Whaddya wanna know about inflation?

Make Me Smart February 29, 2024 Transcript

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Kimberly Adams 

Okey dokey. Let’s go. Hey, everybody. I’m Kimberly Adams. Welcome back to Make Me Smart, where we make today make sense.

Kai Ryssdal 

I’m Kai Ryssdal. Thursday 29 February. Leap Day, which hadn’t really occurred to me until like a week ago. Anyway.

Kimberly Adams

Really?

Kai Ryssdal

Yeah, truly. Truly.

Kimberly Adams 

Do you know any of the people born on Leap Day at all?

Kai Ryssdal 

I do not.

Kimberly Adams 

I don’t think I know anybody either. Well, anyway, happy birthday to I guess they’re called Leaplings out there. But, yeah, who knew. There’s a word for everything. Today, we are going to do something unusual because it’s an unusual day. Leap Day. But we are going to answer listener questions. I guess it’s not that unusual. Anyhow. If you have a question that you’d like us to answer in a future episode, whether it be about a topic in the news or just something you’re wondering about, you can leave us a voicemail 508-U-B-SMART or email us at makemesmart@marketplace.org. So, to get to our very first question, which comes from David in Maryland who writes, “With all the discussions of the markets anxiety over when the Fed will finally lower interest rates, I’ve yet to hear a reasonable explanation of why they should do so. It’s not like the economy needs stimulus, the traditional rationale for cuts, so why should they go back down?” Kai?

Kai Ryssdal 

So, Milton Friedman, he of the University of Chicago and many other things. Very famous, and depending on who you talk to obstreperous economist, said very famously, that monetary policy works with a “long and variable lag,” right? Monetary policy, of course, the raising and lowering of interest rates long and variable lag. Exactly what it sounds like. The catch is that we don’t know really, academic economists don’t know how long and how variable that lag is. And why am I bringing up Milton Friedman, when he’s been dead for a number of years. And Ben Bernanke is the I mean, Ben Bernanke, and Jay Powell is the guy in charge. Well, so here’s why. And Powell talks about this long and variable lag all the time. The economy does not need stimulus right now. It’s growing. We learned the other day at 3.2% in the fourth quarter of last year on an annualized basis, right? So that’s really, really good. Unemployment is really, really low. That is also good. Productivity is high. That is also good. This economy is at the headline level sailing along. The problem is that when things move in an economy as complicated as this one is and as big as this one is, when things move, they tend to move very, very slowly until they move quickly. And the worry now about the Federal Reserve maintaining interest rates at the high that they are five and a quarter-ish percent, after raising them from zero to five and a quarter-ish percent in something less than two years. The catch is the thing that Jay Powell and lots of other fed governors are worried about is what happens to the labor market? Will companies begin to worry quickly about how expensive money is? Will consumer demand fall off? Because loans are so expensive? And will that happen very quickly? And will people start to lose their jobs? Again, remember, we’re less than three years from the pandemic reset. Well, that’s not true. Three and a half years from the pandemic recession, right? So, what the Fed wants to do now is very, very gently take its foot off the brake, right? You can think of the Federal Reserve raising interest rates as putting his foot on the brake to slow the economy. The economy is doing fine. Now, we don’t need interest rates where they are that high anymore because inflation has largely been taken care of. Let’s start backing off a little bit and see what happens when the Fed starts to cut. They’re going to do it really, really gradually. And they’re only going to do it when they’re satisfied that inflation is under control. And it will do no more harm to the economy to keep interest rates where they are or to lower them.

Kimberly Adams 

I’ve got this visual now of you know, those intersections where there’s only a stop sign in one direction, but the other direction can come zooming through. And someone’s just like very slowly easing up like they’ve got a blind spot, and they’re trying to see if it’s safe to cross the intersection.

Kai Ryssdal 

Blind spots are a great analogy. That’s a great analogy. Yeah, that’s seriously right. Because I know I’ve talked about this before. Janet Yellen, when I asked her why inflation was low back in 2018, she shrugged. She literally said, “I don’t know.” And these are the most. Look, Powell’s not an economist, but he’s an experienced guy, but there are 400 economics PhDs who work at the Fed, and they don’t know what’s coming around the corner. And so, the Feds going to go slowly.

Kimberly Adams 

Yeah, I remember doing a story during the midst of the pandemic, and one of the economists I spoke to, and I was like, you know, everybody’s predicting this. Everybody’s predicting that and she said, you know, we need some humility here. Absolutely. Because we have never been in an economy like this before. Ever. And I think that’s a good reminder.

Kai Ryssdal 

Yep. Totally. Totally, totally. All right, next one. Second question today from Steve in the northwest suburbs of Chicago wants to know if increases to the minimum wage could be part of the recent rise in inflation. Kimberly Adams, this one’s for you.

