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    Biden and the Fed Wanted a Hot Economy. There’s Risk of Getting Burned.

    So far, in a real-world test of a new approach to economic policy, prices have been rising faster than wages.Seen at a U-Haul in Overland, Mo., earlier this summer. A “high-pressure” economy has brought more people into the labor market and pushed up wages at the lower end of the income scale. Whitney Curtis for The New York TimesThere is a big idea in economic policy that has become ascendant in recent years: Great things can be achieved for American workers if the economy is allowed to run hot.The notion of creating a “high-pressure” economy is that government should be willing to risk a bit of inflation in the near term to achieve conditions that will over the long run lift people out of poverty, prevent the scars of recessions from becoming permanent, and make the nation’s economic potential stronger.This idea has origins in a 1973 paper by Arthur M. Okun, and was largely confined to think tank conferences in the 2010s. Now, it is the intellectual underpinning of American economic policy, embraced at the highest levels by the Biden administration and the Federal Reserve.It makes for a real-world test of a new approach to economic policy. The results so far show that pushing the economic accelerator to the floor has trade-offs, specifically the combination of trillions in federal spending with interest rates held near zero.While that combination has some created some important beneficial effects, the summer of 2021 has not produced quite the high-pressure economy its enthusiasts were hoping for.The good news is that job openings are abundant, wages for people at the lower end of the pay scale are rising quickly, and it appears that the post-pandemic recovery won’t be like the long slog that followed the three previous recessions.But consumer prices have been rising faster than average wages — meaning that, on average, workers are seeing the purchasing power of their paycheck fall. People looking to buy a car or build a house or obtain a wide variety of other products are finding it hard to do so. And while much of that reflects temporary supply disruptions that should abate in coming months, other forces could keep prices rising. These include soaring rents and the delayed effects of higher prices from companies having to pay higher wages.“I don’t think of the last few months as either vindication or repudiation, yet,” said Josh Bivens, director of research at the Economic Policy Institute and a longtime enthusiast of policymakers seeking a high-pressure economy.In effect, unlike the slow-moving developments of the 2010s, when the debates over running the economy hot took shape, things are moving so fast right now that it is hard to be sure how things will look as conditions stabilize.Still, “I think the benefits of carrying on the go-for-growth strategy will come,” Mr. Bivens said, noting exceptionally strong job creation in recent months.A more traditional view has been that it is unwise for policymakers to try to push unemployment too low, because doing so will generate inflation. That thinking lost credibility as the 2010s progressed — the jobless rate fell ever lower, with few signs of an inflation spike.But while the tight labor market from 2017 to 2019 generated strong inflation-adjusted wage gains for workers, especially at the lower end of the pay scale, there is nothing automatic about that process. In a booming economy, if companies raise prices more rapidly than they increase worker pay — taking a higher markup on the products they sell — it will mean workers are effectively making less for each hour of work.In the past, it has cut both ways. In the strong economies of the late 1960s and late 1990s, average hourly earnings for nonmanagerial workers persistently rose faster than inflation. In the late 1980s, the reverse was true.And it is also true now. Wages and salaries in the private sector were up 3.6 percent in the second quarter from a year earlier, according to Employment Cost Index data, the strongest since 2002. But the Consumer Price Index was up 4.8 percent in that same span, meaning workers lost ground. Other measures of compensation and inflation tell a similar story.One big question is whether elevated inflation is simply an unavoidable consequence of the reopening of the economy after a pandemic, or is at least partly a result of the aggressive use of fiscal and monetary policy to heat up the economy quickly.For example, automobile prices are through the roof, which analysts attribute mainly to microchip shortages caused by production decisions made during the pandemic. But is part of the spike in prices also a result of high demand, spurred by stimulus checks the government has sent and low interest rates that make car loans cheap?Jason Furman, a Harvard economist and former chairman of the White House Council of Economic Advisers, points out that the United States is experiencing significantly higher inflation than other countries that are facing the same supply problems. Consumer prices rose 2.2 percent in the year ended in July in the euro area, compared with 5.4 percent in the United States.“My guess is that real wage growth is faring better right now in Europe than it is in the United States, and it’s faring better because there is less demand and thus less inflation,” Mr. Furman said.The story is better when you look at how lower-paid workers in the United States are doing. The shortages of workers, especially in service industries, are translating into raises for people who don’t make a lot. Data from the Federal Reserve Bank of Atlanta shows that median hourly wages for people in the bottom 25 percent of earners have risen at a 4.6 percent rate over the last year, compared with 2.8 percent for the top 25 percent.And many of the benefits of a hot economy come in the form of pulling more people into the work force and enabling them to work more hours. Employers have added an average of 617,000 jobs a month so far in 2021, versus 173,000 a month in 2011, in the aftermath of the global financial crisis. If sustained, the United States is on track to return to its prepandemic employment level two years after the recession ended. Such a recovery took five years after the previous recession.Advocates of running a hot economy emphasize that a rapid recovery is good for reducing inequality, in part by ensuring there are plenty of job opportunities so that people don’t have to be out of work for long stretches.