Inflation’s Growing Problem: A warning shot for Congress

Inflation’s Growing Problem: A warning shot for Congress

Inflation’s Growing Problem: A warning shot for Congress

poor child in America inflation

The inflation rate in July—as measured by the seasonally-adjusted Consumer Price Index (CPI)—abated somewhat from June’s rate, increasing at 0.5% instead of 0.9%. But don’t cheer too much yet.

This is known by economists as disinflation, not deflation. The rate came down, but prices are still continuing to climb.

Annualized, the monthly inflation rates calculate to 5.8% for July and 11.4% for June. Both rates continue to exceed the Federal Reserve’s target of 2% annual inflation. Of course, as I discussed in this blog, the Fed’s 2% target rate is too high and compromises Congress’s original goal of promoting purchasing power that would benefit everyone.

Prices are Ratcheting Upwards

When the CPI inflation rate is viewed by its increase from the same month of the prior year, the trend is not good. 

Although the increase over the prior year held steady for July, prices were also increasing last year. That is, prices are still 5.3% higher than a year ago when prices were also increasing. The problem is compounding, and prices are ratcheting upwards.

Inflation not a problem?

Perhaps not surprisingly but definitely unfortunately, the Fed’s economists appear to have been caught off guard. When Fed Chairman Jerome Powell testified before Congress last month, he admitted as much as inflation has spiked higher than they anticipated. However, he still maintained that the inflation is based on temporary factors that will abate with time.

Mr. Powell’s comments may have been just for the inflation rate, and he may be overly optimistic. In the meantime, we must brace ourselves for an increase in the price level. 

To think that the price level may come down is probably unrealistic. That has not happened ever since we gave the Fed the responsibility to maintain purchasing power in 1946 that was dumbed down in 1978 to the weaker goal of “reasonable price stability.” Of course, this policy change happened during the complete failure of federal policymakers in both the Fed and Congress when the nation was suffering from double-digit inflation combined with stagnant economic growth.

Why does promoting purchasing power matter? 

Inflation hurts practically everyone. If your wages do not keep up, your purchasing power is eroding. 

This is truest for those in poverty, low-income families, and low-skilled labor. They will slip further behind, making income disparity worse and possibly causing Congress and state governments to spend more on safety-net programs that will only fuel inflation higher when Congress funds the increases with even more debt.

Businesses—who need predictability to make good entrepreneurial decisions—generally will also suffer, slowing down economic activity. 

Workers will have a harder time keeping up with rising prices and will demand higher wages, only fueling inflation further.  

More Cautious Approach to Government Spending is Needed

A likely major cause of the climbing price level is all the governmental debt-based spending to address the pandemic. Further debt-based spending will not ameliorate the problem but exacerbate it. 

Congress needs to exercise more restraint and caution now as it considers the expansive spending bills that appear likely to pass. It is very likely that they are setting up the nation for unpleasant economic times, hurting the poorest among us the worst. The growth in the Consumer Price Index is an omen for Congress to take a step back and trim those bills.

 

Promote Purchasing Power—Not the Minimum Wage

Promote Purchasing Power—Not the Minimum Wage

Promote Purchasing Power—Not the Minimum Wage

sad girl and mom

How to help working families the most

During a focus group session on working class families we recently conducted at the Georgia Center for Opportunity, Jazmine* made an observation more perceptive than most experts.

Our focus group consisted of working-class African-Americans who did not have a college degree and who were not employed in a managerial position nor on track to become a manager. 

Knowing financial stress up close, Jazmine essentially said that either the minimum wage should be increased or the cost of living should be lowered.

Her observation is a perfect segue from my prior blogs on:

 

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Promoting Purchasing Power 

The Employment Act of 1946 declared it is the policy and responsibility of the federal government to:

         “promote maximum employment, production, and purchasing power.”

Promoting purchasing power means lowering the cost of living, as Jazmine suggested. 

Solidified in the 1951 Accord with the Treasury Department, the responsibility ultimately fell to the Federal Reserve to conduct monetary policy as we know it today.

