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Henry Rosovsky, Who Redefined Harvard to Its Core, Dies at 95
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Economists Nervously Eye the Bank of England’s Market Rescue
The Bank of England stepped in to save a critical market this week. Economists say it was necessary but also worry about the precedent.When the Bank of England announced last week that it would buy bonds in unlimited quantities in an effort to stabilize the market for U.K. government debt, economists agreed it was probably a necessary move to prevent a cataclysmic financial crisis.They also worried it could set a dangerous precedent.Central banks defend the financial stability of the nations in which they operate. In an era of highly leveraged and deeply interconnected markets, that means that they sometimes have to buy bonds or backstop lending to prevent a problem in one area from spiraling into a crisis that threatens the entire financial system.But that backstop role also means that if a government does something to generate a major shock, politicians can be fairly confident that the local central bank will step in to stem the fallout.Some economists say that is essentially what happened in the United Kingdom. Liz Truss, the new prime minister, proposed a huge package of tax cuts and spending during a period of already high inflation, when standard economic theory suggests governments should do the opposite. Markets reacted forcefully: Yields on long-term government debt shot up, and the value of the British pound fell sharply relative to the dollar and other major currencies.The Bank of England announced that it would buy long-term government debt “on whatever scale is necessary” to prevent a full-blown financial crisis. The move was particularly striking because the bank had been poised to begin selling its bond holdings — a plan that is now postponed — and has been raising interest rates in a bid to bring down inflation.Economists broadly agreed that the bank’s decision was the right one. The rapid rise in interest rates sent shock waves through financial markets and upended a typically sleepy corner of the pension fund industry, which, left unaddressed, could have carried severe consequences for millions of workers and retirees, destabilizing the country’s entire financial system.“You saw very substantial market dislocation,” said Lawrence H. Summers, a former U.S. Treasury Secretary who is now at Harvard. “It’s a recognized role of central banks to respond to that.”To some economists, that was exactly the problem: By shielding the U.K. government from the full consequences of its actions — both preventing citizens from feeling the painful aftereffects and keeping government borrowing costs from shooting higher — the policy demonstrated that central bankers stand ready to clean up messy fallout. That could make it easier for elected leaders around the world to take similar risks in the future.Those concerns eased somewhat on Monday when Ms. Truss partly backed down, reversing plans to abolish the top income tax rate of 45 percent on high earners.But she appears poised to go forward with the rest of her proposed tax cuts and spending programs, putting the Bank of England in a delicate spot.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Mortgage Market: The uptick in interest rates roiled Britain’s mortgage market, leaving many homeowners calculating their potential future mortgage payments with alarm.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.The “partial U-turn” from Ms. Truss “still leaves the Bank of England with a set of near-impossible choices,” analysts at Evercore ISI wrote in a note to clients. “The only way to alleviate this is for the government to take much bigger steps to restore credibility — but there is little sign this is imminent.”There’s a reason that the interplay between monetary policy and politics in the United Kingdom is garnering so much attention. Central banks have for decades closely guarded their independence from politics. They set their policies to either stoke the economy or to slow it down based on what was necessary to achieve their goals — in most cases, low and stable inflation — free from the control of elected officials.The logic behind that insulation is simple. If central bankers had to listen to politicians, they might let price increases get out of control in exchange for faster short-term growth that would help the party in power.Now, that independence is being tested, and not just in the United Kingdom. Central banks around the world are raising interest rates to try to fight inflation, resulting in slower growth and making it harder for governments to borrow and spend. That is likely to lead to tension — if not outright conflict — between central bankers and elected leaders.It is already beginning. A United Nations agency on Monday warned that the Federal Reserve risked a global recession and significant harm in developing countries, for instance. But the United Kingdom’s example is stark because the elected government is carrying out policy that works against what the nation’s central bank is trying to achieve.