The Crack in Our Windshield

May 28, 2023

by Stephen Stofka

This week’s letter is about debt, both public and household. Since 9-11, the public federal debt  has grown five times. The causes include costly wars in Iraq and Afghanistan, a global financial crisis followed by a slow recovery, tax cuts passed under the Trump administration and a once-in-a-century pandemic. Ten percent of the $32 trillion debt was added during the first three months of the pandemic. As the deadline approaches when the government will not be able to make timely payments to vendors and bondholders, we ask why do we have this thing called a debt limit?

Denmark is the only other country in the world to require an approval of a debt limit after the spending has been approved. Their legislators raised the limit so high that it might be a century before the issue comes up again. That leaves only the U.S. in the world where a debt limit debate is a threat. Neither party wants to repeal this century old law because it has the potential to be a powerful negotiating tool. It allows one party to negate or modify the funding priorities that the other party passed in the last legislative session. This is a game of chicken played for high stakes.

Some have criticized the Biden administration for not starting negotiations sooner. However, the House did not put anything on the negotiating table until they passed a bill on April 26th, just a month ago. Given the fractured Republican caucus, it was not clear that Speaker McCarthy could get a bill passed in the House. French Hill, R-Ark., told Roll Call “The whole purpose of this is to compel the president to negotiate — and to demonstrate to Washington, D.C., that Kevin McCarthy has the votes to raise the debt ceiling.” Four House members defected and the vote barely squeaked by at 217-215. Although George Santos, R-NY, is facing prosecution for fraud, money laundering and theft of public funds, McCarthy has allowed him to keep his seat at a time when every vote is crucial.

In 2011, the Republican House balked at raising the limit but the only legislation they could pass was an affirmation that they would not raise the limit without some unspecified spending cuts. Republicans were unable to agree on terms that they could pass in the House. Despite that, President Obama made the mistake of negotiating with Speaker John Boehner, and the two struck a so called Grand Bargain. Lacking anything in written legislation from the House, a bipartisan committee in the Senate came up with a different proposal and Obama tried to negotiate a compromise between the two versions with Boehner. Boehner could not get any changes past the most conservative members in his caucus. According to Politico reporter Tim Alberta (2017), the staff of Jim Jordan, R-OH, had been working secretly with outside groups to sway enough House members to vote against Boehner’s bargain. Jordan apologized but the incident exacerbated tensions between the warring factions within the Republican House. As Vice-President at the time, Biden would have learned a valuable lesson. Get something in writing before starting negotiations.

In contrast to the growth of the public debt, the growth in household debt has decreased since the financial crisis and the housing bust. The chart below compares the two types of debt, public and household, in two 13 year periods before and after the financial crisis.  

From 1994-2007, the public debt (GFDEBTN) grew 5% per year while household debt rose 8.7% annually. As a percent of disposable income, household debt jumped from 78% at the end of 1994 to 124% at the end of 2007. Chiefly responsible was the doubling of mortgage debt (HHMSDODNS) during the first seven years of the 2000s. Lax underwriting standards allowed families with poor credit scores of less than 620 to secure mortgages. Millions lost their homes during the housing bust, banks tightened lending standards and Americans were forced to go on a credit diet.

Since the financial crisis, American household balance sheets have improved. Household debt has grown by only 2.2% per year, about half the growth rate of personal income (DSPI). As a result, debt as a percent of disposable income had fallen to 91% at the end of 2022. The public finances have not fared as well. Although federal tax receipts, including FICA taxes, have increased 8% annually, expenditures and social benefit payments have outpaced tax receipts, resulting in a 7.2% annual increase in the public debt since the end of 2009.  

This week David Leonhardt (2023) with the New York Times presented a graph of voter policy preferences derived from recent polls. The fiscal liberals in both parties outweigh the fiscal conservatives, a trend sure to promote the growth of the public debt. In the 2011 debt limit duel, Republican leaders like Paul Ryan championed privatization of Social Security and cutting back on benefit programs. In the decade since, neither of those proposals are popular with the party’s base. Instead McCarthy will appeal to the social conservatives in the party and insist on work requirements for benefit programs. As Leonhardt notes, the fight for Democrat and Republican swing voters is taking place in the quadrant of voters who are socially conservative but fiscally liberal, nicknamed the “Scaffles.”

