Talmon Smith on the Great Inflation Surge of 2021

Talmon Smith is an economics reporter for The New York Times and joins David on Macro Musings to talk about the great inflation surge of 2021 and its implications for policy and politics. Specifically, David and Talmon discuss the potential drivers and implications of the great inflation surge that has taken place in 2021, the current and future state of supply chains, the impact of COVID-era stimulus, the state of the labor market, the political implications of the inflation surge, and much more.

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Read the full episode transcript:

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David Beckworth: Tal, welcome to the show.

Talmon Smith: Thanks for having me.

Beckworth: It's great to have you on and full disclosure, I have to share that Tal was my editor on the op-ed I wrote about Jay Powell becoming chair the New York Times. In fact, the title, I think you chose this title, helped me choose this title at least, was why Biden will probably keep this Republican on his team. So, Tal, I like to think that, that op-ed had some influence in the president's decision to keep Powell as chair. But I delude myself because that was written, I believe published in August 6th. And we didn't hear from the president until November 22nd when he gave Powell the nod. So either he was very deliberate and marinated over my op-ed for several months or he completely ignored it. And then at the last minute made a decision.

Smith: You were a strong voice in a large chorus. But yeah, no, it was a joy working with you on that. I'm glad we stayed in touch and yeah, no, it's odd that was in "my previous life" and yet it was only a few months ago. Of course, now on the newsroom side, I've left  at editorial department, but I learned a ton there and it was a bit of a cheat code because of course I got to be an editor but of course, and working with people like you and plenty of other are experts, PhDs, you professors, and think tankers and whatnot. You also get an education as you're commissioning and restructuring and revising articles, whether they're hot takes or narratives or explainers or whatever else. So, it was a good time and I'm glad we're talking again.

Beckworth: Yeah. Likewise, had a good experience writing that Op-ed and likewise, I continue to learn myself Tal as I do the shows, I have interesting guests like you on, I learn from you as well. So this is a two-way street here and looking forward to our conversation today because this inflation surge in 2021, it starts around springtime but has really grown, exploded some will say at this point, and there are many people out there who are advocating for very aggressive responses from policy to cure inflation.

Beckworth: There are some who are taking victory laps, Larry Summers, Mohamed El-Erian and a few others. I personally think it's a little premature for them to be doing that. And I have made the case on here before. In fact, a recent show with Matthew Klein that I think ultimately this will fade next year and we'll be back down to close to 2% within a few years. So with that said, let me just lay out the facts here for why this has become the great inflation surge of 2021. Just some numbers and we'll jump deeper into them and you can give your perspective on them.

Smith: Sure.

Beckworth: But the November CPI came in at 6.8%. So that's pretty high. That's the highest since the 1980s. Today, we're recording the December 14th and the PPI, producer price index came in at 9.6%. That's blistering hot. That's almost double digit. We're close to double digit inflation at least with producer price. Now we have the PCE index, which the Fed targets and that hasn't come out yet for November but it was 5% last month. And we won't find that out until after the show airs. That's I believe December 23rd. But these are some really, really high numbers for inflation. It's added a momentum for a policy change.

Beckworth: And so, we've seen a number of people come out and say, Hey, we got to do something. Even Powell before Congress recently said, "We got to retire this term transitory." He had been advocating transitory inflation narrative and he's given up on that. I was shocked to see, just recently, Narayana Kocherlakota come out and say the Fed's got to do something very aggressive. He was very much a dove when he was at the FOMC. But he's argued that Fed may need to take short term interest rates well above two and a half percent over the next year. So, a lot of calls, there's other names I could mention as well but a lot of things are going on and I'm just wondering, what is your take on this? First, how do you see this as a reporter? Both, what's driving it, and then what do you think are the implications that flow from it?

Explaining the 2021 Inflation Surge

Smith: Yeah. Well, how you react to these numbers is one thing, is one factor. There's always the data themselves and then there is how you decide to interpret it. And then based on that interpretation, you may have a certain diagnosis. And then based on that diagnosis, you may have various prescriptions that you put forth. I'm no longer in the prescriptions business especially, but there is a lot of room for interpretation in between those two levels of cognitive, I guess, processing or even three. Like you said, the number are eye popping, the price increases year-over-year in particular are remarkable. And yeah, I mean, there is a debate that has been intensifying throughout this year that has now hit a fever pitch in Washington and in New York over what, if anything, policy makers, particularly monetary policy makers. So our Central Bank, the Federal Reserve can do about this.

Smith: I've always found it interesting in my reporting to notice how putting these debates, these weighty from 10,000 or 30,000 whatever people say. When I'm just talking to a woman in Buffalo, New York, or somebody in Springfield, Illinois, who are really worried because they have had a summer in which they were paying a lot for home cooling and now they're hearing that they're going to have to pay a lot for home heating. They're not as understandably in the weeds on these debates. But they're also not into the weeds and many people that aren't necessarily economists, economic reporters aren't under these weeds either of the private sector reasons. The market reasons why, for example, home heating prices are in a position where they could potentially surge and where there are already expected to be higher than in recent years.