“One always worries that actions like these can affect incentives going forward,” said Karen Dynan, a Harvard economist who served as a top official in the Treasury Department under President Obama. “It’s basic economics: People respond to incentives, and fiscal policymakers are people.”Part of the issue is that it is hard for central bankers to single-mindedly focus on controlling inflation in an era when financial markets are fragile and susceptible to disruption — including disruptions caused by elected governments.Before 2008, the Fed had never used mass long-term bond purchases to calm markets in its modern era. It has now used them twice in the span of 12 years. In addition to last week’s moves, the Bank of England also turned to mass bond purchases to calm markets in 2020.Bank of England officials have stressed that the policies they announced last week are a temporary response to an immediate crisis. The bank plans to buy long-dated bonds for less than two weeks and says it will not hold them longer than necessary. The Treasury, not the bank, will be responsible for any financial losses. The bank said it remained committed to fighting inflation, and some economists have speculated that it could raise rates even more aggressively in light of the government’s growth-stoking policies.If the bank is able to hold to that plan, it could mitigate economists’ concerns about the longer-run risks of the program. If interest rates rise again and it gets more expensive for the government to borrow, Ms. Truss will still need to grapple with the costs of her proposed programs, just without facing an imminent financial crisis.But some economists warn that the Bank of England may find the situation harder to extricate itself from than it hopes. It may turn out that the bank needs to keep buying bonds longer than expected, or that it cannot sell them without threatening another crisis. That could have the unintentional side effect of giving the British government a helping hand — and it could demonstrate that it is hard for a big central bank to remove support from its economy when the elected government wants to do the opposite.Liz Truss, Britain’s prime minister, will still need to grapple with the costs of her proposed programs, but she won’t be facing an imminent financial crisis because of the Bank of England’s actions.Alberto Pezzali/Associated PressMs. Truss’s policies — particularly before her partial reversal on Monday — would work directly against the bank’s efforts to cool growth, stoking demand through lower taxes and increased spending. The rapid rise in bond yields last week suggested that investors expected inflation to rise even further.Under ordinary circumstances, these conditions would lead the Bank of England to do even more to bring down the inflation it had already been fighting, raising interest rates more quickly or selling more of its bond holdings. Some analysts early last week expected the bank to announce an emergency rate increase. Instead, the brewing financial crisis forced the bank to do, in effect, the opposite, lowering borrowing costs by buying bonds.While lowering rates and stoking the economy was not the point — just a side effect — some economists warn that those actions risk setting a dangerous precedent in which central banks can only tighten policy to control inflation if their national governments cooperate and do not roil markets in a way that threatens financial stability. That situation puts politicians more in the driver’s seat when it comes to making economic policy.Guillaume Plantin, a French economist who has studied the interplay between central banks and governments, likened the dynamic to a game of chicken: To avoid a financial crisis, either Ms. Truss had to abandon her tax-cut plans, or the Bank of England had to set aside, at least temporarily, its efforts to raise borrowing costs. The result: “The Bank of England had to chicken out,” he said.Policymakers have known for decades that when the government steps in to rescue private companies or individuals, it can encourage them to repeat the same risky behavior in the future, a situation known as “moral hazard.” But in the private sector, there are steps governments can take to offset those risks — regulating banks to reduce the risk of collapse, for example, or wiping out shareholders if the government does need to step in to help.It is less clear what monetary policymakers can do to prevent the government itself from taking advantage of the safety net a central bank provides.“There is a moral hazard here: You are protecting some people from the full consequences of their actions,” said Donald Kohn, a former Fed vice chair and a former member of the Bank of England’s Financial Policy Committee, who agreed that it is necessary to intervene to prevent market dysfunction. “If you think about the entities that benefited from this, one was the chancellor of the Exchequer, the government.”Some forecasters have warned that other central banks might have to pull back on their own efforts to fight inflation to avoid destabilizing financial markets. Some investors are speculating that the Fed will have to end its policy of shrinking government bond holdings early or risk stirring market turmoil, for instance.Not all of those scenarios would necessarily raise the same concerns. In the United States, the Biden administration and the Fed are both focused on fighting inflation, so any reversal by the central bank would probably not look like bowing to pressure from the elected government.Still, the common thread is that financial stability issues could become a hurdle in the fight against inflation — especially where governments do not decide to go along with the push to rein in prices. And how worrying the British precedent proves will depend on whether the Bank of England is capable of backing away from bond buying quickly.“Is this just an exigent moment that they needed to respond to, or does it give the fiscal authority room to be irresponsible?” said Paul McCulley, an economist and the former managing director at the investment firm PIMCO. “The question is who blinks.”Joe Rennison More
