In July 2024, the American Institute for Economic Research’s Everyday Price Index (EPI) rose 0.30 percent to 291.3. With this increase the EPI resumes an upward trend that was broken with a slight decline in June 2024. Since January 2023, our proprietary index has risen fourteen out of the last nineteen months. 

AIER Everyday Price Index vs. US Consumer Price Index (NSA, 1987 = 100)

Among the twenty-four EPI constituents in July 2024, twenty-one rose in price, two were unchanged, and one declined. The sole decline in prices occurred in pet and pet products; rising the most in price were the motor fuel, food at home, and food away from home categories.  

On August 14, 2024, the US Bureau of Labor Statistics (BLS) released Consumer Price Index (CPI) data for July 2024. The month-to-month headline CPI number rose by 0.2 percent, meeting forecasts. The core month-to-month CPI number also increased by 0.2 percent, which also agreed with survey predictions of 0.2 percent. 

In July, the food index rose by 0.2 percent, consistent with the increase observed in June. Within this category, the food at home index inched up by 0.1 percent. Of the six major grocery store food group indexes, three experienced gains while the other three saw declines. Specifically, the index for meats, poultry, fish, and eggs jumped 0.7 percent, driven by a significant 5.5 percent increase in the eggs index. The indexes for fruits and vegetables and nonalcoholic beverages also recorded gains, rising by 0.8 percent and 0.5 percent, respectively.

Conversely, the index for other food at home dropped by 0.5 percent in July, after a 0.5 percent increase in June. Similarly, the cereals and bakery products index decreased by 0.5 percent, while the dairy and related products index edged down by 0.2 percent. The food away from home index also saw a 0.2 percent rise in July, following two months of stronger 0.4 percent increases. Breaking this down further, the index for limited-service meals rose by 0.3 percent, and the index for full-service meals increased by 0.1 percent.

In the energy sector, the index remained unchanged in July, following a 2.0 percent decline in June. The gasoline index also showed no change over the month, although unadjusted gasoline prices rose by 0.8 percent. The electricity index saw a modest increase of 0.1 percent, while the fuel oil index climbed by 0.9 percent. In contrast, the natural gas index fell by 0.7 percent.

Excluding food and energy, the all-items index rose by 0.2 percent in July, slightly up from the 0.1 percent increase in June. Within this, the shelter index grew by 0.4 percent, with rent climbing 0.5 percent and owners’ equivalent rent up by 0.4 percent. The lodging away from home index reversed its 2.0 percent decline in June, rising by 0.2 percent in July.

The medical care index decreased by 0.2 percent in July, after a 0.2 percent rise in June. Within this sector, the index for hospital services dropped 1.1 percent, though the indexes for physicians’ services and prescription drugs both edged up by 0.1 percent. The motor vehicle insurance index saw a significant increase of 1.2 percent in July, following a 0.9 percent rise in June. The index for household furnishings and operations grew by 0.3 percent over the month, with additional increases observed in the indexes for education, recreation, and personal care.

On the other hand, the index for used cars and trucks continued its downward trend, falling by 2.3 percent in July after a 1.5 percent decrease in June. The airline fares index also dropped by 1.6 percent, while the apparel index declined by 0.4 percent, and the new vehicles index slipped by 0.2 percent.

July 2024 US CPI headline & core month-over-month (2014 – present)

In year-over-year data, headline CPI rose 2.9 percent, less than the expected 3.0 percent rise. Year-over-year core CPI rose 3.2 percent, meeting the 3.2 percent prediction.

July 2024 US CPI headline & core year-over-year (2014 – present)

Over the past 12 months, the index for food at home increased by 1.1 percent. Among the categories, the meats, poultry, fish, and eggs index saw a notable rise of 3.0 percent, while nonalcoholic beverages index grew by 1.9 percent. The index for other food at home experienced a more modest increase of 0.9 percent. The index for cereals and bakery products, however, remained unchanged during this period. In contrast, the indexes for both fruits and vegetables and dairy and related products each declined by 0.2 percent over the last year.

The index for food away from home saw a more significant rise, climbing 4.1 percent over the last 12 months. Breaking this down, the index for limited service meals increased by 4.3 percent, and the index for full service meals rose by 3.8 percent during the same period.

The energy index experienced a 1.1 percent increase over the past year. Within this category, the electricity index surged by 4.9 percent as the natural gas index went up by 1.5 percent. The gasoline index decreased by 2.2 percent, and the fuel oil index saw a slight decline of 0.3 percent over the 12-month span.

Excluding food and energy, the year-over-year index rose by 3.2 percent. The shelter index was a major driver, increasing by 5.1 percent and accounting for more than 70 percent of the total 12-month rise in the all items less food and energy index. Other indexes that recorded significant increases over the year include motor vehicle insurance, which surged by 18.6 percent; medical care, up 3.2 percent; personal care up 3.4 percent; and recreation up 1.4 percent.

The positive progress on disinflation over the past three months suggests that the Fed’s goals of price stability and full employment are not at odds, but challenges may surface by the end of 2024. The labor market is expected to cool significantly as the year progresses, and there remains a possibility that certain non-cyclical factors will see the rate of inflation stabilize at a level above the Fed’s 2-percent target later this year or early in 2025.

The resurgence of the “supercore” inflation measure, which excludes housing from core services, indicates ongoing price pressures that could keep the Fed cautious about cutting interest rates as much as some market participants have hoped (as expressed via market implied policy rate markets). In July 2024, supercore rebounded by 0.21 percent after two consecutive monthly declines, although the annual rate slipped slightly to 4.48 percent from 4.67 percent in June. Most categories saw increases in July other than core goods, which have been instrumental in the recent price cooling. A key takeaway from the latest CPI data is that housing costs continue to drive inflation higher. Some economists had forecast that substantial rent increases would have eased by now, but the numbers suggest that the housing inflation story isn’t over yet. 

Despite this, it is quite likely that the Fed will proceed with a rate cut at its September 17 – 18 meeting. Speculation will now likely shift toward the size of that rate cut, yet with several more inflation, unemployment, consumption, and other reports due before the next Fed meeting, such projections currently lack substantive value.

In his self-searing memoir, Late Admissions: Confessions of a Black Conservative, Glenn C. Loury tells all in only the way he can. Loury’s singular journey from precocious young boy in Chicago’s South Side to one of the nation’s sharpest social critics doesn’t fit with many of the success narratives remarkable thinkers tell about themselves. You see, Loury’s account is brutally honest. From engaging in multiple extramarital affairs to smoking crack cocaine in his Harvard office, Loury doesn’t withhold the kind of details one might have if he wanted to present a more sanitized account of his life and career. And as he luridly shows, the challenges and personal temptations that emerged from childhood have haunted him ever since.