“We are seeing ongoing stimulus and expanded income support programs doing what they’re supposed to do,” said J.W. Mason, a fellow at the Roosevelt Institute and a longtime proponent of running the economy hot. “The numbers we should really be looking at are employment growth and wage growth, especially at the low end, and those trends are positive and encouraging. They’re the numbers we would have hoped to see at the beginning of the year.”In the late years of the last expansion, employment gains were particularly strong for racial minorities, people with low levels of education, and some others who often have a hard time getting hired.“The thing we know for certain is that when you run a hot economy, people get jobs who wouldn’t otherwise get jobs,” Mr. Furman said. “That by itself is sufficient reason to want to run a hot economy. You’re talking about some of the most vulnerable workers getting hired, and that’s a wonderful thing.”Still, even some supporters of running the economy hot see risk that the scale and pace of stimulus actions have been too much.“It’s not that my commitment to a tight labor market has weakened,” said Michael Strain of the American Enterprise Institute, one of the center-right voices who favored the approach. “It’s that the specific policy mix is a mistake, for a bunch of reasons. There is such a thing as too much stimulus, which becomes counterproductive, either because inflation eats away wage gains or the supply side of the economy can’t keep up.”Even people who believe in a high-pressure economy, in other words, would do well to keep an eye on just how high that pressure is getting, and how sustainable it really is. More

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    Black Workers Stopped Making Progress on Pay. Is It Racism?

    William Spriggs, a professor at Howard University, wrote an open letter last year to his fellow economists. Reacting to the police killing of George Floyd in Minneapolis, he began the letter with a question: “Is now a teachable moment for economists?”Slamming what he saw as attempts to deny racial discrimination, Dr. Spriggs argued that economists should stop looking for a reason other than racism — some “omitted variable” — to account for why African Americans are falling further behind in the economy.“Hopefully, this moment will cause economists to reflect and rethink how we study racial disparities,” wrote Dr. Spriggs, who is Black. “Trapped in the dominant conversation, far too often African American economists find themselves having to prove that African Americans are equal.”After a year in which demands for racial justice acquired new resonance, Dr. Spriggs and others are pushing back against a strongly held tenet of economics: that differences in wages largely reflect differences in skill.While African Americans lag behind whites in educational attainment, that disparity has narrowed substantially over the last 40 years. Still, the wage gap hasn’t budged.In 2020, the typical full-time Black worker earned about 20 percent less than a typical full-time white worker. And Black men and women are far less likely than whites to have a job. So the median earnings for Black men in 2019 amounted to only 56 cents for every dollar earned by white men. The gap was wider than it was in 1970.Lost ProgressEarnings of Black men, as a percentage of the earnings of white men, are at the same place they were in the 1960s and 1970s. More

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    The Federal Reserve chair says the United States needs ‘more inclusive prosperity.’

    Jerome H. Powell, the Federal Reserve chair, said on Tuesday that the central bank was focused on returning the economy to full strength, and he emphasized that the Fed would be more ambitious and expansive in its understanding of what that meant.Speaking before House lawmakers on Tuesday afternoon, Mr. Powell emphasized that the Fed was looking at maximum employment as a “broad and inclusive goal” — a standard it set out when it revamped its policy framework last year. That, he said, means the Fed will look at employment outcomes for different gender and ethnic groups.“There’s a growing realization, really across the political spectrum, that we need to achieve more inclusive prosperity,” Mr. Powell said in response to a question, citing lagging economic mobility in the United States. “These things hold us back as an economy and as a country.”The Fed cannot solve issues of economic inequality itself, he said. Congress would need to play a role in establishing “a much broader set of policies.”But Mr. Powell’s explanation of full employment came as many lawmakers wanted to talk about the second of the central bank’s two goals: stable inflation. The Fed chair was quizzed repeatedly about the recent pickup in price gains, with Republicans warning that the trend could become dangerously entrenched — even quoting statistics about recent jumps in bacon and used-car prices — as Democrats warned that the central bank should not be quick to react to the price pressures.“There’s sort of a perfect storm of very strong demand and weak supply due to the reopening of the economy,” Mr. Powell said, adding that much or all of the recent overshoot in inflation came from short-term bottlenecks. “They don’t speak to a broadly tight economy.”Mr. Powell added that price jumps have been bigger than expected and that the Fed was monitoring them closely, but he said they were still expected to wane over time. He also acknowledged that economic data was uncertain now, given quirks in supply and demand as businesses reopen.“We have to be very humble about our ability to really try to draw a signal out of it,” Mr. Powell said.He said he had “a level of confidence” that strong price gains would be temporary but was not certain when bottlenecks would clear up. Nevertheless, the goods and services categories where costs are picking up quickly, like restaurants and travel, are clearly tied to the pandemic.“It should not leave much of a mark on the ongoing inflation process,” he said. More

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    America Is on a Road to a Better Economy. But Better for Whom?

