Economic Trends 
January 2021 | Creighton Institute for Economic Inquiry  

Welcome to our January report covering results from Creighton’s two December economic surveys. Creighton’s monthly survey of supply managers and procurement experts in nine Mid-America states indicates economic growth is in a range indicating the regional economy is experiencing a healthy economic rebound, but current employment remains below pre-COVID-19 levels. The overall index from Creighton’s monthly survey of bank CEOs in rural areas of 10 states climbed above growth neutral for December, but with stabilizing and even expanding farmland prices. 
Creighton University
Jack MacAllister Chair in Regional Economics
From the Desk of Professor Ernie Goss
Punishing Success by Raising Taxes:
Biden’s Bite to Support Government Expansion

President Biden has promised to raise taxes on high income individuals to fund his planned rapid decade-long expansion in federal spending. His approach calls for raising the top income tax rate from 37% to 39.6%, limiting deductions for top earners, and boosting the long-term capital gains tax rate for high earners from 20% to 39.6%.
Table 1 below lists the 10 states with current highest income tax rates on additional income. As presented, a California high wage earner, or self-employed, keeps only $35.85 of every $100 of additional income. Importantly, these rates do not account for other taxes paid primarily by higher income individuals such as capital gains taxes, and do not consider Biden’s proposed cap on deductions for high income earners. The rates do include Medicare, and Social Security taxes.
Even before the Biden Bite, the top 5% of earners pay approximately 58% of federal income taxes. Likewise, the increase is ill-timed hitting earners in an economic downturn (i.e. a reverse stimulus). The Keynesians should be properly outraged, but don’t count on witnessing it.
In addition to funding a plethora of new government programs, proponents of the Biden Bite argue that these tax hikes will reduce income inequality as measured by the Gini Coefficient. The Gini Coefficient measures income inequality with the coefficient varying from zero (least income inequality) to 1.00 (maximum income equality).
Table 2 lists the ten states experiencing the greatest degree on income inequality. Four states with the highest income inequality are ranked in the top 15 states in terms of income tax rates. Calculating the correlation between top tax rates and the Gini Coefficients for the 50 states and D.C. indicates only a slight association between tax rates and the Gini Coefficients. However, the association is opposite to that argued by the Biden proponents. That is, states with higher tax rates on higher earners experience greater income inequality, not less.
This essay is based on state income tax data indicating that increasing the tax rate on higher income has not and will not reduce income inequality, and in fact may increase income inequality.

Taxing better educated, higher earners will instead further burden high earners which discourages initiative, reduces the motivation to improve human capital via education, and incentivizes tax avoidance and/or tax evasion. Furthermore, raising taxes at this time, offsets some of the positive impacts of stimulating the economy with higher consumer spending fueled by Stimulus I and II.
Number of the Month
$120 billion

At their December meeting, the Federal Reserve’s Open Market Committee reaffirmed its commitment to purchase $120 billion in U.S. Treasury bonds and mortgage-backed securities. What does this mean for you? This commits the Fed to inject $120 billion per month into the U.S. economy. This tends to increase the U.S. money supply, reduce the value of the U.S. dollar, hold interest rates down, and stimulate inflation.

Goss Eggs 
Recent Dumb 
Economic Moves

Buyers of Special Purpose Acquisition Companies (SPAC) have not been bitten yet, but they need to beware of elevated risks in 2021. SPACs raised more capital in 2020 than in the previous 10 years. Michael Klausner, a Stanford law professor found that between January 2019 and June 2020, SPACs lost 12% of their value within six months of finding a private firm to take public. The bubble is likely to burst in 2021 as investors learn the truth about SPACs.

Year-End Manufacturing Index Falls: Finding & Hiring Workers is Top 2021 Challenge

December survey highlights:
  • For a second straight month, the regional Business Conditions Index declined, but remained in growth range.   
  • Approximately 36% of manufacturers reported that finding and hiring qualified workers would be their top challenge for 2021. This compares to 70% recorded last year at this time.  
  • On average, supply managers expect to receive an average wage and salary increase of 2.1%. This compares to 2.5% recorded at this time last year.
  • The wholesale inflation gauge indicates elevated inflation in the pipeline.
  • Comparative 2020 economic performance from top to bottom: (1) Nebraska, South Dakota, Arkansas, Missouri, Kansas, Oklahoma, Iowa, Minnesota and (9) North Dakota.

