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On the inflation front, we are not at the 2 percent target, but inflation has come down to 3.7 percent. Biden can boast: Core inflation is at its lowest level in two years, and we have one of the lowest inflation rates of any major economy in the world.
The results are impressive.
The Wall Street Journal seemed almost apologetic about its gloom-and-doom forecasts. “It is easy to make fun of other people’s past forecasts, but considering the hurdles the economy has had to clear, it really is striking that it has done so well,” the Journal intoned. “Add that inflation has cooled despite the addition of 2.4 million jobs so far this year, and gross domestic product is expanding much faster than economists expected,” the report added. The economy even overcame “a regional bank crisis, a sharp increase in both short- and long-term borrowing costs, and the resumption of student-debt payments.”
Less discussed is why this is happening.
One data point emerged last week that might explain how we are simultaneously getting strong growth and reduced unemployment and inflation. The Labor Department reported, “Nonfarm business sector labor productivity increased 4.7 percent in the third quarter of 2023, the U.S. Bureau of Labor Statistics reported today … as output increased 5.9 percent and hours worked increased 1.1 percent.” Moreover, the report found, “The increase in labor productivity is the highest rate since the third quarter of 2020, in which productivity increased 5.7 percent. From the same quarter a year ago, nonfarm business sector labor productivity increased 2.2 percent in the third quarter of 2023.”
Bottom line: We are not seeing wage inflation, which many experts predicted. Instead, the report found: “Unit labor costs in the nonfarm business sector decreased 0.8 percent in the third quarter of 2023, reflecting a 3.9-percent increase in hourly compensation and a 4.7-percent increase in productivity.” This continues a pattern some picked up on over the summer.
As Karl W. Smith observed at Bloomberg: “Rising labor productivity means the economy can create more stuff with the same number of workers, working the same number of hours. That’s crucial because getting inflation back under control requires either businesses to increase the supply of goods and services or consumers to decrease their demand.” In this case, business has increased supply, allowing consumers to buy more. That boosted the consumer spending number, critical to the U.S. economy’s performance.
It’s too early to see if the trend will last or if it is directly related to Biden’s economic agenda. Productivity waxes and wanes, tied to surges and lulls in growth. However, if productivity gains and growth (which soared in the third quarter) continue over an extended period without a surge in inflation, Biden should claim some credit.
After all, Biden’s plan was to increase growth and the share of wealth going to the middle and working classes. By investing in infrastructure, green energy and other ventures, he hoped to boost productivity and allow wage gains without inflation.
In its first year, the Inflation Reduction Act drove the private sector to invest more than $110 billion in green energy. The federal government has also spurred American businesses in overall investment. A recent Treasury Department report found: “By June, real construction of manufacturing facilities had more than doubled since 2021, mainly reflecting new factories in the technology sector.” It should not be surprising, then, that the economic recovery in the United States has been stronger and quicker than in other countries.
National Economic Council Director Lael Brainard last month touted “the historic trifecta of the bipartisan infrastructure law, the Chips and Science Act and the clean-energy portions of the Inflation Reduction Act [that] are boosting the supply side of our economy by catalyzing private sector investments in infrastructure, clean energy and semiconductor manufacturing.” By combining enhanced worker training with government and private-sector investment, she explained, the administration hopes to maintain the manufacturing boom and growth in other sectors. She added that we have had “particularly large employment gains during this recovery in sectors like professional and business services and transportation and warehousing, and manufacturing and construction have also seen employment gains.”
The Federal Reserve chair has taken notice. Reuters reported, “A recent surge in U.S. productivity has underscored Federal Reserve Chair Jerome Powell’s emerging narrative for how inflation may continue to decline even amid sustained job and economic growth.” The report continued, “The best-of-both-worlds outcome would rely on the U.S. finding a new balance between the demand for and the supply of goods and services less by ‘destroying’ demand — the way Fed interest rate increases typically play out — and more through improvements in the economy’s capacity.”
“Bidenomics” bet on American workers’ ability to increase productivity, given the proper training and aided by strategic investment. And, lo and behold, with a gusher of public and private investment, it seems that the dream scenario — higher output, higher wages and declining inflation — might just be attainable. If so, Bidenomics might finally get its due.
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