Category: Economic Policy

The Poverty Line in the U.S
The poverty line, or poverty threshold, is the minimum amount of income that a family needs for food, clothing, transportation, shelter, and other necessities, once a year. It represents the border between poverty and non-poverty for administrative and statistical purposes. In many countries, such as the United States, this statistic is adjusted yearly for inflation. An example of the U.S. poverty line in the year 2021 is shown below. The poverty line varies according to the number of persons in a household.

Source: Department of Health and Human Services

There are two versions of the poverty line in the United States:
- The poverty thresholds are the original version of the federal poverty measure. They are updated each year by the Census Bureau. The thresholds are used mainly for statistical purposes. For instance, preparing estimates of the number of Americans in poverty each year.
- The poverty guidelines are the other version of the federal poverty measure. They are issued each year in the Federal Register by the Department of Health and Human Services (HHS). The guidelines are a simplification of the poverty thresholds for use for administrative purposes. For instance, determining financial eligibility for certain federal programs such as Project Head Start.
Methods of Evaluating Poverty

One of the methods to calculate the poverty line in the U.S. is the Gallup Poll. The national survey has regularly asked people to report what is the least amount of income a family needs in order to get along in their community. However, it is possible that some interest groups may ask people to inflate their answers with the expectation of higher benefits.

The other popular method to evaluate poverty is through counting calories. The relationship between hunger and poverty remains strong, and many countries calculate poverty lines by calculating how much it costs to obtain enough food. Such calculation meets a calorie norm of around 2,000 calories a day, which is recommended by nutritional experts at the Food and Agricultural Organization of the United Nations.

Calories can be converted into money by looking at what people spend and finding the income level at which, on average, people get 2,000 calories. This can be done by plotting what is called the “calorie Engel curve.” For example, in the United States, the poverty line was set by starting not from a calorie norm but from an economic food plan recommended by the Department of Agriculture.

Poverty Classification
- Relative poverty is identified as the inability to participate in society. Relative measures of poverty are often constructed by using poverty lines that move with average income, so that the minimum acceptable income is tied to what other people get. To some people, poverty also means lack of access to education, healthcare, or even entertainment. Relative poverty is a much more complicated concept. This concept of relative poverty is often used in developed worlds.
- Absolute poverty is simply not having enough to eat or enjoy good health, a severe lack of access to basic human needs. The basic living standards are consistent over time and globally, for example all humans need the same caloric and water intake no matter where they live.
The 2001 poverty line in the United States for a family of two adults and two children was $18,000 a year, more than ten times as much as the international “extreme poverty” line of $1 per person per day used by the World Bank and the United Nations.

The poverty line is used today to decide whether the income level of an individual or family qualifies them for certain federal benefits and programs. There are numerous United States policies regarding the poverty line, such as the recently passed American Rescue Plan by the Biden Administration. President Biden’s healthcare proposal aims to expand the Affordable Care Act so that 97% of Americans are insured, and will cost $750 billion over 10 years. It would include a public health insurance option like Medicare, which will be available premium-free to individuals in states that haven’t expanded Medicaid and to people making below 138% of the federal poverty level. It would also eliminate the 400% federal poverty level income cap for tax credit eligibility and lower employees’ maximum contribution for coverage to 8.5%. Many federal programs, such as the National School Lunch Program, are created and adjusted based on the poverty line. These programs are made as an effort to make food more accessible for those below the poverty line guidelines each year. The National School Lunch Program was created initially in 1946, with about 7.1 billion children participating that year. The program has grown dramatically, with 30.4 million children participating in 2016. Depending on family income, students can receive reduced or free meals.

Some critics argue that measuring poverty in the United States based solely on the cost of food ignores other significant factors that may influence a household or individual’s wealth. For instance, there are a multitude of factors, such as health conditions or access to transportation, that could impact how much someone could earn or how much they must spend. If an individual has a medical condition which their insurance does not cover, their spending will be higher than an individual without such a condition, even if they have the same incomes and spending habits.
October 1, 2021
Introduction to the G7

History

The Group of Seven (G7) is a group of like-minded countries who meet regularly to address pressing global issues. The seven countries’ influence on the international stage has led to further interest in their meetings and their diagnosis of the most important issues to address.

The Group of Seven (G7), consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, held its first summit in 1975 in response to global economic challenges. In 1944, the Bretton Woods system established the U.S. dollar as the “world currency” by requiring nations to peg their currency to the dollar which was then tied to the price of gold. In 1971, President Nixon announced the end of the gold standard in the United States and countries were left to select a new exchange agreement for currency. For example, a nation could link the value of its currency to that of another nation, “float” the currency and allow the market to determine its value, participate in a currency bloc, or adopt a new currency.

A few years later, the Organization of Arab Petroleum Exporting Countries (OAPEC) placed an embargo on exports to the United States for supporting Israel during the Yom Kippur War, causing oil prices to skyrocket. The rise of fiat currency paired with the 1970s recession led the world’s largest economic powers to convene and discuss the future of international economic policy with the first G7 meeting.

From the G6 to the G8 and Back to the G7

The G7 was initially known as the G6 before Canada joined the group in 1976. Russia then became the newest member in 1998. President Bill Clinton hoped by granting membership to Russia, he could encourage the nation’s first post-Soviet leader to develop closer relations with the West. However, Moscow’s annexation of Crimea in 2014 resulted in Russia’s indefinite suspension. President Trump suggested Russia be readmitted in 2018 but that idea was rejected by other members.

Initiatives

The heads of government for each G7 nation meet annually to discuss an array of issues. The European Union participates in the annual summits as a “non-enumerated” member represented by the presidents of the European Council. The G7 is not based on a treaty and has no permanent secretariat, and the presidency rotates each year.

