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Economic inequality is one of the most significant issues facing cities and entire nations today. But a mounting body of research suggests that housing inequality may well be the biggest contributor to our economic divides. Thomas Piketty’s influential book, Capital in the Twenty-First Century, put economic inequality—and specifically, wealth inequality—front and center in the global conversation. But research by Matthew Rognlie found that housing inequality (that is, how much more expensive some houses are than others) is the key factor in rising wealth. Rognlie’s research documented that the share of wealth or capital income derived from housing has grown significantly since around 1950, and substantially more than for other forms of capital. In other words, those uber-expensive penthouses, luxury townhomes, and other real estate holdings in superstar cities like London and New York amount to a “physical manifestation” of Piketty’s insights into wealth inequality, as Felix Salmon so aptly puts it. More recent research on this topic by urban economists David Albouy and Mike Zabek documents the surge in housing inequality in the United States. Their study, published as a National Bureau of Economic Research working paper, charts the rise in housing inequality across the U.S. from the onset of the Great Depression in 1930 through the great suburban boom of the 1950s, 1960s, and 1970s, to the more recent back-to-the-city movement, the 2008 economic crash, and the subsequent recovery, up to 2012. They use data from the U.S. Census on both homeowners and renters. Over the period studied, the share of owner-occupied housing rose from less than half (45 percent) to nearly two-thirds (65 percent), although it has leveled off somewhat since then. The median cost of a home tripled in real dollar terms, according to their analysis. Housing now represents a huge share of America’s total consumption, comprising roughly 40 percent of the U.S. total capital stock, and two-thirds of the wealth held by the middle class. What Albouy and Zabek find is a clear U-shaped pattern in housing inequality (measured in terms of housing values) over this 80-year period. Housing inequality was high in 1930 at the onset of the Depression. It then declined, alongside income inequality, during the Great Compression and suburban boom of the 1950s and 1960s. It started to creep back up again after the 1970s. There was a huge spike by the 1990s, followed by a leveling off in 2000, and then another significant spike by 2012, in the wake of the recovery from the economic crisis of 2008 and the accelerating back-to-the-city movement. By 2012, the level of housing inequality in the U.S. looked much the same as it did in the ’30s. Now as then, the most expensive 20 percent of owner-occupied homes account for more than half of total U.S. housing value.

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Christy Regis had only recently gone from working three jobs to one when the dreaded “notice to quit possession” notice fluttered from her Stratford apartment door in August. The pre-eviction warning nudging Regis and her 2-year-old daughter out of their home came after she fell $1,000 behind on her rent because she used the money instead to fix her 13-year-old, broken-down Nissan. With nowhere else to go, the pair moved in with Regis’ mother, uncle, and brother in Milford. Regis has since started a second job and said she will likely need a third if she hopes to rent another home in a safe community with decent schools. “Even when I was working, the amount I was investing in child care and everything, it just did not add up and it was just like the money was going everywhere but where it needed to,” Regis said. “We needed to eat. It got to the point where it was like you had to pick and choose what you put your money to.” Regis’ dilemma – not being able to afford a home in a suburban area – is a common one for many of Connecticut’s low-income residents, particularly people of color, because of the state’s longstanding and widespread lack of affordable housing. Local housing advocates place racism – and the now-illegal practice of redlining – at the center of a complicated web of factors that have led to persistent disparities in housing options available to people of color and whites. Despite the Malloy administration’s efforts over the last eight years to create more housing opportunities, the problem remains intractable, advocates say, due to restrictive zoning ordinances, persistent segregation, and housing discrimination. Research by the Kirwan Institute for the Study of Race and Ethnicity at Ohio State University indicates a majority of black and Latino households in Connecticut live in areas with high crime and poverty rates, low-performing schools, and a lack of employment opportunities. This is typically coupled with black and Latinos’ disproportionately lower incomes — leaving them with a greater need for affordable housing and spurring the development and rehabilitation of those units in urban areas. Though wealth inequality — the differences between different households’ income, stocks, property, and other assets and debts — is one of the chief forces of division in modern society, more economists are becoming increasingly focused on differences in the housing component of the phenomenon. Representing both the disparities between housing quality and the availability of affordable shelter, housing inequality stems both from market forces as well as discrimination and segregation. It can be both the cause and the effect of poverty. Richard Florida, a professor and director at the University of Toronto’s Martin Prosperity Institute, wrote in an April 2018 essay in CityLab that “a mounting body of research suggests that housing inequality may well be the biggest contributor to our economic divides.” “The ability to buy and own housing, much more than income or any other source of wealth, is a significant factor in the growing divides between the economy’s winners and losers,” Florida wrote. “It’s a matter of liberty and opportunity. If you’re stuck in a kind of de facto apartheid where you can only live in certain places because price of admission to other towns is too high — you have a problem.” David Fink, Partnership for Strong Communities Low-income families’ lack of housing mobility often leaves them with fewer choices, said David Fink, a consultant for Partnership for Strong Communities. “They have greater access to child care, health care, recreation, and fresh food by living in those [suburban] places,” Fink said. “It’s a matter of liberty and opportunity. If you’re stuck in a kind of de facto apartheid where you can only live in certain places because price of admission to other towns is too high — you have a problem.” While affordable housing has remained largely concentrated in Connecticut’s biggest municipalities, cities and towns’ sovereignty over their zoning laws has amplified the divide. More than two dozen municipalities across Connecticut have enacted strict zoning ordinances prohibiting multi-family housing, a type of development housing advocates describe as the most effective way achieve affordability. Other communities have fought efforts to create affordable housing within their borders, with residents often voicing concerns it will change the character of their town or bring traffic. The state has long used the 1990 8-30g law — also known as Title 8 — as a measuring stick for evaluating Connecticut’s broad access to affordable housing. That law encourages, but does not require, all municipalities to have 10 percent of their housing stock deemed affordable. Under the statute, developers who build affordable units can appeal to the courts to override local zoning codes in towns that don’t meet that threshold. Non-exempt municipalities can meet a four-year moratorium if they are successful in increasing their affordable housing stock by two percent. In 2017, only 30 of Connecticut’s 169 municipalities met or exceeded the 10 percent threshold, according to the latest Affordable Housing Appeals List. Connecticut’s persistent problems in this area fall squarely amid a nationwide affordable housing crisis that has led states to tackle rising housing costs by building upward. In 2016, Connecticut had 140,531 households whose incomes met the definition of “extremely low,” according to the National Low Income Housing Coalition. The NLIHC found the state had 36 affordable and available homes per 100 renter households in that category. In another recent report, the NLIHC ranked Connecticut as having the ninth most expensive housing wage in the nation. It found that renters make an average of $17.38 an hour, while the full-time hourly wage needed to afford a decent two-bedroom apartment is $24.90. That means those earning the $10.10 state minimum wage would have to work 99 hours a week to comfortably afford that apartment. For people of color, however, the struggle to find affordable housing in safe communities with good schools is complicated by more than just a wage gap.