Loury was born in Chicago in 1948. After his mother shuffled him and his sister to different homes and put her other children up for adoption, Glenn’s aunt, Eloise, vowed to unite the clan under her roof. Aunt Eloise’s house in Park Manor, where little Glenn and his sister lived in an attached apartment with their mother, typified the stylishness and respectability that many in Chicago’s South Side exuded. Despite the difficult circumstances, these outward appearances symbolized the hopes and ambitions of black Americans seeking to pave their way to prosperity.

Throughout his memoir, Loury presents the reader with two versions: the cover story and the real story. Referring to the house he grew up in, “It is true,” he writes, “that Eloise’s house was a monument to an ideal for living.” However, “it is also true that in that house, our friend Boo-Boo’s father, a man suffering from mental illness and alcoholism, shot himself in the head as my horrified, helpless mother looked on.” Such stories illustrated the stark contrasts that defined black America in the 1950s and 1960s, when personal ambition often clashed with deep-set traumas that were never easy to shake.  

While struggling to pass his classes at a high-performing academy, he discovered that his girlfriend, Charlene, was pregnant. Soon, he dropped out of school and began working as a timekeeper at a printing plant. Not long after, Charlene gave birth to their second child, and Loury found himself in a situation resembling many of his own family’s struggles.  

Loury eventually returned to school, where he excelled in mathematics, earning him a scholarship to Northwestern. At this time during the late 1960s and early 1970s, Northwestern boasted one of the nation’s leading economics departments, where new mathematical and econometric techniques were being pioneered. Soon, Loury was admitted to the Massachusetts Institute of Technology, thanks to his success at Northwestern and his special mathematical abilities. At MIT, the economics profession was being reinvented. Nobel laureates Paul Samuelson, Robert Solow, Franco Modigliani, and Peter Diamond, among others, were revolutionizing the field, and Loury would have a front row seat.

Loury’s dissertation quickly earned him a place as one of MIT’s budding stars. “Essays in the Theory of the Distribution of Income” employs innovative mathematical techniques to demonstrate the importance of social networks (family, friends, etc.) in building critical labor market skills and traits. As Loury explains, “My idea is that human development is not just transactional. It’s not just people buying stuff in the marketplace. It’s also relational. It’s people interacting with one another inside networks.” These insights catapulted him into the upper echelon of the economics profession, and placed him in the center of the debate over race and inequality in America.

After a brief stint at Northwestern following his PhD, Loury began teaching and researching at the University of Michigan, where he expanded on his cutting-edge work exploring the intersection between social capital and racial disparities. He soon began traveling across the country giving lectures and consulting with representatives from the natural gas industry. But as Loury’s career took flight, his inner demons manifested themselves in ever less subtle ways. He started to invite companions with him to his meetings, searching for clever ways to obscure his infidelity to his girlfriend Linda. The more he engaged in deceitful activities, the easier it became for him to surrender to his passions.

After much consideration, Loury accepted an offer to teach at Harvard, becoming the first black tenured economics professor in the school’s history. The pressure to perform, combined with an expectation to solidify a unique identity, pushed him away from the economics department and into Harvard’s Kennedy School, where he could pursue a wider range of topics without the competitive intensity that infamously pervaded Harvard’s economics faculty.  

A stark paradox emerged from Loury’s newfound role as a conservative pundit on race. He could, for example, skewer many in the black community for their lack of personal responsibility, as he surfed a dark alley for some late night action. Whether he realized it or not, Loury’s private actions began to reflect the very patterns he publicly scrutinized in America’s black communities.

In the mid-1980s, Loury’s personal issues only escalated. He was embroiled in scandal after one of his lovers accuses him of assault (the charges are later dropped). To make matters worse, an affair intensified with a new love: crack cocaine. Pretty soon, Loury was thinking about how to procure and smoke the drug, but oddly enough, his research was rarely affected. Eventually, he was arrested and booked for drug possession, putting his Harvard position on thin ice.

After hitting rock bottom, he finally admitted himself into rehab, and then a halfway house, where he not only addressed his addiction, but his fixation with an overinflated ego he slowly built by flaunting all the rules. Slowly, he supplemented the rigidities of AA with the spiritual nourishment of Christianity. It would take many years, but Loury’s lifelong search for his own identity would be tied up in the very people he neglected: his family and community.

Through all his trials and relapses, Loury’s wife, Linda, stood by his side. And in 2003, when she was first diagnosed with cancer, he would stay with her until the very end. Linda Datcher Loury, a respected social economist in her own right, was the anchor that Loury so desperately searched for, and finally found. Cleaning out her office, he stumbled upon one scribbled book, with highlighted sections that clearly applied to his own transgressions. “She made a study of forgiving me,” he reflects.

Late Admissions is not an intellectual autobiography. It’s much more. It’s an open book. A personal odyssey of an economist who battles the very challenges he studies. Economists often get lost in abstractions. The theories of human behavior prove so alluring that economists lose focus of the real world. By coming to terms with himself, Glenn Loury gains a deeper understanding of the challenges and opportunities facing the same communities in which he was raised.

Where many economists model the world, Loury’s revealing admissions animate it. He shows that what makes a good economist or intellectual is their willingness to appreciate the very human qualities that drive the social sciences.

Concluding the book, he writes:

I cannot defeat the enemy within, not entirely. To do so would be to defeat myself; to deny my true nature. For now, we hold an uneasy truce, one that requires long negotiations to maintain. I have my strategies. But the game never ends.

Loury’s acceptance of his limitations is his greatest strength. Late Admissions is more than an economist’s confession. It’s a reflection of the triumphs and challenges we all experience. 

After slight deflation in June, prices once again ticked up in July. The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 0.2 percent last month, for a year-over-year increase of 2.9 percent. Core CPI, which excludes volatile food and energy prices, also rose 0.2 percent on the month, and has risen 3.2 percent year-over-year. 

The annualized monthly inflation rate was 1.9 percent in July. The annualized monthly core inflation rate was 2.0 percent. Taken together,  inflation appears to be in line with the Federal Reserve’s official 2-percent target.

Shelter prices saw the largest increase. They rose 0.4 percent on the month, “accounting for nearly 90 percent of the monthly increase in the all items index.” The estimated increase in the shelter component of CPI, however, likely reflects price pressure from a year or more ago. As Treh Manhertz at Zillow shows, “annualized changes in shelter CPI can remain elevated long after rent price growth cools.”

Using the latest inflation data, we can ascertain the stance of monetary policy. The Fed’s target range for its main policy interest rate is 5.25-5.50 percent. If market participants expect 1.9 percent inflation, in line with the July headline inflation rate, the implied real interest rate target range is 3.35 to 3.6 percent. If they expect 2.0 percent inflation, in line with the July core inflation rate, it is 3.45 to 3.7.

