Finger Pointing

April 18, 2021

by Steve Stofka

Some restaurant employers complain that they can’t find workers and blame the stimulus payment and the extension of unemployment benefits. Workers complain that businesses are not willing to pay for the additional health risk of close contact with the public. Child-care remains an ongoing obstacle for many. Pick your target – the bums in Washington and their relief programs, cheap business owners, belligerent customers, or unmotivated employees. Oops, almost forgot one other culprit – the Covid virus. Finger pointing does not build solutions. Finger touching does.

In its March survey, the National Federation of Independent Business reported (2021) that 42% of owners reported that they could not fill a job opening, yet only 28% reported offering higher wages. Some expressed their concern that unemployment benefits were too generous, reducing the demand for jobs.

In a recent study, Gabriel Chodorow-Reich and his colleagues at Harvard (2018) found that an extension of unemployment benefits had only a small macroeconomic effect on unemployment, employment, job vacancies, and wages. However, they noted that some studies focusing on particular industries and workers have found greater effects from more generous unemployment benefits.

In macroeconomic models benefits for employed or unemployed workers does affect the unemployment rate. Benefits for the employed raise the input cost of labor and causes an increase in the price of a product. An increase in price leads to a reduction in demand. Employers respond to that demand reduction by laying off employees or not adding to their workforce. Unemployment benefits reduce incentives for workers to find work. States charge employers a fee for additional benefits, further driving up labor costs. However, in the aggregate, a change in benefits has only a small effect on wages and unemployment.

In a crisis, providing relief to specific populations and business sectors is difficult. When the CARES act was passed at the start of the pandemic, the paycheck protection aspect was designed to help small businesses. Big corporations took advantage of loopholes in the law’s language and exhausted that targeted relief for small businesses. Big business got big by being voracious, leaving little for the competition. A government that enacts broad relief measures are criticized for giving relief to those who don’t need it. We would rather blame each other than blame a virus.

Inflation

Inflation expectations have an effect on wages. If workers expect higher prices in the near future, we want higher wages to cover our living costs. We see the price of gas go up from $2 per gallon to $2.80 per gallon in the past six months and reason that a lot of prices will be going up. We listen to the news in our car and hear inflation is up such and such a percent. We check the price of hamburger or some other grocery item. For the sake of simplicity, some economic models assume that consumers are knowledgeable about setting inflation expectations. We don’t have the time to be experts, so we guess at it and correct our expectations as we get new information.

In a recent paper, Ehsan Ebrahimy (2020) and fellow economists at the International Monetary Fund studied the effects that pandemics and wars had on inflation. Pandemics generated uneven swings in prices during the pandemic, but the recovery period brought an offsetting of those price swings. They found no net inflation effects from pandemics like the Spanish flu.

Expectations contribute to inflation. The price of residential toilet paper during the Covid crisis is a small example of this phenomenon. Different production plants make commercial and residential toilet paper because consumers are willing to pay more for a softer product. In the first months of the pandemic, panic buying and hoarding caused a shortage of toilet paper and a rise in price. Manufacturers like Kimberly-Clark built more production of residential toilet paper and store shelves were restocked in recent months. Responding to the increased inventory, people started using the toilet paper they hoarded. Now there is a surplus of toilet paper and prices have dropped below pre-pandemic levels.

Unlike pandemics, war involves the destruction of  physical capital, factories and offices. In the recovery periods following war, the IMF researchers found a persistent inflation in developed economies because some of the productive capacity had been destroyed. When there was less supply to meet demand, prices went up. Even a country not directly damaged in a war, like the U.S. in the past two world wars, suffered lasting inflationary effects in the post-war recovery periods. During WW2, the U.S. used up a lot of raw materials and production to make weapons. Following the war, inflation shot up over 10% in the U.S., five times the current rate. Following that inflation spike, the economy fell into recession, which caused a price plunge, followed by another spike in inflation to over 7%. The inflationary shock waves following the war took seven years to dissipate.

The researchers concluded that there was little evidence to support a belief in a sustained inflationary trend during the recovery from this pandemic. That does not rule out the possibility of uneven short-lived price rises. As shown above, expectations have an effect on prices.

We are more comfortable when we humanize the causes of inflation, pointing the finger at “those people.” We prefer to live in a world of intent, not random chance. Attacks on Asian-Americans have increased as if someone born and raised in America had something to do with the Covid virus. Employers blame Congress or unmotivated job applicants, who blame heartless employers. As Rodney King said, “Can’t we all just get along?” (Sastry & Bates, 2017). We can use our fingers to connect, not blame.

