Inflation Could Top 10% With Ukraine Conflict

Inflation Could Top 10% With Ukraine Conflict

By Yuval Rosenberg and Michael Rainey
Tuesday, February 22, 2022
A topsy-turvy "Twosday:" While the palindromic calendar reading of 2-22-22 is seen as a sign of good luck, producing a wave of weddings, accelerated births and extra-festive Taco Tuesday meals, the day began on a decidedly down note in Europe as Russian President Vladimir Putin stepped over the line in Ukraine, threatening war with potentially severe economic and humanitarian repercussions. Here’s what you need to know.
US Inflation Could Hit 10% as Ukraine Conflict Intensifies: Analysis

Russia’s military incursion into Ukraine and the threat of a wider war are pushing energy prices higher, threatening the U.S. economic recovery while limiting the options available to the Federal Reserve as the central bank tries to gain control over a bout of inflation that has proved to be more severe and more enduring than expected.

Oil prices approached $100 a barrel Tuesday, hitting levels not seen since 2014. Analysts at JPMorgan estimate that if the military conflict between Russia and Ukraine escalates, oil could top $120, and if the war interferes with Russian energy exports, the price could move higher still.

Economist Joe Brusuelas of the consulting firm RSM estimates that if oil prices hit $110 a barrel, inflation in the U.S. could hit 10% on a year-over-year basis – a level not seen since 1981 – while economic growth could be reduced by a full percentage point.

“The U.S. and global economy should prepare for a modest energy shock,” told Politico Tuesday. “Growth is going to slow and inflation is going to increase.”

A problem for the Fed: The U.S. central bank is expected to start raising interest rates in March as part of its effort to reduce inflation, but the threat to economic growth could complicate the situation. Some inflation hawks have been calling for a half-percentage-point increase in March, with multiple quarter-point hikes in the months following. But the Ukraine conflict may reduce the odds of such a big hike next month and limit the number of increases during the year, as officials seek to cushion the blow of the energy price spike.

“Basically, now they're positioned to hike into a slowing economy with higher inflation and significant uncertainty around the supply of and pricing of energy,” Brusuelas said. “So yeah, this is a major problem.”

Mohamed A. El-Erian, the former CEO of bond giant Pimco, warned that the Fed may find itself with few good options in the coming months as it faces down what could be a stagflationary shock. “Having missed multiple windows for orderly normalization, it finds itself in the midst of rising geopolitical strains with already very low interest rates and a bloated balance sheet,” he said in an opinion piece Tuesday. “Making things more challenging, the Fed has eroded its inflation credibility and lost control of the monetary policy narrative.”

Time to revive the child tax credit? Brusuelas says that U.S. officials may need to find a way to address the energy shock, which will likely slow growth and damage households’ balance sheets. One easy option would be to revive the expanded child tax credit, which rapidly provided extra income to millions of American households last year before expiring in December.

“During the pandemic, the federal government tried to mitigate the loss of income caused by the pandemic,” Brusuelas says. “As a result, we have a ready-made program that could be quickly revived to provide direct cash to stressed households and cushion the adjustment caused by tensions in Ukraine. … It makes sense for the federal government to provide direct relief to beleaguered households so they can purchase food, fuel, clothing and shelter, in addition to defraying child care and school-related expenses. The child tax credit has been demonstrated to work and will be needed should another supply-induced energy shock hit households.”

Quote of the Day

“Once the positive long-run benefits to children are considered, many safety net programs are cost-effective. However, the current government practice of limiting the time horizon for cost-benefit calculations of major policy initiatives reduces the influence of the most current economic research on the long run benefits.”
— Economists Anna Aizer, Hilary W. Hoynes and Adriana Lleras-Muney, from a paper published this month by the National Bureau of Economic Research. The authors argue that the 10-year horizon typically used by government agencies such as the Congressional Budget Office to evaluate proposed social programs emphasizes up-front costs while obscuring important long-run benefits.
“Economists are now amassing a mountain of evidence that supports the notion that spending on kids has huge benefits, not just for kids themselves, but for society — and taxpayers — as a whole,” NPR’s Greg Rosalsky says in a review of the paper. “While many economists in the past may have helped contribute to the scaling back of social programs by pointing out their costs, maybe now they will help contribute to building them back up by illuminating their ample benefits.”
Rick Scott Unveils an 11-Point Agenda That Includes Tax Hikes for Millions

Senate Republican leaders have made it clear that they aren’t interested in detailing their plans if they win control of Congress in the midterms elections. Asked last month what his party’s agenda would be, Senate Minority Leader Mitch McConnell (R-KY) dodged: “That is a very good question,” he said. “And I'll let you know when we take it back.”

