Economy and Economics Archives - Reason Foundation Free Minds and Free Markets Wed, 08 Mar 2023 23:11:47 +0000 en-US hourly 1 Economy and Economics Archives - Reason Foundation 32 32 Examining day-to-day crypto volatility and why it’s important Wed, 08 Mar 2023 15:00:00 +0000 Bitcoin, Ethereum, and other cryptocurrencies frequently exhibit daily price drops during bull markets and increases during bear markets far in excess of traditional assets.

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Few asset classes have been more volatile over the past several years than cryptocurrencies. Bitcoin, trading above $20,000 at the time of this writing, exceeded $50,000 for two brief periods in 2021—and fell almost as low as $30,000 in between. Other high-profile cryptocurrencies, such as Ethereum and Dogecoin, have experienced similarly dramatic highs and lows. 

​​But cryptocurrencies are also exceptionally volatile over much shorter periods of time. ​Day-to-day price fluctuations of cryptocurrencies eclipse those of traditional currencies, stocks, and precious metals, and do so consistently across assets and time periods. This phenomenon is not entirely driven by the longer-term ups and downs reported in headlines. Bitcoin, Ethereum, and other cryptocurrencies frequently exhibit daily price drops during bull markets and increases during bear markets far in excess of traditional assets. The interactive chart below provides one way to visualize this day-to-day volatility—the daily percentage increase or decrease in price in U.S. dollars from the previous day. 

This interactive tool allows the reader to investigate the phenomenon of day-to-day volatility for different cryptocurrencies, traditional assets, and time periods. During the period 2018–2022, Bitcoin’s average daily change (​​measured as the absolute value of the percentage change from the previous day) was 2.87%, versus the Euro (0.34%), pound (0.43%), and yen (0.35%). Other major cryptocurrencies, such as Ethereum (3.76%), Ripple (4.04%), and Dogecoin (4.55%), exceed Bitcoin’s already-high fluctuations. 

The table below presents this statistic for each asset or index tracked by the data tool. 

Why is the day-to-day volatility of cryptocurrencies important? 

Despite much public discussion about cryptocurrencies as speculative investments or world-changing technology, their success ultimately hinges on widespread adoption as currencies—including as a medium of exchange. Day-to-day volatility creates exchange rate risk over short periods of time. This creates problems for a currency’s usefulness as a medium of exchange if one or both parties to the transaction need to quickly move their money into a different currency. Either the buyer or seller, or both, must take this exchange rate risk, increasing the transaction cost and, ultimately, the price. 

To date, the use of cryptocurrencies as a medium of exchange has taken off in only a small number of market niches, most notably dark net markets where mostly illicit goods are for sale. A 2018 article reported that Bitcoin’s high short-term volatility was adding to the cost and lowering the number of transactions on such platforms. 

There are likely multiple causes for the unusually high volatility of cryptocurrencies. While more widespread adoption may be part of the solution, other likely causes are structural and follow directly from the way cryptocurrencies are designed. Large banks and other financial firms hold huge reserves of traditional currencies, and stocks have market makers, both serving to smooth out short-term volatility and make exchange markets more liquid. Bitcoin, on the other hand, eschews large central intermediaries by design.   

Solutions lie in further entrepreneurial innovation, and that process is already well underway. Bitcoin’s ​​Lightning Network is designed to facilitate faster transactions at a larger scale. Stablecoins, pegged in value to fiat currencies like the dollar or other assets, eliminate high day-to-day volatility by design. They can be used to keep money in the crypto ecosystem—protected from short-term fluctuations and, in theory, easier and faster than traditional fiat currencies--to exchange with Bitcoin or Ethereum. However, their relative novelty opens the door for long-tail risk as well as fraud. 

These and other avenues carry some promise to address day-to-day volatility and make cryptocurrencies more viable for everyday use. But innovation must continue. The Lightning Network and Stablecoins both introduce the scope for large financial intermediaries and dependence on the fiat system that crypto pioneers sought precisely to avoid. Furthermore, the much larger number of people not yet sold on crypto may see these as further complications to already convoluted and risky alternatives to fiat. 

The crypto community must turn away from ​​voices such as Bitcoin maximalists that say the perfect solution is already in hand, and keep innovating and experimenting.  ​Regulators ​could do great harm by making rules that ossify this still-developing technology or cut off as-yet unrealized solutions that only a market process of discovery can deliver. 

We hope that the interactive tool provided here, which offers an intuitive way to visualize the phenomenon of day-to-day volatility in cryptocurrencies, will play a part in opening the conversation and potential for fresh ideas. 


We selected the top 10 cryptocurrencies by market capitalization from CoinMarketCap in addition to FTX’s FTT token. The top 10 cryptocurrencies include seven traditional cryptocurrencies and three stablecoins. We did not include the latter, which track the day-to-day volatility of fiat currencies by design, in the interactive chart, but do report their average daily changes in the summary table. Daily price and exchange rate data are sourced from Yahoo Finance via the R library quantmod. The only modification to the original source data occurred for the Ruble to Dollar data (RUBUSD=X). On Jan. 1, 2016, the original value appears to be off by a factor of 100, this value is divided by 100. Additionally, on June 13, 2022, and July 18, 2022, the adjusted close is outside of the bounds of the high and low—and inconsistent with historical data on the close price from The Wall Street Journal. These two values were replaced with the open price from the following day.

Daily percent change values are calculated from the percent change from the previous trading day’s adjusted close price. Our comparison of daily changes across different types of currencies and assets presents a challenge because different assets trade according to different schedules. Stocks trade on exchanges with daily opening and closing times and close on weekends and certain holidays. Traditional foreign exchange markets stay open around the clock, Monday through Friday, but close on weekends, and this is further complicated by time zones and different holidays globally. Cryptocurrencies trade continually.  

There is subjectivity inherent in addressing this issue. We chose to limit our analysis to the trading days of our traditional stock indices (S&P 500 & Russell 2000), which align with New York Stock Exchange trading days, and use reported adjusted close as the price. While this eliminates a small amount of data from the sample for cryptocurrencies, we conducted robustness checks and confirmed this does not drive our results about persistent differences in day-to-day percent changes. 

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FTC Chair Lina Khan’s consolidation of power is a feature of her approach to antitrust, not a bug Thu, 23 Feb 2023 22:10:00 +0000 New Brandeisians, led by Lina Khan, seek to move away from the consumer welfare standard of antitrust enforcement.

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The Federal Trade Commission and its chair Lina M. Khan have had a difficult start to 2023. On Feb. 1 a California federal district judge rejected the FTC’s attempt to block social media giant Meta’s acquisition of virtual reality fitness startup Within–a decision the FTC opted not to appeal. While few observers ultimately expected the FTC to prevail in court, the case was viewed as an early test of Khan’s attempt to “remake antitrust law” at the FTC, meaning its speedy and categorical rejection was bad news for Khan and her radical antitrust insurgency. 

But the real bombshell came two weeks later when FTC Commissioner Christine Wilson made a self-described “noisy exit” from the commission in the form of a Wall Street Journal op-ed on Feb. 14. It wasn’t Khan’s overhaul of antitrust law that Wilson said drove her out–the commission is bipartisan and dissent is commonplace. It was Khan’s alleged “disregard for due process and the rule of law” and “abuses of government power,” Wilson wrote, that prompted her, the lone Republican commissioner. to leave the FTC. (Noah Phillips, the commission’s other Republican, resigned in October 2022.) 

Wilson cites in detail Khan’s refusal to recuse herself from the commission’s failed bid to block Meta’s acquisition of Within. Before she joined the FTC, Khan had argued Meta (at the time named Facebook) should not be allowed to make any further acquisitions. Wilson says she objected to Khan’s refusal to recuse herself on both due process and ethical grounds but was overruled by the Democratic commissioners and Khan herself. Wilson made a similarly futile attempt to object to the recently proposed FTC blanket ban on non-compete clauses in employment contracts. 

The FTC is not an organization intended to be adversarial to the companies under its regulatory purview, but rather a neutral arbiter of whether any harm would come from mergers and other conduct it scrutinizes.  

More information regarding the rule violations alleged by Wilson is likely forthcoming. But those who have followed the antitrust philosophy of Khan and her allies on the progressive left should have little trouble connecting the dots between their antitrust goals and the wrongdoings alleged by Wilson. Fundamental to Khan’s vision is the scope and necessity for “good” government power to act as a check on bad “concentrated private power.” 

Khan ignited the left’s newfound interest in antitrust with a 2017 paper critical of the widely adopted consumer welfare standard (which focused on prices) as weak and overly permissive to mergers. Her Yale Law Review article took aim at Amazon, specifically its capacity for predatory pricing to harm competitors and vertical integration to compete with sellers on its own platform. Amazon was but one example. The point was encouraging a much more active use of antitrust enforcement to check what Khan and others believed was the outsized influence of large corporations—a point driven home by the title of Columbia Law professor, and Khan ally, Tim Wu’s book, The Curse of Bigness

Under this logic, the potential bad conduct by large private firms is limited only by one’s imagination. And prior to its ascendance in the Biden administration, the movement alternately known as “hipster antitrust,” “break up big tech,” and New Brandeisianism put its imagination to work. In addition to product market monopoly, there was labor market monopsony, vertical restraints, coercion and gatekeeping, and (as in the case of Meta and Within) power in predicted markets of the future. Perhaps the starkest case of this movement believing big is bad is their belief in the threat of market power to democracy. Some on the left have argued that large corporations, through their money, could boost certain political campaigns (likely to candidates who disagree with such hyperactive use of antitrust enforcement). 

None of these scenarios are implausible, but they remain hypothetical. Rather than clarify the types of conduct deemed anti-competitive, a long and expanding list for regulators to scrutinize is de facto discretionary power. In effect, the New Brandeisians sought to move from the consumer welfare standard of antitrust enforcement to the standard that mandates companies compete in the manner that regulators would like them to. 

Khan’s goal of restraining the growth and dynamism of American business as an end unto itself was on full display in Nov. 2022 when the U.S. Securities and Exchange Commission issued new policy guidance regarding its role under Section 5 of its charter to prohibit “unfair” competition. Claiming a mandate that went beyond antitrust legislation and court precedent, the commission stated that it could take action against competitive conduct deemed “coercive,” “exploitative,” “abusive,” or “restrictive,” leaving these terms subjective and undefined.

It was, as Wilson noted in her resignation op-ed, an “I know it when I see it” approach. Wilson’s concerns about due process and the rule of law appear well-founded. 

Khan now faces the public allegations that, in her first year as FTC chair, she waged war on the perceived specter of concentrated private power by concentrating an unprecedented amount of public power for herself and friendly FTC commissioners.

Thus far, her efforts have almost entirely failed. The tides could turn as neither Republicans nor Democrats appear eager to bury their respective hatchets with big tech. But the biggest name in the movement once sarcastically labeled the hipster antitrust movement as a throwback to the days before the consumer welfare standard has instead garnered criticism and a high-profile resignation for allegedly neglecting legal norms that have stood far longer tests of time.

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Can the FTC block technology mergers based on future market predictions? Mon, 19 Dec 2022 21:58:07 +0000 The bid to block Meta from acquiring Within will test the FTC’s argument that potential future concentration is enough to stall the merger.  

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The Federal Trade Commission’s (FTC) bid to block Meta Platforms, Inc. from acquiring Within, designers of the virtual reality fitness app Supernatural, began in a San Jose court on Dec. 8. The three-week hearing is expected to test the FTC’s argument that potential future concentration in the still-developing market for virtual reality fitness applications is enough to stall the merger of Meta and Within.  

Federal Trade Commission Chairwoman Lina Khan, tapped by President Joe Biden to lead the agency last year, hopes to preside over the most significant change of course for U.S. antitrust policy in decades. She and others belonging to the New Brandeisian school of antitrust advocate a more aggressive stance toward mergers than has been seen in decades. This advocacy is making the FTC’s case against Meta a case to watch as it may offer a preview of the FTC’s new strategy, as well as its potential success in court.

When Facebook rebranded as Meta in Oct. 2021, the company signaled a change in its strategic outlook. Meta began investing heavily in virtual reality (VR) technology, which is expected by many to grow rapidly over the next decade. Today, Meta has already entered markets for VR hardware, social platforms, and games. As part of that strategy, Meta announced last year that it would acquire Within, developers of the VR fitness app Supernatural, for $400 million. A large tech company acquiring a niche startup in a nascent, fast-developing market is not an unusual event. Along with fitting Meta’s strategy, startups like Within often consider such buyouts successful outcomes of their entrepreneurial ventures.  

The Federal Trade Commission’s July 2022 announcement that it was blocking the acquisition reflects the more aggressive antitrust approach Khan is taking. The FTC press release says:

The complaint alleges that Meta is a potential entrant in the virtual reality dedicated fitness app market with the required resources and a reasonable probability of building its own virtual reality app to compete in the space. But instead of entering, it chose to try buying Supernatural. Meta’s independent entry would increase consumer choice, increase innovation, spur additional competition to attract the best employees, and yield other competitive benefits. Meta’s acquisition of Within, on the other hand, would eliminate the prospect of such entry, dampening future innovation and competitive rivalry. 

