Jay Blindauer
In October 2022, I circulated “An In-Depth Examination of Inflation Relief for a Government Contractor[.]” Much has occurred since. Inflation remains an acute problem. In turn, contractors and subcontractors continue to grapple with the ongoing challenges of higher costs. Here, I provide some of the latest information and updates.
CPI
First, consider the U.S. Department of Labor (“DoL”), Bureau of Labor Statistics (“BLS”) Consumer Price Index for All Urban Consumers (“CPI-U”). “There are four major categories of purchases covered in the CPI-U: food, energy, commodities like cars and clothes, and services like rent and healthcare.”[1] The latest CPI-U numbers, which BLS published in its March 14, 2023 summary, stated that “[o]ver the last 12 months, the all items index increased 6.0 percent before seasonal adjustment.”[2]
The 6.0% number is what is called “headline inflation”—meaning it includes food and energy.[3] Because economists often consider food and energy prices to be too volatile, they may pull those items out to see what is called “core inflation.”[4]
Below shows how the 6.0% compares to the previous unadjusted numbers for CPI-U headline inflation.[5]
| CPI-U Month | Increase/Decrease Over Previous 12 Months |
| February 2023 | +6.0% |
| January 2023 | +6.4% |
| December 2022 | +6.5% |
| November 2022 | +7.1% |
| October 2022 | +7.7% |
| September 2022 | +8.2% |
| August 2022 | +8.3% |
| July 2022 | +8.5% |
| June 2022 | +9.1% |
| May 2022 | +8.6% |
| April 2022 | +8.3% |
| March 2022 | +8.5% |
| February 2022 | +7.9% |
| January 2022 | +7.5% |
| CPI-U Month | Increase/Decrease Over Previous 12 Months |
| December 2021 | +7.0% |
| November 2021 | +6.8% |
| October 2021 | +6.2% |
| September 2021 | +5.4% |
| August 2021 | +5.3% |
| July 2021 | +5.4% |
| June 2021 | +5.4% |
| May 2021 | +5.0% |
| April 2021 | +4.2% |
| March 2021 | +2.6% |
| February 2021 | +1.7% |
| January 2021 | +1.4% |
| CPI-U Month | Increase/Decrease Over Previous 12 Months |
| December 2020 | +1.4% |
| November 2020 | +1.2% |
| October 2020 | +1.2% |
| September 2020 | +1.4% |
| August 2020 | +1.3% |
| July 2020 | +1.0% |
| June 2020 | +0.6% |
| May 2020 | +0.1% |
| April 2020 | +0.3% |
| March 2020 | +1.5% |
| February 2020 | +2.3% |
| January 2020 | +2.5% |
Since at least January 2012, the Federal Reserve System’s Federal Open Market Committee (“FOMC”) has maintained that a 2% inflation rate is optimal for maximizing employment and keeping prices stable.[6] Hence, generally speaking, anything above 2% (“above-target”) is sub-optimal for employment and price stability, and trending toward instability. However, the FOMC evaluates the 2% goal against the Personal Consumption Expenditures Price Index (“PCE”) (addressed below). See id. For CPI-U, the target rate may fairly be stated as somewhere in the vicinity of 2.5%, at least for core CPI-U. See id. Therefore, looking at the above data, February 2023 marked at least 23 (possibly 24) months of above-target inflation, which, at least when measured with headline inflation, started in March-April 2021. In sum, the current headline CPI-U portrays a picture of continuing and significant inflation.
PPI
Turning to the BLS Producer Price Index (“PPI”), “[t]he Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.”[7] Under the overall index, “PPIs are available for the output of nearly all industries in the goods-producing sectors of the U.S. economy— mining, manufacturing, agriculture, fishing, and forestry— as well as natural gas, electricity, construction, and goods competitive with those made in the producing sectors, such as waste and scrap materials.”[8] Additionally, “[t]he PPI program covers approximately 72 percent of the service sector’s output[.]”[9]
The PPI focus is at the wholesale (not retail) level. Consequently, compared to CPI, PPI is generally the better indicator of inflation experienced by businesses. Hence, PPI tends to be more germane to Government contractors and subcontractors.
There are other key differences between CPI and PPI.
First, PPI “does not include imports, because imports are by definition not produced by domestic firms.”[10] In contrast, CPI covers the prices consumers pay, irrespective of whether a good or service is imported or domestically produced.
Second, about a third of the CPI is the cost of shelter (which is mostly “owner’s equivalent rent of primary residence”).[11] PPI does not include this factor.[12]
Third, “[i]n contrast to the CPI, the PPI does not currently have complete coverage of services.”[13]
Fourth, “the PPI includes government purchases, while the CPI does not[.]”[14]
Because of the differences, for Government contracts cost and pricing analysis, PPI tends to provide better benchmarks for non-commercial supply or construction contracts.
CPI may be more useful for some commercial products and services, because pricing for those contracts is more closely connected to consumer supply and demand.
For non-commercial services, if it is a service covered by the PPI (e.g. scientific and technical services), the PPI may provide the better benchmark. And if the service is not covered by the PPI (e.g., educational services), the CPI may be preferred.
Alternatively, where contract pricing is based on loaded labor rates, the Employment Cost Index (“ECI”) (discussed below) may offer the best benchmark.
It is also worth noting that, because PPI is focused at the wholesale level, and businesses tend to be inflation shock absorbers for consumers, PPI changes can be more volatile than the CPI. Also, some folks over-indulge in the view that PPI is a prognosticator of CPI.[15] This is because, theoretically, what producers experience today, consumers ought to experience tomorrow. However, because of the many differences between PPI and CPI, it sometimes does not work out that way.[16]
In view of the foregoing, BLS’ March 15, 2023 PPI summary stated that, “[o]n an unadjusted basis, the final demand index rose 4.6 percent for the 12 months ended in February.”[17] Below shows how the 4.6% compares to the previous PPI inflation numbers.[18] Keep in mind that BLS often re-calculates the PPI numbers, and expressly warns that it may do so “up to 4 months after original publication.”[19]
Therefore, the below-provided PPI inflation numbers are the most current—not necessarily what BLS originally published, or where any re-calculations will settle.
| PPI Month | Increase/Decrease Over Previous 12 Months |
| February 2023 | +4.6% |
| January 2023 | +5.7% |
| December 2022 | +6.5% |
| November 2022 | +7.3% |
| October 2022 | +8.2% |
| September 2022 | +8.5% |
| August 2022 | +8.7% |
| July 2022 | +9.7% |
| June 2022 | +11.2% |
| May 2022 | +11.1% |
| April 2022 | +11.2% |
| March 2022 | +11.7% |
| February 2022 | +10.4% |
| January 2022 | +10.1% |
| PPI Month | Increase/Decrease Over Previous 12 Months |
| December 2021 | +9.8% |
| November 2021 | +9.8% |
| October 2021 | +8.9% |
| September 2021 | +8.8% |
| August 2021 | +8.7% |
| July 2021 | +8.0% |
| June 2021 | +7.6% |
| May 2021 | +7.0% |
| April 2021 | +6.5% |
| March 2021 | +4.1% |
| February 2021 | +3.0% |
| January 2021 | +1.6% |
| PPI Month | Increase/Decrease Over Previous 12 Months |
| December 2020 | +0.8% |
| November 2020 | +0.8% |
| October 2020 | +0.5% |
| September 2020 | +0.3% |
| August 2020 | -0.3% |
| July 2020 | -0.3% |
| June 2020 | -0.7% |
| May 2020 | -1.1% |
| April 2020 | -1.5% |
| March 2020 | +0.3% |
| February 2020 | +1.1% |
| January 2020 | +2.0% |
As the numbers show, for PPI, February 2023 marked the 25th month of higher-than-2% inflation. This closely aligns with the 23-to-24-month streak under the CPI. Also, like with the CPI, PPI inflation really started accelerating in March to April 2021. And, like with the CPI, March to June 2022 (middle of 2022) witnessed the worst of it—at least so far. Finally, the data shows that the inflation picture is currently improving, but significant inflation is still occurring.