Is the Fed’s interest rate target too high, too low, or just right? We need to compare our estimates of the implied real interest rate target range to the natural rate of interest, which is the price of capital that balances supply and demand in short-term capital markets. We can’t directly observe this rate; the best we can do is estimate it. The latest estimates from the New York Fed put it somewhere between 0.70 and 1.18 percent. Hence, the Fed’s interest rate target range appears to be much higher than the natural rates. Unless the estimates are totally divorced from reality, interest rates suggest money is quite tight.

We also must consider monetary data. The M2 money supply, which is the most commonly cited monetary aggregate, grew 0.87 percent over the last year. It grew at an average annual rate of 5.4 percent over the five year period just prior to the pandemic. Divisia aggregates, which weight money supply components based on their relative liquidity, rose more. Divisia M3 grew 1.30 percent over the last year, compared with 4.5 percent on average over the five years prior to the pandemic. Divisia M4 (including Treasuries) grew 2.10 percent, compared with 4.7 percent in the earlier period. Hence, both simple-sum and Divisia monetary aggregates are growing at historically low rates.

To judge whether monetary policy is loose, it is not enough to show that monetary aggregates are growing at historically low rates. What matters is whether the money supply is growing faster than money demand. As with the natural rate of interest, we do not directly observe money demand. Nonetheless, we can create a proxy for money demand by summing real GDP growth (3.1 percent) and population growth (0.5 percent). That proxy suggests money demand is plausibly growing at around 3.5 – 4.0 percent per year, which is much faster than all of the above money supply figures. Hence, monetary data says money is tight, too.

The Federal Open Market Committee (FOMC) next meets in September. They should seriously consider cutting their interest rate target. Although inflation was higher in July than in June, it was still in line with the Fed’s target — and arguably below target once one accounts for lagging shelter prices. Yet, while inflation has declined over the last year, monetary policy has passively tightened: the Fed’s fixed nominal interest rate target over this period corresponds to a rising implied real interest rate target. If monetary policy remains tight, it could result in a significant economic contraction. To avoid a recession, the Fed should acknowledge it has finally (albeit belatedly) whipped inflation, and bring monetary policy back in line with economic fundamentals.

In an essay published recently by American Compass, long-time protectionist Michael Lind defends the Biden administration’s 100 percent tariffs on electric vehicles (EVs). In pushing this defense, Lind rhetorically asks “other than the obnoxiously anonymous lead writers at The Economist and a few libertarian dead-enders, who really believes that China’s crushing of the American EV industry would be a ‘free market’ outcome that enhances American prosperity?”

Overlook Lind’s apparent unawareness that the editorials of many premier publications — including the New York Times, Washington Post, Financial Times, and Wall Street Journal — are, and have long been, written anonymously. In this matter The Economist isn’t unique. Let’s focus instead on the substance of Lind’s claim, which is this: Only benighted free-market ideologues could possibly believe the lunatic notion that the US government should not protect US-based EV producers against subsidized competition from China — competition that would, absent such protection, crush the EV industry in America.

Although I must plead guilty to being among the “few libertarian dead-enders” who Lind holds in such contempt, the argument against EV protection isn’t remotely as deserving of contempt as Lind seems to think.

To minimize confusion — a goal, it seems, that’s shared by distressingly few protectionists — let’s separate arguments for protectionism to improve the performance of the American economy from arguments for protectionism to improve national defense. And let’s begin with the former, as economic performance is the chief concern not only of Lind in particular but of protectionists generally.

Here’s the strongest case for protecting American EV manufacturers; it’s got three parts.

1) All Chinese EV manufacturers are less efficient at producing electric vehicles than are all American manufacturers.

2) Beijing’s subsidies to Chinese producers allow them nevertheless to sell so many EVs in the US that too little demand remains for American-made EVs, thus forcing American producers to abandon the field.

3) Beijing’s subsidies never enable Chinese-based EV producers to produce as efficiently as could the now-defunct American-based EV producers. This third assumption is necessary in order to ensure that the first assumption remains valid.

How would Americans be harmed if, under these conditions, the US government maintained a strict policy of free trade with respect to EVs? Lind and other protectionists likely think that the answer to this question is obvious; they’ll say that Beijing’s subsidies destroyed in America an industry for which Americans have a comparative advantage. In this answer they’ll be correct. But this answer is irrelevant to the policy question.

Although, by assumption, the Chinese here incur higher costs to produce EVs than would Americans, the people who pay these costs are exclusively the Chinese people. Beijing’s subsidies enable Americans to get EVs on the cheap, and the economic consequences to Americans are identical to what the consequences would be were Chinese producers ‘naturally’ more efficient than Americans at producing EVs. If there would be no complaints from Americans about unsubsidized Chinese-made EVs being sold in America, there should be no complaints from Americans about subsidized Chinese-made EVs selling in America.

I can predict Lind pouncing with this retort: “Gotcha! As soon as American producers abandon the field, the Chinese will raise the prices of their EVs to monopolistic levels. We’ll then be sorry that we didn’t protect American EV producers.”

Maybe. In our incredibly complex world many different outcomes are possible. The relevant question, however, is: Is this outcome likely? And the answer is: No; it’s highly unlikely. 

First, firms in free markets retool to take advantage of the profit opportunities created when other firms behave monopolistically, so a Chinese EV monopoly in the future is unlikely to be so long-lived as to justify protectionism in the present. Put differently, the additional sums that Americans would certainly pay today as a result of tariffs would likely be greater than the additional sums that Americans might pay tomorrow if the Chinese obtain — and choose to exploit — a temporary monopoly at supplying EVs.

Second, for the Chinese to be able to raise their EV prices to monopolistic levels, EV production would have to have been abandoned not only by all American producers, but also by EV producers in Europe, Japan, Korea, and everywhere else in the world but China.

As long as Americans maintain a free-trade policy toward EVs, the Chinese, to be plausibly in a position to charge monopoly prices for EVs in America, would have to monopolize sales of EVs not just in the US, but globally. Achieving this outcome would require massive, long-running subsidies. And remember, by assumption Chinese EV producers remain inefficient, so the subsidies would have to continue indefinitely. For the Chinese people, this policy would be a sure economic loser.

The protectionist response is predictable: ‘No matter! We can’t take that chance! We must counteract Beijing’s subsidies with high tariffs.’

This response would be worthy of serious consideration if serious thought went into it. But, alas, that’s not the case. Protectionists who offer this response fail to understand the trade-offs that are at hand because they fail to ask important questions — questions such as these:

– Protectionist subsidy of American EV producers necessarily diverts resources away from other industries in the US; what is the value of the production that declines in America because of EV protection? Do we have good reason to believe that the value of this foregone production is less than is the value of what we gain by protecting EV producers?

