The Capital Letter

A Low Road to Higher Taxes

Amazon CEO Jeff Bezos at a news conference in Seattle, Wash., June 18, 2014 (Jason Redmond/Reuters)
The week of June 7: blurring income and capital to raise the tax take, inflation, oat milk and much, much more.

However much some on the left might like to deny it, there is a legitimate distinction between capital appreciation and income, and however much some of them might understand it, failing to account properly for that distinction presents too good a propaganda opportunity to be passed up.

And so when ProPublica, “an independent, nonprofit newsroom that produces investigative journalism with moral force” “obtained” and then, in an article by Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, publicized some of the details of “a vast cache of IRS information showing how billionaires like Jeff Bezos, Elon Musk and Warren Buffett pay little in income tax compared to their massive wealth — sometimes, even nothing,” much of the secondhand reporting of their story, not to speak of the ProPublica article itself, followed an all too predictable narrative.

But first some background. The data, Eisinger, Ernsthausen, and Kiel explained, which consisted of “the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years” was handed over to ProPublica “in raw form, with no conditions or conclusions.” The information provides “an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.” Presumably it does (or could do) the same with respect to all the “thousands” who had their data pilfered.

ProPublica’s reporters then “spent months processing and analyzing the material to transform it into a usable database.”


We then verified the information by comparing elements of it with dozens of already public tax details (in court documents, politicians’ financial disclosures and news stories) as well as by vetting it with individuals whose tax information is contained in the trove. Every person whose tax information is described in this story was asked to comment. Those who responded, including BuffettBloomberg and Icahn, all said they had paid the taxes they owed. . . . Musk responded to an initial query with a lone punctuation mark: “?” After we sent detailed questions to him, he did not reply.

Musk wins again, I reckon.

Eisinger, Ernsthausen, and Kiel:

One of the billionaires mentioned in this article objected arguing that publishing personal tax information is a violation of privacy [but] we have concluded that the public interest in knowing this information at this pivotal moment outweighs that legitimate concern.

Ah yes, ends and means.

In a statement ProPublica’s editor in chief and president jointly commented:

Many will ask about the ethics of publishing such private data. We are doing so — quite selectively and carefully — because we believe it serves the public interest in fundamental ways, allowing readers to see patterns that were until now hidden.

“Patterns” (the different treatment of capital and income) that were not “hidden” to anyone with a basic awareness of the way in which the tax system works, patterns that are the result of decisions taken by democratically elected legislators, and which generally reflect basic tax principles that have applied for a long time and, with exceptions here and there, across much of the world (once in power, communists preferred outright confiscation).

Eisinger, Ernsthausen, and Kiel may object to those principles and, despite a disclaimer that what “it would take for a fundamental overhaul of the U.S. tax system is not clear,” would probably prefer to see the introduction of some form of wealth tax (a form of taxation that, as the authors concede, has been tried and, by some, abandoned elsewhere, even if they understate the extent of that abandonment), which would, almost by definition, capture unrealized capital gains within its net.

The authors have the honesty to mention that where such wealth taxes exist, they are on “a small scale” (I should add, that so far as I am concerned, any wealth tax should, both for practical reasons and as a matter of principle, be rejected). Perhaps it’s worth noting that the now-scrapped Swedish wealth tax on, say, a Jeff Bezos (one of ProPublica’s targets) would have peaked out at about 3 percent in the late 1980s, assuming that he was unable of take advantage of various available reductions. I suspect that quite a few of those in the U.S. who want to see the taxation of unrealized capital gains, a grotesque idea on many levels, might not be satisfied with 3 percent, at least when it comes to the super-rich.

ProPublica’s editor in chief and president concede that:

There is also a legal question here, and we want you to know we have taken it seriously. A federal law ostensibly makes it a criminal offense to disclose tax return information. But we do not believe that law would be constitutional if applied to bar or sanction publication of a story in the public interest when the news organization did not itself remove the information from the control of the IRS or solicit anyone else to do so — as we did not.

I suspect they are right about that. What’s more, I would not describe that as a “loophole,” even if that is a word that the authors of the ProPublica report use several times (for example, “in the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes . . .”) in their own work. The law is the law.

