Month: February 2022

A Real Test

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February 27, 2022

by Stephen Stofka

A central archetype of the American character is an individual who stands up to a large institution. America declared independence in defiance of the British Empire. The text and spirit of the Constitution shows a healthy distrust of institutional power. In Mr. Smith Goes to Washington, Jimmy Stewart played an idealistic young man who wrestled with the power politics of the Washington elite. In 1971, Daniel Ellsberg challenged the White House and Defense Dept when he released the details of the Pentagon Papers to the New York Times. In his 2016 Presidential campaign, Donald Trump played the newcomer, ready to challenge the institutional power of Washington. This week thousands of Ukrainian civilians volunteered to take up arms against the Russian Army’s assault on their capital, Kyiv. This was a defiant defense of democracy that most Americans could champion.

Americans have long been conflicted in their attitudes to the institutions that form the web of civic life. Our faith in government has been sorely tested in the past two decades. The pretext for the war in Iraq was founded on faulty intelligence and political passion. The fall of Enron and the discrediting of a large accounting firm, Arthur Anderson, led many to question what the attention and motives of the many agencies that took up office space in Washington. The financial crisis confirmed our worst fears. Corruption, incompetence and political impotence had helped bring the global financial system to its knees. When the pandemic touched the shores of America in early 2020, there was not much belief left in the reservoir of American trust.  

In late 2018, the Pew Research Center interviewed 10,000 Americans about their trust in government (Rainie et al., 2021). Trust in government was at historic lows and ¾ of respondents thought it had become much worse in the past twenty years. A supermajority of Americans can’t distinguish truth from lies when politicians speak. At that time, only 42% of those interviewed thought that a lack of trust was a big problem. The pandemic has revealed just how big a problem it is. Parents have threatened school board officials. Thousands of airline passengers have threatened fellow passengers and airline employees. Americans have reacted violently not to an invading army but to mask mandates. Is this what we fight for?

A lack of trust in government may be very low but it is not new. More troubling is the growing lack of trust we have in other Americans, an unraveling of social cohesion that takes years to develop and decades to repair. Under the pretense of fostering connection with others, social media helps drive us apart with carefully written algorithms that promote conflict as a form of social engagement. We need an enemy other than our neighbors. As Ukrainians escape with their children to Poland, Slovakia, Hungary and Moldova – as they sleep in subway tunnels to escape bombardment by Russian troops – as they take up arms to protect their capital – let’s remember that the real test of freedom is not whether we have to wear a mask in a grocery store or on a plane.

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Photo by Aaron Burden on Unsplash

Rainie, L., Keeter, S., & Perrin, A. (2021, July 27). Trust and Distrust in America. Pew Research Center – U.S. Politics & Policy. Retrieved February 27, 2022, from https://www.pewresearch.org/politics/2019/07/22/trust-and-distrust-in-america/

Good Hands Government

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January 20, 2022

by Stephen Stofka

Socialist policymaking is founded on an aspirational principle of equal outcomes. Central to that approach is an expanded role for government as an insurance company, the insurer of last resort. Should government be the insurer of first resort? Some would prefer that but others are uncomfortable with the lack of privacy that entails. A characteristic of insurance is what economists call asymmetry of information. The insured knows more about their situation and risks than the insurer. Do we want to give government an incentive to pry into our private lives? Can government protection create a moral hazard? Will people be less careful or less industrious because they trust that government has their back? Student loan debt brings a pointed focus to some of these issues.

According to 39 state Attorney Generals, Navient was a predatory servicer of high-interest loans for students attending for-profit colleges (Settlement Administrator, 2022). In the mid-2010s, the Obama administration put its foot down with many  for-profits – if they could not meet minimum graduation rates, they would be cut off from federal funds. Many folded. Recently, 39 states  reached a settlement with Navient that gave relief to many thousands of student borrowers. Who was given no relief? Students who had been paying their loans on time.

In many areas of our lives, we disagree about who is responsible for the risks of unwelcome outcomes. A person who gets an education assumes a certain risk that higher lifetime earnings will be greater than the cost of an education. Such a risk cannot be quantified or insurance companies would sell policies to college students. However, the federal government provides some guarantee for federal student loans. Colleges, including for-profit schools, are usually accredited. That accreditation provides some assurance – but not insurance – to a student that a school’s curriculum has sufficient quality to earn the accreditation. However, conventional non-profit colleges are supervised by regional accrediting organizations that have higher standards than the accrediting bodies of for-profit colleges (The Best Schools, 2022). Without the regional accreditation, for-profit students often discover that they cannot transfer their credits to a 2-year or 4-year college. Employers may doubt the worth of their educational credentials.

