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This same ambiguous outlook applies to the U.S. economy as a whole. On the one hand, data released by the Department of Commerce last week reveals that real gross domestic product (GDP)—the value of all goods and services produced by the US economy, adjusted for inflation—increased at a 2.4% pace in the second quarter, following 2% growth in the first quarter. If this pace continues—a big if—then the economy will have safely avoided recession territory, having rebounded modestly from the two quarters of negative GDP growth at the beginning of 2022.

But past is not prologue. The economy still faces multiple headwinds that leave the risk of recession—or at least a significant weakening of growth—very much on the table. For one thing, the effects of monetary policy (i.e., rate hikes) on the economy operate with a time lag. The primary mechanism through which rate hikes fight inflation is by making borrowing costlier, thereby discouraging the demand for spending and, with it, the pressure on prices. The medicine from earlier doses of rate hikes is already having an effect on the economy; headline CPI inflation fell to 3% year-over-year last month, down from a peak of over 9%. However, rate hikes from late spring have not yet fully reverberated throughout the U.S. economy. Even so, the recent GDP data indicate that consumer spending only grew by 1.6% in the second quarter, with durable goods spending only growing by 0.4%. This particular subset of spending is useful as a gauge because durable goods like washing machines and other expensive household items are often purchased using credit, which now commands higher interest rates because of the Fed’s actions.

Another headwind facing the economy is the impending resumption of student loan repayments this fall. Make no mistake: student loan repayments ought to resume. Bailing out student debt by transferring it from the people who are reaping the financial gains from their education to taxpayers is regressive, fiscally irresponsible, and inflationary. However, this reality does not take away from the fact that people will feel the sting of being required to pay debts that they have been shielded from during the past few years. Consequently, consumer spending growth is likely to slow further or even turn negative. Considering that consumer spending contributed 1%age point (out of the 2.4) to GDP growth in the second quarter, a hypothetical scenario where consumer spending growth flatlines would by itself reduce GDP growth to just 1.4%. Moreover, another important component of GDP—investment—is sensitive both to rates themselves as well as business expectations about future consumer demand. It is entirely plausible—maybe even likely—that investment growth will decline from its most recent rate of 5.7%, and if that happens, GDP growth could easily fall below 1%.

Still another important headwind is the fact that, for all the progress the Fed—and the Fed alone—has made in combatting inflation, it has not yet succeeded in achieving its 2% target. As shown in the figure below, headline inflation is down to 3%, but core inflation—a better measure of fundamental pricing pressures—is still nearly 5%. Moreover, because the inflation readings are year-over-year measures, and because the monthly numbers from July and August 2022 were very low, it is quite possible that the headline year-over-year inflation numbers may rise modestly over the next few months.

Lastly, and arguably most importantly, the U.S. economy has been facing a productivity crisis over the past two years. Productivity—that is, economic output per hour of labor—has decreased by nearly 2.5% since the second quarter of 2021, which is unprecedented. By comparison, productivity rose by nearly 5% from the first quarter of 2017 to the fourth quarter of 2019. Not coincidentally, that earlier period corresponded with household income rising by over $5,000 after inflation—meaning higher purchasing power—as compared with the recent decline in purchasing power of over $2,000. The figure below gives a stark visual reminder that prices have grown consistently faster than wages since the passage of the American Rescue Plan Act “stimulus” bill in early 2021, with price growth decreasing only in response to the Federal Reserve’s interest-rate-hiking campaign.

As speculation continues over the near-term trajectory of the U.S. economy, it is worth mentioning again the essential need to raise productivity—not just to avoid recession, but to lift the economy out of the doldrums of 1% to 2% growth and return to or exceed its historical norm of 3% growth. While these numbers may seem difficult to relate to, a rule-of-thumb may prove useful. The amount of time (in years) that it takes for the U.S. economy to double in size is roughly 70 divided by the growth rate. Thus, if an economy grows at 3% per year, it will take approximately 70/3 = 23.3 years to double in size. By contrast, if the economy grows at 2% per year, it will take 70/2 = 35 years to double, and it will take 70/1 = 70 years to double if growth is persistently only 1%. That would be a disaster for the U.S.’s potential to remain the leading economy in the world.

