While a stagnating economy with high inflation is what economists usually call stagflation, the current situation is worse, as the real economy is declining. So there’s much less to go around for everyone—making us poorer in the process.

This inflation-recession could be resolved by Washington reversing course, but President Joe Biden and Democrats in Congress are doing the opposite. Their new bill, called the “Inflation Reduction Act” (IRA), will spend more, raise taxes, increase debt, and contribute to more inflation, resulting in a deeper recession.

The IRA includes estimated hikes in taxes with a new 15% corporate minimum tax rate, 87,000 new Internal Revenue Service (IRS) agents to audit more taxpayers, and new closure of “carried interest loophole.” These are each bad policies, but especially during a recession. These add up to an estimated tax hike of about $730 billion compared with current policy over the next 10 years.

The main tax hike is the new alternative minimum tax (AMT) of 15% on book income for corporations with net income exceeding $1 billion. This proposal has a rosy revenue projection of $313 billion. But businesses don’t pay taxes; they just submit them. People pay them, through higher costs, lower wages, and fewer jobs. The dynamic effects will result in less tax revenue collected from this hike.

According to a recent study by the Tax Foundation, this tax hike alone would contribute to killing 23,000 jobs, a 0.1% cut in wages, and 0.1% less in economic output. If we consider other provisions like the tax hikes on carried interest and reinstatement of the federal Superfund program, the total number of jobs killed is 30,000 with every income group having a reduction in after-tax income.

Clearly, this wouldn’t reduce inflation or help the economy recover. But there’s more.

While the IRA is aimed at taxing the rich and corporations more, the Congressional Joint Committee on Taxation finds that every income group except those with income between $10,000 to $20,000 per year would face a higher average tax rate. This would mean President Biden’s pledge to not tax anyone earning less than $400,000 per year would be broken, with about half of the burden falling on those earning less than $200,000 per year.

And the $80 billion in additional funding for 87,000 new IRS agents to increase tax enforcement and compliance is expected to bring in a phony amount of about $200 billion over a decade. But this will just increase more bureaucracy in an already overly bureaucratic federal government that will make Americans’ lives worse as they put more costs on taxpayers. Specifically, there could be 1.2 million more individual audits per year, and you can bet when the IRS doesn’t increase tax collections from legal tax returns they will come after every tax group, not just those making more than $400,000 per year.

On the spending side, the IRA provides tax incentives and subsidies for unreliable wind and solar energy, an expansion of Obamacare subsidies until 2025, and other expenditures to the tune of about $430 billion. Using these rosy assumptions, there is a projected deficit reduction of $300 billion over 10 years.

However, more conservative estimates suggest that the IRA will have less deficit reduction and will likely increase the deficit.

The Tax Foundation, Penn Wharton Budget Model (PWBM), and Congressional Budget Office (CBO) calculate a $178 billion, $247.8 billion, and $101.5 billion in deficit reduction over the next decade, respectively. But assuming the Obamacare subsidies are extended over the full 10-year period for an apples-to-apples comparison, the PWBM estimates that would bring that deficit reduction down by $158.9 billion to just $88.9 billion over the decade, which is the same amount of the deficit in just June 2022.

But recall that these estimates are compared with current policy assumptions over the next decade, which already have massive deficits because of reckless spending, so the IRA will most likely make the deficit worse.

Spending will be permanent and is on the front end of the bill, while taxes will likely be temporary and are more on the back end—so the deficit will be higher in the first few years, which will give the Federal Reserve more debt to purchase thereby creating more inflation.

And the higher taxes, more debt, and more inflation will stifle economic growth so a deeper recession will result.

The IRA does the opposite of what the name implies. This is now too common with Democrats in Congress as they like to keep redefining things that don’t match their narrative. They should instead name this bill the “Inflation Recession Act” because we will get more of both.

This far-left agenda must be rejected. Kill the bill.

Published at TPPF with Daniel Sanchez-Pinol

Americans are sacrificing their savings to keep up with soaring inflation.

This burden has contributed to consumer sentiment reaching its lowest level in June since the University of Michigan started the survey in January 1978. And the progressive policies in D.C. could soon make this bad situation worse.

The personal saving rate, which is the share of after-tax income not used for consumption, declined again to 5.1% in June. This is after it reached 33.8% in April 2020, which was a record high since January 1959, after the first round of “stimulus” checks sent by Congress during the shutdowns.

There were two more rounds of checks sent by Congress, along with enhanced unemployment payments and other handouts that weren’t connected to work, which kept the saving rate historically high as many places were shut down and people made more from handouts than they did while working.

Remember, nothing is free.