The obvious effect of expensive housing – people having less money to spend on other things – is the one most people focus on. But it is only part of the story, because expensive housing makes people change their behaviour too – it affects where you live, what your job is, how big your family is and what your day-to-day life looks like too. And it’s these hidden effects that are the most important. As we’ve described above, better jobs drive up the price of housing when it’s difficult to build more. But that works both ways: when housing is scarce in high-productivity areas, some people are priced out of the area altogether, so they can’t move within range of better jobs. This means that many people are working in less productive jobs than they could if it was easier for them to move to more productive places. Their wages and productivity are lower and it’s harder for highly productive businesses to hire them. That means people who do get to live in these high-productivity places are less productive than they could be, because they are less able to combine their skills with the complementary skills of the people who have been priced out. As a result, many businesses end up leaving highly skilled staff without assistance, spending their time on work that could be done by others, lowering the time they can spend on the tasks they’re best at. This happens in people’s private lives too: people often spend hours trying to fix their leaky pipes instead of just calling in a plumber, because the prices of plumbers near them have risen to cover the costs for plumbers to live there. On average, workers in larger cities tend to be more productive than workers with similar skills and education in smaller cities. Sheer size is not all that matters, because complementarity between workers matters even more – a skilled software engineer will likely increase her income more by moving to Berlin (population: 4.4 million) than to Mexico City (population: 21 million). But there is strong empirical evidence that, other things being equal, bigger is better. This helps workers directly: people who moved from small to large cities in a study in Spain gained a wage premium when they did so, and accumulated better experience as time went by – and their experience persisted even if they moved away later, in the form of higher wages. In the United States, productivity per worker tends to rise by 2% or more with each doubling of city size. The link between size and productivity is only apparent when the city includes skilled, educated workers, which suggests the effect is mostly driven by the transfer of knowledge and division of labour among high-skilled workers. Metropolitan areas that are largely made up of unskilled workers do not become more productive as they get bigger. By historical and global standards, today’s most successful cities in America and other Western countries are astonishingly sparsely populated and sprawling. Haussmann’s Paris, Gaudi’s Barcelona, and the Georgian and Victorian areas of London are much more densely populated than nearly every square mile of the Bay Area and even most of the NYC metro area, other than Manhattan. The main cause of this is regulations that ban buildings that make better use of the land. Economists Gilles Duranton and Diego Puga judge that if New York allowed more of the sorts of densities that were more common historically, rents and house prices would fall towards construction costs, and the city would at least double in population, to over 40 million people. Similar things would happen to the Bay Area, Boston, Los Angeles, and other US ‘superstar’ cities if higher densities were allowed. This could mean those places looking more like central Paris or Barcelona, both of which are incredibly dense (and also happen to be very nice places to live). The total cost of this regulation-induced sprawl in the United States may be enormous. According to one study, if just three cities – New York City, San Jose and San Francisco – loosened their rules against building denser housing to the national average level of restrictiveness, millions would move to jobs that made the best use of their skills and total US GDP would be 8.9% higher. This would translate into average American wages being $8,775 higher per year. Others go even further. Duranton and Puga estimate that the average income gain from a housing regime that allowed easy building could be around 25%, or around $16,000 more per person per year. To put that in perspective, 9% is approximately how much the US economy contracted by in the second quarter of 2020, after Covid and lockdowns brought much of the US economy to a standstill. Sixteen thousand dollars per capita is the entire yearly income of people in Greece or Hungary. That’s a lot of money to leave lying on the sidewalk.

The US housing shortage isn't just fueling an affordability crisis. It could be contributing to several of the major problems the country is facing. Imagine you're a city-dweller living paycheck-to-paycheck. You're trying to save so you can afford a down payment on a home someday, but there's not much left to stash away after paying rent. A few years later, you buy a home that's probably a little more expensive than you can afford. You used to walk to work, but given you now live an hour away from your job in the city, you begin spending much more time in a car. You make plans to start a family over the next year, but given the cost of the home, the extra years it took to finally obtain it, and its modest size, you decide to aim for a fewer number of children than you had previously envisioned. This is the gist of the "housing theory of everything," coined in 2021 by economists Sam Bowman and Ben Southwood and housing advocate John Myers. They wrote in the Stripe-owned online magazine Works In Progress that the substantial shortage of homes in the US is a key driver of more than just falling housing affordability in recent decades. "Western housing shortages do not just prevent many from ever affording their own home. They also drive inequality, climate change, low productivity growth, obesity, and even falling fertility rates," they said. While roughly two-thirds of US households are owner-occupied, the country is short between 1.5 million and 6 million homes, according to various analyses. The housing market's crash during the Great Recession led the industry to pull back on construction for many years, and materials and labor shortages during the height of the pandemic fueled another slowdown. Some have pointed to complex rules and regulations — many of them related to environmental concerns — that have made it more difficult to build homes. With the US homeowner vacancy rate — the percent of units available for occupancy — near record lows, the lack of supply has contributed to soaring prices. As of last June, the combination of elevated prices and interest rates made the housing market "more unaffordable than at the peak of the runoff in 2005," Mark Palim, Deputy Chief Economist for Fannie Mae, told Insider. The housing theory of everything, however, suggests that this lack of affordability is far from the only American problem the housing shortage is contributing to.

In our view, rundown apartment units located in desperately poor neighborhoods are a root cause of many quality-of-life issues. And these issues will only become more widespread, intractable, and irreversible as the crisis of unaffordable housing continues to spread from poor, underclass households to those earning average median incomes and above. According to a study by the NYU Furman Center and Capital One, from 2006 to 2013 the percentage of low- and moderate-income renters facing severe rent burdens increased substantially in many large metro areas across the country. The number of U.S. households that spend at least half their income on rent could increase 25% to 14.8 million over the next decade, according to a report by Harvard University’s Joint Center for Housing Studies (JCHS) and Enterprise Community Partners. According to the report, significant numbers of households in higher income brackets—80% to 120% of area median income—also struggle to find affordable rental units in all 50 states. This lack of “workforce housing” results in their inability to live in or near the places where they work. In high-cost metro areas, two-thirds of renters earning between $30,000 to $45,000 and half of those earning $45,000 to $75,000 have disproportionately high housing costs. This is at a time when average median incomes in America’s largest metro areas range from around $50,000 to just over $63,000, according to the U.S. Census Bureau. The need for affordable housing subsidies is already overwhelming the resources of federal, state, and local governments, leaving them unable to provide adequate assistance. And regrettably, the philanthropic community has basically abandoned funding services that improve the lives of the residents—after-school programs, summer camps, health and wellness, and financial literacy, to name a few. Government must increase its commitment to affordable housing. It is clear, if we are to tackle social inequality in this country, housing and related services must become a top priority of these funders. Fifty years ago, President Lyndon B. Johnson launched his Great Society, a set of domestic programs to eliminate poverty and racial injustice in America. According to some estimates, we’ve spent upward of $22 trillion of taxpayer dollars in hopes of creating such a society. Yet fundamentally little in the way of poverty and racial injustice has changed. Today, 46.5 million Americans live in poverty, 16.1 million of whom are children. Millions live on the edge, one job loss or one illness away from an impoverished existence. Why has this monumental—and costly—social endeavor failed? While there are a number of reasons, a key component of social inequality is our housing policies, which for decades have simply created islands of poor and low-income families who, for all intents and purposes, have been ignored and cut off from mainstream society. Our housing policies have forced entire generations of Americans into neighborhoods—whether labeled public housing, low-income housing, or undercapitalized affordable housing—offering little supportive educational or social services. The result has been unemployment, ever increasing crime rates, drugs, gangs, domestic violence, child abuse, high rates of incarceration, and premature deaths. Where and how people live either provides or deprives them of opportunities to engage in healthy and prosperous lives. However, the fact is that it’s not only those who live in unhealthy homes and environments who are affected. All of society suffers when people are denied decent, safe, affordable housing. When people are forced to spend as much as 50% of their income on housing, the following are often the result: · They live in substandard housing. For many, however, the infrastructure of their neighborhoods is important to them—churches, relatives, and friends nearby, public transportation, social services, etc. Moving new affordable housing to the suburbs is not the panacea some believe. Much needs to be done to preserve deteriorating housing and improve neighborhoods in the urban cores. · Those who seek nicer housing at affordable rent farther from urban areas find themselves pushed greater distances from their work. This not only places a strain on them and their families with respect to commuting times and costs, but also on their employers who often experience higher absenteeism and worker turnover rates, greatly adding to the cost of doing business. · They are often forced to rely on fast food establishments for their caloric intake. A family can buy a lot more calories for $10 at McDonald’s than at the fresh fruit and vegetable section in a grocery store (if they have access to a grocery store) plus there’s no preparation required after a long workday and commute. According to the Centers for Disease Control and Prevention, the estimated annual medical cost of obesity in the United States was a staggering $147 billion in 2008 U.S. dollars. · They cannot afford to, or have the opportunity to, educate themselves or their children in order to achieve higher-paying jobs and work opportunities that would help them break their cycle of financial struggle and poverty. Substandard urban schools are the norm, and job training is inadequate at best. This places a greater burden on our already costly social and entitlement programs. · The above lead to higher degrees of stress, frustration, and hopelessness, creating a downward spiral of human suffering and an increase in public costs. Clean, safe affordable housing can stabilize neighborhoods and be a springboard for greater opportunity. Anyone who works a 40-hour week in the United States, the world’s richest nation, should be able to afford life’s basic necessities, especially decent, safe housing. Yet, according to the National Low Income Housing Coalition, a family with one full-time worker earning the minimum wage cannot afford the fair-market rent for a two-bedroom apartment anywhere in the United States. Local community development corporations and other mission-driven nonprofit housing groups must compete with well-capitalized, market-rate private developers in an already tight housing market. Research tells us that without support for affordable housing, affordable housing developers are unable to supply new rental units at rents that are low enough for low-income households. With rental restrictions expiring for roughly 30% of the 1.34 million units of affordable housing created by a Department of Housing and Urban Development program known as Sec. 8 project-based rental assistance (400,000 affordable units), housing advocates fear that these properties will be converted to market-rate properties by developers seeking to cash in on gentrifying neighborhoods, typically displacing the existing tenants. The low-income housing tax credit program (LIHTC) has been an extremely effective tool to create and preserve affordable housing; it is a prototypical public/private program. According to the National Council of State Housing Agencies, the LIHTC program has provided the financing for the development or preservation of nearly 2.8 million units. But the number of tax credits allocated to the states annually doesn’t come close to meeting the needs of communities nationwide. Typically, there are applications submitted for two to three times the number of housing credits the state agencies have to allocate. The need for quality affordable housing has never been more critical. In 2012, there were 11.5 million extremely low-income renters and only 3.3 million affordable apartments available to them—a gap of 8.2 million units. Without the LIHTC, it is uneconomic to develop apartments for low-income families. According to Harvard’s JCHS, in order to develop new apartments affordable to people working full time earning the minimum wage, without subsidy construction costs would have to be reduced by 72% of the current construction cost average. Since the 1980s, wages have failed to keep up with the cost of housing, whether one rented or owned. During the late 1990s and early 2000s, housing prices were rising 10% to 20% or more per year, depending on where in the country one lived. Yet, according to the Economic Policy Institute, wages have grown only 6% since 1979, after accounting for inflation. In more recent years, real income for the median household has been level or declining each year since the recession that began in 2008, according to the U.S. Census Bureau. In 2014, that number remained 6.5% lower than it was in 2007. More than 55% of American adults—approximately 138 million people—are struggling financially, reports the Stewards of Affordable Housing for the Future. Unless wages begin to rise or affordable rents become more available, there will be no housing relief in the foreseeable future for millions of families. To add insult to injury, the last recession served to exert enormous pressure on an American middle class struggling for decades to purchase housing they could comfortably afford. From the early- to late-2000s, the only way many first-time buyers were able to get into the housing market was through highly leveraged mortgage products. After they purchased their homes, which they thought would continue to increase in value, these families believed that they had arrived, that they were now living the American Dream—only to be rudely disappointed when the downturn came. As of June 15, 2015, as a result of the 2008 housing collapse, 5.1 million households owed more on their mortgages than the current value of their homes, according to CoreLogic. Worse yet, since 2004, more than 7 million families have already lost their homes to foreclosure (with an additional 1.4 million still in the foreclosure pipeline) and are now forced to rent—or in the worst-case scenario, are homeless! From 2004 to the second quarter of 2015, homeownership rates have fallen from a record high of 69.2% to 63.4%, the lowest level of homeownership since 1967, according to a study by Harvard’s JCHS and Enterprise. Consequently, there are more renters now than at any other time in U.S. history, which places greater stress on an already short supply of affordable rental units. This does not paint an encouraging picture for a middle class that’s continually being hollowed out by low-paying jobs, stagnant wages, and high housing costs.