The G7’s agenda focuses on the most pressing global issues, as seen by the nations involved. For example, in the 1990s the group focused heavily on the economic transition of former communist states. Although the G7 formed to discuss economic cooperation, the group evolved to address foreign policy and human rights issues as well. At the June 2021 meeting, the G7 discussed rebounding from the economic hardships of COVID-19 in a sustainable manner. They pledged to increase global vaccine manufacturing capacity, invest in recovery plans that promote economic growth, reach net zero carbon emissions by 2050, and increase access to education, especially for women. The group also launched its Build Back Better World initiative to counter China’s Belt and Road Initiative. The plan aims to provide hundreds of billions of dollars in infrastructure investments to developing countries.

Although the G7 is not able to pass laws as a collective body, the members still work in unison to achieve their objectives. In 2002, the G7 played an instrumental role in creating the Global Fund to fight against HIV, TB, and malaria across 155 countries. G7 members have provided 75% of the Global Fund’s $45.4 billion in assistance since its creation. The effort has saved an estimated 38 million lives so far. Member nations also helped organize the Muskoka Initiative in 2010 to help reduce maternal and infant mortality and committed billions in funding. Experts projected the initiative would prevent more than 1.3 million deaths.

Future of the G7

Although the G7 has experienced notable success, questions remain as to whether the group is losing relevance. G7 nations accounted for 63% of the global GDP in 1975. Today, that share has dropped to 45%.

Two of the six largest economies in the world, China and India, are not members of the group despite their rising share of the global GDP. The G20, a complimentary organization to the G7, includes all G7 members in addition to India and China, among others. The group’s members make up 80% of global GDP and 60% of the world’s population. While the G7 addresses both economic and political issues, the G20 tends to focus almost exclusively on economic matters.

Efforts to counter China, such as the Build Back Better World initiative, continue to dominate the G7 agenda. As former White House advisor and member of the secretary of state’s policy planning staff Ash Jain explained, “The G7 is being rebranded as a group of like-minded democracies, as opposed to a group of ‘highly industrialized nations.’ They’re changing the emphasis.” The effort to counter the rise of China explains the G7 as more of a “like-minded” coalition of nations rather than a forum dealing exclusively with economic concerns.

September 23, 2021
Introduction to Unemployment & the Labor Market
The labor market refers to the market in which the workers and businesses exchange wages for labor and vice versa. The labor force includes all working age individuals who are legally and physically able to work and are actively seeking employment. This notably excludes children, retirees, and working age individuals who are not actively seeking employment. Equilibrium in the labor market determines the prevailing wage rate and the number of hours worked. It occurs when the supply of labor, or the number of hours individuals are willing and able to work at a given wage rate, equals the demand for labor, the hours of work employers are willing and able to pay for at a given wage rate.

To understand why markets are naturally disposed to reaching equilibrium, it is useful to visualize the market graphically. The supply curve for labor is upward sloping because people are willing to work more hours at higher wages. Conversely, the demand curve for labor is downward sloping because businesses are less willing to hire workers as labor costs increase.

Equilibrium in the labor market, represented by point E, occurs when the supply of labor, or the number of hours individuals are willing and able to work at a given wage rate, equals the demand for labor, the hours of work employers are willing and able to pay for at a given wage rate.
- Point A: At this point, there are more companies willing to hire employees at the prevailing wage than there are individuals willing to work. Because there are not enough workers willing to work at the prevailing wage, wages will rise (causing employers to demand less labor) resulting in equilibrium point E.
- Point B: At this point, workers are supplying much more labor than companies are willing to pay at that wage rate. The resulting surplus of workers will push wages back down (causing workers to supply less labor) resulting in equilibrium at point E.
The labor market can be analyzed on both the microeconomic level as well as the macroeconomic level:
- At the macroeconomic level, the labor market is comprised of the entire labor force (working age population either actively working or searching for work) and all the firms in the economy, with analysis generally focused on the aggregate level of both wages and hours of work.
- At the microeconomic level, the labor market is comprised of individuals seeking work and individual firms seeking labor. Supply increases in conjunction with wages until the marginal utility of an additional hour of pay begins to decrease, while demand is determined by the intersection of marginal cost and marginal revenue of the output of the labor. Marginal utility can be understood as the additional benefit of hiring one more unit of labor. When the marginal utility of hiring another worker falls below the cost of hiring the additional worker, employers will no longer be willing to hire that individual.
The classic economic model discussed thus far assumes a completely free market, but this is rarely true. According to economic theory, market distortions occur when the government, private industry, or another actor take any action to influence the market and in doing so, impede the market from reaching equilibrium. Examples include labor regulations, environmental regulations, minimum wage, downward rigidity of wages, payroll taxes, extensive hiring processes, trade regulations, social safety nets, collusion amongst employers, and unions. As a result of market distortions, equilibrium may not be reached leaving either a surplus of workers actively seeking employment or a surplus of employers unable to fill jobs. In the case of surplus workers, the result is unemployment. For example, if a minimum wage is set higher than the equilibrium wage, more people will be willing to work at that price than employers will be willing to hire. Similarly, if a union negotiates a wage higher than the equilibrium wage, more individuals will be willing to work at that price and an employer may choose to hire less workers, resulting in a worker surplus.

When an economy is operating at its full capacity the economy is in a state of full employment; however, there is still unemployment present due to frictional and structural unemployment. The rate of unemployment in this situation is called the natural rate of unemployment. Frictional unemployment refers to unemployed individuals who are temporarily between jobs. It is caused by the existence of hiring processes and the lack of perfect information, which impedes individuals seeking work from finding employers immediately and vice versa. Structural unemployment occurs when there is a mismatch between the skills of people seeking employment and the needs of companies seeking to hire workers. For example, if a law firm is seeking to hire a new associate, but the only applicant has not completed a law degree. Another main type of unemployment is referred to as cyclical unemployment. This happens during the natural dips in the business cycle when an economy is not operating at full capacity.