The law is unlikely to look so favorably on those who leaked the information.


Attorney General Merrick Garland told lawmakers that investigating the source of a massive leak of taxpayer information behind an article by ProPublica will be one of his top priorities.

Good. Let’s see how that goes.

Writing on Marginal Revolution, Tyler Cowen asks:

The information was stolen illegally, yet on Twitter so many intellectuals were crowing about the disclosure.  (Did some of those same people condemn the theft from Biden Jr.’s laptop?  How many of them, in other contexts, will defend strong rights of privacy?  I guess that right is for everyone except rich people who create a lot of jobs and output.)

ProPublica acted unethically, and in fact nothing fundamentally new or interesting or surprising was learned from their act as accessory.

The real story is how the numbers were obtained, and here I fear the worst.  A single rogue agent can’t just pull up the files of rich people on demand, as I understand the system (if so, Trump’s return would have leaked a long time ago).  So this was probably a coordinated effort of some sort, is it crazy to suspect the Russians having some role in it?  Who else has the will and ability?  (China has the ability, but the “coddled rich people” meme is not one they are looking to push.)  What other breach of national security has occurred in the process of unearthing this information?  How was it done?  Are conspiracy theories becoming more true these days?

It is stunning to me how little consideration these issues are being given and how poorly so much of our MSM has performed.

Stunning? Not really. Meanwhile, you can read some of the New York Times coverage here.

And here’s Edward Luce in the Financial Times:

The unanswered question about ProPublica’s leak is where it came from. The news site does not know its origin but has corroborated the data against other sources. A reasonable suspicion is that it was hacked by an entity that does not wish US democracy well. No single IRS officer would have access to all this information.

ProPublica also observes (correctly) that “outside of the U.S., Sweden, Norway and Finland make public every citizen’s tax returns.” This owes a great deal both to the very Nordic concept of, to use the Swedish term, Jantelagen, an anti-individualistic approach to life difficult to reconcile with core American values, reflected also in the “right to roam” across private land contained within the Swedish Allemansrätten.

America is not Sweden. What those who leaked the tax information and those who published it have done, however ironically, risks undermining the administration’s current proposal that the IRS be given even more power to peer into individuals’ private information. If the IRS cannot be trusted to safeguard the secrets with which it is already entrusted, why give it more?

Turning to the substance of the ProPublica report, we read that:

The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

Well yes, that’s because those “gains” are largely meaningless until they are realized. Ask those who were worth (on paper) millions during the dot-com boom, and then next to nothing thereafter. In the event a tax on unrealized gains had been in force and levied at that time would they have been given refunds on the unrealized gains “accumulated” during the bubble, but wiped out the year after?

And there’s something else. We are frequently told by those on the left and their fellow travelers that short-term investment horizons are a discreditable feature of “casino capitalism.” Yet the prospect of being taxed on unrealized gains penalizes those investors and business-builders who are in for the long haul, qualities, we are told, that ought to be encouraged.

Eisinger, Ernsthausen, and Kiel:

America’s billionaires avail themselves of tax-avoidance strategies beyond the reach of ordinary people. Their wealth derives from the skyrocketing value of their assets, like stock and property. Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell.

To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.

We’re going to call this their true tax rate.

They can call it “true.” But that does not make it so. Make the case for a wealth tax, however misguided, by all means, but do not pretend that (possibly temporary) growth in unrealized asset values is, in any real sense, “income.” To be sure, it is true that billionaires can, as the authors highlight, borrow against the value of their assets, but then, so, on a vastly smaller scale, can anyone who takes out a home equity loan. The argument that a loan (whether big or small) which, like all loans, must be repaid is, in some respects, a form of income and thus can be used as the justification for imposing a tax on the asset on which it is secured does not rest on the soundest of logical foundations.

There’s much more in the ProPublica piece to consider — read the whole thing — but little of it is any more persuasive. I noted, incidentally, a sideswipe at the Trump tax overhaul:

In 2018, [Bloomberg] reported income of $1.9 billion. When it came to his taxes, Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration, charitable donations of $968.3 million and credits for having paid foreign taxes.