Smith: And there's various factors like the fact that as many people have come on the show before and said the economy was turned off intentionally, there was income support, there was business support and then it was turned on again. And when you do that, we've first off, we've never done it before, but we shouldn't necessarily be surprised at a bunch of, for lack of a better phrase, weird things are happening. And one of those weird things is as things reopen, they're not going, and by things, I mean our economy and all the things that economic activity entail, there's not going to be a perfect even balance step for step with your left leg, stepping with your right leg, where producers, suppliers, consumers are all marching in a tango, like in perfect step.

Smith: And so, one of the things that has happened particularly on the goods side of the economy is that we've seen demand for goods outstrip supply and not necessarily just because there is increased demand, we have seen evidence of increased aggregate demand across the economy, from what we can tell based on the data and from various anecdotes. I mean, at this point, I don't know about you David but it feels like there's a million anecdotes out there from suppliers and also retail businesses saying that the supply side is constrained or strained in some way.

Smith: That's one of the biggest reasons why, for example, oil went from being negative at one point, or at least WTI oil was negative at one point in spring of 2020 and now as the economy reopened and there's all sorts of demand for fuel throughout the spring, when we have what I would call the post-vaccination boom, now we've seen prices surge ahead to levels not seen in years.

Smith: That's an input to go back to the original anecdotal point I was making, that's an input price for that family in Springfield, Illinois or that single mom in Buffalo. They really don't have a good reason to have gotten to the weeds and known about those market and balances. But that is a reason why there's also even more complex high finance reasons that have to do with of course, I shouldn't say, of course, that have to do with something called capital discipline, which is a very fancy euphemism for producers of fuel deciding to let prices run higher before increasing supply, that way margins, profits can go up in the meantime.

Smith: The downstream effect of that is that, if you consume fuel then including for your home heating or for your car or truck, whatever it is, your business even, you're going to face higher prices. So pandemic imbalances that just have to do with turning economy on and off, really fascinating but far factors like oil and gas industry investors being pissed off because they had about a decade where they were promised during the fracking boom, that they'd be made even more rich than they already were.

Smith: And then turns out it was a boom and bust cycle and it was great for consumers be because the burst meant cheaper energy prices, but it meant very poor financial performance for those companies that they were investing in. And so now that means there's a lot of pressure on those companies to become profitable and they are becoming profitable but they're doing so in part because well, they've not increased, what's called their rig count, another industry term for just the amount of drilling producing that they are doing.

Smith: To bring this full circle, what did anything that I just said have to do with the Fed funds rate? None of it had to do with the Fed's funds rate. And there is a question out there and it's a good question though, it is to be sure it should be noted that it is a question. We should always be intellectually humble to the extent we can. There's a good question of, okay well, is tightening monetary policy going to give us greater oil supply or go back in time and find a smoother way for us to have had supply and demand go together better?

Smith: I think the firm answer, just a first approximation is no, yet now there is greater concern, as you said, both inside the Fed and outside of the Fed, that it might be time to use monetary policy, which is a powerful tool but a blunt tool to try to put a bit of a damper on aggregate demand or at least attempt to have that cause and effect.

There's a good question of, okay well, is tightening monetary policy going to give us greater oil supply or go back in time and find a smoother way for us to have had supply and demand go together better? I think the firm answer, just a first approximation is no, yet now there is greater concern, as you said, both inside the Fed and outside of the Fed, that it might be time to use monetary policy, which is a powerful tool but a blunt tool to try to put a bit of a damper on aggregate demand.

Smith: The idea of being that borrowing costs through higher interest rates increase a bit then maybe there's less appetite for risk. Maybe there's a little less lending. Maybe consumers take that signal of a higher borrowing costs and are a little bit more frugal with their spending. We will see, I think the jury's still out on these macro debates, whether it's inflation or we might talk about this later, deficits, all sorts of things. I mean, it's definitely interesting time to be covering economics just because I'm no longer a cub reporter, but I'm not necessarily an old man and I came of age. I was in high school and in college during the Obama era and that time in politics and in economics felt intellectually much more settled. Of course, though politics got crazier than the Tea Party era, there's funny people that would've said then that politics was crazy too.

Smith: I mean, there was a time where I know now Rush Limbaugh and folks like him are considered mild compared to some of the folks left or right that we have now as shock jock and et cetera. But in terms of Washington, New York, the political economy, things were much more settled. Conventional wisdom was much more tight. And now, I mean left, right, center, up, down, I mean, you talk to all sorts of people who are very well credentialed, very thoughtful. Frankly, a lot of them, I wouldn't say all of them but a lot of them very open-minded and you could get about 10 different narratives about what's going on with the economy right now.

