Diffusion Indices and Deficits

Episode Summary

Executive Summary: The episode blends a weekly data rundown with a deep dive into U.S. fiscal policy. The panel discusses housing, inflation, labor market indicators, and then evaluates the timing, composition, and macro effects of the American Rescue Plan and Biden’s broader Build Back Better agenda. Bernard Yaros argues fiscal support has been necessary but should be paired with tax increases and careful deficit management; the group generally favors child care and early education support while questioning some implementation details and debt sustainability.

Main Topics: Weekly economic indicators and market signals (Priority: 5/5): The hosts identify key real-time indicators to track, including lumber prices, tax refunds, the Philly Fed prices-paid index, the back-to-normal index, UI claims, the 10-year Treasury yield, TSA throughput, and sticky CPI components. Housing market cooling amid strong demand (Priority: 5/5): The discussion centers on soaring lumber prices, tight inventories, and moderation in housing starts and existing home sales. The panel concludes that demand remains strong, but supply constraints are pushing the market toward slower growth and eventual equilibrium. Inflation pressures and commodity volatility (Priority: 4/5): Ryan highlights that commodity-driven inflation fears may be overstated because businesses can absorb or substitute around input cost spikes, and many commodity surges are temporary. The panel emphasizes the gap between prices paid and prices received as a useful indicator. Fiscal impact of the American Rescue Plan (Priority: 5/5): Bernard explains that most stimulus checks and UI support from the ARP have already reached households, while state/local aid, education funds, and child tax credits will phase in more slowly. The near-term fiscal impulse is strong but will fade as emergency programs expire. Labor supply, UI benefits, and reservation wages (Priority: 5/5): The group debates whether enhanced unemployment benefits reduce work incentives. Bernard argues the effect is real but not the only factor; childcare, health risk, and altered wage expectations also raise reservation wages and affect labor supply. Build Back Better priorities and tradeoffs (Priority: 5/5): The panel mostly supports childcare and early childhood education as the most attractive components for labor supply and long-run growth. They are more skeptical about free community college implementation and about overly optimistic IRS enforcement revenue assumptions. Debt and deficit sustainability (Priority: 5/5): The conversation ends with a disagreement on federal debt risks. Bernard is relatively sanguine if the debt-to-GDP ratio stabilizes, while Mark argues the U.S. should act now, before deficits become a crisis and fiscal space disappears.

Key Arguments: Commodity prices can change rapidly, so headline inflation fears may overstate the risk of persistent inflation. Housing moderation is driven more by supply constraints and inventory shortages than by weak underlying demand. The American Rescue Plan’s biggest short-term boost came from stimulus checks and enhanced UI; remaining support is slower-moving and more distributed over time. Enhanced UI likely affected labor supply by increasing reservation wages, but childcare constraints and health concerns are also major drivers. Childcare subsidies and early childhood education are the strongest parts of the Build Back Better agenda because they can raise labor force participation and long-run growth. Free community college may be worthwhile in concept but difficult to implement fairly across states with very different tuition levels. The administration’s IRS enforcement revenue estimate appears too optimistic relative to CBO-style assumptions. Debt is less alarming if the debt-to-GDP ratio is stable, but rising debt momentum could eventually trigger higher interest costs and a confidence problem.

Data Points: Lumber price: $1,453 per thousand board feet - Chris’s statistic of the week; noted as down 15% from the peak just two weeks earlier. Lumber peak: $1,676 per thousand board feet - Recent high discussed as evidence of extreme commodity volatility. Average tax refund: $2,856 - Bernard’s statistic of the week; average refund was described as 3% to 5% above comparable periods in prior years. Additional child tax credit refunds: $50 billion - Expected to hit between July and December as monthly payments are advanced. Philly Fed prices-paid index: 76.8 - Ryan’s statistic of the week; highest since the early 1980s and used to gauge inflation pressure. Philly Fed headline business conditions index: 31.5 - Used as a contrast to the prices-paid index; indicates strong business activity. Back to normal index: 89.9% - Mark’s chosen weekly statistic, showing the economy is almost back to pre-pandemic conditions. Florida back to normal index: 99.8% - State closest to fully back to normal, according to the index. New York back to normal index: Below 80% - State at the bottom of the back-to-normal ranking. Lowest pandemic back-to-normal level: 60% - The index’s trough during the shutdown period. Existing home sales: 5.85 million annualized - Discussed as below the prior six-to-twelve-month pace above 6 million. Home market time on market: 17 days - April figure showing extremely tight existing-home inventories. UI claims: 444,000 - Weekly unemployment insurance claims discussed as a high-frequency labor market indicator. Pre-pandemic UI claims: 215,000 - Benchmark cited as roughly normal or better-than-normal labor market conditions. 10-year Treasury yield: 1.65% - Ryan said it had risen from near 0.5% last August, reflecting stronger growth and inflation expectations. TSA throughput: 1.7 million travelers - Daily checkpoint volume, still well below about 3 million in 2019. ARP size: $1.9 trillion - The American Rescue Plan discussed as the key pandemic relief package. Build Back Better agenda: $4.5 trillion over 10 years - Combined proposed spending and tax credits in the American Jobs Plan and American Families Plan. Infrastructure proposal size: $1.3 trillion to $1.7 trillion - The physical infrastructure component was described as narrowing in negotiations from roughly $2.2 trillion. State and local aid: $350 billion - ARP funds expected to be spent gradually over several years. Education funding: $170 billion - ARP support for K-12 and higher education, with spending extending through 2027. PPP remaining funds: $8 billion - Loan support still left, targeted to underserved communities. UI multiplier: $1.70 in GDP per $1 spent - Bernard cited prior Moody’s work showing UI is a highly effective stimulus tool. IRS enforcement proposal: $80 billion in added budget / $700 billion expected revenue - Bernard questioned the administration’s projected revenue yield as too high. CBO-style IRS payoff assumption: $3 in revenue per $1 spent - Used to argue revenue estimates should be closer to $200–300 billion than $700 billion. Publicly held federal debt to GDP: ~103%–104% - Current post-pandemic debt burden before full ARP effects are included. Projected debt to GDP after ARP: ~110% - Expected to rise once additional deficit spending is reflected in the data. Post-World War II peak debt to GDP: 145% - Historical high cited as comparison. Historical pre-crisis debt to GDP: ~40% - Long-run benchmark before the financial crisis.

Pivotal Quotes: "I think the inflationists are still crying wolf." — Ryan Sweet: Ryan argues commodity spikes are real but not necessarily signaling prolonged double-digit consumer inflation. "It’s high, but as long as it’s high and stable, we can navigate through no big deal." — Bernard Yaros: Bernard’s view on debt sustainability: the level matters less than whether the debt ratio keeps rising. "The time to act, the time to think about it is now when things are relatively stable." — Chris Dees: Chris warns against waiting until deficits become an immediate crisis before addressing debt and fiscal reform.

Implications: Listeners should expect near-term inflation and housing pressure from supply bottlenecks, while fiscal support fades unevenly. Childcare and labor-supply policies may matter most for growth, but debt discipline and realistic revenue scoring will shape what passes and how sustainable it is.