Then, interest rates went up.

In a well-functioning market, the process should have reversed itself. The higher interest rates pushed the total price of purchasing a home back up, which surely lowered demand. At the same time, with house prices still far above the pre-pandemic level, builders should have been building like mad to bring homes to the market. These two forces should have resulted in a housing price correction. But this is not what happened. The higher interest rates have cooled demand, but prices remain high. Below is a chart I created using the Federal Reserve Economic Data (FRED) system. It shows the trend in the median U.S. home price since February 2020, just before the pandemic. The average price of a home in the United States grew by roughly $120,000, or about 38 percent, from the first quarter of 2020 to the third quarter of 2022. It has declined modestly of late, but not much.

The bizarre thing is that builders haven’t responded to the higher prices. In fact, FRED data show new housing starts today are lower than before the pandemic. Meanwhile, many existing homeowners are “locked in” with low-rate mortgages and reluctant to move, further constraining supply. Even with tempered demand due to the combination of high prices and high interest rates, the lack of supply is keeping prices elevated.

But what are the builders doing? They should be falling all over themselves to bring new houses to the market. Think of it this way: If it was profitable to build homes in Q1-2020, it should have been even more profitable by Q3-2022, continuing until today.

A recent issue of the Journal of Economic Perspectives (JEP) brings together several groups of economists to weigh in on the housing market. I read the issue with great interest. One of the most striking findings is that in many major markets, the price elasticity of housing supply is very low, which means builders barely respond to rising prices with new construction. This is odd. Normally, suppliers should respond strongly to higher prices, which put more money in their pockets. In fact, the invisible hand of the free market depends on it.

The articles discuss several reasons builders have responded so weakly to higher prices. With respect to the recent situation specifically, one might initially blame it on rising construction costs, but the articles suggest this is not the primary explanation. Rather, they emphasize the role of regulations and zoning. Local land-use rules, approval processes, and other restrictions make it slow and costly to build, even when market prices suggest that building more housing should be profitable.

Another interesting finding from the research is that we don’t need to focus on building low-income housing to make housing affordable. If we build higher-end homes, people will move into them from less desirable homes, which will then become more affordable. The effect of building homes at the higher end of the market cascades down.

In short, we just need to get out of the way of the market.

So, the next time you hear complaints about high home prices or a shortage of low-income housing, remember the biggest obstacle is the rules we’ve chosen for ourselves. Deregulating housing construction, and thereby expanding supply, offers the clearest path to putting homeownership in reach for more Americans.

The post What’s Wrong with the Housing Market? appeared first on Show-Me Institute.

In December 2024, in Springfield, Missouri, the Show-Me Institute and Show-Me Opportunity hosted an event featuring Dr. Aaron Hedlund, Chief Economist at the Show-Me Institute, and Elijah Haahr, former Missouri Speaker of the House and host of The Elijah Haahr Show on KWTO.

The discussion focused on the 2025 economic outlook for Missouri and the U.S., exploring issues such as unsustainable government spending, the growing national debt, and the Federal Reserve’s role in shaping inflation, housing, and labor markets.

This episode is a recording of that event.

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Produced by Show-Me Opportunity

The post 2025 Economic Trends for the U.S. and Missouri with Aaron Hedlund and Elijah Haahr appeared first on Show-Me Institute.

Several years ago, my colleagues and I were debating what the worst possible tax policy change could be. We settled on “exempting lottery winnings from income taxes.” While it may not be quite that bad, the ongoing effort to exempt senior citizens from property tax increases around the state are a similarly misguided attempt at tax reform that will have harmful effects on the counties where it becomes law. This includes Greene County, which passed the plan in 2023, and may include Stone (the county question) and Webster (Proposition 1) counties, each of which has the proposal on the November ballot.

State legislation passed in 2023 and amended in 2024 authorized any county to freeze the real property taxes of the primary homes for senior citizens who meet certain qualifications. Their property taxes would stay at the same amount they were when they become eligible for the plan, which for most people would be when they turn 62. The purpose of the bill is to help senior citizens stay in their homes as they age, but there are several major problems with this proposal.

This proposal is harmful simply because it reduces the property tax base. A major tenet of good tax policy is that the base should be as broad as possible so that the necessary rate can be as low as possible. Unless local governments cut services in response to the enactment of a tax freeze for seniors, it will almost certainly lead to higher tax rates on those property owners not eligible for the freeze. A senior tax freeze is every bit as much of a tax increase on non–senior citizens as it is tax relief for some senior citizens.