Kimberly Adams 

Yes. So, as a refresher inflation is the rate of increase in the prices of things. It’s not just sort of things getting more expensive at the speed at which things get more expensive. And, you know, we’ve talked to lots of experts across the Marketplace about inflation on this, including Betsey Stevenson, who’s been on the show before. And they all seem to say, at least the ones we’ve talked to, that increasing the minimum wage has likely had very little effect on the speed at which things are getting more expensive, therefore inflation, right? And that’s mainly because there are just too few workers in the United States who are actually working at minimum wage jobs, right? So according to the Bureau of Labor Statistics, workers with wages at or below the federal minimum wage made up 1.5% of all hourly paid workers in 2021. Now, I should say the federal minimum wage is only $7.25. It hasn’t gone up since 2009, which is wild to me. Now, then, if you look at the state and city level, they have minimum wages that are much higher, which can make some items more expensive, or even make things in general more expensive in a particular place. So, let’s say you look at DC, for example, we have a pretty high minimum wage relative to the rest of the country. We’re increasing the tipped minimum wage here, so it’s become a lot more expensive to say, eat out at restaurants. So in DC, if you’re looking at restaurants and going out, you’re going to see and feel that inflation in a way that maybe you won’t feel in a place that doesn’t have a similar minimum wage dynamic. All of that to say, though, it wouldn’t necessarily be inflationary across the board because at the same time, prices for other things are going down. And you have to look at what wages and prices are doing throughout the entire economy. And remember, when we’re looking at inflation numbers, we’re looking at the country. We’re looking at the national rates, not what’s happening in an individual spot. And so, it tends to balance out. Even if you look at wages overall, not just minimum wage. A paper from the San Francisco Fed says that wage increases, so that’s wealthier people and people making higher wages getting even better ones, that hasn’t really boosted inflation all that much either. And Marketplace’s Lily Jamali did a story on this. I’m just going to quote from it. “Rising wages are only responsible for about a tenth of a percentage point of the increase in the Feds preferred personal consumption expenditures price index.” So, not all that much. A little bit, but not all that much. That’s the answer.

Kai Ryssdal 

There you go. There you go. Good answer

Kimberly Adams 

Yeah. All right. Next question. This one is short and sweet. And it comes from Nat who writes, if we look at inflation since 2008, it averages 2%. So, why the year-on-year focus?

Kai Ryssdal 

Oh, interesting. Okay. Two basic responses, one of which comes from Julie Smith, who’s a professor of economics at Lafayette and one comes from me. The one from the actual economist in this conversation goes like this. The feds mandate is twofold, as we know, right? Maximum employment and stable prices. And the Federal Reserve has decided that stable prices means inflation, give or take 2% on an annual basis. So, the Fed really is interested in what is happening now. And in the prior 12 months so that we can figure out what’s going to happen now and in the next 12 months, right? The feds more worried about what prices are doing now than what they were doing in 2008. Because 2008, while you know, for a lot of reasons, maybe a great year for economic reasons and the great financial crisis, not a great year. What happened in 2008 doesn’t really matter. So, that’s the professional economist’s view on this. One of her thoughts. My thought is this. Hey so, the S&P 500 has gained 10% a year on average over the last 100 years. That actually happens to be true. Okay? Doesn’t do you much good to know that if in a particular year you’re interested in which is say this year, the S&P is up, I don’t even know what it is the last 12 months. 30 something percent. Or going back to 2008, the S&P 500 actually hit, cratered and hit a low of I don’t even remember what it was but it was down a lot of percent. If you go back to 2020, it was down a lot of percent. What you’re interested in is what is happening proximately in time, not what happened over time if that makes any sense. Okay? Don’t check your 401 every day. Don’t count on interest returns and stock market returns over 100 years. Think about what it is over what is relevant to you in this moment. And what’s relevant to the Fed in keeping with their mandate is what’s happening annually. That’s the answer.

Kimberly Adams 

You know the first time I ever bought any kind of stocks or financial investments was in late 2007.

Kai Ryssdal 

Oh no, for reals? We’ve talked about this. I remember now.

Kimberly Adams 

Yeah. I was so like, feeling good about myself. I researched all these companies. I researched all these stocks. And I was like, this was before I was a business economics journalist. I was covering just straight politics at the time. And I was like, alright, I’m going to, you know, do this, and I’m going to plan for my future. And I was in my, like, 20s feeling like I was getting in early. I lost everything. And because I had no experience in the markets, I, you know, sold at the bottom of everything, but I mean, most of the companies I’d invested in ended up like going completely under anyhow, so it didn’t really matter. But yeah, that was a hard introduction to the stock market for me.

Kai Ryssdal 

Yeah. Oh, my God. Alright, last question of the day. Chase in Ecuador asks whether employees who earn a yearly salary are working for free on Leap Day, which is of course today. Kimberly Adams, go.