With a national shortage of homes for sale and rent, affordable housing is increasingly out of reach for a growing number of Americans. As the primary regulators of land-use and zoning policies, local governments are perhaps best positioned to reform policies that limit the supply of housing. However, state governments can also play a significant role in increasing housing production and preservation and improving housing affordability. Below are five meaningful actions that states can take. 1. Coordinate affordable housing financing across multiple funding sources. Financing for affordable housing production relies on a complicated matrix of funding sources, often called the “capital stack.” These sources can include tax credits, housing bonds, private equity, and grants. Accessing these financing options often requires separate and complex applications and administrative processes. By serving as a clearinghouse for these various funding options, a state can help expedite the application process and enhance the ability of developers to formulate a successful capital stack. Examples of how states have implemented this clearinghouse function include: Creating a consolidated application to access available funding sources. Massachusetts is often cited as a model for its consolidated application and its statewide agency that coordinates financing support. Signing memorandums of understanding (MOUs). Instead of creating a new government office or agency to facilitate financing, some states use MOUs. In an MOU, a state can formalize a framework for stakeholders to coordinate application requirements and share developers’ documentation.

The Low-Income Housing Tax Credit (LIHTC) program is the federal government’s primary tool for encouraging the development and rehabilitation of affordable rental housing. The program gives State and local LIHTC allocating agencies the authority to issue LIHTCs to developers to offset the costs of acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. These units are subject to rent restrictions such that the maximum permissible gross rent, including an allowance for utilities, must be less than 30% of imputed income based on an area’s median income (AMI). Typically, developers sell their LIHTCs to outside investors in exchange for equity financing to cash flow the project. The LIHTCs give investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing. Investors' equity contribution subsidizes low-income housing development, thus allowing some units to rent at below-market rates. To qualify for the credit, a project must meet the requirements of a qualified low-income project. Generally, project sponsors/developers (project sponsors) are required to set aside at least 40 percent of the units for renters earning no more than 60 percent of the AMI (the 40/60 test) or 20 percent of the units for renters earning 50 percent or less of the AMI (the 20/50 test), as elected by the property owner. In addition, LIHTC owners cannot discriminate against voucher families and must accept Section 8 voucher tenants. The process of allocating, awarding, and the claiming the LIHTC begins at the federal level with each state receiving an annual LIHTC allocation according to its population, with a minimum small population state allocation ($3,245,625 in 2021). The credit allocation for 2021 and 2022 was increased for buildings located in any qualified disaster zone. A state’s Qualified Allocation Plan sets the state’s initiatives of its affordable housing program, shaping the type and location of housing built. There are two types of credits available to developers: the 4 percent credit and 9 percent credit and calculated as 4 percent or 9 percent of the project's qualified basis, a figure calculated from the gross construction costs of the project's affordable units (excluding land). The 4% tax credit (30% subsidy) is for the acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds. The 9% tax credit (70% subsidy) is usually for new construction and substantial rehabilitation without federal subsidies. Once the housing project is placed in service and the required occupancy rate has been achieved (essentially, made available to tenants), investors can claim the LIHTCs in equal amounts over a 10-year period. Building owners must make a one-time submission of Form 8609 to the Low-Income Housing Credit Unit of the IRS no later than the due date of their first tax return. A separate Form 8609 must be issued for each building in a multiple building project and can be used to obtain a housing credit allocation from the housing credit agency and certify certain information. Generally, a state income tax credit is treated for federal income tax purposes as a reduction or potential reduction in the original recipient's state tax liability to the extent that the taxpayer can only apply the credit against a current or future tax liability. State tax credits are generally recognized over a 5-year period. LIHTC properties must commit to at least 30 years of affordability, and subject to a 15-year “compliance period,” monitored by state housing agencies. This is the period where the tax credits that have been given to developers can be taken away or “re-captured” if the property fails to comply with LIHTC regulations.