People who live in homes of similar value with similar public services should pay similar property taxes. The young couple who has lived in their Marshfield home for a year should not pay higher property taxes than their neighbor just because their neighbor has lived there for two decades.

Passage of this bill would also lead to the problematic situation in which people vote on property tax increases that they themselves will not personally pay. In Stone County, the Village of Indian Point has a sizable property tax increase also on the November ballot. Indian Point seniors can vote for the proposition knowing that they may not have to pay the increased taxes if the tax freeze also passes. That’s not good government. The single best aspect of property taxation is that it imposes the costs of local services on the people who use those services, unlike sales or local income taxes that are exported in part to visitors, commuters, and others. Instituting a system in which people vote on property taxes they won’t pay breaks that beneficial connection.

For a cautionary tale about the dangers of property tax subsidies and alterations, consider California’s infamous Proposition 13, which was passed in 1978. Prop 13 limited the increases in property assessments and taxes for homeowners. The measure has certainly had its intended effect of keeping property taxes low for longtime California homeowners. However, it has also reduced mobility, dramatically increased alternative taxes, limited homeownership opportunities, and caused substantial tax disparities between similar properties. This is not what the people of Southwest Missouri need.

According to data from the Federal Reserve, people aged 65 to 74 have the highest net worth of any age group. So why, if we were to pick any age group for tax exemption, would we pick the wealthiest among us? (People over 75 have less wealth than those 65–74 or 55–64, but they have a higher net worth than any age grouping under 55.) We shouldn’t be handing out property tax exemptions to anyone, whether those exemptions take the form of corporate subsidies, developer abatements, or senior citizen tax freezes.

While passage of these propositions in Stone and Webster counties would benefit some senior citizens, it would alter the property tax and assessment system in a myriad of harmful and biased ways. Property taxes work best when the assessments are accurate, the base is wide, and the rates are low. Senior property tax freezes do not move Stone County or Webster County in that direction.

The post Senior Citizen Property Tax Freezes in Stone and Webster Counties Are Not Sound Public Policy appeared first on Show-Me Institute.

On May 15, 2024, Show-Me Institute Chief Economist Aaron Hedlund joined Pete Mundo on KCMO to break down the latest inflation data and discuss what it means for the Federal Reserve’s next move on interest rates.

Photo credit:

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Photo ID: 2258307915

Photo Contributor: christianthiel.net

The post What Does the Latest Inflation Data Mean for the Fed’s Next Move? appeared first on Show-Me Institute.

Several years ago, my colleagues and I were debating what the worst possible tax policy change could be. (I work at a think tank, so conversations like this are normal.) We settled on “exempting lottery winnings from income taxes.” While it may not be quite as bad, the ongoing proposals before Missouri counties to freeze the property taxes for senior citizens are similarly misguided attempts at tax reform. Boone County is the first county to put this question before voters, who will vote on Proposition One on April 2. Hopefully, Boone County voters will see through the sympathetic arguments for the plan and realize that this is very poor public policy.

Last year, state legislation authorized any county to freeze the real property taxes of the primary homes for senior citizens who qualify. Their property taxes will stay at the same amount they are when they become eligible for the plan, which for most people would be when they turn 62. The purpose of the proposal is to help senior citizens stay in their homes as they age, but there are several major problems with this idea.

This proposal is harmful simply because it reduces the property tax base. Unless local governments in Boone County cut services in response to the enactment of this tax freeze for seniors, it will almost certainly lead to higher tax rates on those property owners not eligible for the freeze. Proposition One will be every bit as much of a tax increase on non–senior citizens as it is tax relief for some senior citizens. People who live in homes of similar value with similar public services should pay similar property taxes. The recent college graduates in Columbia who have lived in their home for a year should not pay higher property taxes than their neighbor just because the neighbor has lived there for two decades.

Concerns over reducing the tax base are especially applicable in Boone County, with its substantial amount of university-owned property that is already off the tax rolls.

Passage of this proposal would also lead to the problematic situation in which people vote on property tax increases that they themselves do not pay. The single best aspect of property taxation is that it imposes the costs of local services on the people who use those services, unlike sales or hotel taxes that are exported in part to visitors, shoppers, and others. Instituting a system in which people vote on property taxes they won’t pay breaks that beneficial connection.