ECI
The Employment Cost Index (“ECI”) “is a quarterly economic series published by the Bureau of Labor Statistics that details the growth of total employee compensation.”[20] The index is based on data from the National Compensation Survey,[21] which gathers information from “about 7,000 private industry establishments and . . . about 1,400 state and local government establishments[.]”[22]
“The ECI covers the civilian economy, which includes data from both private industry and state and local government. Excluded from the civilian economy are workers employed in federal government and quasi-federal agencies, military personnel, workers in the agricultural sector, volunteers, unpaid workers, individuals receiving long-term disability compensation, and those working overseas. In addition, private industry excludes workers in private households, the self-employed, workers who set their own pay (e.g., proprietors, owners, major stockholders, and partners in unincorporated firms), and family members paid token wages.”[23]
Data is also provided by occupational group (currently relying on the 2018 Standard Occupational Classification (“SOC”)), industry group (currently relying on the 2017 North American Industry Classification System (“NAICS”)), geographical census division (there are nine (e.g., Middle Atlantic)), and whether workers are unionized (or not).[24]
Accordingly, BLS’ latest ECI summary—published January 31, 2023 for the last quarter of 2022—shows, for private industry workers, a total compensation increase of 5.1% over the preceding 12 months, which is detailed as a 5.1% increase in wages/salary, and a 4.8% increase in benefits.[25] Below details how the numbers compare to previous reports.[26] The numbers are for private industry workers (as opposed to all civilian workers), and are not seasonally adjusted.
| Quarter | Total Compensation Increase Over the Preceding 12 Mos. | Wages/Salary Increase Over the Preceding 12 Mos. | Benefits Increase Over the Preceding 12 Mos. |
| 4th Qtr. 2022 | +5.1% | +5.1% | +4.8% |
| 3rd Qtr. 2022 | +5.2% | +5.2% | +5.0% |
| 2nd Qtr. 2022 | +5.5% | +5.7% | +5.3% |
| 1st Qtr. 2022 | +4.8% | +5.0% | +4.1% |
| 4th Qtr. 2021 | +4.4% | +5.0% | +2.9% |
| 3rd Qtr. 2021 | +4.1% | +4.6% | +2.6% |
| 2nd Qtr. 2021 | +3.1% | +3.5% | +2.0% |
| 1st Qtr. 2021 | +2.8% | +3.0% | +2.5% |
| 4th Qtr. 2020 | +2.6% | +2.8% | +2.1% |
| 3rd Qtr. 2020 | +2.4% | +2.7% | +2.0% |
| 2nd Qtr. 2020 | +2.7% | +2.9% | +2.0% |
| 1st Qtr. 2020 | +2.8% | +3.3% | +1.6% |
| 4th Qtr. 2019 | +2.7% | +3.0% | +1.9% |
Based on the data, three things jump out.
First, compensation growth over the last two years has significantly outpaced most of the previous decade. For example, from 2013 to 2018, “[y]ear-over-year [wage] growth has mostly ranged between 2% and 3%[.]”[27] Thus, we are presently in a time of accelerating wages.
Second, despite that March to June 2022 witnessed the worst of overall inflation (at least for the time being), labor costs continue to increase at a high rate. This seems to suggest that above-target inflation will persist. This is because labor is typically a major cost element in pricing. So, if labor costs remain high, it logically follows that prices will remain elevated. Further, higher labor costs also support higher consumer demand. Consequently, higher labor costs can also create inflationary pressure at the consumer level. For these reasons, the accelerated wage growth is concerning. Indeed, it does little good for workers to be paid more if inflation undermines their ability to obtain more. Therefore, arguably, the January 31, 2023 ECI summary does not engender optimism. Perhaps next quarter’s report will be better.
Third, whereas last year supply and construction contractors seemed to experience the worst effects of inflation, now it appears to be the service contractors’ turn.
PCE
The U.S. Department of Commerce, Bureau of Economic Analysis (“BEA”), publishes its own inflation indicators, one of which is the Personal Consumption Expenditures Price Index (as stated above, referred to as “PCE”). BEA, not BLS, assesses personal consumption. This is because BEA is responsible for calculating the gross domestic product (“GDP”). And, “[t]he four components of gross domestic product are personal consumption, business investment, government spending, and net exports.”[28]
The PCE is “[a] measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services.”[29] “It’s similar to the Bureau of Labor Statistics’ consumer price index for urban consumers.”[30] Yet, “[t]he two indexes, which have their own purposes and uses, are constructed differently, resulting in different inflation rates.”[31]
Generally speaking, the PCE is based on the national income and product accounts (“NIPA”) data which BEA uses to determine GDP.[32] This data includes “statistical reports, primarily from the U.S. Census Bureau but also from other government agencies; [ ] administrative and regulatory agency reports; and [ ] reports from private organizations, such as trade associations.”[33] One example of relied-upon census information is the Quarterly Census of Employment and Wages.[34] It is also worth noting that the PCE extrapolates from the CPI and PPI.[35]
Because of the data and methods used to construct the PCE, it is broader than the CPI.[36]
Specifically, unlike the CPI, the PCE does not merely account for goods and services purchased by a consumer, but also purchased on the consumer’s behalf (e.g., medical care, which is typically partially paid for by an employer and/or the Government).[37]
Additionally, unlike the CPI-U, which only focuses on goods and services obtained by urban households, the PCE contemplates all U.S. households.[38]
The PCE also uses different statistical weighting. Particularly, for CPI, shelter takes up about a third of the overall index, with food and energy significantly weighted.[39] Alternatively, PCE typically puts the most weight on healthcare—food and housing are also significantly weighted, but energy is not.[40]
Finally, whereas the CPI weighting is updated annually (as of 2023), the PCE weighting is updated every quarter.[41] Consequently, the PCE is better at adjusting due to the substitution effect.[42] The substitution effect is when consumers select alternatives to avoid higher prices—which, when not accounted for, many experts believe can lead to inflation being statistically distorted.
Overall, when comparing the two indexes, “the CPI tends to show more inflation than the PCE.”[43]
The reason PCE is included in this discussion is because the FOMC relies upon the PCE for making policy. Specifically, “[t]he FOMC focused on CPI inflation prior to 2000 but, after extensive analysis, changed to PCE inflation for three main reasons: [t]he expenditure weights in the PCE can change as people substitute away from some goods and services toward others[;] the PCE includes more comprehensive coverage of goods and services[;] and historical PCE data can be revised (more than for seasonal factors only).”[44]
With the foregoing in mind, BEA’s January 2023 PCE assessment shows a core (minus food and energy) inflation rate of 4.7% over the previous 12 months.[45] I focus on core (and not headline) PCE because that is ostensibly what the FOMC cares most about. Here is how the 4.7% compares to the previous core inflation numbers.[46] Keep in mind that BEA often reassesses the numbers.