Rents have increased over the last two years at a historic rate. Between December 2017 and September 2022, the median rent for newly leased units rose nearly 32 percent, with nearly all of that increase occurring in 2021 and 2022.[1] (See Figure 1.) These higher rents are especially hard for families with the lowest incomes to absorb. Closing the housing affordability gap will require a comprehensive housing strategy, including developing new units, preserving existing affordable housing, and expanding rental assistance. Expanding the Housing Choice Voucher program, as the 2023 House-passed Transportation-Housing and Urban Development (HUD) funding bill calls for, would most immediately help renters absorb cost increases. Such an expansion would help reach renters with the lowest incomes. Over the long term, lawmakers should enact major additional rental assistance expansions, with the goal of making assistance available to everyone who is eligible. Rental assistance provided directly to tenants gives people more choice of where to live and the opportunity to reduce segregation of people with low incomes, can also be project-based to support new affordable housing units. Policymakers at the federal, state, and local levels can further address the crisis in housing affordability by making additional capital investments in housing and taking related actions, including: Reducing the shortage of deeply affordable rental housing, implementing a housing developer-focused renters’ tax credit, and reversing restrictive local zoning practices; Preventing the loss of existing affordable housing; Improving the Low-Income Housing Tax Credit program; Investing in tribal communities’ housing needs; Removing barriers to homeownership; and Reforming project-based housing programs to encourage higher-quality housing. While rising rent costs are currently headline news, the housing affordability crisis has existed for years, primarily due to the gap between families’ incomes and their rent costs.[2] (See Figure 2.) This, coupled with the fact that federal rental assistance only reaches about 1 in 4 likely eligible households, means that millions of families have long struggled to afford housing and meet other basic needs such as food, clothing, and transportation. In 2019, about 9.4 million households without rental assistance paid more than 50 percent of their income on rent or lived in severely inadequate housing. Of these renters, 7.8 million were very low income, defined by HUD as at or below the federal poverty line or 50 percent of area median income, whichever is higher.[3] These counts don’t include the almost 600,000 people who experience homelessness on any given night,[4] or the millions of people who are living doubled up[5] or are unnecessarily institutionalized due in part to an inability to afford a place to live on their own.[6]The federal government began investing in public housing developments to make housing affordable to people with low and moderate incomes. Initially, in the aftermath of World War II, primarily white people lived in public housing due to housing segregation and a federal focus on the housing needs of returning white war veterans. Public housing developments helped residents quickly stabilize their housing and move on to unassisted housing and homeownership.[7] But over time — and not coincidently — as people of color increasingly moved into public housing units, the government failed to provide enough funding to make up the growing gap between what people could pay in rent and what it cost to maintain developments in good condition, which caused public housing properties to deteriorate and surrounding communities to suffer.[8] It’s estimated that over $70 billion is currently needed to revitalize public housing; that amount doesn’t include addressing the lack of adequate ongoing maintenance costs.[9] As a result, families with the lowest incomes have limited access to public housing, nor can they find housing that is affordable given their incomes in the private rental market. Even if landlords charged only what they’d need to cover their costs of ongoing operations, general maintenance, and debt payments owed on the development, the rents would exceed many people’s ability to afford their rent. For example, in 2019, the average income for a household designated as “extremely low income,” defined as 30 percent of area market income or below, was $11,318 per year. That same year, the average monthly operating cost for a rental unit — the cost for a landlord or property owner to break even, not including any profit — was about $520 per month, or a little more including utilities. HUD generally considers a unit affordable if rent and utilities do not exceed 30 percent of income. In this scenario, 30 percent of $11,318 is $283 per month, about half of the landlord’s minimum costs — and most housing costs more than this minimum calculation. The gap between the cost of housing and what households can afford must be closed either by households using more of their income on rent — further straining their ability to pay for their basic needs — or with housing subsidies. To address these challenges, the federal government has turned to tenant-based rental assistance, typically in the form of federal Housing Choice Vouchers, which subsidize housing costs in private rental housing. Compared to public housing, tenant-based rental assistance: Gives people more choice of where to live; Provides the opportunity to reduce segregation of people with low incomes, who are disproportionately people of color, in neighborhoods that have historically been and continue to be disinvested in; Can be used where people live now so a new unit isn’t necessarily needed and the family feels immediate relief; and Can be project-based, up to a certain amount, to support new affordable housing units and to restructure long-term financing for redeveloped public housing properties, which helps stabilize funding for ongoing operating costs.[10] Vouchers can also support new rental housing development. This is done when housing agencies tie vouchers to a specific unit (known as “project-based vouchers”) to guarantee that developments include units affordable for families with low and extremely low incomes.[11] The value of these vouchers is promised in advance and included as part of the financing structure for the development. This structure ensures that at least some of the operating costs will be covered, which also lowers the risk to lenders. For example, many buildings with units dedicated as permanent supportive housing for people experiencing homelessness who also have disabilities use project-based vouchers to make units affordable for this population. One of the benefits for tenants of project-based vouchers over other federal project-based assistance programs (like public housing) is that if the tenant wants to move after the first year, they are guaranteed the next available tenant-based voucher, which allows them to live wherever will accept the voucher. The housing property with the project-based voucher keeps that subsidy for the next tenant. The House-passed Transportation-Housing and Urban Development bill’s funding level of $1.1 billion would be enough to help about 100,000 to 140,000 additional families afford safe, stable homes. Most immediately, in 2023 appropriations legislation, Congress should provide as much of that $1.1 billion for new vouchers as possible, in addition to providing enough funds to cover the cost of existing vouchers. Some argue that increases to the voucher program would push up rents by increasing demand for rental units and contribute to inflation; however, research on previous voucher expansions has found that vouchers have little overall impact on housing demand or market rents.[12] Hence, they should have little direct effect on inflation. It is also important to understand that many new voucher holders are current renters who, if their current unit meets inspection standards and their landlord will accept a housing voucher, can use assistance to help pay their current housing costs. Also, the voucher program’s payment rules include elements that constrain housing costs. The program’s payment standards cap subsidies based on moderate rents in local markets, and housing agencies must certify that rents are reasonable compared to rents charged for similar, unassisted units in the community. Without rental subsidies, families are at risk of the negative outcomes caused by housing instability such as eviction, homelessness, and frequent moves.[13] The overwhelming research on the voucher program shows that the gains for families far outweigh concerns about impact on the housing market. Over the long term, lawmakers should enact major additional rental assistance expansions, with the goal of making help available to everyone who is eligible. Currently, only 1 in 4 households who are likely eligible for federal rental assistance receive it. This has real-world negative consequences on people and communities, with research showing the negative impacts on health, childhood well-being, employment, and housing stability that result from families struggling to afford their rent.[14] President Biden’s 2023 budget and the House-passed version of the Build Back Better Act included significant voucher expansions to move toward this goal.[15]

The Civil Rights movement of the 1960s provided momentum for the creation and enforcement of equitable housing practices via the Fair Housing Act of 1968. This law prohibited discrimination on the basis of color, race, religion, and national origin in most real estate transactions, and established a moral and legal precedent for the banking and housing sector.12,15 Unfortunately, this pivotal law was often poorly enforced due to societal pressures to maintain the established racial hierarchy.12,15 The impact of racial residential segregation was compounded by systematic disinvestment in housing by the federal government in the late 20th century. The federal government has tools to address the needs of renters including the Low-Income Housing Tax Credit, which offers a tax incentive to developers to produce affordable housing, and the Housing Choice Voucher program, which provides rental subsidies to increase affordability for renters. These programs, however, are underfunded, in contrast to the mortgage interest deduction, which enables homeowners to deduct mortgage payments from their tax burden. As a result, deep inequities in wealth accumulation persist between predominately white homeowners and renters of color.16 This disinvestment intersected with a decreased low-income housing stock, and increasing cost for housing.10,16 These inequities were compounded by the Great Recession of the late-2000s that led to a rapid decline in homeownership and increase in renters, with the largest increase occurring in low-income households.16 The impact of the economic downturn and stagnant HUD funding restricted the sustainable pathways for low-income renters to secure affordable housing16 and led to an increased number of cost burdened renters (those who are paying greater than 30% of their income for rent) which rose from 14.8 million to 21.3 million from 2001 to 2014.16 It also led to an increased number of severely burdened households (those who are paying greater than 50% of their income for rent) which rose from 7.5 million to 11.4 million in the same time period.16 The economic downturn had a disparate burden on families and communities of color.16

Do economic downturns generate pressure for diversionary conflict? Or might downturns encourage austerity and economizing behavior in foreign policy? This paper provides new evidence that economic stress is associated with conciliatory policies between strategic rivals. For states that view each other as military threats, the biggest step possible toward bilateral cooperation is to terminate the rivalry by taking political steps to manage the competition. Drawing on data from 109 distinct rival dyads since 1950, 67 of which terminated, the evidence suggests rivalries were approximately twice as likely to terminate during economic downturns than they were during periods of economic normalcy. This is true controlling for all of the main alternative explanations for peaceful relations between foes (democratic status, nuclear weapons possession, capability imbalance, common enemies, and international systemic changes), as well as many other possible confounding variables. This research questions existing theories claiming that economic downturns are associated with diversionary war, and instead argues that in certain circumstances peace may result from economic troubles. Defining and Measuring Rivalry and Rivalry Termination I define a rivalry as the perception by national elites of two states that the other state possesses conflicting interests and presents a military threat of sufficient severity that future military conflict is likely. Rivalry termination is the transition from a state of rivalry to one where conflicts of interest are not viewed as being so severe as to provoke interstate conflict and/or where a mutual recognition of the imbalance in military capabilities makes conflict-causing bargaining failures unlikely. In other words, rivalries terminate when the elites assess that the risks of military conflict between rivals has been reduced dramatically. This definition draws on a growing quantitative literature most closely associated with the research programs of William Thompson, J. Joseph Hewitt, and James P. Klein, Gary Goertz, and Paul F. Diehl.1 My definition conforms to that of William Thompson. In work with Karen Rasler, they define rivalries as situations in which “[b]oth actors view each other as a significant political-military threat and, therefore, an enemy.”2 In other work, Thompson writing with Michael Colaresi, explains further: The presumption is that decisionmakers explicitly identify who they think are their foreign enemies. They orient their military preparations and foreign policies toward meeting their threats. They assure their constituents that they will not let their adversaries take advantage. Usually, these activities are done in public. Hence, we should be able to follow the explicit cues in decisionmaker utterances and writings, as well as in the descriptive political histories written about the foreign policies of specific countries.3 Drawing from available records and histories, Thompson and David Dreyer have generated a universe of strategic rivalries from 1494 to 2010 that serves as the basis for this project’s empirical analysis.4 This project measures rivalry termination as occurring on the last year that Thompson and Dreyer record the existence of a rivalry.5 Why Might Economic Crisis Cause Rivalry Termination? Economic crises lead to conciliatory behavior through five primary channels. (1) Economic crises lead to austerity pressures, which in turn incent leaders to search for ways to cut defense expenditures. (2) Economic crises also encourage strategic reassessment, so that leaders can argue to their peers and their publics that defense spending can be arrested without endangering the state. This can lead to threat deflation, where elites attempt to downplay the seriousness of the threat posed by a former rival. (3) If a state faces multiple threats, economic crises provoke elites to consider threat prioritization, a process that is postponed during periods of economic normalcy. (4) Economic crises increase the political and economic benefit from international economic cooperation. Leaders seek foreign aid, enhanced trade, and increased investment from abroad during periods of economic trouble. This search is made easier if tensions are reduced with historic rivals. (5) Finally, during crises, elites are more prone to select leaders who are perceived as capable of resolving economic difficulties, permitting the emergence of leaders who hold heterodox foreign policy views. Collectively, these mechanisms make it much more likely that a leader will prefer conciliatory policies compared to during periods of economic normalcy. This section reviews this causal logic in greater detail, while also providing historical examples that these mechanisms recur in practice.

