Inflation and the Role of Tax Policy: Transcript

0:00:00.0 Cara Griffith: All right, let's get started. Welcome everyone. It's so lovely to see a whole bunch of people in person. I'm Cara Griffith, I'm the president and CEO of Tax Analysts. I want to thank you for joining us today for our very first hybrid event in conjunction with the ABA Tax Section annual meeting. I want to thank the ABA Tax Section for hosting this, and in particular to Julie Divola, who really put a lot of hard work into making this event successful. And we're looking forward to more collaborations with the ABA in the future. And before we turn to that event, I am very pleased to make a big announcement for us. In collaboration with the ABA Tax Section, Tax Analysts and the ABA Tax Section have developed a new fellowship. This is going to be a public service fellowship that sort of piggybacks on the success that they've had with their other fellowship.

0:00:54.2 CG: We developed this fellowship for three reasons, and it's slightly different. This one is going to be looking for an experienced attorney, but we're trying to help meet the needs of low income taxpayers for tax assistance, promote tax-related public service, and to give seasoned attorneys the opportunity to work in the public interest sector. We're really excited about this, and we hope that to the extent that you're able, that you'll spread the word and we'll find a good candidate.

0:01:17.0 CG: For the initial year of our fellowship, we're going to be sponsoring a fellow that will be based at the La Posada Tax Clinic in Twin Falls, Idaho. Applications are due July 28th, so it's coming up soon, and you can find more information about the fellowship on the tax section's website. But, we are here today, both in person and with a virtual audience to discuss a very timely subject, inflation. We'll examine whether tax policy contributed to the rise in inflation and whether tax policy can be part of the effort to reduce inflation. So today's event for Tax Analysts is the 17th in our series of public discussions that we call Taxing Issues. We launched this series now back in 2020 as another of our efforts to encourage a debate on tax issues. We've been bringing the tax community together, so far virtually, today in person, with leading policymakers and experts for bipartisan discussions on the future of tax policy.

0:02:13.7 CG: We are thrilled today to have both an in person and a virtual audience. Unlike today, we've held most of our taxing issues events in a virtual format. Moving forward, we will likely do a mix of two, with some hybrid, some in person and some all virtual. But however we do it, we will continue to broadcast all of our events. And we really welcome your feedback on how we can make this more interactive, particularly in a virtual format. We also always welcome suggestions on webinar topics. You can send feedback and suggestions to events@taxanalyst.org. We also welcome questions today. We're going to have a dual method because we have a dual audience. Thank you for those who emailed questions in advance. And for those who are in person, there are mics on either side that we would ask that you go to to ask your question, and for those who are virtual, please use the chat feature to submit questions during today's event.

0:03:04.9 CG: We'll begin our conversation with a panel discussion, and then I'll reserve about the last half hour for all of your questions. We have a lot to cover, so let's turn to the topic at hand. For several months after inflation began to take off, we repeatedly heard experts both within and outside government referring to inflation as transitory. The conventional wisdom was that inflation was largely the result of supply chain issues that were rooted in the pandemic. But now the Federal Reserve and many economists have changed their thinking and they're seen inflation as more persistent rather than transitory. Supply chain issues may have helped fuel the rise in inflation, but economists are now debating whether the underlying cause or causes also include monetary policy, tax policy or fiscal stimulus used to address the pandemic-driven recession.

0:03:58.3 CG: For quite a number of years, the Federal Reserve has engaged in loose monetary policy. It's continued to increase its balance sheet while keeping interest rates at zero. The Fed did this to generate growth and it worked. The economy rolled along for quite some time with low unemployment, low inflation, low interest rates and a stock market that continuously hit regular new highs. And then we had the Tax Cuts and Jobs Act, which provided businesses and individuals with tax cuts, which arguably are going to add one to two trillion dollars in federal deficits through 2025. Now proponents said that was necessary and that it would generate more economic growth, but opponents have said maybe it did exactly the opposite. The Federal Reserve warned that a massive tax cut could drive up inflation and that would lead them to raise interest rates.

0:04:46.8 CG: Then came COVID-19, which was expected to cause a very deep recession, and this prompted massive fiscal response from both presidents Trump and Biden. In total, policymakers provided more than five trillion in fiscal stimulus between 2020 and 2021. Much of that five trillion in debt was purchased by the Fed. Now, getting inflation under control is mainly the Fed's job, of course, and it does that by setting interest rates. In fact, about a week ago, the Fed raised interest rates by half a point, which is the largest increase in 22 years. But tax policy can also affect inflation. So what can be done about inflation and can or should tax policy be part of the solution?

0:05:33.7 CG: To answer that and more, thankfully I don't have to do it and we've got a fantastic panel to address all of those questions. So first we have Martin Sullivan down at the end, chief economist and contributing editor for Tax Notes and an expert on federal taxes. Next to him is Hana Greenberg, vice president of tax at the Retail Industry Leaders Association. And next is Andrew Grossman, chief tax counsel for the House Ways and Means Committee. And finally, we have Jeff Wrase, deputy staff director and chief economist for the Senate Finance Committee. Thank you all so much for joining us today. I am excited about this conversation and I know that I'm going to stand to learn a lot. Marty, to kick us off, can you talk to us about the root causes of inflation?

0:06:20.2 Martin Sullivan: Sure. Sure thing. Thank you, Cara, and good afternoon, everybody. We thought it would be very useful to give you some background on the data, so when we discuss what the cures for inflation should be, we should at least know what the causes are and what the numbers are. So, let me give you a little background, just a five minutes of economic vegetables before we get to the fun part. Okay, so this is yesterday at 8:30 AM The Bureau of Labor Statistics announced our new inflation rate, and the markets went a tumbling, because the news was not good. The chart you see over here is the U.S. inflation rate... Whoops. Where did it go? Show's over.

[laughter]

[applause]

0:07:18.4 MS: Oh, there it is. Can we go back one? Thank you. Okay, thank you. This is the U.S. inflation rate since 2019. So this is only a three-year span, and you could see how much things have changed. And if this went all the way back about 20 years, it wouldn't be much different. We have been spoiled rotten with 2 percent inflation for at least the last two decades. And then the pandemic hit. The blue line is the inflation rate that you read about in the newspapers. The red line is the inflation rate called the core inflation rate, where you take out... Oh, use the microphone? The core inflation rate where you take out the energy, the volatile energy and fuel prices. So, the pandemic hits. Do we have inflation from a pandemic? No, actually. The economy goes into recession, inflation goes down. It wasn't until 2021 that inflation kicked in, and it went up an unprecedented high rate, and then with the Ukraine invasion of February 24th, we had even more inflation.

0:08:47.5 MS: We really want to look at the red line because it takes out those volatile fuel and food prices. But the other thing to notice, you go, "Well, it went down yesterday. Why is everybody... What's wrong? Why is everybody so upset?" Well, what you really can't see is that in the single month of April, the core inflation rate went up 0.6 percent, and if you multiply... I had to use my calculator. If you multiply 0.6 times 12, that's 7.2 percent. So, the latest indication is that our core inflation rate is now 7.2 percent when everybody was expecting it to go down. So it is not a very good inflation outlook. So, now we're going to talk about what's causing this, and I'm going to give you four stories. You don't have to believe all of them, but I'm going to give you four different stories about what the possibilities are. Okay. So, story number one is a supply side story. It's about tight labor markets. It's about the great resignation. This chart goes from February of 2007 to the present, and it shows the ratio of job openings to unemployed persons.

0:10:16.8 MS: Now, I only get to show you one of... A limited number of slides, and it's a little hard to understand, but it's really useful if you'll bear with me for a second. So, you'll remember in 2007 through 2009, we hit a recession, and unemployment was a huge problem, and this ratio was at 0.16. In plain English, think about it this way. If you had a... If there was a job opening with a Help Wanted sign, there'd be seven people standing outside, and only one person is getting the job, that's a recession. That's where we were 12 years ago. Then things got better, they got better, they got better, they got better, then COVID hit, back down into the dumps. But then what happened? And this is important to note, the time here. This is in 2021. This is into the pandemic. We have this rise in this ratio. And what this means, if you had two employers on a strip mall looking for a clerk, only one of those employers will be lucky to fill that job opening.