– Beijing’s subsidization of Chinese EV producers necessarily diverts resources away from other industries in China, which particular industries in China suffer as a result of this subsidization? Might it be the case that the resources poured by Beijing into EV production would instead have been used, in the absence of such subsidization, to fortify other Chinese industries that compete with American producers? Therefore, might Beijing’s EV subsidies weaken other Chinese industries that would otherwise be effective competitors of American producers? The free trader is untroubled by the prospect of this competition from other Chinese industries, but the protectionist — to remain consistent — cannot be untroubled. The protectionist must admit the possibility that Beijing’s EV subsidies weaken what would otherwise be Chinese competition in non-EV industries — a weakening that, according to protectionist logic, is good for America. Yet the protectionist who argues that Beijing’s EV subsidies require protection of American EV producers has given no thought to the Chinese industries that, because of those subsidies, become less effective competitors in America.

These arguments will not divert determined protectionists from their position. Protectionists will continue to present abstract and remote possibilities as if these are concrete and likely enough to occur to warrant government intervention. But the open-minded person wisely realizes that good policy-making focuses on that which is likely and avoids being obsessed with that which is extremely unlikely.

Economists are famous for drawing diagrams, as so often illustrated in their traditional “chalk and talk” classroom presentations. Some of the curves involved even get named after famous users, from the Phillips curve to the Lorenz, Kuznetz and Laffer curves. 

The intent of such diagrams is to illustrate some economics “incentive story” or relationship in a clear visual manner in order to make it easier to “see,” retain and utilize it. Especially given that analogies from one analysis to another in economics are common (e.g., the costs of regulation often act like taxes and price floors or ceilings in one area have many similar effects when imposed in other areas), that approach can be highly productive. Also, illustrating such relationships graphically, allowing the application of marginal analysis that is a hallmark of the discipline (by so often reducing choices to what I call “the rule of rational choice” which compares the marginal expected benefits to a decision-maker to their marginal expected costs), is a useful way to counter the often sloppily thought-through and misleadingly represented political “sales” pitches for policies that are now so prevalent, particularly in an election season.

When dealing with public policies, however, we should remember that using just one diagram may still be misleading. More than one incentive story or relationship is usually in play. This is where economists’ “other things equal” or “ceteris paribus” approach to teaching each particular incentive story can cause analytical problems if too literally applied to cases where other important-to-understand things are not equal. Those “other things” almost always exist (reflected in the common economics maxim that “you can’t change just one incentive story”) and can alter, and even reverse, many answers, so that accurate understanding requires that they also be taken into account. 

Many examples of the shortcomings from such “single curve” analysis of government policies, which leave out important “other things,” exist. Consider some.

One of the most common shortcomings is ignoring how government revenue was raised in analyzing the effects of programs. The problem is that you cannot “see” those issues in a diagram focused only on where the money was spent. And since every way of raising added government revenue distorts the affected market, wiping out gains from some mutually beneficial exchanges that are eliminated as a result, that is a major omission (usually referred to as the welfare cost or excess burden of a tax). A situation in which you believe there are $1.25 in benefits per dollar spent in a program and conclude that it is efficient, is actually inefficient if the cost of raising each dollar of the revenue is really $1.40 (far below the estimates for many taxes), but recognizing that fact requires you to look there as well as where it is spent.

Conversely, you cannot comprehensively analyze the effects of some government tax without asking what the value of the financed spending is. In the standard diagrammatic analysis of taxes, the revenue raised is treated as simply a transfer from those in the market affected to the government. That means it assumes that people get their money’s worth from that government spending (i.e., a dollar of spending produces a dollar of benefits). However, given the impaired incentives and the sizeable amount of waste, fraud and inefficiency routinely found in government programs, spending in many areas can easily provide far fewer benefits than the amount spent. For example, if a billion dollars of tax revenue was raised to spend on a program that gave citizens only half their money’s worth, the single diagram approach to taxes will miss half a billion dollars of the actual costs.

Particularly when both major political parties are populated with ardent protectionists, we must also recognize that the same issues arise with tariffs, quotas and the various other forms of non-tariff barriers (e.g., “product safety” rules actually designed to create barriers to entry to foreign competitors). You cannot adequately analyze the effects of import restrictions on steel by only looking at domestic steel producers who benefit. You must also look at the harmful effects on further domestic processors of steel and on domestic consumers by way of the higher prices that result. In the same way, analyzing American sugar import restrictions requires also looking at the effects on candy makers (who have migrated north to Canada and south to Mexico, where those restrictions do not exist) and American consumers. Beyond that, we must look at the effects of reciprocal protectionist policies from countries targeted by our protectionist policies. 

Another objectionable form of single diagram analysis involves regulations. They are commonly analyzed solely in terms of an aggregate effect in a market in a way that hides important aspects to be considered. For example, one could look at the effects of a minimum wage regulation on “the poor” by focusing on how it affects their incomes in the aggregate. But what is missed by that is that even if that group earns more in the aggregate as a result (which is not necessarily the case) some in that group lose their jobs, hours worked, valuable on-the job training, etc. Harming those poor people who lose cannot be justified by trying to help the poor in the aggregate. 

A different single-diagram approach arises in macroeconomics, where textbooks often illustrate cases of recession or inflation as implying a “market failure,” by starting the diagram in recession or an inflationary boom without explaining how it came to be. That leaves the impression “the market” (and not the government) caused it. They add a caveat that the market adjustment may be slow and then compare that result to a diagram showing an optimal government “solution” that looks good in comparison. The implication of such diagrams is that government is the solution to market failures. 

But that ignores other real possibilities that don’t make government look so good. They include the fact that government often causes the problem in question (e.g., the Great Depression) or continues to make it worse rather than solve the problems (e.g., the inflation of the 1970s or the 2020s), which could be, but usually isn’t, illustrated diagrammatically, which hides the fact that the best solution in such cases would be to stop such government policies rather than giving government more discretionary power to supposedly solve the problems it caused. It also ignores the fact that government interventions can be even slower than market recovery and may even make things worse rather than better, such as when government stimuli has its effects after markets have recovered, making such efforts destabilizing rather than stabilizing. Further, it ignores the fact that governments can often overshoot the implied optimum solution, as with too much monetary stimulus, creating a future inflation issue to deal with, or with too much monetary restraint, threatening recessions in search of a solution to inflation. 

One more common example of the failures of single diagram analysis is in “welfare” programs such as food stamps (SNAP). In one diagram, one can analyze the (surprisingly small) effects on food consumption. But there are many other effects. Because benefits are reduced with income, SNAP acts like an income tax, paid in reduced benefits, and those effects must be analyzed. Similarly there is an asset limit that can act to reduce savings to earn or learn one’s way out of poverty. There is an implicit subsidy to housing in the program as well. There can be further interactions between SNAP and other benefit programs (as when food stamp benefits were counted as income in calculating AFDC benefits, reducing those benefits). Leaving out such things, and more, each of which can be considered diagrammatically, is misleading in omitting or over-simplifying real-world issues and problems.

