Author: seansteegpierce@gmail.com

Three months ago, when you could still buy a used car for a reasonable price, the debate on inflation was on whether or not it was real. Now, we have moved onto whether this inflation is a ‘transitory’ effect of the lifting of COVID restrictions or if it will be more sustained. The best indication that it is likely going to be a longer-lasting level. Managing the ramifications of that inflation is where things get hairy. 

Unprecedented levels of both fiscal and monetary policy were helpful in stabilizing an economy in free fall, but they also pumped unprecedented amounts of money into the market. After the financial crisis, loose monetary policy resulted in a booming stock market and widescale employment, but it never really brought about rising wages and thus consumer goods’ prices stayed relatively stable. This time around, the federal government stuck money directly into the pockets of consumers. On top of that, generous unemployment benefits have kept many out of the workplace unless induced by higher wages. Low-wage workers have experienced their fastest raises in decades.

Unemployment levels have not yet reached the lows of 2019, so the economy is not suddenly exploding with double-digit growth. Wages, however, unlike consumer goods, are what economists like to call ‘sticky.’ People who make higher wages are generally unwilling to accept lower ones. That means, when people DO go back to work, they will probably be making more money. More money in the hands of consumers, especially the lowest-income consumers, means higher spending and, you guessed it, inflation.

There are two questions remaining: 1) will wages continue to rise? and 2) will wages rise more quickly than the cost of living? If people start blasting off applications at the same time, supply of labor will balance with the demand and wages will stop rising. Less cash flooding consumer goods markets and housing markets will mean slower inflation. Asset prices, however, will continue to climb and inequality will climb even higher (wealthier people tend to hold more financial assets, which benefit from loose monetary policy even as wages stagnate).

Even if the supply of labor returns a bit more slowly, real wages could decline, though, if inflation comes too quickly. Soaring prices on everything from vehicles (in part due to a shortage of silicon chips) and coffee (due to poor yields, probably from climate change) can individually be explained by temporary factors. However, the whiplash on supply chains could prove an enduring problem, especially with the continued protectionist behavior by countries across the globe. If supply issues take years to resolve, the higher prices can hardly be called transitory. 

The economy will have to be monitored closely to determine the proper course of action. If labor supply is tight, spending $1 trillion on infrastructure may put too much pressure on it, crowding out private companies. If, instead, people return to work rapidly, we could experience a recession while waiting for Congress to hammer out the details of a package. The best possible way forward would be to put automatic releases on projects based on economic benchmarks like total employment and real wage growth. Spending too rapidly could cause everything to come crashing down around us, but the same could be true of an overly miserly approach. It was true three months ago and it’s truer now: this is a high-risk economy, but we could come out of it in better shape than we have been in for a long time if we can manage it well.

Markets are the products of thousands of decisions of billions of people. They are incredibly complex – which, by the way, is why economists generally use assumptions to make modeling them more manageable. Yet, somehow, markets almost always create an efficient system of distributing resources in order to most efficiently cater to society’s needs. The ‘almost’ means that we are constantly tweaking the mechanisms and incentives dictating the market’s structure, but it also means we have to be careful to avoid turning the almost into a snarl of inefficiency. At the center of this entire system is fierce competition for resources, which, in a modern society, translates to money. 

Competition is life at its most natural state. It is the same from the microscopic scale as it is on the Serengeti. The difference for us is that resources are allocated based upon a set of rules rather than the law of the jungle. We, as a society, get to vote for what we value with our money. Those monetary votes are what firms compete over. The field of play is ideally the product itself, or at worst marketing, but it frequently bleeds over into ways of harming competitors. Sometimes, when there are just a couple of large companies in a given market, they collude in some ways to keep prices high or wages low. Other times, the structure of the market creates barriers to competition. Often, the very thing choking off that competition is regulation. 

The particulars of different markets are endless. Given the sheer volume of variables impacting markets, generalizing is impossible. Still, categorizing helps us develop a better framework for writing the rules than a one-size-fits-all approach. Instead, building a toolkit from which you can pull out a hammer or a screwdriver or an allen wrench as needed helps us avoid making problems worse.

