The Change Changed

November 13, 2022

by Stephen Stofka

October’s CPI report released this week indicated an annual inflation of 7.7%, down from the previous month. Investors took that as a sign that the economy is responding to higher interest rates. In the hope that the Fed can ease up on future rate increases, the market jumped 5.5% on Thursday. Last week I wrote about the change in the inflation rate. This week I’ll look at periods when the inflation rate of several key items abruptly reverses.

Food and energy purchases are fairly resistant to price changes. Economists at the Bureau of Labor Statistics (BLS) construct a separate “core” CPI index that includes only those spending categories that do respond to changing prices. It is odd that a core price index should exclude two categories, food and energy, that are core items of household budgets.

Ed Bennion and other researchers (2022) at the BLS just published an analysis of inflationary trends over several decades. Below is a chart of the annual change in energy prices. Except for the 1973-74 oil shock, a large change in energy prices led to a recession which caused a big negative change in energy prices.

We spend less of our income on food than we did decades ago so higher food prices have a more gradual effect, squeezing budgets tight. Lower income families really feel the bite because they spend a higher proportion of their income on food. In the graph below a series of high food price inflation often precedes a recession. Unlike energy prices, there is rarely a fall in food prices. Following the 2008 financial crisis, food prices fell ½% in 2009. It is an indication of the economic shock of that time.

Let me put up a chart of the headline CPI (blue line) that includes food and energy and the core inflation index (red line) which does not. Just once in 75 years, during the high inflation of the 1970s, the two indexes closely matched each other. Following the 1982-83 recession, the core CPI has outrun the headline CPI.

A big component of both measures of inflation is housing. The Federal Reserve (2022) publishes a series of home listing prices calculated per square foot using data. You can click on the name of a city and see its graph of square foot prices for the past year. You can select several cities, then click the “Add to Graph” button below the page title and FRED will load the graph for you. Here’s a comparison of Denver and Portland. They have similar costs.

The pandemic touched off a sharp rise in house prices in both cities. Denver residents have attributed the big change to an influx of people from other areas. However, Census Bureau data shows that the Denver metro area lost a few thousand people from July 2020 to July 2021 (Denver Gazette, 2022). In the decade after the financial crisis, there simply wasn’t enough housing built for the adults that were already here.

The surge in home buying has not been in population but in demographics. As people approach the age of 30, they become more interested in and capable of buying a home. The pandemic helped boost home buying because interest rates plunged from 5% in 2018 to 2.6% in 2021.

Record low interest rates enabled Millennials in their 20s and 30s to buy a lot more home with their mortgage payment. That leverage caused housing prices to rise. A 30-year mortgage of $320K has a monthly mortgage payment of $1349 at 3%. At 5%, it is $1718 and at 7% it rises to $2129. Ouch!

Rising rental costs and home prices drive lower income families to less expensive areas in a metro area or entirely out of an area. Declining public school enrollment has forced two Denver area counties to announce the closing of 26 schools and transfer them to other schools (Seaman, 2022). As the number of students decreases, the schools infrastructure costs do not change, increasing the per student costs. Buses have to be maintained, drivers paid, schools staffed with guards, cafeteria staff, janitors and administrative personnel. Once schools are shuttered, the building may be sold and converted to other uses, either residential or commercial. The public schooling system is like a large ship that takes some time to change course.

During our lifetimes we experience many changes. They can happen quickly or emerge over time. The effects may be short lived or last decades. Families are still living with the consequences of the financial crisis fourteen years ago. Carelessly planned urban development isolates the residents of a community. The social and economic effects can last several generations. As we grow older, we learn to appreciate William Faulkner’s line, “The past is never dead. It’s not even past.”


Photo by Davies Designs Studio on Unsplash

Bennion, E., Bergqvist, T., Camp, K. M., Kowal, J., & Mead, D. (2022, October). Why inflation matters. U.S. Bureau of Labor Statistics. Retrieved November 11, 2022, from

Denver Gazette. (2022, March 25). Denver joins big city trend with pandemic population slip. Denver Gazette. Retrieved November 11, 2022, from

Federal Reserve. (2022). Median listing price per square feet:Metropolitan Areas. FRED. Retrieved November 11, 2022, from

Seaman, J. (2022, November 10). Schools targeted for closure in Denver, Jeffco have disproportionately high numbers of students of color, data shows. The Denver Post. Retrieved November 11, 2022, from



October 3, 2021

by Steve Stofka

This week I enjoyed a video (CFR, 2019) on the 2008 financial crisis that aired on HBO in 2019. VICE reporters interviewed former Fed chairman Ben Bernanke, and former Secretaries of the Treasury Hank Paulson and Tim Geithner, key policymakers during the crisis. They regretted the devastating effect that the crisis had on so many families. They understood the public anger at the bailouts of Wall Street. They attributed the rise of populism to the public perception that there was one rule for the elites on Wall Street who had created the crisis and those on Main Street who suffered the consequences. As I watched the financial Trinity of Paulson, Geithner and Bernanke, I thought they still don’t get it.

A prominent feature of the global political system is anarchy, the lack of a central authority governing all the states. Until the 2008 crisis, the public thought that national institutions supervised the global financial system to make sure that the players in that system did not endanger the public. The Trinity were in control of institutions that were charged with the safety of the public trust. Each of them believed in a light supervisory touch, thinking that the financial system was mostly self-regulating because the players kept each other in check. The crisis demonstrated the fault of that thinking.

