Fascinating Data

Note: this post is far afield of my usual discussions. In the interest of not distracting those who read this blog because I usually discuss web-oriented things, the content of the post is beyond the jump.

Via Mark Thoma, the SF Fed’s briefing numbers look really odd. The inflation expectation numbers look to depend on an extreme version of the commonly held assumption that workers have lost their collective bargaining power, thereby removing the wage/price linkage that caused so much damage in the 70’s. That might be good for “the economy” (as defined by what’s good for bankers), but if true, it seems bad for you and me.

What it means to you and I is that our economy has a chance of beating the rap on the fundamental inability of private markets (bankers) to judge risk accurately only because some percentage of our annual incomes will be shaved off and there’s nothing we can do about it. And that is the good news. Put another way, we’re staring down the last of the Bush Administration’s regressive taxes and we just have to take it. The well-off pay a 17%-ish percent maginal tax rate on investment income, while those in “the productive economy” (the people those stimulus checks are designed to help out) pay well above that on every additional dollar they earn. Of course, it’s basic economics that if you are in a situation in which you spend more of your marginal income than you save, then any tax on consumption hits you much harder than those who can afford to save. So prices increases without attendant wage increases hurt the middle and lower classes, particularly when the price increases aren’t related to “core” inflation. When “core” inflation goes up, it really starts to squeeze asset values, but non-core inflation simply implies that it costs more to buy things like food, fuel, and all of the other daily necessities. While “core” inflation seems a good metric to talk about projected long-term inflation rates and linkages and embedding, its effects aren’t the ones currently being felt by Americans.

Inflation is generically decried most heartily by the wealthy because it hurts them by reducing the real interest rate on savings, i.e. it reduces the return on assets invested. But not all inflation is created equal. The current situation is laying bare the difference between the average person’s concerns about non-core inflation (the price of gas) and economists concerns about asset allocation (what’s the rate of return on investment?). Put tersely: the current bout of inflation is hurting the people who can least afford it and those who can afford it are using the occasion to decry policies which they personally dislike even if their relationship is tenuous to the current trouble. There seems to be a lack of proportionality at work in the public dialog which I find deeply unsettling. Where did our conception of an adversarial press corps go?

The odd take-away is that inflation isn’t so bad when it’s tied to increases in productive output and income for those most at risk and when those increases promote stability, a fact that the “Washington Consensus” missed time and time again in its disastrous large-scale experiments in emerging economies. If those most at risk of income shocks are insulated by very low unemployment rates and a system that allows those in trouble to keep most of their (minimal) wealth in times of trouble (employment insurance, bankruptcy laws that don’t strip people of fixed assets, etc.), then inflation is a tax that hurts the rich more, who incidentally are much more able to cope with such effects.

But inflation like we’re experiencing? It’s of a different sort. Non-core inflation is still in-check, which is good, but headline inflation is hurting those least able to cope at a rate not seen in decades. It’s the last, grandest, “fuck you” of the current administration’s policies to those who need to work for a living. Logic and data suggest that voting for regressive taxes isn’t in my interest, or nearly anyone else’s. Why then does a party looking to cling to power field bumbling fools who stand up for regressive taxation when logic, electability concerns, and basic math skills make plain how foolish that really is?

I’m a “right tools for the job” kinda guy. John McCain’s economic and fiscal policy proposals certainly are making him look like a tool, but absolutely the wrong one.


  1. David
    Posted July 15, 2008 at 6:03 pm | Permalink

    Whatever you may think of the current fiscal policy and tax structure, it’s not responsible for the inflation that we see. You’re essentially decrying that commodities prices are going way up, and emerging economies have started to strain supplies. This is not something that happened over night, and not the Bush administrations fault, no matter how stupid they are. Sure, you could say that wasted 8 years not preparing for this, but you could also accuse the Clinton administration of the same thing.

    Whatever progressive tax policies you favor, they are not going to turn back inflation anymore than drilling for oil off the coast is. If you tax more disposable income away from the wealthy, they make consume less, but it isn’t going to make a dent in worldwide demand.

    And while revenues from progressive taxes could be used to subsidize those effected by inflation or invest in long term programs to increase supplies, either through efficiency gains or scaling up, it again, isn’t something that can be solved overnight.

