The Water That Connects Us

August 28, 2022

by Stephen Stofka

Several events this week share a common theme. President Biden announced a partial student loan forgiveness program.  Fed chair Jerome Powell announced the central bank’s firm commitment to tame inflation. The justice department is pursuing tens of thousands of fraudulent claims related to the pandemic federal relief programs. California Governor Gavin Newsome announced that the state will completely phase out gas fueled cars by 2035. What do these four events have in common? Government officials taking action to shield or relieve individuals from some oppressive force – a debt burden, rising prices, a pandemic, and a contributing cause to climate change. Government is a raft, an anchor of safety that we must share if we are to keep our heads above the water that connects us.

The physical world does not care whether human beings acknowledge or deny climate change. In 2013 the IPCC released their fifth assessment of the global climate. They were careful to note that they could not project individual small weather events like thunderstorms but that there would be more extreme weather events. Tree ring data indicates that this two decade drought in the west last occurred 1200 years ago. Agriculture uses 80% of the total amount of water humans use and have been severely impacted by water rationing. The federal government and states have spent billions fighting fires throughout the west. In recent days several southern states have experienced “1000 year” floods. They have declared emergencies to trigger federal assistance for cleanup and rebuilding.

The sun pours a flow of energy on the earth. Greenhouse gases like carbon dixoide retard the escape of the heat from that energy. California’s initiative is a key declaration of an aspirational agenda to lessen the release of greenhouse gases.  Building an infrastructure for thousands of electric vehicles is a Herculean task. So was the journey from Independence Missouri on the Oregon Trail in the 19th century. More of us are realizing that things have gotten to a point that we have to make some changes whether we like it or not. California has declared its intention to start the journey. Let’s hope more states will follow.

Inflation is oppressive. In a Jackson Hole summit speech this Friday Fed Chairman Jerome Powell stressed the Fed’s  commitment to taming inflation. “Inflation feeds on itself,” he said. As people come to expect higher inflation they may buy more now, making choices that actually accelerate inflation. When inflation is low, businesses and people no longer need to factor in rising prices as they make future plans. Former Fed Chairman Allan Greenspan called it “rational inattention.” The Fed has a twin policy mandate from Congress – full employment and stable prices. Because unemployment is so low the Fed feels that they can focus their policy tools on curbing inflation. Powell warned that rising interest rates would have a negative impact on both economic growth and employment. The stock market fell more than 3% in response to the Fed’s determination to keep raising rates until inflation has returned closer to their target.

David Farenthold (2022) reports that the Justice Department is pursuing tens of thousands of fraudulent claims under the CARES act. Three relief programs totaled $5 trillion, $3.1 trillion in the spring of 2020 and $1.9 trillion under the new Biden administration in the spring of 2021. Because there are so many cases, those who stole $10,000 will probably escape prosecution as investigators tackle claims with larger amounts. The Labor Department has 39,000 cases of fraudulent unemployment claims pending. The Small Business Administration has over two million fraudulent claims to investigate and verify. So far, the Justice Department has charged 1500 and secured 500 convictions. During the pandemic, Congress reached out. Many took advantage.

President Biden announced a student loan forgiveness program of $10,000 for each student with outstanding student debt and an income below $125K. The debt relief does not apply to those pursuing advanced medical and law degrees. A surge of college enrollment before and after the Great Recession drove student loan debt much higher. For-profit colleges overpromised well-paying careers to attract lower income students who qualified for federal grants and loans. Those low-income students who qualified for Pell grants will be eligible for up to $20,000 of student loan forgiveness. This will help minority students and women who typically earn less even after earning a BA degree. Most of those who graduate from 4-year schools come from the top 50% of incomes, and are endowed with more financial and educational resources prior to entering college. Whether a president has the power to forgive student loan debt is a matter for the courts. Mr. Biden’s executive action will surely be challenged.

Former President Ronald Reagan once quipped “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.” Despite his rhetoric, Reagan headed a big spending government that helped certain groups of people. Communities near military bases appreciated his military buildup in the fight against the Soviet Union. Investment and savings banks appreciated the 1984 and 1986 bailouts from his administration. High interest rates during the early 1980s drove the economy into a deep recession and curbed inflation but crippled debt-burdened farmers. Many family farms were sold to large agricultural holding companies. Military contractors and finance companies got relief. Farmers did not.

The founders of our country thought that the business of government was to protect people from oppressive burdens. Then as now we argue about whose burdens, who pays and how they should be relieved. We are all interconnected, swimming in the same pool. Government is a big raft, a temporary rest from a lifetime of staying afloat. At times we appreciate the hand up when someone says, “I’m from the government and I’m here to help.”