Realism is one of the two dominant methods of analysis in international relations. Realists focus on the strength and distribution of military power among states who have competing interests. The force in the financial system is not military weapons but the ability to leverage capital. National governments bestow those weapons of power on their financial institutions. Each of the big investment banks serves their own interests and are supposed to follow the rules. Central banks and supervisory institutions rely on a balance of power between the big financial players to self-regulate this system.

In the global political system, there is no central ruling authority. In the American financial system, the financial industry lobbies against any oversight or regulatory power. They want anarchy – to be left alone until their risk taking reaches critical mass and threatens the global system as it did in 2008. Then the players rush to the Fed or the White House for a bailout. Despite the financial power that Paulson, Bernanke and Geithner had at their fingertips, they felt impotent during the crisis. It was not comforting to watch each of them make gestures of futility as they spoke, arguing that they had to follow the law. Why? The people who ran the investment banks that took extraordinary risks did not play by the rules.

As the crisis unfolded, the public watched the anarchy on display. The big investment banks have the equivalent of nuclear weapons given to them by their governments and there is little effective supervision. The Trinity blamed “liar loans” for contributing to the crisis. Prospective homeowners were told by mortgage companies that they did not have to document their income. Many low-income families welcomed the chance to own their own home for the first time in their lives. They believed the government was supervising these mortgage companies because the mortgages were being bought by government institutions. Even if it sounded too good to be true, the government must know what it was doing. That belief was about to be shaken to its foundation.

The 2000s were marked by a string of government follies. The public was shocked to learn that the nation’s security agencies had been alerted to the threat of the 9-11 attackers. A lack of communication and coordination between agencies had let the attackers slip through the security net. Following that revelation, the Department of Homeland Security was created to coordinate federal agencies. In 2002, the public learned that no one had been supervising the nation’s largest accounting firms. As the giant Arthur Anderson imploded, investors wondered whether the financial statements of the nation’s largest companies were fiction. Enron and some dot-com companies blew up. After demonstrating American military power and technology in the invasion of Iraq, the mismanagement of the war became apparent. The fumbling federal response to Hurricane Katrina confirmed the impotence of the Federal government. Five consecutive years and five government failures.

After all that, the American public still trusted the imprint of the federal government on a mortgage. The financial crisis was the last in a string of government failures that caused a large loss of trust in government. Government institutions like the Fed and the Treasury had trusted Wall Street but not Main Street. Government had broken a bond of trust with the public and these three had been partly responsible for that broken pact. Breaking trust is difficult to understand or acknowledge.


Photo by Aimee Vogelsang on Unsplash

CFR. (2019, May 01). Panic: The untold story of the 2008 Financial Crisis | full vice special report | HBO. Retrieved October 03, 2021, from


July 11, 2021

by Steve Stofka

This week President Biden issued an executive order (White House, 2021) to counter the trend toward corporate consolidation and oligarchy that has arisen during the past decades. I appreciated that the report contained links to the outside data sources they are using. After almost six months in office, Mr. Biden has signed 51 orders, almost half of them rescinding the orders of former President Trump (National Archives, 2021). In 2017, Mr. Trump signed 55 orders total but only eight of those were rescinding orders. The pace of orders slows after the first several months in office. I’ll review some highlights from this order.

For the past decade inflation has been below the Fed’s 2% target but the trend toward consolidation in some key industries gives those few companies that dominate an industry greater pricing power. Modern Farmer reported that 80% of the meatpacking industry is controlled by just four companies (Nosowitz, 2020). In 2000, the top 20 home builders controlled 15% of the market. Today it is 30%. Mr. Biden’s order notes that mark-ups, the charges over a company’s cost, have tripled in recent years. Since 2010, Federal Reserve data (2021) shows that after-tax profits have increased almost 50%, substantiating the claim of higher markups. In the past decade, low interest and rising profits have fueled a tripling of the stock market.

For the ten years following 9-11, after-tax profits also tripled, despite the worst financial crisis since the Great Depression in the 1930s. Many financial companies lined up at the corporate soup kitchen in Congress and were bailed out. Homeowners and workers went hungry while Congress paid bonuses to the same speculators that sparked the crisis (Story & Dash, 2009). Sorry, folks, we had to honor the contracts, the politicians in Washington said. It’s the law. Who helped write the laws? The corporations that got bailed out.

The order notes the growing increase of non-compete agreements for new job hires, making it more difficult to move to a more attractive job. It references data from the Economics Innovation Group (EIG, 2021) that the rate of new business formation has sunk by half in the past fifty years. The shift of manufacturing to China has also contributed to the overall decline.

The report notes the upswell in occupational licensing requirements over the past several decades. Licensing appears to be about public safety and some of it is. The states have come to depend on the revenue from the licensing fees and it avoids having to raise some taxes on voters. Trade schools that certify beauticians and other occupations like the tuition revenue they receive. Established business like licensing because it keeps out competition. The benefits are widespread and the costs are concentrated to those seeking careers in those occupations, many of them blue collar and little political power.

There are many faults in our federalist system that an executive order cannot remedy because the Constitution gives a lot of power to the states. What it can do is bring more attention to these anti-competitive practices. New Zealand and Singapore top the World Bank’s list of countries with low obstacles to doing business. The U.S. is sixth, just behind S. Korea and a few places ahead of Norway.

