Rand Paul and John Stossel

Most politicians speak in bumper sticker slogans. As a result, it isn’t very often that a politician shows up who is conversant in political philosophy, economics and public policy. Then again Senator Rand Paul (R – KY), an intelligent and thoughtful man, is not a typical politician. 

Senator Paul, an ophthalmologist and politician, has strong libertarian leanings. Straightforward about his convictions, you won’t find him resorting to bland Senate speak to avoid discussion of contentious issues. Which is one reason why he enrages his detractors who would rather silence differences of opinion. Especially ones that are well thought out, which his tend to be. 

Recently Paul sat down for a half-hour interview with John Stossel to discuss socialism, inflation, mandates and his book “The Case Against Socialism”. The interview, shown below, is well worth watching. 

JFB

John Stossel Interviews Rand Paul

The Jawbone of an Ass

[The White House] is considering whether to escalate an attack on parts of corporate America over rising consumer prices, according to an administration official and three people with knowledge of the discussions who spoke on the condition of anonymity to reflect private meetings.

—The Washington Post, Front Page, November 20,2021.

As surely as night follows day, the Biden Administration, a breeding ground for economic illiteracy, is once again looking for someone to blame for its policy errors. The latest search is necessitated by a sharp rise in inflation. 

Up until recently the Biden Administration denied the existence of an inflation problem. When that didn’t work they, along with the Fed, erroneously described inflation’s rise as merely transitory. Now transitory is being redefined upwards to a date uncertain. 

Funny thing though, the rise in prices has been relentless and broad based.  According to the Bureau of Labor Statistics (BLS):

“The monthly all items seasonally adjusted increase [of the Consumer Price Index] was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors. The energy index rose 4.8 percent over the month, as the gasoline index increased 6.1 percent and the other major energy component indexes also rose. The food index increased 0.9 percent as the index for food at home rose 1.0 percent.” 

In response to the bad news, the Biden Administration has decided to jawbone corporate America. After all, that approach worked so well for Lyndon Johnson, Richard Nixon, Gerald Ford and Jimmy Carter, none of whom served 2 full terms. Moreover since the rise in inflation has become broadly based and embedded in the minds of consumers, Mr Biden will apparently have to jawbone corporations in every sector of the American economy. 

Which will all have precisely the same effect: Zero. 

The fact is that the rise in inflation is directly attributable to (1) policy actions the White House has taken and (2) policy decisions implemented by the Fed that the White House has cheered on. This year alone Congress, at the behest of the White House, has continued to spend money with gusto—and the Fed has accommodated the exercise by purchasing about half the Treasury bonds used to finance the enterprise. 

The result is a huge increase in the money supply and consumer demand. At the same time the Biden Administration and its allies have constrained the production and distribution of  goods and services. For example, the Administration is at war with domestic producers of fossil fuels, but begs OPEC to produce more. Mr. Biden’s nominee for comptroller of the currency, Cornell Law Professor Saule Omarova, has said that she wants to “…basically get rid of these carbon financiers…by [starving] them of their source of capital”. 

And then there are the executive orders the Administration is issuing that will increase regulatory costs on producers. Those costs will inevitably be passed on to consumers. Not only that,  Mr Biden has decreed that regulators no longer even need be constrained by cost – benefit analysis. Regulators may rely on aspirational but vaguely defined goals when imposing new rules on businesses. How’s that for increasing the costs and risks of doing business, not to mention handing out favors to friends?

So the net of it is that the Biden Administration is busy increasing demand and reducing supply. Any freshman student in economics will tell you what will happen as a result: Prices will rise. There isn’t any mystery here. 

It is, or should be, crystal clear that the Biden Administration is (1) simply  trying to change the subject, (2) remarkably illiterate in matters of basic economics or (3) both. My money is on 3—both.  

What is truly unfortunate is that the Biden Administration actually seems to think, despite a mountain of evidence to the contrary, that the government is actually capable of micro-managing the $23 trillion U.S. economy. But what they have actually demonstrated beyond all reasonable doubt is gross incompetence, even in executing legitimate governmental functions. 

Under the circumstances, the idea that the Administration is going to jawbone prices lower is simply ludicrous. 