Smith: So, that's a long way of saying, I don't know but it's been interesting to track and find out. And I think starting in spring, we'll start to get some answers about how the post-pandemic economy, to the extent we ever will live in something that we can call post-pandemic. Maybe we should say post-vaccination campaign economy, what that looks like. I think in spring of '22 will get some more answers.

Beckworth: Yeah. I'm hopeful too, that 2022 will give us more answers. Hopefully we'll get to the other side of the pandemic. We have a Pfizer pill coming out. I just think there's a lot of reasons to be optimistic. Some of the recent news about the omicron variant seems to be that it doesn't create all the deaths and hospitalizations we were worried about, but that's tentative. But if that is the case, I think this will be a much better year than 2021 has been.

Beckworth: Also, I wanted to echo what you said, these are very interesting times to be engaged in this. I mean, I know you're a reporter. I'm a senior research fellow at the Mercatus Center but it's amazing. And again, things I want to be careful here because these individuals that you mentioned who are suffering real pain, that's a key part of the story. But from where I sit, it's been amazing to be engaged in these conversations on Twitter, on this podcast, constantly engaged in how to interpret the latest inflation numbers that come out, the latest GDP growth numbers. How do we interpret the number of ships out at sea at the LA port, a lot of interesting conversations. So it is an amazing time to be a part of this conversation.

Beckworth: I want to come back Tal, to a couple points you made. I think two big ones in trying to make sense of the inflation surge of 2021. One is energy prices and the other just this reopening of the economy and supply chain problems that were created by it. And you had a story titled “One Year Jump in Energy Prices is a Big Factor in Inflation’s Jump.” And I encourage listeners to take a look at that and we'll provide a link on the show page, but I was reading a report from Moody's by an analyst there named Ryan Sweet.

Beckworth: And he had an interesting decomposition of the CPI that just came out last week, the 6.8% year-over-year, again, a blistering hot number. And he said of that 6.8, two and half percent of that is energy or energy related costs. So anything from heating your home to gas and your auto to natural gas, all of those accounted for two and a half percent. That's quite a big piece of change there. And then, he added up other industries that he calls supply chain constrained and they include, just to see what he's talking about, they include new and used vehicles, motor vehicle parts and equipment, sporting goods, furniture and bedding, things that would be affected. Physical things would be affected by the quick reopening of the economy. And he attributes 1.8%.

Beckworth: So if I take that 6.8, that scary headline, I subtract out the energy part 2.5, I subtract out the 1.8, I'm down at 2.5% for the CPI. And historically, CPI has run a little bit above the PCE, which is what the Fed actually targets. So that actually puts us within the ballpark of where inflation should be. Now, the implication here is that those energy prices are going to reverse. And I think that's a fair reasonable assumption. I mean, prices are already beginning to fall. And some of these sector oils going down, gases going down, probably will continue to fall. And I think next year they'll definitely be the case. Supply chain issues, I'm hopeful those will be good to improve. We already see some evidence of that and that may take longer than the energy reversal. But any thoughts on supply chains getting fixed to the markets through capitalism, I mean, can we expect progress do you think in 2022, on the supply chain front?

What’s Next for Supply Chains?

Smith: Yeah. So, without turning our combo into a marathon of citing data and in the spirit of you bringing up interesting batch of stuff that you were into, I also ran into it very interesting chart. I wish I could show it. So I'll try to just verbally illustrate it from Oxford Economics, their global risk survey. They ask businesses, when do you expect supply chain disrupt, excuse me, when do you expect supply chain disruption to end for your business? And it looks like in Q1 of '22, a little under 10% of respondents said they think supply chain disruptions will end. They don't define end. So I guess it's a self-defined term there. Q2 of '22, say that five times fast, over 30% say they expect supply chain disruptions to end for their business.

Smith: And then in Q3, right around the same, maybe a little bit under 30%, so you mean you put those together alone by Q3 or the end of Q3 of next year, over two thirds of businesses expect their supply chain disruptions to end. And a healthy chunk of them over a third of them expect, oh, so if I'm doing my math on the fly here so don't judge me too hard. It looks like by the end of Q2 based on this survey and it is one loan survey. So take that with a grain of salt, almost 40% of businesses expect their supply chain disruptions to end. So there's a reading of this that is something like if you read as good news, particularly when you try to assess things in the full scope of time.

Smith: However, to your point about these being interesting times to be engaged in macroeconomic debates, macroeconomic debates may more than ever do not operate in the full scope of time. They operate frankly, I mean, monthly indicator by monthly indicator and in some cases on an even faster new cycle. Of course, I'm sure monetary policy does would love if the New York Times didn't report on every nasty CPI number. I apologize in advance.