For a cautionary tale about the dangers of property tax subsidies, consider California’s famous Proposition 13, which was passed in 1978. Prop. 13 limited the increases in property assessments and taxes for homeowners. The measure has certainly had its intended effect of keeping property taxes low for longtime California homeowners. However, it has also reduced mobility, dramatically increased alternative taxes, limited homeownership opportunities, and caused substantial tax disparities between similar properties. This is not what Boone County needs.

According to data from the Federal Reserve, people ages 65 to 74 have the highest net worth of any age group. So why, if we were to pick any age group for tax exemption, would we pick the wealthiest among us? (People over 75 have less wealth than those 65–74 or 55–64, but they have a higher net worth than any age grouping under 55.) We shouldn’t be handing out property-tax exemptions to anyone, whether those exemptions take the form of corporate subsidies, developer abatements, or senior-citizen tax freezes.

Passage of Proposition One would certainly benefit some of Boone County’s senior citizens, but it would alter the county’s property tax and assessment system in a myriad of harmful and biased ways. Property taxes work best when the assessments are accurate, the base is wide, and the rates are low. Proposition One does not move Boone County in that direction.

The post The Upcoming Senior Property Tax Freeze Vote in Boone County appeared first on Show-Me Institute.

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.

The post Recession: To Be or Not To Be, That Is the Question appeared first on Show-Me Institute.

The state legislation, Senate Bill 190 (SB 190), authorizes any county to freeze the real property taxes of the primary homes for senior citizens who qualify under the eligibility rules. Their property taxes will stay at the same amount they are when they become eligible for the plan, which for most people would be when they turn 62. The purpose of the bill is to help senior citizens stay in their homes as they age, but there are several major problems with this proposal.

This proposal is harmful simply because it reduces the property tax base. Unless local governments cut services in response to the enactment of this tax freeze for seniors, it will almost certainly lead to higher tax rates on those property owners not eligible for the freeze. This bill is every bit as much of a tax increase on non–senior citizens as it is tax relief for some senior citizens. People who live in homes of similar value with similar public services should pay similar property taxes. The young couple who has lived in their home for a year should not pay higher property taxes than their neighbor just because their neighbor has lived there for two decades.

Passage of this bill would also lead to the problematic situation in which people vote on property tax increases that they themselves do not pay. The single best aspect of property taxation is that it imposes the costs of local services on the people who use those services, unlike sales or earnings taxes that are exported in part to visitors, commuters, and others. Instituting a system in which people vote on property taxes they won’t pay breaks that beneficial connection.

Furthermore, there are important questions about the enabling state legislation. In order to receive a property tax freeze, it says you have to be “eligible” for social security. Does that include social security spousal benefits for people who are themselves not senior citizens yet? Are teachers not eligible for this program? Some Missouri public school teachers are not in the social security program. Are they not included? These are just two flaws in the state legislation that are repeated in the county bill.

For a cautionary tale about the dangers of property tax subsidies, consider California’s famous Proposition 13, which was passed in 1978. Prop 13 limited the increases in property assessments and taxes for homeowners. The measure has certainly had its intended effect of keeping property taxes low for longtime California homeowners. However, it has also reduced mobility, dramatically increased alternative taxes, limited homeownership opportunities, and caused substantial tax disparities between similar properties. This is not what we need in Missouri.

A major tenet of good tax policy is that the tax base should be broadly based. St. Louis County, for example, is considering a property tax increase for major public building construction and renovations, yet at the same time it is poised to become the first county to move forward with a local ordinance to exempt senior citizens from property tax increases (if the governor signs the authorizing legislation). In other words, it’s debating a property tax increase while also considering exempting a large swath of residential property from those same future property tax increases. In economic terms, this is lunacy.

According to data from the Federal Reserve, people ages 65 to 74 have the highest net worth of any age group. So why, if we were to pick any age group for tax exemption, would we pick the wealthiest among us? (People over 75 have less wealth than those 65–74 or 55–64, but they have a higher net worth than any age grouping under 55.) We shouldn’t be handing out property-tax exemptions to any individual, whether those exemptions take the form of corporate subsidies, developer abatements, or senior citizen tax assessment freezes.