The government’s spending becomes household income in some form or another, an accounting identity that joins the growth in public and household debt. Our economy, laws and regulatory framework promote financial crises and exacerbate social problems. Policymakers, economists and social scientists can debate the causes, extent and severity of the problems but acknowledge the reality.  We may discover that our experiment in governance does not scale as our population grows and congregates in cities, as our technology advances and we become accustomed to greater energy use. The spread of mass communication and social media since World War 2 has exacerbated rather than resolved our ideological and cultural differences. The growth of our public debt indicates that we expect more from our government than our economy or political framework is able and willing to pay for. Like a crack in our windshield, it will continue to grow.


Photo by Ivan Vranić on Unsplash

Keywords: public debt, household debt, mortgage debt, debt limit

Alberta, Tim. 2017. “John Boehner Unchained.” POLITICO Magazine. (September 27, 2022).

Federal Reserve Bank of New York. (2023, May). Quarterly report on household debt and credit.

The various FRED data series used in this post were HHMSDODNS Mortgage Debt, HCCSDODNS Consumer Credit Debt, GFDEBTN Public Debt, DSPI Disposable Personal Income.

Leonhardt, D. (2023, May 25). Ron DeSantis and the “scaffle” vote. The New York Times.


May 21, 2023

by Stephen Stofka

This week’s letter is about the role of assumptions in our lives. They play an important part in the claims we make to others so they are implicated in our self-esteem and personal relationships. They become integrated in our decision making process, affecting choices that have a lasting influence in our lives.

An assumption is an unspoken part of claims and assertions. The technical term in the study of rhetoric is an enthymeme. An example of an enthymeme is that people should be encouraged to vote because democracy depends on the full participation of citizens. The unspoken assumption or premise is that democratic government is good for citizens. A syllogism makes a claim based on two clearly stated premises. The enthymeme leaves out one of those premises and it is this mutual understanding of the unspoken premise that binds people together. However, if both parties do not accept this unspoken premise, the issue cannot be resolved. This lack of agreement in an unspoken premise is a key aspect of religious and political debates. Our decision making often consists of enthymemes containing vague assumptions. This rhetorical tactic explains how we can fool ourselves into thinking we are above average investors.

Researchers construct an assumption that becomes a hypothesis when they design an experiment to test that assumption. Most of us don’t follow such a formal process. Our assumptions are tested by our observations, by the natural experiments of unfolding events. All too often, we fool ourselves by paying particular attention to those events which confirm our assumptions. We form a growing conviction that our assumptions are confirmed by the reality we observe around us. We make predictions of the future by converting our assumption into a conviction and we are shocked when events upset that conviction.

An example is the recent bankruptcy of Silicon Valley Bank (SVB). Depositors assumed that Gregory Becker, the company’s CEO and member of the board of directors at the Federal Reserve’s San Francisco branch, would be a prudent manager of depositor funds. They were stunned when they learned that Becker and Daniel Beck, the company’s CFO, did not hedge the bank’s interest rate risk, a management practice finance majors learn in school. Both men resigned but benefitted handsomely from their employment at the bank. At a Senate hearing this week Becker rejected responsibility for the fiasco, blaming regulators and customers for the bank’s downfall. His financial survival depends on minimizing his role in the whole affair and defending himself against accusations of fraud.

Economists assume that people are rational, that they are capable of making choices that will maximize their welfare. They make a further simplifying assumption that each person is both principal and agent, making the decision and realizing the benefits and costs of that decision. In a principal-agent relationship, however, the agent and principal are separate. They have different motivations because the benefits and costs are not the same. As a society becomes more complex, the principal-agent problem grows geometrically. The voices we hear most are those of the agents – Becker, the Senators, the regulators – whose actions must satisfy their own welfare while they serve the principals – teh citizens and depositors.

Objections to raising the U.S. debt limit go like this: the country is spending more than it receives in taxes. Like any household, we must cut our spending and live within our budget. The unspoken assumption is that the government’s budget is a scaled up version of a household’s budget. Politicians often court this fallacy of composition because they know that people yearn for simple explanations of complex issues. The U.S. currently spends over 20% of its income on defense, as the chart below shows. This would be equivalent of a family making $80,000 a year and spending $16,000 on a security system.

According to the Treasury Department (n.d.), 38% of tax collections are FICA taxes used to fund Social Security and Medicare. Imagine if a family sent 38% of their income to their parents or grandparents. These are just two examples that might lead us to reject the assumption that a family’s finances are like those of a government. In political debates like these, one side clings to the unspoken assumption because it is the linchpin of their argument.