We don’t want anticompetitive companies like Facebook and Google having policies on not poaching each other’s employees and we don’t want noncompetes preventing wages from reaching their true equilibrium. In the same way that having only one internet provider available means you have to stomach poor service, anticompetitive approaches to hiring means employees have limited ways of selling their labor and must settle for lower wages and worse benefits. President Biden’s effort to end the practice of endless noncompete agreements is a good start at preventing the problem, but some exceptions need to be made to prevent intellectual property theft and determining what that threshold looks like will need to be clearly defined. 

Platforms, such as Amazon, create an entirely different problem. Amazon was built into the behemoth that it is now by constant iteration and investment in making a better product. The company has been so good, in fact, that they have effectively forced some competitors to pay them for the privilege of selling on their platform. It is a ruthlessly efficient business, but a customer-centric one. It’s not entirely fair to say they have destroyed retail, but they have outcompeted everyone in the shift to consumption on the internet. If regulation of the company was done heavy-handedly, consumer welfare would be greatly harmed, and Walmart would likely start celebrating. A few targeted measures like one preventing Amazon from violating agreements with sellers and copying the most popular products (something they have been documented doing), would be much better.

The government itself frequently prevents competition in numerous ways, too. One is by subsidizing dying giants. A lifeline for a company that is no longer productive may save a few jobs, but over the long term it prevents better businesses from growing and chokes off competitors – slowing innovation in the process. Alternatively, the government can create a thicket of well-meaning regulation that raises costs and encourages concentration. That, too, destroys competition, because a concentrated industry is a less competitive one. Small businesses cannot compete or grow because the barrier to entry – high legal or compliance costs – is simply too high.

The Biden Administration’s effort to encourage competition is a laudable one, but they must recognize the difficulty that lies ahead. Entrenched interests will try to prevent meaningful legislation and a well-meaning but misguided attempt could backfire with both higher costs for consumers and even less effective competition. The moment is opportune. People everywhere feel cheated by monstrous corporations finding their way into every facet of our lives. The administration can recruit Republicans to the cause by cutting regulations that are less effective while Democrats push for tighter controls on the biggest corporations. With a little bit of elbow grease, this could be a signature achievement.

Sometimes, markets don’t function quite how they’re intended to. Incentives are out of wack, regulations are too complex, there is a lack of trust, or the rules just weren’t made the way they should have been. Maybe the costs aren’t concentrated on the consumer, like in the case of emissions. More often than not, the first instinct of regulators and lawmakers is to simply add new regulations to the amorphous blob of existing regulations that they think will prevent the bad outcome. However, there’s only one way to solve the problem: reorganize the market so incentives are properly aligned with what we are trying to maximize. Continuing on the theme of last week, let’s look at how maligned incentives impact green markets and why carbon pricing could help solve that problem.

For environmental markets, the biggest problem is something called an externality. There are costs to everyone for CO2 emissions or methane emissions or a number of other waste products, but costs are not borne by the consumer or the producer of the product. Rather than taxing or limiting these emissions, US policy has been to attempt to influence emissions through things like fuel economy standards. The CAFE standards have, unfortunately, been a dismal failure even at raising the miles the average car can travel per gallon. Have you ever wondered why vehicles have been getting progressively bigger over time? CAFE standards make exceptions for bigger vehicles, so automotive producers here are able to sell bigger cars for less relative to smaller cars. This does nothing to account for the true costs of fuel emissions, but, in reality, the cost should be through the fuel. Consumers can then choose the size of their vehicle or its fuel efficiency and automakers would adjust to consumer preferences.

Instead, once again, we have reached into the grab bag of regulation to push electric cars on consumers. It may be that they are the best solution, but many of them are currently charged using coal power plants. That makes them less environmentally friendly than gas-powered cars. Batteries, on top of that, need rare earth metals that are often mined using damaging methods like strip mining. This is not to say that electric cars are bad; they can be great and they might even be a good solution to vehicle emissions. However, we are still avoiding the obvious answer: price the ‘consumption’ of the emission.