Photo by Jong Marshes on Unsplash

Fahrenthold, D. A. (2022, August 16). Prosecutors struggle to catch up to a tidal wave of pandemic fraud. The New York Times. Retrieved August 25, 2022, from

United Nations. (n.d.). United Nations Charter. United Nations. Retrieved August 26, 2022, from

Community Consensus

August 21, 2022

by Stephen Stofka

Over a century ago, the passage of the 16th Amendment allowed the federal government to tax earnings from labor, giving the central government entry into the lives of every American. Fifty years earlier, Congress had passed an income tax to pay the debts incurred during the Civil War. In 1895, the Supreme Court ruled that taxes on income were a direct tax that must be apportioned in accordance with Article 1, Section 8 of the Constitution. The 16th Amendment bypassed that uniformity requirement to tax incomes at different rates. The target of the income tax was the top 1% but within two decades the tax affected low and middle income groups. The stated goal of current income taxation is income distribution and a leveling of outcomes. A century after the passage of the income tax, income distribution has reached record levels of inequality (FED, 2021). As a leveling device, the income tax has failed.

As tax rates on income increase, incentives to evade the tax rise. Those with the highest rates lobby to have their income excluded or be taxed as a special class. As advocates of Modern Monetary Theory point out, a sovereign nation that issues its own currency does not need tax revenues to fund itself at the margin. Taxes act as a restraint on the purchasing power of private parties and the spending priorities of government. Because income taxes are not levied uniformly, they are especially subject to corruption and political influence by those most damaged by the tax. Billionaire investor Warren Buffett has noted that he pays a lower tax rate than his secretary. A tax law meant to curb inequality thus promotes inequality under the law.

Bitcoin* promised anonymous transactions between people at a low cost. It’s anonymity promoted the principle of uniformity, treating large and small transfers equally. The principle of peer-to-peer exchange without government oversight, taxes or exchange fees recalls an earlier time in our history when there was a quasi-boundary between society and the federal government. Society is built on agreement. The foundation of government is forced compliance with the law. An example is our courts and police forces. Political economy is the marriage of these two institutions, force and agreement. Economics is the study of exchange in the search to satisfy our needs. Politics is the study of the division of rights and power. Needs and rights must ever be in conflict.

In conventional exchange, rights are recognized and protected by a government body. Enforcement involves sanctioned force that is concentrated in a small proportion of our society and that concentration of power makes government subject to corruption. The deluge of lobbyists on Capitol Hill is a testament to the dominant power of the federal government. Bitcoin distributes the recognition of rights across a vast public ledger but it lacks an enforcement mechanism to protect those rights. Bitcoin’s principle of distributed consensus offers the promise that the sanctioning of force could be more equitably distributed among majority and minority groups in our society.

Minority groups are often victimized by selective policing that keeps them penned into socio-economic spaces on the fringes of political power. An unpaid parking ticket rapidly accumulates interest and late fees, then becomes a bench warrant and makes someone subject to arrest. The owner of a delivery truck fleet in New York City with multiple double parking violations is rarely arrested. Institutions of enforcement were designed by the majority for the benefit of the majority.

Fear of the police and those institutions is felt deep within everyone in a minority neighborhood. Power tends to concentrate and leads inevitably to autocracy. A distributed ledger principle acts as a curb on that tendency. A community with digital control of police weapons might be able to disable the weapons of an abusive officer, forcing that officer onto desk duty or patrolling parking meters while an incident is investigated. What is science fiction today becomes science fact tomorrow. Fifty years ago a flip phone communicator like the one used on Star Trek was a figment of an author’s imagination. The public ledger technology that forms the foundation of Bitcoin exchange is still in its infancy but it is a vison of distributed community constraint as opposed to the autocratic constraints imposed by government.

In principle, the law is meant to be a uniform constraint. In practice, the law is a constraint warped by those with the money to buy influence and political power. Those who currently have power fight hard to keep it. If public ledger technology could be adapted to a community constraint on the use of force, those with resources would likely develop a way to modify that constraint for their own benefit. Should society abandon the pursuit of a distributed community constraint? No. The internet is younger than the oldest millennial and is pockmarked with scams and illegal activities but the benefits outweigh the dangers. Even if Bitcoin remains a private currency with limited adoption, its technology and principles point to a better world.


Photo by Alexandre Van Thuan on Unsplash. A library is a distributed perspective.

*I’ve used Bitcoin as a substitute word for digital currencies in general.

Federal Reserve Bank of St. Louis. (2021, October 15). How has income inequality changed over the years? Saint Louis Fed Eagle. Retrieved August 20, 2022, from

Housing Affordability

August 14, 2022

by Stephen Stofka

The National Association of Realtors (2022) publishes a Housing Affordability Index (HAI) that measures median housing prices, mortgage rates and median family income to determine a ratio of housing costs to family income. June’s index was the lowest affordability since 1989. Since the Fed began raising rates this year, affordability has fallen by a third. In the notes I’ll include some comments on the methodology behind the HAI.