    Ironically, regressive taxes do help, because they hit consumption across the largest swath of population. If you want people to drive less, to waste less electricity, one way of doing it (admittedly not optimal, not desirable) is to tax their activities, either through explicit government taxes, or implicit ones like inflation.

    At worse, you could blame the Bush administration for massively increasing the budget deficit, which is closely linked to the trade deficit, by lowering national savings. The larger trade deficit devalues the dollar, which causes increased demand for US assets and good/services, driving up prices. Due to the nature of the dollar as an international reserve currency, the Fed has been exporting inflation for the last several presidential administrations, and all those foreign dollars will eventually be looking to be cashed in as the dollar declines, bring the inflation back home to roost.

    The problem with people on the left and the right, is they always search for short term blame, and to tie blame to their opposition. The reality is, there are big structural shifts happening in the world today that are out of the control of fiscal or tax policy fixes.

    I’m voting for Obama, but if you think even 8 years of solid Democratic rule, and progressive taxation is going to fix this, I hope you’re right. Unfortunately, I don’t see the progressive OECD countries fairing that much better in the face of massive commodity inflation.

    It’s simply not an issue of Republicans vs Democrats. Both parties have been complicit in letting the situation fester. When times are good, politicians don’t want to enact policies which could rock the boat, and when times are bad, they don’t have the fiscal freedom to enact long term fixes.

  2. Posted July 15, 2008 at 6:20 pm | Permalink

    With an excerpt line like:

    Note: this post is far afield of my usual discussions. In the interest of not distracting those who read this blog because I usually discuss web-oriented things, the content of the post is beyond the jump.

    I had no choice but to click on the “…read more” and see what it was you felt was left field. You could have written a post about growing roses, making coleslaw or cloud formations in the Austrian Alps and I’d have read it with a hook like that hanging. ;-)

  3. Posted July 15, 2008 at 6:55 pm | Permalink

    hey David:

    So I’m not decrying the rise in commodity prices. It had to happen as we encourage the rest of the world to join us in prosperity, and would have happened more precipitously had we decided to end our destructive farm subsidies. That burden is yet to come, and there’s no hiding from that. What hasn’t been a foregone conclusion, however, is that we would undermine our own stability to prop up the illusion of propsperity well beyond our means and spend that capital on things which don’t contribute to the productive economy. Energy policy comes to mind, and not in the simple-minded “oil is a global commodity, what could we have done?” sort of way. This is about rates of change, and we have seen what 8 years of sticking your head in the sand (or worse) can do. I’m not pegging this on any one party, though. Of course the Clinton administration deserves its share of blame. Greenspan promoted at least one of our dual asset bubbles under a Democratic administration, and his “stewardship” allowed much of the housing asset bubble to form. The best we’ve had so far has been Ben Bernanke and Henry Paulsen who have at least seen to it that counter-cyclical policies continue and that outright failures of large institutions aren’t permitted. Bernanke and Paulsen are the appointees of a Republican administration, so there’s no partisan bent to this IMO. It is painful to have to watch them pretend not to vehemently disagree with the ideological bits of the administration, though. Can’t wait to see what kind of hearing the Republicans in congress will give their inevitable proposals for more regulation.

    It’s curious to me that you’re suggesting that contraction of the economy (the exact forms of austerity promoted by conservative economists) via reduction in productive use of capital is a positive side benefit. We’ve lost our stability, so now we should dispense with growth? I suppose that shrinking the economy is one way to deal with the deficit and a weaker currency, but I’m not personally looking forward to the result of such a policy prescription. It has been tried on many smaller economies with disastrous consequences. So long as the US dollar is the international reserve currency, we can still get out of this without too much pain (lower growth rates over the next N years, etc.). McCain’s economic policies appear to have so little grounding in the reality-based world, though, that I don’t see much of a way for a McCain presidency to not result in further devaluing of the currency and the eventual replacement of the US dollar as the international reserve currency. That is where the policy differences can really hurt us right now: a lack of credibility in the next president’s fiscal policies undermining the current hints of competency by Bernanke et. al. Ugg.