Where the government has fallen short, some intrepid private individuals and corporations have stepped up. We have a robust voluntary market for carbon offsets in the US and a myriad of projects rushing to fill the demand of environmentally conscious consumers. This voluntary market has led to some fantastic innovations. Farmers are using regenerative practices that sequester carbon to the soil through the roots of their crops and cover crops. This even leads to higher yields over time. A new process of creating concrete pulls carbon directly out of the air and combines it with calcium to create concrete. It’s even cheaper underwater, so it may lead to artificial islands someday. Building with cross-laminated timber from trees harvested sustainably could knock off a few percentage points from global net emissions. Insulation using straw packed tight is both flame-retardant and incredibly effective, all while sequestering a significant amount of carbon (but don’t tell the Big Bad Wolf). A new form of cattle feed can significantly reduce their gaseousness and pig fecal matter has been purified to provide natural gas. It doesn’t take much. These incentives have sparked a boom. If we’re not careful, though, it can all vanish with a poof (sorry).

These voluntary markets have been made possible by a coterie of verification standards. Several nonprofit organizations, such as Verra and the Climate Action Reserve, have taken it upon themselves to create registries for projects relying on independent verification. The initial market failed because of fraud, but it has come back stronger with that simple change.

Sustainability is not really sustainable without profit, though. Societies assets go where there is money to be made and we make it extraordinarily difficult to innovate sometimes. The US, unlike Europe, has no central emissions market. We have a plethora of zoning restrictions that sometimes make it nigh on impossible to build new infrastructure including green infrastructure. North Dakota took it upon itself to protect the coal industry by handicapping the wind industry. Our success is not a foregone conclusion. We must get out of the way of innovation by lifting silly restrictions and putting a price on the things that actually matter, such as carbon and methane emissions. We can leverage existing verification standards and build upon them to prevent fraud. This can all be made a lot easier with a few simple tweaks to existing markets.

Protectionist and isolationist policy has become the norm, but we can still reverse course. Other countries would also prefer to trade with us. Instead of accepting the decline of the global world order into nationalism and tit for tat trade policy, we can leverage our position into a freer and fairer market. Climate change policy requires buy-in from emerging countries as well; this can bring us that. We can use it to bring in workers with skills that we need right now, like nurses. To bring it home, we still need to invest in retraining to make sure those who are negatively impacted still make out ahead.

Tariffs make things more expensive for US consumers, sure, but it also has created problems for consumers abroad who want US-made goods. When then-President Trump instituted huge tariffs on steel, manufacturers of finished goods had to pay higher prices for their raw materials, which made them less able to compete. On net, we had to pay more for the same thing and lost jobs. It doesn’t end there. While the small group that benefits from tariffs is enriched, they become weaker competitors without being pushed by international companies to keep them sharp. American automakers in the 60s and 70s are a great example. Quality deteriorated to the point that cars only lasted a couple of years before falling apart while Japanese firms like Toyota made high-quality cars at lower prices. In the end, US automakers (with the exception of Ford) went into bankruptcy, wiping out their investors, before finally coming back stronger and using some of the same practices as Toyota.

The costs of the tariffs in our Toyota example were borne by buyers of cars who had to either settle for an inferior product or pay the pass-through costs of the tariffs. It is exactly the same for consumer goods now and it functions as a regressive tax – many of the higher-end products are made in the US, so the tax is not paid by wealthy consumers. We can roll back tariffs in a negotiated way that requires other nations to sign agreements giving US firms an equal footing to compete in their own markets (particularly important in markets like the EU and China, where some local producers are protected by steep regulatory bulwarks). This is a much better method than Trump’s unsuccessful attempt to negotiate quotas, which again bypasses markets completely and coddles legacy producers.

Labor standards, meanwhile, can be addressed in emerging markets like Indonesia where some factories have been found to use child labor. Raising labor standards limits exploitative practices that are both damaging and unsustainable and it makes firms in those countries compete on a more equal footing. Further, we can import some of their skilled workers. That directly addresses shortages here (such as nurses, as mentioned above) and, frequently allows those workers to send remittances to families. This export of dollars effectively lowers the dollar relative to other currencies, making our exports more competitive. 

Those emerging markets eventually should attain a higher standard of living and the one thing that always comes with higher income is more energy usage. The Biden Administration has been vocal about environmental policy, but none of that will matter if emerging economies in Asia and Africa continue to build out coal powerplants. We can invest in their energy infrastructure as part of a broader deal, which in turn expands our soft power as well. Further, establishing demand for low-cost renewable energy in emerging markets, both decentralized and more grid-based, will continue to reduce prices. 