Smith: There's probably going to be another nasty CPI number and we will report on that and to the extent that people are still filling that major squeeze on their household budgets, we're going to report on that too because you got to... that's the job. You got to document what's happening. But survey is like that do suggest that if what you are saying, sorry, not what you were saying, but the disaggregated data, what you're looking at, if that holds true and this survey from Oxford Economics and others like it, prove to be true, then a prescription of patients is a valid consideration.

Smith: I think that's true but in the meantime, we're essentially talking about taking another halfway trip around the sun maybe May '21 before these monthly indicators balance out. And that's of course, assuming that another variant doesn't pop up and do something crazy to the global economy, it's assuming geopolitical stability. And of course in any model, you have to embed some assumptions. But in researching these things and in making a ton of phone calls and occasionally though, hopefully more often in the new year with COVID being something to be managed though still feared. Also, on the road and traveling on the road, I think we'll get a firmer sense of how deeply connected to pandemic phenomenons, so much of these price increases are.

Smith: And the last thing I'll say before, kicking it back to you is that, the 12-month change in energy prices as of November was 33%. So I mean, a 33.3% actually. So right on the dot of one third, which is nearly five times the overall inflation rate according to the, again, this specific basket CPI. Of course, as you mentioned, the Fed prefers PCE or even core PCE, which we don't have to get into the details of the differences in the basket, but it's different intense run a little bit lower.

Smith: Nevertheless, I mean, that's absolutely remarkable for energy prices to be running that much higher than the rest of price increases in the rest of the economy. Price increases in energy are notoriously volatile and so we can and should expect it to be equally as probable, that energy prices could plunge down by that much maybe more or much less. And so there is the potential for good news coming around the corner, that's absolutely true. But again, in the meantime, particularly for those who can at least afford these increases, it's a pain. Though, to be sure it's also true that politicians as always are opportunistic and have no problem highlighting that pain from price increases if it's to their benefit politically.

That's absolutely remarkable for energy prices to be running that much higher than the rest of price increases in the rest of the economy. Price increases in energy are notoriously volatile and so we can and should expect it to be equally as probable, that energy prices could plunge down by that much maybe more or much less. And so there is the potential for good news coming around the corner, that's absolutely true.

Beckworth: No absolutely. And I think it is important for policy makers to see through as much as possible the surges in inflation we've seen this year that ultimately will be to use a dirty word now, transitory or temporary. And I think again-

Smith: Your word, it's not mine.

Beckworth: I'll claim it. I know Chair Powell says we have to retire that word but at the end of the day, I mean, I think it's important for policy makers to see through that. Now, at the same time, I also think it's important and I believe it's reasonable that monetary policy does begin to gradually tighten next year. Not so much to respond to those categories of inflation but to avoid any additional and high inflation that could emerge from the Fed keeping policy easy.

Beckworth: Another way I like to look at this is, as the economy recovers, the Fed doing nothing is adding stimulus to the economy, because maybe the, what would say the equilibrium rates going up and the Fed's not raising its rate. But separate issue but I do think it's challenging but important for Fed officials to see through this for policy makers to see through this. But when you have a number like 6.8%, that's hard to do. It's hard to do.

Beckworth: So on this point about politicians taking advantage of this opportunity, Mitch McConnell, leader of the Republicans in the Senate had a tweet that said inflation is hammering working families from coast to coast but Democrats want to print, borrow and spend trillions more. Our economy is already sputtering on their watch but Democrats want to wall up the country with massive tax hikes that would kill American jobs.

Beckworth: So I want to come back to that in a bit. I don’t want to spend too much time on that right now, but yeah, this is something that's hard for Fed officials to see through when you've got calls like that. And also, as I mentioned, former Fed officials telling the Fed it's time to tighten and prominent voices like Larry Summers. I'm going to transition away from what I think are truly these transitory factors and move to something that's received a lot of attention and that is the fiscal support, the government provided many would advocate that the helicopter drops, those stimulus checks, the added unemployment insurance benefits, added fuel to the inflationary fire. And that's a key part of what we saw in 2021.

Beckworth: My own take, just to lay out on the table here is that those things did support incomes. They did support spending but it only returned it to where it would've been had there been no pandemic. So it's more the composition, it's more this whole unknown about a pandemic going on. But nonetheless, you've written an interesting story about the stimulus checks and recent developments going on there. So maybe walk us through that. What do we know about the stimulus checks and what is their trajectory going forward?

The Impact of COVID-era Stimulus

Smith: Yeah. First and foremost, barring a massive change in political winds, the era of stimulus checks of stimies of economic impact payments, whatever you to call them seems to be over. The last of those being the pandemic relief package passed in March, or was it in April this spring, the American rescue plan under President Biden. The other two times for that being the December package passed under President Trump also sent around pandemic relief. And then before that of course – the headline, the star, the point guard, I guess of this massive experimentation, and I guess what's been called ‘the Superdole’ – the CARES Act. 2.4 trillion give or take and upwards of 1200 bucks and more if you had kids that, that went out to families.