    Listen to This ArticleAudio Recording by AudmTo hear more audio stories from publications like The New York Times, download Audm for iPhone or Android.The plunge the U.S. economy took last spring was so precipitous that the charts from the time look, literally, like cliffs. Industrial output fell 12.7 percent in April 2020, the worst drop since records began a century earlier, as entire industries shut down virtually overnight. Airline travel, as measured by the number of people passing through T.S.A. checkpoints, fell 94 percent in a month — from two million people on March 1 to just 124,000 on April 1. In two months, employers cut 22 million jobs, more than in every recession in the last 50 years, combined.“This thing is going to come for us all,” the economist Martha Gimbel, now an adviser to President Biden, said in April 2020, when the full extent of the damage was just beginning to hit home. She meant every industry, every income group, every class of worker — not just flight attendants and line cooks but also white-collar workers in supposedly recession-proof industries. Even sectors that were initially thriving in lockdown, like personal entertainment and home improvement, would feel the pinch once enough people saw their paychecks evaporate. No industry is recession-proof in a recession that shuts down the entire economy.That was the dominant view at the time. But it was wrong. “This thing” didn’t come for us all. It came for the restaurants, the hotels, the movie theaters and for thousands of other businesses and millions of workers. But the ripples didn’t spread as far as economists feared. The financial system didn’t melt down. White-collar workers didn’t lose their jobs en masse. The factories and construction sites that shut down in April had mostly reopened by June.A year later, the recovery is in full swing. Restaurants are open again. Airports are filling up. The United States has regained two-thirds of the jobs lost last spring, and is closing the remaining gap at the pace of hundreds of thousands of jobs a month. In his annual letter to shareholders a year ago, Jamie Dimon, the C.E.O. of JPMorgan Chase, warned of a “bad recession” that could rival the 2008 financial crisis; in this year’s edition, he predicted a multiyear boom. Amid the euphoria, the government’s closely watched monthly jobs report showed that hiring in April was a quarter of what economists had expected, and down sharply from March. It was a stark reminder: The pandemic isn’t over. A robust recovery isn’t guaranteed. The U.S. economy still faces a long climb back to health — and the most vulnerable workers will, inevitably, be the last to benefit. The number of jobs held by college graduates in April was back almost to its pre-pandemic level; among those with a high school diploma or less, there is still a gaping hole of more than 3.5 million jobs.Counting all the various Covid relief packages passed under two presidents, the United States has now pumped more than $5 trillion into the economy.Political leaders and policymakers from President Biden on down have talked about the need to create a post-pandemic economy that is better than the one we left behind last year. The question is: Better for whom? The pre-pandemic economy, too, was praised in some corners as the best in decades, but it was still one in which the unemployment rate for Black Americans was twice that of white Americans, where someone could work a full-time job 52 weeks a year and still stay mired in poverty and where people’s toehold in the middle class was so tenuous that, within weeks of losing their jobs last spring, many were left idling in their cars in a miles-long line at a local food bank. “We need a different economy than the one we had, because the one we had clearly was not resilient,” says William Spriggs, a Howard University economist.And yet in the next breath, Spriggs allows that he is optimistic that we actually will build a different economy this time, one in which jobs are plentiful, wages are rising and prosperity is widely shared. That optimism stems in part from the relatively strong recovery so far, and partly from the federal government’s ongoing efforts to keep it on track. But it also stems from the fact that after a crisis that laid bare the deep inequities in the U.S. economy, policymakers, journalists and voters are all less likely to accept without question a recovery that reaches only a small segment of the population. The first two decades of the 21st century were a parade of economic disappointments: The bursting of the dot-com bubble was followed by a recession; which was followed by a “jobless recovery”; which was followed by another burst bubble, this time in housing; and another, even worse, recession; and another, even weaker, recovery. Officially, the Great Recession ended in June 2009, but it took two years for U.S. gross domestic product to return to its pre-recession level, and six years for unemployment to do so. Long-term joblessness didn’t even stop rising until the recession had been over for nearly a year, and it didn’t get back to its pre-2008 normal until well into 2018. Year after year, forecasters predicted that this was the year that growth would finally pick up and wages would rise and prosperity would be widely shared. And year after year they were wrong. The pessimism became so ingrained that by 2019, when things were, finally, actually pretty good, the dominant economic narrative was about what would inevitably cause the next recession. (“Global pandemic” did not tend to make the list.)Judged against that grim benchmark, this recovery already looks like an improvement. The consensus is that G.D.P. will return to its pre-pandemic level sometime this quarter, and possibly already has. The unemployment