Posen adds that COVID-19 is also likely to reduce international trade in the short to medium term. Those who believe economic interdependence is a powerful barrier to war might be alarmed by this development, but he points out that trade issues have been a source of considerable friction in recent years—especially between the United States and China—and a degree of decoupling might reduce tensions somewhat and cause the odds of war to recede.

For these reasons, the pandemic itself may be conducive to peace. But what about the relationship between broader economic conditions and the likelihood of war? Might a few leaders still convince themselves that provoking a crisis and going to war could still advance either long-term national interests or their own political fortunes? Are the other paths by which a deep and sustained economic downturn might make serious global conflict more likely?

The mainstream financial media is enamored with the idea that the Federal Reserve, after “heroically rescuing us” from the “home mortgage meltdown” can now engineer a “soft landing.” The media believes that a group of economists sitting comfortably in the Eccles Building in Washington, D.C. can “mastermind” the most important economic signals of all: the price and amount of money. In effect, the financial media—e.g., CNBC’s Steve Liesman and his ilk, but not Rick “Tea Party” Santelli—believes that the Federal Reserve can pull and push its economic "levers" and twist its economic dials like the “man behind the curtain” in the Wizard of Oz. They believe that by pulling levers and twisting dials in just the right combination, interest rates will gradually rise, the Fed’s so-called “quantitative easing” program will slowly unwind, and more than $4 trillion in “out of thin air money” created since 2009 will be “retired”—without triggering a recession. Would that it were true. Unfortunately, the Federal Reserve cannot accomplish this feat today. Why is this a certainty? Because never in its 105-year history has the Fed been able to so do, even facing less daunting economic challenges. Indeed, every "tightening" cycle in the Fed’s star-crossed history has been followed by an economic downturn (recession) or even a depression.

Ultimately, increasing military contract prices expands opportunities for contractors to abuse the FFP contract designation, especially without preserving guardrails that prevent price gouging. Contractors knew what they signed up for when they agreed to FFP contracts, but now they expect an industry-wide bailout from Congress without pursuing relief through proper channels. As noted above, the Pentagon has maintained a restrained view on inflation relief, calling for more information from the defense industry to illustrate need. Pentagon acquisition chief LaPlante has underscored the importance of data-informed contract adjustments, stating in September, “I need data about companies that are either potentially going under or not bidding that are affected by inflation. Because we need to inform the Congress, we need to inform the Pentagon. I’m convinced there’s real-world examples of people being hurt … But we need to show the data.” Warren echoed LaPlante’s data requests in her letter to his office, asking several process-oriented and oversight questions regarding any potential inflation-related adjustments to Pentagon contracts. Still, there is no public evidence of businesses requesting inflation relief from the Pentagon. LaPlante’s office has said they will respond to Warren’s letter directly, and the Center for Defense Information (CDI) is keen to discover what information the Pentagon may have shared with her office. CDI has submitted a Freedom of Information Act (FOIA) request for all records and communications from LaPlante’s office regarding Warren’s letter, with the hope that such documents will unveil industry data and analysis to justify inflation-related contract adjustments. CDI has not yet received a substantive response to our FOIA request, but will update this piece if and when we receive documentation of DOD’s response to Warren’s letter. Until then, we have no reason to believe there’s an actual justification for increasing military contract prices due to inflation. The Pentagon, a member of Congress, and CDI have called on the defense industry to explicitly demonstrate the need for inflation relief on a company level — to no avail.

The defense industry has continually cited inflation to justify more military spending. One group of defense contractors, the National Defense Industrial Association, has justified such requests for inflation relief by claiming the Department of Defense will lose more than $110 billion in buying power from fiscal year 2021 to fiscal year 2023. But the Pentagon has yet to verify that claim, much less publicly advocate for sweeping adjustments to Pentagon contracts because of inflation. On the contrary, Pentagon Defense Pricing and Contracting Principal Director John Tenaglia has instructed contracting officers to limit such adjustments. While industry backed a legislative proposal to increase prices for what are known as firm fixed price (FFP) contracts, Tenaglia issued official guidance in both May and September pointing out that, according to the law, companies with FFP contracts must “bear the risk of cost increases, including those due to inflation.” He clarified that there is no authority to change the price of an existing FFP contract, unless that contract contains a clause authorizing a price adjustment resulting from an economic factor like unexpected inflation.

Today, the Fed’s Dual Mandate is interpreted as an inflation target. The Fed—and other central bankers—seek to keep inflation at 2%. Inflation is defined as the general change in the price of some basket of goods and services. Which goods, which services, and in what quantities are constantly debated. Each market participant and economist has his/her preferred metric, be it the Consumer Price Index (CPI), Personal Consumption Expenditures Price Index (PCE), CPI excluding food and energy, core PCE, the price of gold, etc. Importantly, inflation no longer stands for monetary debasement (as there are no monetary standards to debase in fiat currency regimes; more on that here). Thus, inflation is subjective. Its presence, amount, and scope are constantly disputed. What’s not contested is how the Fed achieves its target. It’s widely held that adjusting the Federal Funds Rate (FFR) does the trick. "The orthodoxy guiding policy in the post-WWII era was Keynesian stabilization policy, motivated in large part by the painful memory of the unprecedented high unemployment in the United States and around the world during the 1930s. The focal point of these policies was the management of aggregate spending (demand) by way of the spending and taxation policies of the fiscal authority and the monetary policies of the central bank. The idea that monetary policy can and should be used to manage aggregate spending and stabilize economic activity is still a generally accepted tenet that guides the policies of the Federal Reserve and other central banks today." According to this Keynesian stance, which most academics support, the Fed impacts demand by adjusting the FFR. Raising it can “cool down” an overheated economy while lowering the FFR can stimulate an under-utilized one. Without getting into the details, the theory rests on the Taylor Rule, which links interest rates to levels of aggregate demand. As described below: "The theory …is based on the view that the economy can move above or below a full market-clearing equilibrium in the short run—called a “demand gap.” A positive demand gap means the economy is overheated; a negative demand gap means it is operating below capacity. Other than random shocks, the main disturbance preventing general equilibrium is a deviation of the real interest rate from the natural interest rate. The policy solution is to adjust the nominal fed funds rate to move the real rate to the natural rate. … Instead of using money supply as a policy tool, the Fed follows a Taylor rule in setting the fed funds rate target. To the extent that it can align inflation expectations with its own ultimate inflation target, the Fed is able to get actual inflation in its target range (typically close to a measured 2 percent rate)." This theory drives the Fed. It primarily conducts monetary policy by adjusting the FFR to achieve a 2% inflation rate. The Fed believes that changing the FFR impacts the overall level of demand for goods and services in the United States. According to the law of supply and demand, lower demand should lead to lower prices—on average—and vice versa. It’s a neat little theory. "Well, so, as I mentioned, you can see places where the demand is substantially in excess of supply. And what you’re seeing as a result of that is prices going up and at unsustainable levels, levels that are not consistent with 2 percent inflation. And so what our tools do is that as we raise interest rates, demand moderates: it moves down. Interest rates, you know—businesses will invest a little bit less, consumers will spend a little bit less. That’s how it works. But, ultimately, getting those, getting supply and demand back, you know, back in balance, is what gives us 2 percent inflation, which is what gives the economy a footing where people can lead successful economic lives and not worry about inflation." While orthodoxy today, some economists note that the “empirical evidence for this [theory linking interest rates to demand] is surprisingly weak … .” Interest rates simply don’t impact commercial investment and consumer spending as theorized. Thus, the interest rates-inflation link seems more myth than science. Yet this theory drives monetary policy globally. "The theory is that as interest rates rise, borrowers decide to borrow and spend less. The empirical evidence for this is surprisingly weak, for the most part. Empirical estimates of the elasticity of spending with respect to the interest rate generally show it does not matter much—with the exception of purchases of residential real estate. Low rates probably boost asset markets (including housing), but that does not feed directly into inflation." As an investor closely following individual companies for nearly 20 years, I’ve always found this popular theory bizarre. Prices are not a plaything for academics or central planners. They play a specific and vital role in commerce. By utilizing the language of money, prices mark the value at which items trade. As a result, they facilitate the movement of value from producer to consumer. It should be obvious that prices are not set from the top down. Rather, each business (and individual) engaged in trade meticulously derives them one by one. The goal, however, is not to maximize prices. Businesses seek to maximize profits. Prices are just a means to a business’s end. Profit maximization is not an abstract concept or “something nice to have.” It is a matter of survival. Each business consumes resources in order to create higher-value ones. Every input, from energy, labor, unfinished goods, websites, real estate, and financing, must first be acquired and organized before they can be transformed into output sold to others. Profit measures the value produced in this process. A loss represents a net consumption of resources. Thus, a money-losing entity cannot survive on its own. It consumes more than it produces and ultimately must perish (unless injected with fresh, outside capital). “I have to raise prices when I raise wages. That’s just how it works,” said Herridge, who doesn’t have enough staff to get all of his Burger King locations back to 24-hour operations. “That’s going to be the primary driver of inflation still over the next year or so.” Unsurprisingly, businesses respond to rising input costs by raising prices. Their revenues must keep up. Failure results in hardship and, potentially, catastrophic failure. Look no further than your local gas station. When the price of (crude) oil increases, so does gasoline at the pump. The gas station does not concern itself with a drop in demand (at least initially). It’s focused on survival. The same holds for every item. Gasoline prices are tightly correlated with the price of crude oil from which it’s derived. Contrary to theory, the Fed is forcing businesses to raise prices by hiking the FFR, both directly and indirectly. Higher interest rates lead to higher financing costs which must be paid for with revenue. While not all companies employ debt, all consume capital. Thus, raising the cost of capital impacts all commercial ventures to varying degrees.