Sen. Rick Scott of Florida, who chairs the National Republican Senatorial Committee, apparently has a different view. Scott has released an 11-point, 31-page plan laying out the conservative agenda he’d want to pursue if Republicans win Senate and House majorities this year and the White House in 2024.

The plan is heavy on culture war controversies and traditional right-wing talking points. It starts with the claim that “the militant left now controls the entire federal government, the news media, academia, Hollywood, and most corporate boardrooms – but they want more.” It promises to have kids say the pledge of allegiance and to finish construction of Trump’s border wall — and name it after the ex-president. There’s plenty of fodder for Trump supporters who still falsely claim that the 2020 presidential election was rigged.

But Scott also proposes dramatic cuts to the federal government and calls for cutting the government workforce by 25% in five years. “Many government agencies should be either moved out of Washington or shuttered entirely,” the plan says.

Washington Post columnist Jennifer Rubin notes that the plan lacks “any proposal to bring down inflation (which Republicans have been hollering about for months); to increase wages or reduce income inequality; to prepare workers for the 21st-century economy; to provide relief from tariffs (which are essentially taxes); and to increase school performance on basic subjects.”

And the proposed cuts, Rubin writes, “will not be popular with anyone who visits national parks, relies on federal law enforcement, has an issue with Social Security, needs a tax refund or thinks we need a strong national defense.”

Scott pairs his call for smaller government with a call for tax increases on millions of lower-income Americans. “All Americans should pay some income tax to have skin in the game, even if a small amount,” the plan says. “Currently over half of Americans pay no income tax.”

The proposal, as The Washington Post’s Aaron Blake notes, rekindles the makers-versus-takers divide that led to Mitt Romney’s 47% gaffe. “The language of the plan itself effectively acknowledges it’s advocating for an income tax increase on ‘over half of Americans’ — a group of people that is overwhelmingly lower-income. And in fact, the number of Americans to whom this would apply has climbed during the pandemic,” Blake says.

He adds: “The political ads almost write themselves: The leader of the effort to elect a Senate majority wants to use that to raise taxes on as much as half of the country, however modestly. The GOP has for years defined virtually any new tax as a tax increase, and this meets that definition.”

The plan also contrasts with how former President Trump celebrated the idea of not having to pay income taxes and proposed a 0% income tax rate for individuals making $25,000 a year or married couples making up to $50,000. “Trump proudly projected his plan would increase the number of Americans who didn’t pay income tax to 75 million,” Blake says.

The bottom line: “Taken as a whole,” Rubin says, “the agenda reveals that the GOP is not a political party with ideas to improve the lives of Americans. It’s a frightful expression of White grievance and contempt for the intelligence of voters. And it confirms what we have long suspected: Republicans don’t lack an agenda; they’re just shy about revealing how unpopular it is.”

Dems Look to End Tax Break for Pro Sports Stadiums

Three House Democrats on Tuesday reintroduced legislation to end a lucrative tax break used by professional sports teams to fund new stadiums.

Reps. Earl Blumenauer (OR), Don Beyer (VA) and Jackie Speier (CA) rolled out the “No Tax Subsidies for Stadiums Act of 2022,” which seeks to end the tax-exempt status of municipal bonds used to finance pro sports stadiums. The lawmakers say that pro sports leagues and teams are rich enough to finance and build their stadiums without public money.

“The NFL has proven once again that it can’t play by the rules. As such, taxpayers-subsidized municipal bonds should no longer be a reward for the Washington Commanders and other teams that continue to operate workplaces that are dens of sexual harassment and sexual abuse,” Speier said in a statement. “There is no reason why these teams—the average of which went up in value to $3.48 billion in 2021, according to Forbes—should have American taxpayers footing any of their bills. It doesn’t make economic sense, and it’s particularly galling given the league’s longstanding failure to address issues of sexual harassment and sexual assault as well as on-going racial and gender discrimination and domestic violence.”

The lawmakers say that subsidies for professional sports stadiums have cost the federal government $4.3 billion since 2000, based on a study published in the National Tax Journal.

“Billionaire owners who need cash can borrow from the market like any other business,” Beyer said. “Arguments that stadiums boost job creation have been repeatedly discredited. In a time when there is a debate over whether the country can ‘afford’ investments in health care, child care, education, or fighting climate change, it is ridiculous to even contemplate such a radical misuse of publicly subsidized bonds.”

Read more at The Washington Post.

Please tell your friends they can sign up here for their own copy of this newsletter.


Views and Analysis