rate is on pace to get there sometime next year. Turn on CNBC these days, and the debate is not over the risks of a weak recovery but over the possibility of runaway inflation, a problem usually associated with an economy that’s running too hot, not one that’s trying to get back on its feet after a crippling recession.This recovery is different, in part, because this recession was different. The last crisis, like most recessions, was caused by a fundamental imbalance — the housing bubble — that had to be resolved before the economy could start growing again. Construction workers and mortgage brokers had to find jobs in other industries. Households had to get out from under unsustainable debt loads. Banks and other financial institutions had to write off hundreds of billions in bad loans. This time, there was no imbalance. Things were basically going fine, and then an outside force, what economists call an “exogenous shock,” turned the world upside-down. If we could somehow have pressed “pause” until the pandemic ended, there would have been no reason for a recession at all. Of course, there is no “pause” button. That’s why everyone was so worried about the ripple effects last year. Restaurants can’t pay waiters when they have no customers. Waiters can’t pay rent when they have no jobs. Landlords can’t pay their mortgages when their tenants don’t pay rent. Banks can’t make new loans when borrowers stop making payments. And so on and so on, until what began as an isolated crisis caused by a specific set of circumstances has turned into a general pullback in activity across the economy.Except that never really happened this time. Evictions, foreclosures and bankruptcies all fell last year. The financial system, as anyone who has checked their 401(k) balance lately can attest, did not collapse. Perhaps the most shocking statistic in a year of shocking economic statistics is this one: In what was, by many measures, the worst year since at least World War II, Americans’ income, in aggregate, actually rose.How is this possible? Because of the other reason this recovery is different: the federal government. Counting all the various Covid relief packages passed under two presidents, the United States has now pumped more than $5 trillion into the economy. That dwarfs not just what the U.S. has spent in any previous recession, but also the aid provided in almost any other large country. Here’s what that money meant in the real world: When the economy shut down last spring, the federal government stepped in to ban most evictions and made it easy for borrowers to delay payments on their mortgages and student loans. It expanded access to nutrition benefits, school-lunch programs and other emergency relief programs. The Federal Reserve bought hundreds of billions of dollars’ worth of bonds to keep credit flowing and avoid a repeat of the 2008 crisis.Most important, the government gave people money. Lots of money. By April of this year, the typical middle-class family of four had received more than $11,000 through successive rounds of direct payments. That doesn’t include the expanded child tax credit that was part of the latest aid bill, which is worth up to $3,600 per child.The CARES Act, which Congress passed in late March 2020, also provided $600 a week in extra unemployment benefits to laid-off workers, and created a whole new program — Pandemic Unemployment Assistance — to cover freelancers, gig workers and other people who ordinarily don’t qualify for benefits. And it created the Paycheck Protection Program, which gave out more than half a trillion dollars in low-interest — and in many cases, forgivable — loans to small businesses, most likely preventing thousands of employers from going under entirely.The government didn’t get everything right. Much of the economic response to Covid was deeply, frustratingly flawed. People spent weeks battling their way through busy signals and overloaded websites to claim their benefits, often only to see their payments suspended because of a lost piece of paperwork or a data-entry error. Small-business aid was snapped up by businesses that didn’t really need the help (and in some cases weren’t small), while restaurants, retailers and concert venues that were truly struggling became ensnared in a tangle of red tape and, in some cases, simply gave up. Congress, which reacted with such uncharacteristic speed in the spring, quickly fell back into its old partisan patterns, with Democrats pushing for more spending, Republicans for less — resulting in a monthslong delay in aid during a critical period last fall. “Their fiscal policy response was, in the beginning, on the money — it was exactly what we needed,” says Michelle Holder, an economist at John Jay College in New York. “But the long view was not necessarily taken into account with regard to how long it was really going to take our country to slog through this pandemic.”But as bad as it was, the scale of the hardship would have been far worse without the abundant government response. Researchers at Columbia University found that the federal aid kept 18 million Americans out of poverty last April and 13 million in January. The image of Americans lining up at food banks is, appropriately, seared on our collective memory, and measures of food insecurity did rise in the pandemic. But government aid almost certainly saved far more people from hunger, says Diane Whitmore Schanzenbach, a Northwestern University economist who has studied food insecurity during the pandemic. She notes that data from the Census Bureau shows rates of hunger dropping sharply after government aid checks arrived in January and March.And the aid didn’t just rescue millions of individual families. It also arguably rescued the economy itself. Last spring, for