Macro Roundup

New NBER offers a (narrative based) historical perspective at the relationship btw fiscal deficits and inflation. They find“…We find that the relationship between fiscal deficits and inflation generally holds in wartime when fiscally stressed governments resorted to the inflation tax…”

And that condition won’t hold true coming out of the pandemic, “…During the pandemic, central banks have shifted to highly expansionary policies as fiscal authorities have implemented record-breaking deficits that have pushed debt ratios close to WWII levels (and beyond in the US). Currently, inflation in the US is well below the Fed’s 2% target. What are the risks that could trigger moderate or even high inflation?One possibility is that the unprecedented peacetime deficits and monetary accommodation raise the risks of sustained (money growth fueled) excess demand. Also the Fed’s new strategic goal of raising inflation may inadvertently run the risk of unanchoring inflationary expectations. Second, the mounting debt could exert fiscal dominance over monetary policy. The lessons from our historical survey are: avoid war, be cautious of sustained monetary accommodation of fiscal deficits, avoid fiscal dominance, maintain central bank independence, keep inflationary expectations anchored, and pursue pro-growth economic policies. The evidence suggests that ignoring the lessons from history could be at the policy makers’ peril….”
Michael Bordo and Mickey Levy, "Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record," National Bureau Of Economic Research, December 2020, https://www.nber.org/system/files/working_papers/w28195/w28195.pdf

They argue that the slow recovery from the crisis was a headwind to inflation, “…The primary reason why inflation stayed low is that the unprecedented monetary easing, including the Fed’s massive balance sheet and sustained zero interest rates, and the record deficit spending,did not stimulate any sustained acceleration in aggregate demand(Levy 2017). This constrained excess demand and product pricing and wages…”

Their primary takeaway, “.. We find that the relationship between fiscal deficits and inflation generally holds in wartime when fiscally stressed governments resorted to the inflation tax.There were two peacetime episodes in the early twentieth century when bond financed fiscal deficits that were unbacked by future taxes seem to have greatly contributed to inflation: France in the 1920s and the recovery from the Great Recession in the 1930s in the U.S. In the post-World War II era a detailed examination of the Great Inflation in the 1960s and 1970s in the U.S. and the U.K. suggests that fiscal influences on monetary policy was a key factor….”

Ed Yardeni bets on continued deflationary pressure “....Our money is on the 4Ds. They should continue to keep a lid on inflation.... Détente. In the grand sweep of economic history, inflation tends to occur during relatively short and infrequent episodes, i.e., during war times. The more common experience has been either very low inflation or outright deflation during peacetimes....Technological Disruption. Nevertheless,recent global trade tensions and the pandemic are likely to cause businesses to diversify their offshore supply chains away from China and to onshore more of them. That could be costly and inflationary. It could also be cost effective now that labor shortages attributable to global demographic trends are stimulating technological innovations in automation, robotics, artificial intelligence, and 3D manufacturing. These all enable onshoring and boost productivity to boot.... Demographics. Fertility rates have plunged below population replacement in recent decades around the world as urbanization has changed the economics of having children. Instead of being an important source of labor and elder care, as they were in agrarian communities, children are all cost in urban settings. Nursing homes have few vacancies, while maternity wards have plenty. Increasingly geriatric demographic profiles are inherently deflationary....Debt. During the 1960s through the 1980s, debt was stimulative; more of it stimulated more demand and added to inflationary pressures. Now, easy credit conditions aren’t as stimulative to demand as in the past because so many consumers have so much debt already. However, easy monetary conditions are a lifeline to zombie companies, enabling them to raise funds to stay in business and add to global supplies of goods and services, which is deflationary....) …The dollar’s descent. Yet another interesting set of correlations is the ones between the inverse of the dollar versus the price of copper and versus expected inflation (Fig. 19 and Fig. 20). All three variables are consistent with rising inflation pressures. However, similar past episodes in recent years signaled that deflationary pressures were abating rather than inflation rebounding….”