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Photo by Humberto Arellano on Unsplash

Chodorow-Reich, G., Coglianese, J., & Karabarbounis, L. (2018). The macro effects of unemployment benefit extensions: A measurement error approach*. The Quarterly Journal of Economics, 134(1), 227-279. doi:10.1093/qje/qjy018. Retrieved from https://scholar.harvard.edu/files/chodorow-reich/files/ui_macro.pdf

Ebrahimy, E., Igan, D., & Peria1, S. M. (September 10, 2020). The Impact of COVID-19 on Inflation: Potential Drivers and Dynamics. International Monetary Fund Research. Retrieved from https://www.imf.org/~/media/Files/Publications/covid19-special-notes/en-special-series-on-covid-19-the-impact-of-covid-19-on-inflation-potential-drivers-and-dynamics.ashx

NFIB. (2021, April 13). Small business owners struggle to find qualified workers. Retrieved April 17, 2021, from https://www.nfib.com/content/press-release/economy/small-business-owners-struggle-to-find-qualified-workers/

Sastry, A., & Bates, K. (2017, April 26). When L.A. erupted in anger: A look back at the Rodney King riots. Retrieved April 17, 2021, from https://www.npr.org/2017/04/26/524744989/when-la-erupted-in-anger-a-look-back-at-the-rodney-king-riots

Working Worries

April 11, 2021

by Steve Stofka

Early Saturday morning came the news that Amazon workers at the Bessemer, Alabama plant had rejected a union by more than 2-1. The strength of the rejection surprised analysts and advocates. Companies who offer competitive wages and generous benefit packages often win against union adoption elections.

Amazon workers at Bessemer start at $15 an hour; adjusted for relative cost of living, it is $17.30, slightly below the national median warehouse wage of $17.77. In addition, Amazon offers comparatively generous medical benefits. In a 2020 study, Antonios Chantziaras at the Durham University Business School and two professors at Greek business colleges found that auditing fees are higher for U.S. companies that have unions, an indication of the complexity of union work rules (2020). It makes economic sense for companies to pay workers enough to dissuade any organizing efforts.

The Amazon workers who would be receptive to union organizing are those in Los Angeles, where the starting pay is the same $15 hour. According to the BEA, the cost of living in L.A. is 40% higher than in Bessemer. The starting pay of $15 is above California’s minimum wage of $14, but indexed to the nation as a whole, that $15 per hour in L.A. is worth only $11 per hour.

Bernie Sanders and others campaigned in Bessemer to show support for union organizers. Instead of trying to organize where workers would be motivated to join a union, workers in Amazon’s 230 warehouses have been waiting to see the results of the Bessemer election. Why does organized labor and the politicians who support them campaign with the most effort in those geographic areas that are the least likely to succeed?

According to many analysts the economy is on a coiled spring, ready for explosive growth. There are many positive signs but the contradictions are puzzling. For two consecutive weeks, initial jobless claims have risen. However, the Bureau of Labor Statistics reports that the 4-week average of unemployment claims has not risen (FRED Series CC4WSA). The past two weeks may be data noise or a seasonal shift in the workforce, but that is not the sign of an economy poised to leap into action. In March, the 4-week average of claims was almost double the number of claims in March 2020, as the nation went into lockdown.

The Covid pandemic has uncovered startling disparities in our economy. According to the Bureau of Labor Statistics, those who kept their jobs this past year have seen a 4% increase in weekly wages (FRED Series CES0500000011). The other half of that story is ugly. Those service businesses who are open may offer jobs at lower wages. With many businesses still closed, job applicants have what economists call low bargaining power and are willing to take less pay.

The Relief Act and the recent stimulus checks have helped many. Let’s hope that these worrying signs are just noise and that the country is back to full recovery.

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Photo by Christopher Burns on Unsplash

BEA. (2019). Cost of living calculator. Retrieved April 11, 2021, from https://research.stlouisfed.org/publications/cost-of-living/calculator

Chantziaras, A., Dedoulis, E., & Leventis, S. (2020). The impact of labor unionization on monitoring costs. European Management Journal, 38(2), 288-307. doi:10.1016/j.emj.2019.09.004. Retrieved from https://www.sciencedirect.com/science/article/pii/S0263237319301100#!

Inflation Not

April 4, 2021

by Steve Stofka

I will keep this short on Easter weekend. The March Labor report that came out two days ago surprised to the upside, but I am not convinced that this will be a robust recovery this year. The relief act passed a month ago may give the kick needed. Despite the inflation warnings of some, the employment trends don’t signal inflationary pressures this year.

The unemployment rate declined from 6.8% at the end of last year to 6.2% at the end of March. However, the rate is still 1.7% above the 4.5% long-term natural rate of unemployment, an estimate of what the unemployment rate could be if available labor and other resources were employed. A year ago, the unemployment rate stood at 3.8%.

The labor force shrank by .2% this past quarter, about the same as the last quarter of 2017 and the 3rd quarter of 2015. Considering there is a pandemic, that shouldn’t be worrisome, but it is unusual for the labor force to shrink in the first quarter of the year. The last time was in 2011, a time when it seemed there might be another global recession. It’s not a sign of a robust recovery.

