Wealth-Income Ratio

January 16, 2022

by Stephen Stofka

Analyses of wealth and income inequality engage policymakers and economists and provoke lively discussion on social media. Thomas Piketty (2013) stirred up debate with the publication of Capital in the Twenty-First Century. Five years later came the publication of After Piketty (Boushey et al., 2019), a series of essays by prominent economists. I wanted to tackle a different aspect of this subject – why the ratio of wealth to income has become so erratic in the past two decades. The answers are too complex for a blog post and beyond my capability to understand. But let’s take a short journey down the rabbit hole.

In the past ten years both stocks and housing prices have more than doubled, moving in a synchronized dance. In the graph below I’ve plotted the two series on top of each other to show the similarity in trend.

The Federal Reserve charts a ratio of household wealth to disposable income, which is income less taxes plus transfer payments like Social Security. Although there are some similar components, the ratio is different than the capital-income ratio that Piketty uses. Housing represents the majority of wealth for many households. Many workers own part of the stock market through mutual funds, 401K plans at work or IRA retirement plans. The doubling of these two asset classes has led to a rise in household wealth and raised the wealth-income ratio to historically elevated levels.

In the graph above I have highlighted past decades where this percentage found a level and remained there. For almost 50 years following WW2 household wealth was about 5x disposable income. Beginning in the mid-90s, this percentage turned erratic, unable to find any stability until the violent recession following the fiscal crisis. In 2013, stock prices and housing began a steady climb that endured the pandemic shock and continues to this day. Will we establish a new level of wealth at 8x disposable income in the next few years? I doubt it. Such a growth curve is unsustainable.

As I search for the underlying causes, I look back to the mid-90s when the wealth-income ratio first turned erratic. The internet first began to grow into our commercial and personal lives. Heady expectations of rocketing business profits led many investors to make wild bets on companies who had little history, a lot of hype and little profit. Out of the carnage of mis-investment emerged an internet platform that has transformed our personal lives. Apple and Amazon are two success stories. In 1997 giant Microsoft made a $150 million investment in failing Apple Computer that kept Apple out of bankruptcy. This year Apple’s valuation passed the $3 trillion mark, about 13% of the entire GDP of the U.S. That same year Amazon went public. It’s business model? Selling books. For years it struggled to make a profit. Amazon’s market capitalization is now over $1.6 trillion. The so called FAANG stocks of big tech have surpassed the industrial and financial giants of the 20th century. Two researchers at Morningstar studied the decade long impact of the ten largest stocks and the impact they made on the overall return of the entire stock market (Solberg & Lauricella, 2021). Perhaps that concentration of market power is contributing to a more erratic wealth-income ratio.

Low interest rates and leverage have affected household wealth. In the mid-90s, bankers at JP Morgan developed the collateralized mortgage to spread risk. In ten years, misuse and overuse of that idea led to a historic meltdown in housing prices and caused a worldwide fiscal crisis. Since then the supply of new housing has not kept pace with demand. Fueling that demand is a large Millennial generation which is settling down. Persistently low mortgage rates have increased the pool of qualifying buyers. Low rates have raised the present value of the future housing services a homeowner receives from the house they buy. Not enough supply to meet demand has led to higher housing prices.

High inflation this year has grabbed headlines and stirred up comparisons to the stagflation of the 1970s. There are too many differences between now and then but that is a subject for another blog post. A rising federal debt has certainly contributed to a rising level of wealth but does not account for the erratic behavior of the ratio itself. In the mid-90s, the federal debt began falling and the wealth-income ratio rose dramatically.

I suspect that finding an equilibrium in this ratio will be a painful process. To reestablish a sustainable ratio, there are two possibilities. The first is a hard landing where asset valuations fall more than incomes fall. The second scenario is a soft landing in which incomes rise more than valuations rise. Let’s hope for the soft landing.

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Photo by Ludde Lorentz on Unsplash

Boushey, H., Bradford, D. L. J., & Steinbaum, M. (2019). After Piketty: The agenda for economics and inequality. Harvard University Press.

Cautero, R. M. (2021, December 28). What is disposable income? The Balance. Retrieved January 15, 2022, from https://www.thebalance.com/what-is-disposable-income-4156858

Piketty, T. (2013). Capital in the Twenty-First Century. (A. Goldhammer, Trans.). The Belknap Press of Harvard University Press.