While SB 190 would benefit some Missouri senior citizens, it would alter our property tax and assessment system in a myriad of harmful and biased ways. Property taxes work best when the assessments are accurate, the base is wide, and the rates are low. SB 190 does not move us in that direction.

The post What to Do about Property Taxes in Missouri appeared first on Show-Me Institute.

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.

The post A New Economic Playbook with Allison Schrager appeared first on Show-Me Institute.

First of all, consumer spending is holding up. After only growing by 1.3% in the first quarter of 2022, it ended the year growing at a 2.1% clip—hardly robust, but clearly in positive territory. Consumers have been slammed by high inflation and eroding purchasing power for the better part of two years, but the steady job market and still-elevated checking account balances of households have managed to keep them afloat. Unfortunately, so too has rapid growth in credit card utilization, which may act as a source of financial vulnerability for consumers going forward as they grapple with continued interest rate hikes. Transitions into credit card delinquency are already on the rise, driven especially by households in the 18–29 and 30–39 year age ranges.

Switching gears, gross private domestic investment declined notably in the third quarter of 2022 (9.6% on an annualized basis) but increased by 1.4% in the fourth quarter. On the surface, this turnaround is good news. However, peeking beneath the hood reveals some reasons to be cautious. Most strikingly, residential investment fell by 26.7% as the housing market gets pummeled by the rapid rise of mortgage rates over 2022. In the first week of January 2022, the average rate for 30-year fixed-rate mortgages sat at 3.2%. In the last week of December, it was at 6.4%. Such a huge increase in rates translates to a jump in monthly payments of over $800 for someone buying a $400,000 house with a 20% down payment—making it more difficult to qualify for a loan.

Looking beyond the housing market, nonresidential fixed investment increased by an anemic 0.7% on an annualized basis in the fourth quarter after growing by 6.2% in the third quarter, a sizable deterioration. As a result, fixed investment overall fell by 6.7% on an annualized basis in the fourth quarter, which is even worse than the 3.5% decline in the third quarter. So how is it, exactly, that private investment still increased by 1.4% overall? The answer: inventories increased, which is far less important for economic growth in 2023 and beyond than businesses confidently investing in new factories and capital.

So what does all this mean for 2023? Unfortunately, not much. The good news is that the economy is not crumbling—at least not yet. And there are also reasons to be hopeful that the Federal Reserve’s interest rate hikes are finally breaking the back of inflation despite the federal government’s fiscal profligacy since the beginning of 2021. However, interest rates are still on their way up, consumers are borrowing more, gas prices are on the rise again, and the housing market is stalling out, with very real prospects of modest to moderate house price declines in at least certain pockets of the country. None of these trends bode well for consumer sentiment or small business optimism. But there’s still a chance that the Federal Reserve can manage to thread the needle, and divided government in Washington, D.C., means that more blowout inflationary spending packages are less likely. It’s certainly something worth crossing our fingers about.

The post The Latest GDP Report: What Does It Mean for 2023? 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.

The post Inflation and the Dangers of False Narratives appeared first on Show-Me Institute.

A year later, in January 2023, a lot has changed, but some things remain the same—especially the amount of economic uncertainty on the horizon. The economy began the year with rock-bottom interest rates, but after the Federal Reserve finally came to terms with the persistence of inflation, it wisely abandoned its lax stance and proceeded to tighten the screws by raising interest rates at an extremely rapid pace—taking its benchmark Fed Funds rate from 0 percent at the beginning of the year to over 4 percent by the end. During this same period, mortgage rates jumped from historically low levels of under 3 percent to over 7 percent. As a result, existing home sales fell by 35 percent over the year, and residential investment plummeted. Meanwhile, gross domestic product shrank during the first two quarters of the year but managed to register a respectable number in the third quarter (fourth quarter data is not available yet).

The primary questions on everybody’s minds entering 2023 are these: Can the economy achieve a soft landing? And can inflation come down without the U.S. economy entering recession? Unfortunately, it is still far too early to tell. Today’s jobs report revealed that the labor market continues to hold up, with payrolls growing by 223,000 in December 2022 and the unemployment rate falling to 3.5 percent. While these data are good news, they don’t tell us much about the future, because the labor market tends to lag the rest of the economy. In other words, if the U.S. economy hits turbulence in 2023 and enters recession territory, the labor market response will likely be delayed, as has been the case historically. In the meantime, the main takeaway from the most recent jobs report is that the prospects for the Federal Reserve reversing its rate hikes are basically nil—at least until inflation drops back down to 2 percent and remains there for a while. The recent release of the Federal Reserve’s minutes from its most recent policy meetings confirms that there is no sentiment at the Fed to begin rate cuts anytime soon.