Labor Market Regulations

Even though market distortions can hinder the labor market’s ability to reach equilibrium, certain regulations are introduced to account for externalities that cause the equilibrium price to differ from the true costs and benefits of the good or service in question, in this case labor. In the US, major regulations in the labor market have included the introduction of a minimum wage, unemployment insurance, and welfare training.

The first minimum wage in the United States was introduced by Massachusetts in 1912, followed by 12 other states and the District of Columbia in the following years, but those laws were struck down by a 1923 Supreme Court ruling that it violated employers’ and workers’ 5th Amendment rights to liberty of contract. In an unexpected reversal, the Supreme Court upheld a Washington state minimum wage law in 1937, paving the way for a federal minimum wage, which was first introduced at $0.25 per hour with the passage of the Fair Labor Standards Act in 1938. The minimum wage, which has been raised a number of times in the decades since the passage of the Fair Labor Standards Act, stands at $7.25 per hour and is a topic of contentious political debate, with one side pointing to the increased income of workers and the other pointing to increased unemployment it would create if the minimum wage is set above the equilibrium wage. Most recently, the prospect of raising the federal minimum wage to $15 per hour was under consideration for inclusion in the American Rescue Plan until the parliamentarian determined it was not allowed under the Senate’s budget reconciliation rules.

Unemployment: Causes, Provisions, and Policy Tools

Additional causes of unemployment include increasing frequencies of workers being displaced by outsourcing and automation. Outsourcing is when a U.S. company shifts its production to use foreign workers rather than American workers. This happens in various ways. The classic example is a company shutting down a factory in the US and instead shifting production to a factory in China or Mexico. A less frequently discussed form of outsourcing occurs through provision of H-1b visas to foreign nationals that allow them to work in the United States. This is most frequently seen with tech companies in Silicon Valley. Automation, with respect to unemployment, refers to companies that choose to use technology in their production rather than employees. Analysis from the Brookings Institution found no evidence of layoffs following automation investment spikes by their employers. However, it was found that workers at such firms experienced income losses in the following five years.

The first unemployment insurance provisions were contained in the 1935 Social Security Bill, its objectives being “to offer workers income maintenance during periods of unemployment…to help maintain purchasing power and to stabilize the economy; and… to help prevent dispersal of the employer’s trained labor force…during temporary unemployment.” The program has evolved substantially since its beginnings, with the current unemployment insurance program in the US being a joint federal-state venture, financed by federal and state unemployment taxes. However, it has retained its original intent to exist as a stopgap measure of support for people experiencing unemployment.

Most recently, unemployment insurance has been a topic of debate due to the COVID-19 pandemic, with unemployment insurance benefits being expanded under the CARES Act and again under the American Rescue Plan. Debates are typically centered on whether an overly generous UI system can discourage workers from returning to work. A recent analysis from the Federal Reserve Bank of SF reported that the supplemental payments offered under the CARES Act had little or no adverse impact, while research from the Federal Reserve Bank in Atlanta indicated that an expansion of unemployment benefits during the 2008-2009 recession kept the jobless rate higher than it otherwise would have been. In order to actively target the unemployment rate, the government has several policy tools at its disposal, which can be broken into two subcategories: monetary policy and fiscal policy. Through what is known as expansionary fiscal policy, the government can create jobs through increased spending on government projects. The most famous example of this in the United States was the passage of the New Deal following the Great Depression. Additionally, the government can influence unemployment through less direct measures. For example, the government can cut taxes, thus increasing household disposable income and spending, which spurs job growth. Monetary policy impacts unemployment through manipulation of the money supply and the federal funds rate. For a detailed explanation on how the Federal Reserve uses monetary policy to impact the unemployment rate, look out for a forthcoming piece by my colleagues Rachel Zhang and Jamie Davis.
September 14, 2021
Inflation, the Fed, and Monetary Policy

The Federal Reserve is the central bank of the United States, and its main function is to create the conditions for maximum employment, stable prices, and long-term economic stability through monetary policy. Financial regulation is among its other functions, but those are secondary to controlling the money supply.

The Fed’s primary tool of monetary policy is controlling the federal funds rate, which is the rate at which banks can borrow money overnight from the Fed. This rate affects other interest rates that private banks set. So, when the federal funds rate decreases, real interest rates decrease as well. Lower interest rates means that businesses and individuals take out more loans because it is cheaper to borrow. However, lower interest rates also mean there is increased risk of inflation because the demand for the dollar increases.

Structure

The Federal Reserve is split into 12 districts based on economic activity. Each district is independent of the others but governed by a board of governors, which reports to Congress. The federal government further centralized American central banking in 1933, 1935, and 1980 to make federal monetary policy more effective and cohesive. Several councils within the Fed represent the interests of banking and savings institutions as well as low-income communities, and a council of statisticians oversees forecasting models. Technically, the Federal Reserve is owned by private banks. According to one district, “while the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends. Holding this stock does not carry with it the control and financial interest given to holders of common stock in for-profit organizations. The stock may not be sold or pledged as collateral for loans. Member banks also appoint six of the nine members of each Bank’s board of directors.”

Combating Inflation and Historical Context

Inflation in fiscal year 2021 has thus far exceeded expectations. However, according to the chairman of the Federal Reserve Board, it is not clear yet that there is inflation across the board, which would be indicative of a more worrying, long-term trend (link to my context brief on inflation). In order for the Fed to raise interest rates before late 2022, which is when they currently plan their initial hike, there needs to be more evidence that the economy is overheating. The amount of fiscal support coming out of the COVID-19 recession is unprecedented, which complicates forecasting.

