Kamala would have increased the top tax rate to 39.6% and that along with continuing Biden’s policies would have kept inflation decreasing and thus Powell could have kept cutting rates and so the deficit/GDP ratio would have been under 4% in Kamala’s second year.
One huge mistake Democrats have made since 2009 is not jacking up the top rate ASAP because as 1993 and 2013 show 39.6% is better than 35% or 37% as far as raising revenue while keeping GDP growth strong. The reason is obvious—everything is set up for wealthy Americans including the banking sector and so it’s much easier for them to get a line of credit to expand a successful business and so the tax cut money just goes into their family trust fund. And generational wealth just ends up increasing home values and property taxes and second home values and private school tuition which squeezes the upper middle class
Where did he say that? He said nothing of the sort. Eliminating insane tariffs isn't fiscal austerity, restoring a trillion dollars to Medicaid and not gifting billionaires and corporations a trillion dollars in tax cuts is neither fiscal austerity nor deficit reduction. What are you talking about?
Nailed it: “But the first step is to believe that what people have been screaming about their lives for the past several years actually exists.” Differentiating core essentials is obviously critical for those in the bottom half of the K distribution but as a signifier, it’s important for a lot more of us who actually go to the store to buy stuff.
Great piece synthesizing the different strands. The only element that I'd add is that reduction in social programs - I do think that being given something and then having it taken away can have significant negative reactions.
Seems pretty straightforward from this story. Real income is up ~10% since 2018, but the proportion of that available for non-essentials went down 1-2%. So a third-quartile household with a $50K income went from having (1-0.72)*$50K = $14K to spend on nice stuff, to having (1-0.74)*$55K = $14.3K (all in real dollars). So their real income to spend on happy stuff was basically flat despite the 10% rise in real income. Add any amount of aggravation and hassle to that, and rational net utility is negative since 2018.
Could it just be variance? Inflation and real earnings stats are just averages.
Depending on where and how you live, your "personal inflation" might be higher than the average at the same time your wage growth was stagnant or even negative.
If there's been an increase in national variation affecting specific sectors of the economy, then we'd expect to see both more losers and more winners. That alone would explain a lot more bad vibes, and they wouldn't be wrong from their situation either.
Not an economist, so I found your explanations very helpful. Question: Why have so many essentials risen as much as double the overall inflation rate? For example, why has the cost of auto insurance risen by more than double the overall inflation rate? More accidents? Increased cost of repairs? Market concentration or collusion? Or because "the strong do what they can, the rest of us accept what we must"? Same question applies to veterinary services ....
> The first is a money-illusion story: people fail to recognize that their incomes rose alongside prices, so their distress reflects confusion rather than material harm.
How could anyone believe this? People know their own incomes. They're not stupid.
I know for a fact I'm worse off now than before the inflation surge because prices are higher AND my nominal income is lower!
Many economists - too many - look at the aggregate data, which shows everything is hunky dory, while down here at ground level, what we see is a near polar opposite. Economists are confused as to why we don't see what they see, but can't admit their own confusion, so they write it off as us being confused.
What the author has done here was peel apart some important threads from the larger aggregate, the threads that show clearly why we're all so infuriated by this economy.
"We have many ideas for tackling housing, healthcare, and food costs."
Maybe food, but housing and healthcare (and education) we actually have a terrible track record and they have risen faster then inflation for many decades.
And no pouring more money into Medicaid doesn't make it more "affordable" it actually makes it less affordable but forces some citizens to subsidize others. "subsidize demand" is the reason these sectors have all risen faster then inflation.
Thank you. I've been trying to say this for years now. Most economists look at the aggregate data, the trendlines, and declare "everything looks a-okay here to me. Why is everyone so upset?" My contention is that the aggregate data (such as GDP and PCE) don't show what's happening at ground level.
What you've accomplished here was to peel some of the threads that are most relevant to ordinary citizens, clearly demonstrating the real numbers that people see every day - the very numbers that are leaving us infuriated.
The solution you offered at the end is, of course, spot on, but the implication is that the only way to find our way back to sanity is to extricate the current misadministration and replace them with actual competence. To be more explicit, Trumpkopf is the worst problem.
I also frequently find a disconnect in our surveys with industrial workers over the past year between how they view their own financial outlook and the overall economy. Most are confident in their own jobs and optimistic about their own financial future. But very pessimistic about the overall economy.
I'm not convinced by this line, but I may be missing something simple: "If utility comes from consumption above some baseline floor, then a rising share devoted to essentials leaves less room for discretionary consumption and lowers welfare, even if total income keeps pace with total prices."
Discretionary consumption falls as a share of total income, but is there any reason to believe it will fall in absolute terms? If the prices of essentials rise faster than inflation as a whole, the prices of discretionary goods must necessarily rise more slowly than overall inflation. If income gains match inflation, why couldn't that smaller share buy the same basket of discretionary goods?
Anecdotally I can share that even though I make the most I ever have, I have nearly zero discretionary income (as in getting coffee out once a week is a huge splurge vs 2019 when I’d eat out 1-3x’s a week as an illustration).
So perhaps depending on what the discretionary income is spent on it may be possible to maintain that.
That has not been the case across all categories of spending for me.
So you're converted to the cause of fiscal austerity and deficit reduction?
Stephen Miran is giving FOMC speeches saying that r* is at 0 percent, so we have that going for us on this front. 😎
Shut up Matt.