Americans believe in American exceptionalism but the Nordic countries keep beating us in various international categories. People say “You Americans. You should be more like the Nordic countries!” Suck on it, Norway, Finland and Sweden. We are ahead of you in ease of doing business. Next year we’re going to take on S. Korea and after that, tiny Denmark. There is nobody more capitalism loving than America and we’re going to prove it by stopping some of these anti-competitive practices!


Photo by Pietro Mattia on Unsplash

EIG. (2020, June 29). Dynamism in retreat. Retrieved July 11, 2021, from

Federal Reserve. (2021, June 24). Corporate profits after TAX (without IVA And ccadj). Retrieved July 11, 2021, from

National Archives. (2021). Federal Register: Executive orders. Retrieved July 11, 2021, from

Nosowitz, D. (2020, June 09). DOJ reportedly Subpoenas ‘Big Four’ Meatpackers. Retrieved July 11, 2021, from

Story, L., & Dash, E. (2009, July 30). Bankers reaped lavish bonuses during bailouts. Retrieved July 11, 2021, from

Van Dam, A. (2019, October 19). Increasingly, economists find, homebuilding in fewer hands. Retrieved July 11, 2021, from

White House. (2021, July 09). FACT sheet: Executive order on promoting competition in the American economy. Retrieved July 11, 2021, from

A Public Sense of Duty

Each New Year we renew our hope in the future, but have we lost our sense of duty to the future? Following World War 2, the U.S. and Russia engaged in a protracted Cold War of competing ideologies. We fought proxy wars in Vietnam and Indochina, South and Central America. Instrumental to the battle against Communism, America invested in our children’s education.

In 1978, the homeowners of California revolted against the rising property taxes that funded public schools. Since then, our per capita spending on children and young adults has steadily declined.

China’s spending on education has risen dramatically in the past two decades but it still lags the U.S. in spending as a percent of GDP. For how long? Do Americans have the “fire in the belly,” that focused desire to best the enemy, that we did seventy years ago?

In our technological society, the level of education of one’s parents has become a class distinction. The National Center for Children in Poverty (NCCP) reports that 80% of low-income families are headed by parents without a high school diploma. With a high school diploma, kids still have a 60% probability of being born into a low-income family (NCCP, 2021).

A child born in a middle-class suburb will receive a better education than one born in a poor neighborhood, where many residents are renters. Property taxes fund public schools, but landlords don’t live in those neighborhoods and want low property taxes. They have an influential voice in local politics.

Two years ago, I wrote about the post-war surge in college degrees (Stofka, 2018). Before WW2, only 5% of children earned college degrees; more than a third of children now earn college degrees (NCES, 1993). Is our society paying for that learning and experience? Despite their educational skills, teachers in charter schools make the same $53K average as all employees in private industry (NCES, 2020, Table 5). The pay in charter schools is 15% less than public schools (Table 5); that may explain the much higher ratio of black and Hispanic teachers in charter schools (Table 1).

An NCES survey in 2003-4 showed a national student teacher ratio of almost 15. The ratio in a 2018 survey was 21 students per teacher (NCES, 2020). Our educational system is asking our teachers to do more, to have a bigger and more expensive skill set, but does not pay them for their talent and hard work.

Construction workers average $63K per year, higher than public school teachers (BLS Series CES2000000011). 50% of teachers in traditional public schools have a master’s degree, in charter schools it is 39% (Table 4). Do half of all construction workers have a master’s degree? No, of course not. Why does our society value a painter or a carpenter more than a public-school teacher?

Construction workers provide mostly private goods, where private parties benefit from their work. Teachers provide public goods; the immediate benefit is only to the parents of the children in school. The provisioning of public goods and the caretaking of natural resources are only possible when a community has a sense of public duty. Has it declined in the past few decades?

Americans once built a sense of community in opposition to the common enemy of Communism. Covid-19 might have been that common enemy; it has highlighted just how fractured our society is. The common enemy is us, our neighbors, our professionals, and institutions.

The erosion of trust began in the 1960s but culminated in the financial crisis a decade ago. We learned that our institutions were run by pirates, whose duty was chiefly to other pirates, the elites who knew how to work the system. Under President Obama, Attorney-General Eric Holder did not want to waste public money on prosecuting financial crimes when there was a small chance of conviction. Neither he nor Mr. Obama understood the damage of that policy. The American people watched as the pirates were let off with a slap on the hand. Washington was awash with scoundrels.

In 2016, Americans elected an outsider, a pirate in the real estate industry who pledged to rid Washington of pirates. The Trump administration proved to be little more than a carousel of pirates. The Senate, in a shambles under the leadership of Mitch McConnell, held few confirmation hearings for department chiefs. Why bother? Most had temporary titles as acting heads of departments and agencies for a few months before another Twitter outrage from the pirate in chief tossed them overboard.

President-elect Joe Biden can avoid the policies of the Trump administration that so undermined the trust of the American people, but can he avoid those policies of the Obama administration which caused many Americans to abandon any hope for fairness in Federal policy? When public trust and public duty are so greatly diminished, the country declines – its spirit, its institutions and its infrastructure. Will we – can we – recapture that sense of public duty?


