Mark my words: Inflation is coming

Mark Levin recently debated Arthur Laffer, the well-known supply side economist, as to whether inflation would be an outcome of the shutdown of the American economy. Laffer didn’t think so; Levin predicted it would be a problem and he’s right. The reasons are simple to understand. In economics, price is a function of supply and demand. Gold is rare; people want it; the price is high.

Why will the American economy suffer from inflation? The answer is simple. Conditions resulting in a supply problem for many products and services are already evident.

* Meat producers are having to destroy both mature and young cattle and pigs because shutting down restaurants and institutional purchasers has depressed demand. The impact will result in higher meat prices when restaurants reopen, as it will take months before producers are able to gear up. Some farmers may go out of business as a result of the lack of a market for their livestock. That too will affect supply.

* Farmers are having to let produce go unharvested due to decreased demand, but more important in the future is likely to be a lack of labor––a function of several factors that will remain in place even after the virus restrictions are lifted. Prices of products from other countries will also go up as they will be battling the same problems we’ll be facing.

* Restaurants are being asked to reduce seating when they reopen. That will result in higher prices as food prices will be higher and restaurants will need to earn more per customer to cover expenses.

* Products sourced from China are very likely to cost more for a variety of reasons including the fact that Chinese factories will need to make up for lost sales during the pandemic.

* The U.S. is looking to move production of medical equipment and pharmaceuticals out of China back to their home countries to prevent a reoccurrence of supply problems that arose at the beginning stages of the crisis. Given the cost of labor is higher in the U.S., products for everything from hand sanitizers to ventilators to pharmaceuticals will be higher than in the past.

* All other products produced overseas, such as clothing, will be higher as a result of the impact on suppliers––some will have been bankrupt, while others will need to raise prices to catch up.

* Labor prices in the U.S. will be higher in many industries as people will be trying to catch up for lost income.

* Governments may have to raise taxes and fees to avoid reducing services.

Higher prices in some cases will be temporary, but high prices has an affect like a tidal wave. When the price of labor, products and services increase, the user of those products must also raise prices. I don’t know what percentage of manufacturing equipment is made in China or other low-wage countries, but if hammers, lithium-ion batteries and robots cost more, those costs will have to be passed along to consumers.

Complicating this is the fact that consumers impacted by the shutdown will have less money to spend. Having lower sales, sellers must raise prices to achieve the income they need to stay in business.

Get ready, folks. Inflation is on its way. Sorry, Mr. Laffer. Your curve won’t solve this problem.

 

Garbage in, garbage out

Many of you might remember the early days of computer programming when the mantra was “garbage in, garbage out.” That needs to be applied to today to computer models predicting the severity of the coronavirus. A few examples should suffice.

The authors of an op-ed in Sunday’s Washington Post admit as much when they quote Anthony Fauci saying “Models are as good as the assumptions you put into them” at the end of an article in which they expose how sketchy the assumptions are that have been put into such models as the one out of University of Washington’s Institute for Health Metrics and Evaluation that Fauci and others have been relying on.

One of the factors that is not included in any of these models that viruses mutate. A study from China (which of course would need to be replicated) found thirty strains of the virus that causes COVID-19. The author writes, “Sars-CoV-2 has acquired mutations capable of substantially changing its pathogenicity.” The implication of that finding is that the reason some people who are otherwise healthy get very sick and die while others are asymptomatic might be that the strain they came in contact with might be more virulent.

The models are being used today to justify extreme social distancing including shutting of all but “essential” businesses in most states. Suggestions that some states and counties can ease these restrictions have been met with outcries, claiming to do so invites more deaths. The problem with that assertion is that unless one knows FOR CERTAIN the number of people who have been infected by the virus the fear of tens of thousands of additional deaths is not backed by fact.

Some recent evidence suggests more people have had the virus that previously known, including people who had mild cases or who are asymptomatic. But the bottom line is we don’t have sufficient answers to make clear-cut policy decisions. As a result, governors and other elected officials are playing safe––not wanting to be blamed for causing deaths.