example, landlords across the country feared that tenants who had lost their jobs would start missing rent payments. But that never happened at a large scale. According to data from the National Multifamily Housing Council, which represents apartment owners and managers, 80 percent of tenants paid rent on time last May, and 95 percent paid by the end of the month — both comparable to the previous year, despite an eviction moratorium that lowered the stakes for nonpayment.Researchers at the JPMorgan Chase Institute, using data from thousands of checking accounts, found that practically as soon as the CARES Act aid began flowing, spending among low-income consumers rebounded fully to its pre-pandemic level. In other words, unlike in virtually every other recession on record, millions of people lost their jobs, but they didn’t have to stop spending. More than anything else, that is what put us on track to avert a downward spiral.“It doesn’t look like it’s going to happen,” says Louise Sheiner, a former Federal Reserve economist who is now at the Brookings Institution. “The fiscal support is what will prevent it from happening.”Illustration by ArdneksU.S. employers added 266,000 jobs in April. In any normal time, that would represent a good month for hiring; in the two years leading up to pandemic, job growth averaged a bit under 200,000 jobs per month. But in the context of an economy that is still down more than eight million jobs from February 2020, it represented an alarming deceleration (770,000 jobs were added in March). It also further inflamed an already-simmering debate over the best way to help the economy. Democrats looked at the unexpectedly weak job growth and saw evidence of an economy still in need of government aid. Republicans looked at it and saw evidence that government aid was contributing to the problem — that enhanced unemployment benefits were discouraging people from looking for jobs, leading to a shortage of available workers. Still, few economists expect the weakness to last. Goldman Sachs, in a note to clients after the disappointing jobs report, said it expected job gains to average 800,000 per month between May and September, which would still represent a faster recovery than after any crisis in recent memory. Speed matters because a principal lesson of the last recession is that the victims of a slow recovery are disproportionately the most disadvantaged workers. Wage growth for all but the highest-earning workers didn’t begin to pick up in earnest until nearly a decade into the recovery from the last recession. The Black unemployment rate didn’t fall below 10 percent until 2015, six years after the recession ended. (The unemployment rate never hit 10 percent for white people in the first place.)‘There is going to be a tendency to look at those numbers and say, “Mission accomplished,’ before it is time.”Jerome Powell, the Federal Reserve chairman, has repeatedly cited racial and other disparities as a reason for trying to revive the economy as quickly and completely as possible. People at the bottom of the income ladder enjoyed just a few years of decent gains before the pandemic cut the recovery prematurely short. The faster we can get back there, the sooner they can begin to enjoy those gains again. “Those who have historically been left behind stand the best chance of prospering in a strong economy with plentiful job opportunities,” Powell said in a speech at a National Community Reinvestment Coalition conference in early May. “Our recent history highlights both the benefits of a strong economy and the severe costs of a weak one.”Low-income families are starting in a much different place from where they were in the last recovery. Indeed, American households are, on average, in the best financial shape in decades. Debt levels, excluding home mortgages, are lower than before the pandemic. Delinquencies and defaults are down, too. And Americans in aggregate are sitting on a mountain of cash: $6 trillion in savings as of March, more than four times as much as before the pandemic.Averages, of course, don’t tell the full story. The wealthy, and even the merely affluent, have done exceedingly well during the pandemic. They have, by and large, kept their jobs. They have seen the value of their stock portfolios soar. And they have spent less on vacations, restaurant meals and other services. For those at the other end of the economic spectrum, the picture looks very different: Many of them lost their jobs, had no investments to start with and needed every penny of the aid they received to meet basic living expenses, if they managed to get that aid at all.Those diverging fortunes are what commentators have called the “K-shaped recovery” — rapid gains for some, collapse for others. But that narrative is incomplete. Millions of people have been financially devastated, but many more have not been. Most low-wage workers kept their jobs, or got them back relatively quickly. Many of them will emerge from the pandemic in better financial shape than they entered it, thanks in large part to successive rounds of government aid. Low- and middle-income families came out of the last recession mired in debt, and spent years trying to climb out of that hole. That reality colored their financial decisions long after the recession was over: whether to buy a house, whether to go to college, whether to take a chance on that new job or that new career or that new city. This time around, many people will have the opportunity to make their choices free of that burden.The lesson of both this crisis and the last one is that policy matters. In the last recession, an initially fairly robust response petered out too quickly, leading to a decade of stagnation. That hasn’t happened this time, but it still could. Unless the