With technological progress, we expand our definition of what is a necessity. We argue whether government has a responsibility to ensure that each family has a certain level of sustenance – adequate housing, food, a source of income and access to educational resources. Those in neighborhoods with single family homes resist efforts to build affordable multi-family housing. A real estate developer earns a higher profit building expensive townhomes than affordable housing units. Should a developer be compensated if required to build affordable housing? City councils would prefer not to bring up the subject of using tax money to compensate a developer for doing less.

We disagree about who should pay, who should get and how much. Several decades ago, the homeless were less visible, a huddle of a human being lying under a tree or on a park bench, occupying about 18 square feet. In destination cities like Denver, Portland, L.A and other western states, encampments of homeless in colorful pop-up tents line downtown sidewalks and along streams and rivers that course through the town. Depending on the size of the tent each person may occupy up to 50 square feet. Like the rest of us, they are taking up more space per person. Are there more homeless or are they simply more visible?

The reasons why people are homeless are numerous and varied but the dynamics of housing supply and demand are key factors. Where demand for rental housing is low, landlords of affordable units may skip a criminal background or credit check. When demand is high, rents are higher and landlords are more discriminating. They may require higher security deposits as a tool to screen out renters. The annual change in rental costs was 6.3%, below the 7.3% increase in housing costs but workers’ wage increases have not kept pace in the past year. (I’ll put the series identifiers and index numbers in the notes at the end). Over a long time period, have earnings kept up with housing costs?

I began with 1973, the year that the U.S. and most of the world adopted floating exchange rates between currencies. This allowed capital more freedom to move around the world. Several economists mark that as a turning point when the returns to labor began to lag behind the returns to capital. Today’s workers make $612 for every $100 that workers made in 1973, a 6:1 ratio. Housing costs have risen even faster. The Bureau of Labor Statistics calculates that a person spends $888 for shelter today for each $100 spent in 1973. In computing the CPI, the Bureau of Labor Statistics (2022) and the Census Bureau include mortgage payments, taxes and insurance – PITI – to determine the cost of shelter itself (32% of income), about 5% for utilities and another 5% for maintenance and repairs. Together they make up more than 40% of a family’s income.

We measure things in order to compare qualities. An example might be measuring the width of a bookcase and the width of a space in the living room where we want to put the bookcase. Comparing total housing costs across five decades is difficult. We prefer to live in bigger spaces and in far greater comfort than we did 50 years ago. Today’s new homes average 2600 SF. The thirty year average is 1800 SF. Moura et al (2015) estimated that each of us has twice the space of a person living in 1900. Total housing costs may have grown almost 50% faster than wages but per capita housing space has grown at least as much. Adjusting for the larger personal space, we could conclude that wages have kept up with total housing costs. But that’s not how many of us perceive affordability. More space and comfort has become our standard.

Changing standards and expectations cause a shift in definitions and benchmarks. The BLS includes the cost of cell phones, computers and internet access under Information and Information Processing. Many families consider these to be utility expenses as necessary as the heating and electric bill. The BLS estimates a family spends 3.5% of their income on these modern day necessities – about $3000 a year. TV cable subscriptions add another 1%. Five decades ago, a family had a $0 monthly cost for these. Together that cost represents $320 per month that impacts housing affordability. The cars we drive today are safer, more mechanically reliable and more fuel efficient but we spend more of our income on transportation costs. In the post-war period, food and clothing were almost half of a typical family’s expenses. Today those items make up just 13% of a family’s spending (BLS, 2014). We live in bigger homes because other items that used to take up a lot of space in our budget have shrunk.

News media often puts current economic measures in historical context – the highest since and the lowest since – but these quantitative measures are not adjusted for improvements in the qualities of goods. On a hot summer’s day five decades ago, there might have been several overheated cars on the drive home from work. Changing a flat tire on the side of the road was common. Automobile deaths were far higher. Older people died from heat exhaustion in uncooled apartments and homes. Our standards and expectations have changed.

Each month economists measure thousands of data points – as numerous as the stars in the night sky. Economists and politicians connect those dots using different paths of reasoning, motivation and perspective. We may cling to a particular doctrine that clouds our interpretation of the data. In the end economic issues are personal. Have our earnings kept up with our housing costs?


Photo by Tierra Mallorca on Unsplash

BLS. (2014, April). One Hundred Years of price change: The consumer price index and the American Inflation Experience : Monthly labor review. U.S. Bureau of Labor Statistics. Retrieved August 12, 2022, from

BLS. (2022, February 11). Relative importance of components in the Consumer Price Indexes: U.S. city average, December 2021. U.S. Bureau of Labor Statistics. Retrieved June 17, 2022, from

Lautz, J. (2022, January 7). Tackling home financing and down payment misconceptions. Retrieved August 12, 2022, from

Moura, M. C., Smith, S. J., & Belzer, D. B. (2015). 120 years of U.S. residential housing stock and floor space. PLOS ONE, 10(8).