It is still possible to gather some other tea leaves from some of the recent economic data, however, to get a sense for where the economy may be headed. The downside of the latest jobs data is that there is little to no evidence that workers are being enticed from the sidelines. As shown in the chart here, the labor force participation rate—which counts people who are working and those actively looking for work—remains below 2019 levels by a full percentage point. Some of the drop is due to early retirements during COVID-19, but if one looks at the data just for prime-age workers (those between the age of 25 and 54—see the chart here), their labor force participation rate hasn’t fully recovered either. With 1.75 job openings per unemployed worker, the labor shortage has no imminent end in sight, which also complicates the inflation picture by making it more difficult for businesses to accommodate demand without raising prices.

Thankfully, the end of 2022 offered some promising signs for inflation. Most directly, the inflation data itself showed some moderation, although it continues to run hot at over 7 percent year-over-year. Also, the most recent jobs report showed that wage pressures also may be subsiding to some extent. Of course, faster wage growth in principle is a good thing for workers, but only when driven by sustainable forces. Over the past nearly two years, wage growth has run hotter than in prior years, but the increase took place amidst a backdrop of declining productivity. The result has been even faster price growth, resulting in a steep drop in purchasing power, leaving families poorer in terms of their living standards. Going forward, 2023 offers a lot of uncertainty, and data over the next few months regarding inflation and productivity will be quite revealing. One thing working in the economy’s favor is a divided Congress, which should mean a stop to the glut of inflationary government spending. The question is whether it will be too little, too late to avoid a hard landing.

The post Year-End Jobs Report: Goldilocks, or Calm Before the Storm? appeared first on Show-Me Institute.

On May 10, 2022, Aaron Hedlund, chief economist at the Show-Me Institute, and Tyler Goodspeed, Kleinheinz Fellow at the Hoover Institution at Stanford University, discussed the impact of decades-high inflation on the economy, workers, and consumers, as well as the role of the Federal Reserve in solving the problem and the risk of the next recession.

Listen to the podcast:

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The post Inflation in America: The Role of the Fed and the Risk of Recession appeared first on Show-Me Institute.

Inflation has reared its ugly head again—hitting a 30-year high of 6.2 percent, which is more than triple the Federal Reserve’s definition of stable prices. Unfortunately, the wayward policies that have contributed to soaring prices, pervasive shortages, and sputtering growth are not going away. In fact, they are poised to get a whole lot worse.

President Biden signed the first of two giant spending bills into law on Nov. 15. That was the $1 trillion “Infrastructure Investment and Jobs Act.” The second bill is the administration’s proposed Build Back Better Act, passed by the U.S. House of Representatives a few days later and now pending before the Senate.

Taken together, we are looking at a potential tsunami of bad policymaking. Let us count the ways the two pieces of legislation threaten our nation’s freedom and prosperity:

#1. The infrastructure act is only partially about infrastructure as most people think of it. For example, the law spends only $110 billion on fixing roads and bridges—barely putting a dent in the maintenance backlog—while Amtrak alone will get 60 percent as much as all of America’s bridges and roads combined. Yes, that Amtrak—the one that has consistently run operating losses almost every year for the past 50 years. Tens of billions of additional dollars will go into public transportation even though only five percent of Americans rely on public transit in commuting to work.

#2. Also under the infrastructure act, the government says it will make “the largest investment in clean energy transmission and grid in American history,” and it calls for “building thousands of miles of new resilient transmission lines to facilitate the expansion of renewables and clean energy.” Wind and solar have been lavishly supported for decades, but still only account for 11 percent of U.S. electrical power generation, and their actual role is much less than that because they are intermittent. Does anyone seriously think they can come anywhere close to replacing gas and coal as the primary source of 60 percent of electrical power generation and be equally cheap, reliable, and easy to use?

