Year-over-year inflation rate now stands at 6.5%

Year-over-year inflation rate now stands at 6.5%

inflation

Year-over-year inflation rate now stands at 6.5%

Today the U.S. Bureau of Labor Statistics announced that the Consumer Price Index (CPI) dropped 0.1% in December, meaning the year-over-year inflation rate now stands at 6.5%. The Bureau also released the 2022 annual average price level, which was 8% higher than 2021.

The Georgia Center for Opportunity’s (GCO) take: “We keep seeing positive headlines about the inflation rate, but that good news is lost on average Georgians who are continually pinched on the cost for everyday necessities like groceries and gas,” said Erik Randolph, GCO’s director of research. “Although there was some positive news in the December numbers, it’s important to keep in mind that core inflation remained elevated, including for food. If policymakers in Washington truly want to help the most economically vulnerable in our country, they must return to fiscal sanity and rein in the spending. Federal Reserve Chairman Jerome Powell remains steadfastly committed to bringing down inflation, and hopefully the change of political leadership in the U.S. House will mean more responsible federal spending. The policy goal should be to repeat the general decline in prices as what happened in December so the price level slowly comes back down. This will extend the opportunity of a higher standard of living for everyone, the rich and poor alike.”

Erik Statement
Key Policy Takeaways from 30 years of Child Poverty Decline

Key Policy Takeaways from 30 years of Child Poverty Decline

child poverty

Key Policy Takeaways from 30 years of Child Poverty Decline

Key Points

  • Childhood poverty leads to worse educational attainment, worse future labor market outcomes, worse mental and physical health and development, and increased risk of engaging in delinquent behavior.
  •  A reduction in child poverty is tied to government programs which incentivize work. 
  • The key takeaway from the Census data which shows child poverty rates are falling and the Child Trends report which studied the causes of the decline is that, despite massive social safety net expansions, work and self-sustainability still played a larger role in lifting children out of poverty than government spending did.

by Alexander Adams

 

In a world marred by clickbait media headlines portending disaster, it’s always a relief when some rosy news can sneak its way into a major publication: “Poverty, Plunging” was the title of a recent New York Times newsletter. Fortunately, there happens to be strong backing for such a direct headline: According to a recent report by the firm Child Trends, a nonpartisan research center, in 1991 27.9% of children lived at or below the Census’ Supplemental Poverty Measure. Today, that number has fallen to 11.4%. 

This is undoubtedly fantastic news. The research is unequivocally clear: children living in poverty face worse lifetime outcomes on a whole host of measures. Childhood poverty leads to worse educational attainment, worse future labor market outcomes, worse mental and physical health and development, and increased risk of engaging in delinquent behavior. The reduction in child poverty makes the lives of millions of children better off and has positive externalities for everyone in the country.  

The Child Trends report asked a few fundamental questions regarding this amazing decline in child poverty, the key one being: what exactly caused this massive decline in child poverty?

According to the media’s portrayal of the report, the reduction was due to expanded social safety net and increased social safety net spending. Another New York Times article on the Child Trends report was headlined: “Expanded Safety Net Drives Sharp Drop in Child Poverty.” Opinion writers at the Washington Post took it a step further, arguing that the decline in child poverty since the 1990s debunks “arguments that…government help must be accompanied with work requirements.”  

But does it really?     

According to the Child Trends report itself, many of the programs proven to be successful in reducing poverty—the Earned Income Tax Credit (EITC), the Child Tax Credit, the Supplemental Nutrition Assistance Program (food stamps)—have work requirements. The EITC is actually an earnings supplement which has been shown to incentivize work. The expansion of work requirements for welfare programs in the 1990s increased labor force participation, according to research, which translated into more income and less poverty. 

In 1991 27.9% of children lived at or below the Census’ Supplemental Poverty Measure. Today, that number has fallen to 11.4%. 

In 1991 27.9% of children lived at or below the Census’ Supplemental Poverty Measure. Today, that number has fallen to 11.4%. 

The increased post-tax income due to work incentives and requirements has not only reduced poverty and increased income, but has had nonfinancial impacts as well such as improved educational outcomes for children. The Georgia Center for Opportunity has previously published work on the deleterious nonfinancial impacts of nonwork. Figure 1.1 of the Child Trends report also shows that child poverty was stagnant from the beginning of the War on Poverty to the mid-1990s. The decline in child poverty occurred after we replaced our no strings attached welfare system with a system replete with pro-work incentives and requirements (though, work remains to be done). 

