Inflation is dropping nicely but won’t reach 2% this year. Technical issues in calculation of housing costs which drives inflation a year later than reality. Government spending / budget deficit in a full-employment economy pushes inflation. Physical goods prices are declining. Services prices are stickier, with a smaller wage-price spiral effect. Global economy is weaker than the US, which is helping. Independent Federal Reserve is holding interest rates high longer than required, making up for its prior slow increase in interest rates.
Fiscal and monetary policy matter. Other industry level policies can greatly reduce inflation. The president and congress have not responded to my early 2022 advice!
November, 2022. Inflation fears are high. The data is positive, but mixed and not enduring enough to be confident that inflation is falling, not accelerating.
Corporations took advantage of supply chain disruptions and shortages to increase prices quite dramatically. Prices had been smooth for a decade. Firms increased them quickly. Prices have NOT continued to increase. They have dropped a bit, especially for goods.
I participate in our political, economic, social, and spiritual communities.
I respect the innate human dignity and rights of my neighbors.
I accept that we each think, feel, and act differently.
I work to improve my participation, compliance and civility skills and encourage others.
Candidate Pledge
In Carmel, we seek to promote an environment of civility defined as the disposition to respect every human being we interact with as our moral equal and worthy of respect. Therefore, we encourage any candidate seeking public office and asking the citizens of Carmel for their vote, to agree to the following tenets of civility.
The Carmel Civility Project: Candidates Pledge
As a candidate for public office in Carmel, I hereby commit to the following five essential tenets of campaign conduct:
1. Civility and Respect: I will maintain a respectful demeanor towards everyone, regardless of our differences, and foster an environment of open-minded dialogue.
2. Integrity and Truthfulness: I promise to uphold truth and transparency in my campaign rhetoric and actions, swiftly correcting any mistakes should they arise.
3. Positive Focus: My campaign will highlight my vision and policies, eschewing negative attacks on my opponents’ character or record.
4. Informed Discourse: I pledge to inform citizens accurately about my platform and engage in constructive discussions to promote understanding and educated voting.
5. Democratic Process and Accountability: I vow to respect the democratic process, accept its outcomes, and encourage my supporters to engage in campaigns with integrity and decency in support of these principles.
By taking this pledge, I affirm a dedication to dignified campaigning not just out of respect for each resident of Carmel, but also in admiration for the institutions we cherish in our community.
I encourage us to always “look at the big picture”: across time, nations, industries, occupations, institutions and political views when considering the “state of the economy”.
Recent surveys indicate that many (partisan) Americans believe that the economy is in recession, the stock market is down, and unemployment is up (false). The US economy continues to lead the world out of the pandemic driven recession. I’ve documented the tremendous strength of the US economy in GDP growth, job creation, wage growth, profit growth and wealth creation. Today I’d like to focus on entrepreneurship and new firm creation, where the US once again leads the world.
The US economy led the world in creativity, technology, job growth and firm creation in the 1990’s as it recovered from the global economic challenges of the late post-war era. The deregulation and technology driven changes produced benefits into the “oughts”, the first decade of the new century. Unfortunately, the dynamic pace of new firm creation based on economic, trade, relocation and technological changes did not strongly continue in the first 20 years of 21st century. New firm creation lagged. Larger firms held onto jobs as they consolidated industries and protected their positions. Venture capital firms facilitated the most successful new companies to quickly expand market share and vanquish weaker competitors. Many Schumpeter disciples worried that the engines of “creative destruction” had lost their momentum and effectiveness.
The Great Recession of 2007-10 destroyed wealth, slowed economic growth, job creation and new firm starts. The Obama-Trump expansion was longer than expected by historical standards, but slower growing. Many critics and commentators concluded that the US had “lost its entrepreneurial spirit”.
New firm creation since the pandemic has basically been 50% higher than before the pandemic.