Unfortunately, there is a price to pay for being overly cautious in terms of millions of people’s livelihoods. The longer the country is shut down the harder it will be to get back up and the longer it will take. The exact price also cannot be calculated because we don’t have those answers either.

We do know there is a limit to how long the federal government can print money and distribute it to everyone in the country. One factor is that the debt even at zero interest will have been repaid. Another more immediate factor is that printing more money could result in rapid inflation––which coupled with scarcity of certain goods will have its own social cost.

My advice to governors is not to take the entire burden on yourself. With the assistance of your legislature and executive agency personnel, set broad guidelines for when certain types of businesses can reopen in each county of your state. That way when deaths occur you can deflect the blame and justify the policy. Some states are facing bankruptcy. It’s time to fight that war as well as the one brought about by the virus.

What’s needed in the State of Maryland to get back to normal?

The coronavirus crisis has hit Maryland hard like it has other states––no, not the number of cases which totals only 8,225 as of April 12 or deaths which number only 235, but in terms of the shutdown of the economy. The pain Marylanders feel is in the number of people out of work (more than 125,000 have applied for unemployment), the number of businesses whose existence is threatened and the closure of schools, parks and other public facilities.

Any death due to the illness is sad and unfortunate, but Maryland is not a hot spot and is unlikely to become one. The state’s number of new cases started to decline this past week and only 1,709 people are currently hospitalized due to the virus. The disease is not overly taxing Maryland’s healthcare system.

Assuming the numbers will continue to decline, it is incumbent on state, city and county officials to begin to put in place concrete plans to remove restrictions and allow people to begin to resume normal activities while still exercising caution and common sense.

I’m calling for the governor to set up a bi-partisan body of public officials to put in place guidelines for when restrictions can be lifted. Right now only businesses designated as essential may remain open and these must enforce distancing and other safety measures.

What would resumption recommendations look like? Here’s an example: When the number of new cases in a county drop below 60 for two or three days in a row, there should be a list of businesses that are allowed to re-open. Then when the number drops below 40 a day in that jurisdiction, the list should include other businesses that can re-open. For example, retail establishments where the same safety measures employed now by pharmacies and grocery stores would apply might fall into the first camp. The first list might also include dentists who were forced to close under the assumption their masks would be needed. Restaurants, hair salons and the like might be allowed to reopen after the second milestone is reached.

When number of new cases in a county drops below 25 a day, public parks, golf courses, basketball courts and other sports settings should be allowed to re-open and education officials should be strongly advised to resume normal school activities.

Fourteen Maryland counties have had fewer than 100 cases. All social restrictions should be removed in those counties immediately.

Until a vaccine is developed and distributed widely, it is likely we will continue to see coronavirus cases resulting in hospitalizations and death. There has to be a point, however, when we as a society determine the fear of the disease should not result in the destruction of our economy. Each year tens of thousands of people die from the flu in the U.S. We don’t ask our public officials to restrict our behavior as a result of the flu. We recommend that people get flu shots and act intelligently when ill.

The president has stated that the cure should not be worse than the disease. For Maryland that means public officials need to act now to enable residents to resume normal activities sooner rather than later.

 

Elizabeth Warren Is Barking Up the Wrong Trees

Given her academic credentials and past political successes––having won her Senate seat twice––you’d think Elizabeth Warren would run a smart campaign for the Democrat Presidential nomination, but you’d be wrong. Polls show her below the top male contenders and she’s far behind in fund raising. Lately, her policy pronouncements sound desperate rather than calculated.

Tax the Richest

Warren began her campaign calling for an “ultra-millionaire tax.” She claims America needs to tax household net worth, not just income, on the basis of statistics that show the richest Americans are richer today than they were forty years ago. She claims that is due to government policies that facilitate wealth accumulation at workers’ expense.

(Workers is her word. It’s a term used by Communists and Socialists and goes back to Karl Marx and the 19th century. It’s not only slanted, but it’s intentionally imprecise. In socialist jargon everyone is a worker except capitalists.)