All of these ideas are synergistic. They create virtuous cycles and, for the vast majority of Americans (and citizens of the world), they will be net positive. However, some people inevitably lose out when they have to compete on the global stage. Jobs that would exist in a protectionist environment disappear. This was a major reason for the populist backlash that saw Trump get elected in 2016. The answer is not easy, but large-scale investments into retraining have been successful in Scandanavia and Germany. President Biden has suggested two years of free community college. I would suggest continuing education. Some companies have already been using VR train workers. This tool gives us the opportunity to create a workforce ready to tackle whatever the future brings.

Under the Trump Administration, the United States beat a continuous retreat from global affairs. After winning the election, President Joe Biden exhorted to allies that “America is back.” After four months, it’s time to peek under the curtains to see how that has gone so far. Unfortunately, the President’s actions have not lived up to his words. Refusal to reopen trade because Trump made protectionism popular is, frankly, not a good look. We are expanding punitive sanctions, even against allies. A “buy American” executive order added costs to every government order. An archaic law called the Jones Act is being vigorously upheld as a model despite the fact that the Jones Act is directly responsible for making American goods less competitive (more on that later). Immigration and refugee programs, rather than being expanded upon as Biden promised on the campaign trail, have continued to languish. We have continued to withdraw from the global stage.

Trade, which expanded more or less continuously since World War II, now seems to be championed by no one. You may think that we are only whacking China with heightening tariffs. That is far from true. The European Union and the United States are in an escalating trade war as well. Steel in particular is being protected from foreign competitors. For what it’s worth, this practice raises steel prices for American manufacturing and makes our higher-value products less competitive abroad, but that’s not the point. The data are conclusive: specialization created by globalization allows greater consumer choice at lower prices.

To be fair, this has created some losers. There are swaths of American geography that were formerly hubs of economic activity but have been largely abandoned to create ghost towns and poverty. The solution to this problem is not cheap. The only countries that have successfully dealt with it have invested two to four percent of their GDP into retraining. The US has not cracked one-half of one percent. It’s a harder thing to tackle than blame on other countries, but solving it requires being more open, not more closed. Perhaps, instead of plowing hundreds of billions more into elder care, we could spend that on retraining workers. It’d raise long-term tax revenue and reduce the cost of supporting those left behind in the long run. Finger-pointing is just too easy, especially when the other side did it first.

Biden has explicitly prioritized jobs over consumers with his “buy American” orders and with his trade policy. It’s easy to point at the 2,000 jobs you saved at a steel plant by making steel more expensive. It’s hard to explain the savings each consumer gets from cheaper steel or the savings manufacturers get, making them more competitive both at home and abroad, and in turn allowing them to hire more people. Each of the jobs ‘saved’ may cost consumers $1 million per year. Sometimes it’s more. The problem is that large groups of consumers don’t get together to protest the extra few bucks they have to spend on things because of irresponsible trade policy, but 2,000 people who lost their jobs because the company they work at is not globally competitive just might.

This brings me to the Jones Act. The Jones Act requires American-made ships to transport goods from American destinations to other American destinations. There are no American shipbuilders of high-quality containerships. As a result, shipping something from, for example, Florida to Maine can only be done overland, which makes it so expensive that, in many cases, it’s cheaper to ship something from China. NPR’s Planet Money explained it pretty well; if you’re interested in learning more, check it out. It’s only 16 minutes. The Jones Act has been largely ignored by politicians, but President Biden has vocally embraced the preposterous law.

If we, as Americans, want to be competitive on the global stage, we must grow our population. I have written about this multiple times, so I won’t go further into it now, but immigration is a key piece of that puzzle. Despite campaigning on expanding immigration, Biden has been loathe to execute for what I have to assume is fear of upsetting the right. It was only after being prodded by supporters ranging from center to far-left that Biden finally expanded the refugee cap from abysmally low Trump levels to 66,000 per year with 125,000 to come down the road. Employers are still finding it extraordinarily difficult to sponsor immigrants on work visas. College and PhD graduates are having no more ease staying here after they finish school than they did under Trump. The status quo is unacceptable. We can only hope that President Biden wakes up to the need for change on this front sooner rather than later. This should be a higher priority.