Those handouts and other government spending contributed to more than $6 trillion in additional national debt, which the Federal Reserve then mostly monetized—leading to the generational high in inflation.

The higher inflation outpaced saving and income growth since then, as the costly policies came home to roost and cut the saving rate to 5.1%—the lowest since August 2009.

What will happen when Americans run out of savings? But there’s little reprieve in sight as inflation looks to keep rising or at least not abating soon from bad policies in D.C.

Inflation, which is the loss of purchasing power of your dollar, continues upward to 6.8% in June 2022 as measured by the personal consumption expenditure (PCE) price index—the highest since January 1982. The PCE inflation measure accounts for the substitution effect from high priced goods to lower priced goods. This isn’t reflected in the often-reported measure of the consumer price index (CPI) inflation rate of 9.1%, which is the highest since November 1981.

Both measures show Americans’ money isn’t going nearly as far as it did a year ago. In fact, families’ purchasing power is set to be cut in half in just 10 years at the pace of PCE inflation and even faster for CPI inflation.

This implies that in order to maintain the same consumption levels, households have to allocate more income to consumption than to savings. And many Americans are turning to increased debt as their savings dry up.

Household debt increased to a record high of $16 trillion in the second quarter of 2022. Not surprisingly, credit card debt grew the most by 13%, which is the fastest increase in 20 years. Moreover, household debt to real economic output passed the 80% mark at the end of 2021. It’s up to 82% in the second quarter of 2022, a historically high rate, as debt increased and the real economy declined for two straight quarters.

This share will likely get worse in the following quarters as Americans go through their savings and dip further into debt. And interest rates going up means the amount to pay interest on the debt will contribute to higher balances and more pressure to meet their financial obligations.

No wonder people don’t feel secure about their economic future. Bad policies by Congress and the Federal Reserve contributed to this destruction and could even make things worse.

Congress spent too much, leading to massive deficits, which gave the Fed debt to purchase to inject money into the economy over the last two years. That inflated “boom” had to eventually “bust.” And that’s what is happening now as the redistribution by Congress has slowed some and the Fed is finally raising its target interest rate allowing markets to correct.

But Congress should be spending much less and the Fed should be more aggressive in tightening the money supply and raising its interest rate target. The famous Taylor rule suggests a rate of at least 6%, which is substantially higher than the current range between 2.5% to 2.75%.

Ultimately, what’s needed now are pro-growth policies of spending, taxing, regulating, and printing cuts instead of what’s coming out of Washington. President Biden and Democrats in Congress aren’t helping the situation with the “Inflation Reduction Act,” as it will lead to more debt and more inflation that will further deplete savings, thereby making a bad situation worse for Americans. Things must change.

Published at TPPF with Daniel Sanchez-Pinol

“We’ve had two quarters: 1.5%  decline in GDP, that’s actually done the first quarter, and this quarter now is estimated by the Atlanta Fed as being very, very close to zero,” economist Art Laffer told Fox Business. “If it comes in negative, that will be the two quarters in a row—that would be the definition of recession.”

With the economy stagnating and inflation soaring, stagflation is here for the first time since the Great Inflation of the 1970s because of bad policies out of Washington. A recession is inevitable as the government-inflated “boom” busts—and we could already be in one. But pro-growth policies would help ease the pain.

The pandemic prompted irresponsible and record-breaking deficit spending by Congress, pumping in massive “stimulus” funds that raised the national debt by $6 trillion to $30 trillion, or about $90,000 owed by every American.

And President Biden has also been on a regulatory spree. His administration has finalized 360 rules through June 17 with a cost of about $215 billion, according to the American Action Forum. Compared to the same time since its inauguration, the Trump administration completed 367 rules at an economic cost of $1.2 billion.

Those bad policies by Congress and the Biden administration have been a major reason why the economy is stagnating, with negative growth in the first quarter of 2022 and likely little to no growth in the second quarter. And the Fed purchasing that debt and printing too much money to chase too few goods resulted in a 40-year high in inflation.

This stagflation affects employers and workers.

Firms now can hold less inventory for the same amount they paid previously, which reduces their profitability and causes them to increase prices, cut costs, or reduce output to keep up with inflation. And consumers have less purchasing power.

Workers and employers must then reduce their spending and investment, respectively. With workers producing less, productivity declined by at the fastest rate since 1947, contributing to why inflation-adjusted average hourly earnings are down substantially over the last year.

Another issue is that safety-net programs were increased without work requirements during and since the pandemic. Those programs included expanding Medicaid, increasing child tax credits, and enhancing unemployment insurance payments. This has created even more dependency on government.