What those Trump-derived deductions might have been I don’t know, but charitable donations have long been regarded as a legitimate tax deduction (and not without reason) and so have foreign tax credits, which are essentially a way of avoiding double taxation on the same income.

A spokesman for Mike Bloomberg commented (to their credit, Eisinger, Ernsthausen, and Kiel refer to it and provide a link to the full text), that:

Mike Bloomberg pays the maximum tax rate on all federal, state, local and international taxable income as prescribed by law.

Taken together, what Mike gives to charity and pays in taxes amounts to approximately 75% of his annual income (over 95% of which is ordinary income). In other words, he currently only keeps about 25 cents of every dollar he makes. His effective tax rate on any income not given to charity is approximately 45%. If he stopped donating to charity, he would keep about 55 cents of every dollar he makes.

Mike has given $11 billion in his lifetime to charity, for which the U.S. allows a deduction to encourage giving. The tax benefit that he gets from the charitable deduction is a fraction of what he gives to charity and he views any of this tax benefit as more money to put towards charitable causes.

He scrupulously obeys the letter and spirit of the law. Mike also pays taxes in more than 30 countries, 35 states and a myriad of cities where his company does business, including New York which has among the highest income tax rates in the country. And as the majority owner of a global business, he pays significant overseas taxes which are not double taxed by the U.S. under federal tax law and international tax agreements.

The company repatriates all profits back to America every year . . .

The appreciation in the value of Bloomberg’s unrealized assets (relying, doubtless, on their highly debatable methodology, Eisinger, Ernsthausen, and Kiel calculate that “between 2014 and 2018, Bloomberg had a true tax rate of 1.30%”) does not rate a mention in his spokesman’s statement. And nor, whether as a matter of law, or even hypothetically, should it have done.

Then there is the claim that “Bloomberg managed to slash his bill [in part] by using deductions made possible by tax cuts passed during the Trump administration.” Even if we accept that as true, perhaps it is worth noting, as Demian Brady wrote for Capital Matters back in February that:

Recent data published from the Internal Revenue Service find that the share of income taxes paid by the top 1 percent of filers increased under the first year of the TCJA, while the share of taxes paid by the bottom 50 percent of filers decreased.

These findings come straight from an IRS report that breaks down the tax share of income earners for tax-year 2018 — the first year of taxes filed under the new provisions. Among its changes, the TCJA lowered tax rates, nearly doubled the standard deduction, and expanded the child tax credit.

The IRS data show that the top 1 percent of filers, those with adjusted gross income of $540,009 or higher, paid 40.1 percent of all income taxes. This amount is nearly twice as much as their income share.

Despite the rate reductions under the TCJA, the tax share of the top 1 percent increased compared to 2017. In fact, the National Taxpayers Union Foundation has compiled historical IRS data tracking the distribution of the federal income tax burden back to 1980, and 2018 was the highest share recorded over that period . . .

Unsurprisingly, Eisinger, Ernsthausen, and Kiel also turn their attention to the estate tax, grumbling about trusts and charitable giving, but what really caught my attention was this:

The notion of dying as a tax benefit seems paradoxical. Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code.

“Widely recognized by experts across the political spectrum as a flaw in the code.”

Some on the left may object to this step-up, but to say that this provision, which is by no means confined to the U.S., is recognized by experts across the political spectrum as a flaw is nonsense.

To take just one instance, here’s Daniel Pilla, writing in Capital Matters in April:

The president vows to eliminate the so-called “stepped-up basis” rule for inherited property. The president refers to this as a “loophole” that allows the rich to game the system. It is no loophole. In fact, it is a specific rule of law under Internal Revenue Code §1014. This law was not a part of the TCJA. It has been on the books since 1954 but is only now under attack by Democrats looking for ways to take more of your money.

Suppose your parents own a home worth $200,000. They purchased the home decades ago for, say, $50,000. . . . If you inherit the home after their death, your basis is equal to the fair market value of the property as of the date of death — in this example, $200,000. See: Code §1014(a)(1). Now if you sell the property for $200,000, there is no capital-gains tax because there’s no gain (sale price minus basis equals gain).