This is an AMAZING and unexpected result for the US. During the pandemic, economic activity ground to a halt. Supply chains stopped functioning. People stayed home. 20 million jobs were lost. 1 million lives were lost in the US. Many firms closed. Global trade and military tensions increased. Trust in governments, corporations and other institutions was damaged. In 2020, there was no reason to believe that the pandemic would be medically controlled soon, or that economic growth would quickly rebound and resume its trend growth rate. But it did!
The IRS tracks new firm tax license applications. Most firms never really do business, but the ratio of initial applications to real firm creations has been stable through history. The Census Bureau has determined which subset of IRS license applications leads to real new firm creations. Both measures show the tremendous 50% increase between the pre-pandemic and post-pandemic eras.
As Wendy’s Clara spokeswoman exclaimed long ago, “show me the beef”. Did the increased rate of tax applications during 2021-22-23-24 result in new firm creation?
The initial surge in new businesses did NOT include the IT or manufacturing sectors which look ready to benefit from AI and government investment policies. Firm creation should continue at its record pace for the next 2-3 years.
Why/how did this happen? US economy did not see wealth destruction during the pandemic as occurred in the Great Recession. Bipartisan government funding during the pandemic protected small businesses and individuals. The US labor market was strong before the pandemic and recovered very quickly to full employment with high quit rates, high job openings, low layoffs, wage growth, high labor force participation, and new immigrants included. There was no “credit crunch” destroying businesses. Venture capital firms were flush with capital, able to invest in the very best prospects. The US economy was mature as an “information age” economy, identifying opportunities. The virtual economy was mature, allowing individuals with minimal technical skills to easily create new businesses, market their services, and engage skilled resources. Individuals experienced being out of work and at home and determined that they could create new firms from home.
The Biden administration claims that its various public policies have leveraged the “natural” rebound.
Despite doomsayer predictions for the last 20 years, the USA remains the world’s largest economy. China’s population, productivity, property, politics, energy, trade, innovation and middle-income transition challenges have undercut past predictions of its inevitable world economic leadership.
One way to get a tangible sense of the USA’s economic size and dynamism is to compare individual states with other countries. Most of us have read articles highlighting the size of California, Texas, New York, Florida or Illinois as standalone economies. They would currently rank globally as economies numbered 9, 14, 16, 25 and 30, lining up with France, Spain, Saudia Arabia, Vietnam and Argentina in the pecking order. Their men’s soccer teams are ranked 2, 8, 53, 115 and 1 in the world. The US soccer team is ranked 11th and after its recent 5-1 pasting from 12th ranked Colombia it is sure to fall several places.
The real economic strength of the US is shown by the next 27 states. Collectively their GDP is as large as India. These 27 states match up one by one with the next 36 states in the global rankings. The 27 matched countries are each proud nations. There are surprises throughout this listing. UAE 33rd largest country? Romania 34th largest? Morocco 56th largest? Qatar 60th largest? Dominican Republic 62nd largest? New Zealand 63rd largest?
Even bigger surprises arise from the pairing of US states to their global equivalents. Raise your hand if you predicted that these US states are the economic equals of their global nation partners: Georgia and Switzerland, Massachusetts and Sweden, Virginia and Ireland, Maryland and Ukraine, Arizona and Portugal, Indiana and Denmark, Minnesota and Norway, Missouri and Greece, New Jersey and Singapore, Alabama and New Zealand.
The remaining 18 US states are not so large. Their combined GDP is about the same as our neighbor Canada, which ranks 15th overall by GDP, about the same size as Spain or Texas.
On the other hand, the US soccer team was ranked 11th globally. Three of the top 5 matching countries of Argentina, France and Spain deliver 1st, 2nd and 8th FIFA ratings. The middle 27 states matching nations provide another 8 world-class soccer teams in Belgium (3), Portugal (6), Morocco (13), Switzerland (19), Denmark (21), Ukraine (22), Austria (25) and Sweden (27).