So how do we achieve growth liftoff? Answering this question is much too large for a single blog post, but the key is productivity, and one important point to remember is that raising productivity is not about squeezing more out of workers and making life at work more of an unpleasant grind. Quite to the contrary. The most effective way to increase productivity is to ensure that workers are equipped with the skills to succeed, unencumbered by regulations to find the best occupation and employer to realize their potential, and where both workers and employers are able to keep more of the fruits of their productive activity. That phrase—productive activity—is key to keep in mind. While public debate often focuses on spending, spending, spending, it’s time to shift our attention to producing.

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The good news: progress has been made. According to data released last week, the May consumer price index (CPI) inflation rate came in at 4%, which is far less than the 9% peak from mid-2022. However, now is not the time to move the goalposts. For years, the Federal Reserve has said its inflation target is 2%, and the economy is running at twice that rate. By contrast, before passage of the American Rescue Plan Act stimulus bill in early 2021, the economy had consistently remained at or below 2% inflation for the better part of a decade and had not hit 9% in over four decades. It turns out that former Treasury Secretary and National Economic Council Director Larry Summers was spot on in spring 2021 when he warned that “I think this is the least responsible macroeconomic policy we’ve had in the last 40 years.”

What is the reason for falling inflation? One explanation can immediately be ruled out. No, the Inflation Reduction Act (a misnomer if there ever was one) did not defeat inflation. For one thing, inflation was already falling before the bill passed in August 2022. Secondly, many of the provisions of the law have yet to go into effect. In fact, the treasury department and IRS just released guidance on some of the significant provisions of the Inflation Reduction Act just last week—nearly a full year after the bill’s passage.

The idea that the Inflation Reduction Act was going to reduce inflation has always been implausible, seeing as its tax hike provisions constrain supply, and its supposed deficit reduction does not begin to take place until 2028. The law increases deficits in the years 2024–2027. More artificially stimulated demand and constrained supply is not a recipe for bringing down inflation. If anything, the Congressional Budget Office is likely taking an overly sanguine view by saying that the law will have a negligible effect on inflation.

Instead, the Federal Reserve’s interest rate hikes and the expiration of American Rescue Plan Act provisions are likely the key factors behind the decline in inflation. Broadly speaking, there are essentially two ways to bring down inflation: reduce spending demand or expand the supply of goods and services. The second approach is preferable in that it simultaneously allows for lower inflation and higher economic growth, but the types of regulatory and tax policy changes needed to expand supply would require consensus in Congress and the White House abandoning the anti-growth policy agenda pushed by many progressives.

The first approach (reducing demand) is what the Federal Reserve has pursued. As the Fed raises rates, borrowing becomes costlier, which makes it less attractive for consumers to purchase things like houses, vehicles, and appliances using credit. Higher interest rates also make saving more attractive. The result: consumers pull back demand. Similarly, the expiration of stimulus from the American Rescue Plan Act reduces overheated demand while the expiration of anti-work provisions removes part of the straitjacket imposed on supply.

Is the falling inflation a surprise? Prognosticators have been all over the map with their inflation forecasts during the past two years, but it ought not to be surprising that inflation would come down once the Federal Reserve finally began to take action and hike rates. At the beginning of the year, soon after the release of the December 2022 inflation data, I published a blog post with a forecast of where inflation might be headed in the first half of 2023. In the spirit of accountability, the figure above shows my inflation projection through May 2023 compared to how inflation has actually played out in reality.

The red (projection) and blue (actual) curves track each other remarkably well in 2023. In fact, my earlier blog post stated “topline year-over-year inflation readings are set to fall rapidly over the next several months—possibly even falling below 4% by early summer.” As a reminder: the May inflation rate came in at exactly 4%. Although my projections were mildly on the optimistic side, they have mostly held up.

Does that mean inflation is no longer a problem? Quite the contrary. The figure below shows that higher prices have essentially been locked in. The Federal Reserve is not even attempting to bring prices down. It is just trying to moderate the future pace of price increases to historic norms. Unfortunately, purchasing power is still more than 3% lower than it was at the beginning of 2021, as shown in the figure below. Until wages start to consistently outpace prices, workers will continue to suffer from the lingering effects of the inflation surge. Here, too, the economy faces serious headwinds, considering that labor productivity is on the decline. But addressing the low productivity crisis is a topic for another day.