Solberg, L., & Lauricella, T. (2021, December 1). The FAANG Market is Fading. Morningstar, Inc. Retrieved January 15, 2022, from https://www.morningstar.com/articles/1070180/the-faang-market-is-fading

A Man With No Blame

January 9, 2022

by Stephen Stofka

A 63 year old man came into a hospital because of a heart problem and found out that his condition was aggravated by Covid. He had not gotten the vaccine because he was fed some incorrect information, he said to a reporter. He was not on a ventilator yet but regretted not getting the vaccine. He was not to blame. One of the many rioters on January 6th a year ago cried that his intentions were honest – a protest against what he had been told was a stolen election. As the riot turned violent, he was swept up in the motion of the crowd. He was not to blame. In the song I Shall Be Released Bob Dylan wrote about a man who also was not to blame. We want others to take responsibility for their actions but are reluctant to shoulder responsibility for our own actions.

In the middle of the 20th century, many psychotherapists took a mechanistic approach to explaining behavior, helping their patients understand that their actions were the result of environmental and genetic factors (Maddison, 1959). Therapists wanted to avoid moral labeling because it did not present a constructive way to help a patient manage their behavior. Scholars like Marshall McLuhan and Noam Chomsky argued that the mainstream media shaped public opinion to conform to corporate and institutional norms. When Noam Chomsky (1988) co-authored Manufacturing Consent there still was a mainstream media. Now we select the media that we want to listen to. We are the curators of our own information stream. Still we blame a conspiracy of misinformation for our own misfortune.

The formation of social media happened in America because it gave us an opportunity to form impromptu victim communities based on race, sexual orientations, political, economic and religious ideologies. We have become communities of umbrage, rallying in opposition to a stream of offenses. We form credential communities who challenge the right of others to call themselves victims.

We are drawn to conspiracy theories because there have been many of them throughout history. A small group of men – it is usually men – conspire in secret to pull the levers of power and affect the lives of many. Price fixing and asset bubbles are two examples. In the 19th century, Cornelius Vanderbilt busted up a cabal of New York politicians who kept railroad rates high and profited handsomely at the expense of merchants and consumers (Stiles, 2011). There was so much political corruption in America that taxpayers no longer trusted politicians with money. There was more transparency if the politicians contracted out the work to publicly held corporations, who had some accountability to their shareholders. By the dawn of the 20th century, corporations ruled America.

America has long been a country of victim communities. In the 18th century, colonists complained of British persecution while they persecuted black slaves, Native Americans and anyone thought to be a “loyalist.” In the Virginia colony, James Madison defended the Baptists who complained of religious persecution by the Anglican majority (Klarman, 2016, 566). Farmers complained of being exploited by “the rich and ambitious,” particularly northern bankers who seized upon every opportunity to repossess their land for failure to meet a payment deadline (Klarman, 2016, 385). In 1783, Pennsylvania farmers surrounded the statehouse demanding relief from their debts. In 1786-7, several thousand armed rebels occupied Massachusetts’ courthouses in an attempt to nullify tax liens and private debt contracts (Klarman, 2016, 88-90). This uprising, known as Shay’s Rebellion, showed a lack of respect for authority and the sanctity of contract that alarmed many leaders of colonial governments. The rebellion prompted the adoption of a stronger central government embodied in a new Constitution. The participants in the rebellion were dealt harsh sentences.

More than 200 years later, a former President, pampered since he was in diapers, claimed that he too was a victim. Like his predecessor, Richard Nixon, he claimed the role of Victim In Chief. He goaded his supporters to storm the Capitol building to deny the certification of an election which he had lost. One supporter carried a Confederate flag into the halls of Congress, a gesture of defiance and a repudiation of Lee’s surrender at Appomattox almost 150 years earlier. More than 700 of those who participated in the riot have been charged. Their leader, a man who has persistently avoided responsibility for any of his actions, faces no charges yet. He is the Victim, the Man Without Blame.

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Photo by Andrey Tikhonovskiy on Unsplash

Klarman, M. J. (2016). The Framers’ Coup: The Making of the United States Constitution. Oxford University Press.

Maddison, D. C. (1959, August 15). The doctrine of “diminished responsibility” in the Criminal Law. The Lancet. Retrieved January 8, 2022, from https://www.sciencedirect.com/science/article/pii/S0140673659922159

Stiles, T. J. (2011). The First Tycoon: The Epic Life of Cornelius Vanderbilt. Alfred A. Knopf.

The Old Normal

January 2, 2022

by Stephen Stofka

“We wish you a Merry Christmas and a Normal New Year” could be this year’s chorus. We left normal about 13 years ago when the global financial crisis erupted. Twenty schoolchildren were massacred at Sandy Hook Elementary in 2012. When Congress could not agree on any weapon restrictions, we knew we had veered onto the land of abnormal. In 2016, 60 million people voted for a candidate with no political experience. They had stopped believing in the normal and now embraced the abnormal. When the pandemic emerged in 2020, we stepped off the gangplank into the dark waters of the unnormal. That year a record number of people voted for a candidate who had spent most of his adult life in politics. They voted for normal.

