Tag Archives: economics

A Thought on Interest Rates

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The Wall Street Journal is speculating on when the Fed might start lowering its benchmark interest rates, speculating further that the Fed might be worrying about whether it’s time and whether leaving its rates where they are might spark a recession. (I was one of those worrying about a recession starting up over the last year or year-and-a-half, and still, but maybe the Fed’s worry is as overblown as mine.)

Early in the article, the WSJ has this:

The central bank will keep its benchmark interest-rate target at a range of 5.25% to 5.5%, a 23-year high….

I’m not sure that’s a useful baseline. The first 20, or so, years of that period are when the Fed was artificially suppressing interest rates.

5.25%-5.5% benchmark rates actually are, long-term, reasonably consistent with a 2% inflation rate.

Maybe it’s time for the Fed to cry “Enough” and go back to the sidelines. Nothing more is needed; let the market fluctuate as it will. Rates already are within the historical fluctuation range that didn’t need Fed interference intervention.

Imagine That

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Don’t take government money to do something good, thereby avoiding the government’s strings necessarily attached (as well as government’s strings that are attached unnecessarily), and be able to do the good thing at much less cost, including for the taxpayers providing the government’s fettered money.

By forgoing government assistance and the many regulations and requirements that come with it, SDS Capital Group said the [affordable housing] 49-unit apartment building it is financing in South Los Angeles will cost about $291,000 a unit to build.
The roughly 4,500 apartments for low-income people that have been built with funding from a $1.2 billion bond measure LA voters approved in 2016 have cost an average of $600,000 each.

It’s even worse in San Jose:

A recent report commissioned by the city of San Jose found affordable-housing projects that received tax credits cost an average of around $939,000 a unit to build there last year.

There are some naysayers:

Some affordable-housing veterans worry whether privately funded construction can scale quickly enough to match the scope of the homelessness problem and whether its backers will maintain their commitments to serve the needy.

That’s a problem for government to solve, not the private funders of affordable housing. It’s government regulations, both well-intended and done solely for political gain, and government strings dictating how government-provided funds must be spent that impact the scope of the “homeless problem.” Government regulations and strings create, in large part, the homeless numbers, including especially the duration of individual and individual family homelessness.

Another case of the advantage of letting a free market operate freely. Imagine that.

Inflation is Coming Down—So What?

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So what, indeed.

Shelter cost inflation slowed, to 0.4% in February from the previous month compared with a 0.6% pace in January. This reinforced suspicions that January’s high reading in that category was an anomaly. But apparel prices, a category that had been in deflation, jumped 0.6%.

There’s concern that inflation isn’t “slowing” enough to encourage the Federal Reserve to start cutting its benchmark interest rates, and that’s a two-edged sword.

It’s nice that inflation may finally be abating, but that’s for the future. Most of us live in the here and now; we have to deal with the present reality of the much higher prices for our necessities, much less for our wants, that Progressive-Democrat Joe Biden’s hugely inflationary policies have created. Those prices won’t come down in nominal terms, and they can’t come down in real terms until wages catch up with, and surpass, prices—which means that wage increases must surpass those price increases over a period of time.

That isn’t occurring at a rate that would ease the loss us Americans are experiencing in the grocery stores and in the homes we want to buy. That last, driven in large part by high interest rates, also is inhibiting our heretofore geographical mobility, and that in turn hurts our ability to earn more by changing jobs. We’re functionally denied that avenue for wage increases that surpass price increases.

As things over the last three years or so, wage increases were much less than those inflation-driven price increases for a couple of years, until last summer. At that point, wages increased slightly—and only slightly—faster than price increases over each of the next several months. Over the last couple of months, though, that trend appears to have reversed, with wage increases again being smaller than price increases as inflation has begun, slowly so far, to rise again. Indeed, over the longer term into the past,

[a]ccording to ECI [the Bureau of Labor Statists’ Employment Cost Index], inflation-adjusted wages have shrunk by 3.7% since the end of 2020. While real wages rose in response to falling energy prices late last year, they have been roughly flat since. Worse, the drop in real wages erased all gains made in the late 2010s. Real wages today stand at 2015 levels, meaning Americans’ paychecks don’t go any further now than they did eight years ago.

