Just as generals go to battle with the army they have — rather than the one they might have hoped for — so, too, do policy-makers encounter the economy they happen to be given. Yet policy-makers typically walk onto White House grounds with ideas that they’ve formed over the course many years, if not decades. If the economy happens to be a less-than-ideal environment for shepherding your favorite policy from theory into practice, you then face a dilemma: Either abandon the agenda you’ve spent years hoping to implement, or attempt to do it anyway. The Biden administration has chosen the latter. The predictable effect has been a consumer price inflation that’s begun to erode the value of an hour’s work across the income distribution.
Our economy — marked by endemic supply-chain disruptions and shortages — is hardly the one the Biden administration would have hoped for. Nevertheless, administration officials are charging full steam ahead on the “transformative” policies that they’ve always wished for. These policies — such as the refundable child tax credit, which would be deposited directly into bank accounts — pump money into the demand side of the economy. Whatever merits these policies may have in theory, in an economy constrained in its ability to supply goods and services, the predictable result has been inflation. If more dollars chase relatively fewer things, the price of things tends to rise.
The chart above underscores the paradox this creates for the Biden administration’s “full employment” agenda. Describing this goal, President Biden said that his “sole measure of economic success is how working families are doing. . . . That means we have to focus on wages like we used to.” But if, as now seems to be the case, the “full employment” agenda causes wages to rise but consumer prices to rise even faster, working families are worse off than they were before. Nor, as the chart shows, is it merely high-income workers who are losing to inflation. Within all four quartiles of the distribution of hourly wages (i.e., the raw number of dollars you earn per hour), the median — the exact middle — rate of wage growth is negative, adjusted for inflation. The median rate of wage growth among individuals who constitute the lowest 25 percent of wage earners was -0.9 percent; for the middle 50 percent of wage earners, it was -2.0 percent; and for the top 25 percent, it was -2.4 percent. And if inflation-adjusted wage growth is negative at the median, by definition, it’s negative for a majority of workers in that group.
The wage data in the chart sidestep a concern often raised by those skeptical that wages are really losing ground to inflation. Low-wage workers were much less likely to be able to work from home and therefore were much less likely to appear in the wage data at all twelve months ago. As a result, the Biden White House’s Council of Economic Advisers points out, their return to work now tends to arithmetically drag down the economy-wide average wage reported by the Bureau of Labor Statistics. It’s true. But the wage-growth tracker from the Atlanta Fed sidesteps this issue with statistical elegance. It computes median rates of year-over-year wage growth for a given month by comparing individuals relative to themselves twelve months ago. And unlike wage-growth measures based on simple averages of all wages earned in the economy, there is no reason to expect a measure based on how individuals’ wages change over time to be vulnerable to distortions from changes in who is in the workforce. The chart shows the median rate of wage growth within each of the four wage level quartiles over the twelve months ending in June 2021 — data reported by the Atlanta Fed directly — minus the percent change in the Consumer Price Index maintained by the Bureau of Labor Statistics over the same twelve months.
Already born through its embrace by President Biden, the “full employment” policy agenda now has longevity as its existential question. If Biden-administration policies cause consumer prices to continue to rise faster than wages for most workers, declining real wages may lead to its demise sooner rather than later. Whether these policies would have been inflationary without today’s supply disruptions is beside the point. As Marx points out, “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already.” The Biden administration has now, by any account, chosen to make its own history. How that history unfolds, and what the fate of the American worker within it will be, is now the open question.