This theory of harm departs significantly from the consumer welfare standard, which Khan and fellow advocates of antitrust reform blame for a more permissive stance on mergers in the past several decades. The FTC’s theory of harm to future competition in the potential market for virtual reality fitness apps applies similar logic: fewer competitors and higher market concentration lead to higher prices. But the traditional consumer welfare standard refers to actual consolidation and competition in existing, definable markets. The FTC’s future-competition theory is an exercise in speculation. 

The Federal Trade Commission’s complaint tries to define a “dedicated VR fitness app” market. Meta’s court filing in response calls that market a piece of “litigation fiction,” noting that subsequent to its initial complaint, the FTC raised its count of five competitors in that imagined market to nine. Meta’s response further states: 

Every relevant competitor who will testify – including representatives of three of the FTC’s claimed in-market apps and one that is poised to enter – will state that there are many other VR and non-VR fitness alternatives available to consumers beyond the nine cherry-picked apps that comprise the FTC’s gerrymandered market. And even the FTC’s invented market is neither oligopolistic nor even “concentrated” in any meaningful respect. It is robustly competitive with many competitors jockeying for consumers’ attention and more entering all the time. 

Meta also asserts it had no plans to create and offer its own fitness app prior to the Within deal and will call industry witnesses to testify that a self-designed VR fitness app from Meta was not widely expected. 

While the FTC’s theory of harm to future competition is perhaps plausible, court precedent requires hard evidence of an existing market mechanism by which an acquisition reduces competition. In rapidly evolving high-tech markets, the ultimate structure of a market still far from maturity is impossible to project even in broad terms, let alone up to the evidentiary standards of a U.S. court. 

Nearly all observers agree the odds of winning the case are not in the FTC’s favor.  For example, an Aug. 2022 commentary in Fortune magazine by Gary Shapiro, president and chief executive officer of the industry trade group Consumer Technology Association, called the FTC’s case against Meta “laughable.”

A recent article from The New York Times states: “Given how novel the F.T.C.’s argument is, it’s unclear if the agency will succeed in blocking Meta’s deal.”

Khan herself may tacitly agree her agency is unlikely to win the case, as it has been reported that Khan suggested at an April 2022 conference that cases should be brought to push the frontiers of current law, adding: “I’m certainly not somebody who thinks that success is marked by a 100 percent court record.”

Bringing cases virtually nobody believes the FTC can win, at significant cost to taxpayers—not to mention both large tech firms and startups—seems to be a poor organizing principle around which any presidential administration would build its competition policy.  

The New York Times article that quotes Khan on her agency not being afraid to lose cases suggests that even a losing effort against Meta may, in the long term, push public, legislative, and court opinion in a direction more favorable to blocking mergers under a future-competition theory of harm. 

However, Khan’s FTC may also have broader strategic goals in mind. The FTC has taken nine actions against mergers and acquisitions in its first year under Khan, a level of activity far above preceding administrations. These actions seem designed to test antitrust law with multiple theories of harm. The FTC attempted to block an acquisition by Illumina, makers of gene-sequencing products, of a small startup in a market where Illumina does not currently compete. And in another ongoing effort, the FTC is trying to block Microsoft (maker of Xbox consoles) from buying game developer Activision under a vertical foreclosure theory of harm that courts have generally not accepted

Perhaps Khan’s goal in bringing losing cases to court, in addition to testing specific novel theories of harm, is simply to create a chilling effect on mergers overall. If partners in potential mergers and acquisitions attach a higher probability of being challenged in court, this increase in expected cost could depress merger and acquisition activity overall.  

Khan and her allies would likely consider this a win. They often take as a starting point the fact that a permissive approach to mergers in the last 40 years has led to a dramatic increase in corporate power and that such power is harmful to workers, consumers, and other stakeholders, even potentially subverting the democratic process. (Other economists vigorously debate this premise and assert that concentration has not meaningfully risen with time.) 

Courts can render surprising verdicts, and the consensus opinion that the FTC is unlikely to win its challenge is no guarantee. But even if one assumes the case will ultimately fail, the opposition of Khan to high merger and acquisition activity overall makes the trial worth watching closely. If the court battle is lengthy, expensive, and laden with appeals, even a loss by the FTC could have a chilling effect on future mergers. But if the FTC is dealt a quick and decisive loss, it may be Khan and others like her who feel the chill. 

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Three economists receive Nobel for hotly debated work on banking and financial crises Fri, 21 Oct 2022 16:40:00 +0000 Bernanke, Diamond, and Dybvig’s work, when framed by the events of 2008, has drawn both intense praise and intense criticism.

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The annual Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Ben S. Bernanke, Douglas W. Diamond, and Philip H. Dybvig on October 10, 2022, for “research on banks and financial crises.” The committee honored Bernanke’s 1983 paper that investigated bank failures through the historical lens of the Great Depression. Diamond and Dybvig were honored for work on the same topic with similar conclusions, but a very different approach–a game-theory model that attempted to explain why bank failures happen, and what they might mean in the broader economy.

Every Nobel announcement is understandably followed by media coverage and acclaim from the recipients’ colleagues, students, and admirers. But this year’s prize has also been met with more immediate and direct criticism than usual. Economists are never shy in expressing their disagreements, but the macroeconomics of banking and financial crises is a particularly stark example.

The debate over this year’s prize is really a continuation of the fiercest and most consequential debate among economists in recent times. The failures of Bear Stearns and Lehman Brothers and the subsequent Great Recession were billed by some as a failure of the economics profession. In the years leading up to the crisis, one leading group of academic macroeconomists did not focus on the banking and financial system in their research, instead solving complicated mathematical models where government policies like taxation and the consumption and saving decisions of individuals determined outcomes in the wider economy. In the wake of the Great Recession they were criticized for deemphasizing the role of banking crises, but they were far from the only leading voices in academia. This year’s prize winners, focusing explicitly on the role of banking in the economy, wrote papers considered highly influential since the 1980s, and Bernanke began leading the Fed just before the crisis erupted.

Economists celebrating this year’s prize generally think that policymakers should have foreseen problems at the big banks in the years leading up to the Great Recession, and did not do enough to soften the blow early on in the crisis. They view the work of this year’s winners as justification for the bank bailouts ultimately put into place. Critics of this year’s prize winners, many of whom opposed those bailouts, are skeptical that the highly technical academic work truly captures the dynamics of banking crises in the real world.

A Model Bank Run

Diamond and Dybvig (often abbreviated “D-D”) won their Nobel prize primarily for their paper “Bank Runs, Deposit Insurance, and Liquidity,” published in the Journal of Political Economy in 1983. The paper attempts to apply rigorous game-theoretic modeling to bank runs and financial crises. The highly stylized model features two types of economic agents: savers who demand liquidity and borrowers who take out long-maturity loans to invest. D-D show that equilibrium is possible that looks, in broad strokes, like a bank run. Too many savers demand their deposits back and create a situation where the financial institution at the center cannot satisfy all withdrawals. The work has been used as justification for government intervention such as deposit insurance.

Praise for D-D often focuses on how influential the work has been in academia and policy circles. Zhiguo He and Yueran Ma, colleagues of Diamond at the University of Chicago’s Booth School of Business, call his work “the perfect balance between practical relevance and academic rigor.” Ricardo Reis of the London School of Economics says, “the lesson that a lender of last resort and fiscal backstops are needed to prevent runs has been internalized across the board.” Cato Institute Senior Fellow George Selgin, a critic of the D-D model, notes that at “well over 12,000 Google citations and counting, it’s certainly among the most cited academic papers in economics, let alone in the sub-discipline of monetary economics.”

Critics like Selgin and Larry White of George Mason University see very limited value in what we can learn from a stylized game-theoretic model of bank runs and similar financial crises, where history and institutional details can teach us more than equations. In his 1999 book The Theory of Monetary Institutions, White notes that the D-D model fails to capture the essential features of the basic deposits and loans that fuel most banks. In a 2020 two-part article on the site Alt-M, Selgin offers several critiques of D-D, including that the various types of equilibria they find depend on knife-edge assumptions. One of these issues is a “sequential service constraint,” where D-D require their modeled bank to satisfy the requests of depositors to get their money back on a first-come, first-served basis but exempted a public deposit insurer from this rule.

Commercial banks, not to mention highly complex modern financial institutions like the ones that failed in the Great Recession, have an uncountable number of institutional details poised to dramatically alter the results of any game-theoretic model. Selgin underscores the need for monetary economists to take history and institutional details seriously by quoting Sir John Hicks:

“Monetary theory is less abstract than most economic theory; it cannot avoid a relation to reality, which in other economic theory is sometimes missing. It belongs to monetary history in a way that economic theory does not always belong to economic history.”

Bernanke and Bailouts

The name Ben Bernanke will surely be the most familiar to readers of this year’s three recipients. As Federal Reserve Chairman during the great recession, Bernanke played among the leading roles in engineering the bailouts of Lehman Brothers and other financial institutions. Bernanke’s prize, unlike the prize awarded to Diamond and Dybvig, is for a work of economic history. More accurately, it is for one notorious episode of economic history.

Also published in 1983, “Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression” argued that bank runs had a causal impact on worsening the Great Depression, as “the resulting higher cost and reduced availability of credit acted to depress aggregate demand.” Therefore, propping up specific institutions could help mitigate future crises’ effects. Sound familiar?

Bernanke begins by characterizing his result as “complementary to that of Friedman and Schwartz, who emphasized the monetary impact of the bank failures.” Friedman and Schwartz famously and influentially argued that the Federal Reserve failed to act as a lender of last resort, precipitating a dangerous drop in the money supply. Bernanke does not explicitly argue against that conclusion, framing his work as “focusing on non-monetary (primarily credit-related) aspects of the financial sector.”

In praise of Bernanke and his prize, Paul Krugman argues that the work was “a tacit rejection of Milton Friedman.” Krugman considers this a good thing—Bernanke’s view of bank failures as a specific cause of the crisis “was dramatically validated in the 2008 financial crisis.” Moreover, Krugman writes that Bernanke “understood what was going on, and the Fed stepped in on an immense scale to prop up the financial system.”

Writing in the Wall Street Journal after this year’s prizes, Hoover Institution research fellow David Henderson also sees Bernanke’s work as not being in harmony with the seminal contribution of Friedman and Schwartz. But, unlike Krugman, Henderson does not view this as praiseworthy:

“The difference between the Bernanke and Friedman/Schwartz views was that Mr. Bernanke thought providing more liquidity during a crisis wasn’t enough; he emphasized the importance of salvaging particular financial intermediaries, even if some of them arguably should have gone bankrupt. While his academic work on this issue was deep and impressive, it, unfortunately, caused him, as Fed chairman, not to focus on liquidity during the financial crisis.”

The 2022 Nobel Committee unequivocally endorsed both the value of activist central banking and the view that our standard economic toolkit can reveal clear and generalizable interventions when banking crises loom. Many Reason Foundation readers may find themselves opposed to this view and may look to the critiques levied by White, Selgin, and Henderson to offer much insight. These critics of the 2022 prize winners do not see the problem as bad economics, but rather as the limitations of even good economics when one must make policy in the real world.

Henderson notes the depth and impressiveness of Bernanke’s academic work but posits that it caused him to focus on one aspect of the 2008 crisis at the expense of others. Selgin echoes these sentiments when he writes that “my beef isn’t with Diamond and Dybvig per se. It’s with those who assume that their model supplies adequate grounds for government intervention in banking.” 

The formal models and highly focused work of academics can inform banking policy, but too often such work instead creates the sort of tunnel vision that could lead even Nobel-caliber economists to questionable conclusions.

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Georgia ballot measure to expand tax exemptions for family-owned farms (2022) Mon, 19 Sep 2022 14:17:00 +0000 Georgia’s 2022 farm tax exemption measure would expand those tax exemptions to dairy products and eggs and family farm mergers.

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Georgia Merged Family-Owned Farms and Dairy and Eggs Tax Exemption Measure would expand certain property tax exemptions for agricultural equipment and farm products to entities that are the result of the merger of two or more family farms, and also extends those tax exemptions to apply to dairy products and eggs.


Under current state law, family farms are exempt from paying certain property taxes on a wide range of farm equipment such as tractors, combines, balers, sprayers, and more and farm products such as livestock and crops.  Georgia’s 2022 farm tax exemption measure would expand those tax exemptions to dairy products and eggs. The measure would also allow larger farms that are created by merging two or more family farms to qualify for tax exemptions.  Equipment must be used for farm production and be owned or held under a lease-purchase agreement to qualify for the tax exemptions, and it does not apply to automobiles and trucks.