Therefore, the below-provided numbers are what is current—not necessarily what was originally published, or where any re-calculations will settle.
| Core PCE Month | Increase/Decrease Over Previous 12 Months |
| January 2023 | +4.7% |
| December 2022 | +4.6% |
| November 2022 | +4.8% |
| October 2022 | +5.1% |
| September 2022 | +5.2% |
| August 2022 | +4.9% |
| July 2022 | +4.7% |
| June 2022 | +5.0% |
| May 2022 | +4.9% |
| April 2022 | +5.0% |
| March 2022 | +5.2% |
| February 2022 | +5.3% |
| January 2022 | +5.1% |
| Core PCE Month | Increase/Decrease Over Previous 12 Months |
| December 2021 | +4.9% |
| November 2021 | +4.7% |
| October 2021 | +4.2% |
| September 2021 | +3.7% |
| August 2021 | +3.6% |
| July 2021 | +3.6% |
| June 2021 | +3.6% |
| May 2021 | +3.5% |
| April 2021 | +3.1% |
| March 2021 | +2.0% |
| February 2021 | +1.5% |
| January 2021 | +1.4% |
| Core PCE Month | Increase/Decrease Over Previous 12 Months |
| December 2020 | +1.4% |
| November 2020 | +1.3% |
| October 2020 | +1.4% |
| September 2020 | +1.5% |
| August 2020 | +1.4% |
| July 2020 | +1.3% |
| June 2020 | +1.1% |
| May 2020 | +1.0% |
| April 2020 | +0.9% |
| March 2020 | +1.7% |
| February 2020 | +1.9% |
| January 2020 | +1.7% |
As the PCE core inflation numbers show, January 2023 marked the 22nd month of higher-than-2% inflation. This is similar to the 23-to-25-month streaks under the CPI and PPI. Also, like with the CPI and PPI, PCE core inflation really started accelerating in March to April 2021. And, similar to the CPI and PPI, the worst of it was in the middle of 2022 (at least so far). It is also interesting to see that core inflation significantly dropped in March to April 2020, coincident with the start of the U.S. pandemic response. Finally, as with other indicators, the data shows that, presently, significant inflation remains.
What does the crystal ball portend?
On March 7, 2023, Federal Reserve Chairman Jerome Powell stated the following to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy[.]”[47]
Hence, the FOMC sees inflation continuing for some time, and remains committed to bringing it down to the target level of 2%. Recall, for January, PCE core inflation was 4.7%. That same month, CPI headline inflation was 6.4%, and was 6.0% in February.
On February 1, the FOMC announced the current federal funds rate range of 4.5 to 4.75% (with the current effective rate being approximately 4.57%).[48], [49] This is subject to change when the FOMC meets again on March 21, 2023.
“The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.”[50] Basically, the FOMC announces a federal funds rate range, and then the Federal Reserve System conducts open market operations (“OMOs”) to try to influence rates to within the established range. Consequently, the higher the federal funds rate, the more costly it is for banks to lend to each other. This impacts the lending rates that banks can give businesses and consumers, which impacts the amount of the money available to buy stuff.[51] To quote Milton Friedman, inflation is “too much money chasing the available supply of goods and services.”[52] Hence, increasing the federal funds rate decreases the money supply, and, in turn, reduces inflation.
But, here’s the rub. According to the Taylor Rule—which is a mathematical formula for determining the federal funds rate necessary to reduce inflation[53]—“the Fed must raise the nominal interest rate by more than the inflation rate.”[54] How much more is what the formula assesses.
In its simplest form (ignoring modified versions), the formula is based on three variables—the current inflation rate compared to the target rate, the GDP output gap, and the neutral interest rate.[55], [56] To perform the calculation using the most current data on the Federal Reserve Economic Data (“FRED”) website, the NYU Stern Department of Economics offers a 6-minute tutorial video, available here.[57] After following the video and running the calculation, the federal funds rate that comes out is 9.26%. Ouch.
Granted, that is based on the presently available FRED data, which is the fourth quarter of 2022 (almost a full quarter old). Further, someone who actually performs the calculation for a living could sharpen the input variables. And, as always, it helps that the U.S. dollar is the world’s reserve currency, because the worldwide demand for dollars helps keep the dollar supply from becoming disproportionate. Still, assuming that the needed federal funds rate is anything close to 9.26%, at the current effective rate of approximately 4.57%, we have a long way to go.
Yet, there are three complications.
First, the higher the federal funds rate, the more risk of recession. The experts are presently debating the prospect.[58] And, as we have all seen in recent days, the ramped up interest rates are already putting significant pressure on banks. As part of this, in a February 2023 white paper released by Former Fed. Reserve Governor Frederic Mishkin, and others, they argue that “there is no post-1950 precedent for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession[,]” and “our analysis casts doubt on the ability of the Fed to engineer a soft landing in which inflation returns to the 2 percent target by the end of 2025 without a mild recession.”[59] Unfortunately, based on the foregoing assessment, the occurrence of a recession (even if it is only mild) appears more likely than not.
Second, the higher the federal funds rate, the larger the interest payments on the national debt. Specifically, according to the U.S. Department of Treasury, the current national debt sits at approximately $31.4 trillion.[60] The U.S. 2022 GDP was only $26.15 trillion.[61]
In the Congressional Budget Office’s (“CBO’s”) February 2023 Budget and Economic Outlook the “CBO projects a federal budget deficit of $1.4 trillion for [fiscal year] 2023.”[62] At the same time, 2023 “federal outlays total $6.2 trillion, or 23.7 percent of GDP[.]”[63]
Against these numbers, the CBO projects that 2023 national debt interest payments will total $640 billion.[64] Compare that to the FY 2023 DoD budget of $816.7 billion[65] (with CBO actually projecting $891 billion in 2023 defense discretionary funding).[66]
However, the $640 billion in 2023 interest payments is based on an average treasury bill (“T-bill”) interest rate of 4.5%.[67] Since T-bill rates tend to track with the federal funds rate, and T-bill maturity is 4 to 52 weeks, a federal funds rate higher than 4.5% may increase 2023 interest payments beyond $640 billion.[68]
Moreover, CBO projects that “[n]et outlays for [national debt] interest [to] nearly double over the period in CBO’s projections, rising from $739 billion in 2024 to $1.4 trillion in 2033.”[69] Yet, CBO based that projection on, from 2024 to 2033, T-bill rates averaging from 2.2 to 3.2%, and the 10-year treasury note interest rate averaging 3.8%.[70] If interest rates are actually higher, and for several years, the CBO’s gloomy debt projection may be, in fact, too optimistic.
Third, to reiterate Milton Friedman, inflation is the product of too much money put into action against the available goods and services, or stated another way, too much spending. And, arguably, there is no greater contributor to over-spending than over-spending by the Federal Government. So, it is unlikely that the excess inflation can be fully resolved without the Federal Government reducing over-spending.
