Wednesday, May 12, 2021

Reagan & Volcker Killed Inflation. Will Biden & Powell Bring It Back From the Dead?

President Joseph Robinette Biden Jr. (JRB) aspires to be as transformative a president as was FDR in expanding the scope and scale of the US social welfare state. Biden is also the anti-Reagan president. He loves Big Government as much as President Ronald Reagan hated it. Furthermore, he has as much faith in Big Unions as Reagan distrusted them.

The Reagan Revolution didn’t last very long. President Ronald Reagan was a proponent of free-market capitalism. He was against big government. He championed the constitutional system of federalism and the republican system of checks and balances. Yet here we are three decades later with lots more crony capitalism and with the federal government bigger and more powerful than ever.

Conservative presidents have had very little lasting impact on the course of our nation. Progressive ones have made much more progress at leaving their marks. The legacies of Theodore Roosevelt, Woodrow Wilson, Franklin Delano Roosevelt, Lyndon Baines Johnson, Bill Clinton, and Barack Obama have radically changed our country. They all expanded the social welfare state to varying degrees. Now President Joe Biden intends to build on their legacies.

To some extent, the Reagan legacy was briefly revived by President Donald Trump. But now under Biden, the progressive agenda is back on the fast track. What is different this time is that Biden, unlike his progressive predecessors, seems to have no concerns about the deficits that will result from his mammoth spending programs. Sure, he is pushing to raise tax revenues to cover some of the costs of his spending plans. But revenues are very unlikely to come close to covering Biden’s ambitious expansion of the social welfare state.

Furthermore, Biden and his economic advisers seem to have no concerns about the inflationary consequences of their policies. On the contrary, they are pushing for higher wages and more power for labor unions. Their regulatory policies, especially the ones aimed at climate change, are going to add lots to the cost of doing business. Their plan to raise the corporate tax rate will do the same. Yet just last week, Treasury Secretary Janet Yellen said, “I don’t think there’s going to be an inflationary problem, but if there is the Fed can be counted on to address it.”

Reagan may not have been as transformative as other presidents, but he helped to end the Great Inflation of the 1970s by supporting Fed Chair Paul Volcker's tough monetary policies. He also accelerated the demise of the labor union movement in the private sector when on August 5, 1981 he fired more than 11,000 air traffic controllers who had ignored his order to return to work after their union, the Professional Air Traffic Controllers Organization (PATCO), had organized an illegal strike. That marked the end of the wage-price spiral of the 1970s, as many private-sector business executives, following in Reagan’s path, successfully pushed back against their labor unions.

Biden loves labor unions and intends to do whatever he can to bring them back in the private sector. He is also pushing to raise wages. Consider the following:

(1) Raising wages at federal contractors. On April 27, Biden signed an executive order that requires federal contractors to pay a $15-an-hour minimum wage. Currently, the minimum wage for federal workers is $10.95 per hour, and the tipped minimum wage is $7.65 per hour. According to The White House Fact Sheet, starting on January 30, 2022, all government agencies will need to incorporate a $15 minimum wage requirement into new contract solicitations, and by March 30, 2022 all agencies will need to implement the minimum wage into new contracts. Additionally, government agencies will need to implement the higher wage into existing contracts when contracts are extended each year.

(2) Promoting unions. On April 26, Biden signed an executive order that will create a task force to promote labor organizing at a time when just over 6% of US private-sector workers belongs to unions (Fig. 1). The White House task force will be headed by Vice President Kamala Harris with Labor Secretary Marty Walsh serving as vice chair. The order is in the tradition of the National Labor Relations Act, which was passed in 1935 under FDR to encourage worker organizing.

(3) Powell's dovish Fed. Meanwhile, last August, the Fed reworded its dual-mandate statement to prioritize “broad based and inclusive maximum full employment” ahead of maintaining price stability. It is now aiming to overshoot inflation above the official 2% target for a while to make up for undershooting it for so many years. Fed Chair Jerome Powell is the anti-Volcker, doing whatever it takes to bring back (some) inflation.