Fiscal Impact

Georgia’s poultry industry generates $1.3 billion in tax revenue annually.  Information for dairy products and eggs, unfortunately, was not available.  According to a representative of the Georgia Milk Producers, the industry’s impact, economically, on the state is estimated at $1.03 billion for the 2021 calendar year, some portion of which is tax revenue. Complete analysis of how this measure would impact Georgia taxpayers was not available.

Proponents’ Arguments

Georgia Gov. Brian Kemp supports the measure. He stated, “There’s no more generational business than a family farm…I know how important small business is to Georgia’s economy, and that’s what Georgia Farm Bureau and the Georgia Agribusiness Council are fighting for in the Capitol every day.” 

The agriculture industry also supports the measure because it would provide their businesses with a considerable tax break.

Opponents Arguments

While there is no active organized campaign against this measure, some members of the legislature expressed concerns about giving a selected group a special tax break that other groups do not get.


This tax measure is an initiative promoted by Georgia Gov. Brian Kemp and is consistent with his efforts to provide tax relief and other favorable policies for the state’s agricultural sector. Support for the agricultural industry, however, extends far beyond just the governor.  Because most of the state’s lawmakers, especially in the Republican Party, also represent constituencies in the rural parts of the state, tax breaks for the agricultural and timber industry have been politically popular.

This measure is very similar to one passed in 2000 that gave a tax exemption for certain farm equipment of family-owned farms for tools and trade implements of manual laborers.  In 2006, voters also approved a measure expanding the homestead exemptions and property tax exemptions for agricultural products.

However, a key principle of good tax policy is that taxes should not pick winners. Broad-based tax cuts are always better than narrowly targeted ones that only benefit a select, politically-connected, or popular group. This measure is not a broad-based tax cut. At best, it would expand an existing tax break the agricultural industry already gets to apply more broadly across that industry.

Tax breaks for selected industries are not without consequences.  They are not necessarily accompanied by state or local government spending cuts to offset any lost revenue, so the tax burden often shifts to taxpayers or industries that are not as favored by politicians.

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Biden administration’s monkeypox funding request highlights the flawed budget process Fri, 16 Sep 2022 04:00:00 +0000 The ability to make emergency requests such as this points to a broken budgeting process. 

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The Biden administration has asked Congress to approve $4.5 billion in emergency funds to help address the monkeypox outbreak, but such a large spending measure is questionable at best. The monkeypox funds are part of a larger package of emergency funding requests.

National Public Radio reports:

The White House is asking Congress for $47.1 billion in emergency funding to cover expected costs for Ukraine, COVID-19, monkeypox and natural disasters. The administration hopes the funding request will become part of an upcoming short-term spending bill aimed at funding the federal government beyond Sept. 30, when the current spending package is set to expire.

Congress must pass the short-term spending bill by the end of September to avoid a partial federal government shutdown on Oct. 1. But the ability to continually make emergency funding requests points to a broken budgeting process. 

Is monkeypox truly an emergency right now? As of early September, the U.S. had less than 25,000 confirmed cases of monkeypox, and the rate of newly confirmed daily cases was declining from its peak in mid-August. Less than 400 new cases are being diagnosed each day as of this writing. 

Although very painful, monkeypox is rarely fatal. Los Angeles County recently reported the first confirmed U.S. death from monkeypox. In August, health authorities reported one death potentially related to the virus, but the affected individual’s cause of death has yet to be confirmed. Notably, older Americans, who were the main victims of COVID-19, have some protection from monkeypox because anyone born more than 50 years ago received a smallpox vaccination.  

According to the Biden administration’s funding request, 1.1 million doses of the monkeypox vaccine have already been made available. By the time any emergency funding becomes available, it is likely that all these shots will have been administered, and there may not be sufficient demand for additional vaccinations. But the administration’s request still includes $1.6 billion to procure monkeypox vaccines, $1.2 billion for testing, treatment, and vaccination services, $1.1 billion for other domestic purposes, and $0.6 billion to fund responses to monkeypox outside the United States.

This last figure should certainly be questioned. With most monkeypox cases occurring in North America and the relatively affluent counties of Western Europe, it is not clear that monkeypox is a sufficient threat in low and moderate-income countries that might need foreign aid. 

It is also worth noting that monkeypox treatment for most Americans will be covered by private insurance, Medicare, or Medicaid. Some forms of coverage may also offset the cost of vaccination. 

The outbreak of monkeypox is certainly a serious public health issue, and it is understandable that it has attracted attention from Congress. But members of Congress should carefully review the proposed funding package. The federal budget process is broken. Congress’ consistent use of emergency spending bills, continuing resolutions and reconciliation rather than a transparent appropriations process, and the failure to offset new federal spending with budget reductions elsewhere are some of the reasons the national debt is already at alarming levels.

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Debtor Nation Wed, 14 Sep 2022 19:00:00 +0000 The national debt is over $30 trillion. Between 1965 and 2020, the federal government ran an annual budget deficit in 52 of 57 years.

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This post was originally published in May 2022. It was updated with more recent data on September 14, 2022.

At the end of the second quarter of 2022, the $30.6 trillion debt of the United States federal government was 1.2 times larger than the annual economic output of the country. The U.S. is now reaching federal debt levels, as a share of gross domestic product (GDP), that we have not seen since the end of World War II.

Federal spending is increasingly untethered from fiscal realities. From 1965 to 2022, the federal government ran an annual budget deficit in 52 of the 57 years.

The annual federal budget deficits during and following the Great Recession of 2007-2009 were dwarfed by the recent federal deficits of 2020 and 2021, however, when annual budget deficits were $3.1 and $2.8 trillion respectively. The COVID-19 pandemic and accompanying lockdowns and policies sparked the largest spending bills in American history, including the $2.2 trillion CARES Act signed by then-President Donald Trump in March 2020. A year later, in March 2021, President Joe Biden signed the $1.9 trillion American Rescue Plan Act.

After accounting for inflation, the national debt jumped by almost $5 trillion in less than two years—rising from $25.9 trillion in the first quarter of 2020 to $30.6 trillion at the end of the second quarter of 2022. To get a sense of the magnitude of the growth of the debt, the current debt of more than $30 trillion translates to each American individual owing $91,814 based on the U.S. Bureau of Economic Analysis (BEA) estimate of 333 million Americans. This is an increase in the national debt of nearly $14,000 per person just since the first quarter of 2020.

While the increase in the national debt during the pandemic has been particularly shocking, it is consistent with a decades-long, bipartisan trend of deficit spending where government expenditures consistently exceed government receipt of money. When tax revenue is insufficient to cover government spending, the government must issue U.S. Treasury bonds, shorter-term obligations like bills and notes, or other debt instruments

Federal Debt Holders

The federal debt is often classified into two buckets: intragovernmental holdings and debt held by the public.

Intragovernmental Debt

Intragovernmental holdings are government debt held by government agencies. As of September 8, 2022, intragovernmental holdings totaled $6.6 trillion, which is 21.4% of the total outstanding public debt. The largest share of this intragovernmental debt is held by the Social Security Trust Fund (46%).

Debt Held by the Public

Debt held by the public can be broken down into debt held by the U.S. public, foreign entities, or the U.S. Federal Reserve. The U.S. public is a broad category that encompasses domestic non-federal investors. It includes state and local governments, private pension funds and insurance companies, banks, and other investors. Foreign entities include the governments and central banks of other countries and private international investors. 

In recent years, even relative to the first two groups of debt holders, the U.S. Federal Reserve has greatly increased its holding of government debt. The Federal Reserve buys the debt with newly created reserves, but these purchases raise the risk of inflation by monetizing the debt. Since new reserves can increase the nation’s supply of money, they can lead to higher prices as more dollars chase the same volume of goods and services. The Federal Reserve asserts, “Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit.” But Federal Reserve asset purchases are traditionally a means of circulating newly printed bills. While new tools like interest on monetary reserves can mitigate the impact of such expansion, the dramatic increase of Federal Reserve debt purchases (which include mortgage debt and corporate bonds as well as Treasurys) is a serious concern.

Given the persistence of federal deficit spending, if demand for U.S. debt does not keep pace with debt accumulation, the risk of debt monetization via Federal Reserve purchases rises further.

Foreign Holders of U.S. Debt

Demand for U.S. debt has increased because the dollar is the de facto reserve currency of the world. The Bretton Woods system, which pegged other currencies to the U.S. dollar which was redeemable for gold, effectively ended after President Richard Nixon suspended dollar-to-gold convertibility. Since that point, the nations belonging to the Organization of the Petroleum Exporting Countries (OPEC) have principally denominated oil sales in U.S. dollars, therefore boosting demand for America’s debt.

The United States heavily relies on foreign buyers for debt financing, which can potentially be a liability if or when international conflicts arise. Russia held $139 billion in U.S. debt in 2013. After the Russian annexation of Crimea in 2014, the U.S. responded with aggressive sanctions and threats to remove Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. In response, Russia’s central bank began divesting from U.S. Treasurys. Today the West is once again sanctioning Russia after its invasion of Ukraine.

Historically, many countries have relied on the safety and stability of U.S. Treasurys. Western sanctions on Russia are a reminder that this “risk-free” asset is not risk-free for those failing to align with American foreign policy. The mid-March reporting that Saudi Arabia may begin pricing Chinese oil sales in yuan is an indication that U.S. financial dominance is not completely unchallengeable. Yuan-denominated oil sales could further erode Chinese demand for our debt, which has declined in recent years.

Today, China and Japan account for nearly one-third of all foreign holdings of U.S. debt. Given America’s friction with China and the population decline experienced in Japan, it is not a certainty that these two countries will indefinitely continue to sweep up large volumes of additional U.S. debt.  

Ultimately, the United States government must understand that we do not have an unlimited capacity for financing our deficit spending. This will become even more difficult as we pay out the rapidly growing liabilities for programs like Social Security and Medicare.

Other Long-Term Federal Financial Obligations

Organizations incur long-term financial obligations in forms other than bonds and the U.S. federal government is no exception. Some common types of financial obligations include pension and retiree health care costs for veterans, civilian federal employees, and the general public (through Social Security and Medicare benefit commitments). Looking at the federal government's balance sheet as of 2021, public holdings of U.S. Treasury securities make up less than one-quarter of total federal liabilities. Unfunded entitlements, like Medicare and Social Security, account for the most at 59% of obligations.

Overall federal obligations have now surpassed $300,000 per American. While substantial in their own right, the debt obligations of state and local governments across the country are dwarfed by the various categories of federal debt.


Unfortunately, the United States does not seem positioned for economic expansion like it was the last time the debt-to-gross domestic product (GDP) ratio was this high during the post-World War II era. Following WWII, debt was reined in by brief periods of inflation and several decades of exceptional economic growth.

In the first two quarters of 2022, the U.S. economy experienced negative growth. With weak or negative economic growth expected, and no significant restriction on federal spending in sight, the debt-to-GDP ratio will continue to rise.

Jeffrey Rogers Hummel, Professor Emeritus in the Economics Department at San Jose State University, was consulted on the “Federal Reserve Assets as Percentage of Publicly Held Debt” chart.

Data & Methodology

  • Federal Spending Versus Receipts: 
    • Overall data is from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) National Income and Product Accounts data, specifically Table 3.2 (Government Current Receipts and Expenditures, which is reported quarterly). 
      • Spending data is from “Current Expenditures” on lines 24 and 44. 
      • Revenue data is from “Current Receipts” on lines 1 and 41. 
      • The inflation-adjusted data series are adjusted according to Q2 2022 dollars using the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from BEA.
      • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.
  • National Debt: Data are sourced from the U.S. Department of the Treasury—titled “Federal Debt: Total Public Debt” (FRED: GFDEBTN).
    • The debt data are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA).
    • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0Q173SBEA) data sourced from BEA.
    • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.
  • Who Holds the Federal Debt: Data is sourced from the U.S. Department of Treasury.
    • Federal Reserve Banks: Public debt securities held by Federal Reserve banks. Data are sourced from Treasury (FRED: FDHBFRBN). The data are reported and presented at the quarterly level.
    • Foreign Entities: Federal debt held by foreign investors. Data are sourced from Treasury (FRED: FDHBFIN).
    • U.S. Public: Calculated by subtracting debt held by “Federal Reserve Banks” (FRED: FDHBFRBN) and “Foreign Entities” (FRED: FDHBFIN) from a FRED data stream, from Treasury, called “Federal Debt Held by the Public” source from Treasury (FRED: FYGFDPUN).
    • Agencies & Trusts: Federal debt held by agencies and trusts. Data are sourced from Treasury (FRED: FDHBATN).
    • All data series above are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF).
    • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.
  • Federal Reserve Assets
    • Total Federal Reserve Assets: The Federal Reserve has a balance sheet that contains both assets and liabilities. Notes in circulation, bank reserves, and other liabilities. On the asset side of the ledger, the Federal Reserve has securities that include things like: U.S. Treasurys, mortgage-backed securities, loans to banks or other institutions, and liquidity swaps with central banks from other countries. Total Federal Reserve assets as a percentage of publicly held debt are calculated by dividing reserve bank credit (FRED: RSBKCRNS) by total public debt outstanding (Treasury: tot_pub_debt_out_amt).
    • Total Treasury Deposits at the Federal Reserve: When the U.S. Treasury issues public debt and deposits the proceeds at the Federal Reserve this is considered a treasury deposit. This figure as a percentage of publicly held debt is calculated by taking reserve bank credit (FRED: RSBKCRNS) and backing out three other data streams (FRED: WTREGEN; FRED: WLRRAL; and FRED: WORAL) and dividing by total public debt outstanding When the Fed borrows from the private sector, it does through what is referred to as reverse repurchase agreements. That amount is calculated by backing out of reserve bank credit in two data streams (FRED: WREPODEL and FRED: WREPOFOR). The overall total of these two forms of Fed borrowing as a percentage of publicly held debt is the sum of the five data streams divided by total public debt outstanding.
  • Biggest Foreign Holders: Data is retrieved from the US Treasury Department’s Major Foreign Holders of U.S. Treasury Securities historic tables, which due to aggregations below certain thresholds may result in missing data for certain years for some countries. Data are adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA).
  • Beyond Publicly Held Debt
    • Federal: Data for these series are taken from the Financial Reports of the United States Government for the years 2000 through present published by the U.S. Treasury Department
      • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
      • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA. 
      • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.
    • State & Local: The bonded debt data come from the U.S. Census Bureau’s Survey of state and Local Government Finance (2020 and 2021 levels are extrapolated). 
      • Pension Debt: Data are sourced from the Board of Governors of the Federal Reserve System (FRED: BOGZ1FL223073045Q). Excluded here are state and local retiree healthcare liabilities for which time series data are not available. Reason Foundation has estimated that these liabilities totaled $1.2 billion in 2019. 
      • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
      • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA.
      • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.