Photo by Dan Russo on Unsplash

NCCP. (2021). United States Demographics of Low-Income Children. Retrieved January 02, 2021, from

NCES. (1993, January). 120 Years of American Education: A Statistical Portrait. Retrieved January 02, 2021, from

NCES. (2020, September). Characteristics of Public and Private Elementary and Secondary School Teachers in the United States. Retrieved January 02, 2021, from

Stofka, S. (2018, June 12). Study Dollars. Retrieved January 02, 2021, from

Ain’t It Great?!

April 19, 2020

By Steve Stofka

Has this pandemic prompted people to have a greater respect for science? Or has the science of the internet fostered more conspiracy theories and information hoaxes typical of countries with low literacy rates? This week – the rise and fall of science in American politics.

Let’s turn the dial back to World War 2. In the space of thirty years at mid-century, scientific understanding and accomplishment leapt forward. People expected that rate of achievement to continue into this century. Flying cars. Supersonic planes. A cure for cancer and the common cold. Lifetimes of 200 hundred years.

In the health sciences, the development of vaccines and antibiotics allayed the fears of millions of parents. Many who had survived the Depression and World War 2 remembered  when Calvin Coolidge Jr., the President’s son, had died from a simple blister he got while playing lawn tennis (Rhoads, 2014). Thousands of World War 1 soldiers died from simple bacterial infections on their skin. In the course of two decades, antibiotics were developed and saved thousands in the next war.

The polio vaccine, developed in the 1950s, removed the threat of death or lifelong disability from the disease. In 1916, a quarter of the people in New York City who contracted the disease died (Smithsonian, 2005). Cities imposed quarantines on individual homes and public transportation during summer months when the disease was most prevalent.

The development of plastics, vitamins, TVs, personal radios, semi-conductors and many more inventions changed our daily lives. Men (mostly) of learning and business leaders schooled in efficient business practices were recruited to government to help run a world that was increasingly complicated.

During the 1960s President Kennedy hired Robert McNamara, the head of the Ford Motor Company, to run the Defense Department. Yes, that happened. McNamara was one of the Whiz Kids, experts in management and the efficient deployment of technology that would refashion the U.S. military during the Cold War against Communism. McNamara made many mistakes in the first five years of the Vietnam War, but hid them until his autobiography  in 1995 (Biography, 2019).

Whiz kids headed by economist Paul Samuelson transformed monetary and economic policy with a precise mathematical approach that modeled human economic behavior as well as the movement of money, goods and services. Inspired by the work of John Maynard Keynes, who advocated strong government intervention, the new economic thinking promised to transform fiscal policy into an efficient tool that would benefit all ranks of society.

Big government spending during the 1960s spurred higher inflation. The economic Whiz Kids could not head off a recession at the end of the decade. When the Arab oil embargo caused gasoline prices to jump, inflation bit hard, and President Nixon instituted wage and price controls to curb inflation. After he left office in ignominy, his successor President Ford, fought inflation by wearing a button on his lapel that said “WIN.” Yes, that happened. The acronym stood for Whip Inflation Now (Smithsonian, n.d.). The experts were not as knowledgeable as they thought. They had tried, they had failed and their ascendancy was at an end.

Enter Ronald Reagan. He had developed a folksy manner as a host for a TV western series. He led California during its oil boom heyday in the late 1960s and early 1970s. His tenure ended just as California’s economy hit the skids. Exit the experts. Enter charisma and myth. Mr. Reagan touted Star Wars defense ideas that were products of an illustrator’s imagination. He believed in a form of wishful thinking called supply side economics. He dismissed the evidence from his own scientists when a mysterious disease began to ravage young men in the gay community. He flaunted a simplistic campaign of “Just Say No” to drug use while he backed insurgents in Central America who used American communities to build a drug empire based on crack cocaine. Mr. Reagan was a pragmatic politician who believed that facts should bend to the will of political leaders. He led the country through the most severe recession since the 1930s Depression. His two terms in office were marked by tax reform, strong economic gains, a resurgence of conservative political ideas and repeated scandals. When the Soviet Union collapsed in 1991, the conservative myth machine concocted a narrative that Reagan was responsible for the downfall of the empire. Like the iconic sheriff in a western movie, Reagan had strode out onto the dusty street of the global town and faced down the bad guy, the USSR.

Charisma left the stage when Reagan’s Vice-President, George H.W. Bush, won the election in 1988. Bush was the compromise between charisma and expertise. He had vast experience in many corners of civilian and military government. In the 1991 Gulf War, he and his Secretary of Defense, Colin Powell, demonstrated a technical prowess and efficiency that lifted the reputation of experts once again. Mr. Bush made a bargain with Congressional Democrats to raise taxes to help balance the budget. Conservatives were angry and disaffected and an expert businessman waited in the wings.

Ross Perot was the billionaire founder of a tech company. As a hard-nosed third-party candidate, he promised to bring honesty and efficiency to government finances. He took a whopping 19% of votes from Bush and gave Clinton the election by default. A contentious three-way race had given another Democrat, President Wilson, a default victory in 1912. Clinton’s vote percentage was 43% (Wikipedia, n.d.). Wilson’s was 42%. President Lincoln holds the record with the lowest vote percentage for a winning Presidential race – less than 40%.