How well has the Fed done with promoting purchasing power? Horribly, quite frankly.

Since 1951, prices have increased 3.4% annually on average, as measured by the geometric mean. In other words, the price level was tenfold higher in 2020 than in 1951. Prices doubled each generation.

It is widely accepted that the poor suffer most from inflation because they spend a higher portion of their income on necessities, and their income growth typically lags others. 

For example, according to the most recent mid-year consumer expenditure report from the Bureau of Labor Statistics, consumers in the lowest income quintile spend 82.2 percent of their income on housing, transportation, food, and healthcare, compared to 64.4 percent for the highest quintile. A five percent inflation rate would cost those in the lowest quintile an additional $1,156 for these items on a budget that is already tight, averaging $28,141. A 10% inflation rate would double those costs to $2,312.

Worse, those in the lowest quintile are unable to save for their future, and inflation erodes away the value of the little savings they do have. Consider that on average, those in the lowest quintile purchased only $563 in personal insurance or toward their pensions, compared to $19,736 for those in the highest quintile. This disparity guarantees the poor will be inadequately prepared for retirement or unforeseen loss or tragedy.

 

inflation

Prior to the federal government taking on the responsibility of promoting purchasing power, prices not only remained fairly stable but actually decreased during times of relative peace. Typically, they only increased dramatically during times of war. 

This pattern can be seen visually in the accompanying chart using the Consumer Price Index and related data from the Federal Reserve Bank of Minneapolis. For example, the price level increased 24% due to the War of 1812 but then deflated 57% over 47 years until the start of the Civil War, even after accounting for a slight bump up due to the Mexican War. 

The pattern was similar for the remainder of the century. Prices increased 74% during the Civil War but then deflated 47% to its pre-Civil War level until the start of the 20th Century.*  Although the price level rose somewhat during the progressive era, it was still 30% lower at the start of World War I than at the close of the Civil War.

 

inflation 2

America’s inflationary policy 

Unfortunately, a 1978 law changed promoting purchasing power to become the lame “reasonable price stability,” which is not the same thing.

Over the years, the Fed has allowed inflation as a matter of policy. In 2012, Fed Chairman Ben Bernanke explicitly stated for the first time an inflation target of 2% per year. If the Fed can somehow hold to this target, which it has not been able to do historically, it equates to doubling the price level every 35 years. Last August, it backed away from this policy. Because of all the pandemic spending and monetary expansions, the Fed approved a policy to allow inflation to rise “modestly” above its 2% target. 

It is not just the Fed that has shied away from promoting purchasing power. In 1978, and in the midst of the stagflation years, Congress legislated the modest goal that inflation should be 3% or less, but the target rate was supposed to come down to zero percent by 1988 unless it might have impeded employment.  

The Fed is not alone to blame for the inability of the federal government to control inflation. Congress’s lack of fiscal discipline resulting in soaring budget deficits place the Fed in a tenuous position to keep interest rates low so federal debt service costs also remain low. Furthermore, recent Fed direct purchases of Treasury debt because of all that federal spending adds to the money supply, eroding—not promoting—purchasing power.

 

How Congress can better help the average working family

If economics has any immutable law, it must be that you can’t get something out of nothing. This explains why the Consumer Price Index increased 5.4% since last year, as announced today by the Bureau of Labor Statistics. And the rate of increase appears to be accelerating. The monthly rate was 0.6% in May but 0.9% in June. If this June inflation rate persists, and hopefully it does not, we will have double digit inflation. A 0.9% monthly rate equates to an 11.4 % annual rate.  

Considering all the recent deficit spending by Congress and expansionary policies by the Fed, expect more of the same, or worse. In fact, according to a survey of economists in yesterday’s Wall Street Journal, “Americans should brace themselves” because economists are waking up to the prospect of higher inflation, expecting “brisk price increases for a while.”

Economic history indicates deflation should be the norm. In fact, innovation spawns increased productivity that allows prices to fall, which should show up as deflation. We have the opposite: productivity gains with inflation. This outcome places the blame squarely on monetary and fiscal policy. 