April jobs numbers are indicative of a broader slowdown — something hardly any forecaster thinks is especially likely — the aggregate economic statistics are going to start looking very strong in the coming months. “There is going to be a tendency to look at those numbers and say, ‘Mission accomplished,’ before it is time,” says Nela Richardson, chief economist for ADP, a payroll-processing firm. That is what happened a decade ago. But this time, far more people are paying attention. Inside the White House, economists have zeroed in on the labor-force participation rate among Black women as a key measure of economic health. Powell, at the Fed, now talks in virtually every public appearance about race and inequality — topics that previous Fed chairs typically tiptoed around or avoided altogether. Journalists who covered the aftermath of the last recession are more likely to question the notion that the economy is good just because the unemployment rate is low.Kristen Broady, a fellow in the Brookings Institution’s Metropolitan Policy Program, says that people are finally paying attention after years of being preached to that public-policy discussions should focus less on aggregate statistics. Recently, journalists and policymakers have been bringing up the subject with her, rather than the other way around. That, as much as anything, is cause for optimism.“This is the first time,” she says, “that I have hope.” More

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    Middle-Class Pay Lost Pace. Is Washington to Blame?

    A new paper by liberal economists presents evidence that policymakers helped hold down wages for four decades.One of the most urgent questions in economics is why pay for middle-income workers has increased only slightly since the 1970s, even as pay for those near the top has escalated.For years, the rough consensus among economists was that inexorable forces like technology and globalization explained much of the trend. But in a new paper, Lawrence Mishel and Josh Bivens, economists at the liberal Economic Policy Institute, conclude that government is to blame. “Intentional policy decisions (either of commission or omission) have generated wage suppression,” they write.Included among these decisions are policymakers’ willingness to tolerate high unemployment and to let employers fight unions aggressively; trade deals that force workers to compete with low-paid labor abroad; and the tacit or explicit blessing of new legal arrangements, like employment contracts that make it harder for workers to seek new jobs.Together, Dr. Mishel and Dr. Bivens argue, these developments deprived workers of bargaining power, which kept their wages low.“If you think about a person who’s dissatisfied with their situation, what are their options?” Dr. Mishel said. “Almost every possibility has been foreclosed. You can’t quit and get a good-quality job. If you try to organize a union, it’s not so easy.”The slowdown in workers’ pay increases happened rather abruptly. From the late 1940s to the early 1970s, hourly compensation for the typical worker grew roughly as quickly as productivity. If the value of the goods and services that workers provided rose by 2 percent in a year, then their wages and benefits tended to go up by roughly 2 percent as well.Since then, productivity has continued to grow, while hourly compensation largely flattened. According to the paper, the typical worker earned $23.15 an hour in 2017, far less than the $33.10 that worker would have earned had compensation kept up with productivity growth.In the 1980s and 1990s, economists increasingly argued that technology largely explained this flattening of wages. They said computers were making workers without college degrees less valuable to employers, while college graduates were becoming more valuable. At the same time, the growth in the number of college graduates was slowing. These developments dragged down wages for those in the middle of the income distribution (like factory workers) and increased wages for those near the top (like software engineers).The technology thesis largely relied on a standard economic analysis: As the demand for lower-skilled workers dropped, their wages grew less quickly. But in recent years, many economists have gradually de-emphasized this explanation, focusing more on the balance of power between workers and employers than on long-term shifts in supply and demand.The idea is that setting pay amounts to dividing the wealth that workers and employers create together. Workers can claim more of this wealth when institutions like unions give them leverage. They receive less when they lose such leverage.Dr. Mishel and Dr. Bivens argue that a decades-long loss of leverage largely explains the gap between the pay increases that workers would have received had they benefited fully from rising productivity, and the smaller wage and benefit increases that workers actually received.To arrive at this conclusion, they examine numerical measures of the impact of several developments that hurt workers’ bargaining power — some of which they generated, many of which other economists have generated over the years — then sum up those measures to arrive at an overall effect.For example, when surveying the economic literature on the unemployment rate, Dr. Mishel and Dr. Bivens find that it was frequently below the so-called natural rate — the rate below which economists believe a tight job market could cause inflation to accelerate uncontrollably — in the three decades after World War II, but frequently above the natural rate in the last four decades.This is partly because the Federal Reserve began to put more emphasis on fighting inflation once Paul Volcker became chairman in 1979, and partly because of the failure of state and