Kimberly Adams 

It’s funny. Marketplace’s. Stephanie Hughes did a story related to this that aired on Marketplace Morning Report. So, the short answer is not really. You’re not going to be working for free, but longer answer, when a Leap Day lands on a traditional workday like today, it does change the way that employees are paid in a couple of ways. So, it’s much more simple for hourly workers. They just get paid the hours they work on a leap day because that is the law. You have to be paid. For salaried employees, a leap year can sometimes create an extra pay period in which an employer decides, could decide to distribute an employee’s annual salary over more pay periods, which means you’re earning slightly less per paycheck, but it balances out in the end. Or they could just keep the paychecks the same despite the extra pay period. In which case, you know, if you have a generous employee, you just earn a little bit more. An extra day’s work, but for work that you did, so that’s not really generous. Anyhow, it just balances out differently. Also, salaried work often comes with the perk of a little bit more of a flexible schedule, or at least it’s supposed to, but doesn’t always. So maybe you work 40 hours, one week, over 40 hours in one week, but fewer than 40 hours another week with the understanding that it’s all going to balance out in the end, based on your workload. So, while workers with fixed pay are unlikely to get a special Leap Day bonus, it doesn’t mean you’re working for free today. Otherwise, I might have just stayed home.

Kai Ryssdal 

Might have just taken the day off.

Kimberly Adams 

I know. Right, right. All right. Well, that is it for today. In the meantime, you can get ready for Economics on Tap tomorrow by subscribing to our newsletter. And in this week’s newsletter, you will get a copy of our new “Unofficial State Cocktails” zine. Longtime listeners will remember that some time ago, we you know, had a little contest of what were the best state cocktails. We got lots of submissions, and we’ve picked some of the best, and so you will find some of our favorite recipes in our little cocktail zine. I’m going to be trying one out myself. And we do have a winner of the cocktail contest, as well as some non-alcoholic options as well, in case you decide to go alcohol free tomorrow. And you can sign up for that newsletter at marketplace.org/smarter.

Kai Ryssdal 

Wait, who decided the winner of the of the cocktail contest? Did you?

Kimberly Adams 

I don’t know. No, it wasn’t me. I didn’t do it.

Kai Ryssdal 

Hmm, I think the producers of this podcast have some questions to answer. But let me do this before I get us out of here. Two postcards were waiting for me in the studio today when I got here. Marissa put them on my desk here in the studio. It’s a postcard from New York City, which is actually really cool. We’ll take a picture of it and put it on the show page. It says, “Kai and Kimberly, a resounding half full on physical media.” I guess we were talking about this at one point. “Digital media purchases are a license which can be rescinded. Cheers, Beth in New York City. Entertainment worker. 35 years old.” So, that’s one. Here’s another one. “Dear Kai and Kimberly.” This is dated 19 February 2024. “Since Kai mentioned the mailing address on the 16th February episode of Make Me Smart, I knew it was my duty as a loyal listener to sit down with my trusty fountain pen and dash off a quick note. Thanks for all that you do on Make Me Smart and the rest of the Marketplace portfolio. I appreciate how you’ve remained committed to facts even when the world around us has become fact optional. I’m proud to be a Marketplace investor and a supporter of my local public radio station WBAA in West Lafayette, Indiana. Yours, Ben Cotton.” Well, Beth and Mr. Cotton, thank you so much.

Kimberly Adams

Shout out to the fountain pen.

Kai Ryssdal

That’s what got to you. The fountain pen. I heard the gasp.

Kimberly Adams 

I love fountain pens. I have my own little collection of fountain pens, and they make me really happy. Yes.

Kai Ryssdal 

You’re going to have to bring some tomorrow afternoon. Show them on camera. People are going to want to see.

Kimberly Adams 

Oh, okay. Well yeah, I will bring several. And I can’t believe I forgot this. Courtney and Marissa pointed out in the chat that we had a poll. That’s how we pick the winners. Remember? A poll that we announced.

Kai Ryssdal 

So, I guess the hosts have some explaining to do. Won’t be the first time.

Kimberly Adams 

And listeners voted in the newsletter. That’s how there was a poll and the listeners voted. And if we were more on top of our own newsletter, we would have remembered that.

Kai Ryssdal 

So, get the zine. Make a cocktail. Grab a beer. Join us. We’re going to have to probably have a couple after this one. On the YouTube livestream tomorrow starting at 3:30 Pacific, 6:30. Eastern. We’ll meet you there. That’s really embarrassing.

Kimberly Adams 

It is. Make Me Smart is produced by, clearly people who know more than us, Courtney Bergsieker. Audio engineering by Drew Jostad. Ellen Rolfes writes the newsletter that I swear I read. Thalia Menchaca is our intern.

Kai Ryssdal 

Marissa Cabrera is our senior producer. Bridget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital around here. That was pretty fun. That was pretty funny.