Kamala would have increased the top tax rate to 39.6% and that along with continuing Biden’s policies would have kept inflation decreasing and thus Powell could have kept cutting rates and so the deficit/GDP ratio would have been under 4% in Kamala’s second year.
One huge mistake Democrats have made since 2009 is not jacking up the top rate ASAP because as 1993 and 2013 show 39.6% is better than 35% or 37% as far as raising revenue while keeping GDP growth strong. The reason is obvious—everything is set up for wealthy Americans including the banking sector and so it’s much easier for them to get a line of credit to expand a successful business and so the tax cut money just goes into their family trust fund. And generational wealth just ends up increasing home values and property taxes and second home values and private school tuition which squeezes the upper middle class
Where did he say that? He said nothing of the sort. Eliminating insane tariffs isn't fiscal austerity, restoring a trillion dollars to Medicaid and not gifting billionaires and corporations a trillion dollars in tax cuts is neither fiscal austerity nor deficit reduction. What are you talking about?
Nailed it: “But the first step is to believe that what people have been screaming about their lives for the past several years actually exists.” Differentiating core essentials is obviously critical for those in the bottom half of the K distribution but as a signifier, it’s important for a lot more of us who actually go to the store to buy stuff.
Great piece synthesizing the different strands. The only element that I'd add is that reduction in social programs - I do think that being given something and then having it taken away can have significant negative reactions.
Absolutely. He did at least mention reducing Medicaid as being problematic. He's right.
Seems pretty straightforward from this story. Real income is up ~10% since 2018, but the proportion of that available for non-essentials went down 1-2%. So a third-quartile household with a $50K income went from having (1-0.72)*$50K = $14K to spend on nice stuff, to having (1-0.74)*$55K = $14.3K (all in real dollars). So their real income to spend on happy stuff was basically flat despite the 10% rise in real income. Add any amount of aggravation and hassle to that, and rational net utility is negative since 2018.
Could it just be variance? Inflation and real earnings stats are just averages.
Depending on where and how you live, your "personal inflation" might be higher than the average at the same time your wage growth was stagnant or even negative.
If there's been an increase in national variation affecting specific sectors of the economy, then we'd expect to see both more losers and more winners. That alone would explain a lot more bad vibes, and they wouldn't be wrong from their situation either.
Not an economist, so I found your explanations very helpful. Question: Why have so many essentials risen as much as double the overall inflation rate? For example, why has the cost of auto insurance risen by more than double the overall inflation rate? More accidents? Increased cost of repairs? Market concentration or collusion? Or because "the strong do what they can, the rest of us accept what we must"? Same question applies to veterinary services ....
Greed. "We raise prices because we can".
> The first is a money-illusion story: people fail to recognize that their incomes rose alongside prices, so their distress reflects confusion rather than material harm.
How could anyone believe this? People know their own incomes. They're not stupid.
I know for a fact I'm worse off now than before the inflation surge because prices are higher AND my nominal income is lower!
Many economists - too many - look at the aggregate data, which shows everything is hunky dory, while down here at ground level, what we see is a near polar opposite. Economists are confused as to why we don't see what they see, but can't admit their own confusion, so they write it off as us being confused.
What the author has done here was peel apart some important threads from the larger aggregate, the threads that show clearly why we're all so infuriated by this economy.
Median does no good. Look at things by quintile.
Or better still, by decile.
I agree with the data but you falter at the end:
"We have many ideas for tackling housing, healthcare, and food costs."
Maybe food, but housing and healthcare (and education) we actually have a terrible track record and they have risen faster then inflation for many decades.
And no pouring more money into Medicaid doesn't make it more "affordable" it actually makes it less affordable but forces some citizens to subsidize others. "subsidize demand" is the reason these sectors have all risen faster then inflation.
Thank you. I've been trying to say this for years now. Most economists look at the aggregate data, the trendlines, and declare "everything looks a-okay here to me. Why is everyone so upset?" My contention is that the aggregate data (such as GDP and PCE) don't show what's happening at ground level.
What you've accomplished here was to peel some of the threads that are most relevant to ordinary citizens, clearly demonstrating the real numbers that people see every day - the very numbers that are leaving us infuriated.
The solution you offered at the end is, of course, spot on, but the implication is that the only way to find our way back to sanity is to extricate the current misadministration and replace them with actual competence. To be more explicit, Trumpkopf is the worst problem.
I also frequently find a disconnect in our surveys with industrial workers over the past year between how they view their own financial outlook and the overall economy. Most are confident in their own jobs and optimistic about their own financial future. But very pessimistic about the overall economy.
I'm not convinced by this line, but I may be missing something simple: "If utility comes from consumption above some baseline floor, then a rising share devoted to essentials leaves less room for discretionary consumption and lowers welfare, even if total income keeps pace with total prices."
Discretionary consumption falls as a share of total income, but is there any reason to believe it will fall in absolute terms? If the prices of essentials rise faster than inflation as a whole, the prices of discretionary goods must necessarily rise more slowly than overall inflation. If income gains match inflation, why couldn't that smaller share buy the same basket of discretionary goods?
Anecdotally I can share that even though I make the most I ever have, I have nearly zero discretionary income (as in getting coffee out once a week is a huge splurge vs 2019 when I’d eat out 1-3x’s a week as an illustration).
So perhaps depending on what the discretionary income is spent on it may be possible to maintain that.
That has not been the case across all categories of spending for me.