More About Chad Stone
Chad Stone is Chief Economist at the Center on Budget and Policy Priorities, where he specializes in the economic analysis of budget and policy issues. You can follow him on Twitter @ChadCBPP.
Full bio and recent public appearances | Research archive at CBPP.org
Today’s solid jobs report shows the labor market continues to improve in important ways but that wage growth continues to languish. That suggests the Federal Reserve should wait until the labor market improves enough to boost wages before beginning to raise interest rates.
Click here for my statement with further analysis.
My latest post for U.S. News’ Economic Intelligence blog shows that American workers have been shortchanged in the recovery from the Great Recession and explains why the projected quickening of wage growth over the next few years won’t trigger an upward spiral of wages and prices. It says in part:
How can wage increases go from 2 percent per year to 3.5 percent [as the Congressional Budget Office projects will occur over the next three years] without igniting unacceptable inflation? The answer lies in the arithmetic of prices, productivity and labor costs.
In round numbers, since the start of the recession in late 2007, hourly labor compensation (wages plus fringe benefits) has grown at about 2 percent a year on average. Productivity growth (increases in output per hour worked) offset about 1.5 percentage points of that increase. The difference, a mere 0.5 percent a year, is the growth rate of labor costs per unit of output produced.
Prices were rising three times as fast as that over this period — 1.5 percent per year — so businesses had three times the revenue per unit of output they needed to cover the increase in unit labor costs. It’s not surprising that profits grew substantially while workers got the short end of the stick. Businesses could have raised hourly compensation by 3 percent a year over this period (half paid for by higher prices, half by greater productivity) without threatening their bottom line.
CBO projects that inflation will rise gradually toward the Fed’s stated longer-term goal of 2 percent per year. That means hourly compensation can rise at 3.5 percent a year without putting any additional upward pressure on prices: Price increases would cover 2 percentage points of that increase, and greater productivity would cover the rest.
“The reality of tax reform . . . is that any politically feasible plan to scale back tax benefits doesn’t generate enough money to significantly cut tax rates without increasing the deficit,” my latest post for U.S. News’ Economic Intelligence notes. “Rather than grapple with this reality, . . . House Budget Committee Chairman Paul Ryan invoked the last refuge of supply-side tax cutters in recent comments about how to proceed with tax reform.” Specifically:
Ryan wants to change long-established methods for estimating the revenue effects of proposed tax changes that the Congressional Budget Office and Joint Committee on Taxation use to “score” the budgetary effects of such legislation. Ryan . . . badly mischaracterizes existing revenue estimation methods while ignoring the fatal flaws in requiring budget crunchers to use so-called dynamic scoring.
Contrary to Ryan’s claim, current revenue estimates reflect many kinds of changes in households’ and business’ behavior resulting from proposed policy changes. But they don’t reflect possible changes in the overall level of economic activity that might result from proposed legislation — and with good reason:
First, estimates of the macroeconomic effects of tax changes are highly uncertain. Second, the most credible estimates usually show changes that are quite small. Finally, and quite importantly, dynamic scoring would impair the credibility of the budget process because the resulting budget estimates will inevitably be controversial and subject to political manipulation.
Adopting dynamic scoring for tax reform, my post concludes, is a gimmick that would only invite more mischief.
Today’s generally solid report shows that job creation is back on an over-200,000-a-month track after slowing sharply in August. Nevertheless, there appears to be substantial room for further expansion, allowing the Federal Reserve to keep interest rates low in pursuit of high employment without igniting unacceptable inflation. Moreover, policymakers should not be concerned about inflation even if wages begin to grow faster than they have so far in the recovery.
Click here for my full statement with further analysis.