On January 6th, 2021, the abnormals stormed the halls of Congress. They wore American flags and big bull horns and painted their bodies red and blue. They believed in a vast conspiracy. They had convinced themselves they were heroes. American cable and social media had created a funhouse of distorted reality and values. In that palace of crazy where everyone looked warped and bent, the warped and twisted looked like everyone else. Acting irrational became a strategy.

What is normal? In the past ten years, the SP500 has nearly quadrupled. Investors know the momentum can’t last but when will it end? Abnormal returns don’t return to normal. They pause then lurch in a different direction. The latest craze has been ESG funds, which grew by another $120B this year, according to Bloomberg. As the dot-com craze and the housing boom showed, investment flows can be fickle.

The flow of goods and services in the economy is more stable but the pandemic upset that dynamic balance. As we avoided close contact with others we diverted our purchasing power from services to goods. In April 2020, orders for durable goods fell 36% from the previous year’s level, comparable to the decline during the 2008-2009 recession (FRED, 2022). Production of gasoline fell 25%. National refineries did not return to their former level of production until April 2021(EIA, 2022). Durable goods boomed back in the spring of 2021. Federal relief supported many families but helped fuel inflation in a distorted economy. When and if the pandemic eases and people resume their habits, the economy may discover a more familiar equilibrium. That will help relieve price pressures.

What will relieve the erratic sentiments that drive investment flows? Casual investors who are young can afford to follow an investment theme. Older investors must protect their savings and avoid chasing the latest passion. A portfolio can protect us only if we protect it.

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Photo by Christophe Hautier on Unsplash

EIA. (2022). Weekly petroleum status report – U.S. energy information administration (EIA). Retrieved January 1, 2022, from https://www.eia.gov/petroleum/supply/weekly/. Table 3.

FRED (Federal Reserve). (2020, November 4). Manufacturers’ New Orders: Durable Goods (DGORDER). Retrieved January 1, 2022, from https://fred.stlouisfed.org/series/DGORDER#0

A New Vision

December 26, 2021

by Stephen Stofka

The launch of the James Webb telescope on Christmas morning promises a new glimpse into the early history of the universe. If the complex folding telescope performs as planned, it will capture the light from galaxies that first erupted into being after the birth of the universe. Events in our lives are less cosmic but help shape our outlook for many years. A 30-year old born in the early 1990s was old enough to fully grasp the horror of the attack on the World Trade Center. The financial crisis interrupted the life plans of this age cohort. As families lost their jobs and homes, many high school graduates felt they had to pursue further education to prepare for a tough job market. A decade later came the Covid pandemic. The Millennial generation has been seasoned by repeated shocks.

Adapting to this turbulence is especially difficult for immigrants, many of whom fled harrowing circumstances in the country of their birth. In 2020, the U.N. estimated 280 million immigrants, a 27% increase in the past decade. For fifty years, America has been the top destination of immigrants. 50 million people, about 15% of the U.S. population, is foreign-born (Armstrong & Richter, 2021).

Almost 20% of Germany’s 83 million people are immigrants. Other destination countries were Saudi Arabia, Russia and the U.K. Russia has the distinction of being both a destination and origin country for immigrants. Availability of work and proximity to overpopulated countries draws migrant workers to these destination countries. Saudi Arabia and the United Arab Emirates are top destinations for Indian and Pakistani migrant workers.

In 2020, migrant workers around the world sent back more than $500 billion in remittances to their home country (World Bank, 2021). That is about the size of Sweden’s GDP and it is a lucrative trade for the international banking community which charges more than 6% in fees.

Americans are a resilient bunch and have withstood a major economic shock every decade. Is that resilience wearing thin? Public health measures and medical advances have increased life expectancy at birth by ten years in the past sixty years. In 2014, life expectancy plateaued at almost 79 years (FRED, 2021). Preliminary 2020 data from the CDC indicates that the pandemic has reduced that expectancy by 1.5 years to 77.3 years (CDC, 2021). A recent study of growing obesity rates in middle aged adults estimated a 4 – 7 year reduction in lifespan (Hruby & Hu, 2015).

Higher suicide rates and gun violence are important contributors to a rising rate of premature death, defined by the CDC as deaths before age 75. In Los Angeles, the premature death rate has risen to the same level as twenty years ago. The trend is not isolated to heavily populated urban areas. By 2019, the premature death rate of sparsely populated Riley County, Kansas had risen to its 2001 peak. In 2021, its violent crime increased by almost 50%, an indication of the stress the pandemic has had on communities throughout the country (KHI, 2021)

The eldest of the Millennial generation touched 40 this year. They will gradually assume the reins of policymaking from earlier generations that took too much for granted. A life expectancy that is flat or declining indicates structural socioeconomic problems that will require clarity, focus and commitment to steer in another direction.