And these expansions of government contributed to soaring deficit-spending with a 25% increase in the national debt in just the last two years. These handouts also encouraged people not to work because they would lose more in payments than they would receive from working. There are now 5.5 million more unfilled jobs than unemployed workers.

In order to reduce the pain of the inevitable recession, Congress ought to adopt pro-growth policies, similar to those between 2017-2019. These policies included a concerted effort to reduce onerous regulations and to pass the Tax Cuts and Jobs Act. They contributed to the U.S. records of the lowest poverty rate (across most demographics) and the highest inflation-adjusted median household income.

But excessive spending was an important factor that was missed then because Congress spent too much. If Congress just reined in spending to no more than population growth plus inflation, as outlined in the Foundation’s Responsible American Budget (RAB), the $20 trillion increase in the national debt over the last 20 years would instead have been a nearly $3 trillion surplus.

This would have meant more money in Americans’ pocket and more economic growth from lower interest rates and less debt for the Fed to purchase to create inflation. Which is why the Fed also needs a monetary rule, which would call for it to have a much smaller balance sheet to reduce the quantity of money and a much higher federal funds rate target.

Historically, the federal funds rate target must be as high or higher than the rate of inflation. With the latest inflation rate being 8.6% and the federal funds rate target being in a range of only 1.5%-1.75%, the rate target should be much higher. While this would likely result in a quick and deep recession, this is necessary given the government-inflated boom that must now bust.

Bad policies have driven this government failure that’s making the situation worse before it gets better. For the sake of Americans, let’s end them now, because more government isn’t the solution.

https://www.texaspolicy.com/economic-stagflation-is-here-is-a-recession-next/

Americans have less money than they had last year—though taxes haven’t been raised. So what’s the problem? Inflation, which has increased at a 40-year high annual pace of 7.9%. It acts as a hidden tax because we don’t see it listed on our tax bills, but we sure see less money on our bank accounts.

In fact, inflation-adjusted average hourly earnings for private employees are down 2.8% over the last year. This means a person with $31.58 in earnings per hour is buying 2.8% less of a grocery basket purchased just last February. “For a typical family, the inflation tax means a loss in real income of more than $1,900 per year,” stated Joel Griffin, a research fellow at The Heritage Foundation.

The hidden tax of rapid inflation has been avoided for four decades. But that’s understandable because we haven’t seen these sorts of reckless policies out of Washington since the Carter administration.

The policies from the Biden administration’s excessive government spending and the Federal Reserve’s money printing must correct course now before things get worse.

What’s causing inflation is being debated.

One claim is “Putin’s price hikes” stem from the Russian president’s invasion of Ukraine.

While this has contributed to oil and gasoline prices spiking recently, these prices—and general inflation—were already rising rapidly. This was because of the Biden administration’s disastrous war on fossil fuels through increased financial and drilling regulations, cancelation of the Keystone XL pipeline, and more.

Specifically, the price of West Texas Intermediate crude oil is up about 110% since Biden took office, yet only up 21% since Russia invaded Ukraine. And to think, the U.S. was energy independent in the sense that it was a net exporter of petroleum products in 2019.

Another claim is the supply-chain crisis.

For example, the global chip shortage has contributed to a large shortage and subsequent increase in the average price of new vehicles—to a record high of $47,000, up 12% over the last year. This contributed to buyers switching to used cars, which has pushed the average price up to nearly $28,000, about 40% higher.

These two claims will likely be transitory price increases, though not sufficient to drive down overall inflation to what we’ve experienced for the last year-plus.

Inflation is persistent because of rampant government spending and money printing.

Larry Kudlow, who served as the director of the National Economic Council for President Trump, stated that inflation “is destroying working folks’ pocketbooks and devaluing the wages they earn, and the root cause of the inflation is way too much government spending, too many social programs without workfare, and vastly too much money creation by the Federal Reserve.”

Both political parties share the blame for too much government spending, which has caused the national debt to balloon to $30 trillion. Just over the last two years, the debt has increased by 25% or $6 trillion.

While some of that may have been necessary during the (inappropriate) shutdowns in response to the COVID-19 pandemic, much of the nearly $7 trillion passed in spending bills was not, especially the trillions by the Biden administration far after the pandemic had slowed and people were returning to work.

Laughably, Speaker of the House Nancy Pelosi recently argued that government spending is helping inflation and President Biden argued that he’s cutting the deficit. Both are false.

Government spending doesn’t change inflation because it just redistributes money around in the economy. And the deficit would only be rising from Biden’s big-government policies but he’s taking advantage of an optical illusion: one-time COVID-19 relief funding drying up and tax revenues rising partially from the effects of inflation.

Ultimately, the driver of inflation is from discretionary monetary policy by the Federal Reserve as it monetizes much of the $6 trillion in added national debt since early 2020.