In the meantime, Jazmine and other hard working Americans struggle to keep up with rising prices. Instead of pushing for increases in the minimum wage that help some at the expense of others, Congress needs to renew our nation’s purchasing power policy and get its fiscal house in order. 

 

 

 *Jazmine’s last name withheld for confidentiality.

 

*This is not intuitive. It takes a smaller percent decrease to offset a percent increase, such as a 43% reduction will offset a 74% increase. For example, suppose you receive a 20 percent pay raise this week, but next week you receive a 20 percent pay cut. Are you back where you started? The answer is no; you are worse off. If your weekly pay was $100, the increase took you to $120, but then your pay cut took you to $96, even lower than your starting point.

 

Erik Randolph is the Director of Research at the Georgia Center for Opportunity.

 

The Top 5 Recommendations to the Feds on Economic Mobility

The Top 5 Recommendations to the Feds on Economic Mobility

The Top 5 Recommendations to the Feds on Economic Mobility

 

By Erik Randolph

 

 

If you had the opportunity to tell federal agencies what they need to do to help low-income people improve their economic circumstances, what would you tell them?

This is not an arbitrary question. It was formally asked by the current administration in Washington, D.C.

A New Council on Economic Mobility

The U.S. Department of Health and Human Services (HHS) is leading the development and establishment of an interagency Council on Economic Mobility. This council will include the heads, or their delegates, of the U.S. Departments of Agriculture, Education, Labor, Housing and Urban Development, and the Treasury. It will also include the heads of the Social Security Administration and the Council of Economic Advisors.

The purpose of the Council is to find areas where the participating agencies can collaborate for a very important purpose: “to promote family-sustaining careers and economic mobility for low-income Americans … and help individuals sustain their economic success.” Note that all these departments administer important welfare and workforce-development programs. 

Last July, HHS solicited comments to 15 questions to help  develop  this new council. What should be its priorities? What barriers do individuals face? How are welfare cliffs impacting individuals? 

Relying on its experience with providing services, working with other service providers, and research, the Georgia Center for Opportunity (GCO) submitted recommendations to this request on October 2, 2020.

GCO’s Top Recommended Priorities

Below are GCO’s top recommendations for what the council’s priorities ought to be.

Priority #1: Eliminate Marriage Penalties

Marriage penalties make number one on our list. 

The strong correlation between marriage and prosperity is well-researched and undeniable. Research also demonstrates overwhelmingly that a stable home with married parents benefits children in many ways, including emotional stability, educational achievement, and future income. Unfortunately for many, the idea of healthy marriage is something desirable but unattainable for themselves. A strong marriage has It’s becoming a luxury for many, and they are losing out on which denies too many the economic and otherwise fulfilling benefits. 

Recently, the Office of Family Assistance at HHS sponsored the study Marriage Penalties in Means-Tested Tax and Transfer Programs: Issues and Options, authored by Bradford Wilcox, Ph.D., Chris Gersten, and Jerry Regier, Ph.D. This study does an excellent job at detailing current research in the area and discusses potential solutions. By the way, GCO gave input to the authors of the study.

Priority #2: Eliminate Welfare Cliffs

As just indicated, the welfare system has embedded disincentives that can discourage recipients from seeking employment, working additional hours, or accepting pay increases. And our research in this area has been recently corroborated by a National Bureau of Economic Research paper written by five economists, including two who work for the Federal Reserve Bank of Atlanta. 

Many of these disincentives are the direct result of federal government policies and are found within the tax code and various eligibility and benefit determination rules of means-tested welfare programs.

Priority #3: Sponsor Research and Financial Modeling to Solve the Big Problems

In a prior blog , I wrote about how welfare programs and the tax code can be barriers by creating disincentives to advance economically. Also, a prior study illustrated how marriage penalties are further barriers. 

Well, these problems are complex, and the solutions have perplexed policymakers for years. Therefore, it is important for continued research to come up with the best solutions. 

By the way, GCO is well positioned to help examine these issues. We have studied both the problems and offered potential solutions. 