#3. Then, too, as part of the green energy component of the “infrastructure” plan, the federal government will mastermind the building of a network of 500,000 electric vehicle charging stations, thereby not only putting taxpayer money at risk, but also putting the federal government in the position of picking winners and losers among America’s small-town communities through its choice of where to put those stations. The survival of local communities may soon depend increasingly on Washington, D.C.’s whims.

#4. The proposed Build Back Better Act would permanently and dramatically expand the welfare state and abolish work requirements as a condition for receiving aid. There would be some “free money” for taxpayers at all levels of income. The wealthy would get theirs in the form of expanded state and local tax (aka SALT) deductibility. The top current deduction of $10,000 isn’t much for a top-one-percenter living in an expensive house in a spendthrift, high-tax state like California or New York. Build Back Better includes an eightfold expansion of the maximum SALT deduction to $80,000. The typical taxpayer would get no benefit, while top earners would receive an average windfall of nearly $23,000. The Build Back Better Act would also permanently enshrine the Biden administration’s reimagined Child Care Tax Credit, which would allow a family to receive thousands of dollars a year ($3,600 per child under age 6 and $3,000 per child at 17 and under) in government cash with zero earned income and no expectation whatsoever of anyone having to seek a job.

#5. Adjusted for a lot of gimmickry, a close reading of the bill shows that it would result in nearly three trillion dollars in cumulative budget deficits over the next decade. Claims that the bill will not add a dime to deficits and debt are entirely spurious.

To sum up, what we have here is an overarching vision for transforming America. It would concentrate more decision-making power in the hands of the central government. And it would turn what has been a society of producers, workers, and investors into a society of people and institutions (including unions, businesses, schools, and an enlarged army of social workers and activists) whose livelihoods depend on what government gives them.

The post Commentary: A Tsunami of Bad Policy appeared first on Show-Me Institute.

• Barry Langford, Chair of the Columbia College Criminal Justice program. Langford has taught at the school since 1994.
• Aaron Hedlund,  economics professor at the University of Missouri and visiting scholar at the Federal Reserve Bank of Saint Louis.
• Nicole Volkert, former prosecutor and municipal judge. Volkert has served both Monroe and Montgomery Counties and a legal advisor to the Columbia Police Department
• Jennifer Bukowski, a criminal defense attorney with over ten years of experience. Nicole founded the Bukowsky Law Firm seven years ago after serving as a public defender for three years.
• Eric Schmitt, Treasurer of the State of Missouri, elected in 2016. Previously, Eric served in the Missouri State Senate

The 90-minute presentation was packed with information. Panelists discussed criminal justice theory, the process and players from arrest to parole, over-criminalization, and the deleterious role of fees and fines, along with possible reforms. Some of the latter the Show-Me Institute has discussed before, including the cost of incarceration overall and reforms such as Raise the Age and reducing mandatory minimums. Panelists even pointed out the positive effects that education choice can have on incarceration likelihood.

The entire presentation is now available online (click above). The Show-Me Institute is grateful to everyone who participated.

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Take for example the provisions of HB 1942, which would limit the annual interest on a payday loan to 36%. That may sound like a high limit to many, but remember that payday loans are not secured, meaning they are not backed by a car or a house or something else the lender can repossess if the person who takes the loan doesn’t pay up. They’re like personal loans from banks, which don’t come cheap. According to the Federal Reserve, the average personal loan interest rate is around 10%. For those without good credit, the rate approaches 30%.

Capping interest rates might sound like a good idea—sticking it to lenders and helping out regular people. But the people who take out payday loans are often those who would not qualify for a loan at 36% interest. Thus, a bill like HB 1942 would protect these people from high interest rates by cutting off their access to credit entirely. If someone’s car breaks down or they have a medical emergency and they need cash fast, telling them they should have saved more or joined a credit union six months ago will be cold comfort.

See former policy analyst David Stokes talk about payday lending in this Show-Me Institute video.

The post Missouri Legislature Looks to Further Regulate Payday Loans appeared first on Show-Me Institute.

“The stated goal of this project is economic development. That’s the dominant goal,” [Russ] Johnson said. “The dominant goal is not to have a lot of people ride it. The dominant goal is to develop the city.”

During remarks at the meeting, supporters, including Kansas City Mayor Sly James, presented as evidence of economic development the construction that has already taken place downtown. However, this employs a logical fallacy — post hoc ergo propter hoc. Municipalities often claim credit for development simply because it occurred after their policies were enacted, but it is disingenuous.