Russia’s war with Ukraine. A 40-year high in both the consumer and producer price indexes. A spike in the price of critical raw materials, including nickel, aluminum, copper and lumber. A skyrocketing jump in the price of oil. Supply chain problems. Labor shortages. Excessive government spending. Exploding government debt. A $4 trillion increase in the nation’s money supply. All these factors (and others) are contributing to increased inflation. But am I worried? Not really. And you shouldn’t be either. Change happens. This has happened countless times before. We’ll adjust. Let me explain. I can adjust because, as a small business owner, I can and have increased my prices, as 68 percent of small businesses reportedly have, according to a recent report from the National Federation of Independent Businesses. My customers aren’t thrilled. But it’s not as if they’re not expecting it. That’s because they’re doing the same with their customers. My competitors are doing the same. Big brands are doing the same. It’s a market economy. And the market is shifting. So we shift with it. The economy doesn’t go away when prices go up. Things adjust. People spend differently. But they still spend. “When this happens, I get more rides,” my Uber driver said to me recently. “People would rather take an Uber than spend on gas for their car.” Another option for me, as a business owner, is cutting costs. And I’ll do that too. I’ll get an energy audit from my local utility company and more diligently monitor power usage in my office. I’ll cut back on travel where I can. I’ll buy products in bulk, comb through my overhead, limit discretionary spending and negotiate harder on contracts. And as countless other businesses are doing around the country, I’ll invest in more technologies that will get work done with fewer people. Like a Fortune 1,000 company, I’ll make these adjustments to maintain my profits. This is not hyperinflation, thank goodness. It’s just a good old-fashioned double-digit across the board price increase. The same kind of inflation Americans saw in the 1970s and 1920s and throughout the 19th century, and it’s the same inflation that millions of business owners from ancient Egypt to medieval Florence saw before that. But we’re not Venezuela. We’re the U.S., and the good news is that the U.S. economy is the largest in the world, and with that comes lots of buyers and sellers. People don’t go into caves when prices rise. They still buy and sell. That’s all fine for business owners like me. You may ask: But what if you’re not a business owner? What if you’re an employee or on a fixed income? Should you be worried about inflation? Not really. If you have a job – and I certainly hope you do – you’ll get cost of living increases. Why? Because employers like me don’t want to lose you in these times of tight labor. It’s not that we’re altruistic. It’s just that we understand that if we don’t pay you enough to keep up with inflation, you’ll look elsewhere. So, we will. Even so, you may decide to make a few extra bucks doing a side gig like my Uber driver. If so, then good for you. If you’re unable to work for health or other reasons or if you’re retired or on a fixed income, the government is mandated to pay your social security and Medicare at higher rates as the cost-of-living increases. Assuming you have a good financial adviser, your savings will also grow along with interest rates, which will rise this year. Will this be enough? Probably not. But when is it ever? Hopefully, you’ll do the same as me when it comes to expenses. Maybe you’ll spend less on frivolous things than before. Maybe you’ll wonder why you subscribe to so many streaming services (Is “Inventing Anna” really worth it?) or if it’s necessary to drive a gas-guzzling vehicle in lieu of a hybrid or electric one — or a bike. You’ll pay closer attention to your household expenses, your extracurricular expenditures (Really? A onesie for your Great Dane?) and your taxes. You’ll take more reasonable vacations and cook at home more often. (It’s still much cheaper than eating out, even with rising food prices.) You’ll be fine. You may even be happier. If you’re smart, you’ll also make sure your savings are keeping up with inflation. As I said earlier, as prices rise so will interest rates. That’s good news. You’ll make sure any excess cash is now in a savings account earning interest. You may also decide to (finally) meet with a financial planner and better invest your money like all those rich people always do. You may even invest in mutual funds that carry stock of those Fortune 1,000 companies that will do all of the above in order to keep their shareholders happy. (And they will, trust me, they will.) The media loves to report bad news, so you’ll inevitably read about the losers during this inflationary era. But there will be winners too. There will be people who profited and suffered thanks to the great and terrible decisions they made. There will be people who took unnecessary risks that paid off or didn’t. There will be people who were smart and people who were lazy and dumb. But those will be the exceptions, not the norm. Most of us will be paying more for the things we want, but we’ll be receiving more income too. It’s all relative. It’s just an adjustment. The price of a gallon of gas in 1950 was $0.27. So, whether you’re a business owner like me or not, please don’t worry so much about inflation. I’m not. It’s happened before, and it will happen again. Let’s just make sure that we’re smart about how we’re managing our money, that we’re paying attention to the economy and we’re watching our pennies. But then again, shouldn’t we always be doing that?

The U.S. banking sector overall appears well-positioned to weather recent industry turmoil, but the experience could still weigh on credit conditions in the future, the Federal Reserve said on Monday. In its semi-annual report on financial stability, the U.S. central bank said overall funding risks for banks remained low and firms still have ample liquidity. Furthermore, additional policy efforts by U.S. bank regulators following the abrupt collapses of Silicon Valley Bank and Signature Bank in March should continue to backstop the system if further stresses arise, the Fed said. "The Federal Reserve is prepared to address any liquidity pressures that may arise and is committed to ensuring that the U.S. banking system continues to perform its vital roles," the Fed said. While the central bank noted there were spillover concerns following the failures of Santa Clara, California-based SVB and New York-based Signature, it maintained that the issues that sank those regional banks do not appear broadly across the banking sector, calling them "outliers" in terms of heavy reliance on uninsured deposits. Those firms, as well as First Republic Bank, which was closed by regulators earlier this month and sold to JP Morgan Chase, also were grappling with large amounts of unrealized losses spurred by rapidly rising interest rates. Depositors fled SVB within days after it appeared the firm was in trouble, precipitating its abrupt closure. The Fed noted in its report on Monday that more than 45% of bank assets reprice or mature within a year, suggesting there is not heavy exposure to less valuable securities for long periods of time. But while the amount of uninsured deposits at banks is declining, they still remain above historical averages after an influx of deposits spurred by the COVID-19 pandemic. In aggregate, it said banks remain well-capitalized.