This is what we refer to as “stepped-up basis.” And the rule absolutely does not apply only to “rich people.” The operation of Code §1014 is not controlled by one’s annual income, the value of the inherited asset, or the total value of one’s estate. It applies across the board. Every American taxpayer enjoys the benefit of stepped-up basis on inherited property.

If Code §1014 were repealed in its entirety, all inherited property would be taxed on sale at the capital-gains rate. In general, the gain would be calculated on the difference between the sale price and the price at which the deceased person paid for it (plus any capital improvements that add to the cost basis). To go back to your parents’ home, if they paid $50,000 for it, and you sold it for $200,000 after their death, that $150,000 would be subject to tax. And that example might not be as extreme as it seems. It’s not unlikely that your parents would have held on to their last home for many years.

One consolation, however, is that the White House appears to be contemplating exempting the first $1 million in unrealized gains from these new rules, a limit which, if left unchanged, will likely be eroded by inflation over the years, if not outright reduced or eliminated. Moreover, you can expect the tax bill to be calculated at a much higher rate than those currently in effect . . .

Eisinger, Ernsthausen, and Kiel conclude as follows:

Buffett put it in 2011: “There’s been class warfare going on for the last 20 years, and my class has won.”

That’s imagery designed to conjure up images of greedy plutocrats and hardworking blue-collar folk. In reality, however, this article is just another salvo in the attempt by one section of the elite to wrestle power (and what flows from it) from another. That the result would result in severe damage to the economy and to the aspirations of millions is, it seems, beside the point.

The Capital Record

We released the latest of a series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 21st episode David was joined by Dr. Lacy Hunt, one of the foremost economic minds alive today, to unpack the debate over monetary inflation and the impact of government debt on economic growth. Lacy delivers some hard truths about where we are, how we got here.

And the Capital Matters week that was . . .

Back to the 1970s (and not just when it comes to inflation)

Jon Hartley recalled Free to Choose:

In May, Bob Chitester, producer of Milton Friedman’s famous Free to Choose PBS TV series and Free to Choose Media, died at the age of 83. Last year marked 40 years since the original airing of the series, which was first released in January 1980, toward the end of the Carter administration, in response to liberal economist John Kenneth Galbraith’s The Age of Uncertainty BBC series released in 1977. Free to Choose, in its original run on PBS, played an important part in making Friedman a household-name economist, and it has since attracted millions of views online.

The series, which defended the virtues and welfare-enhancing abilities of free-market capitalism that helped set the stage for Reaganism, was launched during an era of rising inflation and big government. Indeed, the supply-shock era of the 1970s was a setting that all too eerily bears resemblance to today’s COVID-19 economic environment amid President Biden’s spending binge, the current “transitory” uptick in prices, and gas lines following the Colonial pipeline cyberattack. (The latter, in fairness, pales when compared with the OPEC embargoes of the 1970s and is hardly the fault of the president.) For this reason alone, everyone should consider watching (or rewatching) Free to Choose . . .

Energy Policy/Climate Change

Travis Nix:

With gas prices soaring across the country, politicians should be working to fortify American energy independence and ensure that oil companies are treated fairly compared with other industries. Senator Bernie Sanders and Congresswoman Ilhan Omar must have missed the memo. They’ve introduced a bill to make drilling for oil more expensive.

The “End Polluter Welfare Act,” as they’ve dubbed it, would eliminate a critical tax provision that eases expenses for American oil and gas companies drilling domestically. This bill would eliminate American jobs, reduce wages, and make America more dependent on energy sources in the war-torn Middle East, in addition to raising gas prices . . .

Dominic Pino:

“In this house, we believe,” among other things, “science is real,” reads the sign in front of your most insufferable neighbor’s house. The idea is to signal sophistication and allegiance to the Party of Science. Your most insufferable neighbor wants everyone driving past his house to know that he isn’t one of those slack-jawed Neanderthals he reads about in the New York Times from far-out places like central Pennsylvania or South Jersey. No, he’s pro-science, and he voted for Biden and wrote a stemwinder of a Facebook post back in March praising the president when he announced, “Science is back.”

