Thought of the Week:
Earlier this month, as I sat in my corner spot on the couch, scrolling through On Demand and Netflix, looking for another series to binge watch, my wife said, “You know, we really need to start reading again.” As usual, she was right, and although I read a ton for work, I haven’t been reading as much as I should or even as much as I once did. I used to love reading biographies of historical figures, books about early America, and even the random John Grisham, Elmore Leonard, or David Baldacci novel. But somewhere along the way, it just became way too easy to watch a show we had DVR’d, get caught up in the 24/7 news cycle, or scroll through social media. With all that in mind comes the first ever The Washington Connection book review from the libertarian CATO Institute. It’s Ryan Bourne’s The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy. The book asks a number of policy questions, including: was inflation’s recent spike exacerbated by corporate greed; do rent controls really help the less fortunate; are U.S. health care prices set in an untamed marketplace; and do women get paid less than men for the same work and do they pay more than men for the same products? According to the book, market prices are under siege, and the war on prices is frequently waged with damaging government price controls and harmful central bank monetary mismanagement. In fact, the book notes that bad policy is too often propped up by widespread, misguided public beliefs about the causes of inflation, the effects of price controls, and the morality of market prices. The book breaks these complex issues down into separate sections―inflation, price controls, and value―and brings economic theory and evidence to present day debates. For example, it concludes that:
- Recent inflation was caused by excessive macroeconomic stimulus, not corporate greed or “supply shocks” such as the pandemic or war in Ukraine.
- Politicians have blamed inflation on business and encouraged a “war on prices” via damaging proposals against “price gouging,” “junk fees,” and “shrinkflation.”
- Federal, state, and local governments already cap rents, interest rates, and prices, delivering price controls that create shortages, lower quality products, and black markets, which harm low-income communities the most.
- Both the “pink tax” (women paying more for similar products) and the “gender pay gap” (women being paid on average less than men) largely reflect choices families make, not business “sexism.”
- Uber-style dynamic pricing, far from being something customers should fear, may be beneficial to consumers across a range of sectors.
Whether one ultimately agrees or disagrees with the book’s conclusions, at the very least it provides an insightful foundation for policy discussion, which is absent from today’s sound-bite heavy political conversation. Even if The War on Prices isn’t your cup of tea, the next time you reach for the remote think about cracking open a book…I’m going to try to…unless the Orioles are on.
Thought Leadership from our Consultants, Think Tanks, and Trade Associations
Capital Alpha’s Review of President Biden’s “Remain in Mexico” EV Tariff Policy. This week, the White House announced a new round of Section 301 tariffs targeting Chinese-made electric vehicles, solar photovoltaics, batteries and battery components, steel and aluminum, semiconductors, and medical supplies. The announcement was long expected and comes as no surprise. However, what the press coverage missed is that the tariff announcement is only a first step. It is one thing to tariff Chinese-made EVs that originate in China; it’s another thing to tariff EVs made by Chinese manufacturers in third countries such as Mexico, Canada, EU nations, and other third countries. President Biden is seeking pre-emptively to block or stop imports of Chinese EVs that might come to the U.S. from Chinese-owned plants in Mexico or anywhere else. The announced tariffs will not do that but serve as a warning shot. To achieve their end, the Biden administration will need new legislation from Congress; expect to see work on legislation begin, but don’t expect a bill to pass Congress until next year, after the election.
Eurasia Group Sees Geopolitical Radicalization Causing Political Disruption and Raising Business Risks. A new radicalization of political, economic, and commercial attitudes has placed a spotlight on a broad spectrum of views with the potential to disrupt the global trading system. Unlike prior conceptions of radicalization that focused narrowly on terrorist activity, the reframing considers a more expansive set of behaviors as radicalization. Today’s radicalization is diffuse and derives from major shifts in well-established public opinion as well as the political realignment away from the center and toward the poles. For business, radicalization is a symptom of a political landscape in flux that cannot be ignored. Logistics firms, supply chains, and energy facilities are emerging as prime targets for operational disruption by actors adopting asymmetric conflict tactics. Consumer and retail companies will remain on the front lines of attitude-based shifts in buying habits, with associated impacts to their stock prices and capitalization tables. Going forward, rising radicalization will bring exposure to far-left and/or far-right policies on regulation, taxes, tariffs, boycott movements, calls for divestment, reputational risk, operational disruptions, and legal action, which will only make “risky business” environments more treacherous.
