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.


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.


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.



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.


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

MERIC. (2021). Cost of living data series. Retrieved March 06, 2021, from