There is a false assumption underlying her calculation, which is that the same families who were super rich forty years ago are superrich today. If that were true, then we could consider her argument that government tax policy is a factor in keeping the rich rich, but it’s not true. Just as many of the top 25 corporations of 1975 have been replaced by new corporations today, many of today’s wealthiest families gained their wealth recently. They didn’t inherit their wealth. They earned it.

Her wealth tax also ignores that fact that the top wage earners in America already pay a hefty percentage of income taxes, which is why Warren wants to tax household net worth including assets held in trust, retirement assets (401k plan monies) and even assets held by minor children. This is a soak the rich scheme the consequences of which can only be bad for the economy. Why? The tax would force people to withdraw billions out of the stock and bond markets, which would slow economic growth and result in layoffs. Further, a significant portion of the collected money would have to pay the thousands of new IRS employees who would be necessary to assess the household wealth of millions of Americans. It could take one fulltime employee weeks per millionaire.

Warren Boards the Runaway Electoral College Wagon

Not satisfied to ride the tax the rich train, Warren joined the crowd clamoring to get rid of the Electoral College. “Everyone’s vote should count equally,” she argues. That would make sense if we were a country like Israel, whose population is around 10 million, but we are a federal republic made up of 50 states. To nationalize our electoral system taking political power away from the states would represent a dangerous step towards nationalizing the entire country, making the federal government all powerful and reducing state and local governments to puppet shows. That is exactly what the founders feared when they designed our constitution.

The Electoral College gives power to small states like Rhode Island, Utah and Mississippi. Abolishing the Electoral College would lead to candidates spending all their time in the five or six most populace states. It’s a terrible idea and even worse that a law professor who should know better endorses it.

Chasing Bernie: A Bad Plan

Off to a slow start Warren seemingly saw Bernie Sanders leading the early polls and decided to compete with Bernie by coming out with her “universal free college and cancellation of student loan debt” plan. Some of her analysis of the problem makes sense––in particular the fact that public college tuitions have escalated faster than inflation disadvantaging lower income families.

There two major problems with her plan, however––her analysis of the source of the problem is skewed and her solution introduces a measure of unfairness and false hope.

Warren claims it’s “virtually impossible” for a young person to achieve what she achieved––rising from a poor small town family to become a teacher, law professor and U.S. Senator. The basis for this unsubstantiated and rather absurd claim is the high cost of higher education. Costs have increased faster than inflation and many students are forced to borrow money, but what’s to stop someone from following a similar career path once they graduate? To make that claim, Warren makes assertions that are patently false.

Why has college become unaffordable? Warren says it’s become the state and federal government would “rather cut taxes for billionaires and giant corporations and offload the cost of higher education onto students and their families.” This is a backhand slap at the Trump tax cut, but Warren admits elsewhere the high tuition problem is not recent in the making. It’s been building for decades, under both Democrat and Republican presidents and governors.

She can’t resist taking a whack at capitalism claiming government has “stood by as employers demanded higher credentials while offloading the cost of getting those credentials onto workers.” What? Job credentials reflect the skills and knowledge required to do the job. Government has no role in determining what skills an employer feels an applicant should possess for any particular job title. I don’t even think the Soviet Union went that far.

Then she claims employers have not passed along in the form of wage increases the profits they’ve earned as a result of the skills workers bring to the job. That must come from some academic statistician who decided to find figures that matched his or her bias because the fact of the matter is that employers today are paying high wages for skilled workers. Ask any computer programmer if s/he is compensated fairly in relation to the cost of his/her education!

How Much Will It All Cost?

Warren admits her debt cancellation plan would cost $640 billion and universal free college would double the cost of the total program. Where will $1.25 TRILLION dollars to pay for this come from? The ultra-millionaire tax program, of course.

Fine, except Bernie Sanders wants that money to pay for universal health care, Beto O’Rourke wants it to battle climate change, and Warren herself needs some of that money for her universal child care program.