Your most insufferable neighbor was also happy when Biden canceled the Keystone XL pipeline project back in January. At long last, TC Energy, the Calgary-based energy company constructing Keystone XL, threw in the towel yesterday and announced it was abandoning the project. Rather than wait out another American presidential administration and hope the next one would allow it, TC Energy is cutting its losses and moving on . . . it seems segments of the Left have fooled themselves into thinking politicians make decisions based on science. They pretty much never do, and for good reason.

Take the question of Keystone XL. Scientists say that climate change poses a threat to the planet. Scientists have done countless studies demonstrating that in various ways, whether they look at sea levels, temperatures, greenhouse gases, etc. Scientists have found that the Alberta tar-sands oil that Keystone XL would have transported is especially bad for the environment.

Scientists also work for energy companies. ExxonMobil, ConocoPhillips, Royal Dutch Shell, BP, Chevron, et al. are some of the largest employers of scientists in the world (and they pay them fantastically). To find oil reserves (which is a lot harder than you might think), they need earth scientists. Pipeline engineering, too, is a highly technical scientific field. Scientists developed technology to detect minor pipeline leaks from outer space, which is actually much faster than detecting them from Earth. The technology uses satellites that analyze the vegetation near pipelines and detect changes in vegetation growth that would indicate hydrocarbon leakage.

If your political position is “pro-science,” what do you do? There are brilliant scientists doing outstanding work on climate issues, and there are brilliant scientists doing outstanding work for petroleum and pipeline companies. That’s why Biden’s executive order didn’t use “pro-science” reasoning and instead made it about diplomacy. Science is of very limited use in making this decision because it doesn’t care about politics. Water freezes at 32 degrees and boils at 212 degrees no matter who’s president . . .

Me on oat milk and other matters:

It is hard to deny that certain forms of environmentalism, often (but certainly not exclusively) when climate change is involved, take on strong religious characteristics, frequently of a distinctly millenarian nature.

However hard it may be to deny that eminently self-evident fact, plenty do, which made it refreshing to read this in an article in the Financial Times by Judith Evans:

“As the oat milk brand Oatly spread across the world last year, its chief executive, Toni Petersson, said his product — which boasts lower greenhouse gas emissions than conventional dairy — was not just another drink.

“For people today, sustainability is more of an ideology. It’s a structured belief system, almost like a religion . . . but it’s relied on what the science says,” Petersson said. “And I think we as a company have a licence to take a place in that ideology.”

The science . . .


Robert VerBruggen:

new ProPublica story begins (emphasis mine):

“In 2007, Jeff Bezos, then a multibillionaire and now the world’s richest man, did not pay a penny in federal income taxes. He achieved the feat again in 2011. In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes.

Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros paid no federal income tax three years in a row.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.”

What?!?!? That’s bad. Tax data are supposed to be private — and zealously guarded — and yet “thousands” of people’s information got out . . .

Veronique de Rugy on Biden’s proposed global minimum corporate tax:

It started with the Biden administration arguing that other countries should join the U.S. in adopting a global minimum tax. This is how the White House pitched the proposal:

A minimum tax on U.S. corporations alone is insufficient. . . . President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens.

This is a perfect definition of a tax cartel with the explicit intent of suppressing tax competition from countries with lower (and I would argue better) tax systems. And the G-7 nations have now reached an agreement on a 15 percent global minimum tax. But to these government officials, the real value of this agreement is that it will make it easier to bully, or at the very least, to exert strong political influence over some 135 countries to get them to join their seven-country tax cartel.

Banking & Finance

John Berlau:

As America shows its resilience and recovers from a devastating pandemic, many American families and entrepreneurs need credit to rebuild their lives and livelihoods. One would think the last thing the nation’s lawmakers would want to do is impose legal uncertainty to hamper the flow of credit to those who need it most.

Yet this is just what Congress seems poised to do. The Senate voted last month to overturn the “true lender” rule, which clarified that smaller banks could partner with outside firms to offer credit using the same legal framework under which big banks have long issued credit cards. To ensure that credit flows to deserving American families and small businesses, the House must reject similar attempts to kill the rule through a Congressional Review Act (CRA) resolution and must leave the Trump administration rule in place . . .