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Biden’s Student Loan Plan Sets Off Fierce Debate Among Economists
Liberals and more moderate Democrats are arguing over the impact on inflation, the federal budget deficit and high earners.WASHINGTON — President Biden’s plan to forgive some student debt has sharply divided liberal economists and pitted the White House economic team against both independent analysts and veterans of past Democratic administrations.The areas of disagreement include how much the package of debt relief and other changes to student loans will cost taxpayers and whether the plan is “paid for” in budgetary terms. The plan’s impact on inflation, which is rising at a rapid clip, and the degree to which it will help those most in need are also matters of contention.The plan, announced last week, includes forgiving up to $10,000 in loans for individuals earning $125,000 or less and an additional $10,000 for borrowers from low-income backgrounds who received Pell Grants in college. Mr. Biden also proposed changes to loan repayment plans going forward that will reduce monthly costs and eliminate interest accumulation for potentially millions of lower-earning borrowers who maintain payments.White House officials have offered partial estimates of who will benefit most from those moves, and how much they might reduce federal revenue. The officials have made a case for why the package will not add to inflation. And they have claimed it will be “paid for,” though not in any way that budget experts agree fits that term.Conservative economists have attacked the plan, claiming it would stoke higher inflation and burden taxpayers with hundreds of billions of dollars in new debt. Some liberal economists have defended it as a lifeline for graduates who have been harmed by the soaring costs of higher education.What to Know About Student Loan Debt ReliefCard 1 of 5What to Know About Student Loan Debt ReliefMany will benefit. More
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Pace of Climate Change Sends Economists Back to Drawing Board
Economists have been examining the impact of climate change for almost as long as it’s been known to science.In the 1970s, the Yale economist William Nordhaus began constructing a model meant to gauge the effect of warming on economic growth. The work, first published in 1992, gave rise to a field of scholarship assessing the cost to society of each ton of emitted carbon offset by the benefits of cheap power — and thus how much it was worth paying to avert it.Dr. Nordhaus became a leading voice for a nationwide carbon tax that would discourage the use of fossil fuels and propel a transition toward more sustainable forms of energy. It remained the preferred choice of economists and business interests for decades. And in 2018, Dr. Nordhaus was honored with the Nobel Memorial Prize in Economic Sciences.But as President Biden signed the Inflation Reduction Act with its $392 billion in climate-related subsidies, one thing became very clear: The nation’s biggest initiative to address climate change is built on a different foundation from the one Dr. Nordhaus proposed.Rather than imposing a tax, the legislation offers tax credits, loans and grants — technology-specific carrots that have historically been seen as less efficient than the stick of penalizing carbon emissions more broadly.The outcome reflects a larger trend in public policy, one that is prompting economists to ponder why the profession was so focused on a solution that ultimately went nowhere in Congress — and how economists could be more useful as the damage from extreme weather mounts.A central shift in thinking, many say, is that climate change has moved faster than foreseen, and in less predictable ways, raising the urgency of government intervention. In addition, technologies like solar panels and batteries are cheap and abundant enough to enable a fuller shift away from fossil fuels, rather than slightly decreasing their use.Robert Kopp, a climate scientist at Rutgers University, worked on developing carbon pricing methods at the Department of Energy. He thinks the relentless focus on prices, with little attention paid to direct investments, lasted too long.“There was an idealization and simplification of the problem that started in the economics literature,” Dr. Kopp said. “And things that start out in the economics literature have half-lives in the applied policy world that are longer than the time period during which they’re the frontier of the field.”Carbon taxes and emissions trading systems have been instituted in many places, such as Denmark and California. But a federal measure in the United States, setting a cap on carbon emissions and letting companies trade their allotments, failed in 2010.What’s in the Inflation Reduction ActCard 1 of 8What’s in the Inflation Reduction ActA substantive legislation. More
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Is the U.S. Entering a Recession? Here’s Why It’s Hard to Say.