Is this a case of buyer beware? How is a college education different than starting a small business? Students have a wealth of research available to them before they enroll in a for-profit college. Should taxpayers pick up the tab for students who may not have done adequate research before committing to a student loan?  Every year hundreds of thousands of small businesses go out of business for the same reason. They did not research the market. They didn’t have adequate management experience. Many people may be stuck with 2nd mortgages used to fund the business. Should taxpayers bail out small business owners? 

Financial and medical risks can be substantial and we may vehemently disagree about government’s responsibility for absorbing these risks. Government now insures us against loss of income due to injury (workmen’s compensation) or permanent inability to work (disability insurance), old age (Social Security), protects our pension funds (ERISA), insures our homes against flooding (Flood Insurance Program). It pays our medical bills if we are poor (Medicaid) and when we are old (Medicare).

Should government have a minimal or expanded role in our lives? If we want government to have our back, what is the limit? What are the boundaries between government and our lives? What is the extent of our personal responsibility? How much risk must we shoulder? There are many strong opinions on the subject.

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Photo by Lina Trochez on Unsplash

Settlement Administrator. (2022, January 13). 39 State Attorneys General Announce $1.85 Billion Settlement with Student Loan Servicer Navient. Home. Retrieved February 20, 2022, from https://navientagsettlement.com/Home/portalid/0

The Best Schools. (2022, January 6). Guide to for-profit colleges: What you need to know. TheBestSchools.org. Retrieved February 19, 2022, from https://thebestschools.org/resources/for-profit-colleges/

Unfolding Story

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February 13, 2022

by Stephen Stofka

Trying to find the cause of inflation is like looking for a car in a big parking lot. Science is a process of ruling out causes. The latest release of the Employment Cost Index (ECIWAG) from the BLS rules out higher wages and salaries as a key driver of rising prices. During the financial crisis wages fell below trend and have stayed below the trendline for 12 years until this past year.

The average pay increase this past year has been 4.0%. Workers who have gained the most in this past year have been those with lower wages. Customer facing workers in leisure and hospitality workers are up 8% and retail workers have gained 6.3%. Other service jobs and whole sales are up over 5%. Industries with the lowest increases are in education 2.5%, state and local government (2.5%), utilities 3.0%, and financial activities 3.2%.

Two times a year the Philadelphia Federal Reserve (2022) surveys a number of economic forecasters and publishes the consensus outlook for inflation over the next decade. The current projection is 2.5%. Expectations for inflation among the public are on a shorter time frame. Once a month the University of Michigan publishes their survey of customer inflation expectations. December’s reading was 4.8%.

Housing costs could be a culprit for rising prices. The vacancy rate is very low at 5.6% and that has helped support a 5.7% increase in housing costs (CPIHOSSL). The growth rate has been swift in the past year, an aftereffect of the pandemic. For several years, the growth rate of housing costs had been about 2.7%, then fell to 2% during the pandemic. This erratic growth of the past months is unlikely to last.

The lack of new car inventory has led to sharp increases in used car prices, with smaller cars leading the pack. When the pandemic hit, auto manufacturers canceled their orders for semiconductors. As the tech factories in Asia resumed production, the auto manufacturers dedicated what chips they could get to larger SUVs and trucks with the highest profit margins. That has left a severe shortage of smaller cars. That has resulted in sharply higher prices for the used models.

The pandemic has been an experiment that would be unethical if done by anyone other than mother nature. For decades economists will try to understand the interlocking price and supply mechanisms. Economists still argue about the causes of the stagflation of the 1970s, almost fifty years ago. Human society and our interactions are at least as complex as the human mind. As economists sort through the dynamics of evolving relationships they can only hope to understand what is not true.

