Tag Archives: inflation

Easy fixes sometimes are anything but

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Contrasting the Trump and Harris economic planS

Source: Directors & Boards

Politicians like easy-sounding solutions to complex problems, particularly on the economic front. Their fixes often are aimed at pleasing voters who know little or nothing of economics. At times, their efforts smack of pandering and might even be harmless.

But, at other times, they can be quite dangerous — as seems likely with the plans of Donald J. Trump. Just mull over what 16 Nobel laureate economists have to say:

“The outcome of this election will have economic repercussions for years, and possibly decades, to come,” warns a letter signed by Columbia Prof. Joseph Stiglitz, former chief economist at the World Bank; Harvard Prof. Claudia Goldin, former director of the Development of the American Economy program at the prestigious National Bureau of Economic Research, and 14 other Nobelists. “We believe that a second Trump term would have a negative impact on the U.S.’s economic standing in the world and a destabilizing effect on the U.S.’s domestic economy.”

They caution that Trump’s plans, including his goal to impose tariffs of 10 percent to 20 percent on foreign goods and 60 percent on Chinese-made products, will do exactly the opposite of what he’s been promising as he has attacked the Biden-Harris administration for inflation. Just as inflation rates are coming down, those duties would kickstart a price-spiral anew.

Source: Dividend Power

“Many Americans are concerned about inflation, which has come down remarkably fast,” the economists argue. “There is rightly a worry that Donald Trump will reignite this inflation, with his fiscally irresponsible budgets. Nonpartisan researchers, including at Evercore, Allianz, Oxford Economics, and the Peterson Institute, predict that if Donald Trump successfully enacts his agenda, it will increase inflation.”

And listen to some of those folks, who’ve crunched the numbers on Trump’s plans:

“The Peterson Institute for International Economics think-tank in Washington calculates that 20 per cent across-the-board tariffs combined with a 60 per cent tariff on China would trigger a rise of up to $2,600 a year in what the average household spends on goods,” reports the Financial Times. “They say that the tariffs would disproportionately hit the low-income households that Trump claims his economic policies help protect.”

And the Peterson Institute is hardly alone. The Tax Policy Center, concurs, albeit with slightly different figures because Trump has floated both 20 percent and 10 percent global tariffs.

“A worldwide 10 percent tariff and a 60 percent tariff on Chinese goods proposed by Republican presidential candidate Donald Trump would lower average after-tax incomes of US households in 2025 by about $1,800, or 1.8 percent,” writes center senior fellow Howard Gleckman, a former BusinessWeek colleague. “They’d reduce imports into the US by about $5.5 trillion, or 15 percent, from 2025–2034.”

The consensus among the experts is that Trump’s plan would hit consumers hard. The effect would show up not only in finished goods made overseas, but in anything manufactured in the U.S. with foreign-made components, as the higher costs would filter through the system. Thus, there would be no escaping the higher prices.

Beyond just ratcheting up inflation, Trump’s plans could drive down gross domestic product and employment.

“Candidate Trump has proposed significant tariff hikes as part of his presidential campaign; we estimate that if imposed, his proposed tariff increases would hike taxes by another $524 billion annually and shrink GDP by at least 0.8 percent, the capital stock by 0.7 percent, and employment by 684,000 full-time equivalent jobs,” says another nonpartisan group, the Tax Foundation.

The kick in the teeth that Trump could deliver to the nation may also come at a tough time, as the economy slows under the Federal Reserve’s so-called “soft-landing” approach. The Fed, the independent group that has the job of reining in inflation, recently lowered interest rates by a substantial half-point in the federal funds rate. That’s because its leaders believe that inflation is moving toward a sustainable 2 percent annual rate, the Fed’s target, without driving unemployment up to unacceptable levels.

The Federal Reserve, source: Investopedia

As the Fed tries to balance employment and inflation, it is no doubt mindful that the national jobless rate recently rose to 4.2 percent after dipping as low as 3.4 percent, a 54-year-low, earlier in the year. The Fed is following classic economic theory: when the jobless rate is too low, higher wages kick up inflation; when unemployment is too high, of course, that’s a red light for the economy.