The U.S. may register a second straight quarter of economic contraction, one benchmark of a recession. But that won’t be the last word.The United States is not in a recession.Probably.Economic output, as measured by gross domestic product, fell in the first quarter of the year. Government data due this week may show that it fell in the second quarter as well. Such a two-quarter decline would meet a common, though unofficial, definition of a recession.Most economists still don’t think the United States meets the formal definition, which is based on a broader set of indicators, including measures of income, spending and job growth. But they aren’t quite as sure as they were a few weeks ago. The housing market has slowed sharply, income and spending are struggling to keep pace with inflation, and a closely watched measure of layoffs has begun to creep up.“A month ago, I was writing that it was very unlikely that we are in a recession,” said Jeffrey Frankel, a Harvard economist. “If I had to write that now, I would take out the ‘very.’”
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Notes: Production and job data are through June. Income and spending are through May and are adjusted for inflation. Income data excludes government transfer payments. All figures are seasonally adjusted.Sources: Commerce Department, Labor Department and Federal Reserve, via FREDBy The New York TimesMr. Frankel served until 2019 on the Business Cycle Dating Committee of the National Bureau of Economic Research, the semiofficial arbiter of when recessions begin and end in the United States. The committee tries to be definitive, which means it typically waits as much as a year to declare that a recession has begun, long after most independent economists have reached that conclusion. In other words, even if we are already in a recession, we might not know it — or, at least, might not have official confirmation of it — until next year.In the meantime, economists agree that the risks of a recession are rising. The Federal Reserve is raising rates aggressively to try to tame inflation, which has already contributed to large declines in the stock market and a steep drop in home construction and sales. Higher borrowing costs are all but certain to lead to slower spending by consumers, reduced investment by businesses and, eventually, slower hiring and more layoffs — all hallmarks of an economic downturn.“Are we in a recession? We don’t think so yet. Are we going to be in one? It’s a high risk,” said Joel Prakken, chief U.S. economist for S&P Global Market Intelligence.But the U.S. economy still has important sources of strength. Unemployment is low, job growth is robust, and households, in the aggregate, have lots of money in savings and relatively little debt. “The narrative that the economy has slowed quite a bit and is showing signs of deterioration from higher inflation and higher interest rates, that narrative is solid,” said Ellen Zentner, chief U.S. economist for Morgan Stanley. “But when you look at factors like jobs, where we’re still creating three to four hundred thousand jobs a month, with an unemployment rate that has not begun to show signs of sustained increases, and the cushions of excess savings, healthy household balance sheets — these are things that go far in keeping the U.S. out of recession, or at least staving off recession for longer.”What is a recession?Americans feel terrible about the economy right now — worse, at least by some measures, than at the peak of the pandemic-related layoffs in spring of 2020. It’s easy to understand why: The climbing cost of food, fuel and other essentials is eroding living standards. Hourly earnings, adjusted for inflation, are falling at their fastest pace in decades.8 Signs That the Economy Is Losing SteamCard 1 of 9Worrying outlook. More - in Economy
Is ‘Greedflation’ Rewriting Economics, or Do Old Rules Still Apply?
Economists and politicians are debating whether monopolistic companies are fueling inflation in ways that confound longstanding theory.There are few good things about living through a period with the highest inflation in four decades, but here’s one: It’s a chance to re-examine what happens in an economy that’s gone haywire.Since prices started to escalate a year ago, politicians and economists have seized on inflation to tell their preferred story about what went wrong, and what policies would bring it back into line. Some say it’s very straightforward: Supply and demand, Economics 101.“There’s simply a lot of cash out there,” said Joe Brusuelas, chief economist for the accounting firm RSM US, referring to the several trillion dollars in pandemic stimulus that’s filtered into the economy since early 2020. “The competition for those goods is up and that’s sending prices up, whether we’re talking about getting a Nissan Sentra or a seat on an American Airlines flight.”The White House and progressive organizations, however, say wait a minute: This time is different. In a time of extraordinary disruption, they contend, increasingly dominant corporations are taking the opportunity to jack up prices more than they otherwise could, which is squeezing consumers and supercharging inflation. Or “greedflation,” as the hypothesis has come to be known.The argument comports with the Biden administration’s focus on the ills of economic concentration. Congressional Democrats have run with the idea, introducing bills that would impose a temporary “excess profits tax” on companies that charge prices they deem unreasonably high, or simply ban those high prices altogether. Critics, including the nation’s largest business lobby, deride these efforts as based on a “conspiracy theory” and a “flimsy argument.”So what’s really going on?It’s hard to tease out. A pandemic, a trade war, a land war, huge government spending, and a global economy that’s become vastly more integrated might be too complex for traditional macroeconomic theory to explain. Josh Bivens, research director at the left-leaning Economic Policy Institute, thinks that’s a good reason to revisit what the discipline thought it had figured out.