Inflation Threat: How Bad Are Recent Job and Inflation Reports?

Frank Stricker

By FRANK STRICKER        

There was bad news about the economy in April. However, some of the bad news was really about the good news that the economy is opening up, and people and businesses wanted to buy more stuff. Let’s look at the details.

Higher Inflation

The consumer price index (CPI) rose 0.8 percent in April and 4.2 percent over the last 12 months. Big gainers included airline fares and used cars and trucks, whose price jumped 10 percent in one month. In many cases, the increases were the expected outcome of the opening of the economy and new spurts in demand, which producers could not yet meet.

Federal Reserve Chair Jerome Powell had predicted that inflation rates would increase as the economy recovered. If price hikes threatened to get out of hand, he said he had the tools to respond. There are dangers in that last promise. An orthodox response to rising prices–the Fed crunching credit and, perhaps, the federal government cutting spending–could bring a new recession within the pandemic recession. More later.

It might be calming to know that the price of some consumer items has not risen much. If your budget is tight, you should buy more eggs and not so much citrus or bacon. Eating in is better. The price of food consumed at home increased just 1.2 percent since April 2020. Keep using your old washer if you can. Don’t fly anywhere or buy a new TV And take some consolation in the fact that minus food and energy–that’s a big minus–the CPI has risen only 3 percent since April 2020. Of course, these suggestions won’t eliminate inflation flare-ups or a shortage of household income.

There is not much individuals can do to limit price hikes, but panic buying can create shortages and more inflation. For example, in South Florida, in an event unrelated to the economic recovery, panic buying shut down many gas stations even though the region does not get its gas from the hacked Colonial pipeline.

Employers Can’t Find Workers?

Meanwhile, the payroll jobs report for April generated a lot of excitement. Experts had predicted that the job totals the government amasses from business and government organizations would show a big increase, but the number increased by a mere 266,000. That was not the first bad month during the recovery. In December, total jobs actually fell by 306,00. But since then, we have returned to positive if weakish growth. The report for May 2021 was stronger. Unemployment fell to 5.8 percent, and payroll job additions rose to 559,00. That was better but still not the way to get to real full employment soon.

Is job growth slow because governments are paying people to stay home? Some employers want to think so. Especially in the restaurant business, they are talking about labor shortages. But can you have general labor shortages in the midst of a huge recession? We need 20 million additional jobs to erase pandemic and long-term job unemployment. Yet owners, managers, trade groups, and the pro-business press conclude that if employers can’t get all the employees they want at the price they want, there is a labor shortage. They don’t like substantial unemployment benefits. Employers want desperate workers. So, they use claims of labor shortages to demand cuts in unemployment benefits. They think that last year’s $600 federal unemployment supplement and the current $300 supplement are the kinds of things that discourage work.

Last year, researchers found that the $600 bonus was not a major reason why more of the unemployed were not back at work. It must be true that some people prefer decent unemployment benefits to rock-bottom wages and lousy working conditions. But there are other reasons, too, why people are not rushing back to work. For one thing, there really is a job shortage out there. No kidding. Some people are pessimistic about their long-term prospects, and some are just burnt out. Some are worried about catching COVID-19 at work. Some are taking time to rethink their occupational options. Also, more than 8 million potential employees–mostly women–say they are not working because they are taking care of parents or children, or both. Finally, some individuals worry about giving up unemployment benefits for a job that could disappear next month. Do they want to struggle again with the benefits bureaucracy?

In “They-Won’t-Work” articles, some restaurant owners who have complained about the labor shortage say they have offered large signing bonuses without success. Perhaps true. But there is no legal backup for such promises, nor, in many states, for decent pay. The minimum wage is $7.25 in many poor states. In 16 states, employers pay just $2.13 an hour to tipped workers. (Tips are supposed to get the wage up to legal minimums.) Cooks and dishwashers may earn more. But if they are paid, say, $11 an hour and work 40 hours a week every week of the year, they still gross just $22,880. That’s poverty.

The leisure and hospitality sector, which includes restaurants, was slammed hard by pandemic closures. The situation is improving but still grim. Pay levels are rising, but average wages are still the lowest of any major occupational sector. Average hourly pay for non-supervisorial employees in this sector has risen 7 percent since April 2020 (much less after inflation), but it is still just $15.68. That is the average–not the minimum–so millions receive much less. On average, workers in this sector are the working poor.

Full Employment Coming Soon?