federal governments to provide more economic stimulus after the Great Recession of 2007-9.Drawing on existing measures of the relationship between unemployment and wages, Dr. Mishel and Dr. Bivens estimate that this excess unemployment lowered wages by about 10 percent since the 1970s, explaining nearly one-quarter of the gap between wages and productivity growth.They perform similar exercises for other factors that undermined workers’ bargaining power: the decline of unions; a succession of trade deals with low-wage countries; and increasingly common arrangements like “fissuring,” in which companies outsource work to lower-paying firms, and noncompete clauses in employment contracts, which make it hard for workers to leave for a competitor.Together, Dr. Mishel and Dr. Bivens conclude, these factors explain more than three-quarters of the gap between the typical worker’s actual increases in compensation and their expected increases, given the productivity gains.If that figure is in the right ballpark, it is a crucial insight. Underlying most of the explanations for anemic wages that Dr. Mishel and Dr. Bivens cite is the idea that wage growth depends on policy choices, not on the march of technology or other irreversible developments. Government officials could have worried less about inflation and erred on the side of lower unemployment when setting interest rates and passing economic stimulus. They could have cracked down on employers that aggressively fought unions or foisted noncompete agreements onto fast-food workers.And if policymakers are to blame for wage stagnation, they can also do a lot to reverse it — and more quickly than many economists once assumed. Among other things, the conclusion of the paper would suggest that President Biden, who has enacted a large economic stimulus and sought to increase union membership, may be on the right track.“One of the biggest things about the American Rescue Plan,” said Dr. Mishel, referring to the pandemic relief bill Mr. Biden signed, “is first and foremost its commitment to getting to full employment quickly. It’s willing to risk overheating.”The paper’s conclusions suggest that economic programs embraced by President Biden may be useful in raising wages.Stefani Reynolds for The New York TimesSo is the paper’s number plausible? The short answer from other economists was that it pointed in the right direction, but may have overshot its mark.“My sense is that things like fissuring, noncompetes have become very important in the 2000s, along with unions that have gotten to the point where they’re so weak,” said Lawrence Katz, a labor economist at Harvard who is a longtime proponent of the idea that the higher wages earned by college graduates have increased inequality.But Dr. Katz, who has also written about unions and other reasons that workers have lost leverage, said the portion of the wage gap that Dr. Mishel and Dr. Bivens attribute to such factors probably overstated their impact.The reason, he said, is that their effects can’t simply be added up. If excessive unemployment explains 25 percent of the gap and weaker unions explain 20 percent, it is not necessarily the case that they combine to explain 45 percent of the gap, as Dr. Mishel and Dr. Bivens imply. The effects overlap somewhat.Dr. Katz added that education plays a complementary role to bargaining power in determining wages, citing a historical increase in wages for Black workers as an example. In the first several decades of the 20th century, philanthropists and the N.A.A.C.P. worked to improve educational opportunities for Black students in the South. That helped raise wages once a major policy change — the Civil Rights Act of 1964 — increased workers’ power.“Education by itself wasn’t enough given the Jim Crow apartheid system,” Dr. Katz said. “But it’s not clear you could have gotten the same increase in wages if there had not been earlier activism to provide education.”Daron Acemoglu, an M.I.T. economist who has studied the effects of technology on wages and employment, said Dr. Mishel and Dr. Bivens were right to push the field to think more deeply about how institutions like unions affect workers’ bargaining power.But he said they were too dismissive of the role of market forces like the demand for skilled workers, noting that even as the so-called college premium has mostly flattened over the last two decades, the premium for graduate degrees has continued to increase, most likely contributing to inequality.Still, other economists cautioned that it was important not to lose sight of the overall trend that Dr. Mishel and Dr. Bivens highlight. “There is just an increasing body of work trying to quantify both the direct and indirect effects of declining worker bargaining power,” said Anna Stansbury, the co-author of a well-received paper on the subject with former Treasury Secretary Lawrence Summers. After receiving her doctorate, she will join the faculty of the M.I.T. Sloan School of Management this fall.“Whether it explains three-quarters or one-half” of the slowdown in wage growth, she continued, “for me the evidence is very compelling that it’s a nontrivial amount.” More

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    Seeing the Real Faces of Silicon Valley

    Mary Beth Meehan and Mary Beth Meehan is an independent photographer and writer. Fred Turner is a professor of communication at Stanford University.The workers of Silicon Valley rarely look like the men idealized in its lore. They are sometimes heavier, sometimes older, often female, often darker skinned. Many migrated from elsewhere. And most earn far less than Mark Zuckerberg or Tim Cook. More

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    The Economy Is (Almost) Back. It Is Looking Different Than It Used To.