Smith: And then of course, as you mentioned, there was a suite of other things that were done to support people's incomes and help them get through the pandemic, loan forbearance, there's boosted Federal supplement to state unemployment benefits, which in many cases gave low income workers greater incomes than they had and their jobs before the pandemic.

Smith: And in addition to that, there was an expansion and eligibility for unemployment. And so it is absolutely just true on its face that there was, I guess you could call it helicopter money. Some people in support of that don't like that analogy because it makes the idea of government supporting its own citizens own tax pay seem willy nilly. So I won't weigh into whether it's necessarily helicopter money or not, but it is true that it’s the largest government intervention in our lifetimes, definitely in a generation.

Smith: And part of what that did is it increased the personal saving rate which is a monthly indicator which shows in the aggregate how much Americans are taking in in terms of income and how much is going out in terms of whatever taxes they're paying, whatever spending they're doing, et cetera. It's a pretty easy plus, minus equation.

Smith: That jumped fourfold and from its February 2020 levels in April to about 34%. I mean, if you look at the chart, the Federal Reserve tracks this and you can find it pretty easy on an internet search, it's just a really remarkable hockey stick graph to watch. But then because these infusions were of course temporary, you see it shoot back down and then steadily decrease until essentially the next infusion of income support and cash assistance however you want to define it that comes in December and that only lasts for so long.

I won't weigh into whether it's necessarily helicopter money or not, but it is true that it’s the largest government intervention in our lifetimes, definitely in a generation. And part of what that did is it increased the personal saving rate which is a monthly indicator which shows in the aggregate how much Americans are taking in in terms of income and how much is going out...That jumped fourfold and from its February 2020 levels in April to about 34%.

Smith: And then you see another draw down in these savings until Biden is in office and the American rescue plan has passed. So what is left of people's cash reserves is generally stemming from that last intervention from spring besides the child tax credit expansion, which included monthly payments, which started in July and which end this week, giving families depending on the age of your kids, $300 give or take for six months. And then you get the rest of that credit, that tax credit if you file your taxes in the new year. So economists, generally call all of what I've been describing, all of these cash reserves that built up and then fell down a bit then were built up again and so on "excess savings" which is generally defined as the amount by which people's cash reserves during this COVID-19 crisis, have exceeded what they normally save in a counterfactual where none of this had happened at all.

Smith: And the methodology, depending on who you're asking, whether you're asking Federal Reserve or whether you're asking some private sector economic research for such as Moody's Analytics, who I cite in this article anywhere between 1.8 to 2.6 trillion, that's where we currently stand. And it's also true that some of these cash reserves are not from government infusions of cash, excuse me, it's true that not all these cash reserve stemmed from the Federal government and the cash infusions that it provided families in a great time to need.

Smith: It's also true that spending habits changed during the pandemic. And that goes for everybody because of course, you can't buy concert tickets and go to a concert when those venues are shut down and it's for a long time, it was virtually impossible. And then even after that, it was very hard logistically to eat out and so on and so on. I don't have to list all these things because we all lived the limits on our social and economic activity.

Smith: I was going to say over the past year but even longer we're coming up on, I don't know, we're coming up on two years and it's a phenomenon again, that goes across all income groups. And yet, if you are in the work from home economy, if you're a knowledge worker, if you have the ability to work remotely and you generally make more money and those people that were able to work remotely as many of us know, disproportionately are higher income earners, then you're also just stacking a lot of paper you're... and maybe you're spending more than you used to on takeout. But many of the other things that used to do whether that was travel or whatever else have flattened out if not gone to zero.

Smith: And so, these excess savings to the extent they are excessive compared to the counterfactual or COVID never happened are also very highly concentrated among older folks, among more wealthy folks, among folks with higher incomes with the knowledge that, of course, plenty of people. For example, if you were a very high end wedding planner, your income tanked but maybe you're wealthy before that because you ran such a successful business, you're able to take the hit.

Smith: So I know that there's nuance within all these aggregate numbers and I'm letting knowledge that particularly because it's been such a painful 18 months or so. But that's basically the scope of things. Now, with spring being the last major infusion and with the relatively modest in comparison CTC fading as of this week, the story essentially looking at the early evidence we have that for many, particularly those with the least amount of disposable income are already seeing those excess savings dwindle and in some cases be completely depleted.

Beckworth: And that amount again, that you shared with us was 1.8 to 2.6 trillion. Correct? Is that the number?

Smith: Yes. Calculations can vary because the exact methodology of what counts as saving or savings can vary. So there's a lot of stuff that at the end of the day is neither here nor there.