In time, the lower interest rates that the Fed has engineered should deliver an upward jolt to the economy. That will set the stage for the next president – whoever that is – to bask in the glow of sustainably low unemployment with reasonable inflation. But that president’s policies, if they are inflationary, could tip the balance.

As the experts see it, the outlook under a Trump presidency is hardly cheerful, particularly if his tariffs trigger an all-out global trade war. “The last time we were in a trade war under Trump, the global manufacturing cycle went into a recession,” Julia Coronado, a former Fed economist who now runs the MacroPolicy Perspectives consultancy, told the Financial Times.

Recall that, during Trump’s term, the economy slipped into recession from February to April 2020, a few months before his tour in the White House ended. Covid drove that downturn, which was marked by a jobless rate of 14.8 percent in April of 2020. When Trump left office, the jobless rate had fallen to 6.4 percent and it fell substantially after that, in part thanks to the infrastructure-spending policies of President Joe Biden.

Source: Bloomberg

Contrast Trump’s plan with Harris’s blueprint for stimulating housing construction, particularly for the middle class. She wants to boost housing supply by expanding the Low-Income Housing Tax Credit, providing incentives for state and local investment in housing and creating a $40 billion tax credit to make affordable projects feasible for builders. Mark Zandi, chief economist at Moody’s, and Jim Parrott, a housing adviser under the Obama administration, estimate that America has a shortfall of three million homes right now, and Harris aims to close that gap. The two are advising her campaign on these plans.

Ben Harris of the Brookings Institution, a former chief economist of the U.S. Treasury, concurs that the plan is sound. “Critics assail the high cost of subsidies to developers, but they are the best tool the federal government has to incentivize homebuilding,” he writes. “We desperately need more affordable homes in America – millions of them – and the only practical way to boost supply quickly and meaningfully is to offer financial incentives to local governments to expand zoning for affordable housing and to developers to build it. The vice president proposes to do both.”

To be sure, Harris’s plan to provide $25,000 to first-time homebuyers is drawing less praise.

Calling that “a really bad idea,” Michael Strain, an economist at the American Enterprise Institute, says: “The ultimate beneficiary of that credit is not going to be first-time home buyers. It’s going to be people selling homes.” Economics writer Peter Coy of The New York Times echoes that, saying the plan would do nothing to boost housing stock, but only demand. “Sellers surely would take advantage of the increased demand by raising their prices,” Coy writes. “So a big portion of the taxpayer money that was intended for home buyers would wind up in the pockets of sellers.”

But it’s far from clear how the construction stimulation efforts and the aid to homebuyers would offset one another. A rush of homebuilding in theory should lead to lower prices, and the numbers of people likely to be involved in her $25,000 support effort seem relatively small.

Moody’s estimates that Harris’s down-payment plan would help some 11.7 million more first-time homebuyers, including 2.75 million first-time Black and Latino homeowners. This is just 3.2 million more first-time homebuyers and 1 million more Black and Latino first-time homebuyers than would take place without her plan.

For her part, Harris is doing some pandering by proposing to attack alleged price-gouging, particularly in grocery costs. Quoting a campaign statement, The Washington Post reported that Harris wants to implement “the first-ever federal ban on price gouging on food and groceries — setting clear rules of the road to make clear that big corporations can’t unfairly exploit consumers to run up excessive corporate profits on food and groceries.”

The details were not clear, the Post reported. But it said Harris would aim to enact the ban within her first 100 days, in part by directing the Federal Trade Commission to impose harsh penalties on firms that break new limits on so-called gouging. The statement did not define gouging or excessive profits.

As Alexander Henke, an economics professor at Howard University, told the school newspaper, Harris’s “vague” plan appears to be more like a political economy move than an economic one, tapping into popular sentiment against price gouging by delivering poll-tested messaging. And Harris should know better — she studied economics at Howard and her father, Donald, is a retired Stanford University economics professor.