National Association of Realtors (2022). Housing affordability index. Retrieved August 12, 2022, from As constructed, an affordability index of 100 should be affordable. However, the NAR calculates a mortgage payment that is not typical. They base their calculation on a 20% down payment. The average down payment is only 10%. First time buyers typically put down only 7% (Lautz, 2022). This raises the mortgage payment and lowers the affordability. After adjusting for this, an HAI reading of 140 is probably a better benchmark of affordability.

 U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Housing in U.S. City Average [CPIHOSSL], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 13, 2022. July’s annualized increase was 7.3% and climbing.

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average [CUUR0000SEHA], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 13, 2022. July’s annualized increase was 6.3% and climbing.

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Shelter in U.S. City Average [CUSR0000SAH1], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 12, 2022. Note: Total cost of shelter was 39.90 in April 1973 and in 2022 it is 354.45, an 8.88 ratio.

U.S. Bureau of Labor Statistics, Average Weekly Earnings of Production and Nonsupervisory Employees, Total Private [CES0500000030], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 12, 2022. In July 1973 the index was 153.14. In July 2022 937.38. A 6.12 ratio.

A Virtuous Cycle

August 7, 2022

by Stephen Stofka

July’s employment survey (BLS, 2022) reported a half-million job gains and marked a milestone – the recovery of all the jobs lost during the pandemic. In addition, earlier employment gains were revised higher by 28,000. The BLS survey indicated that only 7.1% of employees worked remotely, a surprising contrast to the amount of attention that the media gives teleworking. Last week, I discussed the dating of recessions. With this report, it is unlikely that the dating committee at the NBER will dub this a recession. Consumption, income, employment and investment are the pillars of this economy and they are doing well, contributing to the current inflationary trends.

Annual gains in private investment topped 18% in the second quarter, besting the 16% gain in 2012:Q1 a decade ago (series notes at end). Businesses invest in people, driving up employment gains. In the graph below, I multiplied the annual gain in employment by 4 to show the correlation between investment and employment.

Higher employment leads to higher incomes. Just as employment has returned to pre-pandemic levels, real (inflation-adjusted) disposable incomes are now at pre-pandemic levels. Disposable income includes government transfers like social security and pandemic stimulus checks. The last stimulus checks went out in March/April 2021, more than a year ago. It’s a good bet that these are sustainable income numbers produced by economic growth, not the result of special  transfer payments.

Higher incomes lead to higher spending. Real (inflation-adjusted) consumption spending marked an annual gain of 1.57% in June and is now up 4.5% over pre-pandemic levels. Consumers have made an abrupt shift from buying goods to buying services. Real sales at restaurants are now 10% above pre-pandemic levels.

To keep up with high demand for goods and clogged shipping ports during the pandemic, Target and Wal-Mart ordered extra and now have more inventory than they would like. Their loss is the travel and leisure industry’s gain. Marriott Hotels (2022) reported a surge in demand this year. In the U.S. and Canada, their leisure traffic is 15% above pre-pandemic levels and their revenue per room is about the same as in 2019.

Higher incomes usually lead to higher savings. In the decade before the pandemic, households saved 6-7% of disposable income. In 2020 and 2021, the savings rate averaged a whopping 20% and 12%. Most of that higher savings was done by households with higher incomes. Congress could have passed a CARES act that sent stimulus payments only to those with lower incomes, but they chose not to. Those additional savings became investment and that brings us full circle to the higher investment and employment – a virtuous cycle that Adam Smith wrote about more than two hundred years ago.


Photo by Markolf von Ketelhodt on Unsplash

BLS. (2022, August 5). Employment situation summary – 2022 M07 results. U.S. Bureau of Labor Statistics. Retrieved August 5, 2022, from

Marriott Internatonal. (2022, August 2). Marriott International Reports Outstanding Second Quarter 2022 results and resumes share repurchases. Marriott International Newscenter (US). Retrieved August 5, 2022, from

U.S. Bureau of Economic Analysis, Gross Private Domestic Investment [GPDI], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 5, 2022.

U.S. Bureau of Economic Analysis, Real Personal Consumption Expenditures [PCEC96], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 4, 2022.

U.S. Bureau of Economic Analysis, Real Disposable Personal Income [DSPIC96], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 4, 2022.

U.S. Bureau of Economic Analysis, Personal saving as a percentage of disposable personal income [A072RC1Q156SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 4, 2022.

U.S. Census Bureau, Advance Retail Sales: Food Services and Drinking Places [RSFSDP], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 5, 2022. Note: I adjusted for inflation using the CPI.

 U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 5, 2022.