At the moment the U.S. has issued over $22 trillion in outstanding (and headed higher) publicly held debt. A lot of that debt is held by foreign governments, including China. Which also means that those bond holders also hold dollars. That doesn’t leave a lot of room for policy error, a consideration which seems not to have occurred to the Biden Administration. 

A loss of confidence in the U.S. would be devastating. High and sustained inflation could be the spark that provokes such a loss. In turn that would likely cause a run on the dollar as it did when Jimmy Carter was President. And the performance of President Biden, whose Administration increasingly resembles that of Mr. Carter’s with each passing day, isn’t helping any. The U.S. Treasury may be a lot closer to the edge of a financial cataclysm than the public thinks. 

JFB

Made in Washington DC: Inflation

An impressive list of problems has descended on the Biden presidency. Almost all of them have been brought about or exacerbated by—Joe Biden. Not only that, the Biden method for dealing with them is to (1) insist that the problem doesn’t exist, and then insist that (2) enacting his agenda is just what is needed to remedy the non-existent problem. 

Take inflation. This morning the Bureau of Labor Statistics (BLS) reported that year-over-year inflation surged to 6.2%, the highest it has been in 30 years. The surge in inflation is no statistical fluke. It simply continues the trend that has been in train since January of this year. Moreover the rise in inflation is accelerating and becoming more broad based. 

According to the BLS report:

“The monthly all items seasonally adjusted increase was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors. The energy index rose 4.8 percent over the month, as the gasoline index increased 6.1 percent and the other major energy component indexes also rose. The food index increased 0.9 percent as the index for food at home rose 1.0 percent.” 

Back in July, Biden was dismissive of the inflation threat (See #1 above in paragraph 1). Bloomberg reports “President Joe Biden dismissed concerns that the U.S. would experience persistent inflation as the economy emerges from the pandemic…” He went on to say “There will be near-term inflation” because the economy is picking back up, [He] said Wednesday night at a CNN town hall in Cincinnati. But most economists believe that “it’s highly unlikely that it’s going to be long-term inflation that’s going to get out of hand,”. 

Well, here we are 4 months later and inflation is becoming both pervasive and persistent. But not to worry says President Biden.  Enacting his agenda is all we have to do. (See point #2 in the first paragraph). 

Consider for example the musings of Transportation Secretary Pete Buttigieg, only one of the many incompetents who serve in the Administration. In a breathtaking display of economic illiteracy, Buttigieg actually said that, among other things, paid family leave is part of the Biden Administration’s tool kit to fight inflation. He went on to say that passing the Biden agenda would bring inflation down.

Said Buttigeig:

“Because if we can act to reduce the costs that Americans face: The cost of childcare, the cost of schooling, cost of access to pre-K, just literally putting more money in people’s pocket with the child tax credit that represents thousands of more dollars a year for most families with kids. That’s something that can help at a time when we see other issues like what’s going on in global oil markets increasing the prices people face,”.

Nothing like stoking up demand to reduce price pressures.

Never one to miss an opportunity to mutter a non sequitur, President Biden headed off to Baltimore to argue that the spending (in the $1 trillion infrastructure bill) “…can strengthen global supply chains to help lower prices, reduce shortages and add union jobs…”. How exactly this miracle is supposed to happen was left unstated. 

In any event, Mr. Biden suddenly decided that addressing rising inflation (that didn’t exist until this morning) is a “priority” for his administration.

We are now about at the stage where the kid in the crowd points out the obvious, namely that the emperor has no clothes. The fact is Mr. Biden and his advisors, with the exception of Treasury Secretary Janet Yellin, are clueless as to why the inflation rate has taken off, and why it is liable to be persistent. 

Secretary Yellin has already signaled that she is a team player, so it is unlikely that she will spoil the party by telling Mr. Biden that the problem is largely his fault along with the progressives that have been leading him around by the nose.   

Quite simply, rising prices—inflation—is the result of too much money chasing too few goods. There is too much money floating around for 2 reasons. The first is that the Fed has been recklessly printing money for going on 2 years.The second is that the Fed has kept short term rates near zero while buying an astonishing amount of Treasury debt. As of July 2021, the Fed held $8.3 trillion in Treasury securities, an increase of $3.6 trillion from March of 2020. 

The result has been to blur the line between fiscal and monetary policy thus drastically reducing incentives for fiscal sobriety. Mr. Biden and Congressional progressives have, not surprisingly, taken this as a green light and have ramped up spending on Bernie Sanders wish list of progressive causes. 

Printing all that money stokes demand.  At the same time, the supply side is constrained. To be sure, some of the supply side is hindered by COVID effects. But plenty of the constraints are the result of policy choices. For example, President Biden shut down the Keystone Pipeline in one of his first official acts as president. He is considering doing the same to the Michigan pipeline. 

World oil and gas prices have exploded and now the President of the United States is reduced to begging OPEC to ramp up production. All this while he is deliberately reducing domestic production of U.S. energy. 

Similarly, the ports on the coast have been backed up for months. One of the reasons is union rules that restrict the time they can be open. Another is that they are not nearly as automated as they should be because that would threaten union jobs. And we can’t have that. In fact the infrastructure bill—really an exercise in corporate welfare—spends money not to automate, but to subsidize the use of more manpower. 

The list of policy errors is almost endless. But the point is that the inflation problem we most assuredly have didn’t just fall out of the sky. It is the result of policy error. And those policy errors are likely to continue because the progressive wish list has a price tag that extends to infinity. 

The progressives are quite clear that they mean to transform the structure of the U.S. economy. Which means command and control from Washington, D.C. 

Strap in because it is going to get worse before it gets better. 

JFB

Janet Yellin Scores a D Minus

Ignorance and enthusiasm make a dangerous combination. It’s even worse when people who should know better nevertheless agree to make wildly implausible sales pitches designed to justify foolish policy proposals. In the end a once respectable reputation gets dented and maybe shattered. 

Enter Janet Yellin, PhD. Ms Yellin earned her undergraduate degree in economics at Brown University; she earned her MA and PhD degrees in economics from Yale University. Before serving as Chair of the Fed, and then as Treasury Secretary, she worked as a professor at UC Berkeley, one of the nation’s top schools. 

Janet Yellin

At Berkeley she had a joint appointment at the Haas School of Business and the Economics Department. She was the second woman at Berkeley to receive tenure (1982) and the rank of full professor (1985).  She has also served as a member of the National Science Foundation’s panel in economics and as a fellow at the Brookings Institution. 

And yet, in promoting the Biden Administration’s “Build Back Better” proposal she came up with this doozy:

“It will boost the economy’s potential to grow, the economy’s supply potential, which tends to push inflation down, not up,” she said. “For many American families experiencing inflation, seeing the prices of gas and other things that they buy rise, what this package will do is lower some of the most important costs, what they pay for health care, for child care. It’s anti-inflationary in that sense as well.”

Let’s unpack this remarkable series of assertions, provided without evidence, as the Washington Post used to say (correctly) about Trumpian policy claims. First: the Biden package will “boost the economy’s potential to grow…which tends to push inflation down”. Second, the package will subsidize consumption of health care and child care, which she claims is anti-inflationary in that it reduces consumer costs.

I would be willing to bet that a student at Berkeley who made those preposterous arguments in a class taught by Professor Yellin would earn a solid D-. Consider: The entire thrust of the Biden proposal is to raise the tax burden on the most productive people in the country in order to stimulate consumption by the least productive segment of the population.  

After all, raising taxes on high income earners reduces the savings pool and therefore investment. That reduces the potential supply of goods and services. Moreover, even if it were true (which it manifestly is not) that the supply of goods and services would be increased by the plan, that eventuality is years down the road. The inflation problem is here now.  

Let’s take a look at the demand side. How in the world does subsidizing the consumption of child care and health care services  bring down costs for those services? If I subsidize Mary thus lowering her costs, I have to charge somebody else thereby raising those costs. All else equal, I have not lowered costs, I have merely shifted them. Consequently prices will not accurately reflect production costs and capital will be misallocated. Capital  misallocation reduces efficiency; as a result prices tend to be higher than they would otherwise be.