Dominic Pino:

The Wall Street Journal reports that bank are telling their corporate customers to stop making deposits. Yes, you’re reading that correctly: Banks don’t want more deposits.

The basic idea of banking is to take in money from deposits and lend it out at interest to borrowers. But with interest rates near zero, banks hardly make any money doing that, so taking in more money from deposits doesn’t do much for them . . .

The Internet and Regulation

Alden Abbott and Andrew Mercado:

A founding father of the Internet, Vint Cerf, attributes its astonishing economic success in no small part to “permissionless innovation,” the freedom of Internet developers to try new business models and offer new services without obtaining prior government approval. The clear signal government sends by not overregulating the market is a reason the Internet today is a staple in our lives. Any calls for Internet regulation should be met with a healthy dose of skepticism, and before acting, the government should ensure that proposed Internet regulation is going to provide more consumer benefit than harm.

In a recent essay, Facebook vice president for global affairs and former U.K. deputy prime minister Nick Clegg claims that U.S. Internet “regulation is overdue” and proposes bipartisan congressional action in four areas. Two of his broad proposals deal with clarifying rules for the removal of illegal content by Internet platforms and enacting federal privacy legislation. These proposals may have some merit but need to be fleshed out.

His other two legislative proposals, however, should be rejected. First, his endorsement of a new federal “digital regulator” with broad powers would stifle innovation and allow established companies to keep potential rivals out of the market. Second, his call for Congress to regulate speech designed to “mislead people and undermine public trust” and speech involving the use of social media in elections is particularly pernicious. Having the government police speech on the Internet is a recipe for widespread suppression of competing viewpoints and violates the First Amendment’s guarantee of freedom of speech . . .

Woke Capital

A different take from Sean-Michael Pigeon:

Sometimes it seems like everywhere you turn, a company is taking another political stance or harping on a new buzzword. Hollywood, Big Tech corporations, and even car companies feature slogans that feel brazenly partisan. Many on the right have reacted to this new phenomenon by asserting that Americans don’t want an openly political marketplace. However, as more people find purpose and belonging in their work, conservatives should feel encouraged that “do-gooding” can be a profitable and desirable business model . . .


Kevin Williamson:

The disruption of production has contributed to higher housing prices (lumber prices hit an all-time high last month, with mills unable to keep up with demand) and an enormous run-up in the prices of some goods, notably vehicles and luxury items, as well as shortages in other goods (such as firearms ammunition) that can be difficult to lay hands on at any price. When that gets sorted out, it should — should — take the pressure off some prices, including in such important sectors as houses and cars.

But that may not be enough to lower the current momentum toward higher prices. As economists sometimes put it, the question before policy-makers is whether the inflation we are seeing is sticky, meaning that higher prices are likely to stay with us for a long time rather than being a short-lived blip. Sticky inflation is a problem because it can stick around even when economic growth slows or stagnates, a condition that persisted in the 1970s and gave us the term “stagflation.” Nobody much enjoyed stagflation.

Some people did enjoy the countermeasures that were deployed against stagflation — sky-high interest rates. There are still among us people of a certain age who fondly remember getting 14 percent on their Treasuries back in the 1980s. It was a good deal if you were rich and neither working nor looking for a mortgage.

And that’s the long-term reason to worry about inflation. When the Fed drives up interest rates to slow down inflation, it generally raises borrowing costs throughout the credit markets — including, ultimately, the cost of financing our national debt. Debt service will cost the U.S. government about $380 billion this year, accounting for 8 percent of all federal spending. For perspective, that is about what is spent on undergraduate instruction at all of the nation’s public colleges and universities combined. It’s a big chunk of change — and it’s big with interest rates that are very, very low by historical standards. If the cost of financing the debt goes up, it could easily blow a Pentagon-sized hole in the federal budget. Money that gets spent on debt service is money that isn’t available for other things, whether that’s the ordinary heavy expenditure for Social Security and Medicare or emergency measures in the face of some unknown future crisis. The more you owe, the fewer options you have . . .