In an August 19, 2022 white paper, Francesco Bianchi, Professor of Economics at Johns Hopkins, and Leonardo Melosi, Economist at the Federal Reserve Bank of Chicago, argued essentially that.[71] They wrote:
“When fiscal imbalances are large and fiscal credibility wanes, it may become increasingly harder for the monetary authority to stabilize inflation around its desired target. If the monetary authority increases rates in response to high inflation, the economy enters a recession, which increases the debt-to-GDP ratio. If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure. As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise.”
“In this pathological situation, monetary tightening would actually spur higher inflation and would spark a pernicious fiscal stagflation, with the inflation rate drifting away from the monetary authority’s target and with GDP growth slowing down considerably. While in the short run, monetary tightening might succeed in partially reducing the business cycle component of inflation, the trend component of inflation would move in the opposite direction as a result of the higher fiscal burden.”[72]
So, according to Bianchi and Melosi, without the Federal Government reducing over-spending, the FOMC raising the federal funds rate may not adequately reduce inflation, and could bring on dreaded stagflation (inflation in context of a contracting economy).
For Government contractors and subcontractors, this situation is particularly ironic. Contractors and subcontractors need the Government to spend money, lest there be no contracts. Over-spending contributes to inflation. To alleviate the inflation and make contract performance feasible, contractors and subcontractors seek a remedy (more money) from the Government. In turn, the Government spends even more. It’s a situation of having the wolf by the ears.
Plainly, the Government will always need contractors. But, as this discussion points out, it would be better for the long term interests of the industry if the Government spent within its means. That is, at least when the country is not in a recession or a major war.
Professor Ralph C. Nash previously addressed excessive deficit spending, calling it “an issue that should be of concern to all folks that work in the procurement arena.” 32 Nash & Cibinic Rep. NL DATE MAR (Mar. 2018). Professor Nash’s warning was appropriate in 2018, and even more so today.
What about raising taxes?
Last, if reducing deficit spending is integral to combating inflation, why not just raise taxes? Presumably, it would help resolve the budget gap, and simultaneously reduce consumer spending.
Well, this is where we run into the Khaldun-Laffer curve. In 1974, Economist Art Laffer (born in Youngstown, OH) introduced the idea to modern economics.[73] Basically, there is a point at which, if the Government raises taxes any further, it does not increase revenue, but actually causes people to change behavior and reduce economic activity, thereby reducing revenue. That point is the optimal point on the Khaldun-Laffer curve. No one knows exactly where that point occurs (as in, what is the optimal average rate, or mix of rates). And the reality is the point at which each person changes economic behavior is unique to that person. So, the optimal point is an aggregation of individual behaviors. Accordingly, over time, the optimal point changes, and is susceptible to sociological conditions (e.g., during an existential war, people more willingly pay higher taxes).
We may not know the optimal point on the Khaldun-Laffer curve. But, we do have a reasonably informed idea as to the limits of Federal tax revenue. That is because, based on the Khaldun-Laffer curve, in 1993, an investment analyst named W. Kurt Hauser made an observation, sometimes called Hauser’s law (but calling it a law is an overstatement because it is not a globally applicable principle like the law of supply and demand).[74]
Hauser observed that, since WWII, regardless of the tax rates, Federal tax receipts have generally hovered around 19.5% of GDP (call it 20% for the sake of simplicity).[75] Looking at the FRED data, it shows a little more variability, but nonetheless affirms ~20% of GDP as a threshold that appears difficult to surpass.[76] Why ~20%, and why for so long? Who knows? Obviously, depending on state and locality, Americans pay different total taxes. And Hauser’s observation does not apply to total taxes. Further, looking at World Bank data, there are plenty of countries where central government tax revenue appears to be more than 20% of GDP (e.g., Austria (24.2% in 2020), Denmark (34.1% in 2020), and France (24.7% in 2020)).[77] Nonetheless, for the U.S. Federal Government, ~20% of GDP remains a tax receipts benchmark that, at least to date, has proven hard to exceed.
In the context of the current inflation, it is important to note that 2022 Federal Government tax receipts were approximately 19.2% of GDP.[78] That is 19.2% of approximately $26.15 trillion, which is $5.02 trillion. Hence, based on these figures, even if 2022 revenue was a full 20%, that would have added to the budget only about $209 billion. Recall that, in fiscal year 2022, the Federal Government ran a deficit of approximately $1.4 trillion, and the CBO projects doing so again for fiscal year 2023.[79]
The President’s 2024 proposed budget is currently in the news, and it does propose tax increases.[80] For the sake of argument, let’s assume that some version of tax increase is passed into law, and that it is imposed in 2024. Also, for the sake of argument, let’s assume that it is wildly successful in that it obtains receipts of 21% of GDP. Which, at least according to the FRED data, no modern Presidential administration has ever accomplished.[81] CBO’s current projection for fiscal year 2024 is a budget deficit of 6.1 percent of GDP—that is, a GDP of $27.266 trillion, a budget of $6.415 trillion, and a deficit of $1.576 trillion.[82] That means, at 21% revenue, the deficit would be approximately $689 billion, which would push deficit spending back to the 2017 level.[83]
Would that be sufficient to beat back inflation, and avoid the stagflation that Bianchi and Melosi warned about? Don’t know. But, the thought exercise does highlight the overall point. It seems unlikely that there is some combination of federal fund rate and/or tax increases which will ultimately prevail over inflation unless there is some level of meaningful Federal budget cuts. And, regarding the age-old question of how much deficit spending can the Government run up—the answer is until biting inflation takes hold.
In sum, as Fed. Chair Powell stated, inflation likely “has a long way to go[.]”[84] And it may involve a recession. Therefore, dealing with it remains just as relevant for contractors and subcontractors as it was a year ago.
Supply Chain Realignment
Generally speaking, going into 2023, supply chains have significantly improved, alleviating some of the inflationary pressure caused by previous disruptions.
“Ocean freight timelines are on a steady decline, ports are less congested, labor strikes have been narrowly averted, product and worker shortages have eased, prices have fallen, warehouses are full (maybe too full), friendshoring, nearshoring[,] and reshoring efforts have accelerated[,] and China has lifted its ‘zero Covid’ policy.”[85]
In March to April 2022, McKinsey & Co. surveyed 113 “supply chain leaders,” and found that “[n]inety-seven percent of respondents say they have applied some combination of inventory increases, dual sourcing, and regionalization to boost resilience.”[86] Hence, supply chain realignment is well underway.
This is particularly true in the Government contracts space. At this point, the Government is recurrently making statutory and regulatory changes increasing domestic preferences, and/or sourcing with U.S. allies. Examples include, but certainly are not limited to, the following.
On November 15, 2021, the President signed into law the Build America, Buy America (“BABA”) Act. Generally speaking, BABA “requires iron, steel, manufactured products, and construction materials used in infrastructure projects funded by Federal financial assistance to be produced in the United States.”[87]
Last year, the FAR Council updated FAR Part 25 to implement changes imposed by Executive Order No. 14,005 (Ensuring the Future Is Made in All of America by All of America’s Workers). Generally speaking, to now qualify as a domestic end product under the Buy American statute, the new rules “increase[d] the domestic content threshold initially from 55 percent to 60 percent, then to 65 percent in calendar year 2024[,] and to 75 percent in calendar year 2029.”[88]
Section 851 of the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2023 added New Zealand to the 10 U.S.C. § 4801(1) list of National Technology and Industrial Base (“NTIB”) countries (U.S., Canada, U.K, and Australia comprise the rest of the current list).[89] Generally, the NTIB countries are supposed to work together to ensure the R&D, technical know-how, production capacity, and maintenance of important defense materials and technologies.