Total Employment is still 4.5% below last March, but Construction employment is only 1.2% down from last March. Even though Construction is only 5% of employment, it’s direction signals positive secondary movements in the economy.

There is a formula economists use to estimate the output gap in the economy. When it is positive, that signals some degree of inflationary pressures. When negative, as it has been for most of the past decade, that signals low inflation. We won’t get the first estimate of first quarter GDP for a few more weeks, but the employment data this past quarter estimates a small positive gap and little inflation.

Happy Easter, folks, and stay safe!

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Photo by Sebastian Staines on Unsplash

The Dog That Bit

March 28, 2021

by Steve Stofka

At a Senate Banking Committee hearing this week, Fed Chairman Jerome Powell responded to Republican concerns about inflation. The American Rescue Plan signed into law two weeks ago had little Republican support. Without the passage of the law, millions of Americans would have been subject to eviction in the middle of March. Republican Senators expressed few worries about inflation in 2017 when they passed a tax cut that had the same ten-year cost as the American Rescue Plan. It can be difficult to separate the genuine economic concerns about inflation because the topic is used as a political tool.

Mr. Powell reassured Senators that the Fed has the tools to curb inflation. What they lack are the tools to counter deflation. Once the Fed sets interest rates at zero, they cannot lower them, a situation called the Zero Lower Bound. Higher inflation is a persistent worry among older politicians and voters who experienced the high inflation of the 1970s.  Since then, the Fed has been given far more power by Congress to prevent a repeat of that decade’s stagflation, the unusual combination of high unemployment and high inflation.

Inflation is one of the many human behaviors that is a function of expectations. Let’s say that, ten years ago, I got scared by a neighbor’s dog who got loose and almost bit me. I changed my route home to avoid the dog. The homeowner may have put up a chain link fence to keep the dog inside the yard, but I don’t trust that the fence can contain the dog. The homeowner could have moved or the dog has died and the threat no longer exists, but my behavior has permanently changed. If I walk on the opposite side of the street, and I don’t see the dog out in the yard, that doesn’t mean that the dog is not a threat.

Fear keeps us alive. A six-year-old may have seen a small spider crawling up a wall, imagines that it could crawl inside their ear while they are sleeping and doesn’t want to sleep in their bedroom. Many of us stop worrying about spiders while we are sleeping, or we think we do. As we grow up, our spiders mature. We lose sleep worrying about financial and relationship issues, our health or our job. Inflation is one of those grown-up spiders.

In the popular understanding, inflation is higher prices. Economists understand inflation as higher wages, the main component of most goods and services. Inflation is both a short-term and medium-term process. In the short run, if demand exceeds capacity to meet that demand, prices will go up because workers have more bargaining power and wages go up. However, as Chairman Powell has noted, the insidious aspect of inflation is that not all prices and wages go up at the same time. Inflation distorts the distribution of income and, in the medium run, affects the accumulation of wealth.  

Economists anticipate a return of demand this year; there is a lot of pent-up buying power. Credit card delinquencies are near all-time low, barely above 2%. They were almost 7% in the summer of 2009. The charge off rate is 2.6%, 8% less than it was in 2009. The country has the capacity to meet that demand. There are still ten million unemployed and capacity utilization is below 80%.

There is one troublesome area – housing, which makes up a third of the Consumer Price Index, one of the measures of inflation. For the first time since World War 2, household formation declined in 2020 (FRED Series TTLHH) in response to the pandemic. Last year, many millennials and Gen Z just starting their adult life moved back in with their parents.

Housing supply remains tight. The National Assn of Realtors announced that there were now more real estate agents than homes to sell. The number of housing starts has increased since the housing crisis more than a decade ago, but there are only 7 starts per 1000 working age adults 16-64, slightly above the number of starts during the 1990 recession after the savings and loan crisis.

In response to the Covid crisis, the growth in housing prices (HPI) has shot up from 2% annual growth to over 10% since last March. Although a small part of the total economy, the housing market and the 5% of the labor force that it employs is like the tail that wags the dog. Growth in construction employment went negative last year and is still negative at -4% (FRED Series USCONS). The last time it went negative was in the spring of 2007, six months before the 2007-2009 recession and financial crisis.

This trend is a powerful deflationary force that counteracts inflationary forces that might occur in the 2021 recovery. Understanding those deflationary forces and lacking the tools to combat deflation, the Fed is watchful but less concerned about inflation. One of the forces acting as a brake on inflation is our own expectations of inflation. At the hearing this week, Powell noted that those expectations have become anchored at low rates over the past two decades. During the 1970s, expectations were unanchored. People expected inflation to be as much as it was the past year or worse.