Observatory Group’s Short-Term Outlook for Fed Policy. At this point, there is no case to be made for a September move unless inflation and economic activity turn down sharply. Although April’s core CPI data, which showed a modest slowing from earlier this year, keeps alive the possibility of a rate cut in 2024, that’s all it does. April’s core increase of 0.3% is still too high to be considered a month that contributes to a pattern of benign inflation. The Fed needs a persistent pattern of inflation data consistent with returning to target before it will signal that a rate cut is on the table. Persistence now means at least five months in the minds of many policymakers, and the lack of urgency means a cut will not come as soon as possible. There is an acceptance at the Fed that the 2024 data to date makes no case for a rate cut. In fact, the case for a hike is more advanced than the case for a cut. For now, the Fed is maintaining its baseline that the next move will be a cut—it views its policy stance as tight and the recent inflation data as a sign of temporary stickiness rather than the true underlying picture, but that view is increasingly fragile among Fed policymakers. The only clear message from the central bank now is to be patient and stay on hold. The market sees any move in June as off the table and low odds for a July cut. As such, the Fed has no need to intensify its guidance. Without economic weakness coming into the picture, the case for a cut will take time to reemerge, and September is awfully quick given the Fed’s professed patience, embarrassing reversals on policy guidance, and uncertainty about inflation dynamics. At the same time, the alternative scenario of core inflation stuck above 3% can no longer be dismissed, meaning that as of now there is no case to move as soon as possible on either scenario but rather than bide time to gain confidence in one inflation scenario over another. A complete probability distribution of the FOMC’s rate outlook now includes rate hikes as well as cuts, and those hikes would not be on the far edge of the distribution scale. While the odds of a cut are still considerably higher than a hike, guidance now is to do nothing and wait. This is so even before considering the political sensitivity around starting or restarting a rate cycle before the November election. The Fed would move rates if there is an urgent case to be made, otherwise, the election calendar is just one of many reasons there won’t be a rate move in September.
“Inside Baseball”
President Biden’s campaign has intensified its outreach to older voters, with volunteers organizing bingo games in swing states and running ads during daytime shows, like The Price is Right, popular with seniors. The effort is a bid to capitalize on polls showing Biden leading former president Trump among those 65 and older. Seniors are a coveted voting bloc, boasting the highest turnout rate of any age bracket, and having sizable populations in battleground states. In fact, seniors are more important than ever this year as they offer Biden the chance to offset losses from younger voters frustrated by his handling of the Israel-Hamas war and other issues.
In Other Words
“Sometimes when we listen closely to Israeli leaders, they talked about mostly the idea of some sort of sweeping victory on the battlefield, total victory. I don’t think we believe that that is likely or possible,” Deputy Secretary of State Kurt Campbell shedding doubt on Israel’s Gaza strategy.
“It’ll be entertaining, informative. Like the two old guys on the Muppets,” Sen. Romney (R-UT) on the scheduled presidential debates.
Did You Know
Hosting a presidential debate can be a boon for a university. While hosting a debate might cost a school a few million dollars to update facilities and provide security, past hosts estimate the attention is equivalent to $45 million to $50 million of paid advertising.
Graph of the Week
The Conference Board’s Measure of CEO Confidence increased to 54 in Q2 2024, from 53 in Q1 (a reading above 50 indicates more positive than negative responses). The rise marks the second consecutive quarter the measure is above 50, a sign that CEOs are cautiously optimistic after two years of despair. CEOs’ views of the economy have shifted over the last year. In the last survey, just 35% said they anticipate a recession over the next 12-18 months, down from 72% in Q4 2023 and 90% in the first half of 2023. However, positivity is lukewarm: 30% expect economic conditions to improve over the next six months, down from 36% in Q1, and barely above the 26% that expect conditions to worsen.