The US is an economic colossus that continues to grow faster than the rest of the “developed countries” and maintains its global economic lead. We don’t normally think of Tennessee, Colorado, Michigan, Arizona, Indiana, Minnesota, Maryland and Missouri as global economic powerhouses, but they would EACH rank in the top 55 countries of the world as standalone economies.
Of 10 largest economies in the world, the US has the 3rd highest GDP growth rate at 3.0%. Less developed China (5%) and India (8%) lead the way. The median growth rate is 1.2%. The UK and Germany have negative annual growth rates (recession)! The US has the second lowest unemployment rate at 3.8%, only bettered by Japan at 2.6%. The median is between China at 5.2% and Canada at 6.1%. France and Italy record 7.5% while Brazil and India trail at 8%.
Despite its high wages, high standard of living and highly valued currency, real dollar US exports exceed the pre-pandemic level.
Real dollar imports have returned to their growth trend level, allowing US consumers to take advantage of the differentiated global economy’s strengths.
The misery index, the sum of the inflation and unemployment rates, is down to 7% and trending lower, materially below the 8% average of this century.
US inflation reached 8-9% in 2022 and has fallen to 3%. The “stickiness” is half caused by the lag in housing and rental prices in the index and half due to the continued high 6% federal government budget deficit as a percent of GDP.
There is nominal inflation or actual deflation in most sectors of the US economy today!!!!
On average, the US economy has been adding 2 million new jobs per year for 14 years. 28 million jobs. This is an amazing result.
During the same period, 12 million more people have retired.
The unemployment rate is at a 50-year low. When I was studying economics in 1974-78, there was a big debate about 5% becoming the lowest possible “structural” unemployment rate possible without escalating inflation. 1997-2007 established that a 4.5% to 5.0% unemployment rate was possible. We raced back up to 9% during the Great Recession. The 35-year average was 6.5%. We experienced 3 years of sub-4% in 2017-19 as economists claimed that this was simply impossible. Unemployment rates are still below 4%.
The Black unemployment rate has been chopped in half, from 11% to 5.5%.
The demand for labor remains high. Job openings peaked at 7.5 million before the pandemic. Job openings remain 20% higher at 9 million 5 years later.
The core labor force participation rate has rebounded from the pandemic reaching a level last seen in 2008.
10% fewer black men participated in the labor force between 1973 and 2013. Participation is now solidly increasing.
Real wages stagnated from 2000-14. They have increased by 10% since then.
Real GDP per capita continues to grow.
If you’re a homeowner, the recent one-third increase in home values is a windfall. If you’re a prospective buyer, housing is much less affordable.
US stock market values are up 50% in 5 years.
Coincidentally (?), corporate profits are up 50% in 5 years.
New business creation increased after the pandemic surpassing the pre-pandemic level and exceeding the pre-Great Recession level. Start-ups typically account for all job creation and ensure competition in product and service markets.
Overall productivity growth in the last 5 years has been the same as in 1973-1990 and 2007-19. In recent quarters productivity has begun to increase at a higher rate and many commentators believe that AI will drive productivity at a higher rate for the next 20 years.
The US has achieved energy independence, doubling its production of natural gas in 20 years.
Renewable energy accounts for 22% of US energy generation.
US manufacturing employment has increased by 15% since the Great Recession. It is higher than before the pandemic despite the increase in real median wages and the increase in the value of the US dollar.
Net farm income has doubled since before the pandemic.
We have one-third more voluntary retirees in 2024 versus 2014.
Those retirees are receiving significantly higher incomes.
Retirement assets have increased by 50% in the last 10 years.
US citizens pay very low taxes compared with their developed nation peers.
Summary
The US economy recovered from the uncertain pandemic period faster than other countries due to the combination of very loose fiscal and monetary policy. The fiscal policy boost was bipartisan. The monetary policy boost was nonpartisan. As the strength of the US recovery became apparent by the end of 2021, both Congress and the Federal Reserve Board should have reduced their stimulus levels. The FRB adapted slowly and increased rates. Congress and President Biden have not adapted.
The US economy is experiencing an extra year of excess inflation due to these actions.
It is important to look at the long-run trends and many indicators of economic health. Monetary policy in an independent Fed is effective. Fiscal policy is ineffective. Inflation is higher than ideal.
Let’s list the positive economic indicators. GDP growth, US dollar value, stock market value, exports, employment, retirees and incomes, unemployment, job openings, labor force participation, home values, corporate profits, startups, productivity, energy independence, green energy, manufacturing employment, farm incomes, income equality, poverty, generational progress, and tax burden.
The US economy continues to deliver very positive outcomes for our country. President Biden could do better on reducing the federal budget deficit by increasing taxes or reducing expenditures. Overall, his policies have allowed the economy to continue to deliver benefits.
Last July, I predicted that inflation would be “near 2% by the middle of 2024”. That is not going to happen. Let’s look at the components to assess the last year and the likely future.
Year over year inflation rate peaked at 8.6% in 2nd quarter of 2022. It was more than cut in half at 4.0% a year later in the 2nd quarter of 2023. The last 2 quarters have been 3.25%. The “easy work” is complete. The “hard work” remains.
More volatile Food and Energy prices do not explain the continuing 3%+ inflation rate.
We have enjoyed energy price deflation for 3 quarters.
Food consumed at home prices have been nearly flat for the last 2 quarters after the 12-13% inflation during 2022.
The price of food consumed away from home continues to rise at 4-5% annually. A tight labor market has increased staffing costs for restaurants. High food input costs taught them to better manage their menu prices. Many restaurants went out of business during the pandemic. Restaurants, large and small, lost money during the pandemic and are fighting hard to recover these losses. Following the lean pandemic years consumers have largely returned to their habits of eating out. This is a business sector where high aggregate demand driven by government deficit spending is creating inflation. It is not the “wage-price spiral” of the 1970’s in a manufacturing intensive economy but it is a similar situation in our retail-intensive economy.
We have enjoyed deflation in durable goods prices for 5 quarters as US and global manufacturers realigned their supply chains with more predictable demand patterns.
Nondurable goods inflation has been below the 2% benchmark for 4 quarters.
The broadly defined “services” sector at 5-6% inflation remains a stubborn problem area. It contains a number of sub-sectors with very different market conditions.
Medical care inflation above the overall inflation rate has been an issue for decades, but it has averaged just 1% for the last 5 quarters.
Transportation services prices have increased by 10% annually. This includes public and private transportation. Public sector transportation is attempting to recover from the pandemic driven decline in ridership. Private rail and truck carriers were disrupted by the pandemic as goods movements plummeted. The prospect of driverless trucks kept freight firms and drivers from returning. Transportation drivers are on the low end of wages. The overall increase in real wages at the low end of the labor market has made these physically demanding, away from home, jobs less attractive. This inflation is part long-term structural adjustment and part short-term recovery of freight flows in the economy. Transportation services is 5% of the CPI, material, but not large enough to drive the total.
The education and communications pair of service sectors has low inflation. Education is higher. Communications is lower.
Housing is one-third of the total CPI. It is a very technical, wonky area. It combines a blend of actual rental charges and the estimated rental value of owned homes. Increases in home prices are smoothed out and their impact on the CPI tends to lag by 2-8 quarters. Housing inflation has fallen from 8% to 5%.
Housing sales prices have declined for 4 quarters. This will increasingly blend into the housing CPI, soon producing deflation rather than 4-5% inflation.
Market rent inflation remains in the 3-3.5% range based on the cumulative lack of US housing construction since the Great Recession of 2007-9. Combined with falling housing sales prices the combined housing CPI should decline to 2% by the fourth quarter of 2024.
Dreaded “cost-push” inflation is not a major factor for the US economy. A tight labor market has delivered 1% annual real wage increases for the last 5 quarters. This is a factor in inflation but not a driver or barrier to reaching 2% overall.
2024 looks like 2023, a very high budget deficit for a full-employment economy. In classical Keynesian economic terms, the aggregate demand pressure indicates continued 3% inflation.