President Clinton was the folksy governor of a backwater state called Arkansas, home to the Walton family, the owners of Wal-Mart. He was also a Rhodes scholar. Clinton promised to join expertise and charm. As with Lincoln and Wilson, those on the other side of the political aisle regarded Clinton as an illegitimate President and were determined to remove him from office. After five years of investigation, Republicans successfully impeached him on a charge of lying to Congress about an affair – a dalliance might be a more accurate description – with a White House intern. The leader of the Republican effort, House Speaker Newt Gingrich, was himself having a long affair with a young Congressional aide. Yes, that happened.

It was the 1990s. Mr. Clinton presided over an explosion in computer technology. From its early development in research labs, government and universities, the internet became public in 1993. A different group of Whiz Kids were in charge. Dot com this. Dot com that. Too much money chasing too few opportunities in the burgeoning field of online commerce led to a bust.

After 9-11, the invasion of Iraq demonstrated the power of science. The subsequent campaign demonstrated the even greater power of human hubris and folly. In 2007-2009, technological folly and greed produced the greatest recession since the 1930s Depression. Americans split into two factions: those who believed in expertise and  those who mistrusted it.

President Obama was elected by those who were confident in experts. Policy experts would soon get the country out of the financial mess that the bankers and fast fingers on Wall Street had made of the lives of ordinary Americans on Main Street.

Mr. Obama’s two terms in office proved the inefficacy and arrogance of policy experts. The experts joined forces with vain politicians and created havoc in the lives of many Americans. A stimulus program was mismanaged, ill-timed and weighed down by burdensome regulation. An embarrassed President Obama admitted that there weren’t as many “shovel-ready” projects as he had hoped. Each agency protected its kingdom of regulatory power. Programs to help people stay in their homes floundered. A Cash for Clunkers auto buying program gave a temporary boost but its effect vanished within a few months. The promise of an efficient health care system that allowed Americans their choice of doctor was a fiasco. When the health care exchange web site debuted in 2013, it looked like the weekend effort of incompetent programmers. More embarrassment. Washington experts couldn’t be trusted to change the oil on someone’s car.

In 2016, almost half of voters rejected so-called experience, expertise and a posture of stately reserve in their President. After eight years of President Obama, they had had enough. They wanted the bluster of a pro wrestler and the charisma of a reality show star. Send in the clown!

America is home to the world’s best universities and most innovative companies and attract the best minds and the most capital from around the world. Blah, blah, blah. Americans were tired of best. They wanted great. They wanted insanely crazy great. They got crazy instead. Welcome to America.



Photo by humberto chavez on Unsplash

Biography. (2019, October 3). Robert S. McNamara. Retrieved from

Rhoads, J. N. (2014, July 7). The Medical Context of Calvin Jr.’s Untimely Death. Retrieved from

Smithsonian Institution. (2005, February 1). Individual Rights versus the Public’s Health. Retrieved from

Smithsonian Institution. (n.d.). Knowing the Presidents: Gerald R. Ford. Retrieved from

Wikipedia. (n.d.) 1992 United States Presidential Election. Retrieved from

The Interest Rate Curve

August 4, 2019

by Steve Stofka

I was doing some work on various 1930s Depression era programs and ran across this precursor to Social Security call the Townsend Old-Age Revolving Pension. You can read more about it at the Social Security website in the notes below (Note #1).

The idea was to give people 60 years and older $200 a month. Pretty cool, I thought. Then I checked the BLS inflation calculator and found out that $200 at that time was equivalent to $3900 a month! That’s almost 2-1/2 times the average $1,461 a month that current Social Security recipients receive. The program was to be funded by a 2% national sales tax somewhat like the VAT tax in Europe. Seniors loved the program. They would be receiving twice what an average working person received each month.

A bill was introduced in Congress to adopt this plan; when the proponents of the program appeared at a Congressional hearing, it became apparent that they had not done any research on the amount of taxes needed to fund the program – more than half of the entire federal budget. The idea was shelved but inspired the creation of the Social Security program a few years later.

A unique feature of the plan was that recipients had to spend the money every month or lose whatever they did not spend. As the economy slowed down in early 2008, the Bush Administration sent out tax rebates to everyone in the hopes that the increased spending would stimulate the economy. A 2008 consumer confidence survey indicated that only a third of people spent the rebate (Note #2), but a 2009 Congressional Budget Office analysis indicated a higher percentage (Note #3).

In Obama’s first months in office after the 2008 Financial Crisis, the issue was a hot topic among policymakers and economists. The government could send out another round of rebate checks to people, but it couldn’t make them spend it to stimulate the economy. The Fed had cut interest rates to near 0%. What else could it do?

In an April 2009 NY Times op-ed, the prominent economist Greg Mankiw discussed a proposal that one of his students offered (Note #4). Essentially, the scheme was to announce a lottery that would invalidate 10% of all money. The nominal cost of holding money would go from 0% to -10%. By nominal, I mean excluding inflation which was zero or negative in early 2009. In advance of the lottery, people would want to hold as little money as possible. Would they spend it, or deposit it in the bank?  In today’s digital economy, most of us do not hold as much money as we did several decades ago. Would such a scheme encourage people to spend more?

I remember reading a suggestion at the time that the government should send credit cards to taxpayers instead of checks. The thinking was that people would have to spend the rebate instead of being saved or paying off debt. However, money is fungible, or interchangeable. After receiving my credit card loaded with $600, for example, I could pay my utilities or rent with that and put $600 in my savings account. I have spent nothing extra, which is what the government wants me to do.

