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
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.”
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.”
- Biden Announces Sanctions Against Russian Oligarchs, Banks – Associated Press
- Russian Diplomat Dismisses Sanctions: ‘We’re Used to It' – The Hill
- How U.S. Sanctions Against Russia Work – Washington Post
- Sanctions on Russia Pose New Threat to a Fragile Global Economy – New York Times
- The IRS Is Allowing Taxpayers to Opt Out of Facial Recognition to Verify Accounts – NPR
- Biden Announce New Spending on Mineral Production to Address Supply Chain Challenges – Washington Post
- Court Ruling on Social Cost of Carbon Upends Biden’s Climate Plans – Washington Post
- Romney’s Push to Revive Child Tax Credit Hinges on Work Requirements – NBC News
- The Pandemic Pummeled Long-Term Care – It May Not Recover Quickly, Experts Warn – NPR
Views and Analysis
- Rick Scott Just Laid Out a Republican Agenda. He Has Done His Party No Favors – Jennifer Rubin, Washington Post
- The IRS Is Broken. It Will Take a Big Investment to Fix It – Washington Post Editorial Board
- Why America Has Been So Stingy in Fighting Child Poverty – Greg Rosalsky, NPR Planet Money
- When We'll See Light at the End of the Inflation Tunnel – Conor Sen, Bloomberg
- Why the Poor Suffer Most From Inflation, Even Though Their Wages Have Risen a Lot – Catherine Rampell, Washington Post
- How Government Spending Fuels Inflation – Tunku Varadarajan, Wall Street Journal
- How the Left Should Think About Inflation – James K. Galbraith, The Nation
- If Joe Biden Doesn’t Change Course, This Will Be His Worst Failure – Ezra Klein, New York Times
- The Bold New Campaign to ‘End Poverty in California’ – Katrina vanden Heuvel, Washington Post