Inflation was chronically high during the 1970s due to energy crises and structural changes to international trade. To combat chronic inflation, the chairman of the Fed (1979-1987), raised interest rates to 19% in the early 1980s, causing two recessions. Such high interest rates would be ridiculous today (our current effective federal funds rate is 0.08%), but he set such high rates to combat inflation. With higher interest rates, businesses and consumers were incentivized to save, decreasing the demand for cash and goods alike. With decreased demand for immediate spending, inflation receded. After that recession, interest rates have remained relatively low compared to before the two recessions, while inflation has also remained simultaneously low. This is a textbook example of the Fed using interest rate hikes to combat inflation. Moreover, the post-recession years have demonstrated how full employment and stable prices are not necessarily in conflict. We can visualize the relationship between inflation and unemployment over time:

Source: The Federal Reserve Bank of St. Louis

As we can see, inflation has remained low since the 1980s, even during periods of full employment. In general, the business cycle has moderated so that unemployment during a recession remained lower than the unemployment rate during recessions before 1980. The pandemic recession is a notable outlier.

However, interest rate hikes come with their own set of issues. Part of the problem with predicting how the Fed will react to rising inflation is the lack of data points. Ever since the early 1980s—the first instance of the Fed raising interest rates high enough to combat inflation—there has not been significant inflation in the United States. This stability is one the defining characteristics of the Great Moderation, which describes the last forty or so years of American macroeconomic history during which inflation remained low, expansions were longer and more stable, and GDP grew slower relative to pre-1980 rates (link to business cycle brief)

Controversies around the Fed: Purview and Modern Monetary Theory

Some critics—particularly those who want to see more regulation of big businesses and financial institutions—want the Fed to shift its priorities. Proponents of this position —who tend to be progressive Democrats—want to see the Fed tackle issues beyond central banking like climate change. Perhaps the most prominent example of the expansion is the Consumer Financial Protection Bureau, which is an independent organization within the Fed whose mission is to ensure transparency for consumer financial products. The CFPB is primarily concerned with financial products like mortgages, credit cards, and other common financial products in which individuals take on risk. The expansion of the Fed’s authority has not come without obstacles. In October of 2019, the Supreme Court found in the case Seila Law LLC v. Consumer Financial Protection Bureau that the governing structure of the CFPB, which initially stipulated that its director could only be fired for cause, violated separation of powers. Some progressives also want to wrest control of the Fed away from financial institutions and toward a more centralized governance structure.Finally, some progressive economists within this sector ascribe to Modern Monetary Theory, in which fiscal policy is the primary driver of full employment and interest rates remain low. These economists favor an even more expansionary monetary policy; a policy in which the government may spend an unlimited amount of money because it issues the currency it spends. Inflation, the biggest downside risk MMT’s critics cite, would be handled via increased taxation.

September 14, 2021
What is Inflation and Why Does it Happen?
Inflation is an economy-wide increase in prices and, in turn, an economy-wide decrease in purchasing power. It is the phenomenon of the same goods’ prices going up. Economy-wide price increases may indicate an increase in general consumer demand, and inflation for a single good could be a symptom of increased good-specific demand, or a shortage.

The concept of inflation is tied to purchasing power. Purchasing power is the value of a currency in terms of the ability to purchase goods. It is the real value of money within a given economy. For example, suppose at time A one loaf of bread costs $1. From time A to time B, there is 5% inflation, which means that nominal prices across the board go up 5%. However, if the price of a loaf of bread at time B remains $1, then bread consumers’ purchasing power has increased for that good. Purchasing power is also determined by income. If there is 2% inflation for all goods and services over a year, one’s purchasing power would decrease by 2% over that year. However, if you achieved a 2.5% raise that year, your purchasing power would increase. Moreover, the real value of one’s assets might also fluctuate with inflation (link to Rachel’s brief about protecting assets during inflation).

Measuring Inflation: The Consumer Price Index

Measuring inflation is not always straightforward. Inflation can’t be measured based on the price of a single good, since the relative price of a given good could fluctuate and not be representative of general price trends (television prices are an example of this; the relative price of televisions has plummeted in the past 25 years). Instead, the Bureau of Labor Statistics (BLS), the same government agency that collects data on employment, (link to my previous context brief on unemployment) collects data on the change of prices of a market basket—a group of commonly purchased items. The result of this survey is the Consumer Price Index (CPI). The data can also show the nominal and relative change in prices for individual goods, as we saw in the example about TVs. Because the actual measurement (CPI) is a level, not a percentage change, a single month’s CPI value is of little use when understanding how prices are changing. Instead, you must measure an annualized rate of inflation (or a month over month rate) to see how prices are changing. An annualized rate, much like GDP, is how the media and government agencies tend to report on inflation, as well as the measurement economists analyze.

There is more than one way to measure CPI. Most economic reports focus on headline CPI, but sometimes it can be useful to look at median CPI or core CPI. These measurements trim out outliers and/or central goods whose prices fluctuate unlike the rest of the economy. Housing is an example of such a good. Not all countries calculate CPI in a uniform manner. For instance, some countries exclude housing from their CPI calculations (the US does not make this exclusion). International organizations like the OECD and economists standardize their CPI measurements for the purpose of comparing inflation over international borders.

Measuring Inflation: The Personal Consumption Expenditure Index

CPI is also not the only method for calculating change in prices over time. This measurement is derived from a consumer survey, but indices that measure inflation do not necessarily have to be consumer focused. The quintessential example of such an alternative measurement is the Personal Consumption Expenditure index (PCE). Rather than relying on a consumer survey like the Bureau of Labor Statistics does with CPI, the Bureau of Economic Analysis (BEA) calculates PCE by surveying business. One can also eliminate outlier goods in a PCE calculation, as is done with the trimmed mean PCE index.