The Homeland Procurement Reform Act (Section 7112 of the FY 2023 NDAA) requires the operational components of Homeland Security “[t]o the maximum extent possible, not less than one-third of funds obligated in a specific fiscal year for the procurement of such covered items [(footwear, uniforms, patches, etc.)] shall be covered items that are manufactured or supplied in the United States by entities that qualify as small business concerns, as such term is described under section 3 of the Small Business Act (15 U.S.C. [§] 632).”[90] Arguably, the Act builds off the 2009 Kissell Amendment (6 U.S.C. § 453b), and even expressly orders a review of Homeland Security’s compliance with the Kissell Amendment.[91]
Section 5949 of the FY 2023 NDAA imposes on Government contractors and subcontractors certain prohibitions on semiconductors and related services from listed Chinese companies.[92] The law is similar to Section 889 of the FY 2019 NDAA, which, for Government contractors and subcontractors, imposes certain prohibitions on telecommunications or video surveillance equipment or services from listed Chinese companies.[93]
Section 857(b) of the FY 2023 NDAA amends Section 1211 of the FY 2006 NDAA to expand the prohibition on DoD obtaining certain export-controlled goods or services from a Chinese military company.[94] Part of the expansion, the prohibition now extends to listed Chinese military industrial complex companies, and listed companies owned and controlled by the Chinese government.[95]
As shown by the examples, the trend line is supply chain realignment toward domestic preferences and friend-sourcing. Likely, this will continue and increase. Even so, as helpful as this trend may be for supply chain reliability, national security, and promoting democratic values, there are many instances where it will, at least in the short term, increase costs. After all, U.S. purchasers became addicted to cheap goods and services coming from far off places and our adversaries for that exact reason—it was cheap. Now, building capacity domestically or with our friends will take time. And it may be awhile before economies of scale, streamlined logistics, and other efficiencies are achieved that lead to comparable pricing. So, at least for the time being, supply chain realignment will likely have an inflationary impact for many contractors and subcontractors.
Changes to Public Law No. 85-804 Extraordinary Contract Relief
In my October 2022 note, I discussed the inflation relief available to a prime contractor under Public Law No. 85-804 of 1958 (currently codified at 50 U.S.C. §§ 1431-35, and implemented at FAR Subpart 50.1). Basically, the statutory authority permits a procuring Agency to modify a contract in order to provide a remedy to a contractor when it is in the interests of national defense to do so. The key thing to remember is it is an authority for a procuring Agency to provide a sort of equitable relief—not relief based on legal entitlement.[96]
In December, Section 822 of the FY 2023 NDAA (titled “Modification of DOD Contracts to Provide Extraordinary Relief Due to Inflation Impacts”) significantly expanded the Public Law No. 85-804 authority as it pertains to DoD contractors and subcontractors.[97]
Specifically, the statute expressly states that DoD can now “make an amendment or modification to an eligible contract when, due solely to economic inflation, the cost to a prime contractor of performing such eligible contract is greater than the price of such eligible contract[,]” and DoD “may not request consideration from such prime contractor for such amendment or modification.”[98] An eligible contract is one DoD deems “would facilitate the national defense.”[99]
Further, a prime may submit an extraordinary relief request on behalf of a subcontractor, provided that “when, due solely to economic inflation, the cost to a covered subcontractor of performing an eligible subcontract is greater than the price of such eligible subcontract.”[100] Furthermore, the prime must certify that it will remit the adjustment to the subcontractor, and not require the subcontractor to provide consideration.[101]
Moreover, “[i]f a prime contractor does not make the request described . . ., a covered subcontractor may submit to a contracting officer of the Department of Defense a request for an amendment or modification to an eligible subcontract when, due solely to economic inflation, the cost to such covered subcontractor of performing such eligible subcontract is greater than the price of such eligible subcontract.”[102]
That truly is extraordinary. Generally speaking, DoD is not in privity of contract with a subcontractor. Yet, Section 822 provides a direct inflation relief opportunity for subcontractors. This is possible because, again, the concept behind Public Law No. 85-804 is a form of equitable, not legal, relief.
Now, the limitations.
First, if the requests exceeds $500,000, it must be resolved “at or above the level of an Assistant Secretary or his Deputy, or an assistant head or his deputy, of such department or agency, or by a Contract Adjustment Board established therein.”[103] So, for the Army, Air Force, or Navy, the request will likely go to its respective Contract Adjustment Board.
Second, like many other forms of contract inflation adjustment, Section 822 is just an opportunity to recover increased costs.[104] That means no additional profit.
Third, the new authority ends on December 31, 2023, unless Congress sees fit to later extend it.[105]
Fourth, and this may be most important. DoD officials are only authorized to provide this new relief to the extent that there are “amounts specifically provided by an appropriations Act[.]”[106] According to DoD News, the funding provided included “$12.6 billion for inflation impacts on purchases[,]” “$3.8 billion more to account for inflation in military construction[,]” and “$2.5 billion for inflation impacts on DOD fuel purchases.”[107] Whatever the exact sums may be, obviously, it is a finite sum of money. So, like your favorite diner on Sunday morning, get there before they run out of pancake batter.
Overall, Section 822 provides a considerable inflation relief opportunity for DoD contractors and subcontractors, at least for those who are able to take advantage of it.
FTC-Proposed Ban of Non-Compete Clauses
Talking about inflation, the Federal Trade Commission (“FTC”) has some of its own to dispense. Specifically, on January 19, 2023, FTC, using its authority under the Federal Trade Commission Act to regulate unfair competition, issued a proposed rule to generally ban non-compete agreements between an employer and employee.[108] The proposed rule broadly defines a non-compete agreement “as a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”[109] Further, although “the definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements . . . such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”[110] So, FTC is potentially also going to suppress some NDAs and non-solicitation agreements.
There is a lot to say about the ramifications of such a policy, particularly on Government contractors and subcontractors providing services. However, to stay on topic, consider the potential inflationary impact of the proposed policy. Particularly, as discussed above with the ECI data, wage and benefit increases are presently running at 5.1% per year. Relatively speaking, that is high, and is contributing to inflation. On top of that, the FTC estimates that its proposed rule “would increase workers’ total earnings by $250 to $296 billion per year.”[111] For Government contractors, there is cause to question whether the proposed policy will work out that way. Nonetheless, assuming that FTC’s assessment is correct, that is over $250 billion of cost that businesses will presumably add to prices, further fueling inflation. As stated above, it does little good for workers to be paid more if inflation undermines their ability to obtain more. And FTC’s proposed policy is fairly characterized as potentially inflationary.
Last Word
Unfortunately, as the above discussion highlights, above-target inflation continues. There are many inputs feeding it, the most prominent of which is arguably a Federal budget deficit that has grown to $1.4 trillion per year. And, given that it took years for these economic conditions to build, it makes sense that it may take years to ameliorate. Yet, no outcome is certain. It is a big, interconnected world, there are too many factors, and too much of it is unknown. So, we all wait to see what happens next.