In America and Europe, central banks turned only recently from encouraging economic recovery to battling stubborn inflation. In some emerging markets this shift began much earlier. Brazil’s central bank raised interest rates by three-quarters of a percentage point back in March 2021, 15 months before the Federal Reserve did the same. It foresaw that fiscal stimulus in the rich world raised the risk of inflation, which would upset financial markets and complicate life for emerging economies. The governor of Russia’s central bank, Elvira Nabiullina, warned over a year ago that the prospect of sustained inflation was likelier “than perceived at first glance”. The pandemic had changed spending patterns, she pointed out. No one knew if the shift would last. But that very uncertainty was discouraging firms from investing to meet demand. These kinds of comments look prudent and prescient in hindsight. Indeed, with some notable exceptions, central banks in emerging markets have won increased respect in recent years. Their monetary-policy frameworks have improved, according to a new index (based on 225 criteria) developed by the IMF. Their frameworks are more coherent (their targets serve sensible objectives), transparent (they say what they are doing) and consistent (they do what they say). According to calculations by the World Bank, expectations of inflation in emerging markets in 2005-18 were about as well-anchored as they had been in rich countries in 1990-2004. Inflation also became less sensitive to falls in the exchange rate. Your columnist remembers a sign outside a café in the Malaysian state of Penang in 2015. “Don’t worry!” it said. “As our ringgit falls, coffee price remains the same.” More people expected emerging markets to succeed in their fight against inflation, which in turn made success more likely. This enhanced credibility raised enticing possibilities. Perhaps their central banks, like those in the rich world, would not need to worry about each depreciation and every inflation spike. If so, perhaps they could pay less slavish attention to two forces that had bedevilled them in the past: namely, the global price of capital, which is dictated by the Fed, and that of commodities. When the Fed tightens monetary policy, trouble has often followed for emerging markets. In 2013, for example, Ben Bernanke’s talk about reducing (or tapering) the pace of the Fed’s bond-buying sparked the “taper tantrum”, a big sell-off in Brazil, India, Indonesia, South Africa and Turkey. Things are different in the rich world. When the Fed tightens, central banks in Britain, the euro area and Japan do not feel obliged to raise interest rates. Their currencies may fall. But unless these depreciations look likely to raise inflation persistently above their targets, they are ignored. Likewise, when the price of oil goes up, so does the cost of living. Yet consumer prices need not go on rising, unless people demand higher wages in response, putting further upward pressure on prices in a self-reinforcing spiral. In both cases, central banks can ignore a one-time increase in prices. The more securely inflation expectations are anchored, the more leeway central banks enjoy. The past year has subjected emerging-market anchors to one severe test after another. Global interest rates have risen in anticipation of a faster pace of tightening in America, as the Fed wrestles with a credibility test of its own. And emerging markets have suffered remorseless increases in the prices of food and fuel, which make up more of their consumers’ shopping bills than they do in the rich world. According to the World Bank, food and energy account for over 60% of South Asia’s consumer-price index. Some central banks have been able to “look through” the rise in food and fuel prices. One example is Thailand’s central bank, which has done nothing even as inflation has surged. It insists that “medium-term inflation expectations remain anchored,” and it wants to make sure the economic recovery gains traction. But other emerging markets, including Mexico and Brazil, felt compelled to raise interest rates forcefully long before their economies fully recovered. They were quicker to respond than their counterparts in mature economies, point out Lucila Bonilla and Gabriel Sterne of Oxford Economics. But “that’s partly because they had to be.” Much of their tightening had to keep up with a worrying rise in inflation expectations. They have stayed ahead of the curve. But the curve has been brutally steep. The Fed has been a “somewhat less dominant” force in this emerging-market tightening cycle than in the past, note Andrew Tilton and his colleagues at Goldman Sachs. Fears of a second taper tantrum have not been realised. One reason may be that a lot of footloose foreign capital had already left during the pandemic. Moreover, some of the countries that might otherwise be vulnerable to Fed tightening, especially those in Latin America, are also big commodity exporters that have benefited from higher prices for their wares, point out Ms Bonilla and Mr Sterne.

As the Federal Reserve embarks on a monetary tightening cycle, only a few spots of vulnerability have appeared among emerging markets. Unlike in 1994, when U.S. policymakers’ aggressiveness roiled these markets—especially Mexico’s—the markets appear in a relatively safer place now. Current Fed monetary tightening is the most forceful in almost three decades. The federal funds target rate has increased by 1.5 percentage points over the past three meetings and is expected to rise a total 3.25 percentage points in 2022, according to the median projection from the Summary of Economic Projections released after the June Federal Open Market Committee meeting. This would be a quarter percentage point greater than the 3 percentage points of tightening between February 1994 and February 1995 (Chart 1). During the 1994 tightening cycle, the penultimate increase was a 75-basis-point (0.75 percentage points) move in November 1994, the Fed’s last 75-basis-point boost until June 15, 2022. The tightening cycle sparked the Mexican currency crisis in December 1994—nicknamed the “Tequila Crisis.” While domestic factors, including excessive debt build-up, political instability and an unsustainable exchange rate peg, made the economy especially vulnerable to external shocks, Fed interest rate increases provided the final jolt. The Mexican real exchange rate (the value of the Mexican peso in terms of dollars, adjusted for the purchasing powers of the two currencies) peaked in January 1994 and gradually depreciated during 1994, losing about 8 percent of its value. The real exchange rate collapsed in December that year, dropping more than 40 percent of its value between November and March 1995 (Chart 2). The interest rate on the three-month Mexican treasury bill rose from around 10 percent in February 1994 to 14 percent in November. It skyrocketed to more than 70 percent by March 1995. This real-exchange-rate collapse and spiking local interest rates were tied to a collapse in foreign borrowing. The Mexican current account deficit—a measure of net capital inflows—had grown during the early 1990s, reaching nearly 6 percent of GDP by 1994. By the second quarter of 1995, Mexico was running a current account surplus, indicating that those foreign capital inflows had come to a halt (Chart 3). What explains this sudden collapse of the Mexican exchange rate and foreign borrowing in late 1994 in response to a Fed tightening cycle? And while the 1994 Fed began tightening in February, why did it only lead to a gradual exchange rate depreciation and a gradual interest rate increase through November, before the December collapse? In a recent article, we model a collapse in foreign borrowing in a small open economy in response to an increase in the foreign interest rate, and we describe policies that a central bank can implement to prevent it. For this, we rely on the model of an underborrowing equilibrium (from Stephanie Schmitt-Grohé and Martín Uribe 2021). In this underborrowing equilibrium model, a small open economy faces a borrowing constraint—its ability to borrow from abroad depends on the value of collateral. The economy faces a currency mismatch where borrowing is denominated in the foreign currency but at least some collateral is denominated in the domestic currency. Under a range of possible conditions, two equilibria can occur in a country with high external debt. This results from a circularity—high foreign borrowing leads to a strong exchange rate that supports high foreign borrowing (and conversely, a weakening exchange rate produces inadequate backing for such borrowing). In one equilibrium, foreign borrowing is high, leading to strong domestic consumption and a strong exchange rate, raising the value of collateral, loosening borrowing constraints and allowing still more foreign borrowing. In another equilibrium, foreign borrowing is low, leading to low domestic consumption and a weak exchange rate, reducing the value of domestic collateral, tightening borrowing constraints and reducing foreign borrowing. In this framework, even a modest increase in the U.S. interest rate can trigger a collapse in foreign borrowing in an emerging-market economy such as Mexico. As the U.S. interest rate increases, there will be a gradual reduction in Mexican capital inflows and the real exchange rate as investors find U.S. assets more attractive. This resembles the 8 percent depreciation in the Mexican real exchange rate between February and November 1994. There comes a point where the value of the exchange rate no longer supports the high borrowing/high consumption equilibrium. At that point, there is a collapse in foreign borrowing, or a “sudden stop,” as borrowing constraints bind. The economy must revert to the only equilibrium remaining, with low foreign borrowing, low consumption and a weak exchange rate. Of course, the Fed tightening cycle in 1994 didn’t trigger a sudden stop in all emerging-market economies. Two key factors explain why a collapse happened in Mexico and not elsewhere. The first factor is the economy’s level of external debt. Key to the existence of an underborrowing equilibrium is a high level of external debt. When an emerging-market economy’s level of external debt is high, continued foreign borrowing is only supported by a strong exchange rate that raises the value of domestic collateral. In this case, even a small increase in U.S. interest rates could upset that fragile equilibrium. Mexico had run high current account deficits of nearly 6 percent of GDP throughout the early 1990s, so by 1994, the economy had accumulated a sufficient stock of external debt. The second factor is central bank reserves. Central bank reserves are liquid foreign currency assets that a central bank can sell in a time of crisis to support the value of the currency and prevent a collapse. In 1994, Mexico’s central bank reserves were insufficient. If the rise in the U.S. interest rate leads to a fall in foreign inflows and exchange rate depreciation, the central bank can sell foreign assets and use the proceeds to buy domestic assets, offsetting the decline in foreign capital inflows. A sufficient amount of selling by the central bank will support the value of the exchange rate when U.S. interest rates are rising, ensuring that the exchange rate can still support the high borrowing/high consumption equilibrium. However, to sell foreign assets during a crisis, the central bank must own a stock of such assets before the crisis. Emerging markets must decide what reserve level is adequate to protect their currency against swings in foreign monetary policy. Pablo Guidotti, a former deputy finance minister in Argentina, came to a conclusion that was later popularized by former Federal Reserve Chairman Alan Greenspan. In a 1999 speech, Greenspan summarized the rule stating “that countries should manage their external assets and liabilities in such a way that they are always able to live without new foreign borrowing for up to one year.” The Guidotti–Greenspan rule leads to a simple measure of a central bank’s reserve adequacy: foreign exchange reserves minus the sum of short-term foreign-currency-denominated external debt and the current account deficit. Banco de México entered 1994 with foreign exchange reserves of about 5 percent of GDP. At the time, the Mexican current account deficit was nearly 6 percent of GDP, meaning that the central bank did not have enough reserves to cover a year’s worth of new borrowing, much less service existing debts. Chart 4 presents reserve adequacy as well as its three components for the major emerging-market economies at the end of 2021. Reserve adequacy is negative only in Turkey and Argentina, with their low stock of reserves and high amounts of short-term foreign currency debt. Colombia and Chile have relatively high current account deficits but, at least for the time being, have a high stock of reserves and a relatively low stock of short-term foreign currency debt. Mexico is in a much different place than it was in 1994. It boasts a relatively high stock of reserves, a small current account deficit and a stock of short-term foreign currency debt that is among the lowest in the major emerging markets. This suggests that as the Fed tightens monetary policy and raises interest rates, many major emerging-market economies—notably including Mexico—are in a much safer place than they were in 1994, the last time the Fed was so aggressive.