Figure 1 Source: Federal Reserve Bank of St. Louis

As we can observe in Figure 1, measurements like median CPI and trimmed PCE remain much more stable than their unadjusted counterparts as they remove individual goods that are particularly volatile at a given time.

High Inflation

Inflation can be a major issue for a country’s economy if it is too high, because workers’ purchasing power will decrease at a rate higher than their wage growth, meaning they are effectively worse off. Asset-holders, which constitute anyone with a retirement, college, or savings account, will lose personal wealth as the relative value of their savings decreases. (Link to other brief about how to maintain assets’ values during inflation).

Recent reports on inflation have suggested that inflation—despite initially being driven by temporary price hikes in major goods like cars—is likely here to stay. In June 2021, the annualized inflation rate rose to 5.4%. The International Monetary Fund warned that inflation might remain high for the rest of the year in developed countries that are beginning to rebound from the COVID-19 crisis. You can read about more warning signs of an overheating economy here (link to Allie & Rachel’s brief).

Ideal Inflation Rates and the Fed

However, because of the mechanism of wage increases, ideal inflation is not 0%. Inflation ideally stays around 2% because wages are “sticky”—stuck at their baseline rate and can only go up. Since firms generally do not cut wages, underperforming firms will overpay their workers to avoid hiring more people. With inflation rates comfortably above 0% but not too high, the economy effectively creates real wage cuts, and employers can then reward higher productivity workers with raises to keep up with inflation. When inflation rests at 0%, there is also a higher probability for deflation, which brings with it a host of macroeconomic problems.

One of the Fed’s jobs (link to my other brief on Fed policy) is to ensure that inflation stays around 2%. Inflation can also happen because of more direct policies from the Fed. Quantitative easing (QE), which is when the Fed buys assets (primarily treasury bonds) en masse to increase the money supply. (link to previous briefs or my brief on the Fed). Because this action technically constitutes an increase in the money supply, it is possible for inflation to be a result of QE. However, past instances of aggressive QE policies—particularly in the aftermath of the Financial Crisis of 2007-2008—did not cause inflation like some critics feared.

Although the Federal Reserve has been successful at staving off inflation recently, that has not always been the case. From 1962-1980, inflation was a central macroeconomic problem in the US. This occurred for a few reasons:
1. Because of the explosion in international trade, US dollar reserves became increasingly in demand, spiking up their price.
2. The expansion of national government spending meant the Fed had to keep interest rates relatively low in order to support more deficit spending in the US.
These two causes of inflation were primarily demand-based: an increased demand for US dollar reserves increased its relative value. Oil shocks in 1973 and 1979—results of conflicts in the Middle East and decisions by the Organization of the Petroleum Exporting Countries’ (OPEC)—decreased the supply of all oil in the US. The drastic increase in the price of oil thus increased inflation because oil is a core good in a developed economy.

Going back further, before the Fed existed in its current form—when the value of the US dollar was tied to gold and silver—inflationary and deflationary episodes were much more severe in magnitude and length. For instance, during the Civil War and World War I, the government disconnected the value of the dollar from gold and silver to finance the war effort—effectively increasing the money supply. After each war, the national government allowed the dollar to reconvert to gold and silver, which meant prices fell. After World War II, a similar phenomenon occurred, except by then the dollar was no longer tied to gold or silver. Rather, the government spent an unprecedented amount of money on the war effort, which caused inflation. Like previous examples, the government’s efforts to pay off postwar debt brought the country into a deflationary period. These monetary cycles do not occur anymore because the dollar is not indexed based on any commodity’s value and because the national government does not swing rapidly between deficit spending and deficit reduction policies.
September 14, 2021

Introduction to the American Jobs Plan and Negotiations

The American Jobs Plan is the Biden administration’s next major bill after the American Rescue Plan that provided relief during the pandemic. It is described as “the moment to reimagine and rebuild a new economy” on the White House Fact Sheet. The agenda is to create jobs, rebuild infrastructure, and out-compete China. The originally proposed plan had a budget of roughly 2.2 trillion dollars, including:

$621 billion in transportation,
$400 billion in home care services,
$300 in manufacturing,
$180 billion in Research and Development,
$100 billion in workforce development,
$213 billion in housing,
$111 billion in water infrastructure,
$100 billion in schools and child care,
$100 billion in digital infrastructure, and
$18 billion in veteran’s hospitals and federal buildings.

Biden proposes that the plan would be funded by a series of tax increases including corporate tax hike from the current 21% to 28% and global minimum tax from 13% to 21%, which in total would raise more than $2 trillion dollars in the next 15 years. For more on how this bill would be paid for, check out the X brief.

Opposition on Both Sides

Biden’s first proposal faced strong opposition from the Republican side that viewed the plan as “too big, too expensive, and includes too many tax increases”. One major issue is the definition of infrastructure— Biden’s plan incorporated elderly care and other social spending that the GOP opposes. McCarthy comments that the plan should only include roads, bridges, highways, airports, and broadbands. Another major issue is the tax increase. Senate Minority Leader McConnell has expressed strong views against rolling back of the 2017 tax cuts to pay for the infrastructure package.

There is also opposition from the progressive side of the Democratic party. The Congressional Progressive Caucus says that the plan is insufficient to meet the scale of the threat proposed by climate change. Three House Democrats have also vowed to oppose the package because it does not reverse a cap on state and local tax deductions from former president Donald Trump’s tax law.

Timeline of Negotiations

The White House is open for negotiations to reach a bipartisan deal on at least the infrastructure part of the deal and Biden is prepared to carry out the remaining part of the plan without GOP support.

On May 21, the Biden administration submitted a trimmed-down version of the infrastructure package that costs $1.7 trillion compared to the previous $2 trillion proposal. The details are not open to the public yet, but Reuters reported that it would include reduced funding for broadband, roads, bridges, and other major projects. Jen Psaki, the White House press secretary said that some components, such as investments in research and development, had been removed but would be included in other bills.

