[ The Biden administration is getting bad data and bad advice —
but there’s a way out.]
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THE MISSING INFLATION DATA  
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Matt Stoller
September 20, 2023
The Lever
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_ The Biden administration is getting bad data and bad advice — but
there’s a way out. _

Joe Biden, Gage Skidmore

 

I’ve been out in Los Angeles for the last few days, and the big
economic problem here is the strikes against the movie studios, which
have shut down production. More broadly, as I read the news, the
biggest economic stories are the high cost of living, and then the
United Auto Workers going on strike against the Big Three car
companies. 

_The Washington Post _had a good article
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asking workers why they are striking. Most cited inflation and
fairness. “We’re not making enough money,” said Petrun Williams,
a 58 year-old Ford repairman. “People should be able to buy their
own houses, but right now it’s not possible.”

It’s a hard problem to tackle, because GM, Ford, and Stellantis are
giant, wildly inefficient bureaucracies with high costs optimized to
make $75,000 trucks, and electric vehicles are a completely different
product. But “Bidenomics” isn’t necessarily helping
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In fact, Biden’s White House staff just doesn’t seem to have the
capacity to hear what’s going on, or address it. Earlier this month,
Biden gave a speech
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in Philadelphia celebrating Labor Day, and ahead of it, he said,
“I’m not worried about a strike,” and “I don’t think it’s
going to happen” — comments that are clearly a result of his
senior staff giving him bad information. 

These delusional comments prompted a Detroit Congresswoman to call up
senior White House advisor Steve Ricchetti and scream, “Are you out
of your f—ing minds?”

And this gets to a common question I hear in D.C., which goes as
follows: Why is the public so unhappy? The economy looks, by most
conventional measurements, as if it’s doing well. 

_The American Prospect_’s Dave Dayen summarized
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the statistics as follows: Unemployment is low, inflation is down,
consumer spending is rolling along, and certain manufacturing areas
are booming. “Several measures,” he wrote, “like economic growth
and prime-age employment, have actually rebounded to their trends
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from before the 2008 financial crisis, an almost unthinkable scenario
just a few years ago.”

According to consistent polling, the public thinks inflation is high
and getting worse, and that Biden has done very little to address any
of their problems. What explains how the White House is floundering?
One problem is plenty of people in the political class believe that
the public is simply wrong to be angry. 

Paul Krugman, for instance, wrote a _New York Times column
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saying that normal people _believe_ the economy is bad, even if it
isn’t. I see White House officials interviewed on CNBC periodically,
and while they don’t say that outright, it’s clear they think the
economy is doing well and inflation is down, and their job is to sell
their accomplishments.

There are two reasons why the White House simply cannot seem to govern
effectively. The first is that the tools the political class uses to
understand inflation are misleading them. The second is that Biden
doesn’t have one unified policy agenda, but has a bunch of policy
agendas that work against each other. 

The result of these two factors is that Biden’s story — “look at
all this prosperity I have delivered” — doesn’t work in the face
of strikes and anger.

STICKER PRICE VERSUS REALITY

Let’s start with why the White House doesn’t see a problem. It’s
true that key members of Biden’s senior staff are mismanaging the
situation, but that doesn’t explain why Krugman, as well as many
economists in the administration, don’t see one either. Sure, you
can look at individual strikes, but those are noisy events, not
economy-wide developments.

How does the government perceive the experience of ordinary people in
the economy? There’s a mess of information out there — what
information matters, and what doesn’t? The President can’t ask 100
million Americans how they are doing before making a decision. Over
the last century, bureaucrats have answered these questions by
inventing a host of measurements to serve as a proxy for what normal
people experience.

The government has been measuring prices using some variant
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Index (CPI) since 1913. When there’s a change to inflation, what
that usually means is that the CPI is going up or down. And a change
to inflation isn’t a change in absolute price levels. If inflation
is, say, down, it doesn’t mean prices are down, only that the rate
prices are increasing is less rapid than it was before.

Since 2021, prices have spiked fairly dramatically, with a CPI
reaching up to 9 percent at certain points in 2022 before settling
back to 3.7 percent last month
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doesn’t mean prices are down, just that the rate of increase is
down. The crazy expensive fourteen-dollar sandwich is still a crazy
expensive fourteen dollars, it’s just not going up to seventeen
dollars. One of the bigger contributors to the CPI last month was
housing, jumping by 7.3 percent over the past year.

But does the CPI really show how people experience price increases?
After all, one of the most significant changes in what we pay is
higher interest rates, which the Federal Reserve has hiked
dramatically over the past few years. The Fed’s actions have
increased credit card rates, mortgage rates, auto financing, and
corporate and government borrowing costs. Surprisingly, none of this
is directly included in our inflation metrics. 

“The CPI’s scope,” writes the Bureau of Labor Statistics,
“excludes changes in interest rates or interest costs.” The price
of money, which is an input into everything, isn’t included in how
we see inflation today.