These examples do not exhaust the areas in which what could be called “only one diagram” analysis. And they should not be taken as implying that diagrammatic analysis of economic policy issues is not useful. It is very useful. But when important incentive stories are left out because an analysis is truncated to a single diagram, it is over-simple, and may well point to wrong conclusions.

Stumbling upon the Freakonomics phenomenon in the late ‘00s probably made me study economics. 

The books, podcasts, and informational phenomenon that University of Chicago economist Steven Levitt and journalist Stephan Dubner launched beginning in 2005 was less economics than it was pop psychology wrapped in an economics framework. The result was still one of the largest and most positive PR campaigns for economics in recent decades, with millions of books sold and five hundred episodes made; it was the compelling and accessible writing in combination with real economics-related problems that made the authors a household name.

In How Economics Can Save the World: Simple Ideas to Solve Our Biggest Problems, the paperback out next month in the US, Stockholm University philosophy professor Erik Angner tries to do something similar for the next generation. In extremely well-written and accessible prose — no equations, about three, very simple graphs — Angner explores key economic themes. He deals with poverty and schooling, wealth and environment, and a few chapters on unorthodox things such as how to be happy and how to calibrate your inner overconfidence.

He mentions a writing coach (“made me unlearn decades’ worth of academic writing ‘skills’”), and the reader can tell: he quotes Adam Smith with as much flair as he quotes Hamlet, the work of Deirdre McCloskey as elegantly, if less extensively, as that of Ellinor Ostrom. The conversational tone is excellent for the wide audience he intends — those skeptical of economists and economics — and it’s easy enough to follow along his clear prose even for those without prior training in our arcane arts. With plenty of personal anecdotes, Angner illustrates relevant and crucial economic themes of our times, summarizing well-established literature and occasionally offering some ways in which economics can indeed help save the world. 

It’s a little unclear what Angner thinks is economics as opposed to other careful quantitative social science. Though, if one were to consult a nearby university program in economics, that cutoff isn’t so obvious either. “Economists might tell you that they study humankind in the ordinary business of life… They mean, effectively, anything that occupies us — anything we’re engaged in. Economics has a very broad remit.” Carving out a sum total of zero space for the discipline, Angner writes “Economists are trained to distinguish information that’s trustworthy from information that’s not.”

He suggests that “You don’t have to be an economist to be able to interpret data, but it helps,” a statement for which he provides no evidence and which seems altogether strange given that there is precious little that separates economics from other (quantitative) social scientists in his book. The explanations of economists’ heuristics — thinking on the margin, opportunity cost, solving for the equilibrium — are great but also some of the most economics-unique content we find. 

The book is also a bit derivative. Even without consulting the footnotes, a reader can tease out the underlying books and research programs Angner bases his chapters on. The parenting chapter comes from Bryan Caplan’s Selfish Reasons to Have More Kids and Emily Oster’s books. The organ donation chapter is straight from Alvin Roth’s post-Nobel Prize book Who Gets What and Why. The poverty chapter is Abhijit Banerjee and Esther Duflo’s Good Economics for Hard Times. 

In the parenting chapter, the pages are littered with subjective value — “what works for you doesn’t work for someone else” — and economic analysis comes down to individual preferences, whereas in the much under-analyzed climate chapter, the “socially optimal number of barrels” of oil is a quantity known to a benevolent social planner. The role of economist as providing true, causal information is replaced by a strong urge for social and political activism: “If scientists communicate their knowledge about a problem in a way that makes people less likely to fix it,” Angner writes, “the scientists have failed.”

The book thus jumps awkwardly between the position of positive, value-free economist, and interventionist, paternalizing central planner. The scientist shouldn’t merely search for truth on the best evidence, but has a wider social obligation to shape the world in his image. Angner incorrectly compares carbon taxes to dieting and hand-waves away informational problems about how much and what levels. Just as losing weight means calorie deficit and you can immediately inspect the result, says Angner, all you need for a carbon tax to do its work is get the direction right and we can observe the result. (This isn’t accurate, neither about the economics of emissions nor about losing weight.) Falling into the same well-trodden traps as market socialists of the previous century, Angner suggests that neither informational nor practical problems for a carbon tax are important: we can infer the correct social cost of carbon by whether greenhouse gasses indeed fall. In so doing, he presumes that it’s crucial that they fall as well as pretending that assessing carbon content of imported goods be a simple matter of inspecting the goods arriving at customs and slapping them with a suitably technocratic import tax.

In the other chapters he doesn’t get that far out over his skis. His investment and savings advice are middle-of-the-road, almost boring — though definitely tailored to a twentieth-century history that might not be suitable for the future. The summary of Ellinor Ostrom’s work on governing the commons excellent and the storytelling riveting. 

Whenever someone proclaims to ‘save the world’ one should instinctively apply skepticism — and a front-cover blurb from Klaus Schwab doubly so. It’s far from clear that the world needs saving, who’s doing the saving, or whether the cure is worse than the disease. 

Publishing hyperbole aside, what Angner compiles is, for the most part, much less grand and doubles as a careful summary of current economic research in broad fields that society at large is much concerned with. His previous book, A Course in Behavioral Economics, was an excellent and competent introduction to that subfield. With How Economics Can Save the World he expands the domain in two directions — to the wider public and the economics discipline as a whole. 

The book is a great introduction to economic topics and thinking, and a mostly wonderful defense of a discipline so often rejected as ideological or cruel, financial, or irrelevant. 

Happy reading.

Lately, complaints have arisen on social media accusing Chipotle’s management of decreasing portion sizes and food quality standards, while simultaneously increasing prices across the board at restaurants for their bowls, burritos, and other menu items.   

Economist Ludwig von Mises commented that, in a market economy, the customers are the bosses and “They are no easy boss…with them nothing counts more than their own satisfaction.” So why would Chipotle appear to do something to upset the people it depends upon to stay in business?  

Businesses, especially restaurants like Chipotle, will do anything to stop price increases from being passed onto customers. This is because they know that customers could easily substitute other dining options. Rather than change menu prices, restaurant owners may make adjustments on other margins. Unfortunately, this sometimes leads to backlash. 

The public relations trouble for Chipotle started when internet restaurant reviewer Keith Lee made a video reviewing his local Chipotle to test whether the restaurant was offering smaller portions than in the past. After expressing his resounding disappointment, Lee’s review dropped Chipotle from a near-perfect score a couple of years ago to a much more negative review today.  

Since Lee’s video was posted on May 3rd, it has amassed 2.3 million likes and gone viral, with many others creating reviews of their own. Others have even gone so far as to film Chipotle employees making their order in hopes that the obvious (albeit rude) surveillance will incentivize Chipotle employees to dish out large portions. To top it all off, a video was leaked allegedly showing Chipotle’s employee training, which tells employees to provide smaller portion sizes than previously offered.  