On May 27th, a group of Senate Republicans proposed a $928 billion counter — still $1 trillion shorter than Biden’s original plan, which outlined a significant increase from the GOP’s first, five-year $568 billion proposal. The new GOP version would direct $755 billion toward traditional infrastructure—$506 billion for roads and bridges, $144 billion for public transit and rail, $56 billion for airports, $22 billion for ports and waterways, and the rest on other miscellaneous transportation-related issues. Republicans allocated $4 billion towards electric vehicle infrastructure ($170 billion less than Biden’s proposed budget on EVs). In addition, the GOP assigned $94 billion to water infrastructure like lead pipe replacement, $65 billion on broadband internet access, and $14 billion on resilience like natural disaster preparedness for at-risk communities.

However, only $257 billion of the GOP offer is above baseline levels, which means if projected federal spending of current programs continued, only $257 of the Republican proposal would be financed through additional federal spending. Biden’s $1.7 trillion plan is entirely above current baseline levels, which is why a corporate tax increase from 21% to 28% is needed in Biden’s version. The Senate Republicans, on the other hand, suggested moving “leftover” money from the COVID-19 relief funds to finance the infrastructure plan instead of any tax increase, which Democrats strongly opposed. Much of the relief money that hasn’t been spent will be spent in the coming years on Medicaid, federal lending programs, and state and local relief programs to heal the economy and communities that were hit by the pandemic.

On June 24th, Biden reached an agreement with a group of bipartisan Senators on a $1.2 trillion Bipartisan Infrastructure Framework. The Plan would be the largest federal investment in public transit in history, the largest federal investment in passenger rail since the creation of Amtrak, and the single largest dedicated bridge investment since the construction of the interstate highway system. There are also strong focuses on EV infrastructure, renewable energy, water infrastructure, internet access, and resilience against climate change, cyber attacks, and natural disasters. The White House published the below framework for the Bipartisan Infrastructure Framework:

	Amount (billions)
Total	$579
Transportation	$312
Roads, bridges, major projects	$109
Safety	$11
Public transit	$49
Passenger and Freight Rail	$66
EV infrastructure	$7.5
Electric buses / transit	$7.5
Reconnecting communities	$1
Airports	$25
Ports & Waterways	$16
Infrastructure Financing	$20
Other Infrastructure	$266
Water infrastructure	$55
Broadband infrastructure	$65
Environmental remediation	$21
Power infrastructure incl. Grid authority	$73
Western Water Storage	$5
Resilience	$47

The White House also published the proposed financing sources to fund the infrastructure plan, including reducing IRS tax gap, redirecting unused unemployment insurance relief funds, repurposing unused COVID-10 relief funds, and state and local investment among other sources.

Future Developments

On June 26, Biden issued a statement following the bipartisan agreement that the removed categories in his original infrastructure plan—investments in education, health care, child care, senior housing, clean energy, and tax cuts for families—will be regrouped in his new American Families Plan. He will seek to pass the Families Plan through the process known as reconciliation even without the support of Republicans in Congress. Upon the announcement of the Bipartisan Infrastructure Framework, Biden indicated that he would refuse to sign the infrastructure bill it was sent to him without the Families Plan and other priorities including clean energy.

On June 28th, Biden walked away from his threat to veto the infrastructure plan if it was presented to him without the American Families Plan and assuaged some Republicans by clarifying that he would sign the bill if it were passed on its own. Speaker of the House Pelosi, however, said she would not take up either proposal in the House until both get through the Senate. Senate Majority Leader Schumer plans to start votes on both measures in July.
Despite the current bipartisan progress on the infrastructure plan, the passage of the bill could still be a ways away. In the Senate, the infrastructure bill will need at least 60 votes to overcome a filibuster, which means it would require the backing of 10 Republicans and every Democrat. 11 Republicans supported the bipartisan framework, but a handful of liberal Democrats including Sen. Bernie Sanders, Sen. Ed Markey, and Jeff Merkley have signaled that they oppose the framework because it does not invest enough to address income inequality and climate change. Therefore, the Senate would need more Republican votes to offset any Democratic defect. In addition, with the August recess coming, the bill could be dragged well into the last quarter of 2021.

September 6, 2021

International Trade with China

Today, China engages in international trade on an unprecedented scale, rapidly churning out inexpensive exports and housing enumerable manufacturing plants.

The ongoing trade war is one of the most readily identifiable topics surrounding U.S.-China relations. Mass media’s underlying political bias and proclivity to sensationalize topical issues have resulted in politically-skewed coverage. It’s likely many Americans still instinctively relate the trade war with the Trump administration’s incendiary rhetoric and rigid policies. In actuality, the topic, and its potential mitigation strategies, remain a distinctly non-partisan issue. A report from the Pew Research Center claims that, “Republicans and Democrats largely agree in their assessments of how China’s growing economy […] will affect the U.S.” To this point, within the last month, the Senate has passed a $250 billion bipartisan technology and manufacturing bill aimed at combating China’s economic growth.

A trade deficit occurs when the cost of a country’s imports exceeds the cost of its exports. In the late 1990s, China’s economy saw a dramatic growth in manufacturing exports, resulting in an American trade deficit of $34 billion on average. Following China’s admittance into the WTO in 2001, the trade deficit rose to $202 billion in 2005, and then $273 billion in 2020. In 2020, the United States imported $435 billion in goods and services from China and exported approximately $124 billion, leaving an outstanding deficit of approximately $310 billion in goods and services.