If government can’t force people to spend money, then the government must spend the money directly to stimulate the economy during a downturn. But that leaves it to Congress to decide what to spend the money on and that is a long and difficult process of debate and competition for political and economic power.

It has been more than ten years since the financial crisis. That’s ten years of some very smart and experienced people trying to think of solutions to the next crisis, whenever it comes. No one has been able to come up with a workable solution. I think that’s why the Fed announced a small decrease in the prevailing interest rate this week. In the face of some weaker manufacturing data in this country and around the world, they are trying to steer the economy away from any rocky shore. 

Have policymakers unwittingly crafted a financial world that can no longer cope with the normal downs in a business cycle? There are imbalances that build up during an expansion. A downturn is a correcting mechanism. After ten years, the Fed hasn’t been able to raise rates to a normal 3-4%. Because developed countries around the world have large debts that they must service, central banks are pressured to keep interest rates low.  The low rates entice companies to borrow money to buy back their own stock to make their future earnings more attractive to equity buyers. The low rates fuel robust credit growth among consumers who feel more confident in the future as stock prices continue to rise. The money spent spurs more growth. Eventually, the growth rate of employment and house prices and credit slows to zero. Then comes the downhill part. I think the Fed knows that the brakes on this economy are not working very well and are taking us down a road where the downhill might be more gradual. I hope.



  1. The Townsend Old-Age Pension program
  2. A preliminary analysis 2008 tax rebate
  3. A CBO analysis of the 2008 tax rebate
  4. Greg Mankiw’s NY Times op-ed “It May Be Time for the Fed to Go Negative.”

Slow Growth

April 21, 2019

by Steve Stofka

Happy Passover and Happy Easter. Now that tax day is past, let’s raise our heads and look at long-term growth trends of real, or inflation-adjusted, GDP. For the past seventy years real GDP has averaged about 3% annual growth. In the chart below, I’ve charted the annual percent change in a ten-year average of GDP (GDP10, I’ll call it). As you can see on the right side of the graph, growth has been below average for the past decade.

In 2008, growth in the GDP10 crossed below 3%. Was this due to the Financial Crisis (GFC) and the housing bust? No. The GFC barely figured into the computation of the ten-year average. The housing market had been running hot and heavy for four to five years, but this longer-term view now puts the housing boom in a new perspective: it was like lipstick on an ugly pig. Without the housing boom, the economy had been faltering at below average growth since the 1990s tech boom.

The stock market responds to trends – the past – of past output (GDP) and the estimation of future output. Let’s add a series of SP500 prices adjusted to 2012 dollars (Note #1).

For three decades, from the late 1950s to the mid-1980s, the real prices of the SP500 had no net change. The go-go years of the 1960s raised nominal, but not real, prices. Investors shied away from stocks, as high inflation in the 1970s hobbled the ability of companies to make real profit growth that rewarded an investor’s risk exposure. From the 2nd quarter of 1973 to the 2nd quarter of 1975, real private domestic investment lost 27% (Note #2). In less than a decade, investment fell again by a crushing 21% in the years 1979 through 1982.

In the mid-1980s, investors grew more confident that the Federal Reserve understood and could control inflation and interest rates. During the next decade, investors bid up real stock prices until they doubled. In 1996, then Fed chairman Alan Greenspan noted an “irrational exuberance” in stock prices (Note #3). The “land rush” of the dot-com boom was on and, within the next five years, prices would get a lot more exuberant.

The exuberance was well deserved. With the Fed’s steady hand on the tiller of money policy, the ten-year average of GDP growth rose steadily above its century-long average of 3%. A new age of prosperity had begun. In the 1920s, investment dollars flowed into the new radio and advertising industries. In the 1990s, money flowed into the internet industry. Construction workers quit their jobs to day trade stocks. Anything less than 25% revenue growth was the “old” economy. The fledgling Amazon was born in this age and has matured into the powerhouse of many an internet investor’s dream. Thousands of other companies flamed out. Billions of investment dollars were burned.

The peak of growth in the ten-year average of GDP output came in the 1st quarter of 2001. By that time, stock prices had already begun to ease. In the next two years, real stock prices fell almost 50%, but investment fell only 12% because it was shifting to another boom in residential housing. As new homes were built and house prices rose in the 2000s, long-term output growth began to climb again.

From the first quarter of 2006 to the 3rd quarter of 2009, investment fell by a third, the greatest loss of the post-war period. In the first quarter of 2008, growth in the GDP10 fell below 3%. In mid-2009, it fell below 2%. Ten years later, it is still below 2%.

The Federal Reserve has had difficulty hitting its target of 2% inflation with the limited tools of monetary policy. There simply isn’t enough long-term growth to put upward pressure on prices.  Despite the low growth, real stock prices are up 150% since the 2009 lows.  A prudent investor might ask – based on what?

The supply side believers in the Trump administration and Republican Party thought that tax cuts would spur growth. In the first term of the Obama administration, believers in Keynesian counter-cyclical stimulus thought government spending would kick growth into gear. Faced with continued slow growth, each side has doubled down on their position. We need more tax cuts and less regulation, say Republicans. No, we need more infrastructure spending, Democrats counter. Neither side will give up and, in a divided Congress, there is little likelihood of forging a compromise in the next two years. The stock market may be waiting for the cavalry to ride to the rescue but there is no sign of dust on the horizon.