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Report says big tech monopoly claims are overblown Wed, 13 Jul 2022 04:00:00 +0000 The size of big tech companies alone should not automatically subject them to antitrust exposure.

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Economist Art Laffer recently released a report analyzing three pieces of proposed antitrust legislation making their way through Congress. The study, published by the Committee to Unleash Prosperity, which is led by Laffer, Steve Forbes, and former Donald Trump advisor Stephen Moore, argues that these proposed bills falsely assume a state of entrenched market power in technology while ignoring consumer gains in the form of lower prices and better products.

First, the paper by Art Laffer and John Barrington Burke suggests that monopoly claims against firms like Amazon, Google, Facebook, Netflix, Apple, Amazon, and more could be overblown as measured by the level of firm concentration in the economy. The two measurements it cites to assess concentration are the Herfindahl–Hirschman Index (HHI) and the concentration ratio of the top four firms (CR4). 

The HHI and CR4 aren’t just theoretical concepts of market competition analysis—the Department of Justice has employed both to investigate the impacts of merger applications. Both measures do have major flaws. Concentration is not the same as monopoly power. The HHI typically measures general concentration among all firms while the CR4 measures the sales of the top four firms as a percentage of total sales in the industry. HHI shows how competitive an industry is overall, while the CR4 shows how much of an industry’s output the top four firms are responsible for. 

Between 2002 and 2017, a period of major growth for technology firms, the concentration ratio of the top four firms meaningfully shifted among tech firms. Using the North American Industry Classification System (NAICS) business code system, the concentration ratio of the top four firms in the category of software publishers and data processing, hosting, and related services decreased from 39.5% in 2002 to 35.4% in 2017. Meanwhile, other business categories, like the consumer lending industry, for example, had their CR4 go from 60% to 50% over the same time period. Thus, the consumer lending CR4 was still nearly 15% more concentrated than the information technology C4.  

U.S. Census data shows that the HHI for information technology is far below monopoly concerns and also in line with most other industries. An HHI score of around 1,500 is generally considered to represent a monopoly.  As of 2017, the latest available Census data for this report, the information technology industry had an HHI score of 239. This indicates that while tech may be more concentrated than other industries, it is far from being a market share monopoly as measured by either the CR4 or HHI.  

The most valid criticism of the study is that the NAICS code system used to track industry concentration and sales is flawed and does not capture actual market dynamics. For example, there is no NAICS code for search engines that accurately captures the shape of the market. Critics argue that if NAICS was more detailed then the data would reveal that the industry is more concentrated than the current data suggest. The two categories the study cites as being less concentrated, software publishers and data processors, contain firms like Salesforce, popular video game makers Electronic Arts, and Activision, and less known companies like Perspecta. Critics argue that the real monopolists are in other data categories such as internet publishing, information services, e-commerce, and other categories not broken out in the Laffer analysis, which hides their true market dominance. 

However, another study that used a proprietary method to stitch together NAICS data from 2002-2017 found that even other NAICS categories which contain electronic shopping, search, music publishing, taxi services, and video distribution have only seen slight increases in concentration and are still below many other industries. 

A monopoly cannot be judged by market share alone. The Laffer paper emphasizes that U.S. antitrust is judged by the consumer welfare standard, meaning that antitrust hinges on whether prices can be increased or product quality can be decreased without competition. This has not been the case in the market for digital advertising and search. The price of digital advertising has fallen by almost 30% since 2009 while online search engines have remained free. If digital advertising customers really had nowhere else to go, Google would likely be raising prices on digital advertising but that is not what the data show. In 2009, a typical digital ad would have cost $100 but in 2021 that same ad would only cost $75. This means that it costs less for most companies to connect with customers in a more efficient or cost-effective way due, in part, to improvements in services that Google has invested in. 

In 2019, Google invested $26 billion in research and development, roughly 14% of total non-manufacturing research and development private sector spending. Google has cumulatively invested over $171 billion in research and development since 2013. This research has resulted in performance output for its search product which then directly translates into more ad revenue for the company. While Google’s strong brand and market prominence in the industry would likely dissuade some potential competitors, nothing in an antitrust sense precludes investors and competitors from entering this search and advertising space.

If Google truly had monopoly status and felt no pressure from the competition, we would expect to see them invest less in research and products, raise prices, and allow their products’ quality to decrease without consequence. In terms of search, Google has maintained its market share by continually improving the product while keeping the price charged to search engine users at zero, not by using any coercive power to block out competition. 

Google has recently faced criticism and pressure for tracking user data. They have also seen competition from firms like DuckDuckGo, which promise not to track users’ data. With a fraction of Google’s money, approximately $172 million in investment, DuckDuckGo has achieved a 2.5% of search engine market share.  

The Laffer paper goes on to invoke both Moore’s law, which says that transistor capacity should cost half as much to produce every two years, and Wright’s law, which says that for every cumulative doubling of units produced, the cost to produce is reduced by about 15%. Both of these phenomena contribute to tech companies being able to produce better machine learning models and algorithms at lower and lower costs.  

Faster computer chips can process more data at one time while smarter machine learning models can make the data more intelligible and profitable. Laffer explains how artificial intelligence has improved business processes, “AI can also go beyond traditional A/B testing to make predictions about how creative will perform…by using historical data to determine what kind of colors and messaging will connect with consumers and drive sales.”  

These techniques have improved digital advertising effectiveness and also improve customer experience through better personalization and more relevant ads.  Laffer argues that this happened because internet businesses need less real estate or physical goods than traditional businesses and therefore can invest more into software applications like machine learning which continually improve efficiency at a lower cost of operation. While this has produced historically valuable companies, Laffer emphasizes that this is because they have brought equivalent value to their customers and partners.  

The paper concludes by analyzing the rise of Amazon’s Marketplace seller fees through the framework of the Laffer Curve. The Laffer Curve theory states that there is an optimal tax rate that will produce the most revenue for the government. If the rate is set at 0%, the government did not recover as many funds as it could have. But as the rate approaches 100%, at some point it will go beyond equilibrium and discourage economic activity by making business unprofitable, ultimately reducing government revenues.  

The antitrust bills in Congress claim that Amazon is leveraging monopoly power to increase marketplace seller fees to unreasonable rates. By applying the Laffer Curve theory, Laffer and Burke argue that if fees were too high we would see sellers jumping to other, more profitable options such as Shopify, Etsy, eBay, and others.  As a result, they claim, we should see Amazon’s revenue decrease because it would be “overtaxing” its economic participants. However, the study finds that this is not the case; as Amazon marketplace revenues have steadily increased over the last decade, marketplace sellers have increased, and total sales have increased, demonstrating that participants still find value despite the increased marketplace fee rate.  

In other words, the price of selling on Amazon was likely too low and Amazon is slowly discovering the true value of its service, steadily increasing it until it finds resistance and loses revenue. If Amazon continues to increase the rate, at some point sellers will find another way to sell those goods and we should see Amazon’s revenues decrease.

Contrary to the narratives used to argue against big tech companies like Google and Amazon in proposed antitrust legislation, the Laffer-Burke paper argues that these companies are the largest and most profitable companies we have ever seen, in large part, because they have innovated ways to deliver high-value products at relatively low costs by leveraging advances in digital technology. 

The size of these companies alone should not automatically subject them to antitrust claims. Lawmakers should consider the benefits that businesses and consumers enjoy as well as the ongoing competition in the technology industry. Antitrust law should be reserved for cases where clear monopoly status can be shown to harm consumers in the form of higher prices and lower quality products.

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How President Biden’s plan for student loan forgiveness will make student debt worse Thu, 02 Jun 2022 14:00:00 +0000 The president's plan to forgive $10,000 in debt per borrower - no matter their income level - has serious consequences.

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Many of the 43.3 million Americans with federal student loan debt totaling $1.61 trillion have anxiously anticipated President Joe Biden’s decision about student loan forgiveness. 

Last week, The Washington Post reported that the president’s plan, which sources say is nearing a formal announcement, will resemble his 2020 campaign promise to forgive $10,000 in federal student loans per borrower. The Committee for a Responsible Budget estimates this will cost taxpayers $230 billion.

While political firebrands such as Sen. Bernie Sanders have long supported substantially increasing federal higher education spending, including offering things like free college, President Biden’s proposal would represent a significant change in policy from previous presidential administrations, including Democrats.

President Barack Obama’s 2008 campaign promises were modest by comparison. President Obama sought to expand Pell Grant access to low-income students and eliminate government subsidies to private student lenders. Even Obama’s 2014 executive order that sought to forgive some federal student loans only did so after 20 years and required borrowers to make regular payments via the Pay As You Earn Initiative.

By comparison, the Biden administration’s plan is a major departure from Obama’s more modest and measured approach to student debt. While it would certainly be popular with many of the people who have $10,000 of their student debt forgiven, public opinion is quite divided over how to handle college student debt.

A CNBC national poll conducted in January of 2022 found that 34% of respondents supported loan forgiveness for all student loans. Only 27% of respondents opposed student loan forgiveness entirely. However, 35% of respondents supported a middling approach, preferring loan forgiveness only for those “in need.” 

Supporters of student loan forgiveness for those in need may be pleased to hear that President Biden’s proposal is reportedly going to be means-tested, with individuals eligible for student loan forgiveness if they have an income of less than $150,000 ($300,000 for couples).

The Washington Post editorial board notes some of the problems with that cut-off:

These provisions, while welcome, would not stop the policy from becoming yet another taxpayer-funded subsidy for the upper middle class. The president’s means test would be almost useless, as some 97 percent of borrowers would still qualify for forgiveness. The Committee for a Responsible Federal Budget, a nonpartisan watchdog, estimates that such a plan would cost at least $230 billion, that 71 percent of the benefits would flow to those in the top half of the income scale — and that a quarter of the benefits would go to the top 20 percent. Even this does not express fully how regressive the policy would be, because many recent graduates from medical, law and business schools would qualify for forgiveness even though their lifetime income trajectories don’t justify it.

Similarly, The Wall Street Journal has reported that more than 40% of all student loan debt is held by individuals with advanced and lucrative degrees, such as doctors and lawyers. 

Only one-third of Americans have bachelor’s degrees. These individuals are statistically likely to earn more than the two-thirds of Americans who don’t have those credentials.

This means that many taxpayers nationwide, 85% of whom do not have student loan debt, would now be paying off the student debt of their college-educated peers who, in many cases, enjoy greater affluence because of their college degrees. 

Importantly, this loan forgiveness proposal does not actually address the major problem of rising college costs. Biden’s plan would likely only exacerbate what many have labeled the student debt crisis. 

The American Enterprise Institute’s Beth Akers points out that there will definitely be a change in borrower behavior after any sort of debt reduction. She wrote

“Economically rational people will respond to that dynamic by choosing more expensive programs of study and borrowing more than they would have otherwise. The result: a pool of outstanding student debt growing even more quickly than before.”

This means that Biden’s proposal would incentivize future students to invest in riskier loans under the hope or assumption that their loans could later be forgiven. Such a plan is a disaster in the making that, over the long-term, could significantly expand Americans’ already ballooning student loan debt.

In fact, even if President Biden does reduce student loan debt by $10,000 per borrower, the Committee for a Responsible Budget reported that the total student loan debt would return to its current level in just three years, assuming no change in borrower behavior.