Trade Deficit and the Exchange Rates

A fixed or “pegged” exchange rate is when the value of a country’s currency is inseparably tied to the value of another widely-used commodity or currency. China manipulates its currency by deflating its worth by pegging it to a value less than it would trade for in a free market to gain advantages over trading partners. Many analysts proclaim that the nation’s currency is “significantly undervalued vis-à-vis the U.S. dollar.” This causes exports to the United States to become inexpensive while United States imports to China are comparably more expensive. China’s “massive and sustained currency manipulation from 2000 to 2010…[widended] the trade deficit to historic levels.”

Impact on the US Economy

There is a current debate among economists about whether the trade deficit with China has led to significant job loss in the United States. A recent EPI report stated that there is a correlation between the ever-growing trade deficit and a substantial loss in manufacturing employment. This report claims that “the growth of the U.S. trade deficit with China between 2001 and 2018 was responsible for the loss of 3.7 U.S. million jobs.” However, many economists have challenged this argument, attributing employment loss to “automation, productivity increases, and demand shifts from goods and services.” Further, economists have outrightly denounced the recent administration’s fixation on the widening trade deficit, claiming that, “the trade deficit is a terrible metric for judging economic policy.”

August 6, 2021
Introduction to the World Trade Organization
The World Trade Organization is an international organization dedicated to liberalizing rules of trade between nations. Trade liberalization refers to removing and reducing restrictions to the free movement and trade of goods between countries. Trade liberalization seeks to minimize the role of governments in the resource allocation process to increase economic efficiency globally. The WTO does this by requiring member states to (1) convert all barriers to trade into tariffs (taxes on certain imports or exports) and subsequently reduce these tariffs, and (2) reduce the amount of support and subsidies they offer to exporting industries. It also works to settle trade disputes and promote the economic growth of developing countries. The organization is composed of 164 member states who govern its activities.

Forming the World Trade Organization

The WTO was born out of the General Agreement on Tariffs and Trade (GATT) which was initially created in 1947 by the UN. Members of the GATT decided a new trade organization was necessary in 1995 due to the lackluster dispute settlement system of the GATT. The GATT required positive consensus in both the creation of a dispute resolution panel and adopting of the panel’s report. This positive consensus involved all contracting parties to the decision including the parties to the dispute itself and thus required that every party including the party subject to complaint agree to establish the panel and uphold its report. While most parties subject to complaint did not abuse their veto power, it did create a problem where many disputes went unsolved as those with complaints did not petition to create a panel due to the risk of a veto. The creation of the WTO and subsequently, the Appellate Body within the organization would solve these issues, while presenting new ones.

Structure

The Ministerial Conference is the highest decision-making body. Ministerial Conferences involve all member states meeting every 2 years to make decisions concerning multilateral trade agreements. The General Council has representatives of all member states with the authority to act on behalf of the Ministerial Conference. Since the Ministerial Conference only meets once every 2 years, the General Council carries out day to day functions of the WTO. Sometimes the General Council may meet under a different set of rules as the Dispute Settlement Body or as the Trade Policy Review Body to solve specific issues.

The Council for Trade in Goods, the Council for Trade in Services, and the Council for Trade-Related Aspects of Intellectual Property Rights, all report to the General Council. Each of these councils covers a broad area of trade and handle WTO agreements within their specific area of trade. These councils have committees below them governing more specific areas of trade—for example, the Goods Council has a committee on agriculture. Agreements among some, but not all, member countries are managed by committees composed of the only members to those agreements. Lastly, informal meetings such as Heads of Delegations meetings are where member states meet and make compromises and agreements. Informal meetings are often where breakthroughs and compromises are made in trade agreements.

Dispute Resolution

Similar to the original GATT of 1947, the WTO also faces issues with dispute resolution. Currently, there is a crisis with the Appellate Body, as there are not enough members remaining on the body to reach quorum. Without enough members to reach quorum, they are not legally allowed to deliberate on issues. Appellate Body member terms end, and the US has consistently blocked attempts to fill the vacant seats. The Obama, Trump, and Biden administrations have all blocked recent appointments to the body. The US objects to the operations of the Appellate Body for three reasons:
1. The US claims that the Appellate Body is engaging in judicial activism by often going beyond resolving a singular dispute. Article 3.2 of the Dispute Settlement Understanding, which governs the activities of the Appellate Body states, “recommendations and rulings of the Dispute Settlement Body cannot add to or diminish the rights and obligations provided in the covered agreements.” The Appellate Body is allegedly doing this by clarifying and interpreting provisions found in general WTO agreements such as the General Agreement on Trade in Services.
2. The US claims that the Appellate Body creates “binding” precedent that oversteps its role and once again steers into the area of “making law.” The Appellate Body has a system of “persuasive” precedent rather than binding precedent which means that previous reports may be relevant in similar cases, but the Appellate Body is not legally bound to consider previous reports. In a system of binding precedent, the judicial body would be legally obligated to consider a previous report in deciding a current case. The US views this usage of precedent as affecting the rights of member states without the member states themselves able to participate due to precedent.
3. The US has concerns with case backlog in the Appellate Body as Rule 15 states that former members of the Appellate Body may remain as a member to finish working on an appeal, but this sometimes leads to a delay in issuing a report on an issue longer than 60 days which is forbidden by Article 17.5 of the Dispute Settlement Understanding. The US argues that to avoid this, members should rather take no new cases during this time.
Other Controversies

Members of both the Republican and Democratic parties have threatened to withdraw from the WTO over the key issues of China’s trade policy, globalization, and a rapidly changing global economy. Critics of the WTO point out that the Chinese government’s increasing involvement in their economy is creating unfair competition for other WTO members. China uses state subsidies to gain a competitive advantage in multiple industries such as steel and aluminum. Many feel that the WTO has been too slow to address China’s rule violations, as well as regulate and adjust to new global economic trends and markets such as ecommerce. Lastly, many attribute problems caused by globalization to the WTO, such as the loss of manufacturing jobs in the US to overseas manufacturers.
August 6, 2021
What Changes the Biden Administration will Bring to International Trade

In early March, the Biden administration released its 2021 trade agenda along with its trade report from 2020. Following a year where international trade saw unprecedented setbacks from a global pandemic, the Biden Administration’s Trade Agenda offered a glimpse of what is to come as the world returns to normal. On the campaign trail, President Biden was often critical of President Trump’s trade policy. However, despite the partisan divide, Biden and Trump’s trade agendas have shared certain elements.