Priority #4: Promote Work-First Policies

Research and experience show that promoting work first for those applying for welfare assistance—as opposed to seeking education and training first—usually works better in helping them secure meaningful employment in the long run. 

A work-first policy does not mean that education and training are forsaken. It simply recognizes the reality that connecting people to real jobs in the economy gives them a foothold in the workforce where further skill development and training can often be accomplished while they are holding down a job and earning earned income. 

Priority #5: Look for ways to reduce regulatory barriers

The federal government should review its policies to make sure they do not make it harder for people to get jobs or start job-creating businesses. This recommendation falls under the broad heading of “getting government to help facilitate job growth, not hinder it.”

So what do you think? Should these be the recommended priorities for the new federal council? Are there other priorities you would have included? Post your comments below. 

Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

DISINCENTIVES FOR WORK AND MARRIAGE IN GEORGIA’S WELFARE SYSTEM

Based on the most recent 2015 data, this report provides an in-depth look at the welfare cliffs across the state of Georgia. A computer model was created to demonstrate how welfare programs, alone or in combination with other programs, create multiple welfare cliffs for recipients that punish work. In addition to covering a dozen programs – more than any previous model – the tool used to produce the following report allows users to see how the welfare cliff affects individuals and families with very specific characteristics, including the age and sex of the parent, number of children, age of children, income, and other variables. Welfare reform conversations often lack a complete understanding of just how means-tested programs actually inflict harm on some of the neediest within our state’s communities.

Welfare Without Dignity Doesn’t Work

Welfare Without Dignity Doesn’t Work

Welfare Without Dignity Doesn’t Work 

 

 

By Corey Burres

 

 

I drove through my neighborhood and saw dozens of tents lining the wooded area near my home. I realized there were families and single mothers living in these tents. My heart broke. How did we get here? When did we start to accept this for those in our communities?

I know from our work at Georgia Center for Opportunity (GCO) there are local and governmental services available. I know there are many community groups and philanthropic organizations working to address the basic needs of shelter, food, and health. But I question if these systems address the issue of dignity.

Dignity is a word we throw around a lot at GCO. It’s a core value for our team, but it is also a core component of how we choose to view others. It is a driver, yes, but more importantly, it is a goal. We can address needs and make some headway, but until we restore dignity to individuals we will continue to fight an endless battle. Government safety-net programs are not designed to restore dignity. That is a problem.

Without finding self-worth and dignity in what we do, we continue to seek “just enough.” If we truly want those around us to thrive, we must create systems that seek to do more than simply appease a need. We must create systems that see the value of peoples’ humanity and desire for them to move into a vibrant and thriving future.

The fact of the matter is that systems like Medicaid, food stamps, and other programs are not designed to move people into a better life. Instead, they are a stop-gap that simply meets an immediate or temporary need.

If we truly want those around us to thrive, we must create systems that seek to do more than simply appease a need. We must create systems that see the value of peoples’ humanity and desire for them to move into a vibrant and thriving future.

In the case of temporary unemployment or hard times, this is sufficient and works as intended. It’s why many people tout the effectiveness of these programs. They do work—for some.

However, in the case of intergenerational or long-term poverty, the result is marginalized groups systemically stuck—trapped in dependency and without hope.

And that is what I see when I pass these tent cities. These are our neighbors who have surrendered to a way of life, one that we desperately hope our own loved ones will never experience. The tragedy is that our political leaders have done just enough to appease them.

True compassion says we should hope for them to move off government assistance programs and feel the sense of dignity and belonging we want for everyone.

Over the next month, we are going to highlight changes to assistance programs that will remove the traps in our safety-net systems. We will highlight local support networks that view the individual through the lens of the dignity that they deserve. And we will bring together the business and community leaders leading the charge at Breakthrough.

Will you join us?

 

Welfare Cliffs Exist—Concludes Team of Economists

Welfare Cliffs Exist—Concludes Team of Economists

 

 

 

Welfare Cliffs Exist—Concludes Team of Economists 

 

 

 

 

 

 

By Erik Randolph

 

 

Since 2016, the Georgia Center for Opportunity (GCO) has demonstrated the existence of welfare cliffs. Now a team of five economists has come to the same conclusion.