0:11:28.0 MS: So the labor market has entirely changed, it's been called the great resignation. Five million people retired, more than normal. Immigration is down. We just don't have enough workers, and we're not exactly sure why. But this is certainly one cause of our high inflation.

0:11:50.6 MS: Okay. Now the second story is also a supply-side story, and it has to do with rising energy prices. And if you're old enough to remember the 1970s like, well, some of you do, we've been through this before. I could have shown you all different types of data, but I just wanted to show you this simple chart with gasoline prices. And this chart goes from... Whoops. This chart goes from 1993 to the present. The blue line is actual weekly per gallon gas prices. See, in 1993, you could fill up your tank with a $20 bill and get change back. And then, again we went... Prices went up. The red line is inflation adjusted. What was startling to me is, even though everybody's in a tizzy about rising gas prices, and it has been dramatic over the last year, we've been here before. In fact, we've been in worse situations before in the not too recent past. But nevertheless, energy prices are a big, big portion of our supply side inflation.

0:13:12.5 MS: Now, story number three is not a supply-side story, it's a demand-side story. Now, what this slide has on it is what's called personal disposable income. It's how much money households have in each of these quarters from 2018 to the last quarter of 2021. So in 2018, U.S. households had 3.8 trillion dollars of personal income. That's good. And as is normal in economics, it goes up bit by bit, by bit. And then in the first... Sorry, in the second quarter of 2020, the pandemic hits. Recession, all the world's going to hell. Wait a minute. If the world is going to hell, how come my personal income just shot up? This is not your normal recession, and this has a lot to do with the economic stimulus provided by the government, to the government's credit, at this time.

0:14:15.4 MS: The government has a history of never providing enough in a timely matter. The government did the opposite this time, they provided a lot very quickly. And then, as we move through the end of the Trump administration to the beginning of the Biden administration, the American Rescue Plan gets enacted and whoa, look what happens. Personal income is up. So even though many people are hurting very badly at the low and moderate income levels, the economy as a whole really wasn't hurting that much. So, this is... And when demand is greater than supply, that's going to push up prizes. The other wild thing about this number is when the folks got this extra money, these extra hundreds of billions of dollars, what did they do with it? They did not spend it, it's all in checkable deposits. Not in your savings account, not in their retirement funds. I don't have the chart, but it's an amazing thing, checkable deposits for the last decade have been at about one trillion. These two periods, they shot up to four trillion. So Americans have like three trillion dollars in the bank now that, of spending power that they haven't even used yet, that they may still use, and that keep inflation high. And finally, I have one more story.

0:15:47.1 MS: The fourth story of our inflationary problem is the Fed. Fed, Fed, Fed, everybody talking about the Fed all day long. They talk about it too much. But anyway. This chart shows you... You keep on hearing the expansion of the Federal Reserve's balance sheet. What does that mean? That means the Fed is buying government bonds. Well, what does that mean? It means the Fed is printing money. So, this chart starts in December '02. And that was a normal five-year period, we're just tooting along. Then the great recession hits. Remember, this is the great recession, not the little intermediate recession. This is the great recession. And the Fed conducts extraordinary, expansionary fiscal policy.

0:16:38.5 MS: If you didn't see... Sorry. If you didn't see this half of it, that would be a big number, and it is a big number, but the Fed continued to keep its balance sheet large, and then the pandemic hit, and to its great credit, 'cause there were a few days that it looked like the whole... The financial markets were going to collapse. People don't remember, the Fed stepped in with very generous... They started buying... They did something that they never did before, they bought private sector bonds, and they expanded the money supply by enormous amounts. And then they continue to expand it. And of course, what's not on this chart because it's so recent, is that they've just started to reduce that. So these are four stories about why we have inflation. Probably all four of them are contributing to our problem now, and probably if we want to get rid of inflation, we need to address or look at all four of these possibilities. So, these are the problems. Now we can get the answers from the rest of the panel.

[laughter]

0:17:50.7 CG: Thanks, Marty. That was a excellent job of setting the stage for us. So Andrew, let me turn to you next. So, from your perspective, what are majority members in Congress thinking about the response that we've had to the situation? And given that we are all entirely tax-focused here, does the code provide any built-in responses to help curb inflation?

0:18:12.6 Andrew Grossman: Sure. Thanks for having me, and I guess I'll start off with the traditional disclaimer that I am here, speaking not on behalf of Chairman Neal or any members of the committee of ways or means, but rather myself in my capacity as someone who is certainly familiar with the thoughts of Chairman Neal and the members of the committee and the Democratic caucus at large. It's a good question. As I was reflecting... Marty actually had a great article in Tax Notes a couple of weeks ago, exploring both the present law treatment of inflation as well as potential policy responses to it. And I was kind of, on the way here, reflecting on what I could add to that conversation from my perch, where I sort of am somewhat in tune with what the Democratic caucus is thinking. And it occurred to me that in terms of thinking about the way the tax code operates now.

0:19:16.1 AG: If you think about... The Democratic caucus is primarily concerned with -- when we talk about who is it that our members want to make sure are able to weather an inflationary environment, and they generally look to low income and moderate income, middle income tax payers, I think that's really where their concerns are driven, and so you look at the tax code and you look at, Well, where are values indexed, where are they not indexed and the like. And largely with a couple of important exceptions, we can talk about lower moderate income taxpayers are generally held harmless based on a lot of the indexing that exists in the current tax code. Obviously, the tax brackets are indexed. Most, if not all of the parameters of the EITC are indexed. Even in the case of the refundable child tax credit, the current $1400 amount is indexed and the $2500 threshold for earnings is not indexed, so you sort of win-win both ways with inflation there. But reflecting, and that's to be compared with a lot of people talk about, for instance, indexing capital gains and the like. Well, of course, in order for indexing capital gains to be relevant in your life, you need to have capital gains and capital gains are generally largely accrue to the top 20, 10 percent of the income distribution.

0:20:46.7 AG: And so I would say in terms of thinking about how the tax code handles inflationary environments, I would say that's probably less of a concern for the members of Democratic caucus than things that affect the bottom half, but there are a couple of exceptions and they're important exceptions, the one that sort of springs to mind right away is the child tax credit. Obviously, the child tax credit has been something of a political hot button this year with the provision and ARP, and then its potential extension and expansion in the Build Back Better Act. And in the Build Back Better Act, the version that at least was marked up out of the Ways and Means Committee, the value of the child tax credit was indexed. Currently, the $2,000 value of the child tax credit is not indexed.

0:21:38.4 AG: Now, one observation, not to get overly political with Jeff over here, but the [2017 Tax Cuts and Jobs Act] did exacerbate this in some ways. No doubt about it, the TCJA increased the value of the child tax credit, and the child tax credit was not indexed before the TCJA went into effect, but if you think of the way the TCJA was structured in terms of its individual provisions wherein the child tax credit was increased, but at the expense of a personal exemption for a child, and personal exemptions for children were indexed prior to the TCJA. You sort of substituted a non-indexed child benefit for what was previously an indexed child benefit. So in that sense, by having a non-indexed $2,000 child tax credit, taxpayers are probably made somewhat worse off vis-a-vis law prior to the TCJA. I was sort of thinking about what are some other areas where members might have some concerns, and Marty, I don't think this one was in your article.

0:22:53.6 AG: But it occurred to me that maybe section 86 was an area where the taxation of Social Security benefits -- and there's a threshold in the taxation of Social Security benefits above which if your AGI is in excess of a certain threshold, then there's a certain measurement where they take half of your Social Security income, they add it to your AGI, and then a certain percentage of your Social Security income is taxed above that threshold, and it's not indexed, but it's an interesting example in that case, because what I understand is that was actually a deliberate policy designed in 1983. The thought being that the right answer was to have that income included, but to do that all at once would be something of a shock to Social Security recipients, and the idea being that this is something... By not indexing it, this will gradually get us to the right tax policy answer. And I guess I would say that that does speak to reasoning when you ask yourself sometimes, Well, why wouldn't Congress index one item and why would they index another and the like? And there are often different answers, sometimes it's just about cost. You want to reduce the cost of the bill.