Given all of this, it should be argued, based on the results of the report, that it was pro-work reforms and expansions to earnings supplement programs which directly promote work and self-sustainability that reduce child poverty — not unrestricted government spending.

Not only that, but according to the Child Trends report itself, the vast majority of the decline in child poverty is attributable to increases in earned income and not expanded social safety net programs. According to the report, child poverty fell 16.5 percentage points — from 27.9% to 11.4% — between 1993 and 2019. In 2019, they argue the child poverty rate would be 44% higher in the absence of social safety net expansions. This means, of that 16.5% drop, approximately 6% can be attributed to social safety net spending and over 10% is due to non-governmental factors.[1] 

These other factors represent the effect of earned post-tax income not provided by aid. While the social safety net played a role in material child poverty reduction, we can see that private income played an even larger role in that decline. 

At GCO, we promote self-sustainability and work precisely because we understand that work plays a larger role in lifting oneself up from poverty than government aid — and the Child Trends report supports that argument.

The key takeaway from the Census data which shows child poverty rates are falling and the Child Trends report which studied the causes of the decline is that, despite massive social safety net expansions, work and self-sustainability still played a larger role in lifting children out of poverty than government spending did. Further, among the programs which did measurably help the poor, it was policies oriented towards promoting work, not programs without work requirements, which usually had the largest impact.

[1] As the child poverty rate in 2019 was 11.4% in 2019, and it would be 44% higher without social safety net expansions, this means, without social safety net expansions, child poverty would be approximately 16.4% (11.4*1.44 = 16.4). 16.4 (no welfare) minus 11.4 (reality) = 6%. This means approximately 10.5 percentage points of the 16.5% decline in child poverty was due to increases in earned income, and only 6 percentage points due to social safety nets (16.5 – 10.5 = 6). 

 

Inflation is still raging. Biden’s student loan forgiveness plan will only make it worse

Inflation is still raging. Biden’s student loan forgiveness plan will only make it worse

Inflation is still raging. Biden’s student loan forgiveness plan will only make it worse

Key Points

 

  • Year-over-year inflation rate remains high at 8.3%. While the latest monthly number, and the CPI reading from July, show that inflation has stalled, we’re not out of the woods yet.
  • Reducing fiscal revenue by suspending the loan repayments adds to federal fiscal deficits.
  • Labor market moral hazards will worsen the situation of students achieving meaningful education and solving the problem of their skills not matching what is needed in the labor market.

In September, the U.S. Bureau of Labor Statistics announced that the Consumer Price Index (CPI) rose 0.1% in August. However, the year-over-year inflation rate remains high at 8.3%. While the latest monthly number, and the CPI reading from July, show that inflation has stalled, we’re not out of the woods yet.

There are warning signals, including worldwide drought and continued energy disruptions, that inflation is not yet tamed. Moreover, Federal Reserve policy is refusing to allow the price level to come back down, meaning that most households will continue to contend with higher prices and lagging income growth. 

Meanwhile, the administration in Washington is taking steps that will only worsen the inflationary environment by its fiscal policy that relies on overspending absent adequate revenue. An unexpected part of this is President Biden’s new plan to forgive up to $20,000 in student loans for households making up to $250,000 a year. 

We’ve already written about how this policy will end up hurting the poor and working class. But from a strictly economic perspective, the blanket student loan forgiveness action by the president raises two additional fundamental concerns. 

  1. Deficit spending

Reducing fiscal revenue by suspending the loan repayments adds to federal fiscal deficits. Currently, the federal government is not running surpluses with a manageable national debt as if the federal government is in a financial position to be generous. The government itself is in a financial straitjacket where it must continue to borrow to pay for its expenses, and the interest payments on the national debt continues to grow not just from the additional borrowing but also from rising interest rates. Like a family with a large and growing minimum payment on credit card debt, it is crowding out other budget priorities. 

Although no economist knows how much more debt the U.S. economy can withstand, there is widespread agreement among them across the political spectrum that worsening deficit spending only aggravates inflationary pressures. We may say that taxpayers will eventually pay for the loan forgiveness, but the reality may be that we will pay for it sooner with higher inflation. 