Payroll job increases in April were far below experts’ expectations, and the May numbers were just pretty good. Long-term, the Congressional Budget Office predicts that the number of employed Americans will not attain even pre-pandemic levels until 2024. It is true that the CBO did not take account of President Joe Biden’s $1.9 trillion American Rescue Plan. If people spend new money fast, we’ll get another million jobs sooner. But not real full employment. In 2019, there was much hidden unemployment before the pandemic, even with official rates under 4 percent. So the official unemployment count is a huge underestimation of the unemployed population.

We will need more federal spending and direct job creation to get 20 million new good jobs. Biden’s infrastructure program will help. But how much? A trillion-dollar program that could win a few Republican votes in the U.S. Senate would, over five years, add only $200 billion a year. The annual economic impact would be less than 2 percent of a $21 trillion economy.

The pandemic recession presents an opportunity for a New New Deal that could bring real full employment and decent wages. Some Democrats are already there, and Biden’s vision is more progressive than many of us expected. But will rising prices provide the ammunition right-wingers need to derail the progressive train? If inflation rates stay high, right-wingers and some liberals too will want to cut government spending, crimp the money supply, and undermine pro-worker programs.

Higher Inflation Can Be a Problem, but What’s the Solution?

People on the left should not ignore inflationary threats. We ought to be thinking about soft solutions before authorities decide to control inflation by slamming the economy with a recession. In writing my history of U.S. unemployment, I was surprised that few economists tried to find humane ways to tame inflation in the 1970s. Many, including liberals, came to support NAIRU–the Non-Accelerating Inflation Rate of Unemployment. Often NAIRU was just a highfalutin name for throwing people out of work and destroying businesses in order to limit wage and price increases. As a social science, it was a flop. In the late 1990s, we had rising wages, low unemployment, and low inflation. Not supposed to happen. NAIRU was no help with specifics. And many of us already knew the large point that enough unemployment would limit wage and price increases for a long time.

In my book, I expressed the utopian hope that federal job programs include grants for experts to study ways to restrain inflation without destroying jobs or stomping on wages. These methods might include worker-friendly increases in productivity, tax penalties on businesses that raise prices too much, price controls in areas of known price volatility, and higher taxes on affluent spenders. Economists should be able to come up with useful approaches.

Or maybe not. Stephanie Kelton, an exponent of Modern Monetary Theory and no conservative, is concerned about excessive demand and high inflation, and she does not, I am glad to say, favor harsh solutions such as high-interest rates and recession. But some of Kelton’s suggestions seem like handoffs to Republican campaigners. She suggests repealing tariffs so that businesses and consumers buy more stuff from foreigners. That one needs reframing. She also proposes to lower immigration barriers and import more workers to assure “an adequate labor pool to meet the increased demand for workers”  (New York Times, April 7, 2021). That one needs radical revision. Some of us actually want a less than adequate labor pool. We want real labor shortages. That is one way to get higher wages. We want real full employment. That means real full employment. William Beveridge, a founder of the British welfare state, believed that full employment meant not only that vacant jobs should offer fair wages and be accessible to job-seekers but that there should always be more vacant jobs than unemployed persons. He was right.

But is there a way to have steady increases in real pay, very low unemployment, and moderate inflation? It seemed to happen in the late ‘90s. But was that a fluke? Are economists and policymakers locked in a straitjacket that is something like what imprisoned their predecessors in the late nineteenth century? Back then, the dominant idea was that the central government could do little to nothing to counteract depressions or relieve suffering. (Check Chapter One of my unemployment book.) Markets had to be left alone. It was a kind of iron law of economics at that time. We learned in the twentieth century that it wasn’t true. But are we locked in a new iron law?

Moderately High Inflation Crimps Real Wages

Aside from inflation’s role as a rationale for recession and more unemployment, mid-range inflation rates offset modest increases in the nominal or money wage. From 2000 through 2018, nominal wages–the numbers you see on your paycheck–increased 56 percent. But moderate annual price increases added up to 47 percent over the whole period. So real wages–purchasing power– advanced only about one-half of one percent a year. To reverse 50 years of lousy wages, we need a long period in which inflation rates stay under 3 percent, and nominal wages increase at least 4 to 5 percent a year.

We aren’t going to get such wage increases without fuller employment and a much higher federal minimum wage—also, more unionization. And, while I’m dreaming, shifting income from owners, upper-level managers, and big investors to the working class. The top 5 percent has grabbed an awful lot of the added income that has been produced in the past 40 years.

Frank Stricker is a board member of the National Jobs for All Network, emeritus history professor, California State University, Dominguez Hills, and the author of “American Unemployment: Past, Present, and Future” (University of Illinois Press, 2020).

 

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