Ed Yardeni, "Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?,"Yardeni Research, December 12, 2020, http://blog.yardeni.com/2020/12/inflation-was-sooo-1970s-will-it-roar.html

Important Research from David Splinter (you will likely cite this) looks the impact of taxes and transfers on the middle of the income distribution (middle three quintiles of population, for a four person household the range is $31,400 to $168,200) and finds that since 1979 non-elderly middle-class market income increased 39 percent in real per person terms. The increase was 57 percent when accounting for taxes and transfers. He finds that income support for this group is a recent phenomenon as prior to 2000, market income and income after taxes and transfers grew together whereas since 2000,middle-class income after taxes and transfers grew three times faster than market income

In terms of their share of transfers/ the tax burden he finds, "...Focusing just on amounts for non-elderly households, between 1979 and 2016, the share of means-tested transfers received by middle-class households increased from 27 percent to 49 percent. Their share of federal taxes paid fell from 45 to 31 percent..."

However he also finds“on average, non-elderly, middle-class households pay slightly more in taxes than they receive in current transfers and social insurance benefit” though he notes that the payroll tax burden exaggerates the lifetime burden on these households and that“…Many in the middle class are net beneficiaries as well….”

Interestingly he finds a structural break in 2000. Prior to 2000 middle-class incomes grew at the same rate before and after taxes and transfers, and since then income after taxes and transfers grew three times faster (see Figure 6)"...In other words, between 1979 and the late 1990s, after-tax, after-transfer income and market income of the middle class grew at about the same rate. Since 2000, middleclass income after taxes and transfers grew three times faster than market income. In addition to boosting cumulative income growth over this period, Figure 6 shows that federal policy substantially mitigated the temporary sharp declines in middleclass market incomes that occurred during the 2001 and 2007 recessions. Increasing transfers to non-elderly middle-class households resulted from growth in Medicaid, disability, and other transfers. Between 1979 and 2016, Figure 7 shows that these transfers grew from about 4 to 11 percent of middle-class market income. For the non-elderly middle-class, average real per person transfers increased $1,360 for Medicaid, $250 for disability and other payments from Social Security, and $190 for SNAP and SSI transfers. These increases occurred throughout the middle class, but especially for the lower-middle class. Total transfers among non-elderly average households increased $3,500 for the second quintile, $1,800 for the middle quintile, and $1,000 for the fourth quintile (2016 dollars)..."

There is a good analysis of what sort of additional taxes would be required to fund new levels of transfers (see Table 2):“….For instance, raising the incomes of poor households by “taxing the rich” is straightforward when the number of poor households receiving transfers is a relatively small share of the population. As these poor households earn only a small share of total income, meaningful increases in income can be financed with modestly higher taxes on the remaining tax base. However, increasing the number of households that benefit from transfers (or tax cuts) is costly for two reasons: First, it mechanically increases the number of recipient households and reduces the number of paying households. Second, it requires higher marginal tax rates on paying households that cause a narrowing of the tax base due to avoidance and behavioral changes. Table 2 provides the results of a simple empirical exercise examining this tradeoff: If you raise the income of specified households by 10 percent and fund these transfers with taxes on higher-income households, what is the necessary tax rate?...”

Core findings, “…The “middle class” has benefitted from government redistribution in recent decades. For individuals in non-elderly households in the middle three income quintiles (the middle class), the share of federal taxes decreased, and the share of transfers increased. Between 1979 and 2016, market income per person increased 39 percent. But when accounting for taxes and transfers income increased 57 percent. Middleclass income support, however, is a recent phenomenon. Before 2000, market income and income after taxes and transfers grew together. Since 2000, middle-class income after taxes and transfers grew three times faster than market income. In a revenue neutral exercise, we explore the limits of further support to the middle class…In our analysis of taxes and transfers, we focus on individuals in non-elderly households in the middle three quintiles (60 percent) of the income distribution, whose material living standards provide a broad view of middle-class incomes and changes over time.1 Although the elderly middle-class is also important, we focus on non-elderly households in order to avoid the challenge of inferring the income class of non-working retirees. Doing so also allows us to examine the taxes paid and benefits received by households during their working and child-rearing years and to abstract from issues related to the aging of the population and the substantial growth in Social Security, Medicare, and Medicaid benefits…. In 2016, according to estimates using data from the Congressional Budget Office (2019), the average income earned from market activities—like employment, business ownership, or interest—was about $71,900 per non-elderly middle-class household. Social insurance and means-tested transfers boosted this group’s average income by $7,900 per household, and they paid (or their employer paid on their behalf) $12,600 in federal income, payroll, corporate, and excise taxes—including their contributions to entitlement programs such as Social Security and Medicare. Hence, the net effect of federal income transfers and taxes is to reduce the after-tax, after-transfer income of middle-class households only by about 7 percent. That “net burden” of taxes and transfers is historically low and relieves the middle class from much of the cost of paying for federal public goods or income support to other groups (like poor, disadvantaged, or elderly households)….”