Paying through inflation rather than taxes is regressive, impacting lower income Americans the most. Consider the Tax Policy Center estimate that 57% of households paid no federal income taxes in 2021 with many receiving a net gain instead. The Tax Policy Center expects that the percent of non-paying households will drop to about 40% over the next few years, consistent with pre-pandemic levels. Why is this important? Because it shows how an inflationary policy, instead of a fiscally sound policy, impacts low-income Americans worse.

  1. Labor market moral hazards

Second, it presents moral hazards that will worsen the situation of students achieving meaningful education and solving the problem of their skills not matching what is needed in the labor market.

The moral hazards will come about because given the history of entitlements in this country, once we begin on the path of creating a new entitlement, it opens the door for expanding that entitlement. Are not other students just as deserving of having their debt paid for now and in the future? And what about the past? Why not raise the thresholds so even more debt can be forgiven? What we’re creating here is an entitlement that has moral hazards.  Even the expectation of future loan forgiveness will cause behavioral changes with the same moral hazards.

  • The first hazard is with the students themselves. Choosing a career and what to study is a major life decision where one must weigh the benefits and costs. Already we have a problem with many students making bad decisions and studying things that will not help them develop the skills they need in finding good paying jobs. Installing a system where the cost of education is now paid for with other people’s money will give them yet another reason to rationalize their poor education decisions. While the debt of that education may be forgiven, the opportunity costs will be unforgiving because you can’t turn back the clock and erase the consequences of those bad decisions. 
  • The second hazard is with the post-secondary educational establishments themselves. Government involvement with guaranteed student loans already exacerbates the outrageous tuition price hikes we’ve witnessed over the past 50 years. Having the government now forgiving student debt will only reduce the financial incentives for higher education to rein in its exorbitant costs. 
  • Finally, where are the incentives for institutions of higher learning to adjust their content to match the needs of society and the economy? As the incentives are eroding for students to carefully choose what to study and for the educational institutions to rein in their costs, the arrangement provides yet another reason for academia to justify the assortment of degrees they offer and the courses they teach. Already we are witnessing a disconnect between the content of what students have studied with what they will need to be successful in their careers.These students typically learn this hard lesson once they graduate and are faced with the realities of life. This flaw in the education system is a contributing cause of the great mismatch between what skills and education people have and the skills needed by employers that fuels the economy. Our economy is currently suffering from this problem, which now will only grow worse.
Why student loan forgiveness plan is bad for the poor and working class

Why student loan forgiveness plan is bad for the poor and working class

student loan debt

Why student loan forgiveness plan is bad for the poor and working class

Key Points

  • A core part of our mission at the Georgia Center for Opportunity is to give the poor and working class a leg up on the economic ladder.
  • White House plan unfairly penalizes the poor and working classes, which disproportionately do not have college degrees and have not attended any college at all. 
  • Instead of loan forgiveness, we should work with borrowers to structure their loan repayments in a way that’s manageable but also helps them honor their commitments.
This week, the Biden administration announced a plan to forgive up to $20,000 in student loan debt for millions of Americans. The plan applies to households making up to $250,000 a year (or $125,000 for individuals), an income threshold that targets the middle class and upper middle class and many high-earning professionals.

A core part of our mission at the Georgia Center for Opportunity is to give the poor and working class a leg up on the economic ladder. This doesn’t come through cycles of generational government dependence, but through career training and credentialing that provides the pathway to fruitful full-time work and, ultimately, a better life.

We believe the White House’s plan is wrong on many levels, but a top way is the way it unfairly penalizes the poor and working classes, which disproportionately do not have college degrees and have not attended any college at all. 

Many of these individuals are working service-oriented jobs, entry-level positions, or laboring in the skilled trades. They are paying taxes. Yet under the Biden administration’s plan, they will bear the burden of paying off the student loans of their wealthier neighbors through their tax dollars.

Here are four additional ways that student loan forgiveness is ill-advised:

  1. It will contribute to already high inflation

Another way this plan hurts the poor and working class is by increasing inflation. This demographic spends a disproportionate share of their income on essentials like food and gas that have seen the most dramatic price increases in recent months.