0:24:16.0 AG: And that may have been the answer in the TCJA, of why the Republicans chose not to index the child tax credit knowing that they were replacing that value with an otherwise index personal exemption, but also sometimes it might be because not indexing the value is a way to sort of gradually lower tax, get the tax system more in line. Another example that comes to mind when I think of that is the home mortgage interest deduction.

0:24:47.6 AG: If you look at... You know what? I look back at the Camp bill in 2014, for instance, and I believe the Camp bill set the home mortgage interest deduction at $500000 and raised the standard deduction to $24000, and if you sort of do the math in a low interest environment, especially with no state and local tax deduction, which the Camp bill limited. It'd basically have the effect of eliminating the home mortgage interest deduction for the vast majority of taxpayers, and certainly, as home prices rise and as the standard deduction rises, that would be even more of the case. So obviously in the TCJA, it was $750000, there's still a $10000 standard state and local cap, but in the long, long run, as the standard deduction rises even further, and as the $750000 home mortgage interest deduction stays, of course, you could see that to the extent that you believe the home mortgage interest deduction is a deviation from tax policy, proper tax policy principles, you can see, well, maybe that's a reason why we wouldn't want to index it, it's a way to sort of gradually phase out of the system. I don't know, I can't really speak to the motivations of the TCJA, but that's one observation I have.

0:26:01.5 AG: So let's see, then the other question you asked is, how are policy makers thinking about tax as a tool for purposes of curbing inflation? Admittedly, tax policy itself is not the greatest tool here and tool in the tool chest. And the president has put out a plan and discussed ways his administration is looking like curbing inflation and the tax code does not play a particularly, you know, prominent role in that plan. I will say, sort of as a technical matter there is, you know, part of what the Build Back Better Act does, it has a drug pricing negotiation aspect of the bill and that of course, is you know, there is a significant tax penalty for firms that don't enter into the negotiations. So I mean that is a, technically that is the tax code playing a role in lowering drug prices, but not really what I think you had in mind in the question.

0:27:03.3 AG: Certainly, there are members who have talked about doing a gas tax conference, and yet then we've seen that happen in states in the like and there are certainly other members are talking about wanting to send checks out to taxpayers. And you can see why, you know, you meet with a constituent and a constituent tells you listen, I now have to pay $5.50 a gallon for gas, and here's my fixed income, and as a member of Congress, you think wow, wouldn't it be great if we could give this person more money? And you know in the individual case, wow, that would really help I mean, there's no doubt about it. If you know, I'm living on a fixed income and then you give me more money, and I am now able to buy more goods and services and you know, whether inflationary environment. But the problem is well what happens when you repeat that 300 million times? It's something of a different story.

0:27:52.5 AG: But I guess I would say, members are cognizant of that. And I think that the idea that... What the administration is proposing in the Build Back Better Act and what our members pass out. There's a real understanding that that we need to increase taxes to offset any tax decreases. And not juice aggregate demand any further. And so if you would think of it now, we could talk about the timing of these things and when they happen and obviously, you know, at least in the house-passed version of Build Back Better Act, a lot of the revenue, the tax cuts were upfront and a lot of the revenue increases were often the distance and, you know, but granted that wasn't when inflation was really top of mind for a lot of members. But I think the important thing is that any solution here and any sort of transfer of funds from, you know, into the hands of lower and middle-income taxpayers doesn't increase aggregate demand and probably the best way to do that is to make sure that there's a balance in overall, in terms of where we would get the funds from somewhere else, and I think that's exactly what our members are currently wrestling with, to the extent that they think the tax code is an appropriate vehicle to do that with.

0:29:14.4 CG: Excellent. Thanks. There's a lot there. And Jeff, I had initially crafted, I think a narrower question for you, but I'd like to give you an opportunity to sort of to respond as well, both on whether the TCJA was a contributing factor to inflation and some of the other things that Andrew mentioned, but also to...

0:29:33.5 Jeffrey Wrase: You can't change the rules of the game. And of course, it's not going to work.

[laughter]

0:29:36.9 CG: But then I'll keep to the question of...

0:29:38.1 JW: That's good.

0:29:38.5 CG: Whether or not to talk about the effect of spending on inflation. And did Congress overreact in this situation by providing too much stimulus and really drove inflation, drove where we are today?

0:29:51.6 JW: Yeah, no, and I appreciate being here a standard disclaimer. Nothing I say has anything to do with ranking member Crapo or the committee or anyone in Congress, or anyone in the United States, or the planet, quite frankly.

[laughter]

0:30:07.5 JW: This is Jeffrey's, it's all yours hearing and hold it attributable to me and that's what you're going to get. So, part of my interest in being here is to learn about what tax folks, tax lawyers think about inflation and the tax code and some of it... So, with respect to indexation, we can have 16 hour panel on that, quite frankly, you know, there's all kinds of discrepancies and as Andrew identified. Sometimes your objectives are multiple and you've got one instrument. So you might not do, what could be an optimal indexation scheme. I think sometimes I look at some of what people are thinking of in terms of tax policy and I think back. So I took a lot of economics classes, I'm a very slow learner. And taught a lot of economics classes to the perils of my students.

[laughter]

0:30:58.3 JW: And typically, when you think about inflation, first of all, you recognize, what are we talking about? It's not simply a price level increase here or there. It's basically persistent widespread increases in prices. Persistent is growth, is not just levels. So when I think of what I hear about in terms of tax policy response, you think we're generally in terms of aggregate fiscal policy, aggregate things that operate on aggregate, demand growth or aggregate supply growth, not necessarily levels. So I think that's important. But the textbooks that I learned from and then I taught from typically centered on monetary policy is the reactor to persistent and in our recent episode accelerating inflation and fiscal policy is not the sort of first place you go to look. And idiosyncratic fiscal policies, certain provisions are not the place that you generally think will be a cure-all for widespread price increases.

0:32:03.8 JW: So when I look back, I think, for [the Coronavirus Aid, Relief, and Economic Security (CARES) Act], that the economy shut down and basically, you know, that was a shock. We've got a very small sample to draw from, to see how we would respond fiscal policy-wise, but clearly people weren't able to go to work and needed income replacement, and so we responded quickly. I think often people say, "Well, fiscal policy needs to be on autopilot because, this Congress just is too slow to respond," and maybe there's some truth to that. But in this case I think there was a very rapid response. I know I didn't sleep well or at all for many weeks and that's not an exaggeration. So we were working hard to make sure that people could, you know, feed their families and support, what they needed to support. That was necessary. That was big.

0:32:57.5 JW: And then as time went on, there were bipartisan efforts. And I think over time it was necessary to continue to respond because there was still a need for labor market improvement. And the pandemic was still in place. And there was a lot of uncertainty about new variants and all of that kind of stuff. And the extent to which things were locked down or not, that continued. So there was continued, but I think more modulated, responses and attempts to get more targeted, maybe smaller increments, and to sort of take the approach of the thing that we're confronting is evolving. Let's let fiscal policy evolve along with it. We had the shock and awe, big shock that we responded to in a large fashion, then sort of like let's respond. We then went to early 2021. And so you look at that situation, labor markets, I think had begun to improve.

0:33:55.4 JW: We probably got down to six-ish unemployment rate, inflation was starting to percolate a little bit. I wouldn't say it was runaway but it started to percolate a little bit. So the American Rescue Plan contemplated and executed $1.9 trillion, I believe, of extra spending. A lot of it in my view was not necessarily targeted to the pandemic response need. I think there was a lot more involved in there. It was a very large shock to aggregate demand. It was an increase in aggregate demand of a large amount when at the time I believe the personal savings rate was 26.6 percent. And as Marty showed, there was a lot of sort of pent-up checking accounts savings and things like that. So people had had resources and then distributionally, I'm not going to comment. I don't know, but in the aggregate there was, there's a lot of savings.

0:34:51.7 MS: Yeah.