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Photo by SpaceX on Unsplash

Armstrong, M., & Richter, F. (2021, December 17). Infographic: Migration Destinations and origins. Statista Infographics. Retrieved December 25, 2021, from https://www.statista.com/chart/26424/top-destination-and-origin-countries-of-international-migrants/

CDC. (2021, July). Vital Statistics Rapid Release . Centers for Disease Control. Retrieved December 25, 2021, from https://www.cdc.gov/nchs/data/vsrr/vsrr015-508.pdf

FRED (Federal Reserve). (2020, November 4). Life Expectancy at Birth, Total for the United States. Retrieved December 25, 2021, from https://fred.stlouisfed.org/series/ SPDYNLE00INUSA. Los Angeles County Premature Deaths: CDC20N2U006037. Riley County, Kansas Premature Deaths: CDC20N2U020161.

Hruby, A., & Hu, F. B. (2015, July). The epidemiology of obesity: A big picture. PharmacoEconomics. Retrieved December 25, 2021, from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4859313/

KHI – Kansas Health Institute. (2021). Riley County. Kansas Health Institute. Retrieved December 25, 2021, from https://www.khi.org/assets/uploads/news/15162/riley_county_2021.pdf. World Bank. (2021, May 12). Defying predictions, remittance flows remain strong during covid-19 crisis. World Bank. Retrieved December 25, 2021, from https://www.worldbank.org/en/news/press-release/2021/05/12/defying-predictions-remittance-flows-remain-strong-during-covid-19-crisis

Believing In Answers

December 19, 2021

by Stephen Stofka

Over the next twenty-five years most of the Boomer generation, 1946-64, will pass into history, the last generation of the Age of Modernity that began four hundred years ago. Boomer children were taught by the Silent generation, 1928-45, that had endured the Depression of the inter-war period and World War 2. The Silents had emphasized a mechanical approach to learning, drilling Boomers in multiplication, diagramming sentences and the Pythagorean theorem. Boomers learned to salute the flag in recognition of the American values of democracy, freedom of speech, religion and markets. On the other side of the world were the Communists who were against these freedoms. The Boomers were taught that there were right and wrong answers, but the 1960s would challenge that Modernist mechanical view.

As the vanguard of the Boomer generation turned 65 in 2016, those of the Silent Generation voted for Donald Trump by a 19+ margin. He was the deal maker who offered a black and white version of a complicated world. Build a wall. Free markets. More oil, more coal. Make stuff again and Make America Great, a refrain from Ronald Reagan’s 1980 election. Mr. Trump appealed to people who had learned to fit answers to questions like folding a carton or assembling a piece of furniture from Ikea. In a striking difference of opinion, only 50% of Boomers voted for Trump’s black and white vision.

This was the last election in which the Silent and Boomer generations had the dominant voice, falling to 44% of voters in the 2020 elections (Igielnik et al, 2021). More recent generations, the GenXers and Millennials were more tolerant of differing perspectives. In 1965, Congress revamped the restrictive immigration rules of the previous four decades to allow more immigrants from around the world. Educators taught the process of finding answers as well as the answers. Children learned that there might be more than one solution to a problem.

Although they grew up in an analog world, the GenXers and Xenials were the first generation to come of age in the digital world of the late 1980s and early 1990s (Wolfe, 2020). As earlier generations learned French or Spanish, some Millennial children learned a programming language so they could converse with a computer. A growing pluralism characterized this widening world and marked a transition from the modern to what is now called the post-modern. Later scholars may call this post-war period the beginning of the Age of Pluralism, marked by conflicting authorities, answers and solutions. Many people raised in a monoculture of similar assumptions are uncomfortable with more open perspective. Like all transitions, there is a political struggle to control the discourse.

We have put aside few of our past controversies. Despite a growing condemnation of slavery since the 19th century, the 2020 US Conference of Catholic Bishops estimated that there are still 40 million slaves in the world (2020, 4). Americans are still bound by a Constitution written in an age when people espoused equal rights in principle but believed in a natural supremacy of some races. Our laws and judicial precedents are imprinted with the beliefs and contradictions of that founding generation.

Shortly after the ratification of the Constitution, Jean Baptiste Lamarck (Famous Scientists, n.d.) formalized the evolutionary theory of acquired traits. A giraffe had a long neck because successive generations had stretched skyward to reach tree leaves and had passed this characteristic onto their offspring. For the same reason, some groups of people had evolved more even temperaments and better reasoning skills. To the founding generation, it was eminently reasonable that only men who owned property and demonstrated responsibility could vote.