Instead of debt reduction, policymakers should consider reforms that have a lasting effect and address the rising cost of college. Extricating the federal government from the student loan business altogether or placing strict annual and lifetime caps on federal student loans could help encourage universities to stop hiking their costs.

At the end of the day, any sort of student loan forgiveness is a bad policy since it does not hold individuals accountable for their financial decisions. In fact, it would represent a massive betrayal of public trust. Many people worked to pay off their student loans. Others chose less expensive colleges to avoid student debt. Some people didn’t go to college at all because they decided they couldn’t afford it.

It may be well-intentioned, but President Biden’s student loan forgiveness plan is a recipe for disaster. It would potentially encourage bad borrowing behavior going forward. It would disadvantage those who made significant sacrifices to avoid or minimize their student debt. And, perhaps worst of all, it would force American taxpayers who didn’t go to college to pay for student debt they chose to not accrue and from which they will not benefit.

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Steps metro governments can take to address housing affordability, skyrocketing prices Fri, 29 Apr 2022 17:40:00 +0000 Home ownership is becoming out of reach for many working-class and middle-class Americans.

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A lack of U.S. housing inventory is helping push home prices to record heights. Today, the average home buyer is increasingly unable to afford a home in many metropolitan areas. The Wall Street Journal recently reported, “The median existing-home price [in the US] rose 15% in March from a year earlier to $375,300.”

As inflation rises, the cost of buying a home is also going up even more because the 30-year residential home interest rate has increased from less than 4% to almost 5.5%. Rising inflation is also causing Americans to spend more on basic staples, such as food and gasoline, and Americans have fewer savings available than at any time in the last three years, with the average savings rate decreasing every month but one since July 2021. The result of these and other trends means homeownership is increasingly out of reach for many working-class and middle-class Americans. 

The biggest changes to housing policy need to be made at the local level, where governments need to make changes to zoning laws, building-approval processes, and height limits that prevent more housing from hitting the market. 

The Washington, D.C., region is a prime example of how harmful housing regulations reduce supply and drive up prices. The region has the fourth most expensive housing stock in the country, despite lacking the oceans and the mountains that serve as natural geographical barriers in the other metropolitan areas— San Francisco, New York, Los Angeles, and Honolulu—that make up the rest of America’s five most expensive housing markets. 

The first step is to relax Euclidean zoning regulations. Despite the demand for townhouses and smaller houses, Prince George’s County, Maryland, still has a preponderance of single-family homes zoned on a one-acre or larger lot. Local planners should allow mixed-use zoning as long as there are no public health problems (the original justification for Euclidean zoning).

The region should allow buildings to be set closer to the road, stop requiring that developers include a minimum number of parking spaces for residential developments, and allow multiple housing types to be constructed in the same development.

In suburban areas, single-family homes, cottage courts, and side-by-side duplexes might be a good fit. In central cities, cottage courts, side-by-side duplexes, and small multiplexes might be appropriate. Let all options and choices bloom.

The region also needs to eliminate onerous restrictions for the reconstruction of multi-family housing. Arlington County, Virginia, likes to fashion itself as one of the most progressive communities in the country. But its zoning code reads like it was written in 1922 instead of 2022. Arlington Now spotlighted how Arlington County’s zoning process is making multi-family housing too expensive to build. Renovating multi-family housing on an existing lot requires a community review, a planning commission approval, and county board approval. Yet, renovating a single-family home requires a board of zoning appeals review only. The multi-family review process should be streamlined. 

Fast-growing areas also need to eliminate growth restrictions, such as large lot zoning, agricultural reserves, height limitations, and floor area ratios. 

Suburban Loudoun County, Virginia, has a de facto urban growth boundary along U.S. Route 15 preventing growth in the western half of the county.

Montgomery County, Maryland, has set aside a third of its total land area as an agricultural reserve limiting growth northwest of D.C., even as the region’s metropolitan planning organization (MPO), the Washington Metropolitan Council of Governments, reports that there is virtually no agricultural activity in this “agriculture reserve.”

Meanwhile, the District of Columbia imposes a height limit of 130 feet. The height limit was not enacted to prevent structures from being taller than the U.S. Capitol but is a 19th-century relic that was intended to ensure a fire truck’s ladder could access the top floor of a building and could clearly be done away with now.

Fairfax County, Virginia, has a strict floor-area-ratio (FAR) limit—the ratio of a building’s floor area to the lot, of 0.25. This ratio prevents building on 75% of a property. Similar suburban districts across the country have FARs of 0.40 or higher. 

In addition to getting rid of these bad policies, leaders also need to fight back against Not In My Backyard (NIMBY) activists. Many NIMBYs make bogus claims, such as building more housing will lead to more crime, less tree cover, and negatively change neighborhood character. While some of these concerns are understandable, they are often exaggerated and can almost always be reasonably addressed or debunked.

For example, key environmental areas can be protected without preserving all of the nation’s abundant farmland. It would take about 30% of existing U.S. farmland to feed all of America.

Eliminating unnecessary restrictions that are driving up housing prices would enable regions to build the amount of housing that metro areas need. This would help ensure housing and the American dream of owning a home doesn’t continue to become a luxury good only available to upper-income Americans. Eliminating the housing shortage, which would put downward pressure on housing prices in metro areas, would help solve one of the biggest problems facing American cities and the workers under the age of 40 they hope to attract.

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Russia’s invasion of Ukraine isn’t a good reason for the U.S. to further increase defense spending Mon, 18 Apr 2022 04:00:00 +0000 As with all government programs, we should endeavor to limit military spending to only what is needed.

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President Joe Biden’s 2023 budget proposal calls for $813 billion in total national security spending, a significant rise from current year levels. The total, which includes $773 billion for the Department of Defense, plus smaller amounts for the Department of Energy’s nuclear weapons activities and the FBI’s national security functions, is $31 billion more than the Biden administration had set aside for the 2023 fiscal year in its previous budget. 

The president’s budget proposal would hike defense spending at the rate of inflation plus 1.5%, but U.S. Senate Minority Leader Mitch McConnell wants an even bigger increase in defense spending. Republicans are calling for an increase that would raise last year’s defense spending number by the rate of inflation plus at least 5%. Much of the impetus for increased spending demands is the recent Russian invasion of Ukraine, but events in Eastern Europe suggest that the U.S. may have less to worry about than previously thought when it comes to Russia specifically.

This is true for at least three reasons. First, the Russian army’s poor performance in Ukraine shows that it is not nearly as formidable as we may have feared. Instead, the Russian army appears to suffer from low morale and an inability to handle complex logistics. Corruption and a top-down command structure are hampering its ability to respond to changing battle conditions.

Second, it now appears that a portion of Russia’s military could be tied down in Ukraine for an extended period, further reducing its ability to project power against North Atlantic Treaty Organization (NATO) countries. Even if a peace agreement can be achieved, it appears that Russia may need to commit troops to Donbas or just over the border from Donbas for several years.

Finally, Russia’s action has encouraged NATO allies in Central and Eastern Europe to increase their own military preparedness. For example, Germany increased its defense budget to €100 million and committed to spending at least 2% of its gross domestic product (GDP) going forward. Poland plans to spend 3% of its GDP on defense going forward and will double its army to 300,000 soldiers within five years. Taken together, European NATO allies have more people and far more economic output than Russia and its ally, Belarus. By devoting more of these resources to defense, they’d be more likely to be able to counter a conventional threat from Russia, with or without help from the United States.

Some advocates of increased defense spending also cite potential threats from China, but there is really nothing new on that front to justify additional spending by American taxpayers in the Biden budget. In fact, China’s real estate collapse and renewed COVID-19 pandemic lockdowns in the country will limit Chinese economic growth and thus its ability to augment its own defense spending this year. In the long term, China may conceivably become a military threat to US allies, such as Japan and South Korea, but these countries should have the economic resources necessary to pay for their own defenses.

While it is true that the defense budget has declined as a share of GDP, and as a share of federal spending since the end of the Cold War, this yardstick is not necessarily relevant. As with all government programs, we should endeavor to limit military spending to only what is needed.  From ineffective weapons and defense systems that cost taxpayers billions to paying contractors exorbitant prices for basic equipment, the military budget includes many questionable items. One prime example: Does the nation really need to continue to pay between $110 million and $136 million for each F-35 fighter jet, especially in light of its design flaws and high operational costs, reportedly over $7 million a year per jet?

Also, defense spending trends should be considered in light of the country’s current political and fiscal realities. While it is well known that entitlement programs, especially Social Security and Medicare, account for most federal spending, they also enjoy very strong popular support and are difficult to cut. Instead, as the current rate of inflation drives increased cost-of-living adjustments for retirees and higher medical prices, these programs can be expected to become even more costly to taxpayers in the coming years.

The best opportunity for spending restraint in the near term would be to limit the growth of discretionary spending. Unfortunately, the current political dynamic in Congress makes this difficult. Both major political parties have driven up debts and deficits. Democrats call for higher domestic spending, which Republicans often oppose when they are not in control of the White House. But Republicans consistently call for more defense spending. Some Democrats call for cuts in defense spending to offset the other spending increases they want. And, in the end, there is typically a bipartisan compromise to increase spending in defense and non-defense categories. This dynamic will likely play out again in the current budget cycle, with Republicans already calling for more defense spending and both parties ultimately agreeing on more spending increases that set an even higher baseline for future budgets.

Thus, it’s important to look at how the ever-increasing defense spending contributes to the nation’s $30 trillion debt. In addition to large parts of the wars in Iraq and Afghanistan being financed by adding trillions in debt rather than paid for through annual budgets, the unnecessary annual increases in defense spending are set to continue to help drive up federal deficits through the 10-year budget window and beyond. 

The nation’s fiscal trajectory is on such a dangerous track that Congress needs to get serious about slashing deficits and economies must be found across the budget. The massive defense budget is one prime place to start cutting federal spending and acting responsibly. Otherwise, the United States may eventually face the risk of a severe fiscal crisis in which the federal government may have to suddenly curtail federal spending or destroy the value of the dollar through runaway monetary inflation. This would leave Americans vulnerable to threats that few of us can now imagine.

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Testimony: State and Local Fiscal Recovery Funds program was not a good use of taxpayer money Wed, 02 Mar 2022 04:25:00 +0000 A version of this testimony was presented to the U.S. House Committee on Oversight and Reform on March 1, 2022. Chair Maloney, Ranking Member Comer, and Oversight Committee Members: Thank you for giving me the opportunity to share my observations … Continued

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A version of this testimony was presented to the U.S. House Committee on Oversight and Reform on March 1, 2022.

Chair Maloney, Ranking Member Comer, and Oversight Committee Members: Thank you for giving me the opportunity to share my observations about the Coronavirus State and Local Fiscal Recovery Funds provided under the American Rescue Plan Act. My name is Marc Joffe, and I am a senior policy analyst at Reason Foundation, specializing in fiscal policy issues.

When federal, state, and local governments began implementing COVID-19 public health measures two years ago this month, it was reasonable to expect that states, counties, cities, and smaller government jurisdictions would face large and widespread revenue losses.

But, by early 2021, in the runup to the passage of the American Rescue Plan Act (ARPA), it had become apparent that the severe revenue losses government entities were expecting had not materialized and were unlikely to occur. Thanks to recent technological innovations such as cloud computing and videoconferencing, large parts of the American workforce were able to work remotely without significant productivity losses. While some sectors of the economy, like travel and hospitality, were hit hard, consumers substituted online purchases for visits to retail stores. Most Americans received federal stimulus checks. And Federal Reserve stimulus helped elevate stock and real estate values. As a result, tax receipts from income, capital gains, sales, and property taxes remained robust.

In February 2021, I determined from a review of interim state fiscal reports that state governments had suffered an overall revenue decline of just 0.01% between the calendar years 2019 and 2020.  Similarly, quarterly Census Bureau data on local government revenues also suggested that they had not suffered through that point of the pandemic.

These totals hid variability across governments. Entities heavily dependent on tourism such as Hawaii, Nevada, and the city of Anaheim, home to Disneyland, were hit harder than other places. California also suffered significant revenue losses at the beginning of the pandemic, but these losses were offset by a gusher of income and capital gains taxes from technology companies and their employees, who benefited from the pandemic-driven boom in online activity.

While the facts available to us last March may have justified a targeted revenue support program for a small number of government entities, it clearly did not support a generalized federal aid program. Unfortunately, advocates of this stimulus largely relied on stale revenue projections, as well as overly pessimistic responses from a survey of city officials that was taken at the start of the crisis.

The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program was not only excessive but was also poorly targeted. The state of California, which received $26.5 billion, or 7.6% of the total aid package, went on to report a record state budget surplus. There was also a disturbing discrepancy in per capita aid distributions. While Florida’s state, county, and local governments were allotted $739 per capita, the Commonwealth of the Northern Mariana Islands and its local governments are receiving more than $10,500 per capita. The Commonwealth itself was allotted $482 million to spend on its 47,000 residents.