0:34:51.7 JW: And I think some of the stuff in the American Rescue Plan is also directed at... And perhaps properly, so I'm not going to comment on it. But toward relatively lower income people in the interest of economic stimulus, the idea being this sort of Keynesian stimulus notion of get resources to people who need it and people who have disproportionately low income and who have high marginal propensity to consume, which is to say for every additional dollar you get, you spend a lot of it. That's good for the economy. It stimulates demand if you're trying to stimulate demand. Yet when you're confronting a situation in which there are these supply issues, you have to kind of look at how responsible is it to execute $1.9 trillion into an economy that is having some supply issues. We're coming out of a pandemic.

0:35:43.7 JW: People are trying to figure out, we haven't had a shutdown like this, so how are we going to come out of it? How is the sort of pandemic evolving? And so you kind of have to look at what's going on and what people call supply chain issues. And I'm afraid that's becoming a little bit of a, an offramp for people to say like, well, there's a problem over here as there's a supply chain issue. I almost got here late because I had traffic and tried to figure out what room I'm in and all this kind of stuff. I had a Jeffery's delivery, supply chain issue.

[laughter]

0:36:17.8 JW: But that's kind of like, you have to drill in what, what are we talking about? So ports are congested. We have measures, the Federal Reserve has something on their Liberty Street Economics thing. It's called the Global Supply Chain Pressure Index. And they take there's something called the Baltic Dry Index. They look at shipping costs, which is a measure of like how strained is shipping capacity? And how much does it cost to get something from here to there? They look at a Baltic Dry Index, similar sort of... Sorry, Baltic Dry Index is a shipping index, the Hap X Index, some other stuff, but they're kind of trying to aggregate together a bunch of indicators of supply stresses.

0:37:01.9 JW: And if you look at those, if you look at like February, March, I think April was passed in and March of 2021, you look at those and, and the supply constraints were pretty darn present at the time. And they were growing, if I have my recollection correct. And there's a risk that's not true.

[laughter]

0:37:25.3 JW: But take a look at the index. I think there were indicators of significant supply constraints. And so you kind of would ask how responsible it is to throw $1.9 trillion into some economy that has growing supply issues rather than taking time to have a response still that you think is necessary and maybe more modulated and more sort of take your time.

0:37:51.0 MS: And Jeff, just to get to the perspective, TCJA was a big tax cut $1.5 trillion, but that was spread over 10 years. The ARP was $1.9 trillion.

0:38:04.1 JW: Yeah.

0:38:04.7 MS: All upfront.

0:38:05.5 JW: Yeah.

0:38:05.9 MS: So it's not really, it's a whole different amount of stimulus.

0:38:11.5 JW: Yeah. And so, similarly, we were kind of looking at state and local relief and I saw a bunch of numbers coming in as to why the state and local budget finances were going to signal arm again. And I was very skeptical of those numbers and those projections. But we get amplified numbers often in terms of advocacy. So, it's not unusual to get them, but filtering it out, it seemed like the asks were not consistent with what expectations were and no one could predict the future. So who knew that state and local budgets were going to turn out very well? But $350 billion was released kind of right away almost. I mean, there are two tranches, but a lot of resources released right away rather than kind of saying, "Well, let's see how things roll out in terms of state and local budgets and modulate, let's check in again in four months, five months, six months." So I think that there was a...

0:39:14.6 JW: A large demand in pulse when supply was of showing signals of being restrained. I don't think inflation has gone at the Consumer Price level from roughly 1.4 percent at the beginning of 2020, to most recently at 0.3 percent, because there has been that much of a portion that changed in the amount of greed or the amount of monopoly power or exploitation, I think those are rationales that I don't think are present. It boils down to supply and demand growth in my view, not levels, but also I think people should pay attention to how widespread things have gotten so initially, even around the time that ARPA was passed, inflation was starting to percolate, but it hadn't yet been very widespread, so I kinda looked through... Whatever the CPI number's about, you have to go to and you should gather the family to do this, go to table 1 which shows the CPI by expenditure category, and table 2 that shows the detailed expenditure categories, anything from eggs to children's footwear, so… Look, in March of 2021 it was pretty much concentrated in energy, energy was high, gas prices fuel oil, and stuff like that, but there wasn't like runaway inflation in coffee, fruits, things like that.

0:40:57.5 JW: In April of '22, we're now... This is inflation. This is set-in inflation, and we've got anything from pipe gas service to seafood is double-digit, coffee is double-digit, stationery is double-digit inflation. I can't believe that monopoly power in the stationery sector has gone up by so much. You look at laundry, 10 percent, 10.3 percent rate of increase in prices, I think the laundry service is fairly competitive, I don't see massive monopoly power, at least in my community. So I think that's a diversion, clocks and lamps up 10.3 percent. I wasn't aware that... First of all that there was monopoly power, but second of all, I'm not aware that there's... What are the supply chain issues, so certainly input prices for clocks and lamps makers may have increased, but I think when people try to take that off or maybe they need to dig in and say, What are we talking about with the supply chain issues? Is it that the clock handle inputs are higher price because they take a lot of iron? I don't know, but people should be, I think, a little bit more careful.

0:42:09.1 CG: So that leads us nicely to Hana down there. I wanted to ask you, and I'm very interested in your perspectives on this of what is the retail business feeling right now? We can talk about inflation from a theoretical standpoint all day long, but what are the businesses really feeling... And then the second part of that question is, what would the retail industry like to see done to control inflation?

0:42:32.5 Hana Greenberg: Yeah, thanks for having me. The same caveat of my comments barely even apply to myself, you can mostly blame Larry Summers for a lot of them frankly. And it's been a challenge and if you... But if you dig into the inflation numbers, you see a few major outliers driving a lot of... A lot of... A lot of our inflation right now, you see it obviously in energy and use of cars, I think Martin's slide about the two-point difference, once you just take out, once you take out food and energy is pretty telling. For us, a lot of our products do come on boats over the ocean, and it's hard to de-link the cost of energy from the cost of goods, and there are in fact a lot of different... And unique supply chain challenges facing different industries across the... And they're different every time. One people are talking about right now is a pretty good example in this infant formula.

0:43:29.0 HG: What we saw happen was the same thing that happened with toilet paper in March of 2020, and that's people bought a lot of extra infant formula. That means that people are going to use it over a longer period of time, so the production of that infant formula went down in the short term. After that, as it rebounded, we were short on infant formula. There are only three producers... There are only three producers who supply almost the entire domestic infant formula supply, and then from there, you see a recall in Michigan and then the store shelves are empty and there are people gouging on third-party sellers on the internet. That happened all over the place and little, in different ways, maybe there wasn't a recall in Michigan, maybe you have goods stuck in Shanghai right now, the China zero-COVID policy is another good example. These things cascade one after another after another, and retailers, like their consumers, are trying their best to keep filling those gaps. It's hard when there are some obvious domestic policies that we could do to alleviate those problems.

0:44:40.6 HG: For example, there's a 17 percent tariff rate quota on infant... For on imported infant formula, tariffs are taxes. The reality is, is we know that we don't want to release... The reason that Andrew's members know that they don't want to send another check to everybody, but people talk about lowering the gas tax, 'cause we know those direct taxes on consumers. Those are things that can be felt. There's a reason the Peterson Institute says that we could shave one point off of our CPI by just getting rid of 301 Tariffs. This is the reality, these are direct taxes that we could release and we could have an impact on our lowest income Americans. The reality is that tariffs and sales taxes are some of our more aggressive taxes, so that's something we should really consider from a tax perspective.

0:45:26.3 HG: It may not be exactly how we think about taxes, but it's certainly something within the government's purview. There are also other real supply chain issues. We were happy to see Congress take action on ocean shipping reform, where companies have acted with impunity. There have been supply chain, there have been supply chain tracks across the board, but there are little things we can do and across the board on the supply chain side that really can take some of that pressure off of retailers. The other supply shortage is the one that Martin started with, and that is the labor supply shortage, and there's a lot of reasons for that. Three million people retired early, millions of mothers never re-entered the workforce, and a million Americans frankly are dead.