Economists are just as dug in their ideological foxholes. The Phillips curve, the correlation between employment and inflation, has broken down. The correlation between the money supply and inflation has also broken down. High employment but slow output growth and low inflation. Larry Summers has called it secular stagnation, a nice label with only a vague understanding of the underlying mechanism. If an economist tells you they know what’s going on, shake their hand, congratulate them and move to the other side of the room. Economists are still arguing over the underlying causes of the stagflation of the 1970s.

A year ago, I suggested a cautious stance for older investors if they needed to tap their assets for income in the next five years. The Shiller CAPE ratio, a long-term evaluation of stock prices, is at the same level as 1929. At current prices in a low growth environment, stock returns may  struggle to average more than 5-6% annually over the next five years.



  1. Adjusted for inflation by the Federal Reserve’s preferred method, the Personal Consumption Expenditures Price Index (FRED series PCEPI). Prices do not include dividends
  2. Real Gross Private Domestic Investment – FRED Series GPDIC1.
  3. A video of the 1996 “irrational exuberance” speech

Green Incomes


March 10, 2019

by Steve Stofka

Many Americans cross the street if they think a socialist program is walking toward them. We believe that the U.S.A. is the heart of capitalism, but recent history reveals that our financial and legal systems are based on socialism for the very, very rich.

In the past two weeks, I reviewed the infrastructure goals as well as the justice and education goals of the Green New Deal (Note #1). In Part Three this week, I’ll look at the income supports included in the resolution’s economic agenda.

“Guaranteeing a job with a family-sustaining wage.” This is yet another example of clumsy language used to state a goal that some might read as utopian. Some can group the first phrase as ” Guaranteeing a job with a family sustaining wage” meaning that all wages should have a certain minimum. That sounds like the language of Minimum Wage 2.0, but does that mean that each job should be able to support a family of four, or six, or eight?

Others might group the first phrase as “Guaranteeing a job blah, blah, blah” and read the intent as a platform point of a Socialist Manifesto. Is the government going to hand out jobs to everyone that wants one? Only if the government takes over some of the means of production and becomes the nation’s chief employer can it hand out jobs to anyone who wants one. That is the textbook definition of socialism. It is not enough to have good intentions. Clarity of language matters.

Why the clamor for more income redistribution? The real (after inflation) income of poor and working families has lost more than half since 1980. That might not surprise some readers. The trend is even broader and more insidious. Income data from the Congressional Budget Office (CBO) shows that even the top 5% of real incomes have dropped 30%. The real income of a ¼ million families – the very, very rich – have grown in that time. Here are some highlights from the data.

In 2015 and 1980, the number of poor households, or bottom 20%, equaled the number of rich households, or top 20%. In 2015, the government took money from each rich household and gave it to 5-1/4 poor households to raise their income by 65% (Note #2). In 1980, the government took money from each rich household and gave it to 10-1/4 households to raise their income by only 25% (Note #3).

Why did poor households need so much more support in 2015 than they did in 1980? Because their real incomes before transfers and taxes (BTT) lost more than 50% (Note #4). The real BTT incomes of the top 5%, the very rich, have lost more than 30% . It is only the very, very rich, the top 1%, that have fared well in this fight against inflation. Their BTT income has grown 15% in the past 35 years. The bulk of those gains have probably come from the top .1%, or less than ¼ million families.

Why? Where has the money gone? The high interest rates of the 1980s made the dollar so strong that manufacturers began to move their operations to lower cost markets in Asia. Japan kept the value of the yen low relative to the dollar and attracted much of this investment. The Japanese economy and real estate boomed. American exports of manufactured goods declined, and commodity prices crashed, destroying a lot of income producing wealth, particularly in rural areas (Note #5). Bankruptcies during this decade far exceeded those filed during the Financial Crisis ten years ago (Note #6). Older readers may remember the charity concerts to raise money for farmers (Note #7). Today, many commercial buildings in small towns throughout the country stand empty. As rural clinics and nursing homes close, people must move to urban areas where medical services are available (Note #8).

As real incomes declined in the late 1980s, households and governments borrowed to make up for the loss of income. Who did they borrow from? Financial institutions who managed the assets of the very, very rich. As the financial sector grew in proportion to the size of the entire economy, the top managers of financial firms became very, very rich themselves (Note #9).

In the past twenty years, lobbying by the financial sector has quadrupled (Note #10). It paid big dividends during the latest crisis. After the initial bailout by the Bush administration in the fall of 2008, the Obama administration brought in a team led by Robert Rubin, Larry Summers, and Timothy Geithner. The first two helped dismantle the safeguards between deposit banks and investment institutions during the Clinton administration. Geithner was a protégé of Rubin. All were deeply embedded in the interests of the banks, not the creditors and governments who had trusted the judgment of financial managers.

The lack of separation between deposit banks and investment banks helped spread a cancer from the investment banks to banking institutions throughout the world. As Obama’s Treasury Secretary, Geithner continued to protect the bonuses of top managers despite massive losses. To preserve the wealth of the very, very rich, the Federal Reserve loaded up their own balance sheet with toxic bonds bought at full value.

After a 35-year period of rising real incomes and wealth because of favorable fiscal and monetary policy in Washington –
after Washington protected their wealth and income during the financial crisis at the expense of middle-class families who lost their savings and houses –
it is time for the very, very rich to pay taxpayers back.
You have eaten well. Here is the check.