Chipotle, with a growing PR problem on its hands, decided to address the accusations directly. CEO Brian Niccol was interviewed by Fortune at the end of May and assured customers and investors that complaints about portions were hyperbolic. Niccol’s interview, however, did little to quell customer frustration. 

Chipotle raised menu prices four times between 2021 and 2023 thanks to above-average inflation raising the cost of production. Chipotle does not franchise, so the main company owns and operates all 3,300 restaurants worldwide. Chipotle must bear all the operational risks and absorb the losses when locations do poorly.   

Meanwhile, recent surveys find that customers increasingly view fast food as a “luxury” due to rising prices. To further complicate matters, Chipotle locations in California have also raised prices due to an increase in the minimum wage to $20 per hour, leading California customers to spend less when dining there. 

Chipotle’s own reports found that it had a net profit margin of 12.12 percent  for 2023 (before the online controversy and California minimum wage hike). For every dollar in sales Chipotle earned 12.12 cents, slightly above the restaurant and dining average net margin of 10.66 percent. A single month’s performance could make or break a location.  

When a business already operating on thin margins anticipates rising costs, it has few choices. When customers already see a business as a luxury due to rising prices, operators will be hesitant to continue raising menu prices, rightly worrying that customers will be driven away.  

Chipotle leadership could try the risky option of waiting out the bad PR, but the brand may not be willing to take that risk. It’s not expensive for customers to switch to a Chipotle substitute. Boycott success is determined by potential substitutes. How expensive in time, money, or quality is it to switch from Chipotle to a similar restaurant? Chipotle knows that its customers can easily substitute a Chipotle meal for Moe’s, Qdoba, or local Mexican restaurant (not to mention other fast-food options). It also knows that customers can continue the trend of dining home more often. From the customer’s perspective, Chipotle is not always the go-to option. 

Facing backlash on portion sizes, Chipotle may try other options to cut costs: shortening business hours, decreasing staff, or even shrinking the number of options on the menu. Still another option is to consider dynamic pricing (without the communication mishaps that occurred to Wendy’s), where certain menu items could be offered at reduced prices during slower periods of the day to attract customers. If all those other options are exhausted, the last choice for business owners is to shut down. 

Ultimately, research shows that customers value fast food because it’s fast. A 2008 NIH survey showed that the most frequently reported reasons for eating fast-food were: “fast food is quick (92 percent), restaurants are easy to get to (80 percent), and food tastes good (69 percent).” Chipotle can maintain its competitive edge by making dining at Chipotle as convenient as possible. In its latest earnings report, Chipotle credited growth in Q2 2024 in part to improving “guest access and convenience.” This includes the growth of “Chipotlanes,” which allows diners to place their order online and pick their order up in the drive thru “Chipotlane” without the hassle of getting out of a car or being stuck behind an indecisive customer holding up the drive-thru line.  

While it seems that Chipotle has survived the brunt of the backlash against portion sizes, other restaurant owners are likely to take this as a warning that anything they do to cut costs (even when they try to minimize menu price changes) can become the object of ire. If these abrasive customer tactics continue, many restaurant owners may think twice about staying in business, and potential entrepreneurs may shy away from the restaurant and dining sector altogether. That will mean fewer options are available to diners. In the end, though, this saga is a harsh reminder of Mises’s comment that all business must ultimately answer to the customers. 

Several politicians have recently floated the idea of establishing a Strategic Bitcoin Reserve. Donald Trump broached this issue earlier this year and made an explicit promise at the Bitcoin 2024 conference in late July: if he wins the presidency, the federal government will keep the bitcoins that it holds and all that it acquires in the future through law enforcement actions. The US government currently holds 212,848 of the roughly 19,732,900 bitcoins in existence. Its current holdings would be the basis of a Strategic National Bitcoin Stockpile.

Robert F. Kennedy Jr., another presidential candidate, also delivered a keynote speech at Bitcoin 2024. His speech could have been entitled “I am a Bitcoiner, too.” He proposed that the federal government keep its current holdings of bitcoins and then acquire 550 bitcoins daily until it holds at least 4 million bitcoins. Compare that to the maximum number of bitcoins that can be created, which is 21 million. At nearly 20 percent of the total supply, the bitcoins to be purchased under Kennedy’s plan is quite a lot. He was not explicit about the sources of the funds used to acquire so many bitcoins. If debt were issued to finance the purchases, the debt would amount to 35 million dollars per day. about 13 billion dollars per year at current prices. This is quite small compared to the current deficit.

At the same conference, Senator Lummis from Wyoming announced a bill that would create a strategic bitcoin reserve of one million bitcoins, which would be held for at least 20 years. A major purpose of the bill would be to enhance returns on the Treasury’s assets, such as gold, and help to pay off the national debt.

The sums involved are staggering on a personal basis. They are not so staggering compared to many of the government’s recent undertakings.

While the details differ, the proposals all involve the federal government holding a positive amount of bitcoin for a couple of decades.

The proposals themselves seem to take it as self-evident that it would be good for the government to hold some bitcoins. What are the arguments for and against the federal government holding bitcoins?

One part of the argument for the federal government holding bitcoins is based on projections of extraordinary future returns. Senator Lummis was explicit about this at the conference. Without being explicit about the extraordinary future returns, they are much of the basis of an argument in a Forbes column by Sam Lyman for acquiring bitcoin. All that can be said about that is: maybe so, maybe not.

Is there an intended use of the strategic reserve of bitcoin beyond a highly speculative investment? The bitcoin reserve is nothing like a commodity reserve, such as the US’s strategic oil reserve. It is more similar to the US’s holdings of gold. Despite some remaining misperception, the US dollar has not been related to gold in any way since 1971.

The gold reserve could be thought of as an investment in an appreciating asset, but the price of gold goes down as well as up. Besides, it is not obvious that the federal government is the best investor of its citizen’s funds.

Perhaps the gold reserve could be considered an emergency fund. Valued at current market prices and leaving aside gold held for minting coins, $601 billion in gold held is quite large. It is equal to about $1800 for every person in the United States. Selling the gold over a short period of time would decrease the price substantially. It would be less disruptive to simply print dollar bills in the event of an emergency. For comparison, $601 billion is less than three percent of the total stock of money in the United States.

So much for the gold reserve as an emergency fund. There is no reason to think that bitcoin would be a better or worse emergency fund than gold.

Given that the reserve of gold can be viewed only as the federal government holding it for investment purposes, there is no particular reason to focus only on gold and not include other assets, including cryptoassets such as bitcoin.

A better solution is for the federal government to sell its gold. The proceeds could be used to temporarily decrease taxes, reduce the government’s debt or temporarily increase spending.

