Sent October 2022
Life is complicated enough, but often we make it harder. One of those areas where we make it tougher is in the “science of economics,” an area of study, which, truth be told, isn’t really a science at all in the traditional sense of the word. Common sense would take us a long way toward understanding the world and might even make economic policy better. Let me explain and use our current bout of inflation as the subject.
Theories, Actions, and Common Sense
The unvarnished truth is that the study of economics represents a construct, a way of viewing the world while simultaneously dealing with the interplay of completing forces and imprecise theories. For instance, the oft-quoted economic concept of spending Multiplier Effects, or the Taylor Rule, the Phillips Curve, (and 20-30 more) are all concepts that haven’t been proven in any formulaic way.
Given the constant media headlines about the health of the economy of the United States, and the fact we are indeed the biggest economy in the world, this imprecision is disconcerting to many people. However, I don’t want you to feel that way. Theories are just modes of trying to explain things. Theories don’t get you in trouble. Actions are what get you in trouble. Today I want to address one of those actions where common sense would tell us much more than any theory would do.
It is this:
You Cannot Spend Your Way Out of Inflation
Your common response to the above statement is: “Well, of course; I know that.” However, just at a time where measured inflation last month has again continued to batter U.S. households (8.3%)[i], our leaders in Washington DC display a profound lack of common sense. (Republicans spent too much in their last year as well so spending is not “cornered” by one political party.)
As I wrote about in my letter to you last month, interest rates are being dramatically increased by the Federal Reserve to dampen inflation. Jerome Powell has continued that effort with another 0.75% increase last week[ii], a move that sent stock markets into the toilet. In the past 18 months we have seen mortgage rates go from their lowest level in 35-years to their highest level (3.25% to over 6.3%[iii]). Those increases are dramatic, and painful.
But, as inflation hurts the lowest income households to the greatest degree, it is socially imperative that we slay this beast. People are cutting back on their spending as that inflation bite takes a piece out of their wallets. But… what we are failing to realize is the tremendous spending of our Executive and Legislative branches is directly off-settings those demand-tamping effects and instead fueling inflation.
Whatever you might think about the exact politics of three recent bills from Congress, set that aside and think solely of their spending impact (for the record, Republican spending restraint went out with Reagan):
Inflation Reduction Act
The Inflation Reduction Act (IRA) infuses a great deal of money to the economy, but there are no respected independent economists that have projected the bill will reduce inflation[iv]. If typical U.S. government annual expenditures are in the $3 trillion range, and this Act front-loads $390 billion in extra spending[v] (tax increases come later, theoretically to reduce the deficit overall by $264 Billion), you are inevitably going to push up prices in the short-term.
CHIPS Act
The CHIPS Act (Creating Helpful Incentives to Produce Semiconductors) puts another $280 Billion[vi] out the door. Let me be clear that I think the Chinese government steals technology unapologetically as part of their natural policy, but how we hand out free money needs a little thought, not just emotion.
Think about this: it takes a semi-conductor manufacturer 4-7 years to strategize on building a new plant… and Taiwan Semiconductor Manufacturing Company (TSMC) had already committed to build a $12 Billion plant in Arizona and Intel announced a new Ohio $20 Billion plant within 60-days of the bills passing. Coincidence? Oh – did I mention over $100 Million in lobbying dollars had been spent[vii] and these two companies alone got a combined $20 Billion of your hard-earned money to build those plants? Does anyone with half a brain not think this is just wasteful spending and crony capitalism? We absolutely need new semiconductor research and to overcome critical supply chain risks, but accomplishing it in this way shows wasted incentives and we will boost inflation right with it.
Student Loan Deferment
Finally, due to the pandemic, all student loan debt has been in deferment mode for two years, the cost of which has been $60 billion dollars to U.S. taxpayers. Today we witness an economy where there are two job openings for every job seeker so we’re not talking about an issue where people are out of work and can’t pay the share of student debt that they had of their own volition signed up to pay. Still, we pass a bill by Presidential edict to forgive $400 billion – $600 billion of student debt at the exact same time when inflation is at a 38-year high (the non-partisan Congressional Budget Office just scored the bill as costing $450 Billion[viii] — and others estimate it to go as high as $1 Trillion). It’s like Hurricane Relief without the bloody hurricane.
Where do people think that this “found money” will go now that it doesn’t have to be repaid? We most assuredly have a college affordability problem in this country, but trying to solve the education problem this way is like trying to cure a raging alcoholic by giving him a drink.
Economic Trade-Offs
You run your own household and thus have your own economy to manage. Economics is hard. National economics always involves trade-offs in social and tax policies. However, you can’t have the Federal Reserve trying to keep inflation in the barrel while the legislature is drilling holes in the bottom of the barrel. Jerome Powell might as well sit on the sidelines and pick his nose because he’s fighting a battle he can’t win. If we truly cared about the poor in our society, the least able to confront inflation, we would make different decisions – or at least delay them – until our poor and middle-class workers could afford it.
It remains my deep and distinct honor to serve you.
Patrick Zumbusch
Founder and CEO
Wellspring Financial Partners
[i] August 2022 CPI (Bureau of Labor Statistics, September 13, 2022
[ii] “Fed Raises Interest Rates by 0.75 Percentage Point for Third Straight Meeting” (Nick Timiraos, Walls Street Journal, September 21, 2022)
[iii] “Mortgage rates rise to nearly 6.3%, the highest level since 2008” (Anna Bahney, CNN Business (cnn.com), September 22, 2022)
[iv] “What the Inflation Reduction Act does and doesn’t do about rising prices” (Juliana Kim, NPR News, August 13, 2022)
[v] “What are the Inflation Reduction Act and Budget Reconciliation?” (Rebecca Goldman, League Of Women Voters blog site, September 1, 2022)
[vi] “The US Throws $52 Billion at Chips—but Needs to Spend It Wisely” (Bill Knight, Wired Magazine, July 28, 2022)
[vii] “Chip companies spent $100 million lobbying Congress. They’re about to get $52 billion in subsidies” (Max Cherney, Protocol, April 4, 2022)
[viii] “Costs of Suspending Student Loan Payments and Canceling Debt” (Phillip Swagel (Director), Congressional Budget Office, September 26, 2022)