    The recovery is profoundly unequal across sectors, unbalanced in ways that have big implications for businesses and workers.There have been a lot of strange economic numbers over the last 14 months, as the world has been whipsawed by the pandemic. But one particular line of the first-quarter G.D.P. numbers released Thursday stands out even so.Americans’ spending on durable goods — cars and furniture and other goods meant to last a long time — rose at a stunning 41.4 percent annual rate in the first three months of the year. Enjoy your Pelotons and Big Green Eggs, everybody.The central reality of the economy in 2021 is that it’s profoundly unequal across sectors, unbalanced in ways that have enormous long-term implications for businesses and workers.The economy is recovering rapidly, and is on track to reach the levels of overall G.D.P. that would have been expected before anyone had heard of Covid-19. But that masks some extreme shifts in composition of what the United States is producing. That matters both for the businesses on the losing end of those shifts and for their workers, who may need to find their way into the growing sectors.In such a tumultuous time, it helps to look at the G.D.P. numbers not in terms of how they changed compared with last quarter or last year, but with the prepandemic economy. How does the actual number in the first quarter compare with what that number would have been if it had grown at a steady 2 percent annual rate since the end of 2019, the last quarter unaffected by the pandemic.This approach confirms the basic idea that the economy is not far from that prepandemic trend line. In the first quarter, overall G.D.P. was only 3.3 percent below where it would have been in that hypothetical pandemic-free world. The United States is on track to surge above that 2019 trend in the second quarter currently underway.But as the extreme spike in first-quarter numbers reflects, there has been a huge reallocation of economic activity toward durable goods. Spending on cars and trucks is 15.1 percent higher than it would have been on the 2019 trajectory; spending on furnishings and durable household equipment is 16.6 percent higher; and spending on recreational goods is a whopping 26 percent higher.Altogether, durable goods spending is running $348.5 billion higher annually than it would have been in that alternate universe, as Americans have spent their stimulus checks and unused travel money on physical items.The housing sector is experiencing nearly as big a surge. Residential investment was 14.4 percent above its prepandemic trend, representing $90 billion a year in extra activity. And that was surely constrained by shortages of homes to sell, and lumber and other materials used to make them. It is poised to soar further in coming months, based on forward-looking data like housing starts.Another bright spot is business investment in information technology. The tech industry has been comparatively unscathed by the crisis. Spending on information processing equipment in the first quarter was 23 percent higher than its prepandemic trend, and investment in software 7.4 percent higher.Then there are the losers.The troubles of service industries, especially related to travel, are well documented. While spending on restaurants, airline tickets, concerts and other recreational activities grew in the first quarter, it was a considerably smaller surge than the one that went to physical items, and not nearly big enough to fill in the deep hole those sectors face. Spending on transportation services remains 23 percent below its prepandemic trend, recreation services 31 percent, and restaurants and hotels 19 percent.Those three sectors alone represent $430 billion in “missing” economic activity — largely equivalent, it’s worth noting, to the combined shift of economic activity toward durable goods and residential real estate.A corollary shows up in trade data. Services exports are down 26 percent compared with the prepandemic trend, which reflects in significant part the freeze-up in global travel.Less widely understood is a steep pullback in the energy sector.There are two sides of the same coin: Consumer spending on gasoline and other energy goods is down 11 percent from its prepandemic trend line. And business spending on structures is down 19 percent, which reflects a pullback in investment by both the oil extraction industry and the commercial real estate sector.Separately, the pullback in state and local governments, many of which have faced funding crunches, is real. Their spending is 4.3 percent below the prepandemic trend, another $89 billion in lost activity, though that is likely to return as federal stimulus dollars flow to their coffers and schools reopen.In every recession, shifts take place in the composition of economic activity; the economy rarely looks the same after a wrenching event as it did before. But what is striking about this crisis is the scale and speed of the economy’s rewiring.We don’t yet know how fully service industries will recover as vaccinations take place, or whether durable goods spending will return to more normal levels as stimulus checks are spent and people reallocate their budgets toward travel. We also don’t know whether the surge in information technology spending and the pullback in oil drilling are part of a longer-term shift in the economy (all the more so given the Biden administration’s emphasis on clean energy investment).Moreover, to the degree these shifts in the composition of the economy may be semi-permanent, we don’t know how seamlessly the economy will adjust. Many former waiters or hotel clerks may be ill-suited to becoming construction workers or software engineers.That’s what makes the economy of 2021 so promising but also worrying. The boom is here. We just don’t know yet how bumpy the ride will be in trying to return to something that feels like full-fledged prosperity. More