The anchoring process occurs slowly and changes slowly. People who are less than 50 have formed different expectations based on their life experience. Older Americans may still be suspicious, watchful for the least sign of a phenomenon that imprinted on them when they were younger. In the 1970s, people who would not think of stealing, stole gasoline from their neighbors to get to work. Neighbors in New York City beat each other up over their place in line to get gasoline. Retired people in subsidized housing froze to death because they couldn’t afford the skyrocketing costs of heating their home.

“Don’t go that way,” older Americans  say. “That dog could bite you.” Younger Americans ask, “What dog?”

We make our journey through life avoiding that dog, the one that bit us. Our choices do not keep us safe from a dog biting us. What protects us from a dog bite is the choices of others, the ones that dog owners make to install fences or to keep their pet inside the house. We live in community with others; that makes our lives more convenient, but we are more vulnerable to the choices that others make. The pandemic has focused our attention on that fact, and those who have lived through this past year are imprinted.

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Photo by Tillmann Hübner on Unsplash

Experimental Philosophy

March 21, 2021

by Steve Stofka

At a Senate Banking Committee hearing this week Senator Tim Kane presented a comparison of two philosophies of governing. Without any Democratic support, Republicans passed the Tax Cut and Jobs Act (TCJA) in December 2017. Prior to its passing, the non-partisan Congressional Budget Office estimated the loss of revenues at $1.5T over ten years. After two years of data, they revised their estimate of lost revenue to about $1.8T. The bulk of the benefits go to the top 20% of incomes. Without any Republican support, Democrats passed the American Rescue Plan (ARP) two weeks ago. Its estimated cost is $1.9T over ten years. This bill will benefit the bottom 60% of income earners. Two plans, two philosophies, similar costs.

Tim Kane suggested that we are having a real-world experiment. Both laws are projected to cost the same amount. Economists already have performance metrics on the Republican law from 2018-2019, the two years before Covid.  In 2023, economists can compare performance and benefits of ARP which exemplifies the Democratic philosophy.

The essence of the Republican philosophy is an assumption that income and benefits will “trickle down” from the top 20% of income earners, the wealthy in America. After three decades of Republican rhetoric that income should trickle down, many economists find the opposite trend. Those at the top get wealthier.

The Gini coefficient is a measure on equality/inequality. 0 represents perfect equality, 1 represents perfect inequality. In 1972, the Gini coefficient for household income in the U.S. was .4. In the fifty years since, that coefficient has risen to .48 (FRED Series GINIALLRH), near the mid-point of the equality/inequality range. An economic analysis can only confirm what many Americans sense intuitively; life is getting easier for the wealthy and harder for the middle and working classes.

The Republican philosophy espouses tax cuts and a strong defensive posture around the world which has led to a constant state of war. Former President Trump had to fight his own party to cut back troop commitments in Iraq and Syria. These twin goals – a larger military and tax cuts – are incompatible and have caused bigger deficits than Democratic administrations over the past forty years. Republican voters care about deficits so Republican politicians continue to pay homage to the idea despite their poor performance on that count. Republican politicians counter that it is the Democratic benefit plans that cause deficits, not Republican military spending and tax cuts.

Democrats champion more benefits and higher taxes on high income earners to pay for the benefits. Most of those high-income earners are in solidly Democratic states, not Republican political strongholds, so there is little advantage to Republican resistance to higher taxes. Republicans are opposed to higher taxes on principle, not politics. They believe that there are few legitimate functions of central government under Federalism: 1) provide a common defense and make treaties, what John Locke called a Federative power in his Second Treatise of Government, 2) resolve disputes between states, 3) preserve property and individual freedoms. The several other functions like coining money and post offices can be found in Article 1, Section 8 of the Constitution.

The heart of the dispute between Republican and Democratic voters lies in their different interpretations of the General Welfare clause of that section, i.e., that Congress shall have the power to “provide for the common Defence and general Welfare of the United States.” Democratic voters believe that phrase means Congress should provide for the welfare of the people in each state. Republican voters believe that it applies at the state level. In interpreting the Second Amendment, Democrats and Republicans switch; Democrats think gun rights apply to state militias while Republicans think those rights apply to individuals.

These are long standing arguments and opinions that resist change, despite the experimental data. I agree with Tim Kane that we have a chance to compare economic philosophies. I disagree that the results will change many minds. We don’t like to change our habits or opinions.

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Photo by Bermix Studio on Unsplash

Treasured Myths

March 14, 2021

by Steve Stofka

Some liberal economists promote government welfare policies that would enable one earner to support a household. Former Labor Secretary Robert Reich and Vermont Senator Bernie Sanders are champions of the idea that America was once a nation of one earner households. Does the data support their claims? No. But careful presentation of the data perpetuates a myth that forms the bedrock of a class of liberalism called welfare liberalism.

In the 20 years following World War 2, most of the world’s manufacturing capacity was in the U.S. Workers had greater bargaining power and union membership grew. The number of workers per household dipped slightly, then returned to more customary levels. Was there ever a prevalence of one-earner households? No. It is a myth.

