June 2023 Q&A

You asked, we answer

This Q&A covers 18 questions. Zack took the first 5, which are about a variety of topics. Anirban took the last 13, which are mostly about the construction industry but also touch on a few other macro topics.

Questions Answered by Zack:

How did the US government fund itself before the start of income taxes in 1913? 

By drinking and smoking. In 1915 (income taxes were new and pretty insignificant at the time), tariffs and excise taxes accounted for almost 80% of federal revenue. Liquor and tobacco taxes (part of excise) alone accounted for about 43% of total revenue.

What impact would a national $15 min wage have on credit card delinquency rates 4 quarters from now?

The minimum wage is a topic so politicized that research on the topic is pretty useless; even economists don’t have a good handle on the effects of increasing it. The University of Chicago polls a panel of top economists about various topics, and here’s how they responded to a statement about the effects of raising the minimum wage to $15/hour back in 2015.

A quarter of polled economists agree raising it would substantially lower employment for low-wage workers, a quarter disagree, and more than a third are uncertain (another 20% just didn’t answer the question). Imagine getting several expert opinions on a medical treatment and the doctors give you this dispersion of views. Not great.

Of course, there’s been a lot of inflation since 2015, and the minimum wage would have to be about $19/hour to have the same purchasing power as a $15/hour wage eight years ago. I’m not sure their answers would be any different with the lower real wage.

Here’s what I’m confident about with a $15/hour minimum wage: some workers will get a raise to $15/hour and, at least in the short-term, some low wage workers will lose their jobs (or some low wage jobs won’t come into existence in the first place). This will have a push and pull effect on credit card debt—higher earners probably have marginally lower delinquency rates, the now unemployed marginally higher.

Final answer (with low confidence): a $15 minimum wage wouldn’t have a very noticeable effect on credit card delinquency rates in either direction.  

For someone that can afford it, is now a good time to buy that vacation house you always dreamed of in Arizona, or should we wait a few years?

Given the introductory clause “for someone who can afford it,” yes! The homebuying environment will probably be better in a few years; mortgage rates will eventually come back down, and inventory levels will improve. If you get an ARM, or refinance in a few years, or best of all can buy in cash, then follow your dreams! Unless your dream is to have a new house built in the Phoenix area, because apparently there’s not enough water for that.  

Why do business school grads feel like this is the worst time to be entering job market since 2008?

A lot of MBAs (and undergrad business students) end up working in tech or finance. Tech companies hired like crazy during the low-interest rate boom and are now trimming their workforces, and finance has been cutting back since the string of bank failures earlier this year. In May, the two most tech-oriented subsectors lost a combined 2,700 jobs and commercial banks lost 5,800.

Beyond the job losses, I suspect a lot of companies in those two sectors are currently holding on to employees that would have been laid off if worker shortages weren’t so severe. Employers recognize that worker shortages are going to be a problem for a while, and paying someone you don’t need for a little while is preferable to laying them off and then being unable to fill the position when activity picks back up. If companies are retaining workers they’d otherwise let go, this creates a traffic jam for recent graduates.

With personal spending & income keeping pace with inflation, are there other tools the Fed can use to tame inflation? Would a tax increase help?

Higher taxes could definitely accomplish the same goal as interest rate hikes, but the real answer to this question comes down to the difference between monetary and fiscal policy.

The Fed handles monetary policy, which is a pretty limited set of tools like interest rates, bank reserve requirements, and open market operations (buying and selling securities). Legislators handle fiscal policy, which includes things like taxation and government spending. Both monetary and fiscal policy can affect inflation. 

Monetary and fiscal policy are often contradictory because the Fed’s job is to attain full employment and keep inflation around a 2% annual rate, while legislators’ job is to get reelected. So even as the Fed was raising interest rates, which is contractionary monetary policy, lawmakers were doing things like maintaining the pause on student loan payments, which is expansionary fiscal policy.

Questions Answered by Anirban:

What’s the state of the lending environment for commercial construction projects?