Beckworth: But it's a nice sizeable number, I guess, is what I want to get at. And that's where people freak out I guess. They're like, “all of this money just waiting to be spent is going to add further inflation next year.” And what you just described is, well, the money that was most likely to be spent has been spent by lower income levels and the higher income folks are sitting on what's left of it, is that right? And they don't tend to spend as much out of that category.

Smith: Yes. So, I'd say that again, it's early evidence and the evidence we have though, for example, the largest piece of data that was used in this article was from the JP Morgan Institute. And they're able to actually collect using anonymized banking data based on checking accounts, 1.6 million people, households or families, I'm not sure exactly how to define it, but let's just say 1.6 million people. That's a massive sampling size.

Smith: I know so many economists cultures dream of 1.6 million but nevertheless there are dark spots in this, I guess, species, family of data sets. But yes, as far as we know, just like before the pandemic, rich people have more money, middle income people have some money but have been strapped and continue to be strapped by cost of living increase, not necessarily price increases, but cost of living increases, tuition, healthcare, these things.

Smith: And then of course, there's those who are in the lower two quintiles of the income spectrum, who no matter what's going on in the economy are always on the verge of living paycheck to paycheck or in fact, living paycheck to paycheck. And those poor households saw the greatest impact from these rounds of stimulus. They also exhausted them more quickly because if you're barely breaking even after you meet your basic needs, well then even when you receive two to three temporary infusions of government assistance, the gravity still applies to your financial life. And we've seen for lack of a better term I can come up with gravity pull their finances down again.

Poor households saw the greatest impact from these rounds of stimulus. They also exhausted them more quickly because if you're barely breaking even after you meet your basic needs, well then even when you receive two to three temporary infusions of government assistance, the gravity still applies to your financial life.

Beckworth: Yeah. So I guess my observation is that we really don't know what this remaining excess savings is going to do next year, because most of it is sitting with households that could just as easily continue to sit on it as spend it. They're not the lower income households that have this higher as they'd say, marginal propensity to consume out of it. They're more likely to... We just don't know what they're going to do with these funds next year.

Beckworth: Let's move on to one other category or one other topic related to this and that's the labor market. And it's a nice segue from what we were just talking about because some would say, well, the reason many haven't gone back into the labor force or the missing four or 5 million, people who aren't in the labor force because of these stimulus checks because of the support because of the child tax credit. And so what you've just outlined would suggest if that is the case and there's reasons, I know there's a debate, whether that actually is the case, but if that is the case, then that effect should be fading as well. Is that fair?

State of the Labor Market

Smith: I think that's fair. It's the funny thing about so many of these debates and whether it's from people coming from the perspective of markets, whether its business managers and owners, whether it's journalists and newsrooms I guess now mostly virtual newsrooms for the time being, or people at academic institutions I think and obviously all these so overlap and I guess part of journalism or the job of journalism is to synthesize them.

Smith: I wouldn't necessarily characterize any of these debates as being binary though I just think the nature of dialogue, not to pretend like I'm a linguist here but the nature of dialogue is that when there's a back and forth, it can feel hard for there to not be an either or conversation when based on the reporting that I've done so far and the reporting of many of my colleagues who I lean on all the time for frankly guidance and advice, particularly when looking at some weird chart that confuses the hell out of me or asking for reporting tips is that I argue that right now, there's like this pie chart of factors in the economy, including the labor market that most people of good faith can argue are inputs.

Smith: So let's talk about the labor shortage and then I know some people don't like the term labor shortage, but let's just go with the term labor shortage. I think there's clearly been an uptick in self-employment and there's been an uptick in early retirement. It's also undeniable fact that there are some people that are still deathly afraid of this virus. And I know it's become involved in certain circles to tease people as being, particularly people of certain political persuasions that, oh, they don't want to actually live life if they want to just Zoom forever and so on.

Smith: And I do think there are folks who are maybe overly worried but there are plenty of people with comorbidities or quite elderly parents that have good reason to still be concerned about the virus. And it's just all also true that we don't know some of the effects of long COVID and we are still unsure about how COVID affects children though I don't want to get too far into that because it's really not my bail wick.

Smith: But we know at least that some of those concerns are reasonable. So that's a third pot or slice of the pie that we can account for. It's also true that childcare has been a bit of a nightmare. I mean, it was a nightmare for so many families before the pandemic. It's going to be whatever this post-vaccination world looks like. Even with the potential for the Build Back Better Plan, which includes childcare subsidies. It's still going to be a tough expense for many families and it's been particularly stressful during the pandemic and beyond stressful expensive.

Smith: So that's another factor. And then on top of that, yes, I would say that this batch of excess savings, which again, is unevenly distributed throughout the economy and throughout household but is economic fact of life. It is a factor, but I don't know how many things I've listed, whether it's been five or six or four, but it's at best one fourth, one fifth of this pie with six different, five different factors.

