Thread by @Historian_Steve

1/58. Part 1 of 4 in my series of THREADs on Inflation and the Economy explores the various reasons why Americans might view the economy negatively.

2/58. What is inflation? It is the loss of purchasing power observable in rising prices and paying more money for the same amount of goods. The Bureau of Labor Statistics (BLS) calculates the inflation rate when it issues a monthly Consumer Price Index (CPI) on a basket of goods.

3/58. Inflation can occur for several reasons and there are numerous theories to explain the phenomenon. One way to think about inflation is that rising prices are a response to some sort of imbalance between supply and demand.

5/58. I have always insisted that recent inflation was caused by:

1. Supply Chain disruptions from COVID
2. Russian Invasion of Ukraine (Feb 2022)
3. Excessive Corporate Markups / Profits
4. Three Fiscal Stimulus Checks 2020—2021
5. Accommodative Monetary Policy 2009—2021

6/58. Some of the earliest signs of inflation occurred in the market for used cars. Cars need Silicon-based microchips (semi-conductors) and only a handful of factories in the world produce them. Taiwan, South Korea, Malaysia, and maybe a few others.

7/58. When COVID forced these factories to shut down, a consumer who wished to purchase a car would either have to pay a lot more money or wait several months. Relatedly you might recall the images of tanker ships piled up in a huge backlog outside Long Beach harbor.

8/58. It took the COVID crisis to show us how fragile and finely tuned the globalized supply chain had become. Throw one thing off and the whole system goes haywire. The cost of used cars was 37% higher in January 2022 compared to the previous January.

9/58. When COVID struck, millions of Americans were sitting at home with nothing to do, and with extra cash on their hands. Demand was, thus, elevated at precisely the same time that supply was constrained by factories shutting down.

10/58. Inflation spread to other sectors. The price of fast food went up. Eating out became more expensive. If you’re living paycheck to paycheck and you have a constant reminder of higher prices when you buy coffee or lunch, you’re going to get irritated.

11/58. The situation might have self-corrected with only a moderate amount of inconvenience but then Russia invaded Ukraine in February 2022. The U.S. slapped sanction on Russia. Europe and other parts of the world stopped buying Russian exports.

12/58. Prior to the invasion, Russia supplied virtually all of Europe’s natural gas. The U.S. had the ability to bring some relief, but this would take time (credit to @BaruchAssault).

@BaruchAssault 13/58. Natural gas is the primary input for fertilizer. Russia produces most of the world’s neon gas for manufacturing semi-conductors. Russia and Ukraine were responsible for 30% of the world’s wheat exports. It is easy to see how inflationary the invasion was.

14/58. A key factor often omitted from discussions of inflation that focus only on fiscal and monetary policy is that of corporate markups, or “greedflation.”

15/58. Profit margins for companies selling cars went up. prospect.org/economy/fighti…

16/58. epi.org/blog/corporate…

17/58. See this chart.

I'd add that corporate executives bragged about their price hikes on earnings calls. nytimes.com/2022/05/05/opi…

18/58. While some might argue that corporations have a responsibility to their shareholders to maximize profit, corporations did seem to be raising prices above what was warranted by any underlying increases in wages or other costs of production.

19/58. Corporations took advantage of an unstable environment in which consumers were vulnerable. By mid-2023 the economics profession was more seriously considering corporate profits as a contributor to inflation.

20/58. If companies raise prices excessively, won’t new firms come in to undersell their competitors? No, not when the monopolization of numerous industries like oil, finance, pharmaceuticals, and cable, preclude meaningful competition.

npr.org/2023/05/11/117…

21/58. The recent inflation spike of 2021—2023 added pain and frustration to what were already long-term structural issues in the economy. Annie Lowrey, staff writer for the Atlantic, observed that even before the pandemic, there was an affordability crisis in several areas.

22/58. Lowrey pointed to the costs of housing, health care, education, childcare, and elder care. We pay a lot more for our health care compared to other OECD countries but we don’t have better outcomes

23/58. Housing and rent prices weren’t great even before the pandemic, especially in cities located in blue states. Zoning laws that prioritized single-family homes and NIMBYism put a chokehold on new construction.

24/58. It turns out that unaffordable housing is a problem in the entire Anglo-Saxon sphere. Just guessing here, I wonder if this is because the system of English common law shared by these countries places great emphasis on property rights?

25/58. You couldn’t build in the greater SF or LA areas, so if you wanted a house, you had to build further inland. But then you hit the forest. And if you live in California, you know that climate change now makes forest fires more intense in a self-reinforcing feedback loop.

26/58. Many homeowner’s insurance companies have left California. Their business model no longer works in an environment of more destructive fires.

The same trend is true for companies in Florida due to flooding and sea level rise.

27/58. Housing and Rent were major contributors to the recent inflation. One estimate says housing prices are up 50% since before the pandemic. We clearly have a broken housing market.

28/58. The median sales price for a single family home is six times higher than the median household income (Harvard Joint Center on Housing Studies).

Home prices remain high after a major increase during the pandemic.

29/58. There’s an unfortunate generational aspect to this crisis. Boomers who experienced some of the best growth rates and economic opportunities in the entire world during their youth were in a prime position to refinance with super low interest rates in 2020.

30/58. Boomers who haven’t already paid off their houses locked in 3% rates. They won’t move until rates come down again. They don’t want to trade a 3% mortgage for one at 7%. But millennials?

(To see the rest of this thread, be sure to click on replies).