An overheated economy typically shows a strong increase in imports as demand reaches out globally. This is not the situation in the US this year.
The money supply has a long-term impact on the economy, prices and inflation. The Federal Reserve Bank has been shrinking the “money supply” by 10% annually.
Commodities are the most volatile element of the global economy. Prices jumped by 20% with the unanticipated quick recovery from the pandemic. The last year has delivered commodities price deflation.
Changes in relative market power can drive inflation. Corporations increased profits by 50% in the first year of the pandemic. Profits have been relatively flat since then.
Summary
A dozen sectors point towards 2% inflation by year end. Energy, food at home, durable goods, nondurable goods, medical care, education/communication, housing prices, real wages, imports, money supply, commodity prices and profits.
Four sectors indicate concerns. Food away from home continues to drive high inflation.
Public and private transportation services have not yet reached equilibrium. This pressure may continue for another 4 quarters but should not be a long-term inflation driver.
The “Great Recession” destroyed the construction industry. It has slowly recovered. Total construction has increased, perhaps not enough to bring housing supply into balance with demand 15 years later. Rental inflation at 3% is likely to continue.
The federal budget deficit is the greatest concern. 6% of GDP is a huge deficit.
Net, net, I predict that the Urban Consumer CPI increase in the fourth quarter of 2024 versus the fourth quarter of 2023 will be 2.25%. The federal government spending deficit will directly and indirectly boost inflation.
I’ve read 2 books this week by conservative and progressive authors outlining the consolidation of working-class voters of all racial/ethnic groups into the modern Republican party.
I recently outlined some steps that either party could take to address the challenges that working- and middle-class families face in a meritocratic world.
I’ve outlined other policy steps below that might convince the two-thirds of the electorate that are working and middle class that they are the priority. My rough-cut estimate is that these changes would improve the federal budget deficit by 2% of GDP.
Government Structure
Sunset laws requiring reapproval of substantive changes after the first 10 years.
Bipartisan staff recommended simplification and clean-up laws, one functional area per year, package approval, no amendments.
Independent staff recommendation of lowest 10% benefit/cost ratios for regulations by agency every 10 years, package approval, no amendments.
Implement balanced budget across the business cycle law that considers unemployment rate and debt to GDP levels.
Require spending cuts or funding sources for new spending programs.
Require federal programs to have a minimum 20-year payback from investments.
Migrate to minimum 80% federal funding of all federal programs assigned to states.
Outsource the USPS by region, maintaining 3 day per week delivery minimums.
Government Services
Determine paternity for all births, set and enforce child support agreements, provide basic level support from the state as required.
Provide home childcare volunteer refundable tax credit up to $100 per week.
Greatly expand availability of 1-2 year National Service programs for young adults and senior citizens.
Invest in nominal co-pay front-line mental health screening, intervention, listening, training, group sessions and counseling services for less critical conditions.
Expand veterans hiring preferences to state and local governments, government suppliers and large employers.
Invest in prison to work transition programs.
Allow large employers to setup new employees with default 1% contribution to local United Way/Community Chest umbrella funding services.
Allow any group of 10 states to create a “medicare for all” health care program as a substitute for the Affordable Care Act.
Allow any group of 10 states to create a private insurance-based (qualify in 2 states, qualifies for all states to ensure competition) health care program as a substitute for the Affordable Care Act.
Housing and Transportation
Restrict issuance of new building permits in counties that do not have one-third of permits proposed for units below the existing median unit property value.
Auction regional licenses for private firms or states to offer low annual milage limit used car leases low to medium credit score individuals using federal funding for the inventory.
Create voluntary 5% of income home down payment savings program that accumulates to $50,000 after 10 years of full-time employment contributions.
Retirement
Make social security employee tax payments optional after age 62.
Remove social security payment offsets from earned income after age 65.
Auction to private firms the right to offer standard 401(k) financial advisory services for 0.5% of asset value with 100% federal match below $50,000 and 50% federal match below $100,000.