The most recent interim reports submitted by states, counties, and metropolitan cities to the Treasury Department indicate that governments had spent less than $10 billion of their SLFRF revenues as of July 31, 2021. The largest share of expenditures went to replenishing depleted state unemployment funds. While this was a judicious use of relief proceeds, it is not one that provides any near-term stimulus. With so little of the SLFRF funds being spent on employees, supplies, or services, it is clear that state and local ARPA spending had little impact on economic growth during the second quarter of last year. In hindsight, this result undermines another dubious justification that was used to call for quick passage of ARPA—that it would provide a quick stimulus to lift the economy out of a pandemic-induced recession. In fact, we know the economy had already been growing for 11 months before ARPA was signed.

Legislative restrictions on the use of SLFRF proceeds are complex. Treasury regulations have compounded challenges to effectively use the funds. Several states are litigating a ban on using the SLFRF money to backfill tax reductions, which could stimulate economic activity. Other states, like Illinois, which might have used ARPA funds to pay down debt their unfunded public pension liabilities were prohibited from doing so.

The Treasury Department did not publish final regulations on the usage and reporting of funds until January 2022, after most of the money had been distributed. The department was also slow to publish reports it received from recipient governments and, contrary to the spirit of the bipartisan Grant Reporting Efficiency and Agreements Transparency (GREAT) Act of 2019, did not provide machine-readable reporting standards for grantees. As a result, our understanding of the overall impact of SLFRF is based more on anecdotes than on rigorous data analysis.

I do not doubt that the American Rescue Plan Act advocates and governments receiving the Coronavirus State and Local Fiscal Recovery Funds can point to positive things that have been accomplished with this federal support. But, as the recent resurgence of inflation has shown, the laws of economics have not been repealed: Resources are scarce. The United States cannot pretend otherwise by financing large federal deficits with newly created dollars. Taxpayer funds should always be used judiciously. Giving $350 billion in emergency aid to state and local governments that, for the most part, were not facing a fiscal emergency was not a judicious use of federal taxpayer money.

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The Federal Reserve should rethink its stimulative policies Tue, 28 Dec 2021 16:19:18 +0000 Higher interest rates will pain borrowers in both the private and public sectors.

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Having produced price inflation with its easy monetary policy, the Federal Reserve is now expected to take its foot off the accelerator in hopes of achieving full employment with 2 percent annual CPI growth. But achieving this goldilocks scenario may not be so easy in today’s debt-addicted economy. Although necessary to fight inflation, higher interest rates will pain borrowers in both the private and public sectors.

Rate hikes will drive up federal debt service costs.

In July, the Congressional Budget Office (CBO) projected that the federal government would spend $306 million on $24.4 billion of publicly held debt, implying an average interest rate of about 1.25 percent. With such a large volume of debt outstanding, the U.S.’s annual interest costs could increase rapidly if interest rates rise.

But there are a couple of caveats.

First, some federal debt is long-term and thus its interest rates are locked in. Also, now that the Fed has bought up a large fraction of outstanding Treasury securities, much of the government’s extra interest costs are returned to the Treasury when it remits its net income to the federal government each year.

Higher interest rates also pose threats to the value of investment assets. Stock prices could fall as investors switch to fixed-income securities providing better returns. But as long as real interest rates — i.e. the difference between interest rates and inflation — are negative, most investors could be expected to stick with stocks. Home price appreciation might also weaken because higher mortgage interest rates reduce housing affordability: Buyers will have to take out smaller loans to make their target monthly mortgage payment.

But the biggest fiscal risk may stem from corporate lending. Rather than issue fixed-rate bonds, many highly leveraged companies rely on the syndicated bank loan market where most borrowing takes place on a floating rate basis. According to research from Fitch Ratings, $1.6 trillion of syndicated loans are currently outstanding with almost all borrowers carrying either speculative grade credit ratings or the lowest investment grade rating (Baa3 on Moody’s scale or BBB- from S&P, Fitch and other agencies).

Syndicated loans are distributed across multiple banks with about half of the volume packaged into Collateralized Loan Obligations (CLOs). Although analogous to the subprime Residential Mortgage-Backed Securities (RMBS) that triggered the Great Recession, CLOs have generally performed well over their 30-year history.

The loans packaged into subprime RMBS and CLO deals have high default risk, but corporate borrowers have generally proven more reliable than homebuyers with low credit scores. That may change when the Fed starts raising interest rates, especially if the hikes are precipitous.

A wave of leveraged loan defaults could harm both CLO investors and banks — to the extent that they continue to hold syndicated loans on their books. Because CLOs are well diversified, it is unlikely that defaults will impact investors in the senior AAA/Aaa rated tranches.

But if a lot of leveraged corporate borrowers are forced into bankruptcy by higher interest costs, we could see waves of layoffs. Suppliers to failing companies may also face late and/or partial payments, spreading the pain around the economy.

In this way, a sharp increase in interest rates could significantly slow economic growth or even trigger a recession.

Corporate defaults played a significant role in the 2001-2002 recession, even though the blame is more commonly put on the collapse of the dot-com stock bubble and the impact of the 9/11 terror attacks. But around the time of this recession, such big names as United Airlines, Kmart, Global Crossing, WorldCom, and Enron filed Chapter 11 bankruptcy petitions.

Congress could reduce the pressure on the Fed to raise interest rates by reining in deficits. Lower deficits would mean a reduced volume of Treasury securities coming onto the market, which push up interest rates, unless purchased by the Fed with new money. Although meaningful spending cuts seem unlikely in the current Congress, it could help by not passing the Build Back Better act — something Sen. Joe Manchin (D-W.Va.) appears to have ensured.

Although BBB proponents insist that the bill is close to deficit neutral over the ten-year budget window, CBO estimates that the measure would add $792 billion to the federal debt in the first five years after passage, with that amount partially offset in the second five years. So, in the short-to-intermediate term, BBB is inflationary. It only gets close to balancing if its various spending initiatives are not renewed by future Congresses.

But irrespective of how Congress reacts, the Fed should rethink its stimulative policies and allow interest rates to rise. Although there may be significant economic pain in the near-term, this is better than allowing inflation to become chronic, necessitating much more drastic action down the road.

A version of this column previously appeared in The Hill.

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Online retail sales haven’t grown as fast as you may think, report says Fri, 05 Nov 2021 04:00:00 +0000 Online sales peaked at online 17% of all retail sales over the last year.

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As Americans have been homebound during much of the COVID-19 pandemic, one may have expected online sales to have completely taken over and become the dominant form of retail sales in the United States. But a new report from NetChoice, a research and advocacy organization supported by groups like Google, Amazon, Etsy and Facebook, shows that online retail only grew by 6.7% in 2021. While this was the largest annual gain in over a decade, it is clear online sales are still far from overpowering in-person retail.

Some politicians have called for the breakup of Amazon, as well as other big tech companies like Google and Facebook because there is a perceived market dominance by these online giants. In reality, however, Census data reveal online sales still only make up about 15% of total retail sales. That number may have peaked around 17% during the COVID-19 pandemic, but at no point have online purchases overpowered traditional storefronts.

In fact, in the last few years, online sales have become a complement to both small and large businesses, creating dynamism and competition in the retail industry that is far from being dominated by monopoly. The NetChoice report finds that the nation’s top five retailers (combined physical and online sales) only account for about 25% of total retail sales each year.

Experience reveals that through third-party marketplaces, small businesses have been able to form up and make sales with much more ease than before. A small business model that has become popular in recent years, for example, is for sellers to create a retail website with template services like Shopify, market the brand with social media, sell on Amazon, and eventually try to land a deal with a physical retail location like Walmart or another retailer that focuses on a specific niche. Popular Etsy stores are just one example of this phenomenon.

The opening of third-party online sales platforms has generated competition and small business creation because it takes away many of the logistical and infrastructure concerns small shop owners face. This allows them to focus on their products and increase revenue. 

For years, Bed Bath and Beyond (BBBY) refused to engage in third-party online sales and consequently saw its stock price dwindling over the last few years. Upon the recent announcement that the company would open a digital marketplace for third-party online sellers, its stock jumped 70%. The company hopes this move will help them compete with other online marketplaces, like Amazon and Etsy, which are more generalized and have few physical locations. 

Despite the rise in popularity of online shopping, physical retail locations still play an important role for many industries. In-person sales make up 85% percent of all retail and a survey included in the NetChoice report found that 77% of consumers feel it is somewhat important that a retailer offers a physical location.   

Stores like Bed Bath and Beyond continue to test business models and retail offerings that match a highly dynamic consumer market that values online and physical sales. This suggests that companies like Amazon which have seen success in generalizing online sales may have competition from retailers who have the advantage of having physical locations for customers to see and touch products.

The retail market is far from being stagnant or overly dominated by one company. Innovations in online sales will continue to generate a swath of competition for producers and sellers.  Companies like BBBY are a good example of traditional retailers that may have been slow to the game o balancing their physical and online presences but are adapting and may be able to represent serious competition to retail giants like Walmart and Amazon. 

The emergence of new competitors and the ease of entry for small businesses is on its face evidence the market is working well for consumers. Amazon has innovated and grown itself into an e-commerce giant, but it is far from the monopoly that some politicians make it out to be. Congress and states should avoid stifling the dynamic and competitive online marketplace with unnecessary anti-trust interventions.

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The US national debt is a threat to the nation’s economic future Mon, 01 Nov 2021 05:00:00 +0000 The ratio of publicly held federal debt is expected to hit 202% in the next 30 years.

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Spiraling federal budget deficits since the beginning of this century — and projected to continue for as far as the eye can see — are undermining America’s economic future. Contrary to popular wisdom on the right, the practice of persistently spending more money than the federal government collects is a bipartisan convention.

As the country enters uncharted territory for its debt-to-gross domestic product (GDP) ratio, there are serious risks, especially from inflation, which the Federal Reserve may think is needed to finance the nation’s nearly $29 trillion mountain of debt.

According to Congressional Budget Office (CBO) data, the ratio of publicly held federal debt increased from 32% of GDP in 2001 to 102% today, and is expected to hit 202% in the next 30 years.

While it may be convenient to blame Democrats for this rapid accumulation of debt, Republicans bear a large share of responsibility. After President Bill Clinton and Congressional Republicans partnered to balance the budget in the late 1990s, federal budget deficits returned under President George W. Bush.

Bush cut taxes in 2001 and 2003 without making spending cuts. He also started the long and costly wars in Afghanistan and Iraq. According to the Costs of War Project at Brown University, the budgetary costs of these conflicts exceeds $2 trillion. And that’s only the tip of the iceberg: the wars continue to drive increased spending on veterans’ benefits and decades of deficit spending triggered additional borrowing costs. When other Pentagon spending on the ‘War on Terror’ is included, Brown researchers estimate costs of about $8 trillion since 2001.

President Bush and Republicans also added prescription drug benefits to Medicare, without paying for them, and, ironically, with very little support from House Democrats. CBO projects that this benefit will add about $1.4 trillion to federal deficits over the next 10 years—more than this year’s $1.2 infrastructure bill, another bipartisan deficit builder, if it is passed.

While former President Barack Obama is often blamed for the first trillion-dollar deficit in fiscal year 2009, almost a third of that fiscal year (October 1, 2008 to January 20, 2009) transpired under the Bush administration. Although Obama’s main policy response to the Great Recession, the American Recovery and Reinvestment Act cost $831 billion, less than half of that was incurred in FY 2009.

Of course, the single largest budget deficit in American history occurred under President Donald Trump and a Republican-controlled Senate. The fiscal year 2020 deficit of $3.1 trillion even exceeds the most recent year’s $2.8 trillion shortfall, which is a shared responsibility of the Trump and Biden administrations as well as bipartisan Congressional majorities for all but the final COVID-19 stimulus bill.

Although the most recent gargantuan deficits can be blamed on COVID-19, it is worth noting that federal deficits were rising under President Trump even in the strong economy before the pandemic. In Obama’s last full fiscal year, 2016, the federal government recorded $585 billion in red ink compared to Trump’s $984 billion deficit in 2019 — before the pandemic.

But, regardless of blame, political gridlock via a Republican takeover of the House in 2022 may offer the best short-term prospect for tackling the debt crisis. A Democratic president coupled with a Republican Congress has been the best combination for limiting federal spending in recent decades.

Unfortunately, much of the political left, influenced by the precepts of Modern Monetary Theory, have become “deficit denialists.” They point to decades of warnings that debt and deficits would create an economic crisis that, thankfully, hasn’t arrived yet and assume that means deficit spending and borrowing, like the proposed $3.5 trillion reconciliation bill, can continue indefinitely without consequence.

But if major fiscal reform at the federal level does not start soon (and probably even if it does), the U.S. will face serious economic consequences from the last 20 years of fiscal irresponsibility. This year we’re seeing significant inflation, but the Federal Reserve will continue to accommodate large deficits by printing money to purchase bonds and will keep interest rates artificially low. If the Fed allows interest rates to rise to an economically rational level, it risks triggering a bear market in stocks and further spiking federal borrowing costs via higher interest payments.