That’s crazy.

When I was in the archives learning about Congressman Wright Patman,
the Chair of the House Banking Committee in the 1960s and 1970s, I
found that back then, people included the cost of interest rates in
how they understood inflation. The 1960 Democratic Party platform
discussed inflation
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in precisely this manner, saying that high interest rates enacted a
“costly toll from every American who has financed a home, an
automobile, a refrigerator, or a television set,” and was “itself
a factor in inflation.”

This logic made sense. When you borrow to buy a car or a house, the
cost of that car or house is your monthly payment, not the sticker
price. But in the 1980s, the government changed its method of
measuring inflation, so today, the CPI works under different
assumptions. 

So what does this change mean? Well, the two biggest purchases for an
American family are a car and a house, and in both of these
categories, the CPI excludes the key factor for normal people, which
is how interest rates affect the monthly payment. The sticker price
for a car is an important number, but it’s the monthly payment that
matters.

With that in mind, let’s take a look at the price of cars over the
last ten years.

New car prices spiked from the beginning of 2021 to the end of 2022,
but price levels are starting to come down, ever so gently. But is the
monthly payment coming down?

No. According to Edmunds
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in Q2 of 2022, the average monthly payment for a car was $678, in Q2
of 2023, it was $733. So there’s a slight price decline for the CPI
as new vehicle pricing has come down, but there’s still an 8 percent
inflation rate for what people actually pay. 

Why are monthly payments going up if sticker prices are going down?
It’s simple — the price of money has gone up. The average interest
rate for a new car
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jumped to 6.63 percent in the second quarter of this year. It was 4.60
percent in Q2 of 2022, and 4.17 percent in Q2 of 2021.

And housing? Redfin, a real estate data website, reports the typical
mortgage payment is up 20 percent
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from a year ago. And while most homeowners have mortgages they got
prior to 2021, and so aren’t paying the higher prices, the
exceptionally high current monthly payment means people can no longer
move, and they have to watch their children struggle to find a place
to live. 

Housing prices are social, since the concept of home is so central to
the American order. So even if you are financially unaffected, seeing
a lot of people be unable to move, buy a home, or rent affordably
gives everyone a sense of economic insecurity. That’s why striking
auto workers mentioned the price of housing.

The calculation for housing in the Consumer Price Index is a bit more
complicated
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than that for new cars, but the key piece to understand is that in
1983, the Reagan administration chose to exclude interest costs,
instead asking homeowners what they think they would be paying in rent
if they didn’t own the home they lived in. 

The government simply
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“underestimates changes in housing costs,” according to an
economist at Redfin, especially when interest rates are spiking.
“And that’s because housing costs for the person who is actually
active in the market experiences much greater fluctuation.”

The reason to change this measurement was so that inflation would look
lower than it actually was. Over time, subsequent administrations
sustained this shift. Lying about the symbols used to govern has a
short-term political benefit in that it perhaps gets you some good
media coverage — but over time, it means that the CPI for housing
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necessarily reliable.

So basically, the price of money is a big deal in terms of our
experience paying for things, and it’s being excluded from the
inflation metric that policymakers use to look at the economy. So
that’s why policymakers are confused. Some of their key tools
aren’t reflecting reality, and the people who originally broke the
tools for political purposes aren’t there anymore. 

Today’s political class doesn’t even know what they don’t know.

WHAT IS BIDENOMICS?

Of course, housing and cars aren’t the only things people buy. Food
is much more expensive than it was just a few years ago, as are
everything from hotels to airfares to consumer packaged goods to
seeds. I mean, Visa and Mastercard, which are barely affected by
inflation, are jacking
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up their swipe fees to merchants. 

None of that is a secret. The CPI for food shows that inflation might
be coming down, but prices are still high. So what are Joe Biden and
the Democrats in Congress doing about that? Well, White House
officials call their plan Bidenomics.

The best way to explain Bidenomics is to listen to a judge Biden
recently appointed to the D.C. district court, Ana Reyes, who was
hostile
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to the Antitrust Division when they brought a case against two smart
lock manufacturers. 

Last month, Reyes sat on an American Bar Association panel where she
attacked
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the idea of stronger antitrust enforcement, focusing specifically on
her skepticism around labor-related claims. She bragged to the
audience of defense attorneys that during the antitrust case she
heard, she “pranked” government lawyers by spending three minutes
pretending to dismiss their key witness, before saying “April
Fools.” 

“I have never in my life heard stunned silence,” she later said
gleefully.

Having a corporate lawyer bully-turned-judge appointed by Biden
killing an antitrust suit brought by Biden officials is a great
example of Bidenomics, because it shows the lack of coherence of this
administration’s policy. I’m a big fan of Federal Trade Commission
Chair Lina Khan, but another Biden judge — Jacqueline Corley —
allowed the largest big tech merger of all time, when Microsoft bought
Activision, after Khan challenged the deal.