What’s more, this horse long ago left the barn. Most of the inflation is now behind us, suggesting that the economy is resolving the inflation on its own and there would be few prosecutions.

Just look at the numbers. Prices for food overall rose 9.9 percent in 2022, faster than in any year since 1979, according to the U.S. Department of Agriculture. The hike was especially sharp in so-called food-at-home prices, up 11.4 percent. But the rises have slowed since then, climbing last year by 5.8 percent overall and by 5 percent for food-at-home. This year, the department expects prices for all food to increase 2.3 percent, with food-at-home prices rising just 1.2 percent.

What drove up prices in prior years? Were greedy corporations taking advantage of consumers? Were nefarious or misguided Biden-Harris policies driving up the price of eggs (something VP nominee JD Vance embarrassingly got wrong in a Pennsylvania grocery store photo-op)?

Not according to experts at the Federal Reserve Bank of New York. They point to post-Covid volatility in global commodity prices and a sharp rise in wages for grocery-store workers (likely related to a shortage of such workers). When such “input” costs rise, everyone in the production and retail chain tries to sustain their profit margins. As it happened, foodmakers showed no margin gain in recent years, while retailers showed only a modest uptick in already-thin margins.

Other key elements of the plans of both candidates suggest far different approaches — Trump would take a largely top-down tack while Harris, as she puts it, aims to build the economy from the middle class out. She hit hard on this theme in a Sept. 25 address on the economy and her idea are spelled out on her website.

Source: The New York Times

Harris would boost the corporate tax rate from 21 percent to 28 percent and she has promised not to raise taxes on people making less than $400,000 per year. She wants to restore and expand the earned income tax credit and the child tax credit, including a $6,000 child tax credit for the first year of a newborn’s life. She would also increase the tax deduction for start-up businesses from $5,000 to $50,000, a move she argues would stimulate innovation among all-important small businesses.

By contrast, Trump wants to reduce the corporate tax rate from 21 percent to 15 percent for companies that make their products in the U.S. He already cut the rate from 35 percent during his 2017-2021 presidency. It’s long been known that such moves deplete government revenues. Trump also said he would end taxes on overtime pay and on tips (the tips idea is one Harris also suggests). And Trump also aims to exempt Social Security income from taxes, unmindful apparently of how the Social Security system, even under the current system, will likely be insolvent by 2035 unless policymakers impose a fix.

Trump also wants to extend individual tax cuts he pushed through Congress in 2017, including for the wealthiest Americans. Experts estimate that would reduce revenue over a decade by about $3.3 trillion to $4 trillion.

Harris has also proposed hiking taxes on high-income earners. Americans earning below about $100,000 annually would continue to pay no taxes on long-term capital gains and higher-income families earning up to $1 million would continue paying up to a maximum rate of 20 percent. But those who earn $1 million a year or more would see a rise in the tax rate on their long-term capital gains to 28 percent.

Whether soaking the rich a bit, as Harris proposes, is good or bad economically, it may sell politically. And, if nothing else, it’s likely to do far less harm than Trump’s tariffs would.

“Shining city on the hill” or “a nation in decline”?

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The facts don’t bear out Trump’s doomsaying — at least in economic terms

Source: Los Angeles Times

In a memorable election debate with President Jimmy Carter on Oct. 28, 1980, GOP nominee Ronald Reagan asked Americans: “Are you better off today than you were four years ago?”

Amid the stagflation and rising unemployment of the time, many were not. So Reagan went on to turn Carter into a one-term president. Reagan even won the popular vote (unlike Donald J. Trump in 2016). And he went on to serve two terms.

That “better-off” question is rising again, of course (as it often has in presidential races). As one might expect, Fox News has bruited it, citing a poll the outlet took last spring that suggested 52% of voters felt worse off. Still, in a poll a bit later by The New York Times, The Philadelphia Inquirer and Siena College, the outlook was similar, as more than half of registered voters in six battleground states rated the economy as “poor.” Many Americans even wrongly think we’re in recession.