Where do we go from here? There is no such thing as almost landing an airplane. You either land it, or you crash. In this case, the Federal Reserve has one task: to land inflation at 2% sooner rather than later. The longer it takes to achieve the 2% target, the less inflation-fighting credibility the Fed will have as people start to accept a persistently higher inflation rate as normal, which will make the Fed’s job even more difficult.

While the headline inflation number is moving rapidly in the right direction (and will likely continue to do so at least for one more month), some of the components of inflation are still concerning. In particular, core inflation (which excludes food and energy) is falling much more slowly. The latest core inflation rate from the CPI report is 5.3%, which is only modest progress from the 5.6% rate from the start of the year. One glimmer of hope is that housing costs have been a significant recent driver of inflation, but the data are lagging. Because most people who rent sign one-year leases, large rent increases from several months ago when conditions were different in the rental market still affect current inflation readings. As tenants begin to roll over into new leases, the data should adjust and likely show a slowdown in rent increases.

The bottom line is that the inflation picture has improved, but we are arguably entering a murkier phase over the next several months. The Federal Reserve made clear in its statement regarding pausing rates that it was likely not done raising rates. Rather, the pause is an opportunity for more data to come in to guide future actions. But one thing is clear: the mission is not yet accomplished.

The post Taking Stock of Inflation and the Recent Fed Pause appeared first on Show-Me Institute.

Beginning in early 2022, the Fed initiated a rate hike campaign that, to date, has taken the federal funds rate (which influences other interest rates in the economy) from 0% to over 4%. We now have evidence that the Fed’s rate hikes are beginning to bite. Consumer price inflation peaked in the summer of 2022 at over 9% and has been on the decline ever since, most recently hitting 6.5%. This lag between rate hikes and inflation dropping is common. Moreover, because the monthly inflation increases were so high in the first half of 2022 and have been considerably lower over the past few months, the topline year-over-year inflation readings are set to fall rapidly over the next several months—possibly even falling below 4% by early summer. The figure below visualizes a plausible path of inflation over the next few months.

If this projection comes to pass, it would of course be very good news for families’ pocketbooks. Keep in mind, however, that inflation is declining despite the federal government continuing to spend too much money, and not because of any of the recently passed legislation. Absent the spending binge of 2021 and 2022, the United States would almost surely not have seen the decades-high inflation that has robbed families of precious purchasing power—an erosion shown in the figure below. Since the passage of the American Rescue Plan Act in early 2021, consumer prices have risen cumulatively by nearly 14%. During that same period, worker earnings have increased by less than 10%. This four-point gap marks a significant decline in purchasing power that is showing no immediate signs of reversing.

By contrast, if one looks at recent history—namely, the period between early 2017 and the beginning of the COVID-19 pandemic—earnings noticeably outpaced inflation, as shown in the figure below. In fact, inflation-adjusted median household income jumped by the most on record during that period, just as poverty rates hit historic lows. It is worth pointing out that economic gains of that size were not expected. Instead, the economy outperformed earlier projections from the Congressional Budget Office made prior to the pro-growth tax reforms passed in 2017 and the concerted effort across federal agencies to streamline and reduce the burden of regulations.

Looking forward, the good news is that inflation is likely to continue falling, and possibly at a faster pace over the next few months. Producer price inflation is also moderating, with the most recent core reading (which strips out volatile components related to food, energy, and trade services) coming in at “just” 4.6% year-over-year. However, it is important that we do not move the goalposts and lower the bar for victory. The objective clearly stated by the Federal Reserve—and to which Americans have become accustomed over the past few decades—is inflation that is 2% or less. For this reason, nobody should expect the Federal Reserve to immediately stop hiking rates—let alone begin to cut them—until inflation falls below the 2% threshold and stays there for a while. The Federal Reserve has signaled this much in its recent communications.