In the Wealth of Nations, Adam Smith (2009) wrote “by nature the philosopher is not in genius and disposition half so different from a street porter as a mastiff is from a greyhound.” This observation recognized the commonality of our species as human beings but distinguished people by breed or race. When Smith refers to segments of the British population as a “race of laborers” he does not distinguish race by color as we do today but by capability. Like different breeds of dogs, some races were better suited for certain tasks.

Each generation leaves a legacy of their aspirations, their beliefs and fallacies codified into the institutions that govern successive generations. In the next decade, most of the Silent Generation will have passed into history but their thirst for clear and simple answers will persist in our politics. The Boomers sit on the fence between the mechanical viewpoint of the modern and the fluid perspective of the post-modern. Although their influence will decline at the polls, they will continue to control a lot of the country’s wealth so politicians will court their favor.

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Photo by Nathan Dumlao on Unsplash

Igielnik, R., Keeter, S., & Hartig, H. (2021, September 30). Behind Biden’s 2020 victory. Pew Research Center – U.S. Politics & Policy. Retrieved December 18, 2021, from https://www.pewresearch.org/politics/2021/06/30/behind-bidens-2020-victory/

Famous Scientists. (n.d.). Jean Baptiste Lamarck. Famous Scientists. Retrieved December 18, 2021, from https://www.famousscientists.org/jean-baptiste-lamarck/

Smith, A. (2009). Wealth of Nations. New York: Classic House Books. (Book 1, Chapter 2).

USCCB. (2020). Anti-trafficking toolkit 2020 – USCCB. U.S. Conference of Catholic Bishops. Retrieved December 18, 2021, from https://www.usccb.org/about/anti-trafficking-program/upload/Anti-Trafficking-Toolkit-2020.pdf

Wolfe, H. (2020, July 22). Millennials, baby boomers, gen X and gen Z: The cutoff years for each generation. Considerable. Retrieved December 18, 2021, from https://www.considerable.com/life/people/generation-names/

Long-Term Inflation Trends

December 12, 2021

by Stephen Stofka

This past week the government’s estimate of inflation in November was a whopping 6.9% increase over last year’s prices. A comparison to November 2019 prices shows an annual increase of 4.1%. From June through September of this year, the year-over-year increase in prices flattened out at 5.4%. This plateau supported the view that higher inflation readings were a temporary effect. With the availability of vaccines, Americans were resuming their lives. Supply bottlenecks at western ports were contributing to higher demand. Since September inflation has steadily increased. That wasn’t in the script.

Each month the Bureau of Labor Statistics (BLS) surveys thousands of establishments and records the prices of many goods to compute the inflation estimate. We don’t need to know the mechanics of constructing a price index to get a sense of personal inflation. Many of us conduct a smaller survey of our friends, family and fellow workers. Our basket of goods contains a few important items like food, fuel, utilities and other housing costs. From that we build an inflation base that anchors our expectations of future price changes – until it doesn’t.

If there are a series of surprises to our expectations, we modify our individual behavior in anticipation of further surprises. That behavior can aggravate inflationary pressures so that we contribute to the very condition we anticipate. In its setting of interest rates, the Federal Reserve is mindful of this effect and earlier this year two economists at the Kansas City Fed worried that inflation expectations were anchored too low (Bundick & Smith, 2021). Fed policy and a decade of low inflation had lulled people into expecting minimum disruptions in price. People might have strong reactions to price changes, small or large.

Our base of inflationary expectations is formed over several years. In the chart below is the 5 year average of annual inflation in the Consumer Price Index, the most popular measure of price change.

The mountain of inflation during the 1970s has provoked much thought by economists and policy analysts. One hundred years after World War 1, historians continue to debate the causes of that war. In 2070, economists will debate the causes and effects of that inflation mountain. The peak of the 5-year mountain shown above was more than 9% but the annual rate in 1980 was 14%. Still, our big brains make us very adaptable. It is the surprises to those long-term trends that catch our attention.

In the chart below are two 18-year periods, from 1967-1985 when we climbed the inflation mountain, and the most recent period when we have become used to sluggish growth and declining inflation expectations. The earlier period is in orange, the recent period in blue. The year labels are the most recent period. 2003 and 1967 are Year 1 in the series.

 The graph illustrates the stark difference between the 1970s (orange bars) and the most recent two decades (blue bars). Between 2003 and 2020, Americans came to expect only minor change in the long-term inflation trend. The 2021 blue bar on the right is greater than the highest change post-war inflation which occurred in 1974. It’s even more dramatic because we have become accustomed to slight changes in many prices.