31/58. They’ve steadily bought more houses but they’re still far behind Boomers in terms of total household wealth. A generation that entered the workforce right as the Great Recession was hitting has now seen COVID disrupt their hopes and dreams.

Click reply to see full thread.

32/58. Here are some important statistics on race. Kind of sad to think about. From the New York Times, May 2023.

33/58. Higher interest rates designed to cool inflation have prevented many millennials from buying their first home. This could very well be the unluckiest generation. Millennials have repeatedly delayed the usual milestones that come with adulthood.

washingtonpost.com/business/2020/…

34/58. Mortgage Rates are the highest they’ve been since the 1980s (40 years)

35/58. The high cost of home ownership confines many to the ranks of renters. Sadly, little relief can be found in the rental market. The # of cost-burdened renters—those who spend more than 30% of their income on housing—has gone up to a record 22 million households.

36/58. Inflation stats do not take into account a couple of additional points:

1) the higher cost of borrowing
2) the trade-offs that people make to live within their means.

37/58. Let’s say your job is in LA. You can’t afford a house anywhere near your job, so you have to buy one way out in the desert with a 2-hour daily commute each way. You don’t have spending problem on paper, but you’re probably exhausted and stressed.

38/58. Your hopes and dreams are dashed. Home ownership is the quintessential factor that defines the American Dream. Problems in the housing market have an outsized influence on how people think about the larger economy.

39/58. It is important to discuss the problem of inequality, something that eats away at fundamental principles like equal opportunity and democracy.

40/58. In terms of wealth inequality, we in the United States are far more unequal than our contemporaries. The top 10% own over 70% of the total wealth. We’re a middling country in terms of income inequality.

41/58. What enables this inequality? We should look first to our tax system. A parallel financial universe of offshore accounts allows the wealthy to hide their wealth from taxation, thereby worsening inequality and draining government coffers.

washingtonpost.com/business/inter…

42/58. Then there are dozens of large, profitable companies in the United States that pay no federal taxes. At least 55 of these companies paid no taxes in 2020 on billions of dollars of profits.

nytimes.com/2021/04/02/bus…

43/58. Dozens of Fortune 500 companies reduced their tax liabilities thanks to a range of legal deductions and exemptions that have become part of the tax code. Duke Energy, FedEx, Nike were among 26 companies who paid zero federal income tax for 2018, 2019, and 2020.

44/58. These deductions were part of the supply side tax cuts passed by Congress and signed by President Trump in 2017. Many of them continued after the passage of the CARES Act of 2020.

45/58. ProPublica obtained a vast trove of IRS data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years.
propublica.org/article/the-se…

46/58. Their analysis shows that the wealthiest pay income taxes that amount to only a small fraction of the hundreds of millions of dollars of profits they make each year. The wealthy use tax avoidance schemes that are both legal and unavailable to ordinary Americans.

47/58. America’s uber rich, when taking all of their deductions into account, may pay a true tax rate of between 3 and 4%. Warren Buffett’s true tax rate from 2014 to 2018 was a staggeringly small 0.1%.

48/58. Instead of paying capital gains taxes through the sale of stock or declaring an income that is subject to taxation, the wealthy obtain cash by taking out loans, which are not considered income and do not need to be declared to the IRS.

See how Jeff Bezos benefits.

49/58. Another sketchy technique is to claim losses for your business to avoid paying taxes—something that is common among real estate and fossil fuel companies. They report negative income when these losses are essentially fictitious.
propublica.org/article/these-…

50/58. When the 25 richest Americans are worth $1.1 trillion, dwarfing the size of entire economies of small countries, one has to wonder if progressives are correct when they say that the mere existence of a billionaire is a profound policy failure.

51/58. Student loans. As the cost of attending college has gone up in recent decades, so, too, have the amount of student loans. Some 44 million Americans owe about $1.7 trillion in loans, about equal to the size of the economies of Australia or Brazil.

nytimes.com/interactive/20…

52/58. While a college degree may translate to higher wages and salaries that make loan payments easier, some borrowers don’t finish college. And even those that do often delay home ownership, marriage, and kids because of their loans. buzzfeednews.com/article/annehe…

53/58. The cost of college has gone up significantly since 2000. Millennials in particular have had a tough time with student loan debt.

54/58. All of these factors combine to make entry into America’s middle class difficult. A college degree does not guarantee success. Having a steady job, raising kids, and owning a home at the same time proves frustratingly elusive and daunting for many.

55/58. Anyone under 40 years old has gone through the highest inflation of a lifetime.

56/58. There are policies to mitigate inflation, but they take a long time to pan out. The U.S. Federal Reserve, the nation’s central bank, can raise interest rates, but higher rates take a while to percolate through the economy. And they’ll probably lead to job losses.

57/58. You can more vigorously enforce anti-trust law, but the Robert Borks of the world already did a lot of damage on this front, and more competition will only prevent future price increases without bringing relief to current increases.

22 addendum. (In my haste and excitement to post I forgot a few graphs showing the extent of the inflation we've experienced).

58/58. There’s no denying the pain here. We’ve all been hit with a triple-whammy the last five years of COVID, inflation, and now higher borrowing costs, layered on top of those long-term structural issues.

Stay tuned for Part 2 of my series.

END.

58/58 (Add-on):

Part 2 examines the reasons why Americans should feel positive about the economy. As with Part 1, charts, data, and graphs abound. Part 2 begins here: