Two Cheers for Senator Warren

Has the Federal Reserve heard of supply and demand?

Of demand, Fed officials have heard for sure. They are obsessed with it, possibly because they believe they can control “aggregate demand” by manipulation of credit markets. But if prices are set by supply vs. demand, shouldn’t inflation fighters care about the supply side?

The Fed clearly does not.

Housing costs are the largest component of the Consumer Price Index, at 33%. The Fed believes it can restrain housing costs by pushing mortgage rates upward, cratering demand. But supply is the more pressing issue and rising rates are making it worse.

The Wall Street Journal reports the United States is currently short roughly one million single-family homes, despite home builders rushing to meet demand. The gap, though, is caused not by a shortage of new construction but by the reluctance of current homeowners to sell, swapping their current 3% deals for a Potterville-like 6%.

Worse still, to the extent housing prices are falling because rates are high, the most important asset of most American families is shrinking. Shrinking supply is just another way of saying “getting poor.”

Fed watchers’ big worry, however, is not the price of houses but the price of people. Horror of horrors, not only does unemployment remain near historic lows, Americans are getting paid more for their work. “This must stop!” says the Fed. America won’t be healthy until Americans are underemployed or underpaid.

Since there are so many good jobs going begging, why not boost the supply of labor rather than collapsing the demand?

The Fed’s influence over the supply of labor is far less than its influence over mortgage rates. And since the political branches have decided inflation is the Fed’s job, the topic does not get talked about.

The great lesson of Reaganomics, however, is that fiscal policy, which Congress and the President control, can do more to strengthen the dollar than monetary policy. When a nation produces more, its people are paid more and their money also buys them more. That’s both because Time Prices decrease as abundance grows and because the currency of growing economies is more demanded.

Labor Force Participation Rates

Labor Force Participation Rates are still down significantly compared to pre-lockdown levels. We need to get those people, and more, back to work.

Two years after the pandemic, we still pay too many people not to work. In 2008, 28 million people were receiving “Food Stamps” at an annual cost of $38 billion. By 2022, 41 million were getting that assistance at a cost of $113 billion.

In 2019 before the pandemic, “welfare” payments, excluding Medicaid, totaled $364 billion. By 2021, largely thanks to special pandemic payouts, that had risen to $521 billion. But rather than tailing off last year, welfare spending rose nearly another 20% to $613 billion.

More damaging than welfare, however, are taxes on employment. Social Security and Medicare amount to a 15% flat, unavoidable tax on the decision to hire a worker, or the decision to work.

Abolishing entirely this $1.6 trillion punishment for work would quite likely increase the demand for workers, but it should also increase the supply.

As for fear of bankrupting “the system” by eliminating those taxes, it’s the nation that funds social benefits, not the mythical “trust fund.” Much, or perhaps all the lost revenue eventually would be made up in increased revenues from the corporate and personal income taxes. In time, both the Reagan tax cuts, and now the Trump corporate tax cuts, boosted revenues beyond expectations.

For supply-side skeptics, however, Senator Elizabeth Warren has an answer. Though provisions of her wealth tax such as marking security holdings to market would be destructive except for lawyers, a national tax on real property would be a vast improvement over a tax on jobs.

The current value of U.S. commercial and residential real estate is approximately $65 trillion plus another $2 trillion in farmland. A 2.5% tax would just cover the revenues lost from abolishing the payroll taxes.

The damage to the economy would be far less than payroll taxes are causing now. Real estate assets tend to be used inefficiently, which was why Henry George advocated that governments levy only one tax, on land, so as to encourage its most economic employment. Most companies and many people are occupying more square feet in more expensive locales than they need.

The goal of abolishing payroll taxes would be more than luring back people we “expect” to be in the work force. Of the 33 million Americans between the ages of 65-74, only 26% are employed. Generously assuming half are too feeble to get back on the job, we are missing at least 12 million senior citizens from the workforce, most of whom are more skilled than the average younger worker. Let’s boost their pay and reduce the cost of hiring them and see how many we can lure out of the tedium of retirement.

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