By far, the most common concern in regards to my first article on Medium about the idea of an unconditional basic income was that all prices would inevitably go up as a result, immediately reducing the value of each dollar and essentially creating a new zero. Let’s call it the “New Zero Argument” against basic income. The New Zero Argument: Although a noble idea to give money to those in need, no one would actually be better off as a result of basic income due to everything costing more — especially rent — and therefore the policy idea is entirely pointless because the only thing it would attain is a new zero. In economic terms, this concern is the fear of inflation or even hyperinflation, and it is possibly the most common reflex to the notion of just transferring more money to the lower and middle classes. So how grounded in reality is this concern? First, a quick three minute about inflation and deflation. Now that we know more about what gives money its value, and how we actually want a small amount of inflation, we need to understand that basic income is not the idea of printing $3 trillion new dollars every year and dropping it on everyone from helicopters. (Although there are arguments to be made that to a lesser degree this could be done on a temporary and varying basis as economic stimulus according to perceived economic conditions as a kind of “quantitative easing for people” instead of banks) The money for a basic income guarantee would be already existing money circulated through the economic system. It would not be new money, just money shifted from one location to another. This means that the value of each dollar has not changed. The dollar itself has only changed hands. It is also important to note the observation that even when money supply is vastly expanded, the effects on prices need not be extreme. For example, the Fed’s quantitative easing added over four trillion new dollars to the U.S. money supply, and the results were not enough inflation, as defined by the Fed. “But even with the trillions of dollars pumped into the economy, the Fed has been perpetually unable to get inflation up to the 2 percent level it aims for, except for the occasional brief period. There is good news in that predictions by many Fed critics that Q.E. would unleash vicious hyperinflation have come nowhere close to materializing. But neither has it been enough for the Fed to reach its self-imposed goal. In an economy trying to get out from under an overhang of debt, where excessive unemployment is the leading problem, too-low inflation can be deeply problematic and hold back growth. Q.E. has not been powerful enough to generate as much inflation as the Fed says it wants.” So even though basic income would not be printing new money for everyone, even if it were, inflation would not be a guaranteed result. With that understood, to then understand how much we should actually fear rising prices as a result of redistributing existing money from one place to another instead of printing new money requires some studying, but the short answer is that capitalism not only still exists with basic income, it is enhanced. By enhanced, I mean there is growing evidence from where basic incomes have been actually tried that it increases entrepreneurship. We also have actual examples of partial basic incomes, that we can examine for inflationary evidence. Aside from this evidence, we also need to understand how increased demand leading to higher prices isn’t as simple as we might think it is, and how when it comes to housing prices, in a future where everyone has basic incomes, we are likely to see some very interesting market adjustments. Meanwhile, fears involving unearned income and increased velocity require a closer examination. Because of all the above that needs to be understood in order to more fully examine the question of basic income and inflation, I have split off the above information into four separate smaller articles. Let’s call them Exhibits, A, B, C, and D. If you wish to learn more about each collection of evidence, just read the attached sub-article before moving on. Or you can just keep on reading. In 1982, Alaska began providing a partial basic income annually to all its residents. Until the first dividend, Alaska had a higher rate of inflation than the rest of the United States. But ever since the dividend was introduced, Alaska has had a lower rate of inflation than the rest of the United States. A partial basic income was also provided in Kuwait in 2011, when every citizen was given $4,000. Fears of increasing inflation were rampant, as Kuwait already had high inflation. Instead of bad inflation getting worse, it actually got better, decreasing from record highs to under 4 percent. Elsewhere, where basic income experiments have been actually tried and studied, the result in each case is increased entrepreneurship. People use their basic incomes to invest in themselves and their futures, creating new businesses and helping to drive the economy beyond what would be possible without it. This means more people competing for basic income dollars, with better goods and services and lower costs. All of this represents real evidence to counter any fear of inflation. To further inform inflationary fears on a more academic basis, it’s also important to understand the basic variability of supply and demand and how it applies to various goods and services. Where demand already exists and supply is already paid for, demand is unlikely to change as basic income simply replaces one method of payment with another. E.g., replacing food stamps with basic income is unlikely to make people buy more milk. It just means people will likely buy the same amount of milk with cash instead of SNAP. Where demand is actually increased, depending on the good or service, supply can also easily be increased, be increased with some investment in capacity, or not be increased. It is this third case where prices can rise, and points more to increases in prices for luxuries, and not basic goods and services. All of this represents academic evidence to counter any fear of inflation. Rising rent is a particularly worrisome fear for many when first introduced to the idea of basic income. However, two very important things in particular need to be understood when it comes to housing. There are five times more vacant homes than homeless people in the United States today. This represents a large unused supply that need only be made available. The reason many people are not living in these homes is because they were at one time but couldn’t afford to keep them. Basic income rectifies this and puts people back in homes. Technology represents a major factor in future housing prices, especially a future where everyone has a basic income. Everyone will receive a monthly check to afford rent, and will want to spend as little of it as possible on rent. Meanwhile, owners will want to compete for this money with other owners. Those offering the lowest rents will win. One example of this would be Google deciding to create Google Homes and leasing them out to people for a fraction of what people are paying now. Another example would be super affordable WikiHouses. For these two reasons in particular, in combination with the ability of everyone to truly live anywhere for the first time in history, a nationwide market for ultra-affordable housing will be created, and smart businesses will step into this space in hopes of dominating it. All of this represents theoretical evidence to counter any fear of inflation. Two lesser known economic concerns among those who know of them, are possible differences in how we perceive the value of money depending on how it was received, and how quickly it is spent. There is a popular conception that unearned income is perceived differently than earned income, and therefore spent more spuriously. Because people are considered more likely to spend money they didn’t earn, the fear is that people will pay more for goods and services with basic income, and therefore increase prices. This is a misconception though, and not backed by evidence, with the opposite observed in Alaska, where the dividend is treated virtually identically to earned income. The frequency with which a single dollar is spent in the economy — known as the velocity of money — is another variable in the inflation equation. The faster the velocity, the higher inflation can get. However, velocity as measured by the entire money supply is currently lower now than ever in U.S. history. And as measured by the real money supply, it has been crashing since 2007. We want higher velocity for a healthy economy, and the fear that unearned income has less value is unsupported. All of this represents economic evidence to counter any fear of inflation.