At the end of the day, we are still only four months in to the Biden Administration and he has had COVID on his plate for the entirety of that time. It’s possible that he will improve. He has not, however, given any indication that foreign policy or trade policy will improve beyond less inflammatory language (which, to be fair, is certainly important, even if it is an incredibly low bar). Judged on his performance in this area alone, Biden has outperformed only in comparison to the dumpster fire that was Trump. America deserves better and the world needs more to defend against the incursions of autocracy.

Climate has become more central to global politics because manmade emissions of CO2 and other greenhouse gases are amplifying the greenhouse effect and raising average temperatures. The problem – that of reducing and, in time, reversing, the net emissions of greenhouse gases to the atmosphere, is simple enough.

Politics are anything but simple. Want to put a price on carbon? Gas prices will go up and that ends up being a somewhat regressive tax. What’s worse, your constituents will be furious. It’s not an easy thing to convince an entire group of legislators that they should risk their job for something that has no immediate returns. The obvious answer is to redistribute proceeds from auctions for carbon credits to citizens in order to engender goodwill, but that can be a tough sell for politicians whose state or district produces fossil fuels. 

By the same token, large logging companies hold remarkable sway for their minuscule impact on the US economy. It, along with a shortage of sawmills to process the supply of trees coming from lumber farms, has created an odd collection of incentives. Prices on felled trees have plummeted while lumber skyrockets to all-time highs. Lumber farms are electing not to sell their trees for lumber, but instead to sell carbon offsets that prevent them from ever harvesting those trees. Before we can get too deep into that, though, we need to step back.

The US Forest Service surveys our national forest land, creates roads, and essentially does all of the leg work that any company would be doing if they were logging land. Every year, chunks of the forests are sold off for logging purposes. All of this is done at a steep loss. We are, effectively, subsidizing the logging of old-growth forests. More on that soon. At the same time, carbon offsets are being sold when tree farms, instead of selling their stock of lumber trees, decide to allow those trees to just grow indefinitely. They are doing this in increasing numbers because the prices they are getting for harvesting those trees have been plunging. We are subsidizing the logging of old-growth forests while we subsidize the lumber farms to become new forests.

Sounds senseless, right? It gets worse. Trees, unlike humans, grow faster as they get older, which means old-growth logging is ending the sequestration of much more CO2 than we are subsidizing by allowing lumber farms to turn into new woodlands. Forests, meanwhile, are incredibly complex ecosystems that, in many ways, act as a single organism. The genetic diversity in forests allows them to stay healthy even in the face of new diseases or pests. For context, the DNA of two trees of the same species often diverges much more than the DNA of two mammals of different species. The root systems of trees in forests are connected by fungi (mushrooms) so they can share nutrients and electrical impulses in root systems travel along much like those in the neurons of our brains (albeit much, much more slowly). When a tree dies, it is recycled into the soil, so much of the carbon stored in the tree is returned to the ground, nourishing future generations. This barely scratches the surface of what is happening in old-growth forests, but not a lick of it is true in the managed woodlands of lumber farms.

Lumber farms are laid out to grow trees as quickly as possible and make harvesting said trees as easy as possible. A single species of tree, often cloned, is laid out in neat rows. This is great if you want to use the trees to make houses, but it is not great if you want a healthy forest. Lumber farms are an effective tool for carbon sequestration because we are turning CO2 into buildings. Cross-laminated timber, a method of gluing lumber in a woven pattern, can even make wood panels as strong and fire-resistant as concrete. It’s lighter, too.

To summarize, we are subsidizing the destruction of old-growth forests and the conversion of lumber farms into unhealthy woodlands. Forests house some of the most diverse life on the planet and use all sorts of undiscovered methods to do things that we will probably find useful as a society at some point in the future. More importantly for the problem at hand, they are much, much better at sequestering carbon while lumber farms are better for creating building materials.