Investors are cautioned not to put all their eggs in one basket. Diversification spreads the risk among asset classes. When we buy our first house, the down payment may take all of our savings, making us vulnerable to economic changes that impacts our income. We may make this gamble based on the assumption that in a worse-case scenario, we can sell the house for at least the same price we paid for it. During the financial crisis, homeowners were shocked to learn that their home values had declined. Many assumed that rising home prices were a natural law like steam that rises from a pot of boiling water. Ten million families that had gambled their savings on this assumption were wiped out during the crisis.

February’s reading of the 20-City Case-Shiller home price index showed no change in home prices in the past year. Home prices have fallen in some western cities where prices increased strongly in the past five years. From June 2022 to February 2023, Denver’s home prices have declined 6%. While the change in inflation has moderated, there is disagreement within the Fed’s interest setting committee whether to pause interest rate hikes. Continued rate increases could exacerbate price declines in some western states. Home owners may have to reevaluate their assumption that home prices only go up.


Photo by israel palacio on Unsplash

Keywords: Defense spending, tax revenue, budget, household debt, debt

S&P Dow Jones Indices LLC, S&P/Case-Shiller 20-City Composite Home Price Index [SPCS20RSA], retrieved from FRED, Federal Reserve Bank of St. Louis;, May 18, 2023

U.S. Bureau of Economic Analysis, Federal government current tax receipts [W006RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis;, May 18, 2023.

U.S. Bureau of Economic Analysis, Government consumption expenditures: Federal: National defense [A997RC1A027NBEA], retrieved from FRED, Federal Reserve Bank of St. Louis;, May 18, 2023.

U.S. Bureau of Economic Analysis, Real government consumption expenditures: Federal: National defense [A997RX1A020NBEA], retrieved from FRED, Federal Reserve Bank of St. Louis;, May 18, 2023.

U.S. Treasury. (n.d.). Fiscal Data explains federal revenue. Government Revenue | U.S. Treasury Fiscal Data.,U.S.%20Department%20of%20the%20Interior.

Asylum and A.I.

May 14, 2023

by Stephen Stofka

Asylum and AI

This week’s letter is about immigration from a historical perspective. This past Thursday marked the end of Title 42, the Covid-era policy that allowed border officials to quickly deport many immigrants who crossed into the U.S. at places other than official checkpoints. This generation of Americans is unlikely to come to a final resolution of the immigration issue that has plagued our politics for 150 years. The debate over asylum is more than 80 years old, first sparked by an incident just before the outbreak of World War 2. Can recent advances in machine intelligence help us resolve the bottlenecks created by our own Congress?

Most of us are familiar with Ellis Island, the immigrant processing center in New York Harbor. According to The Statue of Liberty – Ellis Island Foundation (2022), officials at the center processed 12 million immigrants during its 62 year history. The center was mostly active for just thirty years during that time. Most of those immigrants came in the years 1892 – 1924, when Congress passed an immigration law that limited admittance to people from mostly northern European states with family members already in the U.S. Across the river from Ellis Island was an earlier era in U.S. immigration – Castle Gardens at Battery Park in lower Manhattan. From 1855 – 1890, that center processed eight million people, mostly from those same northern European countries.

Like the immigrants appearing at our southern border today, most of those early immigrants came here for better economic opportunities. In countries across northern Europe, promoters of land offered farmland for sale in Nebraska and other Midwest states, recounted by Richard White (2017) in his The Republic For Which It Stands, a thorough history of the Reconstruction and Gilded Age periods of the 19th century. The harvests of wheat in the Midwest states helped drive down prices for wheat in Europe. Lower prices made farming less profitable in those countries and helped drive immigrants to the U.S.

Pundits like cartoonist Thomas Nast ridiculed the ethics employed by the U.S. government. It had pushed the Indians off their homeland, then sold that land to railroads at gift prices. Once the track had been built, the railroads marketed their surplus land to their future customers, immigrant farmers who would rely on the railroads to get their crops to market. Despite the American myth of the Midwest farmer, most immigrants became wage workers. When gold was discovered on Indian territory in South Dakota’s Black Hills, many European immigrants rushed toward the promise of riches and ignored the property rights of the Indians.

In California, voters had rejected ratification of the 14th Amendment on a slippery slope premise. If Negro men were given suffrage, American Indians, immigrants from China and southern Europe would soon be granted the right to vote and the country would be overrun with the mongrel races. Advocates for immigration reform attracted voter support based on these longstanding prejudices.