[1] What is inflation and how is it measured?, USAfacts.org (published on Nov. 11, 2021 and last updated Sept. 29, 2022), available at https://usafacts.org/articles/what-is-inflation-and-how-is-it-measured/.
[2] Consumer Price Index Summary, USDL-23-0484, bls.gov (Mar. 14, 2023), available at https://www.bls.gov/news.release/cpi.nr0.htm. It is important to note that the 6.0%, and the numbers provided in the subsequent tables, are not seasonally adjusted. “Seasonal adjustment removes the effects of recurring seasonal influences from many economic series, including consumer prices. The adjustment process quantifies seasonal patterns and then factors them out of the series to permit analysis of non-seasonal price movements. Changing climatic conditions, production cycles, model changeovers, holidays, and sales can cause seasonal price variations. For example, oranges can be purchased year-round, but prices are significantly higher in the summer months when the major sources of supply are between harvests.” Fact Sheet on Seasonal Adjustment in the CPI, What is seasonal adjustment?, bls.gov (last modified Feb. 10, 2023), available at https://www.bls.gov/cpi/seasonal-adjustment/questions-and-answers.htm.
[3] Headline inflation, Wikipedia.com (last edited Nov. 20, 2022), available at https://en.wikipedia.org/wiki/Headline_inflation.
[4] See id.
[5] All data comes from the BLS Consumer Price Index Archived News Releases. See Consumer Price Index Archived News Releases, bls.gov (last modified Feb. 16, 2023), available at https://www.bls.gov/bls/news-release/cpi.htm#2021.
[6] See Kristie M. Engemann, Federal Reserve Bank of St. Louis, The Fed’s Inflation Target: Why 2 Percent? (Jan. 16, 2019), available at https://www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent; Federal Reserve issues FOMC statement of longer-run goals and policy strategy, federalreserve.gov (Jan. 25, 2012), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm; Gas and used car prices are over 20% above their levels last year, usafacts.org (last updated May 14, 2021), available at https://usafacts.org/articles/inflation-cpi-gas-and-used-car-prices-above-their-levels-last-year/ (“When looking at the percent change in the core CPI-U from 12-months before, inflation has largely been below the Federal Reserve’s target rate for the past five years, which would generally adjust to around 2.5% for the core CPI-U.”).
[7] Producer Price Indexes, bls.gov, available at https://www.bls.gov/pPI/.
[8] See Producer Price Indexes, Frequently Asked Questions, Question 1: What is the Producer Price Index (PPI)?, bls.gov (last modified Sept. 13, 2021), available at https://www.bls.gov/ppi/faqs/questions-and-answers.htm.
[9] See id.
[10] How Does the Producer Price Index Differ from the Consumer Price Index? Comparing the Personal Consumption PPI with the CPI, bls.gov (last modified Sept. 21, 2022), available at https://www.bls.gov/ppi/methodology-reports/comparing-the-producer-price-index-for-personal-consumption-with-the-us-all-items-cpi-for-all-urban-consumers.htm.
[11] Drew Desilver, Pew Research Center, As inflation soars, a look at what’s inside the consumer price index, pewresearch.org (Jan. 24, 2022), available at https://www.pewresearch.org/fact-tank/2022/01/24/as-inflation-soars-a-look-at-whats-inside-the-consumer-price-index/. (“ ‘[O]wner’s equivalent rent of primary residence” – essentially how much homeowners would have to pay if they were renting their homes. (The idea is to separate out shelter, the service provided by a house, from whatever value the house might have as an investment.)” Id.
[12] See Producer Price Indexes, Frequently Asked Questions, Question 4: How does the Producer Price Index differ from the Consumer Price Index?, bls.gov (last modified Sept. 13, 2021), available at https://www.bls.gov/ppi/faqs/questions-and-answers.htm; see also Christina Majaski, Producer Price Index (PPI): What It Is and How It’s Calculated, Investopedia.com (Feb. 16, 2023), available at https://www.investopedia.com/terms/p/ppi.asp (“[T]he PPI does not measure price changes for aggregate housing costs[.]”).
[13] How Does the Producer Price Index Differ from the Consumer Price Index? Comparing the Personal Consumption PPI with the CPI, supra.
[14] See Producer Price Indexes, Frequently Asked Questions, Question 4: How does the Producer Price Index differ from the Consumer Price Index?, supra.
[15] See Chris Jernstrom, CPI, PCE, PPI, WHAT? – A Primer on Inflation, ironstreamcapital.com (Aug. 15, 2018), available at https://www.ironstreamcapital.com/post/cpi-pce-ppi-what-a-primer-on-inflation (“PPI tends to be more volatile than CPI or PCE as businesses often absorb some input price shocks.”).
[16] See How Does the Producer Price Index Differ from the Consumer Price Index? Comparing the Personal Consumption PPI with the CPI, supra.
[17] Producer Price Index News Release summary, USDL 23-0486, bls.gov (Mar. 15, 2023), available at https://www.bls.gov/news.release/ppi.nr0.htm.
[18] All data comes from the BLS Producer Price Index Archived News Releases. See Producer Price Index Archived News Releases, bls.gov (last modified Feb. 16, 2023), available at https://www.bls.gov/bls/news-release/ppi.htm.
[19] See, e.g., Producer Price Index News Release summary, USDL 23-0280, Table A, n.1 (Feb. 16, 2023), available at https://www.bls.gov/news.release/archives/ppi_02162023.htm.
[20] James Chen, Employment Cost Index (ECI): Definition, Uses, and Publication, Investopedia.com (Apr. 19, 2022), available at https://www.investopedia.com/terms/e/eci.asp.
[21] Handbook of Methods, National Compensation Measures: Concepts, bls.gov (last modified Dec. 15, 2017), available at https://www.bls.gov/opub/hom/ncs/concepts.htm (“The National Compensation Survey (NCS) produces indexes measuring change over time in labor costs through the Employment Cost Index (ECI) and the level of average costs per hour worked through the Employer Costs for Employee Compensation (ECEC).”).
[22] Employment Cost Index Technical Note, bls.gov (last modified Jan. 31, 2023), available at https://www.bls.gov/news.release/eci.tn.htm.
[23] Employment Cost Index, Questions and Answers, bls.gov (last modified Apr. 13, 2022), available at https://www.bls.gov/eci/questions-and-answers.htm.
[24] See Handbook of Methods, National Compensation Measures: Concepts, supra.
[25] Employment Cost Index Summary, USDL-23-0147, bls.gov (Jan. 31, 2023), available at https://www.bls.gov/news.release/eci.nr0.htm.
[26] All data comes from the BLS Employment Cost Index Archived News Releases. See Employment Cost Index Archived News Releases, bls.gov (last modified Feb. 7, 2023), available at https://www.bls.gov/bls/news-release/eci.htm.
[27] Drew Desilver, For most U.S. workers, real wages have barely budged in decades, Pew Research Center, pewresearch.org (Aug. 7, 2018), available at https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/.
[28] Kimberly Amadeo, Components of GDP Explained, 4 Critical Drivers of America’s Economy, thebalancemoney.com (updated Jan. 18, 2022), available at https://www.thebalancemoney.com/components-of-gdp-explanation-formula-and-chart-3306015.
[29] Personal Consumption Expenditures Price Index, bea.gov (last modified Feb. 24, 2023), available at https://www.bea.gov/data/personal-consumption-expenditures-price-index.