Like many of those voters, some of my relatives are answering “No” to the “better-off” question, saying they felt richer during the Trump years than they have during the Biden-Harris term. And a libertarian friend argued the same point, contending that the reasons many Americans back Trump are not based in racism or sexism, but rather on economics. They just don’t think Democratic policies have helped them, he said.

But are we, in fact, better off? Do the data substantiate or undercut the often-partisan feelings, deeply felt as they may be?

Without seeing their tax returns, of course, we can’t know whether certain individuals have fared better or not since January 2021. We don’t know how their businesses have done or how they have coped if they are on fixed incomes (though Social Security boosts for costs of living of 8.7% in 2023 and 3.2% this year may have helped).

But we can explore the so-called national “vibecession” to see if it is based in facts or is just a matter of hazy memories. And recall that some of those memories have been demagogically reinforced by Trump’s inaccurate bravado about overseeing the greatest economy in world history.

“Nostalgia’s rosy glow makes almost all presidents more popular after they leave office,” Los Angeles Times journalist David Lauter writes. “[T]hat effect may have been especially sharp this time because the steep inflation of 2021 and 2022 caused voters to fondly recall the good economy of Trump’s first three years in office; and younger voters may have only vague memories of Trump controversies that took place in their teenage years.”

Certainly, we must concede that inflation has been a bear, especially for lower-income folks:

Indeed, because higher prices are baked in, it may not help former Vice President Kamala Harris that inflation has moderated substantially this year. As the Bureau of Labor Statistics reported on Sept. 11, the Consumer Price Index for All Urban Consumers rose just 0.2% on a seasonally adjusted basis in August, the same increase as in July. Over the last 12 months, the all-items index increased just 2.5% before seasonal adjustment.

It also may make little difference to voters that presidents don’t control inflation and can only modestly influence it. Reining in price hikes is the province of the independent Federal Reserve, which is poised to lower interest rates for the first time in four years because of recent progress on the price front. The rollback could make housing and other things more affordable for many, though not for a while yet.

Despite that, of course, Trump has trumpeted inflation as a reason Americans should elect him. He knows all too well that a price spiral has cost incumbent presidents — notably Carter and Gerald Ford — the White House. It helped Reagan to get in, too, so Trump understandably figures it could be a winning issue for him.

What’s more, real incomes haven’t been growing much. As polls expert Nate Silver writes, real disposable personal income, basically how much money people have left after taxes and inflation, is historically one of the best predictors of election outcomes. And it’s been flat during Biden’s tenure: people’s incomes aren’t growing much. Part of that, he notes, was due to spikes caused by COVID stimulus spending — but even over the past year, it’s barely kept up with population growth:

But to maintain that things haven’t been getting better economically — overall — is simply false. If one looks at gross domestic product, for instance, the trend line has been markedly up:

And unemployment rates reflect gains, too. Recall that Trump’s term was marked by a Covid-induced recession that lasted from February to April 2020 (hardly the sort of thing one can look back on fondly). After Trump left the Biden-Harris team a jobless rate of 6.4% in January 2021, the climb back economically challenged the Democrats. It took the labor market a bit less than two years to recover to pre-recession levels. Now, we’re just above historic lows in joblessness, with a 4.2% national rate.

Source: BLS

Moreover, one’s feeling of well-being has a lot to do with housing costs and prices. And for homeowners, times could scarcely be better, at least insofar as their wealth is tied to the value of their homes (the story is different, of course, for renters and would-be home buyers):

To point to just one example, the home of my relatives in suburban Jackson, New Jersey, is now worth $570,000, a good bit more than the $120,000 they paid in 1990 (and that $120K equals $296,500 today, so they’ve had dramatic inflation-adjusted gains), according to Redfin. By that measure alone, they are much better off than in the past.

But much of that data above is backward looking. At the moment, it seems, many consumers are hardly feeling impoverished, and some are beginning to believe Harris would be a better choice than Trump on the economic front.