So the politically easier solution for the Fed is to devalue the debt by depreciating the dollar. Unfortunately, this could help cause a return to the double-digit inflation and frequent economic recessions the country suffered in the 1970s.

It’s difficult to imagine either major political party seriously addressing the national debt right now. Eventually, to make a lasting improvement in our debt trajectory, Congress should implement process reforms such as zero-based budgetingpay-as-you-go procedures that have real teeth, and debt-to-GDP targeting (which may receive more bipartisan support than balanced budget amendments that have failed to pass in previous Congresses). In the meantime, Congress can at least stop the massive annual deficit spending that keeps adding to the debt.

A version of this column previously appeared in the Daily Caller.

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Sen. Manchin’s proposed reforms to the child tax credit would be a step back in fighting poverty Thu, 28 Oct 2021 10:00:00 +0000 Tens of millions of American families began receiving checks worth up to $3,600 annually per child from the federal government in July due to the recently-passed child tax credit. As Congress debates its proposed reconciliation bill, recent legislative wrangling has … Continued

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Tens of millions of American families began receiving checks worth up to $3,600 annually per child from the federal government in July due to the recently-passed child tax credit. As Congress debates its proposed reconciliation bill, recent legislative wrangling has cast doubt on whether the child tax credit will become a long-term fixture in the U.S. tax code and anti-poverty efforts—with some wanting to make the changes permanent, others proposing to extend them only one year, and others opposing them entirely.

In the current House and Senate showdown, Sen. Joe Manchin (D-WV) has emerged as the crucial centrist “swing vote.” Sen. Manchin recently proposed sweeping changes to the still-new child tax credit, including reducing the ceiling for eligible families dramatically—to only those earning under $60,000 per year—and adding a work requirement for recipients.

Last month on CNN, Sen. Manchin said the tax credit had “no work requirements whatsoever” and asked, “Don’t you think, if we’re going to help the children, that the people should make some effort?” This sentiment surrounding work requirements has proven politically potent for decades and, at least at first pass, seems to be built on economic common sense. These concerns also resonate with many people right now because during the COVID-19 pandemic unemployment insurance benefits became more generous and many are observing a shortage of workers, especially in service industries.

However, recent history shows that work requirements for cash assistance to poor Americans often work much better as political sloganeering than as real programs. For example, the Temporary Assistance for Needy Families (TANF) program, instituted in the mid-1990s, added work requirements to the cash assistance program formerly known as American Families with Dependent Children (AFDC). Despite persistent conventional wisdom that benefits should be tied to a willingness to work, the benefits of this major shift were modest and uneven. The results were so weak as to indicate if the ultimate policy goal is helping families emerge from poverty in robust and self-sustaining ways, unconditional benefits may be a better solution.

The same would likely be true of Sen. Manchin’s proposed child tax credit reforms, which should be rejected even in the current climate of labor shortages in some sectors. The “get a job” mentality Manchin imposes, when put into practice, would only result in cosmetic improvements to employment rates and the size of the welfare state. In addition to fewer monthly checks, Manchin’s proposed reforms are a step back in our thinking and framing of debates regarding poverty and work.

The Same Mistakes

In our complicated welfare system, consisting of dozens of programs combining various cash and in-kind benefits with an array of differing eligibility and behavioral requirements, calculating the cash impact of the child tax credit on the “average” recipient family is difficult. But what emerged following this spring’s earlier round of legislative wrangling was a tax credit that differed from other assistance programs currently on the books in three important ways:

  • Eligibility for families with higher incomes than existed in other assistance programs;
  • A lack of requirement that any member of the family be working or looking for work;
  • A simpler and less bureaucratic system.

Sen. Manchin’s proposed changes take aim at the first two characteristics of the child tax credit. However, his lack of specifics obscure the fact that even a well-designed approach to rolling back those first two characteristics impacts the third. Based on past welfare reforms, Manchin’s requirements would mean a system with a bigger bureaucracy that is far more expensive to run and rife with benefit cliffs and loopholes with unintended consequences.

Eligibility for a means-tested program is always more complicated than earnings above or below a single number. How many earners does the family have? What income gets counted? What about other benefit programs? Beyond the income ceilings, do benefits phase out gradually or simply fall off a “benefit cliff?” Beyond the $60,000 figure, Manchin has not answered these questions.

The current child tax credit begins phasing out benefits at higher incomes: $112,500 for single parents and $150,000 for joint filers. It then phases out very gradually, with partial benefits available to single parents and couples earning as much as $200,000 and $400,000, respectively.

Many frame this eligibility over wider income brackets as “paying people not to work.” That isn’t quite correct. Beneficiaries are being paid, which impacts work and other life decisions, but their work decisions on the margin are left to them as free decision-makers with richer knowledge about themselves and their circumstances than policymakers have. Steep benefit cliffs at lower income thresholds are where policy actually impacts those marginal decisions more sharply and creates top-down disincentives to work.

The work requirement called for by Sen. Manchin adds additional bureaucratic strain. The Internal Revenue Service (IRS) can issue checks directly, but a major bureaucratic undertaking is needed to determine who is and isn’t working, is or isn’t looking for a job, and does or doesn’t have some exemption or extenuating circumstance.

Manchin’s direct, yet also vague, call for a “work requirement” for the child tax credit is therefore problematic over his other proposed changes. The experience of the TANF program is instructive, as it was born when such a work requirement was added to the federally-funded but state-administered AFDC cash assistance program. In the years following the change, welfare rolls were cut by several million recipients but the bureaucracy and overall spending only grew. 

Different Results

The shortage of service workers as the nation tries to emerge from the COVID-19 pandemic might appear to some supporters of work requirements as further evidence of their importance. In the wake of extended unemployment benefits and the introduction of the child tax credit, it can look to many like we are indeed paying people not to work. But this story becomes more complicated when viewed as millions of heterogeneous individuals and jobs in a complex economy.

Based on an interview with Indiana University economist Kyle Anderson, Indianapolis Star reporter Binghui Huang writes that the “reasons range from fear of COVID-19, child care needs at home, mismatch of skills between the worker and the job, changing career interests and early retirement.”

We should instead approach the labor shortages currently observed as a question similar to the general supply-chain dislocations also in the news. Indeed, unfilled jobs and cargo ships stuck outside ports are two aspects of the same problem. Writing for Reason Foundation, Marc Scribner illustrates step-by-step a scenario of “cascading impacts” from COVID-19 that lead to such problems in product markets. Scribner is rightly concerned about big policy gestures making the problem worse:

“With the public and businesses feeling the impacts of supply chain problems and news stories already scaring parents that their Christmas toys may not arrive in time for the holidays, politicians are likely going to continue wanting to show they are doing something about the problem by holding summits with business and labor leaders, appointing “czars,” and engaging in other photo opportunities to present the illusion that they can solve these problems. But the reality is supply chain problems are largely out of policymakers’ control and almost certain to continue through 2022. Markets and businesses will adjust but not on a dime.”

Counseling patience in today’s political and media environment may be an uphill climb, but Scribner is exactly right about both the product and labor markets. COVID-19 hit the complex system of our modern economy with countless shocks. In both product and labor markets, the bottom-up process of finding a robust new normal has no shortcuts. 

All the more reason for assistance to workers that is dependable and does as little as possible to distort specific decisions on the ground. Both the left and right are attracted to policies designed to make people do what they think people should do, but avoiding this trap is good advice both in our peculiar current set of affairs and in general. We have seen enough examples of the futility of more top-down micro-managed approaches to expect different results.

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There are no quick and easy fixes to our supply chain challenges Wed, 20 Oct 2021 19:01:00 +0000 Supply chain problems are almost certain to continue through 2022.

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Snarled supply chains are a major economic and news story, with dramatic photos of dozens of container ships waiting offshore for weeks at a time for the opportunity to unload their cargoes at overflowing West Coast ports. In a sign of the times, the Ports of Long Beach and Los Angeles became so congested that some ships could not even approach shallower depths to anchor, forcing them to drift 20 miles offshore. But it’s not just the ports; every hub and spoke of the logistics chain is at capacity. And unfortunately for pundits and politicians in Washington, D.C., there are no policy levers to pull to quickly and easily resolve these issues.

To be sure, certain government policies have made this situation worse than it otherwise would be. These policies include the failure to adopt international best practices and technologies at U.S. ports due to intransigent labor unions and their allied politicians, the duties on Chinese truck chassis that have tripled their price in recent years under the Trump and Biden administrations, and unprecedented federal COVID-19 relief, stimulus and unemployment money going to many households, which contributed to spending. However, while policy reforms could help improve the long-run resilience of the supply chain, the main source of these problems is unusual short-run consumer demand that public policy is ill-suited to address.

The COVID-19 pandemic caused a large shift in consumption from services to durable and nondurable goods, while total consumption has remained on-trend thanks, in part, to generous government assistance that kept personal incomes high throughout the pandemic. E-commerce, in particular, saw a massive boom, and the nature of e-commerce plays an outsized role in pushing various logistics segments overcapacity.

Here’s a simplified story that illustrates the cascading impacts of pandemic-induced changes in household consumption:

  • The rapid flows demanded of e-commerce—from production to distribution to end consumers—caused warehouses that were already stocked with goods meant for pre-pandemic consumers to become more congested as they attempted to adjust to pandemic-caused increases and changes in goods demand.
  • Because there was no space in the warehouses, goods were delayed in unloading from shipping containers on truck chassis in parking lots and loading docks outside the warehouses.
  • Because warehouse parking lots and loading docks were overflowing with full containers and truck chassis, rail customers were not picking up their containers and chassis from freight rail ramps.
  • Because rail customers weren’t picking up their goods from freight rail ramps, rail carriers could not return empty containers and chassis to seaports.
  • Because seaports lacked the chassis to move containers out of ports to inland distribution centers, overflow storage quickly reached capacity at ports.
  • And because there was no space in ports to unload containers from massive container ships, container ships waited for days and weeks offshore to unload their cargo.

Every hub and spoke of the logistics chain is strained due to this shift in consumption and spike in good demand. Unfortunately, attempting to address one link, perhaps by moving to 24-hour schedules at ports as supported by President Joe Biden, will not address problems in other parts of the chain and could possibly exacerbate them.

There are two possible ways out of this mess: consumer goods demand wanes to something closer to pre-pandemic trends or logistics capacity is added to support the “new normal” demand. The latter takes time, as firms must build and acquire a lot of additional structures and equipment, as well as hire new people to work them. Expanding capacity to meet a potential “new normal” of goods demand entails large risks to sunk capital investment from making big bets that present consumption patterns will persist, which is why firms may be reluctant to invest in additional capacity that may not be needed if consumers begin shifting from goods back to services as the pandemic wanes. An economic recession could also bring relief to strained supply chains, although this is obviously not preferable.

With the public and businesses feeling the impacts of supply chain problems and news stories already scaring parents that their Christmas toys may not arrive in time for the holidays, politicians are likely going to continue wanting to show they are doing something about the problem by holding summits with business and labor leaders, appointing “czars,” and engaging in other photo opportunities to present the illusion that they can solve these problems. But the reality is supply chain problems are largely out of policymakers’ control and almost certain to continue through 2022. Markets and businesses will adjust but not on a dime.

Despite politicians looking to blame opponents for supply chain issues and assurances from other politicians that they can fix it, there are no quick and painless ways out of this strange supply chain situation, which is largely yet another unpredictable consequence of a rare, 100-year global pandemic. Instead of asking politicians to do something out of their control, consumers must accept these COVID-related supply chain difficulties are here for the time being. For now, policymakers should be vigilant about avoiding well-meaning but counterproductive policy responses and, instead, work to improve long-run supply chain resilience by jettisoning existing harmful government policies.

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Paying down its debt should be a priority for California Fri, 10 Sep 2021 20:16:30 +0000 Leaders in Sacramento have largely opted to spend this year's budget surplus on short-term priorities.

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As California voters consider their options in the recall election, one factor to consider is the state’s long-term fiscal health. With California’s state government receiving $26 billion in COVID-19 relief and stimulus from federal taxpayers and a large state budget surplus this year, it is easy to forget the “wall of debt” that former Gov. Jerry Brown frequently warned us about. While the state’s finances have had plenty of good news in recent years, Gov. Gavin Newsom’s administration has thus far failed to build upon many of Gov. Brown’s fiscal reforms, leaving the state vulnerable to future economic storms.

California’s 2020 audited financial statements are over four months late, so according to the state’s 2019 audited financial statement, the state government and its component units (i.e., subsidiaries such as the University of California system and the California Housing Finance Agency) have a total of $359 billion in long-term obligations.

With a surprise $75 billion budget surplus this year, California’s flush financial situation was an opportunity to use the surplus to pay down some of the wall of debt but, instead, leaders in Sacramento have largely opted to spend that money on shorter-term priorities.