“When I hear stories about an overheating labor market, I don’t think about falling real wages, and yet we have falling real wages,” Dr. Bivens said. Nor is the rise in profits typical when unemployment is so low. “The idea that ‘there’s nothing to see here’ — there’s everything to see here! It’s totally different.”When thinking about greedflation, it’s helpful to break it down into three questions: Are companies charging more than necessary to cover their rising costs? If so, is that enough to meaningfully accelerate inflation? And is all this happening because large companies have market power they didn’t decades ago?Productive Profits, or Gouging?There is not much disagreement that many companies have marked up goods in excess of their own rising costs. This is especially evident in industries like shipping, which had record profits as soaring demand for goods filled up boats, driving up costs for all traded goods. Across the economy, profit margins surged during the pandemic and remained elevated.When all prices are rising, consumers lose track of how much is reasonable to pay. “In the inflationary environment, everybody knows that prices are increasing,” said Z. John Zhang, a professor of marketing at the Wharton School at the University of Pennsylvania who has studied pricing strategy. “Obviously that’s a great opportunity for every firm to realign their prices as much as they can. You’re not going to have an opportunity again like this for a long time.”Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Measuring Inflation: Over the years economists have tweaked one of the government’s standard measures of inflation, the Consumer Price Index. What is behind the changes?Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.The real disagreement is over whether higher profits are natural and good.Basic economic theory teaches that charging what the market can bear will prompt companies to produce more, constraining prices and ensuring that more people have access to the good that’s in short supply. Say you make empanadas, and enough people want to buy them that you can charge $5 each even though they cost only $3 to produce. That might allow you to invest in another oven so you can make more empanadas — perhaps so many that you can lower the price to $4 and sell enough that your net income still goes up.Here’s the problem: What if there’s a waiting list for new ovens because of a strike at the oven factory, and you’re already running three shifts? You can’t make more empanadas, but their popularity has risen to the point where you would charge $6. People might buy calzones instead, but eventually the oven shortage makes all kinds of baked goods hard to find. In that situation, you make a tidy margin without doing much work, and your consumers lose out.This has happened in the real world. Consider the supply of fertilizer, which shrank when Russia’s invasion of Ukraine prompted sanctions on the chemicals needed to make it. Fertilizer companies reported their best profits in years, even as they struggle to expand supply. The same is true of oil. Drillers haven’t wanted to expand production because the last time they did so, they wound up in a glut. Ramping up production is expensive, and investors are demanding profitability, so supply has lagged while drivers pay dearly.Even if high prices aren’t able to increase supply and the shortage remains, an Economics 101 class might still teach that price is the best way to allocate scarce resources — or at least, that it’s better than the government price controls or rationing. As a consequence, less wealthy people may simply have no access to empanadas. Michael Faulkender, a finance professor at the University of Maryland, says that’s just how capitalism works.“With a price adjustment, people who have substitutes or maybe can do with less of it will choose to consume less of it, and you have the allocation of goods for which there is a shortage go to the highest-value usage,” Dr. Faulkender said. “Every good in our society is based on pricing. People who make more money are able to consume more.”Sorting Chickens and EggsThe question of whether profit margins are speeding inflation is harder to figure out.Economists have run some numbers on how much other variables might have contributed to inflation. The Federal Reserve Bank of San Francisco found that fiscal stimulus programs accounted for 3 percentage points, for example, while the St. Louis Fed estimated that manufacturing sector inflation would have been 20 percentage points lower without supply chain bottlenecks. Dr. Bivens, of the Economic Policy Institute, performed a simple calculation of the share of price increases attributable to labor costs, other inputs, and profits over time, and found that profit’s contribution had risen significantly since the beginning of 2020 as compared with the previous four decades.That’s an interesting fact, but it’s not proof that profits are driving inflation. It’s possible that causality runs the other way — inflation drives higher profits, as companies hide price increases amid broader rises in costs. The St. Louis Fed’s Ana Maria Santacreu, who did the manufacturing inflation analysis, said that it would be very hard to pin down.