On the other hand, there are some promising developments. Some innovations in farming use the same principles of topsoil creation present in forests to increase yields over time, sequester carbon in the ground, and decrease the use of costly – and dangerous – pesticides. Companies like Indigo Ag and Nori are helping farmers market these sustainable practices as carbon offsets. Another company, Kiverdi, is capturing carbon from the air to create aquafeed used for aquaculture (farming shrimp, fish, etc). Many more are coming up with innovative ways to create value from carbon capture. 

More than 500,000 people have now died from COVID-19. It was the biggest killer of Americans last year despite all the preventative measures taken and despite a related increase in deaths from heart disease, the prior holder of the title of deadliest health problem (people were less likely to go to the doctor because of fear of COVID, so diagnoses were delayed and thus more died from other deadly diseases). Fear of the disease also crippled the global economy (If going out comes with a high likelihood of infection, it turns out people go out less often). Given the speed and scale of the pandemic, we might expect the FDA to take more aggressive approaches to drugs meant to prevent or treat the disease. Unfortunately, that just has not been the case. AstraZeneca’s vaccine, despite usage across Europe, the UK, and Israel, is getting panned by FDA officials because it might not be quite as effective as early studies indicate. 

This example highlights a problem that has only gotten worse over time: the FDA places a much higher value on lives lost because of a problem with a drug than it does on lives lost because of diseases. People suffering from terminal illnesses cannot access drugs that have been shown to help alleviate or even cure those illnesses in clinical trials. Drug approval processes can take upwards of two years AFTER clinical trials have concluded. The time it takes to bring a drug to market has steadily risen and now stands at a staggering 14 years.

Regulation in the healthcare industry is important. Without some arbiter determining whether drugs are safe and effective, people would have a much more difficult time figuring out what might be safe. We would rely heavily on doctors to tell us what to do, but not all doctors are able to keep up with all information about all drugs, so that could cause serious problems. Having a trustworthy institution certify that drugs are doing what they are supposed to do simplifies things for everyone. This became problematic only because the FDA sets the bar for approval high enough to quash any possibility of a drug being approved that should not have been. Officials are highly risk-averse because if they approve a drug that turns out to be bad, they will look bad, but if they take a long time to approve a drug, they can blame the process.

The New York Times recently ran an article revealing extensive delays in drug inspections by the FDA in 2020 and COVID was blamed. No further questions were asked. Thousands of people will not have access to needed drugs, but it is not because of COVID. FDA employees could still travel to facilities with proper PPE, but, instead, they have simply refused to do their jobs. The Times, for its part, took the exact same view as the FDA. 

We cannot blame FDA officials. Humans are inherently risk-averse and we fear the results of action far more than the risk of inaction. We just need a more intelligent system. FDA approval for provisionary use should be the norm. If people are in desperate straits, they should be able to take drugs that could save their lives before the approval process is completed. The risk of doing nothing is quite clear to someone told they have a few months to live. Rather than a gatekeeper, the FDA could serve as a certification board for drugs treating serious illnesses. 

A debate is bubbling up about the validity of how we measure inflation and whether or not it is, in fact, much higher than reported. Some think exploding home prices are indicative of much higher inflation while others maintain that inflation remains stubbornly low despite incredibly loose monetary policy over the past ten years. Part of this is semantics, and we will get into that first; the definition of inflation just doesn’t encompass some of the things that are exploding in price. There are, however, legitimate complaints about how inflation is measured and further points about what, exactly, we want to understand with inflation.

To get at the heart of the debate, we need to explicitly define inflation because it helps explain most of the disparity between the two camps. As defined in economics, inflation is the rise in the cost of living over time. This happens naturally because there is not a stable quantity of the thing we use to price those goods and services.

More money is created over time both through ‘printing’ by governments and through private lending. The latter deserves its own explanation. As an example, when you buy a house using a mortgage, you are spending money that banks have on deposit from customers. The people who have deposited the money still have that money, but so does the seller of the house. As the supply of money increases, we all have more of it available, which in turn means sellers can charge more for the same thing because the desire for goods and services has not changed. If it all sounds a bit convoluted, don’t worry. It just means that more money exists, so goods and services costs proportionally more. Unfortunately, that is not the end of the story.

