Federal Reserve building


PODCAST: Inflation, economic growth, tax policy, the Federal Reserve and moving forward

Bellarmine on Business

Host, Jim Ray interviews Dr. Raymond and Carl Hafele on the state of the US economy and issues to consider as we move forward. Join us for a lively discussion about inflation, economic growth, tax policy, the Federal Reserve and more.

Dr. Frank Raymond is a professor of economics at BU. Over the past 20 years, he’s been the interim Dean and the associate Dean for the Rubel school of Business. He focuses on international development, econometrics and macro-economics.

Carl Hafele began teaching at BU 15 years ago. He’s an investment money manager. He had an institutional firm responsible for managing over $20 Billion in assets. He’s now focused on personal investing and instructing as part of the Bellarmine MBA program.

This is the “rainy day.” The solution should involve a mix of fiscal and monetary policy. 


In 2009, the economy experienced the real estate bust and many banks were failing. The Fed injected liquidity via mortgage-backed securities. The banks sat on a large portion of the liquidity. In Episode 2, Stock Yards Bank & Trust CEO Ja Hillebrand commented on the fact that today many of the companies have fairly healthy balance sheets, in spite of the pandemic.

The economy of 2020 is, in Carl’s words, a different animal compared to the 2009 crisis. This is the “rainy day.” The solution should involve a mix of fiscal and monetary policy. 



Who Has the Responsibility?

We began with a brief review of the Laffer Curve and taxes. The question at large is “Are we at the inflection point where investors/entrepreneurs stop investing because of the tax on the margin dollar of the returns of that investment?” Tax rates can actually serve as a disincentive. So, where is the peak of the curve? It’s a balance of achieving maximum productivity, while generating maximum tax revenue for the government. 

The private sector has a role. Thinking of these policies at the household or company level can help to simplify the theory. Do you want to work that extra overtime? Is it worth the effort to start a side job? Is this the proper time for a company to expand operations or sales teams? 

The public sector also has a role. There are parts of the economy in which the market doesn’t function as efficiently. The determination of which parts are best served by the public sector is an area of open debate.


There are 4 Areas Where the Private Sector Doesn’t Do as Well

  1. Lack of competition among firms.
  2. When there are information problems (i.e. asymmetric information).
  3. When an external party is receiving a benefit or harm, but isn’t directly involved.
  4. Dealing with Public Goods (non-rival and non-excludable)


Should We be Worried about Inflation?

Carl discusses the velocity of money. Simply put, “money times velocity equals GDP.” A rising velocity is generally associated with a better economy. For the majority of Carl’s life, the velocity has been roughly 1.7 times. It reached as high as 2.25, prior to 1995. Prior to the pandemic, we were in the 1.3-1.4 range. Once the pandemic set in, we settled at 1.0. Based on this, Carl predicts that regardless of the amount of money the Fed prints, inflation shouldn’t be a factor at these low-velocity levels.


What Should the Government Do, Now?

Frank suggests we should consider raising interest rates, once we recover from the COVID pandemic. This is also absolutely not the time to consider raising taxes. Either of those moves in the current scenario could slow or eliminate positive economic activity.

The risk is that the economy could be in the midst of suffering a "death by a thousand cuts.” As the national debt grows, it could potentially prevent us from being able to generate tax revenue as a result of economic activity. 

The risk is that the economy could be in the midst of suffering a "death by a thousand cuts.”


Growth rates could be negatively impacted due to the national debt service. Interest rates have been extremely low.  How much lower could it go in an effort to spur economic activity? The fact is monetary policy may not have as immediate of an impact in this effort.


There are 3 Kinds of Inflation

  1. CPI – the cost for a basket of goods.
  2. Monetary inflation – based on the Fed’s balance sheet.
  3. Inflation in Asset Prices – this can be a limiting factor for the economy and ROI.


Simplify Tax Policy

Over the years, our tax policy has become extremely complex. It’s become both uncertain and inequitable. It may be time to aggressively simplify. This would include the elimination of loopholes. Businesses want certainty. The cumbersome tax policy, combined with politics, leads to a level of uncertainty and unpredictability.

Today, our individual states independently set state and local taxes. In recent years, there’s been an accelerated move by businesses and individuals flocking to lower tax states. As some states look at increasing taxes as a way to replenish lost economic activity-base revenues, they are risking a flight of Adjusted Gross Income (AGI) from their tax base.

Parting Words

It looks like 2-3 new vaccines may be hitting the market. Even if it takes months to disperse them, this is a positive for the overall economy. There’s a risk that a new stimulus package could limit short-term growth if the incentives for the unemployed act as a disincentive to return to work. We seem to be moving in the right directions to avoid a depression.  Now, we need to avoid actions by the government that don’t actually have a lasting, positive impact. 

Frank described the 4 ways to generate grow (primarily via the private sector): land, labor, physical- and human-capital.  Government may decide to invest in certain areas, but it ultimately needs to be driven by the private sector.

For additional insights, consider Carl’s reading book The Great American Reset, Riding the Economic Rollercoaster of Capitalism (published 2014).

Tags: Podcast , tax policy

About Bellarmine University

Bellarmine University is a vibrant community of educational excellence and ethical awareness that consistently ranks among the nation’s best colleges and universities. Our students pursue an education based in the liberal arts – and in the distinguished, inclusive Catholic tradition of educational excellence, the oldest and most rewarding in the western world. It is a lifelong education, worthy of the university’s namesake, Saint Robert Bellarmine, and of his invitation to each of us to learn and live In Veritatis Amore – in the love of all that is beautiful, true and good in life.