“Consumer sentiment was essentially unchanged for the fourth consecutive month, inching up 1.4 index points,” the director of the much-watched University of Michigan consumer survey reported in an early assessment of August survey results. “With election developments dominating headlines … sentiment for Democrats climbed 6% in the wake of Harris replacing Biden as the Democratic nominee for president. For Republicans, sentiment moved in the opposite direction, falling 5% … Sentiment of Independents, who remain in the middle, rose 3%.”

Source: Econlib

“The survey shows that 41% of consumers believe that Harris is the better candidate for the economy, while 38% chose Trump,” survey director Joanne Hsu writes. “Overall, expectations strengthened for both personal finances and the five-year economic outlook, which reached its highest reading in four months….”

Of course, big-picture facts may matter little to folks who are convinced the past was better. Indeed, with its Make America Great Again theme, the Trump candidacy is based on a rosy view of the past, one that under scrutiny seems beyond saccharine and, for many Americans, is just inaccurate. His negativism, with comments such as “we are a nation in decline,” play well with some, but will they with most?

To be sure, there is plenty of reason to be concerned about various social pathologies in the United States — school shootings come to mind first and foremost. Despite my libertarian friend’s view that racism and sexism are well back in the country’s rear-view mirror, moreover, many Americans are concerned about such ingrained traits in our national psyche — even if we have had progress there.

“Voters overall have mixed views of the impact of Harris’ gender and race and ethnicity on her candidacy,” a recent report by the Pew Research Center finds. “More say the fact that Harris is a woman and that she is Black and Asian will help her than hurt her with voters this fall. Somewhat more voters see Harris’ gender as a potential negative (30%) than see her race and ethnicity this way (19%).”

“Harris supporters are far more likely than Trump supporters to say the vice president’s gender and race will be a liability,” the report continues. “More than twice as many Harris supporters (42%) as Trump supporters (16%) say the fact that Harris is a woman will hurt her with voters. Fewer Harris supporters think her race and ethnicity will be a hindrance (31%), but just 8% of Trump supporters say the same.”

With comments such as “she happened to turn Black,” Trump is doing his best to rouse the racists among his devotees while trying to undercut Harris’s support among Blacks. Certainly, Trump doesn’t seem to be succeeding in the latter regard, with some 82% of Black voters “definitely” or “probably” in her corner, according to a Washington Post-Ipsos poll.

In the end, to the extent that Harris can get people to focus on facts, she may even persuade some that things have been getting better, Trump’s incessant focus on the negative notwithstanding. And there’s a decent shot things will get even better going forward. Focusing on a sunny future — America as a “shining city on the hill” — helped Reagan. Might that work for Harris, too?

Will economics matter in November

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Social issues — together with some economic factors — could decide the fate of Team Biden

Source: Investopedia

Economics, we were taught in grad school, assumes that people will act rationally and in their self-interest. But do they always? And do they always act on valid information? Beyond that, can other factors outweigh economic ones?

The coming election may test some common economic assumptions. And it may be decided on matters entirely apart from household finances.

By most Big Picture indications, the U.S. economy is faring pretty well. As President Biden has repeatedly noted, the unemployment rate has been below 4% for the last 26 months, the longest such stretch in more than 50 years. That is a stunning contrast to the 14.7% jobless rate of April 2020, when Covid shut down much of the economy.

And, to take a couple more key indicators, wages have grown substantially since January 2021, when Biden took office, with the 12-month moving average of wage gains starting at 3.4% that month and rising to 5.4% in February 2024 (with an uptick a year ago to 6.4%). By contrast, inflation has slipped to a 3.2% annual rate so far this year, down from its annual high of 7% in 2022, and falling well below the gains in pay most workers are enjoying.

Even in manufacturing – a long-declining sector – employment recently has been topping 12.96 million each month, the largest number since the fall of 2008. While still a far cry from the 17.9 million jobs in the sector we saw in 1990, it’s a healthy gain from the 11.4 million of the worst Covid period in early 2020.