“It would be interesting to get data on profit margins by industry and correlate those with inflation by industry,” she said. “But I still think it is difficult to capture any causal relationship.”Concentration’s Double EdgeIf you think that’s complicated, try establishing whether market power is playing a role in any of this.It is well established that the American economy has grown more concentrated. On a fundamental level, domination by a few companies may have made supply chains more brittle. If there are two empanada factories and one of them has a Covid-19 outbreak, that in itself creates a more serious shortage than it would if there were 10 factories.“Concentration has affected prices during the pandemic, even setting aside any potentially nefarious actions on the part of leaders,” said Heather Boushey, a member of President Biden’s Council of Economic Advisers.But most of the public argument has been about whether companies with more market share have been affecting prices once goods are finished and delivered. And that’s where many economists become skeptical, noting that if these increasingly powerful corporations had so much leverage, they would have used it before the pandemic.Inflation F.A.Q.Card 1 of 5What is inflation? More
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Biden’s Curious Talking Point: Lower Deficits Offer Inflation Relief
The administration says federal spending trends are helping rein in price increases, but the economic calculus may be more complicated.As Americans deal with the highest inflation in decades, President Biden has declared that combating rising costs is a priority for his administration. Lately, he has cited one policy in particular as an inflation-fighting tool: shrinking the nation’s budget deficit.“Bringing down the deficit is one way to ease inflationary pressures in an economy,” Mr. Biden said this month. “We reduce federal borrowing and we help combat inflation.”The federal budget deficit — the gap between what the government spends and the tax revenue it takes in — remains large. But Mr. Biden has pointed out that it shrank by $350 billion during his first year in office and is expected to fall more than $1 trillion by October, the end of this federal budget year.Rather than stemming from any recent budget measures by his administration or Congress, the deficit reduction largely reflects the rise in tax receipts from strong economic growth and the winding down of pandemic-era emergency programs, like expanded unemployment insurance. And for many experts, that — plus the reality that deficits have a complicated relationship with inflation — makes the budget gap a surprising talking point.“It’s probably not something they should be taking credit for,” Dan White, director of government consulting and fiscal policy research at Moody’s Analytics, said of the Biden team’s emphasis on deficit reduction. The expiration of the programs is mostly “not making things worse,” he said.The Biden administration’s March 2021 spending package helped the economic rebound, but it also meant the deficit shrank less than it otherwise would have last year. In fact, the $1.9 trillion relief plan probably added to inflation, because it pumped money into the economy when the labor market was starting to heal and businesses were reopening.But the White House has explained its new emphasis on deficit reduction and fiscal moderation in terms of timing. Administration officials argue that back in March 2021, the world was uncertain, vaccines were only beginning to roll out and spending heavily on support programs was an insurance policy. Now, as the labor market is booming and consumer demand remains high, the administration says it wants to avoid ramping up spending in ways that could feed further inflation.“Supply chains have created challenges in ramping up production as quickly as we were able to support demand,” said Heather Boushey, a member of the White House Council of Economic Advisers. “The point he’s trying to make is that the plan, moving forward, is responsible and is not aimed at adding to demand.”Moody’s Analytics estimates that inflation will be about a percentage point lower this year than it would be had the government continued spending at last year’s levels.But few people, if anyone, expected those programs to continue. And while it is possible to make a rough estimate about how much fading fiscal support is helping with the inflation situation, as Moody’s did, a range of economists have said that it is hard to know how much it matters for inflation with precision.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.The tie between budget deficits and inflation is also more complex than Mr. Biden’s statements suggest.Deficits, which are financed by government borrowing, are not inherently inflationary: Whether they push up prices hinges on the economic environment as well as the nature of the spending or cutback in revenue that created the budget shortfall.Policies that reduce the deficit could be inflationary, for instance. A big, broadly distributed stimulus that gives direct cash aid to low- and middle-income households could be more than offset in a budget by revenue from large tax increases on the wealthy. But shuffling much of that money to people who are likely to spend it quickly could cause demand to outstrip supply, leading to inflation. Alternatively, spending that would enlarge deficits — like debt-financed investments in energy infrastructure — could reduce inflation over time if the program improves efficiency, expands capacity or makes production cheaper.