As the Brookings Institution points out, $10,000 in debt forgiveness “would involve a transfer that is about as large as the country has spent on welfare … since 2000 and exceeds the amount spent since then on feeding hungry school children in high-poverty schools through the school breakfast and lunch program.”

  1. It doesn’t actually forgive anything

The White House has labeled the plan a “forgiveness” of student loan debt. But in reality, this approach simply transfers the burden onto the backs of taxpayers.

  1. It penalizes hard-working Americans

We’ve already discussed how the poor and working classes are treated unfairly by this plan. But the unfairness extends to many middle class families as well who worked hard to pay off their student loans or their children’s student loans. Once again, government policy is punishing hard work.

  1. Finally, it does nothing to address the affordability problem in higher education

According to Forbes, between 1980 and 2020, the cost of a college education jumped 169%. Meanwhile, the economic value of many four-year degrees has declined. The rapid inflation in the cost of college is, in large part, due to rampant government subsidies in higher education. Forgiving student loans only makes that problem worse.

The Success Sequence is a formula that outlines areas we can work in that will reduce poverty.

The Success Sequence is a formula that outlines areas we can work in that will reduce poverty.

A better way forward

Instead of loan forgiveness, we should work with borrowers to structure their loan repayments in a way that’s manageable but also helps them honor their commitments. We should also work to find a way to lower the cost of higher education to make it more affordable and encourage high school graduates to consider stable, good-paying jobs that do not require expensive college degrees.



A glimmer of good economic news? Maybe not

A glimmer of good economic news? Maybe not

A glimmer of good economic news? Maybe not

Key Points

  • As of June, 35 states and D.C. have not recovered the number of lost jobs
  • The labor force has shrunk despite population growth.
  • Its stated goal of the Federal Reserve remains the same–to reduce inflation to its 2% target, meaning it will take steps to prevent the price level from coming back down. This bad policy goal will burden the working class and the poor and retired persons the most.

It may not matter if federal policy does not change.

We’ve seen some back-to-back encouraging news within the last few weeks. The Employment Situation Report for July showed that the United States finally recovered the number of its lost jobs from the start of the pandemic, and the Consumer Price Index (CPI) inflation rate for July was essentially zero. But digging a little deeper to put the news into perspective reveals real concerns that stagflation will not end anytime soon.

The States Who Are Driving the Job Recovery

On the jobs front, yes, it’s true we’ve recovered the number of lost jobs benchmarked to February 2020 before the drastic impact on the labor market from COVID-19. This indicates we’re on the mend, but the job recovery process has not been the “V” shape hoped for at the beginning of the pandemic, one that would have meant a robust job recovery. 

Two-and-a-half years later, the civilian non-institutionalized population base that feeds the labor force grew by 4.8 million. Our own ARIMA Model job forecast shows we are approximately 5.8 million jobs short of where we would have been had the pandemic not happened. 

But this is not the case for all 50 states. Astoundingly, four states—Montana, Utah, Idaho, and Wyoming—have matched or nearly matched their pre-pandemic ARIMA Model forecasts, effectively eliminating any impact from the pandemic on the number of lost jobs. 

In the meantime, the national job recovery to pre-pandemic levels is driven probably by just 15 states who already recovered their number of lost jobs prior to the nation as a whole. These states are Utah, Idaho, Texas, Montana, North Carolina, Georgia, Florida, Tennessee, Arizona, South Dakota, Colorado, Arkansas, Indiana, and Nevada. 

As of June, the remaining 35 states and D.C. have not recovered the number of lost jobs. We have to wait another week before we know whether another state slipped onto the list of leading states that helped tip the balance for the national July data. 

According to our analysis, a common feature of the leading states is that they tend to have policies that value economic freedom more than the other states do. Incidentally, and for explanatory reasons and not for the purpose of getting political, all but three of the 15 leading states have given political control to the governor’s office and both chambers of the state legislature to the Republican Party.

Jobs Versus People Employed 

One problem with job data is that the dataset allows for double counting. If we want to count the number of people employed, it paints a different picture. 

The Current Population Survey shows the U.S. is still more than half a million workers short when compared to February 2020. In fact, we had fewer employed persons in July than March of this year, using seasonally adjusted data. 

The reason is that the labor force has shrunk despite population growth. This can be seen with the 62.1% labor force participation rate that is more than a percentage point below where it stood in February 2020.