But it is also true that we live in a split-screen economy. Behind the big numbers are unsettling realities that many Americans are having trouble coping with, factors that could outweigh the macro achievements that Team Biden points to. As a friend noted, things are pretty good for the upper middle class and above. Below that, not so much.

Mortgage rates and housing prices are too high for many folks to afford homes, for instance. And high prices, coupled with high loan rates, even put cars out of reach for some — certainly the electric cars that the administration is incentivizing.

“Anyone who wants to buy a house or a car faces a double whammy of higher prices and far higher rates,” The Wall Street Journal noted. “Few are even bothering to apply for a mortgage, with applications for loans to buy a home in the past year at their lowest since 1995. Those who have already achieved the American dream are fine, but it’s getting further away for those still reaching for it.”

And, while inflation rates are coming down, the price of groceries isn’t dropping. Sticker-shock at the cash register continues to be the kind of in-your-face reality that American shoppers face regularly. “Average annual food-at-home prices were 5.0 percent higher in 2023 than in 2022. For context, the 20-year historical level of retail food price inflation is 2.5 percent per year,” the USDA reported. “Price growth slowed in 2023 compared with 2022, when food-at-home prices rose by 11.4 percent.”

Gerald Ford’s failed effort against inflation, source: Wikipedia

Such inflation, it has been said, had a lot to do with turning Jimmy Carter and Gerald Ford into one-term presidents. While the average inflation rate under Biden has been far lower than the others experienced (9.9% on average under Carter and 8% for Ford), Biden’s 5.7% average rate so far has him tied with the rate that obsessed Richard Nixon in his day – hardly a welcome comparison for Team Biden.

And inflation hits some folks far harder than others. Those on the lower end of the economic scale – historically more likely to vote Democratic – are those struggling the most. Many may not realize that presidents have little power over inflation, a challenge that falls to the independent Federal Reserve. But they keenly understand the cash-register effect and that could drive them to seek a change, especially since inflation during the Trump years averaged just 1.9%.

So, if one asks whether a voter is better off now than he or she was four years ago – a line that got Ronald Reagan elected over Carter in 1980 — the answer will vary. Are most voters in Michigan, Ohio and other swing states better off? Unquestionably, they are better off than when Covid raged, but aside from that aberration, are they faring well enough to reward Biden with a second term? Have they been aided enough by the billions Biden pumped into the economy to prevent a repeat of recession after the two-month downturn of early 2020?

Beyond questions of economics, though, social issues such as immigration and abortion policy may weigh heavily, along with the age of both candidates and perceptions about their mental capacities. Will voters recall that Trump quashed bipartisan efforts in Congress to fix the southern border problem, or will they just hear his often-racist podium-pounding on it? Will they react to Republican efforts to bar abortion, even to the extent of curtailing IVF procedures, as the Alabama Supreme Court sought to do before state lawmakers hastily decided to put in protections? Will they consider Trump’s questionable thinking processes, which may far overshadow Biden’s gaffes, as well as Trump’s many self-induced legal woes?

Source: LA Times

Indeed, provided he stays out of jail, will those legal woes help Trump with his backers, as they play into his victim narrative? They certainly keep him in the headlines.

Voters have an extraordinary ability to overlook flaws in the candidates they pin their emotions on. The passion that MAGA enthusiasts feel for their candidate blinds them to his legal and personal flaws, it seems, and their depth of commitment far exceeds the feelings that Biden generates among his backers. Will such passions, coupled with a mixed bag of economic realities, be enough to put Trump back into office?

Moreover, given the distortions of the Electoral College system, where each vote in a less populous and more socially conservative state counts more heavily than each one in more urbanized states, the coming election is hardly assured for the man whose team can claim a lot of credit for restoring a healthy U.S. economy. It’s no wonder the polls put the contenders pretty close to neck and neck. The coming few months promise a lot more drama and, one hopes, better things for voters in time for November.