Below is an incomplete list of studies that demonstrate that economic development is not a result of fixed rail. We encourage everyone to read these, and we encourage streetcar supporters to provide contrary evidence that stands up to scrutiny.

• “The Great Streetcar Conspiracy,” Cato Institute, June 2012. Randal O’Toole has written extensively about the topic. If one questions this research because it comes from the libertarian Cato Institute, there are plenty of other sources.
• The Atlantic Cities published an article which makes clear that evidence for economic development due to streetcars is lacking. The author writes:

But while the Portland streetcar was the anchor or at least the featured element of this growth, it wasn’t responsible for this boom by itself. Rather, it was part of a broader development plan in which zoning, public-private investment, street upgrades, and other renewal efforts also played considerable roles.

• A 2010 study by the Federal Transit Administration concluded there was little information on the matter:

The literature regarding empirical measurement of actual changes in economic activity, such as changes in retail sales, visitors, or job growth, is almost nonexistent for streetcars. Indeed, this lack of empirical data was cited by many of the streetcar system survey respondents described in this report.

The same report also addressed the notion that streetcars attract the creative class:

Although occasionally the literature forecasting economic benefits for proposed streetcar systems posits that streetcars will attract more “creatives” to the area, this idea cannot be substantiated.

• Even the folks in Portland, whose work Kansas City streetcar proponents often cite, admit that results were dependent upon many programs, not just the streetcar. And even then, Portland’s ridership revenue is far less than they expected, making the effort a “money pit.”
• One attendee at the meeting referenced Cincinnati’s rail efforts, which, as one gentleman in attendance pointed out, has become a financial mess that voters rejected.
• A 1997 Georgia State University study of Atlanta’s trail transit system concluded

Taken together with earlier evidence that the social costs of rapid transit are higher than those for buses, the results suggest that it may be difficult to justify rapid rail investment on the basis of a benefit-cost analysis. In the absence of local economic development around stations, the benefits of rail are limited to those that might occur at the regional level. Future work should seek to quantify these benefits.

• A 2004 report from the Federal Reserve Bank in St. Louis also concluded:

. . . the increase in property values and economic development are subsidized benefits and may not be greater than the subsidy costs. Both citizens and local officials should have an understanding of the costs of light-rail transit relative to the potential benefits. Given the size of costs relative to the benefits, the creation of light-rail transit systems or the expansion of existing systems in American cities may be difficult to justify.

Indeed, building commercial-grade rail lines through 100-plus-year-old neighborhoods is difficult to justify. Study after study indicates no support for the city’s “dominant goal” of economic development. If streetcar boosters are aware of research that supports the claim that streetcars themselves — and not the tax-subsidized construction that goes with them — results in economic growth, we are eager to learn of it. Presumably, everyone else cited here would welcome seeing the research as well.

The post An Open Letter To Streetcar Supporters appeared first on Show-Me Institute.

The St. Louis Post-Dispatch’s David Nicklaus brought these results to Gary Findlay, executive director of the Missouri State Employees Retirement System (MOSERS) and an outspoken opponent of fair market valuation. “Using a risk-free discount rate, Findlay says, is about as sensible as arguing that the state should take a zero-risk approach to traffic accidents — by banning cars.”

In fact, fair market valuation does not say that pensions cannot take investment risk. Nor does it argue that investment risk cannot pay off. Rather, it merely says that we cannot assume that investments always pay off and ignore the risks those investments pose to the budget and the taxpayer. Under current pension accounting rules, a plan that takes more investment risk — say, by shifting into stocks, private equity, or hedge funds — automatically becomes “better funded” because the plan then assumes a higher investment return. But high-risk investments do not make pensions better funded. Yes, they reduce contributions for current taxpayers — but shift an equal and opposite contingent liability onto future generations to pay full benefits should the assumed rates of return fail to materialize.

And, as recent experience has shown, riskier investments do not always pay off, even over the long run. In fact, MOSERS’s own investment consultants told them that the plan has a less than 50 percent chance of achieving its stated returns. But full benefits must be paid 100 percent of the time. Fair market valuation catches the cost of guaranteeing full benefits. Current accounting standards ignore it.