Following World War 1, two incidents prepared fertile ground for a coalition of immigration reformers to help pass restrictive immigration legislation. According to the U.S. Citizenship and Immigration Services (2023), the Quota Acts of 1921 and 1924 mostly excluded immigrants who were not from northern European countries. The first was the “Spanish” flu which originated in Kansas, not Spain. News of the disease’s spread was first published in Spain because other countries, including the U.S., suppressed publication. The belief that the disease had originated in southern Europe justified the prejudice against southern Europeans as being unclean (White, 2017).

The second incident was the severe 18 month depression of 1920-21. According to the Social Security Administration (n.d.), unemployment in various industries ranged from 14% in transportation to 27% in construction and 38% in mining. Immigrants competed with wage workers particularly in lower skilled jobs. Restricting immigration reduced those economic pressures.

The U.S. did not have an asylum policy until after World War 2. The precipitating incident came in 1939, when a ship loaded with almost a thousand Jewish refugees left from Germany for Havana, Cuba. Many passengers planned to wait in Cuba while their U.S. visa applications were approved, according to the United States Holocaust Museum (n.d.). However, Cuba backed out of an agreement to receive them. Although the ship sailed close to the Florida shore, U.S. officials did not allow the passengers to disembark and they returned to Germany. Canada and some other countries accepted some refugees but a third were detained and died in the Nazi concentration camps.

The incident tarnished America’s image. After the end of the war with Japan in August 1945, President Truman issued a directive that admitted some displaced persons to the U.S. (USCIS, 2023). It took Congress two more years to formalize an asylum arrangement with the passage of the Displaced Persons Act in 1948. Reflecting long held prejudices among Americans, Congress kept its quota system in place. In 1965, the Congress passed amendments to the 1952 Immigration and Nationality Act that finally abolished the quota system for refugees.

Today, the queue for refugee applications is several years long and many migrants claiming asylum wait in the U.S. until their case is resolved by an immigration judge. According to the USCIS (2023), two Congressional amendments in 1990 and 2004 reduced the burden of proof that migrant applicants must show to substantiate their claims of being political refugees. Those within and without the system admit that it is broken but an evenly divided Congress has not been able to resolve differences.

The development of ChatGPT has sparked a great deal of public interest in the capabilities of interactive Artificial Intelligence (AI) machines. Authorities at the border and in the courts are overwhelmed with migrants claiming asylum status. Most claims will be denied but the applicants get to work and stay in the U.S. while they wait. Might it be possible to use AI machines to process these claims? Some may object to the idea of machines controlling the destiny of vulnerable migrants. If machine intelligence is not adequate to safely navigate a car down a highway, can we trust them to make complex decisions regarding human safety and respect? For successful applicants, a quick decision would give migrants certainty and enable them to access job opportunities and government services that might otherwise not be available under the current system.

The machines could discover as much information as is possible in other countries to assess a migrant’s claims of political or criminal persecution. The machines could sort through the volumes of legal precedent that bog down our human decision-making. They could cite the relevant information and precedent that supported or did not support a claim of asylum. Applicants who were denied by an AI machine could appeal their claim but outside the country. It is not a perfect system but one that might be acceptable to advocacy groups on both sides of the issue.


Photo by Mr Xerty on Unsplash

Keywords: immigration, asylum, AI, ChatGPT

Social Security Administration. (n.d.). Estimates of Unemployment in the United States. Social Security History.

The Statue of Liberty – Ellis Island Foundation. (2022, November 1). Ellis Island. Statue of Liberty & Ellis Island.

U.S. Citizenship and Immigration Services. (2023, February 7). Refugee timeline. USCIS.

United States Holocaust Memorial Museum. (n.d.). Voyage of the St. Louis. United States holocaust memorial museum.

White, R. (2017). The Republic for which it stands: The United States during reconstruction and the gilded age, 1865-1896. Oxford University Press.

The Formation of Expectations

May 7, 2023

by Stephen Stofka

This week’s letter is about expectations – how we form them and why they are essential to our survival. This is a broad topic that encompasses several disciplines, from psychology to neuroscience and economics. Each field of study informs those in associated fields so the debate in economics is enriched by discoveries and theories in these other fields. I can only touch on a few aspects as I introduce yet another complication that might resolve some of the contradictions between theory and data.

We gain the ability to form expectations at an early age. Infants less than one year old learn what is called object persistence. If a toy falls out of their crib, they look over the edge to the floor below to see where the toy went. But object persistence is a primitive form of expectation. True expectation is a weighting of possibilities based on some criteria.