1. Politifact article
2. In 2015, the bottom 20% of households (24.3 million) averaged $20,000 in income before taxes and transfer payments. The top 20% (25 million) earned almost $300,000. After taxes and transfer payments, the incomes of the bottom 20% rose 65% to $33,000. CBO report on household income in 2015, updated Nov. 2018
3. Number of households underlying CBO report is in Sheet “1. Demographics” of Supplemental Data spreadsheet linked on last page of report. Dollar amounts are in Sheet “3. Avg HH Income”, of same spreadsheet.
4. The impact of high interest rates on investment and commodities during the 1980s Secrets of the Temple pp.590-604
5. Using BLS calculator to compare CPI January 1980 to January 2016 prices, $1 in 1980 = $3.05 at the end of 2015. Average income amounts from Sheet 3. See Note #3 above.
6. Four decades of bankruptcies chart at Trading Economics
7. Farm aid timeline
8. Nursing centers in rural areas are closing NYT
9. The financial industry’s increasing share of GDP
10. Increase in financial lobbying since 1998

Fault Lines

January 20, 2019

by Steve Stofka

If your twin brother went away on a spaceship a month ago and looked at the current price level of the SP500, he wouldn’t see much change. What a month it has been! A 7% drop in stock price the week of December 17th, followed by a Christmas Eve when Santa left a lump of coal in investor’s stockings, followed by a government shutdown.

Let’s say your twin brother went off to the Romulan Galaxy on a spaceship flying near the speed of light on October 1, 2007. He has just come back and has aged a few weeks. You have aged a great deal. The financial crisis, the housing crisis, the job crisis, the crisis crisis. No wonder you look older. There are too many crises.

Your twin brother notes a similarity in the behavior of the stock market the past few months and the fall of 2007 when he took his starflight cruise. What similarity you ask? He hauls out his Romulan graphing tool and shows you a plot comparison of SP500 prices (SPY) in the fall of 2007 and the fall of 2018. Not only does your twin brother look younger but he also got a Romulan grapher on his journey. It is not fair.


“In both periods, prices fell about 15% in 15 weeks,” your brother says.

“They happened to fall the same percentage in the same amount of time,” you answer.  “That probably happens all the time and we just don’t notice.”

“15-20% drops in as many weeks doesn’t happen all the time,” your brother says. “It happens when there are fault lines forming. It happened in December 2000, January 2008, again in August 2011 during another government shutdown, and now.”

“Sure, there are some trade problems and the government shutdown,” you protest, “but the economy is good. Employment is at all- time highs, wage gains were over 3% last month, and inflation is relatively tame.”

“Everything was still pretty good in December 2000 and January 2008,” your brother responds. “‘A healthy correction after a price boom,’ some said. ‘The market is blowing off the excess froth before going higher,’ others said. At both times, there was something far more serious going on. We just didn’t know it.”

“You got pretty smart in the time you were gone,” you tell your brother. “Can I get one of those Romulan graphers?”

“Yes, I bought one for your Christmas present 11 years ago,” your brother says and hands you a grapher from his spacesack. “Tell me, what are these picture phones that people are carrying around now? I don’t remember them from when I left. And what’s Facebook?”

Strong Reactions

December 30, 2018

by Steve Stofka

Happy New Year!

Dramatic trading days signal a down market. In the week prior, the SP500 index lost over 7%. On Monday, Christmas Eve, the stock market fell to a level that would traditionally signal the beginning of a bear market, which is 20% below a recent high closing price. After a huge rally on Wednesday and a lot of volatile trading this week, the index gained 3%.

A disruptive stock market underscores the importance of asset allocation. The SP500 has lost 10% in December. A conservatively balanced fund like Vanguard’s Wellesley Income (VWINX) lost 1.8%. The fund is actively managed and has 40% stocks, 60% bonds/cash. A fund of index funds, VTHRX, lost 7.8%. It has a more aggressive mix of 65% stocks and 35% bonds/cash.

As I noted a few weeks ago (Hat Trick), there have been repeated signs of a struggle between hope and fear, between competing estimates of future earnings. 7% weekly price falls occur at crises or turning points. In the past sixty years, there have been only fifteen such weeks. Let’s take a look at the most recent.

In August 2011, then President Obama walked away from an informal budget deal with House Speaker John Boehner. The market lost almost 20% but fell short from hitting that mark. Once a budget deal was negotiated, the market recovered but it took five months to make up the losses.


Three years earlier, in October 2008, the market lost more than 7% in a week when negotiations for a bank bailout fell apart. This was a month after the bankruptcy of investment firm Lehman Brothers ignited the financial crisis. The market would take 39 months to recover that October price level. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (Note #1). Senate Democrats made many concessions to win a few Republican votes for the bill to gain passage. Once it became clear that the stimulus funds would be trickled into the economy over several years, the market tanked, losing 11% during the month of February. In a final week of capitulation, the market lost 7% in the first week of March. This was the turning point.

A 10% weekly price drop in April 2000 heralded the end of the dot-com boom. The market would not recover for 83 months, almost seven years. An even worse fall came after the market opened following the 9-11 attack. The indictment of the international accounting firm Arthur Anderson sparked doubts about the financial statements of other companies and helped fuel an 8% drop in July 2002.

With six weeks of 7% price drops, the 2000s was the most tumultuous decade since the Great Depression. Strong reactions in the market deserve our attention and caution.

1. The American Recovery and Reinvestment Act