Education and Labor Market
Make any overtime or shift premium pay non-taxable (alternative to 10% rate in original proposal). Reduce taxable wages by 10% for hours worked between 6pm and 6a.
Tax university tuition income above $15,000 at 25% rate to fund public colleges.
Create German-style public-private partnerships for broad range of vocational training opportunities.
Offer career and technical training grants for up to 2 years equal to state subsidy of college education.
Offer workers up to $5,000 for relocation or temporary housing as an alternative to up to 2 years of unemployment benefits. (alternative to tax credit for moving expenses)
Provide alternate sets of courses and experience to meet minimum requirements for standard level high school diploma, rather than requiring gateway courses like Algebra II.
Offer an all-industries state administered “career skills” certification program that can be earned in 3 years of employment and classes, including some classes for academic credit in high school.
Require governments and large employers to justify any strict “BA needed” job requirements versus “education and experience” options.
Safety Net
Create a self-funded unemployment lump-sum payment system based on prior 5 years earnings. 4 months award available after 10 years. 6 months after 15 years. 8 months after 20 years. (Alternative to higher benefits and bridging option)
Maintain a present value of future social security benefits asset balance for each participant. After age 35, allow once per decade 10-year term loan at 10-year T-bill plus 2% for up to 20% of balance, maximum of $50,000 loan balance. Repayment through social security system earnings.
Provide payroll contribution funded ($200,000 max) annual income catastrophic family medical insurance (>$100,000/year) to all citizens. (alternative to $25K government provided fund)
Eliminate all specific import tariffs, but levy a 3% tariff on all goods to “protect” domestic producers and help fund government programs. (alternative to 0%)
Pay-off all student loan debt for professional degree medical professionals serving 5 years in non-metropolitan county or metropolitan county with less than 300,000 population.
Subsidize high-speed internet for rural counties.
Offer 10 year T-bill interest rate financing for qualified “low cost” retailers to build stores more than 15 miles away from any existing qualified store.
Levy a $500 per employee annual “closing costs” fee on large employers (250+) for a maximum 20 years to fund local redevelopment programs starting with $5,000 per discontinued employee.
Levy a 0.5% of annual rentals fee on landlords to fund local redevelopment of abandoned properties and areas.
Professions
Staff state professional licensing boards with a minority of regulated active professionals. Reduce licensing requirements to meet public safety standards.
Require states to provide tuition free medical care and residency spots for one doctor per 10,000 citizens each year.
Reduce medical school preparation requirement to 3 years.
Offer reciprocal medical licensing arrangements with 30 leading countries and expedited review and specific qualifications training and experience requirement defined for all others within 90 days of application.
Set a national cap on individual and class-action lawsuits at $2 million per person, adjusted for inflation.
States contract for metro and area multiple listing services and limit total real estate commissions to 4% of transaction value.
Require financial advisors to meet the fiduciary standard of professional care, putting the client’s interests first.
Set maximum prices per service and per hour for home and auto repair firms.
Certify public advisors to provide general advice on consumer economics, budgeting, banking, investing, real estate, insurance and health insurance for $100/hour to citizens, with a $50/hour, 8-hour maximum annual refundable tax credit.
Taxes
Starting with the 35% tax bracket ($462,501 married filing jointly), reduce allowable itemized tax deductions to 0 at $2 million of income.
Add a 40% tax bracket at $2 million of income.
Levy a 5% of excess price paid on personal vehicles sold for more than $50,000, boats for more than $100,000 and recreational vehicles for more than $100,000. (alternative to 10% above $1M)
Add a 10% surcharge to tax rates for residential properties larger than 5,000 square feet. (alternative to surtax above $2 million)
Global GDP growth in 2023 averaged 1.2%, slow but not recessionary. We have rebounded from the pandemic without a secondary recession despite the “soft landing” which has been achieved and we are now moving into take-off mode.
The US leads the “developed” world at 2.4% real growth, twice the global average.
Good News 