Instinctual responses often involve a primary measure of threat or satisfaction. We see this if we walk by a squirrel near a tree. If we are across the street, the squirrel may pause, poised to flee. If we draw nearer, the squirrel runs to the safety of the trunk as we approach. How far up the tree the squirrel goes depends on the distance we are from the squirrel. It would like to keep us in sight but if we get uncomfortably close, the squirrel must choose. It can hide on the side of the trunk opposite to our approach but it loses sight of us. It can go further up the tree, keeping us in sight and staying out of reach. That is a short term expectation formed in response to an immediate threat or stimulus. It is an instinctual rather than a rational expectation, the kind that economists consider.

Rational expectations are formed about the environments that produce events, or data samples, more so than the events themselves. For more than sixty years economists have been debating whether consumers have enough data and patience to construct a rational expectation. Richard Curtin (2022) reviewed the history of this debate as he argued for a theory that embraces both reason and passion as inseparable components of human decision making. In 1959, Herbert Simon protested that inadequate data does not invalidate the idea that consumers are trying to make decisions that improve their satisfaction – that’s the rational part – within the bounds of the data available to them. Simon called this bounded rationality. A few decades later Daniel Kahneman and Amos Tversky explored the biases in our decision making and their work became the foundation of behavioral economics.

Survey data reveals that consumers’ expectations of inflation overestimate actual inflation, according to Henry et al. (2023), economists at the Richmond branch of the Federal Reserve. The basis for that assertion is the University of Michigan (2023) survey of inflation expectations. The inaccuracy is fairly consistent and persistent, meaning that consumers are slow to correct their expectations as new data is released. Richard Curtin (2022) notes that as many as 40% of consumers are not aware of recent government data releases on the inflation rate, the unemployment rate and the growth rate of GDP.

Consumers cannot survive if they consistently and persistently form inaccurate expectations. There is an alternative explanation: economists and consumers are measuring two different things. Economists form their inflation expectations by measuring changes in the prices of goods and services. Consumers form their expectations in part by estimating their loss of purchasing power, their ability to satisfy their wants and needs. If consumers feel that their income gains are not keeping up with the change in prices, they may raise their estimate of future inflation.   

The prices of frequently purchased items like food and energy guide our expectations of changes to our purchasing power. Our purchases of food and energy don’t respond quickly to changes in our income. In economist speak, these items are price inelastic. We still need to drive to work and eat. Secondly, we buy food and gas frequently so our expectations of future prices depends on an averaging of the most recent prices and the last purchase we made. It is unlikely that we will form an expectation of next year’s gas prices based on a ten year average of gas prices. Thirdly, energy prices are quite volatile. I might buy gas as frequently as I go to the movies if I like movies but the price of a movie ticket does not vary as much as the price of gas. To summarize, our expectations of inflation are guided by frequency, recency and volatility.

Energy prices are particularly volatile. In this 2004 article the Federal Reserve graphed the annual changes in energy prices (red) and the broad CPI price index (blue). The difference is startling.

The wild swings in energy prices are noise. Because of that volatility, the Bureau of Labor Statistics excludes food and energy items when it computes an index of core inflation.  Core inflation is the inflation signal that economists use to predict next year’s prices.  

Consumer expectations of inflation include estimates of changes to their personal utility. As Richard Curtin (2022) has noted, it is not practical or possible to measure inflation at such a personalized level so economists average consumer expectations across the entire country. They collect price data at a broad metro area, or MSA. These urban areas can vary a lot from national inflation averages. In the chart below is a comparison of inflation in the Denver metro area and the nation as a whole. Rarely do the two series move together. When economists compile such a variety of consumer expectations into one national average, that average is less likely to accurately reflect individual or sub-regional expectations.

So economists are measuring changes in prices and consumers are estimating the change in their purchasing power. In his General Theory Keynes referred to the marginal efficiency of capital and the animal spirits of investor expectations of that efficiency that could be measured by the direction of market prices. Using that as a template, consumers’ purchasing power would be the marginal efficiency of income. We can gauge the animal spirits of consumers by the direction of total consumer purchases, which are continuing to outpace inflation. That is the best indicator of purchasing power expectations.   


Photo by Rodion Kutsaiev on Unsplash

Curtin, R. T. (2022, September 5). A new theory of expectations – Journal of Business Cycle Research. SpringerLink. Retrieved May 5, 2023, from

Henry, E., Mulloy, C., & Sarte, P.-D. G. (2023, January). What survey measures of inflation Expectations Tell us. Federal Reserve Bank of Richmond. Retrieved May 5, 2023, from,inflation%20every%20month%20since%202012  

University of Michigan, University of Michigan: Inflation Expectation [MICH], retrieved from FRED, Federal Reserve Bank of St. Louis;, May 4, 2023.