Findlay’s traffic accident analogy is not the most apt, but think about it this way: Automobiles come with obvious benefits but also costs, including the risk of traffic accidents. But we cannot weigh the costs and benefits if we refuse to count the number of accidents each year. Similarly, we cannot refuse to consider the possibility that our bets on high-risk pension investments will not pay off, particularly when billions of taxpayer dollars are on the line.

The post Valuing Public Employee Pension Liabilities: Nothing ‘Fair’ About It appeared first on Show-Me Institute.

For those who may be wondering what exactly “first-tier” means, the Edward Jones Dome must be in the top 25 percent of all NFL facilities regarding some established criteria, such as: Fan amenities (box suites, club seats, lounges, etc.), technical areas (scoreboards, lighting, sound, etc.), and revenue-generating facilities (shops and concession stands). Considering that stadiums qualifying as top-tier include the newly-built Cowboys Stadium (price tag: $1.2 billion, with the Dallas Cowboys football team paying $875 million) and MetLife Stadium (price tag: $1.6 billion), the Edward Jones Dome has a long way to go to qualify. In fact, according to Patrick Rishe of Webster University, the cost of upgrading the Dome to “first-tier” status would be, at a minimum, $200 million-300 million (the cost of construction for the Edward Jones Dome was $280,000,000 in 1992 dollars). That is significantly more than the estimated $124 million in the CVC’s proposal.

Thus, officials for Saint Louis City, Saint Louis County, and Missouri have a decision on whether to pay up or face the prospect of the Rams leaving Saint Louis. I would urge the city, county, and state to forgo the use of any public money for upgrades to the Dome for several reasons. The first reason is on principle; the Rams are privately-owned and yet want public money for one of their facilities. If the Rams want a first-tier stadium, they should make a first-tier investment (and put a first-rate team on the field).

Second, even if city, county, and state officials wanted to pay for the upgrades, where are they going to get the money? The state is not exactly awash in cash, and the situation in the county is not much better. Both Missouri Gov. Jay Nixon and the state legislature have ruled out tax increases to help close the budget gap and I highly doubt they will go back on that in order to keep the Rams in Saint Louis. The city, county, and state could issue bonds (the state, at least, has a great credit rating), but they are still paying off ($12 million for the state and $6 million each for the city and county every year until 2021) the bonds issued to build the Edward Jones Dome. Does it make sense for the city, county, and/or state to go further into debt to keep the Rams in Saint Louis for another 10 years? Besides, when Kansas City and Jackson County helped fund renovations to Arrowhead Stadium, Jackson County struggled to keep up with the debt payments. Why put Saint Louis City and/or Saint Louis County in that kind of risky position?

Finally, even if the city, state, and/or county had the money, the use of public funds for sports stadiums does not generate much economic activity. According to a St. Louis Federal Reserve publication, the weight of economic evidence shows that the taxpayers do not get much of a return on their investment. In fact, the Federal Reserve study referred to another study:

Baade found that of the 30 metro areas where the stadium or arena was built or refurbished in the previous 10 years, only three areas showed a significant relationship between the presence of a stadium and real per-capita personal income growth. And in all three cases—St. Louis, San Francisco/Oakland and Washington, D.C.—the relationship was negative.

Considering these reasons, what justification can officials for the city, county, and/or state give for further expenditures on behalf of the Edward Jones Dome?

The post Dough for the Dome appeared first on Show-Me Institute.

The Star’s Sept. 29 editorial, “Voters spoke: Don’t kill e-tax or hike debt levy,” criticized outgoing Kansas City Federal Reserve chairman Tom Hoenig for recommending that Kansas City eliminate its earnings tax. The editorial stated Dr. Hoenig’s comments weren’t backed up with facts.

All the “facts” Dr. Hoenig needs is that as a PhD economist who has spent 38 years with the Kansas City Fed, he knows that Kansas City’s earnings tax harms economic growth in the city. Studies document the harm local earnings taxes have on economic growth, including three relating to Kansas City by Missouri’s Show-Me Institute (which did recommend a way to replace the tax).

Even though a large majority of Kansas City voters chose to keep the tax, that does not prove those studies or Dr. Hoenig wrong. It proves that the people of Kansas City wanted to keep the tax for a variety of reasons, which is entirely their right.

But good economics and popular public policy don’t always go together, which is exactly what Dr. Hoenig has been trying to warn us about at the national level for the last three years as well.

 

The post Letter To Editor in the Kansas City Star appeared first on Show-Me Institute.