The discourse in this country was already aggravated and people are quick to take offense. Social media is built on people gaining attention by alerting others to offensive remarks or behavior. Politicians try to calm the narrative but inflation surprises disrupt the political conversation. Each person responds to their personal sense of inflation and whatever media voice, mainstream and radical, they prefer. Inflation surprises get people’s attention and the media’s business model is built on that attention. Even as inflation decelerates, the nightly news will continue to feature stories that heighten people’s inflation worries because worried people pay attention.

The political waters have been turbulent this past decade but price changes have been exceptionally placid. Like a rock thrown in calm waters, big surprises make big waves that take some time to dissipate. The task of the Federal Reserve’s rate setting policy is to dampen those waves – a series of small rate increases – without sending the economy into a recession.

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Photo by Daniel Vogel on Unsplash

Bundick, B. & Smith, A. (2021). “Did the Federal Reserve Anchor Inflation Expectations Too Low?” Economic Review, Federal Reserve Bank of Kansas City. Available from https://www.kansascityfed.org/research/economic-review/did-the-federal-reserve-anchor-inflation-expectations-too-low/

The Womb Tax

December 5, 2021

by Stephen Stofka

This week the Supreme Court heard oral arguments (Oyez, 2021) in a case called Dobbs v. Jackson that involves a Mississippi law banning abortions after 15 weeks. Current practice is about 24 weeks, the point of viability when current medical technology can keep a fetus alive outside the womb. Two Constitutional lawyers discuss the issues on the National Constitution Center’s podcast We the People (2021). Also this week I was reading about an 18th century British property tax that was based on the number of windows in a home. The more windows the higher the tax. What similarities does the Mississippi law have with a tax?

In 1696, King William III enacted a progressive property tax. Poor people usually lived in homes with fewer windows so the tax was based on the number of windows. There was no tax on a house with up to 9 windows. In the 1750s, the tax on the 10th window was $7.47 per window for all the windows, $75 in current dollars (The National Archives, 2021). In the 1770s, Adam Smith (2009) noted that this was the approximate weekly wage for a mason. A house with 15 windows or more was charged $11.22 for each window so that the marginal increase in tax for the 15th window was $63.72. What did people do? They boarded up some of their windows to avoid some or all of the tax. In an age with indoor fires for cooking and heating, this reduced the flow of fresh air in a home and led to disease and death from asphyxiation. In 1851, the tax was repealed.

A tax is a compulsory payment for the support of  government. A state ban on abortion compels a woman to carry a baby to term. Any loss of work income is an economic cost that a woman must bear in support of the state’s interest, using that term in a general sense (Hudson, 2019). The state claims an interest but does not pay a woman for the rental of her womb to perform that service. Is that a violation of the takings clause (Epstein & Peñalver, n.d.) in the 5th Amendment or is a rental of a womb not a permanent taking? When a state leases a building from its owner, the state pays the owner for the use of the building. Is there an implied contract when the state leases a woman’s womb to carry out the state’s interest?

The tiered structure of the British window tax has some similarities to the Mississippi law. The state does not impose a tax on the first 15 weeks of pregnancy. At the 16th week, the marginal effect of the tax is substantial. A woman must leave the state to seek abortion services, seek other intervention or continue with the pregnancy. A woman bears a considerable expense in raising a child. Economists distinguish between the statutory incidence and economic incidence of a tax. The statutory language states which party remits the tax. The economic incidence is who bears the impact of the tax. A tax on cigarettes is remitted by the retailer to the state – that’s the statutory language – but the impact, the payment, of the tax is on the consumer.

Unlike the window tax, the womb tax is selectively applied only to wombs capable of bearing children. Owners of a home in 18th and 19th century Britain could board or brick up some windows to avoid or reduce their property tax. That action could be undone if the owner wanted to pay the tax. A woman can only have her womb removed if she does not want to make it available to the state. If several thousand women were to dump their wombs – or some symbolic semblance thereof – on the steps of the Mississippi statehouse, legislators might understand the impact of this womb tax.

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Photo by chris robert on Unsplash

Epstein, R. A., & Peñalver, E. M. (n.d.). The Fifth Amendment Takings Clause. Retrieved December 04, 2021, from https://constitutioncenter.org/interactive-constitution/interpretation/amendment-v/clauses/634

Hudson, D. L. (2019). Substantial government interest. Retrieved December 04, 2021, from https://www.mtsu.edu/first-amendment/article/1615/substantial-government-interest. Constitutional lawyers distinguish three levels of state interests: legitimate, substantial and compelling.