Recall that inflation is the rise in costs, not the existence of more money. Previously, it was assumed that there was a somewhat linear relationship between money supply and prices for consumer goods. Over the past decade, the supply of money exploded, but prices of goods stayed relatively stable. In fact, we have had the lowest rates of inflation in modern history as measured by the CPI (consumer price index). It turns out demand for goods and services is driven by consumers, not money supply, and the money was not making its way into the hands of consumers. Instead, it has been stuck in financial markets, which is where prices HAVE exploded. For context, the S&P 500, an index tracking the largest corporations in America, has nearly quadrupled over the past ten years. Meanwhile, the CPI has risen by less than 30%. Median wages have risen by even less than that.

What does it all mean? Real wages, or, put more simply, purchasing power over time, have stagnated. Financial assets have quadrupled. People can buy approximately the same quantities of goods and services, but they have very little access to financial markets. This makes it more difficult to build wealth over time, which will make it more difficult to retire or achieve financial independence. If you were already invested, you’ve probably done quite well. It’s the next generation that will have problems. Millennials will probably have a much more difficult time later in life because the financial markets are unlikely to perform as well over the next 10-20 years. 

There’s another problem, too. Extreme levels of sovereign debt (this is true for the US, but it is also true for most European countries, Japan, and even China) are going to make it extremely painful to tighten up monetary policy. If we wanted to take the air out of asset prices, we would also cripple governments everywhere. There is simply no easy way out.

There is one possibility, but it is high-risk. If it goes wrong, we could, in theory, get hyperinflation a la Weimar Republic Germany or, more recently, Venezuela. Hyperinflation is not often seen, but it can utterly destroy an economy. Venezuela went from a middle-income country to one of the most impoverished countries in the world. If we get it right, we could achieve higher growth and the debt would shrink as a percentage of GDP, thus stabilizing the situation. What, you may ask, is this gambit?

We are seeing it play out right now. Putting as much money into the hands of consumers as possible and making massive investments racks up huge deficits, but it also could result in higher inflation, higher wages, and financial assets falling in terms of median income. To put it mildly, the downsides are catastrophic. However, there are few good options and this offers us, by far, the highest upside. Additionally, assets such as infrastructure and intellectual property offer good value compared to financial assets. Just look at what has happened to real assets (real estate, infrastructure, etc) compared to financial assets (stocks, debt, etc) over time (below). Guessing the odds of each outcome is a fool’s errand, but all signs currently point to the gambit working. GDP growth projections are overwhelmingly positive. The danger is in spending money on things that do not provide real growth, like bailouts of low-productivity companies (cash-eating zombies!) or try to over-regulate, resulting in a quagmire and high inflation without real growth. It’s a thin line, but one we must walk regardless.

Productivity growth has been in a funk for the past 20 years in the US, but we are far from the only ones with this problem. Reasons for this collapse in growth are many, but today I’d like to put the magnifying glass on population (follow the links for previous discussions on corporate bailouts or executive pay). Economic activity has just two inputs: people and capital. In fact, we can probably reduce that even further. Economic activity is output per person multiplied by the number of people. There are, of course, ways to raise and lower the per-person output. The simplest solution, however, is just growing the (working-age) population.

The working-age part is becoming increasingly important. To demonstrate, let’s look at a couple charts. Productivity growth, we can see, is stagnating.

This is remarkably strongly correlated to working-age population.

Young people are simply not entering the workforce as quickly as older people are reaching retirement age. See below. First up is the portion of the population age 65 and older followed by a demographic pyramid (the problem: not a pyramid).

So, what’s going on? Productivity has plummeted while the population aged. A growing consensus of economists have come to the conclusion that population age and productivity are closely linked. A recent paper found that an increase of 10% in the population of people over the age of 60 was associated with a 5.5% drop in economic growth.

People that retire from the workforce take their skills with them; if a population gets older, more will retire and it will be a little bit like a reduction in the total population. We also live in a society that wants retirees to have happy lives, so many of them draw on pensions. That creates another burden on the remaining workers. Some of their productivity is going towards people that will not ever hold another job (I’m not trying to rag on retirees; they already made their contributions to society). We not only have fewer people in their prime working years, but those that remain are increasingly burdened.

The good news is that this is a predictable, slow-moving problem. We will not be suddenly invaded by octagenarians while Gen Zers flee to Ibiza. There are also a couple of solutions that build on each other. There are two ways that you can get a bigger population.