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Photo by Evergreens and Dandelions on Unsplash

Federal Reserve. (2022). First quarter 2022 survey of professional forecasters. Federal Reserve Bank of Philadelphia. Retrieved February 13, 2022, from https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q1-2022

A Voting Booth

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February 6, 2022

By Stephen Stofka

How important are energy prices? British homeowners are paying almost 60% more than last January’s prices to heat their homes with natural gas (https://tradingeconomics.com/commodity/uk-natural-gas). They are upset at government officials and the party in power. In the U.S., the annual January increase to residential consumers was only 2.6% (https://www.eia.gov/dnav/ng/hist/n3010us3m.htm). The UK imports most of their natural gas while US consumers enjoy the benefits of US gas reserves. Americans drive far more than Brits so the weathervane of popular sentiment  in the US is the movement of gasoline prices. In general people don’t like rising prices – period – but when gasoline prices rise faster than paychecks, the public has the sense that something is broken and they want government to fix it. A gas pump can be a voting booth.

During the eight years of slow recovery following the financial crisis in 2008, paychecks struggled to keep up with the rise in gasoline prices. Income growth finally rose above gasoline price growth in the middle of 2016. As incoming Presidents do, Mr. Trump took credit for some of the gains and policies of his predecessor. Until the pandemic struck, paycheck growth stayed above the growth in gasoline prices. These annual growth rates erase most of the seasonality of gasoline prices, which fall in the winter and rise in the spring when the refineries must switch to a more expensive blend for the heat of summer.

That trend took a “wheelie” in the spring of 2020 when the entire country responded to the swell of pandemic deaths in New York City. Headed by a soapbox President with little organizational skill, the Trump administration struggled to cope with the daily demands of the pandemic. Mr. Trump himself cared little for the research his staff brought him. He has admitted that he is not a reader, trusting his instincts more than information. Had he shown more consistency during this singular pandemic, he might have retained enough college educated male voters to tip the 2020 election in his favor. As with many of us, Mr. Trump cannot come to grips with his own failings so he blames others. He has turned that nasty habit of self-deception into an art form of grand deception.

As the chart shows, the annual growth in gasoline prices was far above the growth in paychecks when Mr. Biden took office in the beginning of 2021. Both growth rates reached 10% in the 3rd quarter of last year, but people pay more attention to the sticker price on the pump as they fill up their cars. In the fourth quarter, paycheck growth edged up while gasoline prices growth edged down, a heartening trend if it continues.

Presidents have little effect on gasoline prices, a global commodity dependent on supply and demand around the world and subject to geopolitical tensions. However, the public holds Presidents responsible. If gasoline prices are high, reporters at White House press briefings ask what the administration is going to do about it. Occasionally, they release some of the government’s strategic gasoline reserves to show some action. That release has only a small effect on global prices but it shows the administration’s attention and good intentions. Until the country went off the gold standard during the Depression, each President had to answer for movements in the price of gold. Gasoline powers our daily lives. It is our daily gold.

Mr. Biden is mindful of the electoral beating that Mr. Obama took in the 2010 elections when the Tea Party led a Republican movement to forcefully take the majority gavel from the House Democrats. Most Presidents suffer election losses in the midterms but it was a devastating turnaround in a census year. Mr. Obama was more skilled at rhetoric than taking the tiller of a national political party. As a politician with decades of experience, Mr. Biden is already in campaign mode, moving funds to battleground states to get out the vote in November. He will be mindful of the public’s sensitivity in the final months leading up to the midterms.

Gasoline prices are higher in the summer months and people drive more so they notice high prices. The press is quick to point out Mr. Biden’s low approval ratings, currently in the low 40s. Mr. Biden’s low was Mr. Trump’s high. In a country evenly split between Democrats, Republicans and Independents, a President will struggle to gain and hold a majority favorable public opinion above 50%. According to Gallup (https://news.gallup.com/poll/116500/presidential-approval-ratings-george-bush.aspx) George Bush did not enjoy a majority opinion after 2005, his first year of his second-term. His ratings fell near 30%, lower than Mr. Trump’s lowest ratings. When did those lows come? During the summer months of 2008 when gasoline prices rose above $4 per gallon. Voters carried their sticker shock at the pump into the voting booth a few months later and gave Democrats a resounding majority.

If gasoline prices are moderate this summer, that will give a boost to Democratic chances at the polls but Mr. Biden should be savvy enough not to count on that. He must assume that prices will not be friendly to him or his party this summer. The Republican strategy is to use pocketbook issues to regain a majority in both the House and Senate. Their divisive stance on moral issues only antagonizes Independent voters in the suburbs so Republicans must focus on practical issues. Midterm elections suffer from low turnout. Voters shrug. The party that can energize their voters can command the political field for the next two years. Gasoline prices energize voters.

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Photo by Dawn McDonald on Unsplash