Warren should know that chasing Bernie’s socialist student crowd is political suicide. Students don’t register to vote at the same rate as older adults and their turnout rate is poor. Young adults 21 to 30 may be attracted to all these give-aways, but retired people and those who are in the middle of a career, whether married and raising a family or not, have gained enough life experience to understand these politicians are playing a zero sum game. Here’s why: if you start taking money out of the pockets of the 75,000 richest families, they will not only fight back with tax accountants and lawyers challenging the IRS’ every move, but her program will reduce their wealth resulting in revenue shortfalls. Then what happens when all those giveaway programs can’t pay their bills?

Warren has not separated herself from the crowd because she’s playing the same game as Bernie, Beto and the rest––promising what can’t be delivered with full knowledge that she’ll have to have someone to blame from preventing nirvana. Guess who that would be? That’s right: Republicans and corporations. The next step would be a call for outright socialism. Before that could arrive, however, hopefully Americans would take a look at the Soviet Union, Cuba and Venezuela and decide if that’s the future they want for themselves and their off-spring.

Adding LGBTQ to Baltimore’s Minority Set-Aside Program Raises Important Questions That Ought to Concern Us

Baltimore Mayor Catherine Pugh recently signed an executive order adding LGBTQ businesses to those eligible to receive special consideration in the awarding of city contracts. Although the Baltimore Sun criticized Pugh for the way she went about it––failing to conduct a study first to justify the need, this incident is a good opportunity to re-examine the justification for these programs.

In 1989, the U.S. Supreme Court declared such programs unconstitutional if they are not based on a “disparity study,” showing each group is actually being discriminated against. In that decision Justice Sandra Day O’Connor wrote “The dream of a Nation of equal citizens in a society where race is irrelevant to personal opportunity and achievement would be lost in a mosaic of shifting preferences based on inherently unmeasurable claims of past wrongs.” Her concern speaks to what has happened since––namely, programs run on slim justification haunted by occasional cheating and a burden on taxpayers

Business ownership is fungible. Instances have been uncovered where a woman or minority was named owner of a company solely for the purpose of being placed on the approved list when the true owner was neither. One infamous case involved a man who identified as Navajo moving from Arizona to Maryland for the express purpose of becoming the “owner” of a company that he never owned. (See https://www.washingtontimes.com/news/2010/jul/27/minority-contract-set-aside-program-exploited/)

In addition to minority set asides, some states have small business set-asides. Combining all these programs leaves few opportunities for older companies that might have more to offer on the basis of experience and capital. The result is likely to mean work not done on time or at the desired level of quality and it can cost taxpayers more.

Another potential problem with these programs is setting the percentage of contracts that are to be awarded to minority-owned companies. The rational for a specific percentage ought to be based on current practices as well as the percentage of minority and women owned companies that are eligible to participate. Those numbers are likely to change from year to year and thus regular testing seems to be necessary to avoid favoritism and the exclusion of companies from bidding simply because they are not minority owned.

What O’Connor questions is whether the jurisdictions that offer these programs have the resources to evaluate the qualifications of the applicants and the quality of their work. Does adequate vetting taking place to determine whether a minority company has the management leadership, workforce experience, and capital to undertake the project?

Do they properly monitor minority contract winners to determine that they are carrying out their work in a proper manner, successfully achieving the expected results in the mandated time period?

There are dozens of opportunities for these programs to fail. The intent may be good, but does the results match the expectation?

Finally, do these programs bring us any closer to the day when such programs are no longer needed? I have my doubts. It seems that government bureaucracies generate built-in inertia in matters such as this. It is to the advantage of the employees in the offices that manage these programs to justify the need for their continuation and to overlook any discrepancies in a company’s application in order to give the mayor or governor numbers to show she or he is doing a good job.

A good way to avoid exchanging problems based on discrimination with ones reflecting poor oversight and poor work quality would be to sunset the programs, requiring a diversity study every two or three years before they are renewed.