Tag Archives: inflation

Meanwhile….

Public Policy and Governance, , ,

As House Republicans noisily demonstrate their utter lack of interest in governing, other parts of the federal system continue to operate. The Fed, for example, continues to battle inflation.

In a lengthy October essay in the New York Times, Ezra Klein provided an overview of the causes of inflation and the choices policymakers face when trying to control it.

Inflation often begins as a mismatch of supply and demand. But if people get accustomed to prices rising, then inflation becomes about expectations. And so the task of ending it grows fuzzier: You need to use policy not just to manage the economy but also to alter psychology. The arid language of economics obscures the brutality this demands. You need to hit the economy hard enough to cow everyone who makes decisions within it.

Because that’s what prices are: decisions. Those decisions, even when mediated by algorithms, are made by people trying to predict the decisions other people will make. When people start to believe that other people are raising prices, they will raise prices. If they think other people are raising prices even faster, they will raise prices even faster than that. “How can you persuade people to expect differently?

One way is by increasing supply., but that usually can’t be done quickly. Another is by cutting demand by raising interest rates–but that makes it harder to borrow money or afford homes, and inevitably throws people out of work.

Klein reminded readers of Paul Volker’s approach  to “stagflation” in the 1970s.

Volcker forced a recession so deep that the entire psychology of the American economy changed. Today he is celebrated for his steel. Powell invokes him as inspiration. In a speech at a Fed conference in Jackson Hole this summer, he mentioned Volcker twice and said, of the intended rate hikes, “we must keep at it until the job is done,” presumably a reference to Volcker’s memoir, “Keeping At It.”

Using interest rate hikes to manage inflation operates like a sledgehammer: it reduces demand, but also cuts supply.

When people lose their jobs, they stop producing the goods and services the economy needs. When mortgage rates spike, developers build fewer houses, despite the fact that high housing costs are often caused by too few houses. When borrowing money becomes expensive, people stop borrowing it and cease to make the investments that create future productivity.

Klein documents the various ways in which interest rate hikes disproportionately harm the poor and the jobless, and says that it would be “nice to have a policy that targeted the rich rather than the poor and did so in a way that didn’t hurt long-term investment.”

He asserts that “such a policy exists.” It’s a progressive consumption tax. 

Here’s how it works. Instead of reporting your income to the I.R.S. and being taxed on that, you report your income minus your savings, and you’re taxed on that. That’s a consumption tax: Your taxable income is what you spend, not what you save. Congress can make it progressive by adding a hefty standard deduction and applying a much higher tax rate to people making much more money, just as we do now.

The economist who proposed this approach wasn’t concerned about  inflation. He thought rich people’s spending wasn’t just wasteful, but harmful. Whether one accepts his definition of “harmful” or not–I’m dubious–Klein points to a truly useful aspect of a progressive consumption tax: it can be dialed up and down to respond to different economic conditions.

In a time of recession, we could drop taxes on new spending, giving the rich and poor alike more reason to spend. In times of inflation, we could raise taxes on new spending, particularly among the wealthy, giving them a concrete reason to cut back immediately and to save and invest more at the same time.

Ideally, adjustments could also be made automatic.

Perhaps for every percentage point increase in unemployment above 5 percent, the tax rate would fall by three points, and for every percentage point increase in inflation above 3 percent, it would rise by four points. Other rules could apply for periods when unemployment and inflation moved together. The tax code would become responsive to the economy by default, rather than only through new acts of Congress.

Given the GOP’s semi-religious objection to taxes, and the current domination of the House by people who can barely spell “economic policy,” let alone leave their preoccupations with culture war issues long enough to consider the operation of the economy, I don’t hold out much hope for passage of a progressive consumption tax in the near future, but it’s an intriguing idea.

We should file it away with other good ideas that await a (hoped-for) return of political sanity and lawmaker interest in actually governing.

 

Messaging

Random Blogging, , , , ,

As the midterms get closer, the punditry gets more predictable. For the past several weeks, not a day has gone by without at least one column–usually more– bemoaning the Democratic Party’s lack of effective messaging.

To which I say bull-feathers.

The problem with “messaging” isn’t that candidates aren’t choosing to emphasize arguments likely to move voters; the problem is the civic ignorance of those voters and the siloed information environments they inhabit.

Take inflation. Republicans are convinced that an emphasis on inflation is a winner for the GOP, and they may well be right. If they are, it will be because the average voter has absolutely no understanding of economics–and is totally unaware that inflation is currently a global phenomenon (much worse elsewhere, actually) with multiple causes.

Progressives have been pointing to several of those causes–“messaging” about the effect of the war in Ukraine, the Saudi’s outrageous decision to cut production so as to raise gas prices (a transparent effort to help Putin by helping Trump’s MAGA base), the persistence of pandemic supply chain problems, and a healthy dose of corporate greed.

That last item has led to calls by some economists for a one-time windfall profits tax–but again, how many American voters understand how price gouging  occurs, or what a windfall tax is or does?

American voters have historically blamed the President–no matter who is in office and no matter what his party–for economic conditions a President cannot and does not control. Those voters have historically gone to the polls in midterm elections and ousted members of the President’s party–despite the fact that the opposing party is generally offering zero credible policies to address the economic problem of the moment.