[30] Prices & Inflation, U.S. Price Indexes, bea.gov (last modified Aug. 19, 2021), available at https://www.bea.gov/resources/learning-center/what-to-know-prices-inflation.
[31] Id.
[32] National Income and Product Accounts, Wikipedia.com (last edited Feb. 16, 2023), available at https://en.wikipedia.org/wiki/National_Income_and_Product_Accounts.
[33] NIPA Handbook: Concepts and Methods of the U.S. National Income and Product Accounts, Ch. 5: Personal Consumption Expenditures, at 5-7 (updated Dec. 2022), available at https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-05.pdf.
[34] See NIPA Handbook: Concepts and Methods of the U.S. National Income and Product Accounts, Ch. 3: Principal Source Data, bea.gov (updated May 2019), available at https://www.bea.gov/resources/methodologies/nipa-handbook.
[35] How are personal consumption expenditures (PCE) prices and quantities derived?, bea.gov (last modified Aug. 19, 2009), available at https://www.bea.gov/help/faq/521.
[36] Consumer Price Data, Fed. Reserve Bank of Cleveland, clevelandfed.org, available at https://www.clevelandfed.org/center-for-inflation-research/consumer-price-data.
[37] See id.; see also Brian O’Connell, edited by Benjamin Curry, The Personal Consumption Expenditures Price Index (PCE), forbes.com (Sept. 8, 2022), available at https://www.forbes.com/advisor/investing/pce-inflation/.
[38] Kimberly Amadeo, PCE Inflation, How It’s Calculated, and Why the Fed Prefers It, thebalancemoney.com (Mar. 4, 2021), available at https://www.thebalancemoney.com/pce-inflation-how-it-s-calculated-why-the-fed-prefers-it-4004939.
[39] Andrew Foran, Economist, PCE vs. CPI: What’s the difference and why it matters right now, economics.td.com (Oct. 27, 2022), available at https://economics.td.com/us-cpi-pce.
[40] See id.
[41] See id.
[42] See id.
[43] James Bullard, President’s Message: CPI vs. PCE Inflation: Choosing a Standard Measure, Fed. Reserve Bank of St. Louis, stlouisfed.org (July 1, 2013), available at https://www.stlouisfed.org/publications/regional-economist/july-2013/cpi-vs-pce-inflation–choosing-a-standard-measure.
[44] Id.
[45] Personal Income and Outlays, January 2023, BEA 23-07, bea.gov (Feb. 24, 2023), available at https://www.bea.gov/news/2023/personal-income-and-outlays-january-2023.
[46] All data comes from the BEA Archive of monthly reports of Personal Income and Outlays. See Archive, bea.gov (last modified on March 8, 2023), available at https://www.bea.gov/news/archive?field_related_product_target_id=721&created_1=All&title=.
[47] Scott Horsley, Federal Reserve Chair Jerome Powell warns inflation fight will be long and bumpy, npr.gov (Mar. 7, 2020), available at https://www.npr.org/2023/03/07/1161623217/federal-reserve-jerome-powell-senate-inflation-interest-rates-economy-recession.
[48] Jeff Cox, Fed raises rates a quarter point, expects ‘ongoing’ increases, cnbc.com (Feb. 1, 2023), available at https://www.cnbc.com/2023/02/01/fed-rate-decision-february-2023-quarter-point-hike.html.
[49] Federal Funds Effective Rate, fred.stlouisfed.org (last updated Mar. 1, 2023), available at https://fred.stlouisfed.org/series/fedfunds.
[50] Federal Funds Effective Rate, fred.stlouisfed.org (last updated Mar. 8, 2023), available at https://fred.stlouisfed.org/series/DFF.
[51] To illustrate the federal funds rate impact on lending, consider the prime rate. The prime rate “is the interest rate banks charge their most creditworthy borrowers, like large corporations. For several decades now, the rule of thumb has been that the prime rate is equivalent to the federal funds rate plus 3%.” Rob Wile, How raising interest rates helps fight inflation and high prices, nbcnews.com (updated Dec. 22, 2022), available at https://www.nbcnews.com/business/economy/how-raising-interest-rates-helps-fight-inflation-high-prices-recession-rcna33754.
[52] Peter N. Ireland, What Would Milton Friedman Say about the Recent Surge in Money Growth?, mercatus.org (May 2, 2022), available at https://www.mercatus.org/research/policy-briefs/what-would-milton-friedman-say-about-recent-surge-money-growth.
[53] Adam Hayes, Taylor Rule, Investopedia.com (June 24, 2002), available at https://www.investopedia.com/terms/t/taylorsrule.asp.
[54] John H. Cochrane, Why Hasn’t the Fed Done More to Fight Inflation? (Apr. 27, 2022), chicagobooth.edu, available at https://www.chicagobooth.edu/review/why-hasnt-fed-done-more-fight-inflation.
[55] “In an article published in 1993, John Taylor showed how U.S. monetary policy from 1987 through 1992 could be approximated fairly well by a simple equation that linked the level of the federal funds rate–the policy interest rate of the Federal Reserve–to three variables. The first variable is the neutral value of the policy interest rate in the longer run (adjusted for inflation). The second is the deviation of current inflation from the Federal Open Market Committee’s (FOMC) objective. And the third is the percentage difference of gross domestic product (GDP) from its potential level–the level of output associated with the full utilization of resources.” Principles for the Conduct of Monetary Policy, fedreserve.gov (last updated Mar. 18, 2018), available at https://www.federalreserve.gov/monetarypolicy/principles-for-the-conduct-of-monetary-policy.htm.
[56] “The GDP gap or the output gap is the difference between actual GDP or actual output and potential GDP, in an attempt to identify the current economic position over the business cycle.” Output gap, Wikipedia.com (last edited Nov. 25, 2022), available at https://en.wikipedia.org/wiki/Output_gap. “[T]he Fed’s neutral rate of interest is the point at which rates are no longer stimulating economic growth, but they’re also not restricting it.” Sarah Foster, edited by Mary Wisniewski, The U.S. economy could be at stake when Fed interest rates rise above this crucial level, bankrate.com (Sept. 21, 2022), available at https://www.bankrate.com/banking/federal-reserve/what-is-the-fed-neutral-rate-of-interest/.
[57] NYU Stern Economics FRED Tutorial #3: Taylor Rule, youtube.com (Feb. 5, 2015), available at https://www.youtube.com/watch?v=Q2VvYXBj9_w.
[58] See Dan Weil, Recession Likely After Fed Rate Hikes: Ex-Fed Governor Frederic Mishkin and four other economists say Fed rate hikes could spark an economic downturn, thestreet.com (Feb. 25, 2023), available at https://www.thestreet.com/economy/recession-rate-hikes-fed-governor.
[59] See id.; Managing Disinflations, Stephen G. Cecchetti, Michael E. Feroli, Peter Hooper, Frederic S. Mishkin, Kermit L. Schoenholtz, with Matthew Luzzetti and Justin Weidner, chicagobooth.edu, at 2 and 5 (Feb. 2023), available at https://www.chicagobooth.edu/-/media/research/igm/docs/usmpf-2023-conference-version.pdf.
[60] What is the national debt?, fiscaldata.treasury.gov, available at https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/.