Of course, the timeline for finally taming high inflation could be significantly accelerated with a pro-growth, supply-side agenda that unleashed the productive capacity of the U.S. economy whereby businesses could meet demand without raising prices. If we conceptualize inflation as too much money chasing too few goods, one approach to reducing inflation is to take money out of the economy—exactly what the Fed is doing right now—while the other approach is to ramp up the amount of goods and services the economy produces. In light of divided government, substantial tax and regulatory reform is unlikely, but on the positive side, massive partisan tax hikes and spending bills are unlikely too. Inflation relief is (likely) on the way, but it is important to understand how we got here so we don’t end up making the same mistakes again.

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A good example is electricity bills in Missouri. From 2008 to 2017, the average retail electric bill in Missouri rose 29 percent—the second-biggest increase in the country over that time period. After the Tax Cuts and Jobs Act (TJCA) lowered corporate tax rates from 35 to 21 percent, Missouri utilities reduced electric rates for customers. And it wasn’t just a coincidence; Missouri’s utilities specifically stated that the reason for the rate decreases was the corporate tax cuts.

For the past decade, electric rate increases for three of the four investor-owned utilities in Missouri have far outpaced average salary increases and general inflation. This means that a larger percentage of Missourians’ budgets are being dedicated to paying electric bills, with less being left over for other needs. However, that finally changed between 2018 and 2019 (2018 was the first full year of TJCA implementation) when electricity rates fell by 6 percent—customers of Missouri’s four investor-owned utilities saw cumulative savings of $159 million in 2018 alone.

In sum, just because you may not run a corporation doesn’t mean what happens to corporate tax rates doesn’t affect you. If a decrease in corporate tax rates meant an electric rate decrease for Missourians, it’s fair to believe a corporate tax rate increase would result in electric rate increases. And, as the last decade has shown, that’s an expensive proposition for all Missourians.

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Missouri’s tuition increases are lower than most other states because state law prohibits colleges and universities from increasing tuition beyond increases in the consumer price index. The point here is that Missouri’s institutions are getting a double whammy. They are seeing reductions in state revenues and are simultaneously limited from raising additional funds through tuition.

To some, this doesn’t sound so bad. There has been growing concern about the rising costs in higher education. And increasingly, there is concern about the seemingly illiberal attitudes on college campuses that shout conservative speakers down. And we all remember the fiasco at Mizzou a few years ago.

These are legitimate concerns. Indeed, as George Mason economist Bryan Caplan has suggested in his recent book, The Case Against Education: Why the Education System Is a Waste of Time and Money, there are compelling arguments against public subsidies for higher education.

There are few solid arguments, however, for not allowing colleges and universities to raise tuition to the level they deem appropriate.

I understand the sentiment of wanting to make college affordable, but there are better ways to do it. For example, as mentioned in SMI’s Blueprint on Higher Education, Missouri could encourage competency-based education programs or income share agreements.

Prices are the thing that help the free-market flourish. Prices tell producers where they can make profits, and prices allow consumers to choose wisely. Tuition caps are anti-free market because they distort the true cost of a college education by artificially keeping the sticker price low. It’s time to remove these artificial caps and allow more free-market policies into higher education.

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 Let’s do just what Rep. Ellington has suggested. Let’s look at the evidence from these places. Ellington is correct in saying there hasn’t been an exodus of “corporations or companies,” but there have been some negative outcomes.

 Washington D.C.

 D.C. passed the “Fair Shot Minimum Wage Amendment Act of 2016.” The amendment increases the district’s minimum wage to $15 by 2020 and then sets annual increases that are pegged to changes in the Consumer Price Index. Earlier this year, the Office of the Chief Financial Officer for the D.C. mayor’s office released a study that estimated the impact this will have on the city, and the findings aren’t anything to be bullish about.

 As one would expect, wages will increase. By 2021, the study’s authors estimate that “the average resident will gain roughly $5,100 more (20 percent higher) in wages as of 2021, but approximately 2 percent of impacted residents will experience job loss; this job loss estimate increases to about 3.4 percent by 2026.” Additionally, the study found that “average citywide prices will increase by roughly 0.2 percent and businesses will experience a 2.3 percent average reduction in profits as a result of this policy.”