In 1966, hours worked per week in manufacturing industries peaked at 41.6, (AWHMAN see endnote). Many dads worked overtime to support their working-class families. There was more overtime available because the U.S. was the manufacturing capital of the world. When the youngest children started school, mom often took a part-time job to bring in extra income. Only a small percent of families could live on a 40-hour per week paycheck.

In the late 1960s manufacturing jobs were 28% of all full-time jobs (MANEMP); today it is 10%. Rarely discussed is the decline in office and administrative workers from 18% in the early 1980s to 11% today (OFFICE). Some of these were entry jobs that helped young workers develop skills. A woman might leave an administrative job to raise young children, then return to a similar job when the children reached school age. The decline began in the early 1990s as computers became more affordable and computer programs could do routine bookkeeping tasks. That percentage decline represents 10.5 million workers at pre-pandemic employment levels, more than the current number of unemployed workers.

Technological improvements change the mix of skills needed in the job market. Almost 2 million full-time workers are employed in the software industry (Software). Many more data entry workers could be employed if governments updated their archaic system architectures. The pandemic revealed how antiquated many state employment systems are. Because they did not have integrated claim verification built into their systems, many were able to file false claims using data gained from data breaches of private companies in years past. State systems could not handle the extra load of unemployment claims.

Our founding documents are based in part on the 17th century writings of John Locke. In his Second Treatise of Government, he wrote that power arises from duty; the power that parents have over children arises from their duty to take care of their children (58:1). Some people may extend that power and duty relationship to the government and a nation’s citizens. Two groups may argue over taxes, regulations, and benefits when the underlying argument is whether governments have some duty to take care of their citizens because it has some power over them.

This pandemic has shown the extent of government power. When states and cities shut down private businesses for public health reasons, this aroused a centuries old debate about the extent of government power. In Plato’s time 2500 years ago, Athenian citizens first rejected government authority and refused military service. That independent spirit contributed to their defeat against Sparta where all citizens were expected to serve two years military service. 2000 years ago, Roman citizens scrawled graffiti on their bridges and refused to join military campaigns to establish yet another colony. In any century, a state enacts laws and exercises powers that are repugnant to some of its citizens. What is the extent of that power and those laws?

We cherish our myths, but they confuse our debates. The one-earner household is a mid-century favorite for some. For others it is that America’s founding was the first time in history that people established their freedom in relation to their government. Each generation thinks that it is at a special point in history, just like children do. We reject the notion that there is a circularity to our history. Through the centuries we revisit these debates about duty, power, rights and responsibilities. We tell ourselves that generations in the past never dealt with these issues, that it’s all different now. Yes, the historical context is different each century, but the central issues change little because the human spirit is an enduring bedrock that forms our institutions.

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Notes:

Photo by Ashim D’Silva on Unsplash

AWHMAN, Federal Reserve (FRED) Series: Average weekly manufacturing hours surpassed the 1966 peak under the Obama and Trump administrations.

MANEMP / LNS12500000: Manufacturing jobs divided by total employees who usually work full-time. These numbers come from different monthly surveys.

OFFICE: Office and administrative worker series divided by total employment, LNU02032207 / PAYEMS Series.

Software: Developers, applications and systems software LEU0254477200A series

Equity and Equality

This week the debate over the minimum wage continued in the Senate, on C-Span, other news outlets and social media. The Wall St. Journal presented the minimum wage in Big Mac terms. In 1968, it took 18 minutes of minimum wage to buy that iconic hamburger. Today, it takes 30 minutes of minimum wage. Using that as a guideline, the minimum wage should be at least $12.

Why don’t Democrat politicians propose a minimum wage that varies according to each region’s cost of living (COL)? According to survey data, Colorado’s COL is 73% of California’s COL (MERIC, 2021). Using that as a guideline, Colorado’s minimum wage would be about $11, the same as the current minimum. Missouri’s minimum would be $8.35, which is LESS than the state’s current minimum of $8.60. Many states have implemented a $15 COL-adjusted minimum wage.  

Advocates for a uniform minimum wage argue that they want to erase some of the disparity between urban areas and low paid rural regions, many of which are black or Hispanic. Those in rural areas worry that small businesses will lay off workers, driving the unemployment rate higher than it already is. Others worry that businesses will raise their prices, making it more difficult for those on fixed incomes. In that case, the minimum wage would benefit some at the expense of others.

Twenty years ago, an analysis of minimum wage increases and employment data found only one statistically significant correlation: increases had a minimal effect on teenage employment (Burkhauser, Couch, & Wittenburg, 2000). Other studies have found no effect on employment in the fast-food industry. A recent study examined minimum wage increases in the states and found that increases greater than a $1 had a negative impact of 1% on low-skill employment (Clemens & Strain, 2018). Smaller increases had either no effect or a positive impact. How can we have an informed debate if history does not provide a clear lesson?