If the government temporarily reduced taxes or gave taxpayers a check for the proceeds from selling the gold, taxpayers would be free to use the funds as they saw fit. Some no doubt would buy bitcoin. Some would not, because they are sufficiently risk averse that they do not want to hold a risky asset such as bitcoin. Some would buy gold. Some would use the funds to pay off student loans. In short, taxpayers would be able to use the funds as they saw fit, rather than having people in the federal government determine the use of the funds.

Reducing the government’s debt has similar effects. Lower debt means lower interest payments, which can be reflected in lower current and future taxes. People get to choose what to do with their higher after-tax income.

Increasing spending temporarily is the other alternative. There is no reason to tie government purchases of goods and services or hiring people to sales of gold. Either the purchases or employment are worthwhile or they are not. The source of funds does not affect their desirability. The funds could be used to purchase assets, which could include bitcoin.

Given that financial freedom was one of the motivations for a private digital currency such as bitcoin, it is incongruous to have the federal government acquire part of the stock of bitcoin. Indeed, such an acquisition can be considered partial nationalization. The asset most similar to bitcoin currently held by the government is gold. Rather than acquiring bitcoin, the better solution is to sell the gold reserve and let members of the public decide how to invest their funds.

In January, Axios reported a developing trend in corporate America: corporations across the United States were backing away from DEI, which had become a “minefield” for companies.

Following a multi-year boom in the Diversity, Equity, and Inclusion space following the 2020 death of George Floyd, corporations were pulling back on DEI initiatives.

The risks were too great — especially in what was expected to be a politically charged election season amid growing attacks from conservatives targeting “woke” corporations.

“It’s hard to imagine with the amped up rhetoric of an election year that people really want to stick out their neck more,” Kevin Delaney, co-founder of media and insights company Charter, told markets correspondent Emily Peck.

Axios wasn’t wrong about the trend, which has only picked up steam this summer.

In July, John Deere announced that it was stepping away from DEI efforts and would cease sponsoring “social or cultural awareness” events. The announcement came a week after Business Insider reported that Microsoft had laid off its entire DEI team. Microsoft’s action, in turn, had come just weeks after Tractor Supply, a Brentwood, Tennessee-based company, decided to pull the plug on its social activism efforts in the face of a social media campaign targeting the company.

The backlash against DEI has been so intense that the term itself appears to be going the way of the dodo. The Society for Human Resource Management recently announced it was ditching the word equity from its acronym.

Preaching to Consumers

DEI is just one form of corporate social activism, which comes in various forms and includes its cousin Environmental, Social, and Governance (ESG). Both ideas fall under, to some degree, Corporate Social Responsibility (CSR), the idea that corporations have a duty to take social and environmental actions into consideration in their business models.

If you’re wondering why Burger King has commercials on climate change and cow farts, and why Bud Light’s commercials went from featuring Rodney Dangerfield and Bob Uecker to trans activist Dylan Mulvaney, it’s because of CSR.

The idea that corporations should fight for social causes has skyrocketed in recent years to such an extent that activism is inhibiting companies in their primary mission: generating profits by serving customers.

“Firms leveraging situations and social issues is not new, but showcasing their moral authority despite a disinterested consumer base is,” Kimberlee Josephson, an Associate Professor of Business at Lebanon Valley College in Annville, Pennsylvania, has observed.

Bud Light’s decision to feature Mulvaney cost them an estimated $1.4 billion in sales, and it revealed the danger of corporations leaning into social activism, particularly campaigns and policies that alienate their own consumer bases.

Not very long ago, companies like Chick-fil-A faced backlash from progressive activists for supporting traditional marriage. Culture war advocates on the right have responded in similar fashion.

Conservative influencers have made a point of raising awareness around “woke” corporate initiatives — white privilege campaigns, climate change goals, LGBTQ events, etc. The most successful ones, such as Robby Starbuck who pioneered the campaign against Tractor Supply and John Deere, made a point of targeting corporations with conservative consumer bases.

“If I started a boycott against Starbucks right now, I know that it wouldn’t get anywhere near the same result,” Starbuck recently told the Wall Street Journal.

One can support Robby Starbuck’s tactics or oppose them. What’s clear is that corporations increasingly face risks for participating in social activism campaigns, and the threats now come from both sides of the political aisle.

Social Responsibility and ‘Social Justice’

The idea that businesses have responsibilities that go beyond their shareholders, workers, and consumers stretches back at least to Howard Bowen’s 1953 book Social Responsibilities of the Businessman. Bowen, an economist who served as president of Grinnell College and the University of Iowa, is widely considered to be the godfather of corporate social responsibility.

“CSR can help business reach the goals of social justice and economic prosperity by creating welfare for a broad range of social groups, beyond the corporations and their shareholders,” he wrote.

This is a version of “stakeholder capitalism,” an idea that says corporations must look beyond serving customers to generate profits for shareholders. Various other “stakeholders” must be considered.

Over time, other incantations of stakeholder capitalism emerged, including ESG, which stemmed directly from a 2004 report — “Who Cares Wins” — spearheaded by the United Nations, asset management groups, and banks. Its purpose was “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions.”

These “guidelines and recommendations” eventually morphed into a global ESG framework which graded publicly traded companies on “social responsibility.” Though ESG scoring is notoriously opaque, what’s clear is that a small number of rating firms were allowed to determine what values corporations should have, and penalized them if they deviated. A bad score could see a company cut from a trillion-dollar index fund.

This no doubt explains why companies like Tractor Supply, known for selling farming equipment and animal feed to farmers, had carved out ambitious plans to cut emissions by 50 percent by 2030 and achieve a “net zero” carbon footprint by 2040 (in addition to various other social objectives).

Those plans are now scrapped, and media outlets are aghast, pointing out that not very long ago Tractor Supply argued that these initiatives made “great business sense for Tractor Supply.”

But this analysis misses the reality that social activism now carries greater potential risks and rewards, particularly in light of the collapse of the ESG movement, which earlier this year saw an exodus of $14 trillion, as asset managers like BlackRock and Goldman Sachs fled for cover.

The Problem with Taking Sides

Many Americans likely feel that corporations should have social responsibilities. They just tend to have different views on what those values should be.

I was in church recently, and a pastor spoke of an entrepreneurial friend who was excited to realize how he could use profits from his business to spread the gospel. I suspect that many people who support CSR would be appalled at corporations using their business to spread religion, just like many religious Americans are appalled at corporations embracing what they see as “woke” agendas.

While corporations are free to inject values into the workplace and support social and religious programs, they have no societal responsibility to do so. In fact, there are compelling reasons they should not be doing so.

The Nobel Prize-winning economist Milton Friedman wrote what is perhaps the most famous rebuttal to CSR. In a 1970 New York Times article titled “A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits,” Friedman accused champions of CSR of “preaching pure and unadulterated socialism” and being “puppets of the intellectual forces that have been undermining the basis of a free society.”