National Constitution Center. (2021). National Constitution Center. Retrieved December 04, 2021, from https://constitutioncenter.org/

The National Archives. (2021, February 01). Window tax. Retrieved December 04, 2021, from https://www.nationalarchives.gov.uk/education/resources/georgian-britain-age-modernity/window-tax/. Note: the 6d per window tax is £.025. I used the Bank of England CPI calculator (https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator) to convert pounds in 1750 to 2020 pounds. A pound today is worth $1.32. Also, see this blog for some fun facts https://sashwindowspecialist.com/blog/history-of-window-glass/

Oyez. (2021, December 1). Dobbs v. Jackson. Retrieved December 04, 2021, from https://apps.oyez.org/player/#/roberts12/oral_argument_audio/25307

Smith, A. (2009). Wealth of Nations. New York: Classic House Books. Smith discusses wages in Part 1, Chapter 10.

The Price of Oil

November 28, 2021

by Stephen Stofka

On Friday, fears of another wave of Covid lockdowns caused a sharp decline in equity and commodity prices worldwide. The decline was fueled by short-term traders who did not want to hold their positions over the holiday weekend and sold into a thin market. Crude oil prices fell 12% and closed the day below $70, and below the price of oil in the summer and early fall of 2018. Did we forget how high prices were just a few years ago? Rising oil prices helped fuel voter discontent that Democrats rode to take back control of the House that year.

Below is a graph of West Texas Intermediate, one of two oil benchmarks used domestically and shipped around the world. The price is adjusted to 2020 constant dollars.

As the price of oil broke out of its price channel in the early 2000s, companies began to develop more effective horizontal drilling techniques (Mead & Stiger, 2015, 4). In 2013, U.S. production reached a 24-year high and both political parties claimed credit. Oversupply led to a 50% price decline in 2014. Drivers liked the prices at the pump but states which had enjoyed the boom were hurt by the bust. Republican candidates promised better times in these red states if they were elected.  

In a democracy, politicians must play a game of voter persuasion. They spend millions in opinion polls  to test the temperature of voter passions, to discover the emotional buttons that will win votes. They rig Congressional districts to maximize the voter sentiment in one party’s favor. Like heralds marching into battle, candidates wave their principles and values for all to see. We have chosen this system, this political game, as the best alternative to armed conflict in the streets. Many of us were alarmed when the January 6th rioters championed a return to the violence that shook the foundations of civil society in France during the 19th century. Seventy years of successive revolts in that country left many bodies in the streets. We have far more sophisticated weapons and lots of them. Do we want that bloodbath?

As bread was a rallying cry in the French Revolution, the price of oil sparks political passions in the U.S. Higher prices impact rural folk more than urban residents, blue collar businesses more than white collar firms. When workers have to pay $100 – $200 to fill up a 40 gallon tank on a service truck, they complain. If their party is in power, it’s the fault of speculators and they will soon forget the pain when prices decline.  Voters protest loudest at high oil prices when their party is not in power. Politicians promise that their policies will bring down oil prices. They know their promises are as real as unicorns but voters like unicorns and fairy tales.

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Photo by David Thielen on Unsplash

Mead, D., & Stiger, P. (2015). The 2014 Plunge in Import Petroleum Prices: What Happened. BSL: Beyond The Numbers, 4(9), 1-8. Retrieved November 27, 2021, from https://www.bls.gov/opub/btn/volume-4/pdf/the-2014-plunge-in-import-petroleum-prices-what-happened.pdf

Savings And Inflation

November 21, 2021

by Steve Stofka

Two billionaires, Warren Buffett and Elon Musk, pause before the packaged meat in a grocery store. This past week the price of rib eye steak, their favorite, has gone up a lot. Elon has had a busy week and wants a good rib eye so he picks out a steak and puts it in his basket. Warren would also like a rib eye but can’t bring himself to spend that much on a meal he will cook at home. He decides to buy the top sirloin and marinate it for a few hours. For whatever reason, Warren has reacted to a rise in the price of one good by substituting another good. Economists call this the substitution effect.

The next day Mary is shopping at that same store for a top sirloin steak for dinner. She notices that a few rib eye steaks are on sale for half-price. The expiration date is the next day but she intends to cook it that night so that is not a concern. Just as Warren did the previous day, Mary has responded to a price change by substituting one good for another. What about Elon? His response was to pay the higher price, substituting a different good, his income, for the higher price. Economists call this the income effect, where we substitute money for the higher price. Where does the money come from?

One source is savings, our backup income stream. Savings is the amount of income we have left over after paying taxes and buying stuff. It’s the money we didn’t spend before. After age 40, we become more conscious of the need to save for the later years in life when we stop working. Here’s a chart of per person savings for those over the age of 55. This does not include the equity that people have built up in their homes or investment accounts, but it does show broad trends.

The first of the Boomer generation turned 55 in 2001, a tumultuous year marked by the 9-11 attack, the dot-com bust and the buildup to the Iraq war. During the 2000s, economists and financial advisors warned that the Boomers had not saved enough. The Boomers complained that higher payroll taxes (Tax Policy Center, 2019), used to support earlier generations who had not paid in enough to Social Security, had reduced their ability to save. When the financial crisis reduced the value of both homes and investments, Boomers realized that their savings were too low. During the following decade, many worked past retirement age. Cautious spending by this age group restrained economic growth following the crisis and kept inflation in check during the recovery.