Right now, the GOP’s proposal to “fix” inflation is to cut spending on Social Security and Medicare, and  stop supplying arms and humanitarian aid to Ukraine. How many voters know that, or are aware of the various statements to that effect made by Republican members of the House and Senate?

For that matter, how many voters understand how the filibuster works, and how its deployment by the GOP has doomed popular legislation?

Until the most recent session of the U.S. Supreme Court, few voters understood the connection between the politics of the Senate majority and the placement of qualified jurists on that Court. (Most still don’t understand how we got the current, highly politicized and retrograde Court majority.)

A number of the pundits decrying the inadequacy of Democratic messaging are convinced that the upcoming election is about saving American democracy–a point with which I agree–and that effective messaging should focus on that threat. They never seem to explain just how they would address the loss of American democracy in those 30-second TV ads or glossy mailed flyers.

If American voters understood how our government is supposed to work–if they all knew, for example, that we have three branches of government (a fact that was evidently a revelation to Tommy Tuberville, elected to the U.S. Senate from Alabama presumably because he was a good athlete), and how those branches are supposed to operate, perhaps it would be possible to make the case in a way that would resonate with those voters. Without that public understanding, Democrats (and disaffected Republicans like Liz Cheney) are reduced to making the accusation–and an accusation is not an explanation.

For that matter, even excellent messaging must be heard to be effective.

If American voters all tuned in to the same media outlets, it might be possible to educate them about these matters, but of course, they don’t. Democratic messaging–no matter how brilliant–isn’t likely to reach the legions of voters glued to Fox News and its clones.

What do American voters know?

Most know that an illegitimate Supreme Court has–for the first time in American history–withdrawn a constitutional right. Most know that the right to reproductive autonomy is critical to women’s health and equality, and a significant number know that Republicans are very likely to continue to chip away at other rights previously protected by the constitutional right to privacy.

Some portion of the electorate knows that the President doesn’t control gas prices,  and that Republicans will continue their assault on the social safety net.  Growing numbers recognize that the MAGA movement is dangerous; they may not be able to define fascism but–like pornography– they know it when they see it.

Will what American voters do know be enough to upend the history of midterm elections–a history that favors the party not currently in control of the White House? Will what they do understand motivate sufficient numbers to turn out to VOTE BLUE NO MATTER WHO?

I guess we’ll find out.

 

 

Follow The (Lack of) Money

Education / Youth, Public Policy and Governance, ,

After the West Virginia teacher’s strike, Vox published a fascinating graphic–an interactive database.

The article itself focused on the pay of teachers in West Virginia, and demonstrated how the buying power of those salaries–which remained essentially flat– had been eroded over the years by inflation. Accompanying the article was an interactive feature that allowed readers to see how their own states measured up.

I looked at Indiana.

The first graph showed average teacher pay (both elementary and secondary) over a fifteen-year period, in dollars, and not adjusted for inflation, both for Indiana and nationally. At the beginning of the fifteen years, national pay averaged $46,752 annually, and Indiana’s teachers came close to that average, at $45,791. By 2016, a significant gap had developed: national salaries averaged $58,950, but the average in Indiana was $50,554.

The graph that really “told the tale,” however, took the same time period and adjusted those numbers for inflation. That graph showed that teachers in Indiana have actually sustained a 15.1% pay cut over the past 15 years.

This is worse than the nation as a whole, where teachers have had their pay cut by an average of 3 percent when we adjust for inflation.

And since 2009, teachers in Indiana had their pay cut by 9.7 percent.

The interactive graph was followed by a table showing where each state’s education funding comes from. In Indiana, 9.8% comes from the federal government, 59.1% from the state, and 31.1% from local government.

There’s an old adage to the effect that “You get what you pay for.” Here in Indiana, the General Assembly came close to passing a bill that would have allowed school systems to hire classroom teachers who lack education credentials. As local media reported,

Like the rest of the country, Indiana is struggling to find enough qualified teachers to fill its public school classrooms. Lawmakers have proposed a possible solution: unlicensed teachers.

Right now, traditional public schools can only hire teachers who’ve met the state’s licensing requirements. While there are alternative paths to teaching, the traditional route to a license is a college teacher preparation program, student teaching and licensing exams in content and pedagogy, the actual practice of teaching.

Several recent studies have told us what most Americans already know: pay matters. The scholarship confirms that teacher salaries are linked to employee retention and that higher pay draws smarter people to the field and the classroom.

In most states, teachers are required to obtain a master’s degree. People with such credentials have options beyond the classroom. Very few of them are in a position to forego thousands of dollars annually in order work at jobs they may love, but that’s what we are asking them to do.

We shouldn’t be surprised if teachers in many (if not most) states who want to stay in the classroom follow the lead of West Virginia.

At some point, our slavish devotion to unrealistically-low tax rates has to give way to the need to pay for effective governance and necessary public services, including but not limited to education.

It’s like the old bumper sticker used to say: “Think education is expensive? Try ignorance.”

We’ve been trying ignorance for far too long, and thanks to the Trump Administration, the GOP and the NRA, among many others, we’re learning just how expensive it can be.