Welfare cliffs are an unfortunate feature of the American welfare system. They occur when a family’s breadwinner, or an individual, discovers that his or her family will become worse off economically by earning more money. It sounds paradoxical, but it happens whenever the loss in welfare benefits exceeds the additional take-home pay.

Exactly when the cliffs occur, and how bad they are, depends on many factors, including the characteristics of the family, how much they earn, and where they live. And because of the haphazard way the welfare system is constructed, it turns out that there isn’t a single cliff but multiple cliffs that a family can encounter over the range of potential earnings.

For more information on GCO’s work on the cliffs, check out this website that shows cliffs in eight states by common family types.

New Study

Authored by economists at the Federal Reserve Bank of Atlanta, Boston University, and the University of California, Berkeley, a newly published study takes a sophisticated approach to identify disincentives in the U.S. tax and welfare structure. Published as a working paper by the National Bureau of Economic Research (NBER), the authors fed the results of the most recent Survey of Consumer Finances through a fiscal analyzer.

The Economic Team

David Altig, Federal Reserve Bank of Atlanta

Alan J. Auerbach, University of California, Berkeley and NBER

Laurence J. Kotlikoff, Boston University and NBER

Elias Ilin, Federal Reserve Bank of Atlanta and Boston University

Victor Ye, Boston University

 

 

The Survey of Consumer Finances is a project of the Board of Governors of the Federal Reserve System. It is the most comprehensive survey examining the personal finances of American individuals and families. Thus, the input data for their study represent a statistical picture of how families are faring economically.

In other words, the financial situations of a representative cross-section of families in America was fed through a fiscal analyzer. This particular fiscal analyzer was based on a personal financial planning tool developed by the software company of Laurence Kotlikoff, one of the study’s authors.

The fiscal analyzer estimates the likely future financial path that individuals or families will take over their remaining lifetime, along with the future taxes and benefits they will pay or receive. The study uses standard mortality rates to predict lifespans and gives a unique calculation on the degree and magnitude that incentives or disincentives exist over that likely path.

The study defined the future fiscal burdens, consisting as taxes and benefits, as marginal tax rates. If a person’s remaining marginal tax rate increases, then so does the tax burden. The greater the magnitude of the marginal tax rate, the greater the disincentive.

Study Results

Given our own work, the conclusion of the authors was not surprising. To quote from their study:

“Our findings are striking. One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty.”

“… one in four bottom-quintile households, regardless of age, face marginal tax rates above 65 percent. Thus, a major share of poor households are effectively locked into poverty by America’s fiscal system.”

The authors were careful to point out that this study looks at the structure of America’s fiscal system, meaning these disincentives are hardwired into the laws and rules of the system. This corroborates exactly with our research. The very rules themselves are what create the disincentives and the cliffs. The silver lining here is that rules can be changed.

This study did not attempt to measure how people react to the disincentives. Some might bite the bullet, take the hit, and still advance their earnings anyway. On the other hand, others may take a defeatist tact, backing off from earning more to draw down more government assistance. This is a ripe area for future research, to determine the proportion of people who forge ahead anyway versus those who give up and retreat.

In the meantime, we shouldn’t wait for future research on how many people accept defeat and remain poor. It makes more sense to fix the rules now so the question becomes moot.

Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

 

 

 

 

DISINCENTIVES FOR WORK AND MARRIAGE IN GEORGIA’S WELFARE SYSTEM

Based on the most recent 2015 data, this report provides an in-depth look at the welfare cliffs across the state of Georgia. A computer model was created to demonstrate how welfare programs, alone or in combination with other programs, create multiple welfare cliffs for recipients that punish work. In addition to covering a dozen programs – more than any previous model – the tool used to produce the following report allows users to see how the welfare cliff affects individuals and families with very specific characteristics, including the age and sex of the parent, number of children, age of children, income, and other variables. Welfare reform conversations often lack a complete understanding of just how means-tested programs actually inflict harm on some of the neediest within our state’s communities.