 Seattle

The Seattle Minimum Wage Ordinance went into effect in 2015. From 2015 to 2016, the minimum wage increased from $9.47 to $13. This is roughly a 37 percent increase in a short amount of time. The ordinance has different provisions for different types of employers, but will gradually increase the minimum wage to $15. Earlier this year, a team of researchers from the University of Washington released a paper on the impact thus far. When the minimum wage went up, employers did what we would expect them to do; they reduced the hours of employees. The researchers suggest the increased minimum wage resulted in a reduction of 3.5 million working hours per calendar quarter. Low-wage jobs (jobs paying under $19 per hour) went down 6.8 percent.

 As economist David Neumark noted in his 2012 policy study for the Show-Me Institute, “Should Missouri Raise its Minimum Wage?,” there are clear tradeoffs with this policy proposal. Raising the minimum wage increases the wages for a select portion of the population: those earning roughly minimum wage who manage to not have their hours cut (or their jobs eliminated altogether). This increase comes at the expense of the low-skilled workers who are not able to enter the labor market or lose their jobs. This issue is particularly concerning in our border cities, where higher pay may attract people from neighboring suburbs in other states. As these individuals enter the job market, they may take jobs away from low-skill Missourians living in Saint Louis and Kansas City.

 The real question for Missouri lawmakers is: Do you want to increase unemployment for some Missourians to provide others with higher wages? 

The post On Raising the Minimum Wage in Missouri appeared first on Show-Me Institute.

It looks like the city’s “frugality” will be overshadowed by the massive costs of a proposed expansion that would extend the current line 3.75 miles south from Union Station to the Plaza and UMKC.

The projected construction costs for the extension are estimated at $227M (in 2019 dollars), and the downtown line cost $102M (in 2014 dollars) to build. After adjusting for inflation, on a per-mile basis, that makes Kansas City’s proposed expansion one of the most expensive streetcar projects in the nation.

All figures in 2014 dollars

As the chart above shows, the cost per mile of the proposed expansion is over 20% greater than that of the downtown starter line. Even if the city got a good deal—if we can call it that—on the downtown line, it surely won’t if expansion occurs.

The only streetcar more expensive than Kansas City’s proposed expansion is Washington D.C.’s 2.4 mile H-St. line, which cost over $200M to build. But besting D.C.’s line isn’t much to brag about—it’s been described as one of the most poorly handled streetcar projects in the nation. 

So as efforts mount to expand the streetcar beyond downtown, Kansas Citians should ask themselves: Are we willing to pay higher sales and property taxes to fund one of the most expensive streetcar projects in the country?

Although the rail boosters hope to garner a $100M grant from the feds, the city itself will be on the hook for $130M. More on the financial breakdown of the proposed expansion in my next blog!

Note: Figures adjusted to 2014 dollars with CPI deflator, assuming 2% annual inflation 2017-19. 

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Along with the Hancock Amendment, this amendment would restrict the power of the legislature. Therefore, the legislature should be commended for proposing this amendment. Constitutional amendments like this, along with a balanced budget requirement (which Missouri has), give legislators an easy way to say “no” to special interests.

Now, this is not a full-throated endorsement of the proposed amendment. There are a couple of things that bother me. First, there was an amendment that passed setting the cap at fiscal year 2008, the so-called “high water mark” of state revenues. Considering that the general revenue is expected to increase 3.9 percent  from $7.3 billion this year and that net general revenue for fiscal year 2008 was slightly more than $8 billion ($8,004,309, to be exact), the cap probably will not matter for . . . a while. Second, the spending limits will expire in five years unless lawmakers extend the time limit. So even if the voters approve the amendment, there is a distinct possibility that the cap can expire before it ever has the chance to restrict spending. Finally, the cap only applies to general revenue, which is where lawmakers have the most leeway in regards to spending, but it is not hard to imagine lawmakers putting down in statute specific spending items they want preserved and directing specific monies to funding them.

Despite my issues with the proposed amendment, the legislature should be commended for trying to push spending restrictions. However, it is unfortunate that such restrictions would have to be so watered down before it can pass.