These judges matter in terms of inflation. Had Biden picked actual
populists for the judiciary instead of Corley and Reyes, the White
House’s ability to govern would look very different, and corporate
America would be changing their pricing behavior due to fear of
crackdowns. In early 2022, there was a flurry of interest in using
antitrust to attack how corporations were informally colluding to
raise prices. But an aggressive legal theory needs judges willing to
take market power seriously, and Biden instead chose people who thwart
his own administration. 

It’s not just judges. Factions
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in the administration — in this case, the White House Council of
Economic Advisors — explicitly opposed the corporate
profit-inflation link.

I think a lot about antitrust, but the incoherence is systemic across
most policy areas (and among Democrats in Congress). The pro-labor
administration indicated support
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for the strikes in Hollywood against powerful studios, then a few
months later the former White House Domestic Policy Council head —
Susan Rice — rejoined
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the board of Netflix. For every attempt to make electric vehicles in
America, there’s Treasury Secretary Janet Yellen pushing
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hard to ensure these cars are made abroad.

Normally, policy disagreements would be decided by the President and
his staff. But Joe Biden is a procrastinator, and doesn’t like
making choices. He’s also very old. As for his staff, well, while
Biden’s former chief of staff Ron Klain was aggressive in terms of
policy goals, his new chief of staff, Jeff Zients, is a relentlessly
cheerful former management consultant wholly focused on process. Other
important figures, such as Tim Wu and Brian Deese, have also left. 

With Klain gone, there’s an insular clubbiness at the top, and an
inability to provide a vision or pay attention to policy
implementation. Even if you were to make the point that housing prices
need attention, there’s just no one there who could or would do
anything about it.

And that brings us back to the strikes. The Biden administration could
have headed off the United Auto Workers labor action with discrete
steps to help the workers, but the White House just doesn’t have any
coherence. And so while Biden is saying pro-labor things
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and agreeing the CEOs are paid too much, there’s this.

There is also a sense among some Democrats and labor officials that
Biden’s team miscalculated the standoff and hasn’t understood the
severity of labor’s frustration or concerns. Even recent news that
the Biden administration was considering providing aid to auto
suppliers rankled some in the union world, who thought it could
undermine the strike and saw it as evidence that there are always
funds available for companies, but not workers.

This isn’t to say there aren’t significant achievements. Biden’s
industrial policy push is real, with increases in investment in
semiconductor production, electric vehicles, and batteries, as well
new factories in general. His competition policy approach is also
real, with new merger guidelines, as well as crackdowns on
pharmaceutical profiteering and mergers, the prohibition of
non-compete clauses, and the Google monopoly lawsuit.

There are routinely good decisions coming out from some of the
regulators. The other day, for instance, the Department of Labor
proposed
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a rule opening up 4 million more workers to overtime pay. Meanwhile,
the Securities and Exchange Commission has begun a crackdown
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Unlike the Obama administration, which was ideologically oriented to
push wealth and power upward, the Biden administration has a few
populists trying to do the opposite. But in an inflationary
environment where the stats are juiced to mislead policymakers,
that’s not good enough.

WHAT HAPPENED TO BIDEN’S STATE OF THE UNION?

In February, Biden gave a State of the Union speech
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focused on making things in the U.S., going after junk fees, and
taking on corporate power. His polling temporarily spiked. Since then,
there has been no messaging follow-up from the White House on anything
he said in that speech, almost as if Zients and the rest of the White
House were embarrassed that Biden put forward a populist set of
arguments.

Instead, various officials are out there on TV saying “look at these
charts!” They want credit for inflation being down, economic growth
being up, and unemployment being low. But without recognizing that the
actual costs of housing and transportation are increasingly
unaffordable and going up, that just looks weird. 

Moreover, there’s no actual policy regime, just a disjointed set of
factions trying to get as much done as possible according to their
preferred view. It’s mostly unclear how Biden is actually affecting
people’s lives, and it’s only the genuinely organized groups of
workers who are showing that things aren’t okay.

The economy isn’t great, and there’s no point in trying to pretend
it is. 

That said, Biden can save his administration. He has accomplishments,
and his State of the Union messaging resonated. He can argue that his
first term was about having America recover from COVID-19 by
re-shoring factories, restoring full employment, and fixing supply
chain problems. He can brag about all the big companies suing him,
like various pharmaceutical firms mad that the White House is imposing
price caps. Then he can pledge that he’ll focus on bringing down
housing costs in his second term. 

Will such a story work? I don’t know. Maybe the current pitch will
work; in the 2022 midterms, Biden out-performed expectations. But the
alternative would at least be more relatable than “Eat some
charts!”

If you want to read more articles like this, subscribe
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newsletter on the politics of monopoly power.

* inflation
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* Joe Biden
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