We also held a webinar on inflation featuring Kevin Hassett. You can see it here.

Philip Klein:

For the last decade or so, as the nation’s debt grew and the Federal Reserve kept pumping money into the financial system, there were periodic warnings about the risk of inflation. Yet these fears were never actually realized. As a result, in the face of growing signs of inflation, many people — including the ones who happen to run our nation’s fiscal and monetary policy — aren’t taking the current threat all that seriously. This is worrisome, because in reality, a growing body of evidence — major economic indicators and announcements from small and large businesses — suggests that inflation is quite real.

Consumer prices leapt 5 percent in May year-over-year after gaining 4.2 percent in April, with some sectors experiencing gains not seen in decades. The growth of the money supply has been off the charts. A survey by NFIB, the largest advocacy group for small businesses, found that 48 percent of businesses reported raising prices, compared with just 5 percent who reported lowering prices — the widest gap since 1981. In addition, Factset found that in the first quarter, more S&P 500 companies brought up inflation in their earnings calls than any other quarter since the data firm began keeping track in 2010 . . .

Our chart guy, Joseph Sullivan, on food price inflation and political instability:

As no country is immune to COVID-19’s disruptions in the food-supply chain,” I wrote in Capital Matters on June 2, 2020, “food inflation is now again on the prowl.” Now, a year later, its prowl has turned into a pounce. According to data released by the United Nations on June 3, 2021, global food inflation has jumped to a height unseen in roughly a decade. Last year, food inflation was a worry for many government officials. Now, it’s materialized into a real foe that many are grappling with. And this foe, these latest numbers indicate, has grown to the point that it poses a real threat to the stability of governments . . .

Conservatives against Big Business

 Robert H. Bork Jr:

Rachel Bovard has a well-written piece in The American Conservative that argues for those of us on the right to rediscover our true tradition of using antitrust law to stand up to powerful concentrations of market power. By the time you finish reading her piece, it will seem as if aggressive antitrust action is as Republican as splitting rails and running an underground railroad.

But conservatives should reject her approach. Throughout her piece, Bovard focuses solely on a handful of Big Tech companies for their content decisions that anger conservatives. On this narrow concern, she endorses a purported return to a conservative stand against bigness that would, if enacted, mean the end of capitalism as we know it in America.

If that sounds a bit hyperbolic, consider the two leading antitrust bills in the Senate today . . .


Ingrid Chung on Jeff Bezos’ planned trip to space:

Bezos’s trip to space would, if successful, prove to be a remarkable demonstration of the vitality of free enterprise and the successes achievable through the privatization of space exploration. NASA’s decision to outsource space-exploration projects has contributed to the expansion of the private space industry. The possibility of lucrative government contracts has incentivized corporations to invest resources and efforts, with considerable success, in the development of space technology to remain competitive. Such development is also prompted by the desire to spearhead the new and potentially enormously profitable industry of space travel.

Among the leading space companies, Bezos’s Blue Origin is not the only one taking long strides forward. Elon Musk’s Space X had announced plans to launch the first all-civilian mission to space in February. Virgin Galactic’s founder Richard Branson is allegedly attempting to reach space before Bezos does by securing himself a seat on a test flight scheduled to take off over the Fourth of July weekend. Another space race appears to be on the horizon — only this time, it is among corporations instead of nations. Consider this another reason to endorse the privatization of space exploration — a space race among nations could put polities at odds; a space race among corporations encourages innovation and progress . . .

Finally, we produced the Capital Note, our “daily” (well, Tuesday–Friday, anyway). Topics covered included: France fines Google, an hour-long web outage, bearish Bitcoin, a primer on digital-ad exchanges, Biden’s proposed tax cartel, Apes and Clover, Japan’s debt difference, corporate virtue signaling (exceptions may apply), textual investment, the G-7’s agreement on digital taxes, May’s inflation numbers, the EU’s fine on Amazon, Glenn Hubbard’s suggestion for international tax authorities, inflation, corporatism, risk and space flight, billionaires and value creation.


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