Since Plato’s time 2500 years ago, we have wrestled with equality, equity, and justice. Equity measures by outcome, varying the inputs until the outcomes are about the same. Equality measures by inputs; if everyone gets the same chance, the same inputs, then equality is satisfied. Plato argued that justice was an individual functioning well within community. Some of his companions in The Republic argued for alternate versions of justice: that it was the interests of the stronger, that it was helping friends and harming enemies, or telling the truth and paying your debts.

John Maeda posted a Tony Ruth graphic that depicts these concepts of inequality, equality, equity, and justice (2019). Two kids stand on opposite sides under a leaning apple tree so that one kid below the overhang gets most of the apples that fall. That is inequality. They are both given a ladder of equal height; since they each have the equal tools, that is equality. The kid below the overhang is given a shorter ladder to compensate for his better opportunity at picking apples; that is equity. Justice is the equalization of opportunity and tools; using braces and ropes, the tree is straightened, and each kid is given the same size ladder. Justice is both equity and equality.

As a society we often can’t straighten the tree; if we could, who pays for the labor, braces, and ropes? Who owns the ladders? Writing 500 years ago, Machiavelli said that a republic is the best form of government because the two main political classes of society constantly wrestle with these issues. The two groups may be labeled nobles and common people, or Republicans and Democrats, but they are essentially a tug of war between these notions of equity and equality. One group champions equity over equality; the other fights for equality as a priority above equity.

As we listen to debates in Congress, the workplace, and our households, we can identify those two elements. The argument then evolves into the particulars of process, and this is used to justify either side of the equity / equality debate. Machiavelli wrote that people make fewer mistakes when they focus on the particulars. In working out the details we uncover the broad issues that we tussle over. The road of history is curved; to keep from running off the road, we adjust the steering wheel left and right, repeatedly correcting our previous course corrections. This is a time for correction.

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Photo by Splint on Unsplash

Burkhauser, R. V., Couch, K. A., & Wittenburg, D. C. (2000). A reassessment of the New economics of the minimum Wage literature with monthly data from the current population survey. Journal of Labor Economics, 18(4), 653-680. doi:10.1086/209972

Clemens, J., & Strain, M. R. (2018). The short-run employment effects of recent minimum wage changes: Evidence from the American community survey. Contemporary Economic Policy, 36(4), 711-722. doi:10.1111/coep.12279

Maeda, J. (2019, March 11). Design in Tech Report 2019 | Section 6 | Addressing Imbalance. Retrieved March 06, 2021, from https://designintech.report/2019/03/11/%F0%9F%93%B1design-in-tech-report-2019-section-6-addressing-imbalance/

MERIC. (2021). Cost of living data series. Retrieved March 06, 2021, from https://meric.mo.gov/data/cost-living-data-series

A Nation of Storytellers

February 28, 2021

by Steve Stofka

In our national narrative, the sheriff comes to town and the virtuous town folk walk without fear. Four years ago, President Trump promised to be that sheriff, routing out the miscreants that lived in the Washington swamp. When he was the unlikely winner of the 2016 election, religious romantics attributed his victory to God, not the arcane rules of the Electoral College. When he lost the 2020 election, God was nowhere to be found. He had been chased off by cheaters who had stolen the election from their candidate. Hollywood could only have been invented in America. We are storytellers.

On January 6th, a group of self-dubbed patriots attacked the Capitol building in Washington. In their eyes, the lawmakers in that building were illegitimate, and the vigilantes assumed their Constitutional duty to unseat those lawmakers. They were the Tea Party attacking the British in Boston Harbor more than two hundred years ago. Through social media they had amplified their role in the American myth, taking center stage in a fight for freedom.

America is a game of Prisoner’s Dilemma, the game theory scenario where two prisoners, each in a separate interrogation room, must decide whether to confess to a crime. If neither confesses (they cooperate), they get off with a light sentence. If one confesses and the other doesn’t, one goes scot free and the other is given a harsh sentence. If they both confess, they are both given a medium-term sentence. The players have a choice to cooperate (neither confesses) or defect (confess). If the game is played once, it is better for each prisoner to defect. If the game is played multiple times and there is a memory between games, the prisoners should cooperate.

American politics is not a cooperative game. Within a decade after the ratification of the Constitution, the founders realized, to their dismay, that they had created a vicious party system. In 1800, the founders themselves were engaged in an electoral battle, ready to smear each other’s reputations and the honor of their families to gain the power of the Presidency.

In the halls of Congress, the prisoners meet in committee rooms. They confess to the crime of representing their constituents. They confess to the sin of defending their principles. They handcuff themselves together with rules of order, then come out fighting. They play this game every day, each party unable to cooperate with each other, but telling themselves a story that they are cooperating with the rules. Outside the halls of Congress, their constituents are fighting without rules. The breach of the Capitol building brought the fight inside.