“I’ll fall back on the typical economist answer and say: It depends,” said Andrew Patterson, a senior international economist at Vanguard.The last time the federal government had a budget surplus was 2001. Since 1970, there have only been four years in which the U.S. government taxed more than it spent. Over that period, there have been times of both high and low inflation.“There’s no simple-minded deficit-to-inflation link — you have to look at both the demand and the supply side of the economy,” said Glenn Hubbard, a professor of finance and economics at Columbia University who headed the Council of Economic Advisers under President George W. Bush. The existence or absence of high inflation has more to do with imbalances in the real economy than with complex budget math. “If aggregate demand grows much faster than aggregate supply, you will see inflation,” he said.Complicating matters in the current situation, the stimulus from the last couple of years is still trickling out into the economy because consumers have amassed savings stockpiles that they are spending down, and because state and local governments continue to use untapped relief funds.And stimulus-stoked demand is far from the only reason prices are rising. Over the past year, because of factory shutdowns and overburdened transit routes, companies have struggled to expand supply to meet booming demand. Shortages of cars, couches and construction materials and raw components have helped to push costs higher.Grocery shoppers in Los Angeles. The White House has argued that a shrinking federal budget deficit will help rein in consumer prices.Alisha Jucevic for The New York TimesRecent global developments are worsening the situation. The Chinese government’s latest lockdowns to contain the coronavirus threaten to shake up factory production and shipping, while the war in Ukraine has caused fuel and food prices to increase.Employers are also raising wages as they scramble to hire in a hot job market, and that increase in labor costs is prompting some companies to raise prices to protect their profit levels. Some companies are even increasing their profits, having discovered that they can charge more in an era of hot demand.The demand drag from fading pandemic relief doesn’t appear to have been large enough to substantially offset those other forces. To date, price gains for a range of goods and services have mostly accelerated.Inflation F.A.Q.Card 1 of 5What is inflation? More
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Employer Practices Limit Workers’ Choices and Wages, U.S. Study Argues
A Biden administration report says collusion and other constraints on competition hold down pay and prospects in the labor market.The recent narrative is that there is a tight labor market that gives workers leverage. But a new report from the Biden administration argues that the deck is still stacked against workers, reducing their ability to move from one employer to another and hurting their pay.The report, released Monday by the Treasury Department, contends that employers often face little competition for their workers, allowing them to pay substantially less than they would otherwise.“There is a recognition that the idea of a competitive labor market is a fiction,” said Ben Harris, assistant Treasury secretary in the office of economic policy, which prepared the report. “This is a sea change in economics.”The report follows up on a promise made by President Biden last summer when he issued an executive order directing his administration to address excessive concentration in the market for work.Drawing from recent economic research, the report concludes that lack of competition in the job market costs workers, on average, 15 to 25 percent of what they might otherwise make. And it emphasizes that the administration will deploy the tools at its disposal to restore competition in the market for work.“This is the administration declaring where it is on the enforcement of antitrust in labor markets,” Tim Wu, a special assistant to the president for technology and competition policy on the National Economic Council, said in an interview in which he laid out the report’s findings. “It is sending a strong signal about the direction in which antitrust enforcement and policy is going.”Across the economy, wage gains generally come about when a worker changes jobs or has a credible offer from outside that will encourage the current employer to provide an increase, argues Betsey Stevenson, a professor of economics at the University of Michigan who was on President Barack Obama’s Council of Economic Advisers.The State of Jobs in the United StatesEmployment growth accelerated in February, as falling coronavirus cases brought customers back to businesses and workers back to the office.February Jobs Report: U.S. employers added 678,000 jobs and the unemployment rate fell to 3.8 percent in the second month of 2022.Wages and Prices: A labor shortage is helping to push up workers’ pay. With inflation running hot, that could be a problem for the Federal Reserve.Service Workers: Even as employers scramble to fill vacancies, service workers are seeing few gains. Part-time work is partly to blame.Unionization Efforts: The pandemic has fueled enthusiasm for organized labor. But the pushback has been brutal, especially in the private sector.New to the Work Force: Graduating college seniors will start their career without the memory of prepandemic work life. Here is what they expect.