0:46:09.5 HG: The other reality is we are 20 years into a creeping, a lowering and lowering amount of immigration into this country. And we are not going to with the rates of childbirth in this country where you can't buy, or you can't buy infant formula on the shelves, really do anything about that. There are policies that can deal with our labor supply shortage, with our supply chain shortages -- childcare policy could put some of those mothers back into the workforce. That's something that we'd be interested in seeing. It's important to do these things in a way that is increasing supply and not increasing demand, however, in an inflationary environment, which makes tax not necessarily our preferred route with which to do these things, but there are certainly options out there in the government's purview that could go a long way to resolving a lot of these problems.

0:47:05.1 CG: Thank you. So before we...

0:47:06.4 MS: Well said.

0:47:07.2 CG: You want to respond and I also want to open up the concept of tariffs to the panel. I'm interested to get your opinions on whether we should get rid of tariffs, but Jeff I'll let you respond.

0:47:15.7 JW: Yes, we should. I think, so in no way did I mean that we should not look at policies that can be helpful. I think it's basically for overall inflation, it's kind of like if I'm painting a house and somebody comes to me and says, "Hey, I've got a wrench that operates on spark plugs." I'm kind of like, "Well, that's great, but it doesn't solve the objective." So if the objective is to execute on general inflation, I think fiscal policy is hard to come up with things aside from major aggregate demand movements. But that's not to say that you shouldn't consider policies that are useful at various margins that could set the stage for future improved inflationary performance, things that enhanced productivity, things that as Andrew stated, or what was alluding to that, that help families, weather inflation in a better way. So there's no sort of monetary policies best designed for inflation and therefore fiscal policy should go home and take a vacation. That's not what I was trying to indicate.

0:48:21.1 AG: All the economics religion is of course we object to all tariffs, one famous economist said imposing tariffs is like putting rocks in your harbor. Why do you want to do that? But I'm glad you referenced the Peterson Institute study, which was really remarkable. And this is a bipartisan complaint because Trump raised the tariffs and Biden refuses to get rid of them for their own political reasons. But you're raising the prices of consumer goods not helpful in this time. So it really is almost an automatic good thing to do. And would it be of significant order of magnitude.

0:49:12.6 AG: Marty, I am sort of curious about this and this is where I get to make the disclaimer that I am not an economist and via... But I am just sort of, and this is a genuinely a question from the perspective of an economist, how does a tariff differ from something like an excise tax on gasoline because it is sort of, those are opposite takes.

0:49:38.5 MS: Well, the only difference and you know, is tariff applies only to imports and the gas applies to all, but the economic effect is on goods that usually affect... Low income people more because low income people spend more money on their food -- a larger proportion of their income on food, low income people spend a larger proportion of their income on fuel. So the particular inflation that we have right now is redistributing income. The pandemic was redistributing income, and we already had a redistribution, income distribution problem beforehand. So a lot of folks and I'm fortunate enough to be insulated from this every day and I think we all, a lot of people in this room are, but I think a lot of people are really hurting and it's easy to kind of forget. I mean, just, do you know what the price of a gallon of milk is? Do you know what the price of a gallon of gas is? If you don't, you're probably a... And I don't remember myself, but if you don't, you're probably not hurting that much.

0:50:49.2 JW: Or you take public transportation.

0:50:51.6 MS: Or you take...

[laughter]

0:50:55.9 CG: So the other question I wanted to ask, actually, I have many questions I'd like to ask, but I did want to ask on the idea of full expensing for businesses and how much of a solution is full expensing given that inflation... The code doesn't account for inflation with respect to depreciation.

0:51:16.2 MS: Well, in ancient times when I was in economic school, inflation and its impact upon the tax code was a very central theme. And one of the biggest themes for, and probably one of the main motivators for the Reagan tax cuts of... That was Ronald Reagan, 1981 was the effect of inflation on depreciation. And it was an enormous effect, which was a great, big, it was a large deterrent on capital formation. Which brings us to the general idea here of what can fiscal policy do? If you look at the supply side, and you're going to hear this from Republicans and it makes total sense, you should be increasing productivity, you should be increasing the supply, you should be increasing capital formation. And even from the Dems, you can be hearing, we increase childcare. These are all... Or education. All these are all things that are going to increase our supply -- and get rid of those darned tariffs. These are all things that'll help increase our supply. Unfortunately, all of them take a while.

0:52:26.6 MS: And, not that there's anything wrong with that, because we do have a bias against long term solutions in our political system. So I'm not, I wish we would do all of those things. But I don't think they're going to be the inflation solver. On the demand side, there is something the tax policy can do, but you can't say it in public: You should raise taxes. I mean, unelected officials at the Fed have to raise interest rates because the elected officials in Capitol Hill do not have the nerve, and again, it's only Politics 101. They're not going to raise taxes six months before an election. But that is the economics solution to this problem. And so all we can hope for given the political reality is that they're not going to make things worse by proposing some sort of tax cuts at this or large tax cuts that would, make the situation worse. Although it would alleviate the immediate pain for individual families, especially for families at the low end.

0:53:31.8 MS: So now you say, you might say to me, and you'd be right: You give me nothing here. What am I going to do? Well, you have to tread a thin line between stoking more inflation or preventing a recession. But that line may be so thin that it doesn't exist. That is if you want to get rid of inflation, we may have to have whether you want to call it a recession or you want to call it Stagflation or you want to call... I will definitely call it. It's going to be slower growth. That's what the Fed is doing when it's raising interest rates. And that's the same thing that Congress could do if it raised taxes, which of course it's not going to do. So, we do have a demand side solution to inflation, a tax solution, but it's not politically viable. And we do have a supply side inflation, a tax solution to inflation, but it's a long term, solution. And if... But back in the 1970s, I read in a book that Richard Nixon in 1970 imposed wage and price controls, which was an economic disaster.

0:54:40.8 MS: He just, like, no, you can't do it, period. And then in 1974 Gerald Ford, sort of at the other end of the spectrum to try and close he tried to use the bully pulpit and said, "Okay, everybody just promise not to raise…" -- They had the little win buttons. And so He went from this total command economy solution to this like, "Oh, please don't do this solution." But there was something in the middle that was being, that got a lot of attention, which was called tax-based income policy. And what this was, was a very complicated scheme where, Congress would give tax benefits to employers and to who did not raise their wages by significant amounts and made, also compensated employees, if they didn't get significant amount. Now you could just imagine how difficult it is to draft something like that.

0:55:41.2 MS: This was a very popular idea for all these years, because there were no other solutions out there. And the best thing that people could say about it was, "Well, it's the only thing we can think of right now." There is, no... We were lucky all these years with low inflation, with low interest rates that we could have large deficits. And when you had a problem, just increase the deficit, you-- Give spending cuts, give, for low income folks or to increase productivity. But we don't have that now. And so it's not a, I'm sorry, it's not a pleasant picture, but for people who are looking for an easy way out I certainly don't know where there is one.

0:56:26.0 CG: Yeah, Go ahead.

0:56:26.6 AG: I suppose I wouldn't be doing my job at this point, if I didn't point out that Senator Manchin who is, by all, accounts reported publicly, the senator who is kind of the linchpin to enactment of any kind of budget reconciliation bill, has made it pretty clear that, in his mind, the reconciliation bill should be deficit reducing, and those talks are definitely still ongoing. So I... Marty, we can talk about what our side that will be afterwards as to whether or not Congress would pass a bill that reduced the deficit, or that raised taxes to any significant degree. But it's certainly something that perhaps to, to folks' surprise is very much a central part of the conversation right now. And Senator Manchin to his credit is saying he wants to do this because he's concerned about inflation. And so that could certainly be a possibility, I have some reactions to some of the other things, but do you want...

0:57:32.9 HG: Yeah. RILA... And we would support... I represent a lot of the large retailers in America. We do believe that the wealthy and profitable should pay their fair share. That's something we've supported in the past that we said so in November, when the House passed the Build Back Better agenda. And I just kind of want to add as a multi-generational tax professional in my family, that when all you have is a hammer, everything looks like a nail. There's two sides to fiscal policy in between 2016 and 2019. We increased our federal expenditures, not our spending by a half a trillion dollars on an annualized basis. So Marty's point is stark. We've pulled all of the levers. We pulled the levers when we had full employment, and there are a lot of opportunities that are missing now as a result of that.

