PPP basically tells economists what the comparative strengths and weaknesses are of each country’s currency by looking at the cost of the same “basket of goods” across geography.

The thesis is that in a free market, foreign exchange rates should adjust to equalize the price of goods and services across different nations.

According to The Economist, the Big Mac PPP denotes the exchange rate at which the Big Mac would cost the same in the US as it would in other countries. There are all sorts of comparison problems with the Big Mac index. Russia has one of the cheapest Big Macs, despite the fact that Moscow is among the most expensive cities in the world.

But the Times didn’t want to talk about exchange rates at all. It wanted to make a point about US prices in the time of Covid, and Biden’s so-called failure to control them. It says:

“The dollar figures on workers’ paychecks rose handsomely over the past 12 months. But for most workers, that wasn’t enough to keep pace with the highest inflation in several decades, which eroded the value of each of those dollars….The purchasing power of the average worker’s weekly pay declined by 2.3% from December 2020 to December 2021.”

True, and that sounds bad, but maybe we should add some context. First, Investopedia says that US sales of Big Macs have been falling since the 1980s. Second, the NYT itself says a few paragraphs later: (emphasis by Wrongo)

“Lower-wage workers have seen particularly strong wage growth. For workers in the bottom third of the wage distribution, Arindrajit Dube, an economist at the University of Massachusetts, Amherst, estimates that average wage gains have exceeded inflation.”

Just guessing, but Wrongo thinks that lower-wage workers are likely to be the primary market for Big Macs. And if workers in the bottom third of wage distribution are experiencing the strongest wage gains, maybe that’s what the Times should refer to as a Biden BFD!

And apparently, the Times doesn’t read its own business section, which on Monday said that US fast-food menu prices rose by 8% in 2021. For you non-economists, that means McDonald’s prices rose at a rate faster than US inflation, but instead, the NYT editorial board says Biden blew it.

The NYT tries to take what is a useful way to teach something about comparative exchange rates and forces it to say something critical about Biden. The title of the editorial says that Biden is failing, but in the fourth paragraph, they say:

“Mr. Biden inherited an economic crisis precipitated by the coronavirus pandemic, and his administration deserves credit for orchestrating a fiscal response on a scale commensurate with the nation’s need. The outstanding achievement of Mr. Biden’s first year in office was the passage of an economic aid package in March that shielded Americans from the economic effects of the pandemic and helped to deliver a faster recovery than in other developed nations.”

They seem confused. Later, they say:

“The challenge now is to bring inflation back under control without undermining the economic recovery. The work will mostly be done by the Federal Reserve, not by Mr. Biden or his administration. The role of presidents in shaping the nation’s economic fortunes is generally overstated.”

So presidents really don’t have a big role in improving the economy, except that Biden caused bad inflation, which he can’t fix, because that’s the job of the Federal Reserve.

Does any of this make the NYT sound smart to you?

As someone who was a working adult in the 1970’s and 1980’s, Wrongo remembers truly high inflation. He remembers having a 14% home mortgage. Today’s inflation doesn’t compare to that, something that the editorial board of the NYT must know.

There is so much media laziness in America today. The NYT missed a chance to educate the public about why the prices of various products are increasing. Instead, they settled for an easy criticism of Biden.

How Bad Is Inflation?

The Daily Escape:

Chaco Canyon’s Chetro Ketl Great House – January 2022 photo by James C. Wilson

Every media outlet is talking about the latest inflation numbers. The NYT reported that the Consumer Price Index climbed to 7% for the year through December, and 5.5% after volatile prices such as food and fuel were stripped out. Sounds terrible, right?

Nobody likes higher prices. But remember that 12 month inflation rates (called year over year rates) are a look backward in time. And consumer prices increased 0.5% in December, lower than in the past several months. Month-to-month measures are more reflective of current conditions, although they bounce around more than year/year numbers. A half of one percent rise in December annualizes to a 6% inflation rate, less than the headline rate, if it remains at that level going forward.

Also, wholesale prices rose just 0.2% in December, the smallest increase in 13 months. So maybe inflation is starting to level off.

So, maybe this is a case of beware the headlines. Eric Boehlert says that US media can’t (or won’t) give people context for the current inflationary trend:

“Convinced that rising prices are the defining economic issue of the day — not huge job gains, record-setting GDP predictions, or boosted wages — the press continues to portray inflation as a uniquely American problem that’s hounding Democrats.”

Boehlert says that what’s missing from our inflation coverage is information that inflation is a global phenomenon, fueled by the pandemic. He cites the following articles:

Republicans claim that Biden’s agenda is responsible for inflation. The average person can be forgiven if they believe that Biden’s policies are the cause, but Biden didn’t cause inflation to jump in all of these other countries.

The Economist reports that since the pandemic, there has been a total of $10.8 trillion in worldwide fiscal stimulus, equivalent to 10% of global GDP. The result was that developed countries finally moved the needle on inflation, after they added money to their economies for nearly 15 years since the Great Recession.

So, while each item of the Consumer Price Index — cars, homes, energy and so on — has unique factors driving its prices, there’s an overall reality: The economy is recovering far more quickly than it normally does following a severe recession. But that recovery is uneven, showing up in some sectors as high prices. From The Grid’s Matthew Zeitlin:

“What really worries economists is not just inflation per se, but a situation, as in the 1970s, where prices are rising and the economy is otherwise stagnant, with little job growth or overall growth. This condition is called, naturally enough, ‘stagflation’.”

Zeitlin goes on to say:

“There’s clear evidence that stagflation is not the direction in which the economy is headed. The unemployment rate is down to 3.9%, and overall output is easily above its pre-Covid level…..it’s simply not the situation that the labor market is trending in the wrong direction.”

And the Conference Board is forecasting that 2022 GDP growth will be 3.5% and it will be 2.9% in 2023, so no worries about stagflation in our future.

Zeitlin points out that the supply chain is also a culprit. Over the course of the pandemic, Americans shifted their consumption from services to goods, especially durable goods like furniture and cars. While services still amount for the bulk of US consumer spending, shifting the balance between goods and services can have large effects:

These changes in consumer spending have caused major stress at ports, and throughout the logistics system that moves goods around. This has raised the costs of everything that needs to be shipped.

China’s Zero Covid policy is creating severe lockdowns to keep the variant from spreading ahead of the Beijing Olympics next month. This raises the prospect of more disruptions for supply chains that are based there. China remains the largest supplier of goods to the US.

The Zero Covid policy has economic consequences: Delivery times for ocean shipments from China to the US stretched to a record 80 days in December, up 85% from 2019. This also impacts the cost of shipping a 40-foot container from Asia to the US West coast: It currently costs $14,572 this week, down from a peak of more than $20,000 in September. But that’s about a tenfold increase from two years ago.

The major question facing the Federal Reserve, as well as Biden, businesses and everyday consumers who have to make decisions, is how likely is increased inflation to persist? If the inflation problem is largely being driven by how consumers and businesses have had to adjust to Covid, then while it’s severe, it may be temporary.

Nobody likes or wants higher prices. Pent-up demand and abundant cash savings are part of what’s causing inflation. The other part of the problem is labor shortages, which are resulting in large wage increases for certain occupations.

The only way to stop prices from rising is for the Fed to reduce the money supply, raising rates until demand comes down far enough to match supply. The balancing act for the Fed is to tamp down price increases, while not causing a recession.

Whether the Fed can do that remains to be seen.

The Wrongologist

Geopolitics, Power and Political Economy

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