What about a repeat of the Great Inflation of the 1970s as a result of the current administration's policies? It could happen. However, that decade was uniquely inflation prone. Nixon devalued the dollar on August 15, 1971. The resulting surge in commodity prices was exacerbated by a food price shock (1972-73) followed by two oil price shocks (1973 and 1979). During the 1970s, strong labor unions in the private sector succeeded in quickly boosting wages through cost-of-living clauses in their contracts. Productivity growth collapsed during the decade. The result was an inflationary wage-price spiral [1].

This time may not be different. The dollar is down 12.3% since it peaked on March 18, 2020. Food, energy, and industrial commodity prices are soaring. Wages inflation may be starting to pick up. Labor unions in the private sector may still be weak, but the federal government under Biden is clearly on their side.

Does all this mean that a comeback for inflation is inevitable? Or are there offsetting reasons why this might not happen? I am on the lookout for—but don’t expect—an inflationary wage-price spiral. I do expect to see wages rising more rapidly in coming months given all of the above. The main reason is that I believe that productivity growth is set to move higher during the Roaring 2020s as it did during the Roaring 1920s [2]. I expect that it will be strong enough to offset the inflationary consequences of the Biden administration's inflationary policies. So far, so good [3].

So for now, I remain in the camp anticipating a transitory rebound in the inflation rate in the 3.0%-4.0% range in coming months before it settles back down to 2.0%-2.5%. Stay tuned. ______________________

[1] See my LinkedIn article, "Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?" December 12, 2020.

[2] See my LinkedIn article, "Comparative Roaring '20s," December 1, 2020.

[3] See my LinkedIn blog on productivity.

Tuesday, May 4, 2021

The One Percent: Off With Their Heads!

Socialists promote policies that they claim will lead to greater income equality. History shows that most countries that have embraced socialism have achieved income equality: Almost everyone is poorer than before socialism was imposed on them for their own good. Purchasing power is depressed for most people, and the quality of the goods and services they can purchase is poorer too.

Socialists often declare that the rich don't pay their “fair share” of taxes and must pay more so that the proceeds can be redistributed to boost the incomes of the poor. The problem is that the fair share that the rich must pay never seems to be enough. Higher and higher taxes on the rich result in fewer and fewer of them. Eventually, the only fat cats left are the socialist elites, who always get richer as most of the rich in the private sector get poorer. Needless to say, the poor also get poorer as a result.

In the US today, progressive politicians claim that the “One Percent” of taxpayers are compensated too much and don't pay their fair share of taxes. It's hard to deny that a few CEOs, especially the ones heading up technology and financial companies, get paid too much relative to the pay of their workers. Many professional athletes and Hollywood celebrities earn even more than top-paid CEOs. So the progressives could be right, but let’s see what the latest available data through 2018 show:

(1) Number of tax returns. The total number of all the tycoons on Wall Street, in Silicon Valley, in Hollywood, and on the playing fields—including everyone with adjusted gross income (AGI) exceeding $500,000 a year—was 1.65 million taxpayers in 2018, exactly 1.1% of the 153.8 million taxpayers who filed individual income tax returns that year, according to the latest available data from the Internal Revenue Service (IRS) (Fig. 1). Adjusted gross income is income from all sources before subtracting deductions and exemptions.

By the way, the number of returns showing AGI of $500,000 and over has more than doubled since 2009. The rich have been getting richer, and there are more of them. What you won't hear from progressives is that the same can be said for all the other income groups other than taxpayers earnings less than $50,000, clearly showing that there are fewer low-income tax filers! Their headcount has dropped 6.1 million since they peaked at a record 95.0 million during 2011. Since 2009, the number of returns filed by taxpayers with AGI of $50,000-$100,000 rose 5.0 million, $100,000-$200,000 rose 7.6 million, and $200,000-$500,000 rose 3.7 million.

(2) Adjusted gross income. During 2018, AGI in the US totaled $11.6 trillion. The AGI of the One Percent was $2.5 trillion during 2018, accounting for 21.7% of the total, up from 13.9% during 2009 and exceeding the previous high of 21.7% during 2007 (Fig. 2 and Fig. 3). Over that same period, the share of taxpayers reporting less than $100,000 in AGI fell from 50.7% to 36.6% of total AGI.