0:58:19.6 MS: And, there are other things going... You mean, it's okay. Let me get really pessimistic now. The... Compared to what's going on in Europe, we have it quite easy here. We are self-sufficient prime in our own energy production. So when oil prices go up we don't feel it like the Europeans are feeling it. Also, we may have to increase defense spending a little bit. I did a back of the envelope calculation, and if you look after the Vietnam period, and before the Reagan buildup, so I'm trying to look for it, like what's a normal cold war amount of defense spending, and you compare it to our current level. Well, I get 1.5 percent of GDP, which is... What's... It's like $500 billion. So it's...

0:59:19.3 MS: And then we have to do... We're talking about building new infrastructure so we're not dependent on Russian gas. It's going to cost a lot of money over a long period of time. So those are separate from... Those aren't really supply chain issues. They're more national security issues that may come to the forefront. If we are going to fund them without tax increases, that means we're going to increase the deficit. Well, the deficit is already on a rising path. That's even before we take into account the rising interest rates, which we know are coming. On May 23rd, the CBO will release its new budget forecasts. I think it's going to make a lot of headlines when you see how much the debt, which has been pretty much under control for the last decade or so is not going to be under control anymore.

1:00:22.0 AG: Could I…?

1:00:22.3 JW: Any other happy... When do we start the happy hour?

[laughter]

1:00:26.4 CG: And we need it right now. Go ahead.

1:00:27.5 JW: I think, again, clarity and sort of what we're operating on is important. So if it's the inflation in the here and now, I think we're also confronting rising probabilities of recession. And so raising taxes into a recession is... I studied economics in the same stone age that you did, and I don't recall sort of raising taxes being the prescription for when we're confronting higher recession probability. Longer term and with respect to discussions ongoing I think, certainly, deficit reduction is of interest to both sides. And there will be tax discussions and expenditure discussions in play, I think. And that's a longer term scenario to set for what would the future environmental foundation be for whether or not we have inflation staying or returning. If it returns to where the Fed was worried in the past [chuckle] where we're hitting the zero, lower bound and not having enough inflation, we have to, I think also, take that into consideration. And I don't think raising taxes going into a recession is a good idea though.

1:01:48.6 MS: Again, it's this knife edge we're walking on and if we're going into recession, okay, well, then we don't really... We're not really worrying so much about inflation and then we should be cutting taxes and being stimulative.

1:02:01.5 JW: Unless it's stagflation.

1:02:03.4 MS: Flip... If... Well, that's the next step... Yeah, if the flip side is we're not in a recession, and we're just inflating, well, then we need to un-stimulate, raise taxes or raise interest rates. If we have the golden combination of stagflation of both at the same time, well, you're up the creek without a paddle. There's really... You really have to do something nuclear... Nuclear is a bad word. Very.

[laughter]

1:02:35.3 JW: But then there're...

1:02:36.1 MS: You have to do something very drastic.

1:02:37.5 JW: Yeah. But there are also folks who continue to argue that the real financing costs for government is quite low. And so there's no reason why not to consider additional deficit and debt financing. And then, part of me looks at recent experience and almost kind of looks like a modern monetary theory exercise, which, if you've ever studied that, it's kind of hard to figure out how it works coherently and how the dynamics work. And if you ask people who write in that area, they get very angry if you ask. But we did have a lot of expenditure, and then in MMT often is basically, Well, if expenditure... There's no constraints to expenditure or deficits. The only constraint is if we get inflation. If we get inflation, what do you do? You raise taxes to grab the resource potential back from the private sector so that they can't spend it and that's kind of what things are scarily looking like.

1:03:43.7 CG: So one question that came in, and we'll turn in that and do some audience questions now. So if anyone has some please feel free to go to the microphones. Someone just asked if the government spends tax increases and government spending is a component of final demand, how would such increases cool inflation?

1:04:03.5 JW: Sorry. [chuckle]

1:04:04.8 CG: I had to read it three times too.

1:04:06.9 MS: If...

1:04:07.5 CG: If the government is spending, so they have a tax increase and the government takes the tax increases, and the government is spending those and the government spending is part of the overall demand, how then does the tax increase actually cool inflation, because the demand is still there?

1:04:24.4 MS: It's a good point. And the point is...

1:04:26.8 AG: Balanced budgeting?

1:04:28.9 MS: I'm say... What I was saying, the only and I didn't mean to imply this, but when in fact, the only way to reduce aggregate demand is to increase taxes. And that's not true. The... Of course, the other way is to cut spending. And so the questionnaire is... Questioner is making a good point, which is, if you raise taxes, and you just use it for more government spending, then the net effect is zero. And that's not really going to help anything. So thanks for the question.

1:05:00.6 JW: Interestingly, just to return to what you were talking about CBO, Ranking Member, Crapo had asked for some information from CBO previously about inflationary effects on the budget. It turns out that sort of, like there's there's more expenditure, because some of the stuff is indexed. And then there's more intake, there's more revenue because of higher nominal gains and things like that. Turns out that the spending and the intake is kind of a wash, and the all the action is in interest rates and the action is big. So it's a small amount of interest rate increase means like a trillion dollars.

1:05:31.8 MS: Whoever told Governor Crapo to write that letter was right on the mark. It was a good idea. The...

1:05:37.3 JW: Did you say governor?

1:05:40.9 MS: Did I say governor?

[laughter]

1:05:42.8 CG: Yes.

1:05:43.2 JW: He's a senator.

1:05:44.3 MS: Senator, sorry.

1:05:45.1 JW: No, that's okay. He should be both. [laughter]

1:05:48.0 MS: But what did come out of that letter and I don't think got enough emphasis was it's all in the... If you have inflation, well, government spending automatically goes up. Government taxes automatically increase, but what really sticks out are you're going to have higher interest rates, which we almost... We all know we're having and they're going to go up a lot, and that's going to be a big driver for our larger deficits into the future. This was already baked into the numbers before COVID. It was aggravated by COVID. It's aggravated by the inflation, and now it's aggravated by Fed monetary policy and the events in Ukraine. So who know... Feel sorry for CBO 'cause you have to... You have to predict the number, which almost certainly will be wrong, and you'll be criticized for no matter what, but there's no way they're going to come out with a number that says, "Everything's going to be wonderful, and don't worry about it." Governor Crapo... [laughter]

1:06:49.4 CG: So another question that came in relates to the labor shortage, and it says if declining labor productivity will contribute a higher inflation over time, is there some way for the tax code to encourage participation in the labor force? So I'd be interested in panel's thoughts on that.

1:07:06.1 AG: Well I guess I would say that the EITC, for instance, is a provision that is by-- designed to encourage participation in the labor force. One of our policies in Build Back Better and the bill that we marked up out of committee and the provision that was passed out of the House is to narrowly increase the EITC for workers without dependents. That in particular, that EITC as currently in the tax code doesn't... Is not even enough to offset the payroll tax. So the net effect of the tax code is for a fairly large subset of workers to continue to tax them into poverty, and so that provision is one that would, presumably have an impact on labor force participation rates. It's a good question. I actually was sort of wondering, 'cause I was thinking about looking at that chart, which I think is really, really telling sort of the difference between job openings and labor supply and sort of comparing that with your staff in terms of what folks have in their checking accounts and the like, and sort of wondering... It's an endowment effect in some way.

1:08:34.4 AG: And what happens as time goes on, presumably people are not living on their $1,400 ARP check year after year...

1:08:44.4 MS: That's over.

1:08:44.9 AG: And does that go down by virtue of the fact that we're talking about something that was really a one-time cash infusion. I'm really just asking you, I don't really know.

1:08:57.1 MS: Well, we can go back to the causes, resignations are the number one. And can you get the [inaudible] folks back into the workforce, I don't... There might be some tax incentive, targeted tax incentive you can think of. I don't know what the data is, I don't know enough about childcare, but it would just seem that... I know my neighbor across street, she used to have in-home childcare, but she quit her job and now... And of course, she fired her daycare provider. That's two jobs I saw disappear. That's not an aggregate statistics I can... But I imagine that providing more childcare would be a large benefit.