Rural Mainstreet 
Farmland Prices Best Growth Since 2013: Farm Equipment Sales Highest Since June 2013

December survey results at a glance:
  • Overall index rose to its second highest reading in the past 10 months.
  • For the first time since June 2013, the farm equipment sales index rose above growth neutral.  
  • For the first time since 2013, the farmland price index rose above growth neutral for three straight months.
  • Bankers ranked water availability as the top 2021 farm economy issue; farm labor cost/availability was ranked as the second biggest 2021 issue or concern.
  • Among ten 2021 farm concerns, farm income and farm liquidity were the two issues of least concern. 
  • Growth in agriculture income pulled farmer borrowing down for a second straight month.

View the complete Rural Mainstreet Report.
The Outlook

Professor Goss' Forecast - January 2021:

  • The yield on U.S. long-term Treasury bonds, along with mortgage rates, to climb by another ¼ % (25 basis points) by the end of Q1, 2021.
  • The January job additions will likely be disappointing.
  • Annualized and seasonally adjusted Q4 2020 GDP growth will range between 1% to 2%.

Fed Outlook (as shared by Pacific Financial Planners):
  • “The Federal Reserve on Wednesday concluded its last meeting of the Federal Open Market Committee for 2020. Fed officials provided more detail for its monthly bond purchase program and reiterated their commitment to a monthly purchase of $120 billion of Treasury and mortgage-back securities until its inflation and employment goals are met. The Federal Reserve also raised its outlook on the U.S. economy. It revised its September forecast of a 3.7% decline in GDP in 2020 to a 2.4% decline, and increased its 2021 GDP growth forecast from 4.0% to 4.2%. It also expects unemployment at 2020 year-end would fall to 6.7%, substantially lower than its earlier estimate of 7.6%."
Corn Crop
The Good

  • The USDA said U.S. stockpiles of corn and soybeans would shrink to their lowest levels since 2014 and the average price for corn and soybeans this marketing year would be the highest since 2013-14.
  • U.S. listed companies raised a record $167 billion in initial public offerings in 2020 exceeding the former record $107.9 billion in IPOs for 1999.
  • The latest Purchasing Management Indices (PMI) for both ISM’s national survey and Creighton’s Mid-America were in a range indicating healthy manufacturing growth.
  • According to the Case-Shiller national home price index expanded at an annual pace of 7.9% in October.

Image - Percentages Dollar Falling
The Bad

  • For the first time in eight months, the U.S. lost jobs, shedding 140,000 non-farm jobs in December as the unemployment rate remained steady at 6.7%.
  • Since August 2020, the yield on the 10-year U.S. Treasury bond has risen by almost 60 basis points (0.6%). Two factors account for this: higher expected inflation, and lower risk.
  • Green energy euphoria has truly set investors up for heartbreak in 2021. For example, Tesla stock is now selling for 1,000 times earnings (i.e. a rate-of-return of 0.001 or 0.1%).
  • The U.S. trade deficit climbed to its highest level since 2006. The U.S. budget deficit soared to $572 billion in the first quarter of the fiscal year
Keep An Eye On

  • U.S. Retail Sales report. On Jan. 15 and Feb. 17, the U.S. Census Bureau releases retail and food services sales for December and January, respectively. Look for weaker reports to signal a buying pullback by the U.S. consumer
  • U.S. Jobs Report. On February 5, the U.S. Bureau of Labor Statistics releases its job numbers for January. Another disappointing report would encourage Congress to expand economic stimulus programs.
  • Creighton’s Rural Mainstreet report. On January 21st, Creighton releases its January survey results of bank CEOs in rural areas of 10 states in the Rocky Mountains and Plains states. Growth in the rural economy has been solid and improving.
  • Yield on 10-year U.S. Treasury bond. Contemporaneous @ As inflation expectations rise, so will this yield. A better measure of future inflation than CPI.
Ernest Goss, Ph.D. 
Email: [email protected]