In the spring of 2020, Covid hospitalizations and death shot up in New York City and other urban hotspots. The Trump administration shut down most of the economy for several weeks. Congress and the administration passed emergency measures to provide relief to people who had lost their jobs. Savings shot up and incomes dropped. The pattern for all adults was the same as for older Americans.

As stores reopened and the economy recovered, it was inevitable that some of those savings would be drained away to buy stuff. The abrupt decline in savings has put pressure on prices. Are inflationary pressures temporary or  more permanent? Older generations have built up a reserve buying power that they did not have at the onset of the financial crisis twelve years ago.

There are 70 million Boomers who are spending down their accumulated savings. The Millennial generation, now 72 million strong, is the counterbalancing force to that dis-savings. Older Millennials are crossing the age-40 threshold when people start thinking that they had better put something away for the future. This tug of war in spending and savings between these two generations could continue to put upward pressure on prices for several more years.

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Photo by Damir Spanic on Unsplash

Tax Policy Center. (2019, July 18). Payroll tax rates. Retrieved November 20, 2021, from https://www.taxpolicycenter.org/statistics/payroll-tax-rates. From 1970 to 1990, payroll tax rates increased by 50%.

Prices Rising

November 14, 2021

by Steve Stofka

Put a bunch of people in a crowded theater, then yell “Inflation!” and no one runs for the exits. Instead they all turn to each other and start arguing. The recent rise in prices has prompted much discussion on the dynamics and causes of inflation. In the first six months of this year, the Fed cautioned us to compare 2021 prices to those of 2019 to get a more accurate picture of inflation. That longer term perspective began at 2.0% in January and slowly rose to 3.0% in June (BLS Series CUUR0000SA0). However, it keeps inching up and topped 3.7% in October. The one-year inflation rates have topped 6%. There are several causes including supply bottlenecks and higher demand but how long will it last? Is it temporary or more permanent? What should the Fed do? Is this the return of 1970s inflation?

This will be a two-parter so that I don’t strain anyone’s attention. First some background. Inflation is an increase in the overall price level. Why do prices go up? Because buyers buy stuff. How do people get the money to buy stuff? By working. In the 1950s, a British economist William Phillips studied a seventy year period of data and established an inverse relationship between unemployment and inflation. If more people are not working, they don’t have the money to buy stuff and prices don’t go up much. During the 1960s, unemployment declined more than 3% to 3.4% and inflation rose from 1% to 5%. This interplay confirmed Phillips’ hypothesis and policymakers believed that they could make a tradeoff between unemployment and inflation, balancing the two to produce an optimal economy. In the 1970s, high inflation and high unemployment dashed those hopes. Later, the Phillips hypothesis was revised, matching the relationship of the change in the inflation rate to unemployment.

Still other revisions included the role of the public’s expectations of inflation. I’ll take a real life example from the late 1970s. The price of a stereo with turntable and speakers is expected to go up in price by 20% next year. A store is offering credit with a 20% interest rate. If a consumer buys it now rather than saving up until next year, the amount of interest equals the change in price. A consumer gets to use the stereo for a year for free! Consumers start moving their future buying decisions toward the present and this ratchets up demand and inflation. 

Let’s go back to the definition of inflation as an increase in the overall price level. Where does that start? It may be the price of a commodity that we all use every day. During the 1970s, the sharp increase in the price of oil certainly had an effect. However, there was a sharp increase in oil in the summer of 2008 and there was not a prolonged bout of inflation. In fact, it may have contributed to the ongoing job loss that began in 2007 and added fuel to the developing housing crisis. Every time people think they got inflation figured out, it ducks and weaves like a boxer.

Without any change in policy, inflation automatically transfers income around the economy. Real, or inflation-adjusted, wages may remain the same but workers pay higher taxes on the nominal gains in wages. Economists call this seigniorage. The price of goods is higher so sales taxes are higher. Older people with savings earn higher interest income but those who want to borrow pay more in interest. Banks bank more profits on the difference, or spread, in the interest they pay on deposits and what they charge for loans. At higher mortgage rates, people can buy less house with their money because mortgage payments in the early years of a mortgage are mostly interest.

At higher rates of interest businesses cut back expansion plans and unemployment increases. This may help curb price pressures but people begin to adopt coping strategies than can prolong or exacerbate inflation. This creates a tug of war over the direction of prices. Next week I’ll review some of these behaviors and data trends from the past decades.

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Photo by Vicky Ng on Unsplash