1:09:45.2 HG: There is a section in the Code, 45F, for employer-provided childcare, it's very lightly used, it's an area that was in the president's initial Build Back Better plan, ranking member Brady and ranking member Walorski have some ideas around it, so did the Bipartisan Policy Center, there are ways and ideas out there that I think people are starting to think about in a really tight labor market, about ways you can make it easier for people to get to work, if there are incentives to bring people back into the workforce, there's room to do things like that for lower workers by working with them, lower wage workers, by working with employers.

1:10:20.9 AG: Yeah, I was remiss in not talking about childcare too as a big component of this, especially... There's 45F... But importantly, in the ARP and then subsequently in our mark up in the Build Back Better Act, we expanded the child independent care credit as well, designed to... That was basically a subsidy through the tax code, it comes, of course, with all the problems that Marty now is talking about in terms of... Well, that's cash delivery, that's increasing aggregate demand and the like, whereas I think what Hana is referring to is something that maybe is more on the supply side potentially, but we can have a conversation about supply and demand.

1:11:06.8 MS: What we need is some clever hill staffer to think of tax benefits that provide short-term supply side benefits.

[laughter]

1:11:19.1 MS: If you get that childcare up and running quickly, if you can reduce... If you increase oil production quickly, which I gather you cannot do...

1:11:30.2 JW: Could I take a nerd time out... Sorry just one thing.

1:11:32.6 Speaker 6: I'm only a questioner so you're not taking any time from me.

[laughter]

1:11:36.5 JW: Oh, sure. So on the job openings per unemployed person. This is just a data question, I don't know the answer, but I think it's worth thinking about. Part of what we've been doing and responding to the pandemic is, a lot of the measurement is distorted because things are... The structure of the economy has been shocked tremendously. So I've heard from people who advertise for workers and now we're in more of sort of "remote work is okay" kind of setting, and some have said, whereas I used to advertise in the local whatever media, paper in our stone age days, Marty. But now they're saying, with remote, I am advertising in five, six, seven different locations or different states, and so I don't know how that shows up in the data, so I'm not making a point here, I'm just sort of like, it'd be interesting to find out sort of like is the measurement picking up something that's sort of exaggerating the amounts of jobs available, and I don't know the answer.

1:12:35.8 MS: Well, just very briefly, there's something called frictional unemployment between... Even if you take two weeks off between jobs and you do the whole... Count the whole economy that's like millions of people, and to the extent you can reduce those frictions and streamline the matching, that would be a fine thing to do.

1:12:52.8 JW: Yep. Sorry, sir.

1:12:53.0 Speaker 6: Marty I never thought of retirement resigning until I've heard your speech this afternoon.

[laughter]

1:13:00.1 Speaker 6: And maybe if things get better, I will come back.

1:13:02.2 MS: Don't do it, we need you.

1:13:03.4 Speaker 6: I've really two sort of unrelated issues. Number one, the panel talks about what the government can do, what legislation is needed. What if we had no legislation, no new changes in what we spend, what we have, for two years. I would like to comment on what would be the scenario there. The other thing is this, I'm a trustee of a private not-for-profit university with 23,000 students. And we're very dependent obviously on students taking on student debt. If the student debt is canceled or partially canceled or whatever, how does that affect the economy?

1:14:06.7 CG: That's an interesting question. God, I would like the panel to answer it.

1:14:10.6 MS: I like the first question better.

[laughter]

1:14:12.2 S6: To answer anything you want or nothing.

1:14:15.8 S6: No. After the 1986 Act, the chairman of the Ways and Means Committee was Dan Rostenkowski and one of the things he said was, "Well, let's take a few years off. Let's just have everything just settle down." And that lasted for about 30 seconds because Congress likes to fiddle around. If we don't do anything, it's, 'cause... Supply chain problems, obviously the private sector has a lot of incentive to solve them themselves. I'm guessing those are going to take care of themselves. Even the tougher issues about energy production. We've seen the swings go back and forth and eventually we're going to have lower prices again. But on the other issues, I don't know. Does anybody else want to say something?

1:15:06.4 AG: I guess I'll say this, and I assume that you're referring to just a tax legislation and not to, say, like an appropriation bill which is pretty necessary. But or at least a continuing resolution of some sort to fund the government. But in terms of tax legislation, the reality is that the way tax legislation has run for the past 20 years or so, is that the Congress has set up a series of cliffs after which provisions expire. And I guess the question becomes, if those provisions expire would those be in... If we're looking simply at inflation, never mind any other aspects of the policy, would they be inflation-inducing or inflation-solving? Most of the cliffs are things that would be tax increases to businesses. Now it may be that you look at them provision by provision. So for instance, if you look at 163J, the deduction for interest expense, where the deduction's about to be at the end of the year is going to be much harsher.

1:16:23.3 AG: You could... One could make an argument that the productive supply of businesses is affected by their debt service and how much they're willing to borrow to build out their productive capacity. One could also make what I view as an equally cogent argument that businesses, how much interest they're paying on their preexisting debt is simply just going to be a return to their shareholders. And that would increase aggregate demand. This is a short term, long term play here. And so it's not entirely clear. But I guess the point is... Your question is interesting, is that, "Why does everyone have to do something?" A lot of times politicians just want to do something 'cause they want to show that they're solving the problem, but there are actually action causing events that members of Congress kind of need to face within the next year or two. And so at the very least there are legitimate questions about whether or not they should be acting on them.

1:17:30.5 MS: Well, I just briefly, I'll add, you may get your wish because...

1:17:34.1 S6: Well, I didn't wish for anything.

[laughter]

1:17:37.3 MS: But just...

1:17:37.9 S6: I just asked a question.

1:17:39.7 HG: Last time we saw ourselves in this situation, you did see nothing happen for a couple years.

1:17:44.0 MS: Right. But if, say for example, Republicans take the house, well, we're going to have gridlock. And as long as you don't have a trifecta in both houses and at the White House, it's very hard to get legislation through. So maybe nothing will happen and maybe we'll let the TCJA just expire and...

1:18:06.5 AG: I think...

1:18:08.1 S6: And just on the other issue, no one has an answer for that.

1:18:11.9 JW: Oh we have...

1:18:12.0 S6: The issue of student debt.

1:18:13.9 JW: We have answers. We're just not going to tell you them.

[laughter]

1:18:20.3 JW: But I think on the inflation and elements of tax policy, I think it's reasonable to say what would be tax policies that could be conducive to a less inflationary environment for whatever the future holds and whatever shocks are there. Things to increase productivity, for example, and things like that. In terms of operating on what we're facing right now, I'm struggling a little bit to... Some of these tax policies are sort of level sets and what... You could be taking things that are affected by inflation and filtering through them. But I don't fully understand, and maybe this is just the lack of deep thought process, but how sort of a change in the setting of an individual tax policy will amplify or dampen inflationary pressures. Inflationary pressures are growth animals. And so the stuff that's filtered through these level sets will show inflation or disinflation, but those things I don't see as amplifying or dampening inflation. That is to say, I don't think I can take provision X, Y, Z, change its level and say that that is going to reduce rates of growth of stuff. Maybe the effects of it could, but -- no. There's open questions there as to sort of how these things can be viewed as immediately addressing inflationary issues, I'm not sure I was quite coherent but...

1:19:51.4 MS: These people standing...

1:19:53.1 CG: Let's go over to this side of the room for a question.

1:19:55.4 Speaker 7: Hi. Well, more of a, I want to plant a seed. And your comment, Marty, about your neighbor... Your anecdotal comment about your neighbor across the street who had an at-home caregiver and the mom quit her job, so therefore the caregiver lost her job, I wasn't going to get up out of my chair, but that prompted me to... I'm the mom of three, and I have recently caught the tax bug, and so I'm not a seasoned tax practitioner like many of you, but I have been a mom for quite a few years, and I've seen so many women who are professionals and who for childcare-related reasons, frankly, the cost of childcare, have left the workforce and that reduces their family's discretionary spending, frankly, it reduces the women participation in the workforce, and you've seen all of the studies about diverse teams make better decisions. Right, that's one of our goals here.