Smith: And so, you have to be careful or at least I try to be careful about assigning too much of a causal relationship to any of them, but it is true and there's some people that think this is a bad thing. There's some people that think it's a fantastic thing. It is true that these savings have given workers more leverage and probably I'll speak for myself, it's given workers more leverage than I've ever seen in my time as a participant in a labor force.

Smith: And it's meant that there is a bit of a standoff. And I mentioned this in another interview that I did. It's important that we acknowledge the role that power does and always plays in our economy. I think there's a tendency, particularly among economists and I have many great pals are economists. But I think economists have really trained to think in terms of equilibriums and equilibriums can feel so mathematic and I don't know almost adjacent to physics.

Smith: But of course there's physics, which has its own models and economics which has its own models and I know all models are flawed, but of course there's the real but bone and flush world where there's a guy who is used to having, let's say his pizza parlor operate at a certain margin that he feels is appropriate. And if his labor costs increase because people have decided, well, you're paying me wages where I can barely take care of my basic needs maybe I'll hold out, thanks to my boosted unemployment check or my savings from not doing this or not spending that. And I'm going to leverage that to try to look for something better.

Smith: And so, let's make up a number to make this a bit more concrete. Let's say, you were getting paid $8 at this pizza parlor, and now you're hearing from your friend or your cousin, or through the Grapevine, or you're seeing job postings on social media that you can get a job doing something similar in the service industry for 15 bucks or 12 bucks or let's just say even 11 bucks that's still much better than eight, but that business person, for whatever reason thinks that this is the way that I want to run my business.

Smith: And I think that you in terms of just a general worker, doing this work, can and should be paid at this wage. And then, so what do you have? I mean, you've had plenty of crazy things going on. Many of them having to do with this mysterious virus that we're dealing with and plenty of other factors, but amid all of that, you are having old fashioned labor versus capital labor versus management standoff.

Smith: And frankly, I've talked to the White House about this and particularly their economic team and they firmly put themselves on the side of labor in this case. And I don't want to make it seem as if I'm directly quoting anyone but to just relay the impression I was given. They think that particularly when you disaggregate the unemployment numbers that we're seeing and the labor force participation numbers that we're seeing, that frankly, it's not where they'd like it to be for women. It's not where they'd like to see employment for black and brown people and for those without college degrees.

Smith: And so they're willing to let this, I call it a standoff, others call it slack and I know that there's slight differences between that. And I know I'm making things seem maybe a bit more antagonistic than others would prefer, but they want to see this economy, this labor market run "hot" for much longer, because they think of economy in which workers for the first time in a generation have a palpable degree of more leverage than they've had for some time that that gives them a level of bargaining power that frankly they see as appropriate and making up for lost time.

Beckworth: Speaking of the White House and the political dynamics at play, I want to move to the impact the inflation may have on politics on elections, on President Biden's job approval numbers. And I recently came across a poll taken by ABC Ipsos, I want to read the write-up that ABC News did on this poll here and then get your response from it.

Smith: Sure.

Beckworth: We'll provide a link to this on the show note page as well. President Joe Biden is facing significant skepticism from the American public, with his job approval rating lagging across a range of major issues, including new laws for handling in crime, gun violence and the economic recovery. A new ABC Ipsos poll finds.

Beckworth: As the White House confronts rising and widespread concern about inflation, Americans are especially negative on how the Biden administration is managing this issue. More than two thirds, 69% disapprove of how Biden is handling inflation, while more than half disapprove of us handling other recovery. Partisan splits for inflation so expected negativity and Republicans 94% disapproving. But the survey also reveals weakness from Biden's own party with only a slim majority of Democrats approving.

Beckworth: Let me move on down along here, the ABC Ipsos poll which was conducted by Ipsos and partnership with the ABC News reveals these rocky ratings for Biden at a time when the bulk of Americans name inflation and pain everyday bills as top concern. Concern about inflation is eclipsed worry about the coronavirus risk pandemic, according to recent polls from other sources and as Republicans continuously spotlight the rising prices of the gas pump and grocery stores issues for upcoming midterm elections, likely to be a referendum on Bidens performance.

Beckworth: So what is your sense of this? So you mentioned just a few minutes ago, how on one hand, the Biden administration likes to see this added leverage given to workers as the economy runs hot, on the other hand, they have to face this backlash from people's concerns about inflation. I mean, where do you see this going? Does it have any big bearing? Maybe it's nothing, maybe this will fade along with the inflation next year. What's your outlook?

Political Implications of the Inflation Surge

Smith: From what I've seen and I don't want to make it appear as though I have some omnipotence or anything or an all seeing eye. But from what I've seen so far inflation that is a direct result of increased wages has so far been more limited than feared. Most inflation that we're seeing and we talked a bit about this, well, more than a bit about this. To start the conversation, it stems from various other factors.