The first is through higher birth rates. Raising those is easier said than done, but making it more affordable is a good first step. We have benefits that help the very poor with the costs of having a child, but middle-class people have been left in the dust. We can see from this chart that education is negatively correlated with birth rates…until it isn’t. Making subsidies more universal could be considered an investment in population growth.

The quicker fix is to encourage the immigration of working-age people. It would not be hard to do; people of all educational levels want to move here. Immigrants also have a higher birth rate than native-born women by about 20%. Targeting highly educated people with a path to citizenship if they move here could help us patch the holes in our ship without the political fallout that comes from larger numbers of unskilled workers (to be clear, even unskilled workers have a positive effect on jobs for natives).

This is a long-term problem and long-term problems require long-term solutions. Implementing a kind of social security for children (similar to what Sen. Mitt Romney (R – UT) recently proposed) would take decades to show its full benefits. Immigration is faster, but even that takes time. Germany’s sudden influx of refugees took a couple years to sort itself out. The only way to solve a problem is to face it, though. We cannot solve our demographic issues by ignoring them. 

We are about a month and a half into the Biden Administration, so we can begin to evaluate what has been done so far. President Biden promised to govern based on the advice of experts and scientific evidence. Rather than attempting to compare him to the ongoing train wreck that is former President Donald Trump, we should evaluate him based on the standards he set for himself. The promises to depoliticize expertise and bring back bipartisanship are what I will be discussing here.

The easiest and most obvious fix was a focus on mask-wearing. Widespread and proper wearing of masks is our first defense against the spread of COVID-19, but there are large swaths of the population that have simply refused to put them on. One of Biden’s first executive orders was to mandate masks in federal spaces. This is good and it could have been much better if it was accompanied by a large-scale public information campaign encouraging masks indoors. Further, coordination with governors would have been great if possible. Texas and Mississippi just lifted their mask mandates. It’s possible overtures were made behind the scenes to discourage this action, but they certainly weren’t public.

Next up, we have vaccinations. Operation Warp Speed was implemented under the Trump Administration and threw gobs of money at vaccine development and helped pharmaceutical companies find vaccines in record time. Distribution, however, was disastrous. The drastic improvement under the Biden Administration in the logistics aspect may be partly because they have been much better at sharing information with states, but we should have expected improvements regardless. Further, pressure on the FDA to speed their approval process for vaccines is not nearly high enough. They have been sitting on the AstraZeneca vaccine for months now despite overwhelming evidence of its safety and its use in the UK and Canada. These delays are generally bad, but completely unacceptable during a pandemic. Biden’s biggest accomplishment in this area was the deal he brokered between Johnson & Johnson and Merck. Production of the vaccine is supposed to be high enough to get one to every American by the end of May. With that action alone, Biden has done us all a great service.

With vaccinations coming along and cases plummeting again, you would think schools would begin to re-open. President Biden has said publicly that he is in support of school re-openings. That is a little bit disingenuous, though, because the guidelines the CDC released on when to re-open schools are unduly conservative. Over 90% of schools would be unable to do so and it has just given cover to teachers’ unions that would prefer to wait on returning to in-person schooling. A cynical reading of the situation is that he is trying to take a publicly popular stance while actually bowing to the demands of powerful public-sector unions. Regardless, damage to students unable to attend school is very real and there is a growing body of evidence that risk to both students and teachers is actually quite small (assuming reasonable precautions are taken).

Lastly, and perhaps most pressingly given the status of the legislation, an economic recovery is underway, removing the need for the scale of stimulus now being debated. We know this because of supply chain pressures. Producer prices have skyrocketed with surging demand surprising even the most optimistic corporations. Insistence on the full $1.9 trillion is irresponsible and will handicap our ability to do any sort of spending on infrastructure or innovation. I realize that economics is not exactly a science, but the need to increase the targeting on the stimulus package is very clear. It would also give Biden the chance to show that he meant it when he said he would push for bipartisanship as it would bring some Republicans on board.

President Biden’s approval rating is now polling at 60% and is rising. No politician is more popular right now. He has been refreshingly compassionate after the past four years. Still, he can do better. Following the science means looking at the entire body of evidence, not just that which says what is expedient.