Leaving aside theory, there is history here. When the Affordable Care Act (ObamaCare) was passed in 2010, the average employer cost for family health insurance coverage was $9,773. By 2020 it had risen to $15,754; an increase of more than 60%. Average insurance costs per worker rose from $3,997 to $5,558; an increase of just under 40%. According to Kaiser Permanente, as of July 2020 the average cost for health care insurance is $21,342. About 75% of that is paid for by the employer, which is another way of saying that the worker’s cash wages are reduced by that amount. 

Some statistics on health care costs can be found here, here and here.

To be fair, there is still a vigorous debate over the true impact of ObamaCare on insurance premiums. Some premiums went up, some went down—after accounting for subsidies. Actually the system is not really insurance at all. Instead it is an after-the-fact payment system coupled with income transfers and increased taxes.  That said, ObamaCare was marketed as a way to reduce premiums, and that  it did not do by any stretch of imagination. 

So there is no reason for anybody to take seriously Ms. Yellin’s assertion that throwing more federal subsidies at health care will lower costs. It will just redistribute them, and probably in an inefficient way. 

Similarly, subsidizing child care will not lower costs, it will simply transfer those costs. There is no reason to suppose that federal subsidies for baby sitters (which is what we are really talking about here) will increase economic productivity, much less reduce inflation. 

Ms. Yellin certainly knows that what she is arguing is transparent nonsense. She is probably just repeating talking points dreamed up by some communications flak in the White House.  But she is doing President Biden no favors. The country and Mr Biden would actually be much better off if she were to talk some sense into him. But that, unfortunately, does not look like it’s going to happen. Apparently it is Bernie Sanders and Elizabeth Warren et. al. who have the President’s ear.

JFB

Watch the Bond Market

It bears mentioning that not only were the grandiose goals of the Obama Administration never met, some Obama policies actually  produced results that were the opposite of those promised. Remember, for instance, that if you liked your doctor you would be able to keep your doctor? Or the promise that the cost of health insurance for the average family would decline about $2,500? 

Well we know how that worked out. Health insurance costs rose substantially, and plenty of people lost their doctors. The same story can be told about pretty much everything Obama touched. A sane person would go back and check the assumptions backing  the failed policies. 

But we are not talking about sanity. We are talking about the Biden Administration. They argue that the policy failures of the Obama Administration were not failures at all; the policies just didn’t go far enough. And the Biden Administration, we are told, has no intention of repeating that mistake. They are going to “go big” and repeat the failed policies of the Obama Administration. Except bigger. 

Hence the recently passed spending blow out, with more to come. 

Fans of the Democratic spending spree keep on insisting (1) that the U.S. economy is weak and needs stimulus and (2) the U.S. needs to spend additional huge amounts of money to get the population vaccinated against Covid-19. Further, they argue, interest rates are  exceptionally low so the cost of financing of all this spending is negligible. 

However, economic growth has been far stronger than almost anyone predicted. Going forward, Bank of America estimates growth for 2021 around 6% and 5% for 2022.  Similarly, the Fed projects GDP growth of 6.5% for 2021 with the unemployment rate dropping to 4.5%. Democrats surely know this, but in the spirit of never letting a crisis go to waste, they are going to spend every dime they can get their hands on, and then some.

While the Democrats claim this is needed stimulus, it is manifestly not so. The party simply passed a progressive policy wish list on a strict party line vote. 

Here it is also worth noting that as far as Covid relief is concerned, only about 5% of the spending is actually directed at immediate Covid relief. Not only that, the bill does not allow any states that receive federal money to reduce state and local taxes. This provision will probably be thrown out as a violation of the 10th amendment’s prohibition against the Congress commandeering state resources. Not that the U.S. Constitution holds much sway with progressives.  

What is truly interesting about all this is the reaction of the bond market. Net spending by all levels of government (federal, state, local) is going to amount to about $9 trillion this year. From February 2020 to February 2021, the national debt held by the public increased 25% rising from $17.4 trillion to $21.8 trillion. And that’s before the just passed $1.9 trillion in additional spending, all to be financed by borrowing. 