We are storytellers. After World War 2, many Americans lost their jobs and careers on suspicion that they were Communist sympathizers. Today a common phrase is “if you see something, say something.” The campaign began as a response to the 9-11 attack but has been extended to mean any suspicious activity. The “see something, say something” campaign means to promote predator awareness – those who would victimize children and women. Trayvon Martin and Ahmaud Arbery were two men who looked suspicious and were gunned down by white vigilantes who interpreted the Constitution to give them the right to defend their community against suspicious people.

Hong Kong is an island off mainland China that was formerly under British rule and prized its independence from Communist rule on the mainland. They are telling a different kind of story – turning on each other. As part of a campaign by the mainland Communist Party to repress street protests in Hong Kong, the government set up a hotline to report suspected violators of new security laws aimed to restrict criticism of the government in the media. 40,000 virtuous and vigilant residents have squealed on their neighbors.

Myths connect people but our stories are tearing us apart. Our media is saturated with a mixtape of opinion, lies and carefully filtered facts to present some Americans as the “other.” The Chinese government encourages Hong Kong residents to turn on each other. In our country, the media does the same job. We are proud of those freedoms even if they destroy our civility and our cohesiveness as a society.

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Photo by Patrick Tomasso on Unsplash

A Policy Pivot?

February 21, 2021

by Steve Stofka

Climate change induces more erratic weather patterns. More dry and wet; colder and hotter. California has been hit by persistent drought. Texas and other southern states got walloped this week. Several dozen Texans lost their lives when electricity generation failed for several days this week. For two decades, Texas has adopted a relaxed regulatory policy that does not incentivize or require power generators to prepare for unusual events like this week’s cold snap. Texas legislators argued that these policies reduced costs and lowered bills for Texans. Other states with more stringent regulations weathered the cold snap because power operators beef up their generation system to withstand extremes.

Natural gas supplies 46% of Texas’ electricity generation. The valves and regulators on those lines froze because of a lack of heating equipment. Wind turbines supply 23% of Texans electricity but had no heaters installed as they do in other states. Because Texas has its own electricity grid, it has no power balancing arrangements with other states. Texans pride themselves on their self-reliance to the point of arrogance. They are the Lone Star State, Texans first, Americans second.

Through district gerrymandering a minority of Republican voters in Texas control policy. The state has a constitutionally weak governor with little power. The legislature promotes someone to the post who will be agreeable. Politics is heavily influenced by the oil and gas industry whose rights are senior to property owners. If a gas company wants to run a pipeline through someone’s property, an owner has a difficult fight.

Because Texas was part of Mexico until the 1840s, its laws and culture are influenced by the hacienda system set up by Spain in Latin and South America during the 17th century. In that colonial period, the Spanish monarchy took control away from parliament, imposed a uniform religion and a rigid centralized bureaucracy. Land in the Americas was parceled out in large tracts called haciendas to those who were loyal to the crown. This promoted a system of personal relations among landowners, people over principle, and a lack of growth and technological improvement. Like cuttings on a plant, the culture of white settlers in Texas were grafted onto this system. Texans adopted the “good old boy club” that has plagued politics in Latin America for centuries and made it their own.

Northern states were initially settled by colonists from England. In the 17th century, the English Parliament took power from the monarchy, a power shift opposite that in Spain. Religious and political diversity carried over from the motherland to the colonies and became institutionalized. Property rights, and the products of property could be conveyed to others. This encouraged a system of principle over person, a more impersonal exchange that fostered technological development.

Texas culture relies on tradition more than innovation, but the state provides a fertile and friendly atmosphere for innovative businesses from other states. Business growth relies on a flourishing human capital. Texas’ K-12 schools rank in the middle of the 50 states and above California, both with large immigrant populations and low English fluency (McCann, 2020). However, a state that cannot manage its power grid is not an attractive environment for business.

Will this crisis spark a shift in policy? Texas has long been captured by special interests, who are antagonistic to change. The past few years Texas politicians have stood proud, calling to California businesses, “Come here and get away from those regulations.” That cheery welcome has been tarnished this week. Business executives might wonder if Texas has other infrastructure problems. Texans hope that the fast-moving news cycle will turn its attention elsewhere.

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Photo by Alexander Schimmeck on Unsplash

McCann, A. (2020, July 27). States with the best & worst school systems. Retrieved February 20, 2021, from https://wallethub.com/edu/e/states-with-the-best-schools/5335

Finding the Right Wires

February 14, 2021

by Steve Stofka

Since WW2, households have traditionally held more debt than the federal government as a percent of GDP. I’ll call it %Debt. The biggest component of household debt is mortgages, and includes car loans, student loans, credit card debt, etc. A decade ago, Federal %Debt surpassed households, effectively allowing households to reduce their debt level and put it on the federal balance sheet.

