Widget’s Revenge

Senator Joe Manchin and Senate Majority leader Chuck Schumer have agreed on what they call “the Inflation Reduction Act.” This bill is a slimed down but a still expensive version of the multi-trillion dollar “Build Back Better.” At the core is a minimum of 15% tax on over-billion dollar corporations. The revenue from this tax pays for much of what’s in the legislation.

Democrats and much of the media have applauded this provision as only fair. After all, many big corporations pay no tax. How can that be fair? At least they can give a pittance. !5% isn’t too much to ask from these wealthy corporations. 

Maybe there is more to the story. Let’s look at what I’ll call The Internation Widget Corp (IWC). In my days in Business school, a widget was the stand-in for anything produced. Company A Turns out 100 widgets an hour, but company B only 75. How can B match or exceed A?  

How would this “Inflation Reduction Bill” affect this mythical company? Demand for widgets outstripped production, leading to inflationary supply-chain disruptions. Investment in increased production is necessary to fill orders and maintain the company’s competitive position. IWC will post a profit in 2022 of a billion dollars from selling this essential to many industries.

IWC is investing $4 billion in plant and equipment to meet the challenge. Three billion borrowed. Trump’s 2017 tax reform let it offset its tax liability by rapidly depreciating this investment resulting in zero tax. It’s committing all the company’s profits and the maximum money it can borrow without losing its excellent credit rating.

Expansion means more jobs and economic activity- More taxable income down the road. Trump understood it takes invested capital to create viable employment. Business investment underpinned the Trump boom before the pandemic. In any case, expanding supply to meet demand curtails inflation.

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A Little Respect for Older People

It’s nice to know President Biden had lifesaving Paxlovid as soon as he tested positive for Covid. Of course, President Trump got lifesaving infusions when he had Covid symptoms. Good for them. The reality for other people their age or older is quite different. The Trump Infusions became functionally available only after Florida Governor Ron DeSantis set up centers across his state. Observing Florida’s success in saving lives, other states followed. However, almost a year elapsed after Trump’s treatment before these centers opened.

Even though Paxlovid was approved last December, until recently has been challenging to obtain. Horror stories of people traveling great distances to fill a Paxlovid prescription abound. Things are better, but you still have to check around to find it.

For the average person, this may not seem like a significant problem. For octogenarians like my wife and I, it is a matter of life or death. Four out of five covid deaths occur over 65.

Maybe you can understand my dismay when I asked my doctor for Paxlovid to have for an overseas trip where the drug was unavailable and turned down. No prescription until you test positive. The drug may conflict with other medications.

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Stopping Inflation IV

In the face of the administration’s claim, there is little it can do about inflation; I’ve pointed out how changes in energy and regulatory policy will change the price trajectory. We also have a labor shortage adding to the upward cost pressures. Only now we’re matching the number of employed before Covid. Yet, we are at a 3.6 unemployment rate, which means upward pressure on wages.

Coupled with lower birth rates, we are facing labor force problems. Baby boomer retirements, already shrinking the labor force, gained momentum during the pandemic. Higher transfer payments, commuting, and childcare costs keep others from returning to work. The result is a labor participation rate of just over 62%, down from over 66% at the turn of the century.

Its possible inflation may force more people to return to the workforce, but this is far from certain. We have to look to solutions that worked in the past. The United States led the world in welcoming legal immigrants, but lately, not so much. The Trump administration made sizable cuts in new legal arrivals. So far, The Biden administration has continued the reductions rather than expanded immigration. 

The inability of both parties to confront our longstanding legal and illegal immigration problems provides little hope for relief from that direction. We forget that along with higher interest, lower taxes, and less regulation, Ronald Reagan signed the last major immigration reform. All these things combined to subdue our worst inflation until now. An increase in green cards would help, but nothing gets done. The present administration largely ignores the problem. 

If we can’t increase the labor force, we must make our workers more productive. Historically machines have multiplied labor output. However, our progress on that front leaves much desired—the U.S. lags on machination. This lack is true even though there is plenty of investment capital. We aren’t matching our competitors.

While other advanced nations with slow-growing populations have replaced workers with robots, The U.S. isn’t among the leaders, lagging in seventh place:

What explains our reluctance to mechanize? Our ports are far less efficient than other major world ports. This failure has added to supply chain disruption. The slow pace, in turn, added to our current inflation.

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Stopping Inflation III

In the previous two posts, I pointed out how we have restricted instead of expanded the supply of crucial commodities leading to higher prices. Higher prices are just another way to say inflation. Another way to raise prices is to add to costs. According to Forbes, the United States is no longer in the top 15 countries to do business. While U.S. News & World Report rates us the 6th best nation overall, it drops us down to #45  in their “open for business” category. Why isn’t the U.S.at the top of the business-friendly? What does it mean for prices now and into the future?

I discussed Ezra Klein’s lament that the Government couldn’t do things reasonably a few posts ago. Government policy determines whether a place is an excellent place to get things done. Comparing a Government-sponsored high-speed rail in California and a private venture in Florida, the latter exists while the other is a rumor. Already owning the right of way, the private railroad didn’t have to deal with governments. Unfortunately, most businesses don’t have that luxury. Hence our poor ratings.

Two things vex people in dealing with governments: who are the responsible person I can deal with, and how much time will it take to get approvals? Faced with these hurdles, it’s no wonder many businesses decide to set up shop elsewhere. Being bounced from one agency to another while being hit with lawsuits from environmentalists, nimbies, native Americans, and preservationists have been the fate of far too many ventures.

For those unable to go elsewhere, costs can be open-ended and only recovered at higher prices—a housing project scheduled for one-year development that takes three results in expensive houses. How we can turn this around while still respecting the concerns of others is the challenge. 

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Yes, Pres. Biden, You Can Stop Inflation

The Biden administration claims it can do little about inflation and leaves it up to the Federal Reserve (Fed) to tame prices. The Fed can bring inflation to heel if it will raise interest above the expected inflation rate. Anything less adds to costs while still encouraging borrowing. For instance, you’re buying a house with a 5% mortgage. It sounds high by recent standards, but if inflation is over 8%, the actual rate is -3 plus the interest tax deduction. This interest rate won’t deter people from buying houses or other capital goods. It just adds to demand and costs. Aso, don’t forget rising interest rates add 100s of billions to what we pay on our national debt, adding to rather than solving the problem.

However, if you drive up the interest rate above today’s 8-9% inflation, the economy probably will fall out of bed as it did in the early 1980s. People forget at the same time Fed. Chair Paul Volker was driving interest rates to 18%; we laid the groundwork for a rapid recovery. 

The Carter Administration deregulated industries such as Airlines, Railroads, and Telecommunications. Pres. Reagan extended this trend by dumping gasoline price controls, among others. He also cut taxes where inflation had pushed people into ever higher brackets. These were all supply-side incentives and turned the early ’80s recession into the excellent expansion that continued through the ’90s. 

It may be too late to avoid a recession, but we can try. Biden needs to emulate Carter and Reagan by expanding goods and services rather than maintaining his current roadblocks. The quicker we increase supply, the less the Fed will need to raise interest rates. 

Energy is essential to everything we do; it’s the place to start. Once again, let me lay out the economics. I’ve said it before, the view our future production doesn’t affect world prices is bogus. Yet, the Washington Post economics writer Charlotte Rampell echoes others by saying our energy production doesn’t affect prices. 

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