Responding to all this, the bond market has sold off substantially with some long rates tripling from their lows. The yield’s of both 10 year Treasury notes and 30 year Treasury bonds have risen more than 1 percentage point since the summer to 1.65% and 2.42% respectively. The auction of 7-year Treasury notes held on February 25, 2021 came close to failing.

If the Democrats continue with their irresponsible behavior, and all signs are that they will, it may not be Republicans they have to worry about. It may just be the bond market. If investors lose confidence in the willingness of the United States to tame its finances and control inflation, they will not be seduced by happy talk from the administration, much less the utterances of ignoramuses like Senators Elizabeth Warren and Bernie Sanders. 

Undisciplined fiscal policy, monetized by the Fed, presents the prospect of a collapsing dollar, rising inflation and soaring long-term interest rates. That’s what we experienced in the 1970s. It could happen again. 

JFB

The Enduring Fantasy of the Moderate Democrat

Congress is poised to pass President Biden’s spectacularly misnamed $1.9 trillion Covid Relief and Recovery Act. The bill will pass on a strict party line vote. And there is nothing moderate about it. Not only does the bill contain relatively little that actually addresses Covid-19, it will almost certainly delay the recovery, or at least make it less vigorous than it might have been. 

The reason is fairly simple. The bill, which essentially represents the enactment of a progressive wish list, actually pays people not to work. For instance, by adding $300 per week to State level unemployment benefits Congress made sure that plenty of people get paid more by staying home than by going to work. 

Not only that, the package is going to be financed by the issuance of more Treasury debt which the Fed is going to buy. In effect financing will be accomplished by monetizing the debt the way they do in other advanced economies. Like Zimbabwe for instance. 

Lest anyone think this particular $1.9 trillion package of pork is either sensible or a one-shot, it is worth thinking about a few things. First, Senator Bernie Sanders (D. Rolling Stone) is now chair of the Senate Budget Committee. He has already promised an additional $2 trillion for infrastructure spending. Second, the bill provides $86 billion in relief to bail out union pension funds on the brink of insolvency, thus divorcing performance from reward. In addition, they are providing a couple of hundred billion in relief to state and local governments even though some, like California, have experienced large increases in tax collections. Third, most of the $1.9 trillion will flow to government unions, a portion of which will find its way back to the coffers of the DNC. 

Thus far over the last year the Congress has appropriated something on the order of $3.4 trillion to Covid relief. Add this latest bill and the total comes to around $5.3 trillion. To put this in perspective, Covid relief, both real and in name only, now amounts to something like 25% of US GDP. Altogether the CBO now estimates that Federal outlays for 2020 will be around 32% of US GDP, up 11 percentage points from 2019. Public debt is projected to rise to 98% of GDP in 2020 and continue to rise through 2030 at which point it is expected to rise to 109% of GDP. 

One of the arguments that the bill’s champions advance is that financing all this spending won’t be a problem. The reason often cited is that interest rates are at historic lows which makes it relatively painless to borrow. There are lots of reasons why this is simply incorrect. 

The first is that market interest rates have risen substantially since that argument was first tested out. Back in August of 2020 the 10-year Treasury note yielded about 0.5%. Since then the rate has more than tripled to slightly over 1.5%. Second, if now is such a great time to borrow, private firms and individuals should be able to take advantage of the opportunity without being crowded out by government borrowing. Third, financing projects by borrowing doesn’t make them costless. It just shifts the time when the bill has to be paid in full. 

Fourth, it is worth noting in passing that there is a great con going on here.  Basically this gargantuan spending spree is not about the acquisition if goods and services. It just represents an enormous transfer of income from disfavored constituencies to favored constituencies. That is, to put it mildly, not a productive use of capital. Finally, by expanding its balance sheet to slightly over $7 trillion to accommodate the spending blowout, the Fed is planting the seeds of an upsurge in inflation, perhaps the cruelest tax on the poor that has ever been invented. 

It bears repeating that this bill is being passed on a strict party line vote. It will not receive a single Republican vote. It will receive the votes of all Democratic Senators and all but a couple of Democratic Congressman. It is blatantly partisan and there nothing moderate about it. 

The fantasy that there are moderate Democrats is belied by their actions. And there is more to come. 

JFB