That’s outrageous: The One Percent earned over 20% of all national AGI during 2018! Off with their heads!

Not so fast, Robespierre.

(3) Taxes. Collectively, during 2018, the One Percent paid $639 billion in income taxes, or 25.3% of their AGI (Fig. 4 and Fig. 5). That amount represented a record 41.5% of the $1.54 trillion in federal income taxes paid by all taxpayers (Fig. 6). That’s up from 29.8% in 2009. Meanwhile, the rest of us working stiffs, the “Ninety-Nine Percent,” picked up only 58.5% of the total tax bill during 2018.

What should be the fair share for the One Percent? Instead of about 40% of the federal government’s tax revenue, should they be kicking in 50%? Why not 75%? They would be less rich, but everyone else would be richer—unless paying more in taxes caused the One Percent to work less hard or leave the country, sapping their incentive to keep creating new businesses, jobs, and wealth here in America.

(4) Taxing math. To repeat, during 2018 the One Percent reported $2.5 trillion in AGI, which accounted for 21.7% of total AGI. They paid $639 billion in income taxes, which was 25.3% of their AGI but accounted for 41.5% of total income taxes paid to the IRS.

I’m sure there are plenty of progressives who believe that the One Percent should pay at least 50% of their AGI in income taxes. That would have amounted to an extra $600 billion in their tax bill for a total of $1.25 trillion in 2018. Total tax revenues would have been $2.1 trillion, with the One Percent’s fairer share of that at 60%. There would have been plenty more tax revenues for the government to spend and redistribute.

So let’s tax the rich much more! But if their fair share is raised again and again by the progressives, what will we do when the rich are all gone?

(5) Trumped. By the way, we can slice and dice the IRS data to see how President Trump’s tax reform affected individual income tax receipts during 2018 compared to 2017, i.e., before and after tax reform. The law retained the old structure of seven individual income tax brackets, but in most cases, it lowered the rates. The top rate fell from 39.6% to 37.0%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% bracket was also unchanged.

The number of tax returns increased 0.6% from 152.9 million to 153.8 million, while AGI rose 5.7% to $11.64 trillion (Fig. 7 and Fig. 8). Total individual income taxes paid fell 4.3% to $1.54 trillion as the average tax rate fell from 14.6% during 2017 to 13.2% during 2018, which was the lowest since 13.1% during 2012 (Fig. 9 and Fig. 10).

The IRS data show the following declines in the average tax rates (based on AGI) for the following income groups:

$0-$50,000 (down 0.1ppt from 0.7% to 0.6%)

$50,000-$100,000 (down 1.4ppt from 8.9% to 7.5%)

$100,000-$200,000 (down 1.5ppt from 12.6% to 11.1%)

$200,000-$500,000 (down 2.6ppt from 19.2% to 16.6%)

$500,000 and over (down 1.4ppt from 26.7% to 25.3%)

(6) Three cheers for the Five Percent! These numbers suggest that the biggest winners were in the $200,000-$500,000 AGI group, accounting for 4.5% of all tax returns in 2018. They aren’t in the One Percent. They are in the “Five Percent,” the upper middle class with many of them owning their own businesses, which tend to employ lots of people. Arguably, their tax break provided them with more cash to expand their businesses, which certainly explains why the labor market was so strong in 2018 and 2019.

The Biden administration has pledged that the tax increases it intends to enact will only hit taxpayers earning more than $400,000 per year. The problem is that lots of these people tend to have their own businesses. The latest data available show there were just under 32 million pass-through businesses in 2013, almost 20 times the number of C corporations. There are surely many more such proprietorships today. An increase in their tax bills reduces the cash that they have to invest in growing their businesses. One way or another, a tax increase on them will hurt the wages and employment opportunities of lots of people earning much less than $400,000. Tax increases on the rich inevitably trickle down to the rest of us.

But at least there will surely be more income equality.