[61] Gross Domestic Product, Fourth Quarter and Year 2022 (Second Estimate), BEA 23-06, bea.gov (Feb. 23, 2023), available at https://www.bea.gov/news/2023/gross-domestic-product-fourth-quarter-and-year-2022-second-estimate.
[62] CBO, The Budget and Economic Outlook: 2023 to 2033, cbo.gov, at PDF 3 (Feb. 2023), available at https://www.cbo.gov/system/files/2023-02/58848-Outlook.pdf.
[63] See id. at PDF 8 (pg. 2).
[64] See id. at PDF 24 (pg. 18).
[65] Jim Garamone, Biden Signs National Defense Authorization Act Into Law, DoD News, defense.gov (Dec. 23, 2022), available at https://www.defense.gov/News/News-Stories/Article/Article/3252968/biden-signs-national-defense-authorization-act-into-law/.
[66] CBO, The Budget and Economic Outlook: 2023 to 2033, cbo.gov, at PDF 22 (pg. 16).
[67] See id. at PDF 41 (pg. 35, Table 2-1).
[68] Elizabeth Roy Stanton, How Does the Fed Funds Rate Affect Treasury Bills?, thestreet.com (Nov. 3, 2022), available at https://www.thestreet.com/markets/rates-and-bonds/how-does-the-fed-funds-rate-affect-treasury-bills-1156889 (“As investments, fed funds and Treasury bills generally offer comparable yields.”); Treasury Bills, treasurydirect.gov, available at https://www.treasurydirect.gov/marketable-securities/treasury-bills/ (“We sell Treasury Bills (Bills) for terms ranging from four weeks to 52 weeks.”).
[69] CBO, The Budget and Economic Outlook: 2023 to 2033, cbo.gov, at PDF 26 (pg. 20).
[70] Id. at PDF 4.
[71] Francesco Bianchi, Leonardo Melosi, Inflation as a Fiscal Limit, kansascityfed.org (Aug. 19, 2022), available at https://www.kansascityfed.org/Jackson%20Hole/documents/9037/JH_Paper_Bianchi.pdf.
[72] Id. at pg. 1.
[73] See Art Laffer explains the Laffer Curve, iealondon (Mar. 10, 2017), available at https://www.youtube.com/watch?v=FCk2-QVqCck.
[74] Hauser’s law, Wikipedia.com (last edited Aug. 18, 2022), available at https://en.wikipedia.org/wiki/Hauser%27s_law.
[75] See id.
[76] St. Louis Fed. Reserve Bank Federal Reserve Economic Data, Federal Receipts as Percent of Gross Domestic Product, fred.stlouisfed.org (last updated Feb. 23, 2023), available at https://fred.stlouisfed.org/series/FYFRGDA188S.
[77] Tax revenue (% of GDP), The World Bank, data.worldbank.org, available at https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS.
[78] St. Louis Fed. Reserve Bank Federal Reserve Economic Data, Federal Receipts as Percent of Gross Domestic Product, supra.
[79] Jeff Cox, U.S. budget deficit cut in half for biggest decrease ever amid Covid spending declines, cnbc.com (Oct. 21, 2022), available at https://www.cnbc.com/2022/10/21/us-budget-deficit-cut-in-half-for-biggest-decrease-ever-amid-covid-spending-declines.html; see also CBO, The Budget and Economic Outlook: 2023 to 2033, cbo.gov, at PDF 3.
[80] Kate Dore, CFP, President Biden’s proposed 2024 budget calls for top 39.6% tax rate, cnbc.com (Mar. 9, 2023), available at https://www.cnbc.com/2023/03/09/president-bidens-proposed-2024-budget-calls-for-top-39point6percent-tax-rate.html.
[81] St. Louis Fed. Reserve Bank Federal Reserve Economic Data, Federal Receipts as Percent of Gross Domestic Product, supra.
[82] CBO, The Budget and Economic Outlook: 2023 to 2033, cbo.gov, at PDF 11-12 (pgs. 5-6).
[83] St. Louis Fed. Reserve Bank Federal Reserve Economic Data, Federal Surplus or Deficit, fred.stlouis.org (last updated Oct. 21, 2022), available at https://fred.stlouisfed.org/series/FYFSD.
[84] Scott Horsley, Federal Reserve Chair Jerome Powell warns inflation fight will be long and bumpy, npr.gov, supra.
[85] Alicia Wallace, Covid broke supply chains. Now on the mend, can they withstand another shock?, CNN.com (Jan. 16, 2023), available at https://www.cnn.com/2023/01/16/economy/supply-chain-outlook-2023/index.html.
[86] Knut Alicke, Edward Barriball, Tacy Foster, Julien Mauhourat, and Vera Trautwein (Tim Beckhoff and Jürgen Rachor contributing), Taking the pulse of shifting supply chains, mckinsey.com (Aug. 16, 2022), available at https://www.mckinsey.com/capabilities/operations/our-insights/taking-the-pulse-of-shifting-supply-chains#/.
[87] Construction Materials Used in Federal Financial Assistance Projects for Transportation Infrastructure in the United States Under the Build America, Buy America Act; Request for Information, 87 Fed. Reg. 45,396 (July 28, 2022).
[88] Federal Acquisition Regulation: Amendments to the FAR Buy American Act Requirements, 87 Fed. Reg. 12,780, 12,781 (Mar. 7, 2022); see also FAR 25.101(a).
[89] James M. Inhofe National Defense Authorization Act for Fiscal Year 2023, Pub. L. No. 117-263, § 851 (Dec. 23, 2022), available at https://www.congress.gov/117/bills/hr7776/BILLS-117hr7776enr.pdf.
[90] Id. at § 7112(b)(1)(A)(i).
[92] See id. at § 5949(a)(1).
[93] See FAR Subpart 4.21.
[94] See Pub. L. No. 117-263, § 857(b); see also DFARS 225.770 to 225.770-5.
[95] See Pub. L. No. 117-263, § 857(b).
[96] See, e.g., Automated Power Sys., Inc., 1993 WL 765651, at 4 (T.C.A.B. Nov. 22, 1993) (“Relief is given, not because the recipient is legally entitled to it[ ]; but because the United States will receive some benefit. Actions under 50 U.S.C. §§ 1431-1435 are not subject to the Contract Disputes Act, and Contract Disputes Act procedures are not followed; there is no legal right to a trial, to discovery, or to relief.”).
[97] See Pub. L. No. 117-263, § 822.
[98] Id. at § 822(c)(1).
[99] 50 U.S.C. § 1431(a) and (f)(2).
[100] Pub. L. No. 117-263, § 822(c)(2).
[101] See id.
[102] See id. at § 822(c)(3).
[103] 50 U.S.C. § 1431(a) (as modified).
[104] See id. at § 1431(c) and (d) (as modified).
[105] Pub. L. No. 117-263, § 822(e).
[106] Id. at § 822(b).
[107] Jim Garamone, Biden Signs National Defense Authorization Act Into Law, DoD News, defense.gov (Dec. 23, 2022), available at https://www.defense.gov/News/News-Stories/Article/Article/3252968/biden-signs-national-defense-authorization-act-into-law/.
[108] See Non-Compete Clause Rule, 88 Fed. Reg. 3,482, et seq. (Jan. 19, 2023).
[109] Id.
[110] Id.
[111] 88 Fed. Reg. at 3,501.