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It appears that they won’t be considering any changes to the partial at-large voting on their county council, which is unique among Missouri’s charter counties. There has been a good deal of work done on the question of at-large versus district representation. Public choice economics has provided some evidence that at-large voting leads to lower spending levels. The theory is simple enough: Officials elected at large have less of an incentive to engage in district-specific spending (think congressional “pork” writ local), because all of their constituents both benefit from and pay for all of the same things. My “Government in Missouri” study for the Show-Me Institute addresses this idea in detail on pages 25 and 26, and provides endnote citations to major public choice studies on the subject, for anyone who is interested enough to do further research. (This is usually the part of my government talks where people start to fall asleep.) When I compared the suburbs in St. Louis County that have at-large voting to those with the more common district voting found in city elections, I found limited evidence that the at-large cities spent less. I say “limited” because the differences were not huge, and the sample size was very small — but it’s all in the study.

The portion of the charter proposals that will generate a good deal of attention is the pay raise for local legislators. The charter committee report recommends:

• Set new pay levels for elected county officials, including boosting current legislators’ salaries by more than 10 percent to $28,916 annually. Legislators also would be guaranteed raises based on the local consumer price index.

I see nothing wrong with raising salaries to $28 K per year for nine council officials serving in a county of 650,000 people. There is nothing out of line with that. I do, however, disagree with the proposal to raise it automatically each year, according to the consumer price index. Raising your pay is one of the tough votes that elected officials have to make. Usually, moderate raises that are implemented rarely enough will be supported by the public, as I expect this one will be. However, it should still require a vote, rather than being turned over to a commission or a computer.

The post Should Jackson County Amend Its Charter? appeared first on Show-Me Institute.

I will never forget being on the receiving end of these calls back in 2001, when in response to the reopening of the appeal period after the drive-by assessments scandal, the Council alone received several thousand phone calls in a week.  2005 was also a busy year for helping people with appeals while I was working for Councilman Kurt Odenwald.  I think that the only upside to the drive-by assessment scandal was it made many more people aware of the importance of the reassessment notices you get in March / April of odd-numbered years, which, for legitimate reasons, do not include the tax amount owed.  Too often people used to ignore the reassessment notices and then wonder what the hell happened when they got their tax bill in November.  I believe that now many more people in St. Louis County carefully review their reassessment notices and plan accordingly, whether by appealing, budgeting, lobbying local officials to roll-back the rates properly, or applying for property tax assistance programs. 

Property taxes, in general, are not a bad tax.  I certainly prefer them to income taxes as a way to fund the necessary doings of government.  Every year legislation is introduced in Jefferson City to cap the rates of assessment increase, and every year that legislation fails.  I would like to do away with the entire reassessment system by requiring certificates of value to be filed with every property purchase statewide, not just in St. Louis and Kansas City, and then tying assessment increases to the CPI (or even better, a Missouri-specific real estate value index) until the property is sold again.  Wham, I just eliminated the entire reassessment process and significant increases in one fell swoop!  Isn’t blogging amazing?

The post Assessor’s Office Is Very, Very Busy appeared first on Show-Me Institute.

In November, Missouri voters will vote on Proposition B, which would raise the state’s minimum wage to $6.50 per hour and thereafter index it to the Consumer Price Index, ensuring annual minimum wage increases of the same size (in percentage terms) as the rate of inflation. This paper provides an overview, based on a large body of existing research, of evidence on the effects of federal and especially state minimum wage increases.

The central goal of raising the minimum wage is to raise incomes of low-income families and reduce poverty. There are three reasons why raising the minimum may not help to achieve this goal. First, a higher minimum wage may discourage employers from using the very low-wage, low-skill workers that minimum wages are intended to help. Second, a higher minimum wage may hurt poor and low-income families rather than help them, if the disemployment effects are concentrated among workers in low-income families. And third, a higher minimum wage may reduce training, schooling, and work experience—all of which are important sources of higher wages—and hence make it harder for workers to attain the higher-wage jobs that may be the best means to an acceptable level of family income.

The evidence from a large body of existing research suggests that minimum wage increases do more harm than good. Minimum wages reduce employment of young and less-skilled workers. Minimum wages deliver no net benefits to poor or low-income families, and if anything make them worse off, increasing poverty. Finally, there is some evidence that minimum wages have longer-run adverse effects, lowering the acquisition of skills and therefore lowering wages and earnings even beyond the age when individuals are most directly affected by a higher minimum.

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