Federal debt spiked during the pandemic while household debt levels have risen only 1.5%. For decades, deficit hawks have long warned that rising federal debt levels could cause an economic implosion that would make the Great Depression look tame by comparison. They may be right – finally.

There are two ways that the federal %Debt can go down. The first is to grow the economy; that’s the GDP in the denominator of Debt / GDP. The second way is to reduce the level of Debt, the numerator. It is unlikely that Congress is going to raise taxes enough to reduce the debt, so that leaves only one way to reduce %Debt – grow the economy faster than the growth in federal debt.

To do that, consumers need to spend money because their spending makes up 70% of GDP. There are three ways to increase spending. The first is to increase incomes faster than economic growth but that has not been happening for several decades. The real growth in middle class incomes over the past 30 years is only 15%, or 1/2% per year average.

The non-partisan Congressional Budget Office projects that total incomes will increase by an average of $33B per year over the next decade if the minimum wage is raised to $15 over the next five years (CBO, 2021). That increase of 1.5% in GDP will not change the federal %Debt by much.

The second way to increase GDP is for consumers to take on more debt. A rise in housing prices has lifted the net worth of many households, who can tap into that equity to increase their spending. However, households are already choked with debt. The two largest generations, the Millennials and the Boomers are offsetting each other’s spending. Older Boomers are reducing spending as Millennials increase their purchases. The Millennials have been crushed by the financial crisis a decade ago and again with the Covid crisis. Many feel like they came along at the wrong time in history and are cautious. When consumers pay down debt, they spend less and that lowers GDP growth.

The third way is probably the trend of the future. The federal government will continue to pile debt on its balance sheet and shift income onto households in the hopes that consumers will spend money and grow the economy faster than the rise in federal debt. There is a concept called the multiplier and economists argue over its value. It is the total effect of spending in an economy when the government spends $1. That depends on consumer and business confidence, which depends on the amount of debt each sector holds. The IMF estimates that the multiplier is about 1.5, so that $1 of spending equals $1.50. If so, deficit spending might grow the economy faster than the federal debt grows.

I’ll return to a proposal I discarded earlier – increasing taxes, particularly on the top 10% who don’t spend as much of their incomes on consumer goods as the bottom 90%. Under the Budget Reconciliation rule in the Senate, the Democrats could pass tax legislation that undoes the 2017 tax cuts that the Republicans passed using that reconciliation process. In his campaign proposals, President Biden limited any tax increases to those making $400,000 or more, a small sliver of the population.

Income distribution is skewed toward the upper 5%, who will fight vigorously to keep what they have. They will complain – and they have a point – that they are already paying higher taxes in the form of lost income because interest rates are so low. Those with savings are being paid a paltry amount in interest but the low rates reduce the interest on the debt that the federal government pays each year. Boomers on fixed incomes are having to reduce their savings faster  to meet monthly expenses.

The structure of income distribution is weak. No, it’s not a problem with capitalism, as some like to claim. This is a problem with political policy which pre-dates capitalism. A small group of people in a nation take command of the distribution levers and direct more of the nation’s income to themselves. In the 1700s, the problem was thought to originate with monarchy and aristocracy. Democracy was going to cure the problem, but it didn’t. Communism was going to cure the problem and it didn’t. Socialism – the middle way between capitalism and communism – was going to solve the problem, but the EU demonstrates that socialism simply slows growth, increases structural unemployment, and does little to solve the persistent problem of distributional inequalities.

Governments worry about exogenous factors like Covid, war, or a dramatic shift in commodity prices. While those do produce crises, they do so because of endogenous factors – weaknesses in a nation’s political and economic system that award property rights in such a way as to exacerbate social tensions. The Great Depression and Financial Crisis were examples.

Since the Financial Crisis a decade ago, people in nations around the world have been raising their fists and their voices. The productivity gains that capitalism promoted had ameliorated the centuries old problem of political oligarchies, but no economic system can solve what is fundamentally a political problem.

Those who voted for former President Trump in 2016 did so thinking that he was a political outsider who could “drain the swamp,” i.e., bust up the political oligarchy that controls Washington. He became part of that oligarchy, feeding the monster, because it relied on his lack of political expertise.

Those who voted for President Biden hope that his decency and moderation will help craft legislation that unlooses the grip that the oligarchy has on our political process. Which wires do we pull to disconnect the oligarchy?

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Photo by Victor Barrios on Unsplash

Congressional Budget Office (CBO). (2021, February 08). The budgetary effects of the raise the Wage act of 2021. Retrieved February 13, 2021, from https://www.cbo.gov/publication/56975

Tax Policy Center. (2020, May). What is reconciliation? Retrieved February 13, 2021, from https://www.taxpolicycenter.org/briefing-book/what-reconciliation