1:20:44.8 Speaker 7: My brilliant idea... So childcare is considered a non-deductible personal expense, and anyone who had a young child during the COVID shutdowns when all the pre-schools were closed, and you saw on Zoom these kids pestering their parents while the parents were trying to work. Childcare is not a personal expense, shouldn't be for dual working parents or for single parents who don't have an at-home childcare provider. My suggestion, and I've thought through it, I'm not going to give you a dissertation, but I have thought through it very thoroughly, and I would be very happy to continue with this discussion offline is to make childcare expenses deductible for single parents or for dual income parents. I've thought through certain limits, but it gives parents sort of autonomy in decision-making, it also will encourage more on-the-books paying of childcare providers, I think it will help legitimize that profession, it's an extraordinarily important profession. I know that everybody jokes that your oldest child is like your guinea pig and your mistake, right? Because you do everything wrong. Well, if you better legitimize the childcare profession, you get more well-trained, more well-experienced providers. I think it's a win-win. I think that it would encourage workforce participation, I just think it's a win all the way around. I said I wasn't going to give a dissertation, so I'll shut up now.

[laughter]

[applause]

1:22:06.4 MS: Would you run for President? [laughter]

1:22:11.1 AG: No your comment was really well taken and sorry.

1:22:16.6 MS: No, no. I think it's a very good comment, I think... Go ahead.

1:22:20.7 AG: Oh yeah, I think your concerns there are partially what motivate the changes that the committee proposed of the child independent care credit, which was, it has I think multiple rationales, but one of them is certainly that childcare is an expense that you need to incur to re-enter the workforce. And I understand that your point is probably, we should really be thinking of this as essentially a business expense, it's an expense of producing income and... That's interesting. I even wonder if there's some history about the possibility of whether or not that's ever been proposed before.

1:23:03.2 Speaker 7: I haven't looked into it personally but I suspect that there is history, and I suspect it has something to do with at the time, women were to be at home and were not to be in the workforce, right? And that was a decade... Generations ago, and things have changed, but the tax policy hasn't kept up. On the point about the credit... The childcare credit, points were taken, but I do think a difference should be drawn between poverty reduction measures and making sure provisions are given for low-income children and families with children, versus childcare for work participation because the childcare credit, if I quit my job, I'll still get the... The childcare credit's not encouraging me, incentivizing a person to participate in the workforce, you get it, whether you participate or not?

1:23:51.9 AG: No, no, oh. That's fair, right? There's no requirement to... Actually I think technically, there is. Isn't there?

1:23:58.7 S7: On the, on the, on the earned income tax credit...

1:24:00.7 AG: I think technically section 21 says it is an expense for childcare so that the individual can work, but...

1:24:06.7 S7: On the earned income tax credit, if both parents are working, you actually may phase yourself out of that credit. Right?

1:24:12.2 AG: Right.

1:24:12.8 S7: And so if you're allowing the deduction for the childcare expenses, I just think...

1:24:18.9 S7: Yeah, I think it gets your... It could. I just think it would be...

1:24:22.4 AG: I'd be happy to talk about it...

1:24:23.6 S7: I'm sorry, I said.

1:24:24.4 AG: No, no, no, no. It is...

1:24:25.6 MS: These are the kinds of ideas we need.

1:24:27.3 S7: Can you tell I'm passionate about this?

1:24:29.5 HG: This is the sort of conversation that... I'm a great resigner myself, I've had a couple of careers in the last year, but in a number of places, you've just... This is a conversation that didn't use to be a workforce question, it's not something people... People used to think it was a personal question, and I think that... Especially in a tight labor market, especially after everybody watched moms juggle kids on Zoom and try to do their jobs. I think this is something that there's a lot more...

1:24:54.4 S7: And then you get into mental health. Right? Like the stress of doing all of that, right, and...

1:25:00.7 HG: Having to actually see it in your...

1:25:01.0 S7: Yeah, exactly.

1:25:02.2 CG: Yeah, okay, yeah, thank you. I'm going to encourage you to write an article about that for Tax Notes.

[laughter]

1:25:08.2 JW: That's what I was thinking.

1:25:10.4 CG: That's a really good debate that I think is one that we should have. So I would definitely encourage that. So let's go over to you...

1:25:16.5 Carl Johnson: I'm Carl Johnson from Austin, Texas. I live about 400 yards away from the Goodwill that this week announced that they were giving away... Price was Roman portrait statutes, and of course, if those would descend, I went by and asked if they had another one and they didn't. So if those things would, if those things would only descend, I'm sure it would solve all our problems and no trouble at all. I have a stupid question about this overhang of checking accounts, about how Ukrainian wheat, Russian wheat, Russian are off the market, and in fact, if you have long-term bonds, sell them short, bad to the utter despair of really sell your bonds short.

1:26:00.1 CJ: And you too could be a billionaire if you sell enough of them short. I do have the following... I've been telling all of the deficit hawks for years that borrowing for the government is a profit center because they borrow it under the rate of inflation, meaning that every single day, tick, tick, tick, they make money in relation to buy back, the deficit borrowing shrinks far more than they have to pay. And then only ideologues, in fact, would ever be opposed to deficit spending who cans and can't simply because, "Are you opposed to the government making profit?" And then I suddenly realized that all of your terrible news is going to make that even more so. It seems like interest rates don't meet inflation, much less the tax of inflation over the long term. And in fact, what I've been saying of reassurance to all the deficit hawks are going to be more so. Suddenly, the government borrowing rates seem to be... Likely to be below the rate of inflation and it'll even be... This I mean to be a stupid question. I really do not know why it is not the case that we're still in the position in which government borrowing is a profit center. It's not a cost. It's the way to make money and that is my stupid... Not so short, but my stupid question of the day.

1:27:37.7 MS: Everything's on the table.

1:27:41.9 JW: We have kind of safe haven status or we're always the recipient in the stress times of a lot of investment into treasuries. And therefore, we have relatively low rates but, the more you push the envelope, the closer you get to the high risk of fiscal crisis where people don't regard the treasury securities as a safe haven asset. And so the question is, "How far do you push until the risk is real and imminent?" And no one knows the answer to that. Japan's got high, massively high, debt-to-GDP, we're starting to push into very high debt-to-GDP, the World War II kind of levels. And so the question is, "How much additional risk do you want to take?" And what generates a fiscal crisis? Who knows? What generates a bank run? What generates all sorts of more psychologically motivated... What generates inflation expectations? It's not clear, there's a lot of psychology in there. If inflationary expectations become an anchor, we could have wage-price spirals, we could have runaway inflation. If sort of the confidence in the U.S. fiscal future precipitously goes away, we could have massive spikes in interest rate. These things happen non-linearly and quickly. We just don't know when that happens and what sort of debt-to-GDP.

1:29:18.2 CG: Well, we are almost... We're actually three minutes over time. But we're going to take one more question 'cause happy hour doesn't really start until 6:00, so...

[laughter]

1:29:27.4 JW: I thought we just had a happy hour.

1:29:28.9 CG: No, we had Marty's news, so it wasn't as happy.

1:29:34.9 Speaker 9: I'm not going to be as much of a donor as Marty, but I had some pushback. You mentioned that corporate power and corporate consolidation and corporate proper seeking wasn't really an influence in inflation. You mentioned clocks and you mentioned laundry. Do you know of the company TSMC?

1:29:56.1 MS: No.

1:29:56.9 Speaker 9: So, TSMC is the largest producer of silicon semiconductors. They make 90 percent of semiconductors in the entire world. They're based out of Taiwan. They make five, four, and I think they're making three nanometer silicon conductors. 90 percent of the silicon conductors is what they make. Clocks need silicon chip conductors. Even if you have a shortage of silicon chips, clocks are going to go up 10 percent because consolidation of power, because there's not enough silicon conductor chips. I like to play computer games, you can't buy a PS5, you can't buy a high-end graphics card. You buy a new car, you have to wait six months in order to get some of the high-end silicon conductor chips. Second, you mentioned laundry. Unilever and Procter & Gamble, they're one of the largest laundry manufacturers in the United States. There's a interesting article by Business Insider that's accounted 76 percent of inflation to corporate profits. And then if you go into the article, the earnings call for both Unilever and Procter & Gamble, they said "Yes, well... [Recording ends.]