Adam Looney, Jeff Larrimore and David Splinter, "Middle Class Redistribution: Tax and Transfer Policy For Most Americans," Aspen Strategy Group, December 10, 2020, https://www.economicstrategygroup.org/publication/tax-and-transfer-policy/

Matt Klein post on relative housing costs and average worker incomes finds, "...the most expensive housing—at least from the perspective of the average worker—is generally near a beach in southern California, Florida, or Hawaii...."

Interesting looking at major cities doesn't change this story, "...Focusing only on the biggest metros doesn’t change this basic narrative. Among the metro areas with at least two million people—and combining the San Francisco and San Jose metros on a population-weighted basis—the average workers’ income buys the most housing in the industrial heartland, while the most expensive housing is in Miami, Los Angeles, and San Diego. Amusingly, considering the recent migration trends, housing-adjusted average wages are almost identical in Austin, Texas, New York, and the SF Bay—and all three are more affordable than Denver or Las Vegas...."
Note I asked him, this does not include taxes (or as he pointed out quality of schools) but from the perspective of the average worker I'm not sure that changes the story outside of the margin given their income tax burden is relatively low

New Splinter using CBO data looks finds (as he has previously) that the progressivity of our tax code has increased significantly since 1979 and has more than doubled since 1986. This has been primarily driven by large tax credits for persons at the bottom, at the same time the average tax burdens of top earners have been relatively unchanged because lower marginal rates were offset by decreased use of tax shelters

The tax code has become more progressive“…Figure 2 presents average federal tax rates for the top, middle, and bottom quintiles. Between 1979 and 2016, tax rates decreased across the income distribution: for the top quintile by 0.6 percentage points (27.1 to 26.5 percent), for the middle quintile by 5.2 percentage points (19.1 to 13.9 percent), and for the bottom quintile by 7.6 percentage points (9.3 to 1.7 percent). The larger decline for those with lower incomes implies an increase in tax progressivity. Although a crude measure of progressivity, the gap between tax rates of the top and bottom quintiles increased by 39 percent over this period and since 1986 increased by 110 percent, suggesting a substantial increase in tax progressivity. Decreases in individual income taxes drove the overall decline in bottom- and middle quintile tax rates. The bottom-quintile decrease of 7.6 percentage points resulted from average income tax rates decreasing from zero to -11 percent and corporate tax rates decreasing about half a percentage point, with offsetting payroll and excise tax rate increases (Figure A1). The middle-quintile decrease of 5.2 percentage points resulted from average income tax rates decreasing 4 percentage points and corporate tax rates decreasing about 1 percentage point. The temporary middle-quintile decrease between 2008 and 2012 resulted from policies in response to the Great Recession: recovery rebates in 2008, making work pay credits in 2009 and 2010, and a payroll tax holiday in 2011 and 2012…. Figure 8 shows that between 1979 and 2016, the RS index of tax-and-transfer redistribution increased 59 percent (from 0.13 to 0.21). Since 1986, it increased 66 percent…

David Splinter, "U.S. Tax Progressivity and Redistribution,"National Tax Law Journal, December 2020, http://www.davidsplinter.com/Splinter-TaxProgressivity-NTJ.pdf