That two-edged sword shows up in this way. Higher interest rates help the stereotypical widows and orphans—and today’s retirees—who are living with fixed income sources facilitating their Social Security payments. Those fixed income sources benefit from higher interest rates, since that interest is the source of income for the debt- and dividend-paying instruments they hold.

Higher interest rates, though, hurt the overall economy in a couple of ways. One is the higher cost of the Federal government’s borrowing, including its rolling over of its existing debt. That higher cost means less money to spend on things the Federal government should be spending on (setting aside, for this post, the definition of what the government should spend on). Those higher rates also increase the cost of money to businesses, which leads to lower investment rates, less R&D, slower pay raises, and reduced hiring.

This Time I Disagree with Bjorn Lomborg

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But only a little bit. Lomborg (among other things, Copenhagen Consensus President), in his Tuesday Wall Street Journal op-ed, writes absolutely correctly about the need for climatistas (my term, as is “doomsayers” below) to consider much more than their simple claim of climate change and the imminent destruction from their claimed change. Lomborg, though, concentrated on the economic destruction the doomsayers’ policies would inflict even as those worthies ignore technological advances that would mitigate their claims’ outcome, even were their claims in any way accurate.

Where I disagree is in the lack of discussion of the larger, and more important, context within which today’s alleged climate disaster is supposedly developing.

From the subheadline of Lomborg’s piece:

Climate policy needs to take into account the costs of draconian measures….

The doomsayers need to do more than that. They need to reconcile their claims of impending disaster with some facts that provide longer range context. Facts like Earth, 11k years after the last Ice Age, still is cooler than our planet’s geologic warming trend line (noisy as the data around the trend line are). Facts like there have been a number of epochs in our past where Earth was much warmer than it is now, and life was lush; there have been a number of epochs in our past where atmospheric CO2 was much higher than it is now, and life was lush; and those sets of epochs do not correlate with each other.

Some other facts: our climate changes do correlate, roughly, with orbital changes (small) and rotation axis precession (relatively dramatic). Beyond that, we’re about halfway through the current axial tilt from one direction to the opposite, and we tilt—our northern hemisphere, where most of the oceans are—toward the sun in winter and away from the sun in summer. How do the doomsayers plan to deal with the situation in a few thousand years (roughly equivalent to half the time that has passed since that last Ice Age, and a bit shorter than the time since we started our first civilizations) when our northern hemisphere tilts toward the sun in summer, away from the sun in winter, and the seasons get dramatically more extreme as a result?

The Forgotten Man

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A recent Wall Street Journal editorial correctly pointed out the costs to us ordinary Americans of a variety of Progressive-Democrat President Joe Biden administration plans. The editors were particularly concerned with the administration’s plans for bank and credit card fees that these institutions charge individuals who overdraw their account or make late payments on their credit cards and that these institutions charge businesses for using the various ATM and credit card payment networks.

The Consumer Financial Protection Bureau, the agency proximately responsible for the latest round of regulations capping those fees at markedly lower levels,

acknowledges[] the lower penalty may cause more borrowers to pay late, and as a result incur higher “interest charges, penalty rates, credit reporting, and the loss of a grace period.” This would make it harder to qualify for an auto loan or mortgage.
The agency concedes that credit-card issuers may also raise interest rates, reduce rewards, “increase minimum payment amounts or adjust credit limits to reduce credit risk associated with consumers who make late payments.” Because some states cap credit-card interest rates, “some consumers’ access to credit could fall.”

The editors closed their piece with this bit of naivete, though:

The forgotten man always pays.

Who says they’re forgotten? These are the ones the Progressive-Democratic Party wants to trap into welfare, so Party can trade welfare payments for votes. Imperial Rome did bread and circuses; Party does welfare dolings.