Most of California’s long-term liabilities making up the wall of debt arise not from bonds but from unfunded future obligations to provide retired state workers with the pensions and health care benefits they’ve been promised. Gov. Brown implemented reforms to contain the growth of these public pension liabilities, but Gov. Newsom’s administration has not followed up on them.

Brown enacted reforms intended to help the state’s two pension systems, the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), to begin digging out from their deep financial holes. These reforms included raising retirement ages for new hires and increasing pension contribution rates. But the two systems remain deeply underfunded, reporting ratios of assets-to-actuarial liabilities of about 71%, as of June 30, 2020.

While these funded ratios should improve substantially when updated for 2021, given the recent stock market performance, both pension systems remain well below fully funded at a time of record equity prices. As of 2020, CalPERS still had $163 billion in unfunded liabilities and CalSTRS had $106 billion in unfunded liabilities—debt for which state and local taxpayers are ultimately on the hook.

Reason Foundation’s Pension Integrity Project finds states often must make multiple rounds of legislative reforms to make the structural fixes necessary to straighten out their pension systems. Unfortunately, since Gov. Brown left office, there has been little enthusiasm in Sacramento for further pension reform.

Short of making fundamental reforms, California could simply make extra pension contributions (above and beyond those recommended by system actuaries) to pay down unfunded liabilities. Brown began this practice, and it continued at the beginning of the Newsom administration. But Newsom canceled a planned $2.4 billion extra payment to CalPERS in 2020-2021 amidst the emergence of COVD-19.

Fears of a prolonged economic downturn were understandable when COVID-19 first hit, but rather than a fiscal crisis, California and its tech sector experienced an economic boom that produced a $75 billion surplus for the state government. Unfortunately, even when it was clear the state wouldn’t have a deficit, Newsom didn’t go back and make the pension payment he canceled.

The state’s 2021-22 budget includes $2.3 billion in extra CalSTRS and CalPERS contributions—payments mandated by Proposition 2 (2014), another legacy of the Brown era, which requires the state to apply a portion of capital gains tax revenue to public pensions and other long-term obligations when the tax collections rise above a specified level.

But, rather than taking advantage of the state budget surplus and doing more than the statutory minimum to pay down this debt, Newsom and the state legislature prioritized spending on stimulus checks—in addition to checks provided by the federal government—and funding things like broadband infrastructure, which is also redundant since the federal government is also sending California money for broadband-related projects.

Financial reforms from the Brown era are still helping California tear down its wall of debt. Hopefully, whoever prevails in the recall election will prioritize and continue this essential work.

A version of this column first appeared in the Los Angeles Daily News.

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The $3.5 Trillion Reconciliation Package’s Supposed ‘Pay-Fors’ and Its Impact on Inflation Tue, 03 Aug 2021 17:03:17 +0000 At a time of rising inflation and massive federal red ink, this deficit spending poses many financial risks the country cannot afford.

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The $3.5 trillion reconciliation package recently launched by Congressional Democrats would likely raise federal deficits — despite their assurances to the contrary. At a time of rising inflation and massive federal red ink, this deficit spending poses many financial risks the country cannot afford.

For the first nine months of the 2021 fiscal year, the federal government’s deficit totaled $2.2 trillion, which is actually down from the same period of the last year of the Trump administration. The Congressional Budget Office (CBO) recently projected a 2021 deficit of $3 trillion, also slightly below last year’s record $3.1 trillion deficit. Under its current 10-year projection, CBO sees deficits declining through 2025 before rising later in the decade as the last Baby Boomers reach retirement age and access more federal benefits, including Social Security and Medicare. Annual federal budget deficits never fall below 3 percent of Gross Domestic Product during the forecast period.

Because CBO forecasts are based on current law, they do not reflect the impacts of the bipartisan infrastructure package or the reconciliation budget measure under consideration. Although President Joe Biden’s American Recovery Plan and American Families Plan contained “pay-fors,” which Democratic leaders in Congress says they intend to include in the reconciliation package, there is no assurance that the new revenue will offset the new spending. One way to get such assurance is to ask the Congressional Budget Office to thoroughly score the final package before final votes are taken. But given political pressures, packages are often rushed through before all their provisions are fully evaluated.

Senate Democrats will need all 50 members of their caucus to vote for the reconciliation package, including Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ), who have expressed concerns about the total price tag.

“I have also made clear that while I will support beginning this process, I do not support a bill that costs $3.5 trillion — and in the coming months, I will work in good faith to develop this legislation with my colleagues and the administration to strengthen Arizona’s economy and help Arizona’s everyday families get ahead,” Sinema said in a written statement.

Lobbyists seeking to shield clients from portions of any tax hikes included in the final bill will also be shopping legislative language to any Senator willing to listen. Cumulatively, the types of loopholes lobbyists will be seeking can drain hundreds of billions of revenues from tax hikes and ‘pay-fors’ in the package. Meanwhile, House Democrats representing areas with high state and local income taxes want to repeal the cap on state and local tax (SALT) deductions, which would further reduce the bill’s revenues.

On the spending side, Democrats are cramming numerous programs that would cumulatively cost more than $350 billion annually (or $3.5 trillion over the 10-year budget window) into the reconciliation bill. To make it all fit, lawmakers may phase in programs, thereby reducing their incremental costs in the near term.

In other cases, Congress can cut the long-term price tag by claiming it will terminate programs in later years while expecting a future Congress to extend them. This tactic was famously used by President George W. Bush’s administration, which phased out its tax cuts late in the 10-year budget window. Income tax rate reductions for all but the highest brackets later became permanent. Similarly, the Tax Cuts and Jobs Act of 2017 contains individual income tax cuts set to expire between 2025 and 2027. Since many of these tax cuts also benefit middle-class Americans, they have good prospects of being extended.

If the reconciliation package does increase the deficit, the consequences could be quite negative. As some fiscal hawks have been warning for years, the federal government is headed for a long-term fiscal crisis due to the rapid growth of entitlement spending. CBO has been projecting for years that the nation’s debt-to-GDP ratio would reach record territory in the 2030s and 2040s. The COVID-19 pandemic, recession, and massive government spending in response have accelerated the rising debt trajectory. The reconciliation bill would further exacerbate the debt.  

While many correctly note that deficit hawks’ dire predictions haven’t come about — yet — the fact is that no one knows what level of federal debt is sustainable. Evidence from Japan suggests a modern, first-world economy can support much higher debt burdens than the United States has accumulated. On the other hand, Japan may be able to sustain more government debt than the U.S. because its consumers and businesses save a higher proportion of national income than we do.

Because U.S. Treasury securities offer negative real returns, there is a limit to the amount that can be sold to private players. Unless debt issuance is controlled, the Federal Reserve will eventually be obliged to purchase more Treasury securities with newly printed money, which risks higher inflation.

We do not know whether the country’s currently rising inflation figures represent a transient spike or the beginnings of a long-term trend toward more rapid consumer price escalation. Those arguing that the impact is transient rightly highlight that recent price increases have been concentrated in a few sectors, such as used cars and rental cars that are facing specific issues.

But if consumers have limited money to spend, supply-driven price shocks in one sector should reduce demand for other goods and services, placing downward pressure on their prices. Right now, however, there appears to be so much money in the system that price spikes in specific sectors can be absorbed without reducing demand and pushing down prices elsewhere. And with the Fed adding money by making $120 billion in new bond purchases each month, there is reason to believe that price hikes could rotate around the economy later in 2021 and 2022.

Although 1970s-vintage double-digit inflation may not be in our immediate future, persistent annual price increases of 4 percent or 5 percent can seriously erode savings and impoverish those relying on fixed incomes in just a few short years. Similarly worrying, as the U.S. saw in 1968, inflation at this level combined with other factors such as intergenerational tensions, can, in some circumstances, also contribute to larger economic and social instability.

Rather than take these risks, Democrats should reduce this $3.5 trillion reconciliation package and their other spending plans to actually align with the tax revenue they can reasonably expect to generate. And both major political parties should finally start to grapple with the massive debt and deficits they’ve been laying on the shoulders of future taxpayers.

A version of this column originally appeared in The Hill.

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Recent Inflation Figures Should Not Be Ignored by Policymakers Thu, 24 Jun 2021 04:01:00 +0000 The sharp increase in consumer prices this spring may be a blip but may also be a sign that inflation is returning as a chronic problem. For those of us who can accurately recall the 1970s economy, it is a frightening prospect

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The sharp increase in consumer prices this spring may be a blip but may also be a sign that inflation is returning as a chronic problem. For those of us who can accurately recall the 1970s economy, it is a frightening prospect. Everyone else would benefit from reading contemporaneous news coverage.

Recent events call into question pronouncements of the leading Modern Monetary Theorists who thought that the U.S. could sustain much larger deficits without triggering major hikes in the cost of living. Instead, it appears that the traditional rules of public finance still hold: deficit spending financed by Federal Reserve money creation is inflationary.

Analogies between today’s situation and the 1970s are not quite on target. By the early 70s, inflation was well underway. Instead, we should be drawing lessons from the year 1965, when price inflation began to take off. Prior to that year, inflation seemed to be under control with annual CPI growth ranging from 1.1 percent to 1.5 percent annually between 1960 and 1964 — not unlike the years prior to this one.

Like 2021, the post-election year of 1965 saw the inauguration of an ambitious unified Democratic government. That year, Congress enacted Medicare and Medicaid, began providing federal aid to local school districts, and greatly expanded federal housing programs. At the same time, the Johnson administration was expanding U.S. involvement in Vietnam, increasing the defense budget. The federal budget deficit expanded from $1.6 billion in the 1965 fiscal year (which ended on June 30 in those days) to $27.7 billion, or 3% of GDP, in fiscal 1968.

Although the Federal Reserve made some attempts to ward off inflation, it generally accommodated the government’s fiscal policy according to Allan Meltzer’s detailed history of this period published by the St. Louis Fed. Between calendar years 1965 and 1969, annual CPI growth surged from 1.6 percent to 5.5 percent, setting the stage for the Nixon administration’s closure of the U.S. Treasury’s gold window and imposition of wage and price controls. Inflation reached double digits in 1974 and again between 1979 and 1981. Notably, these were also recession years, refuting the fallacy of the Phillips Curve, which depicted a supposed policy trade-off between inflation and unemployment. By the early 1980s, we had ample evidence that ill-considered policies could give us a combination of high inflation and unemployment, known back then as “stagflation.”

This policy mix was also not great for equity investors. The Dow Jones Industrial Average moved sideways during the inflationary period, closing at the same level in December 1982 as it did in January 1966. One lesson from that period was that high interest rates can be bad for stocks.

That may be one reason the Fed remains reluctant to allow interest rates to rise today. Although messaging from the latest Federal Open Market Committee meeting showed greater willingness to normalize interest rates, action is not expected until 2023.

Rate hikes may bring other worries for the Fed in today’s environment. Given the large volume of variable rate mortgages and corporate loans outstanding in the U.S. today, a rise in interest rates could push highly indebted homeowners and companies into bankruptcy, potentially triggering a recession. The federal government would have to roll over its record stock of short-term debt at higher interest rates, ballooning its interest expense and potentially crowding out more popular spending priorities.

But if private capital is to continue participating in debt capital markets, such as those for corporate bonds and bank loans, interest rates will have to rise to compensate them for the loss of purchasing power on their principal.

Although annual growth in CPI fell sharply after 1982, it is not strictly correct to say that inflation was defeated. Except for a few years around the turn of the century, the federal government continued to run deficits, a portion of which were monetized. Notably, the government began running trillion dollar deficits, and the Fed drove interest rates down to near zero during the Great Recession, but CPI growth remained muted.

But CPI does not tell the whole story. Some sectors of the economy have experienced substantial inflation, but they are not fully incorporated in the consumer price index. Home prices, healthcare costs and college tuition all soared in recent decades. Meanwhile, apparel and consumer electronics remained affordable due to globalization and improved technology.

Back in the 1970s, most of the world was not part of the global economy. Eastern Europe was in the Soviet bloc, while China, Vietnam and India had yet to become major exporters. As more low-cost producers of goods and services came online during the 1980s and 1990s, prices were pushed downward (often and regrettably at the expense of American manufacturing jobs). The trend toward developing countries joining the international trading system and producing inexpensive consumer goods is now over. Indeed, the recent increase in protectionism is, if anything, rolling back the wave of international price competition.

On the other hand, technological improvements may continue to shield us from inflation in certain sectors. For example, the displacement of human cashiers by automated check stands might restrain price hikes at the big box retailers, supermarkets, fast food chains and other establishments that can afford to invest in them. Smaller businesses, facing higher wages, may have to try to pass them through to consumers in the form of higher prices. Already in some parts of the country, restaurants are trying to recoup costs without raising prices on their menus by adding various surcharges ostensibly tied to specific costs.

It is possible that inflation is now moving from assets and human-intensive services to consumer products, but we will need several months of additional data to know for sure. Meanwhile, policymakers should be cautious about adding more to the national debt and the money supply.

A version of this column originally appeared on

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