This means that the 3.5% unemployment rate—which now matches its pre-pandemic level—is misleading. The shrinkage of the labor force is distorting the meaning of the metric.

Taken together on a national scale, jobs have recovered but the number of employed persons has not. This can mean only one thing. More people are working multiple jobs to make ends meet. 

Inflation versus the Price Level

July’s CPI ever-so-slightly decreased. It ticked down 0.2% at an annualized rate–a welcome change from the past 25 months. Just to keep this in perspective, the price level nonetheless increased 14.1% since the start of the pandemic. But there is no need to tell this to average consumers who have been feeling it in their pocketbooks. 

Disturbingly, the Federal Reserve shows no interest in doing something about the elevated price level–and who isn’t even discussing it. Its stated goal remains the same–to reduce inflation to its 2% target, meaning it will take steps to prevent the price level from coming back down. This bad policy goal will burden the working class and the poor and retired persons the most.

 

stagflation

“Disturbingly, the Federal Reserve shows no interest in doing something about the elevated price level–and who isn’t even discussing it. Its stated goal remains the same–to reduce inflation to its 2% target, meaning it will take steps to prevent the price level from coming back down. This bad policy goal will burden the working class and the poor and retired persons the most.”

“Disturbingly, the Federal Reserve shows no interest in doing something about the elevated price level–and who isn’t even discussing it. Its stated goal remains the same–to reduce inflation to its 2% target, meaning it will take steps to prevent the price level from coming back down. This bad policy goal will burden the working class and the poor and retired persons the most.”

Fiscal and Regulatory Policy

The Federal Reserve does not stand alone with its bad policy. Congress and the Administration are just as guilty, if not more so.

Excessive fiscal spending also drives up the price level. Worse, increasing business taxes will pull  resources from businesses. These resources are needed to produce goods and services that we all use and enjoy. It also enables these very same businesses to pay workers and compensate investors, and it leads to more economic growth and prosperity. Likewise, more excessive regulatory restrictions have similar negative effects on people and the economy.

Increasing business taxes and regulating businesses even more at this time will not help keep prices down. Rather, a good portion of these higher costs will be passed onto consumers.  And they will be passed on to consumers to the degree that individual businesses are able to do so. If businesses can’t pass all or even some of those costs on to consumers, then they will be forced to make more difficult decisions, such as cutting back on the number of employees or suspending pay raises to employees. Profits will clearly suffer that may cause a few businesses to scale back or exit the industry altogether. These consequential actions all aggravate stagnation. Add in the price increases and we get more stagflation, not less.

Unfortunately, the President just signed into law the erroneously named Inflation Reduction Act that will do nothing about inflation, but it will hike business taxes and increase regulations that will only worsen the economic situation. 

Congress and the Administration need to start following the lead from the states who are doing it right. Only pro- growth policies relying on innovation and production organically sprouted from within the economy will help us out of this mess, and it won’t work if politicians think that means taking money from successful businesses or imposing new mandates on others or picking the winners and losers in the economy.



 

Media Statement: Assessing the GDP numbers and what it means

Media Statement: Assessing the GDP numbers and what it means

In The News

Media Statement: Assessing the GDP numbers and what it means

Today, the U.S. Bureau of Economic Analysis announced that in the second quarter of 2022, real Gross Domestic Product (GDP) declined by 0.9%. That marks two consecutive quarters of negative growth, a barometer of economic health that economists typically use to define a recession.

The Georgia Center for Opportunity’s (GCO) take:
“It’s now official. We’re having stagflation.

There has never been a time when the Business Cycle Dating Committee did not declare a recession when real GDP declined for two consecutive quarters since the availability of quarterly GDP data,” said Erik Randolph, GCO’s director of research. “In fact, the opposite is true. There have been two times, since the availability of the data, without two consecutive real GDP declines when the Committee declared them to be recessions. This happened with their declared 1960 and 2001 recessions. Who knows if and when the NBER Committee will declare whether we’re already in a recession, and for how long. But if it doesn’t declare so despite the real GDP data, it would be unprecedented and require a good explanation. In the meantime, GDP gives perhaps the broadest measure of economic activity, giving a strong signal that we’re in a recession until such time economists work out their various methodologies to affirm or deny.”