The Fed did this to keep its federal funds rate target from rising above the range of zero to 0.25% by more than doubling its balance sheet to $9 trillion. More money is fueling the ugly government spending and bubbly asset markets that’s resulting in dire economic consequences.

Instead, we need to learn what Presidents Harding and Coolidge realized a century ago. This would mean a return to sound fiscal policy, monetary policy, and the dollar that built on the principles of America’s founding.

We need binding fiscal and monetary rules to hold politicians and government officials in check of we hope to tame inflation and return to prosperity.

https://www.texaspolicy.com/the-tax-increase-thats-hidden-in-plain-sight/

​Overview: The COVID-19 pandemic and forced business closures by state and local governments over the last year left much economic destruction. Many Americans have been recovering as we near herd immunity and states reopen, but fiscal and monetary policies out of D.C. are distorting economic activity and the labor market. For example, the labor market has been improving at a slower pace in recent months, even as there has been at least $6 trillion in passed or proposed bills during the first 100 days of the Biden administration. The federal unemployment “bonuses” and even more in handouts have reduced incentives to work, resulting in a similar number of unemployed as the record high of 9.2 million job openings. Although the economy has withstood these headwinds for now, a pro-growth approach is necessary. 

Price inflation in May 2021 was up 5% over May of 2020. At this pace, the general level of prices will double in less than 15 years. The last time inflation was running this high was in 2008, when gasoline first breached $4 a gallon. And inflation expectations for the next year have reached a record high.

But what did we expect when the government created trillions of dollars and forced people to stay home from work? The Federal Reserve’s balance sheet has exploded by 100% to more than $8 trillion since last year; it was the perfect recipe for inflation with more money supplied than goods and services available to buy.

There have been red flags for months, with businesses announcing that they are raising prices.

Proctor & Gamble manufactures hundreds of products across dozens of brands from diapers to detergents. General Mills makes various foodstuffs from cereals to soups and pastries to pizzas. Hormel also sells various food products. Whirlpool manufactures appliances. Texas’s own Kimberly-Clark makes tissues and paper towels, among other products. Tempur Sealy sells bedding.

Americans use or consume products from these businesses every day, and those companies are all raising their prices, which hurts consumers’ purchasing power. Grocery stores and restaurants across the country have been raising prices as well.

But why these sudden price increases? Businesses are facing higher costs. Commodity prices are climbing quickly, as are wages due to labor shortages.

The contention that current inflation numbers are skewed because of “base-effects” from the early months of the pandemic is incomplete. The consumer price index (CPI) in May 2020 (the lowest point of pandemic-era prices) was just 1% below the CPI’s then-record high in February 2020, which has been eclipsed since August 2020. So, the base-effects argument does not explain a 5% annual increase.

Inflation is a tax, pure and simple, but not an explicit tax. Instead, it robs you of your purchasing power subtly and silently so that most people are none the wiser. It is not accomplished expressly through legislation, but through the sophisticated maneuvers of the Fed, giving inflation an air of mystery.

In reality, there is nothing mysterious about inflation. When the Fed creates money faster than the economy grows, then prices will tend to rise. That is why there is also no end in sight to this inflationary wave. The Fed continues to target historically low interest rates by creating money every month at an annual pace of more than $1.4 trillion, far faster than the economy is growing. The result is real wealth being taken from you—taxation without representation.

Nevertheless, it is surprisingly easy to stop inflation.

Ending inflation only requires the Fed to cease flooding the economy with money. If the Fed slows its money creation, though, then Congress cannot use inflation to finance the nation’s deficits, which seems to be Congress’s favorite way to spend.

Conversely, if Congress were to achieve a balanced budget through sound fiscal policy, then the Fed could return to its original mission of price stability, and not worry about backstopping massive federal deficits with newly created money.

This could be more quickly be achieved by implementing the Texas Public Policy Foundation’s Responsible American Budget, which sets a total budget limit at no more than the average taxpayer’s ability to pay for it as measured by population growth plus inflation. While this would not completely solve the problem of inflation, a journey of a thousand miles begins with a single step, and this will point the country in the right direction.

We must not let the best be the enemy of the good; something must be done sooner rather than later to stop the current runaway spending in Congress.

For example: Senators in Congress have recently reached a tentative bipartisan “infrastructure” deal to spend another $579 billion without raising taxes—or more accurately, without explicitly raising taxes. The spending will be financed with bonds purchased by the Fed, which means through the implicit tax of inflation. That $579 billion will still be collected, but not through so obvious a mechanism as the IRS.

No, inflation is too subtle, silent, and sophisticated for that.

​Full article