Smith: Though labor costs, particularly unit labor costs as I understand it and as economists define it have increased. And there is the potential that as wages, particularly on the lower end increase, that businesses decide to not just "eat" those costs, but pass them along to consumers via the services and goods that we all use. And of course, consumers are also voters, or at least many of them read that potential uptick in prices that they face as either noticeable.

Labor costs, particularly unit labor costs as I understand it and as economists define it have increased. And there is the potential that as wages, particularly on the lower end increase, that businesses decide to not just "eat" those costs, but pass them along to consumers via the services and goods that we all use. And of course, consumers are also voters.

Smith: And if they're noticeable, crippling or frustrating is an unknown and outside of my wheelhouse to some extent. But we do know that for example, Chipotle raised their prices to keep their margins up. And it was, I can't remember it off the top of my head but it was a pretty mild increase from what I can remember, it definitely wasn't more than you pay tax on your burrito at Chipotle. Starbucks and some other large corporations have also increased their prices they say, as a result of increasing their wages.

Smith: But it is not at a push the panic button, we have a 1970s, early 80s style wage price, spiral level, at least not for now. And there is the one bit of nuance to go back to the pizza parlor that we were talking about before, there's economists and business groups that will say, well, look, small business people who provide generally half of the employment in this economy, don't have the scale and flexibility of fortune 500 corporations who adjust to increases in labor costs on top of the increased prices that they're seeing due to supply chain snags.

Smith: And it's a fair debate but I would say that the evidence so far does not support the panic around what many people in the private sector call wage inflation which is a fancy word for people getting paid more wages. And so, we're in this awkward spot where folks are worried about inflation, they're worried about wage price spirals and that's understandable.

Smith: The '70s were, which as your listeners probably know, and some were there for it, it was a time of really great uncertainty and frustration because of inflation eating into people spending power and, and people really care about their paychecks. Folks work hard. Americans work the most out of just on hours basis, I'm not passing judgment on our fellow friends and other developed countries. But among developed countries, Americans work more hours than any other. And people's take home pay is something they prize a lot.

Smith: And particularly when they have journalists, politicians, experts of various kinds, giving them explanations for inflation that are really can complex, it can feel frustrating. And I imagine, or not even I imagine, I've talked to folks who also just frankly don't buy it. To just wrap up the point here, people like A to B explanations. I mean, I think we all like A to B explanations, this happened so this is happening. And folks will stomach or tend to stomach A to B to C explanations but then once you get to A to B, to C, to D you can tend to lose people. And I think that's politically some of what's going on, because for example, we were talking before about capital discipline. That's exactly what's going on. And I was talking to one investor in industry that to go back to a pie chart explanation, he signed about 40% of energy price increases.

Smith: He might have been specifically talking about oil. So oil prices, which have come down and in recent days in part because of changing weather projections for the winter but he has signed about 40% of the increase, the surge really, in oil prices to capital discipline. The Biden administration is in the stance of their potential being price gouging, that's a much more loaded word. I won't use that. But what on earth does capital discipline have to do with the millions of people that are just trying to put gas in their truck and get them and the kids to grandma's, three states away for Thanksgiving, for the upcoming Christmas holidays.

It's a fair debate but I would say that the evidence so far does not support the panic around what many people in the private sector call wage inflation which is a fancy word for people getting paid more wages. And so, we're in this awkward spot where folks are worried about inflation, they're worried about wage price spirals and that's understandable.

Smith: You can try to break down the need for patience potentially and well, there are investors that were upset about what happened in their industry after the fracking boom but to the extent you have their attention at all in the first place, it doesn't surprise me to see some polling showing that consumers voters are losing patience. The last thing I'll say on this point is that I was, right before we hopped on, I was reading the Philly Fed consumer survey, and this also ties in with excess savings phenomenon and they’re dwindling.

Smith: They write that more correspondents are estimating now that their annual income will be lower than last year. That "more concerned about their ability to make ends meet over the next three to 12 months." And that this level of concern is back at 2020 levels based on how they've been measuring it. And that is especially the case for "lower earners" excuse me and "non-whites." So, there's a lot of uncertainty and anxiety which the administration has acknowledged and congressional Democrats have acknowledged among the populace out there. And while it is clear that one party is pushing that anxiety because of its clear potential political benefit it's as you mentioned, also, an anxiety that is being self-reported by voters, consumers and Biden's own party.

Beckworth: Yes, and I guess my bigger question is, will this have a big bearing say on 2022 elections? It's typically the midterm elections go to the other party. And it just seems that this inflation surge has become such an issue that it's just going to add more weight to that. And maybe the Republicans take back the house, maybe even in the Senate. But on that our time is up, our guest today has been Talmon Smith. Tal, thank you so much for coming on the show.

Smith: Thank you for having me.

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