“Companies are well aware of this,” she said in an interview, so they rally around a simple solution: “If we just stop competing, it will be better for everybody.”The Treasury report lays out the many ways in which employers do this. There are noncompete agreements that bar workers from moving to a competitor, and nondisclosure agreements that keep them from sharing information about wages and working conditions — critical information for workers to understand their options. Some companies make no-poaching deals.“There is a long list of insidious efforts to take power out of the hands of workers and seize it for employers’ gain,” said Seth Harris, deputy director at the National Economic Council and deputy assistant to the president for labor and the economy.This is happening against a backdrop of broad economic changes that are hemming in the options of many workers, especially at the bottom end of the job market.The outsourcing of work to contractors — think of the janitors, cafeteria workers and security guards employed by enormous specialist companies, not by the companies they clean, feed and protect — reduces the options for low-wage workers, the report argues.The mergers and acquisitions that have consolidated hospitals, nursing homes, food processing companies and other industries have also reduced competition for workers, the study says, curtailing their ability to seek better jobs.The report notes, for instance, that mergers trimmed the number of hospitals in the United States to 6,093 in 2021, from 7,156 in 1975. It cites research into how some of these mergers have depressed the wage growth for nurses, pharmacy employees and other health workers.The Treasury’s document is drawn from a body of research that has been growing since the 1990s, when a seminal paper by David Card and Alan B. Krueger found that raising the minimum wage did not necessarily reduce employment and could even produce more jobs.The conclusion by Mr. Card and Mr. Krueger, which economists would consider impossible in a competitive labor market in which rising labor costs would reduce employer demand, started the discipline down a path to investigate the extent to which employers competed for workers. If a few employers had the power to hold wages below the competitive equilibrium, raising the wage floor might draw more workers in.Lack of competition, the Biden administration argues, goes a long way to explain why pay for a large share of the American work force is barely higher, after accounting for inflation, than it was a half-century ago. “The fact that workers are getting less than they used to is a longstanding problem,” Ms. Stevenson, who was not involved in the Treasury report, noted.Anticompetitive practices thrive when there are fewer competitors. If workers have many potential employers, they might still agree to sign a noncompete clause, but they could demand a pay increase to compensate.Even if there is no conclusive evidence that the labor market is less competitive than it used to be, the report says, researchers have concluded that there is, in fact, very little competition.Suresh Naidu, a professor of economics at Columbia University, argues, moreover, that institutions like the minimum wage and unions, which limited employers from fully exercising their market power, have weakened substantially over time. “The previously existing checks have fallen away,” Mr. Naidu said.Unions are virtually irrelevant across much of the labor market. Only 6 percent of workers in the private sector belong to one. The federal minimum wage of $7.25 an hour is so low that it matters little even for many low-wage workers. The Treasury report argues that an uncompetitive labor market is reducing the share of the nation’s income that goes to workers while increasing the slice that accrues to the owners of capital. Moreover, employers facing little competition for workers, it argues, are more likely to offer few benefits and impose dismal working conditions: unpredictable just-in-time schedules, intrusive on-the-job monitoring, poor safety, no breaks.The damage runs deeper, the report says, arguing that uncompetitive labor markets reduce overall employment. Productivity also suffers when workers have a hard time moving to new jobs that could offer a better fit for their skills. Noncompete clauses discourage business formation when they limit entrepreneurs’ ability to find workers for their ventures.Addressing the issues that the report singles out is likely to be an uphill task. The administration’s push to increase the federal minimum wage to $15 has been unsuccessful. In Congress, bills that would ease the path for workers to join a union face long odds. Going after noncompete clauses, no-poaching deals and other forms of anticompetitive behavior would be an easier task.Last year, the Justice Department’s antitrust division brought several cases challenging no-poaching and wage-setting agreements. In January, four managers of home health care agencies in Maine were indicted on federal charges of conspiring to suppress the wages and restrict the job mobility of essential workers during the pandemic.Still, deploying antitrust enforcement in the job market is somewhat new. It has been used mostly to ward off anticompetitive behavior that raises prices for consumers in product and service markets. Persuading courts to, say, prevent a merger because of its impact on wages might be tougher.A note by the law firm White & Case, for instance, complained that the move to block Penguin Random House’s attempt to buy Simon & Schuster on the grounds that it would reduce royalties to authors is “emblematic of the Biden administration’s and the new populist antitrust movement’s push to direct the purpose of antitrust away from consumer welfare price effects and towards other social harms.” More