Rhetoric on Trade

Both administrations also emphasized rebuilding infrastructure, labor rights and farmers. Biden’s first trade agenda states: “market opportunities reap the greatest economic benefits when they are pursued in alignment with the interests of American workers and innovators, manufacturers, farmers, ranchers, fishers, and underserved communities. Under the Biden Administration, trade policy will encourage domestic investment and innovation and increase economic security for American families, including through combatting unfair practices by our trading partners.” Trump’s first trade agenda had similar themes: “we reject the notion that the United States should, for putative geopolitical advantage, turn a blind eye to unfair trade practices that disadvantage American workers, farmers, ranchers, and businesses in global markets.” When it comes to American manufacturers, farmers, and ranchers, the rhetoric from the two administrations is strikingly similar. The Trump administration prioritized American farmers through the negotiation of the USMCA agreement and the Biden administration has already affirmed that they will make sure the USMCA agreement continues to deliver on its promise to help U.S. farmers.

Manufacturing Tariffs

Although President Biden critiqued Trump’s trade policy towards China, he has been reluctant to remove the Trump administration’s steel and aluminum tariffs. The metal tariffs were intended to aid American manufacturing companies trying to compete with cheap foreign imports mainly from China. Steel industry groups and newly Biden appointed Chief of Commerce Gina Raimondo lauded the previous administration’s tariffs as “effective”. Given the Rust Belt’s history of swinging presidential elections it might not come as a surprise that the Biden administration is prioritizing manufacturing workers in international trade policy.

Diverging Values and Philosophy

The philosophical differences between the two administrations can be seen in their attitudes towards trade alliances and governing bodies. The Trump administration showed preference towards bilateral trade negotiations, or trade negotiations where the U.S. engaged in talks with each country individually rather than sweeping trade agreements between multiple countries. Under President Trump, the US withdrew from the Trans Pacific Partnership, a trade agreement between the United States, Canada, New Zealand, Japan, Mexico, Australia, Vietnam, Peru, Chile, Malaysia, Singapore, and Brunei. The administration was also hostile towards the World Trade Organization. The Biden administration, on the other hand, has signaled multilateralism, in which agreements are made between three or more parties, as its preferred method of international trade policy to strengthen the American middle class. Biden plans to attempt to re-enter some of the international agreements that the Trump administration withdrew from and provide more support to the WTO.

The Biden Administration’s trade 2021 trade policy agenda aims to use trade policy to impact climate change. The 2021 Biden trade policy agenda references incorporating climate change reducing initiatives into trade agreements 13 times, while the Trump administration’s 2017 trade agenda never mentions it. Biden plans to emphasise climate change through carbon border adjustments. The Biden administration also highlighted their plan to use trade policy to aid “disadvantaged communities” and “Communities of color”, which was not a point of emphasis in the Trump trade policy agenda.

August 2, 2021
Intro to Biden’s Infrastructure & Corporate Tax Plan
Announced on March 31^st, 2021, President Biden’s American Jobs Plan aims to rebuild America’s infrastructure while creating millions of new jobs and modernizing various sectors of the American economy. In addition to repairing the nation’s outdated roads, bridges, airports, and electric grids, the plan calls for investing in social services, promoting racial equity, boosting wages, and expanding high-speed internet access across the country.

With an eye towards meeting the challenges of climate change and an increasingly competitive China, the plan also endeavors to “innovate for the future” by jumpstarting manufacturing, improving job training programs, and revitalizing research & development into key technologies.

The bill calls for almost $2.3 trillion in new spending. In tandem with the American Jobs Plan, President Biden is proposing a new Made in American Tax Plan that would offset the infrastructure package’s hefty price tag and eventually reduce the ballooning budget deficit. By raising close to $2 trillion over 15 years, this plan would specifically:
- Increase corporate tax rates from 21% to 28% (though this is still markedly lower from the 35% rate that existed before Trump’s 2017 tax reform bill);
- Establish a global minimum tax of 15% on income earned overseas for U.S. companies;
- Eliminate loopholes that encourage companies to move profits to overseas tax havens.
The Biden administration is spearheading negotiations on a broader global minimum tax rate for corporations with the Organization for Economic Cooperation and Development (OECD). The goal of a global minimum tax rate is to establish a tax system where a company will pay a certain percentage of its profits in taxes to its home country, regardless of where those profits are being earned. In other words, an American company that moves some of its operations offshore to a low-tax jurisdiction would have to pay the US government the difference between their minimum rate and whatever the company paid on its overseas earnings. For example, if a company from a country with a global minimum rate of 15% earned overseas profits that were taxed at 5%, the government would be entitled to bring the company into compliance by charging it an additional 10%. This new global tax regime would apply to multinational companies irrespective of where they’re headquartered and hopefully deter countries from competing for business by lowering tax rates.

Proponents of this tax plan argue that not only will it reward investment at home by offering a tax credit to firms that move jobs back to the US, it will also incentivize investment in green energy and American manufacturing. Most notably, it would finally ensure US-based multinational firms, like Amazon & Netflix, pay their fair share by closing legal loopholes that corporations exploit to dodge paying federal taxes.

Opponents of the tax plan cite the post-pandemic timing of the proposal as dangerous for a country trying to recover from a recession. They believe the tax increases will slow economic recovery and make the US a less attractive investment option on a global scale, especially after just lowering the corporate rate from 35% in 2017.
July 16, 2021