Friedman understood that corporations don’t have a social responsibility (or a religious one) beyond serving their consumers and generating profits. This is their raison d’être, and how they best serve society. They don’t have a responsibility to spread religion or to champion diversity or to stop climate change or to promote equity. These values might be good, but it’s not the responsibility of corporations to promote them.

“[T]here is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits,” Friedman wrote, “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

This is the most famous element of the Friedman Doctrine, but I don’t think it’s the most important one. The most important line is Friedman’s warning on the dangers of straying from this model, which he makes at the beginning of the same paragraph:

[T]he doctrine of ‘social responsibility’ taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means.

This is the true danger of CSR, stakeholder capitalism, or any of the alphabet soup acronyms that seek to replace capitalism with collectivist systems that seek to undermine the rights of property owners: it risks extending politics into our private lives beyond its proper scope.

One of the hallmarks of a totalitarian society is that public and private levers of power are utilized to enforce adherence to state dogmas, and Friedman wasn’t the first to recognize the potential dangers of corporate social activism.

Writing in Harvard Business Review in 1958, the German-born American economist Theodore Levitt warned of replacing the profit motive with corporate do-goodism in an article titled “The Dangers of Social Responsibility”:

The trouble with our society today is not that government is becoming a player rather than an umpire, or that it is a huge welfare colossus dipping into every nook and cranny of our lives. The trouble is, all major functional groups — business, labor, agriculture, and government — are each trying so piously to outdo the other in intruding themselves into what should be our private lives. Each is seeking to extend its own narrow tyranny over the widest possible range of our institutions, people, ideas, values, and beliefs, and all for the purest motive — to do what it honestly believes is best for society.

This is precisely what stakeholder capitalism has done, and it’s a primary reason why culture today is saturated with politics and political messaging. Corporations, by embracing Bowen’s idea that corporations have a duty to pursue “social justice,” have helped blur the line between private and public life.

Though many Americans are alarmed by corporate America’s retreat from social activism, it’s actually a sign that nature is healing.

The move likely will not only help the bottom lines of companies like John Deere and Tractor Supply, but it will allow them to serve their customers more effectively. Keeping politics and “social responsibilities” out of corporate boardrooms, charters, and messaging is likely to result in a more harmonious society.

Considering that it is an election year, it is perhaps unsurprising that there are two competing narratives on the current state of real (i.e., inflation-adjusted) wages. Democrats point out that, even after adjusting for inflation, wages are now higher than they were prior to the pandemic. Republicans, in contrast, note that real wages have declined since Biden took office. The fact checkers say both sides are technically correct: whether real wages are higher or lower today depends on one’s choice of the start date for the analysis.

At first glance, the fact checkers appear to be correct. As shown in Figure 1, real average hourly earnings can be calculated by dividing average hourly earnings by the Consumer Price Index and then multiplying the series by 100. By this measure, real average hourly earnings grew at an annualized rate of 0.4 percent from January 2020 to June 2024 (as indicated by the blue dashed line). They grew at an annualized rate of -0.6 percent from January 2021 to June 2024 (as indicated by the red dashed line).

A closer look, however, suggests otherwise. The problem isn’t so much with the fact checkers. Rather, it is with the data, which should be adjusted for composition effects. After adjusting real average hourly earnings for the changing composition of employment, it no longer matters whether one chooses a start date of January 2020 or January 2021: real average hourly earnings are higher today. But they aren’t much higher. Real average hourly earnings have grown slower in the post-pandemic period—and, under the Biden administration — than they did in the immediate pre-pandemic period.

Composition Effects

The Bureau of Labor Statistics reports the average hourly earnings of all private employees in the United States. In calculating this average, they do not include the hourly earnings of unemployed persons or those outside the labor force. Since the composition of employed persons might change over time, the average hourly earnings series should be adjusted for composition effects.

To see the potential problem, consider the average weight of people on an elevator. Suppose initially the elevator holds a woman (115 lbs), her baby (25 lbs), and two adult men (165 lbs and 205 lbs). The average weight of people on the elevator is (115+25+165+205)/4 = 127.5 lbs. Next, suppose the woman and her baby exit the elevator on the second floor. Now, the average weight of people on the elevator is (165+205)/2 = 185 lbs. Of course, no one’s weight has increased between the first and second floor. Rather, the composition of the elevator has changed. The woman and her baby were initially included in the average, but were then omitted after they exited on the second floor.

Something similar happened with the real average hourly earnings series. As shown in Figure 1, real average hourly earnings increased from $34.02 in January 2020 to $35.97 in May 2020. Did the average American get a raise in early 2020? No. Rather, many Americans lost their jobs in this period, as the economy came to a screeching halt. And, since those exiting employment were more likely to earn less than $34.02 per hour than more than that, the average hourly earnings among those remaining employed increased.

One simple way to adjust the real average weekly earnings series for composition effects is to include one’s weekly earnings in the calculation of the average regardless of whether he or she is employed, with the assumption that anyone who is not employed has hourly earnings equal to $0. The real average hourly earnings of the US population — everyone, not just those employed — is equal to the average hourly earnings of those employed, multiplied by the number of employed persons, and then divided by the population. 

Using employment and population data from the Federal Reserve Economic Data website, the adjusted series is constructed and presented in Figure 2.

Analyzing Adjusted Real Average Hourly Earnings

How have the real average hourly earnings of all persons in the US changed since January 2020? The adjusted series shows a substantial decline in real average hourly earnings in early 2020, from $16.27 in January to $14.57 in April. This should not come as a surprise, since many people were out of work — and, hence, not earning anything — at the time. Real average hourly earnings have improved in the time since, rising to $16.57 in June 2024.

Notably, the real average hourly earnings of all persons in the US are higher today ($16.57) than they were on either January 2020 ($16.27), just prior to the pandemic, or in January 2021 ($15.93), when President Biden took office. But they are not much higher. Real average hourly earnings of all persons in the US grew at an annualized rate of just 0.4 percent from January 2020 to June 2024. For comparison, they grew at an annualized rate of 1.9 percent from June 2014 to January 2020.

Competing Narratives

Democrats want to take credit for the higher real wages. Republicans want to deny that real wages are higher. Both are obscuring the facts.

Real wages are a bit higher today. But they are not as high as pre-pandemic real wage growth would have predicted. It would be difficult to conclude, therefore, that the Biden administration has been a boon to American workers. But it would also be wrong to conclude that workers are worse off than they were just before President Biden took office.

Since Democrats are unlikely to tout tepid real wage growth and Republicans are unlikely to acknowledge any progress on real wages whatsoever, the two competing narratives will likely persist. Reasonable people should reject both narratives, in favor of the facts. Politics is not a suitable substitute for reality.