Inflation Is Broken

By John Mauldin


I have been writing for many years that the US in particular and the Western “developed” world in general were approaching a time where none of our choices would be good.

We have arrived. Any choice the government and central banks of the US and the rest of the world make will ultimately lead to a crisis. Just as the choices that Greenspan and Bernanke made about monetary policy created the Great Recession, Yellen and Powell’s choices will eventually lead us to the next crisis and ultimately to what I call The Great Reset.

I believe we have passed the point of no return. Changing policy now would create a recession as big as Paul Volcker’s in the early ‘80s. There is simply no appetite for that. Further, the national debt and continued yearly deficits force monetary policy to stay accommodative.

Today we will look at these problems through the lens of inflation. In general, consumers agree inflation is undesirable. They don’t want the prices of things they buy to go up.

But let’s talk about academics and central bankers. A little inflation makes sense from their viewpoint. They want to always have room to cut interest rates, should the economy falter. 

They would prefer to avoid negative interest rates. They need “normal” interest rates a comfortable distance above zero. 

That’s hard to maintain unless the economy has some degree of inflation. So, they tolerate a little inflation and, when necessary, actually encourage it.

But this raises another question: How do central bankers, or anyone else, actually know how much inflation exists? They depend on data, and data can be twisted, misinterpreted, or just plain wrong. Sometimes all at once.

I touched on this problem last week in Everything Is Broken. So much of our broken economy is the result of broken monetary policy, resulting from broken data. This affects everything

If Federal Reserve officials think inflation is low when it’s actually high, or vice versa, they will set interest rates too high or low. Governments, businesses, and consumers will all make similarly bad decisions, all of which will eventually coalesce into a catastrophe like the Great Recession. And it will all trace back to a data problem.

Inflation is far from the only data problem but it is probably the most consequential. 

So today we’ll dive deeper into this subject. Our distorted inflation data has a lot to do with housing “prices.” I use quote marks there because price may not be the right word, as you will see.

Housing vs. Shelter

We have to start with a definitional issue. For most people, housing is a major expense, and often the single largest one. Hence it is rightly a big part of the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).

The Federal Reserve favors the PCE measure, while for whatever reason, the business media seems to focus on CPI. Typically, the core CPI and PCE move more or less in tandem. But notice that both measures use housing as their biggest component. This table shows the weightings.


Source: Wikipedia


Notice that owner’s equivalent rent (OER) in the CPI is 234%, but total housing costs are weighted at 42.4%. The BLS tries to take into account how many people own their home, rent their home, and then what the other costs of housing are. 

Some people own their home outright and other people have large mortgages. 

As you will see, there is a lot of guesswork involved.

First, do you actually “consume” housing? 

In one sense, no. The house is still there after you sleep in it, just slightly used. You didn’t consume the house itself. You consumed the shelter it provided you for that particular night. 

I know, a subtle distinction. But it matters to academics and the way we measure housing/shelter inflation.

Shelter is a service; a house is a capital good. When you buy one you aren’t consuming; you are investing. 

Since 1981, the inflation benchmarks haven’t measured housing prices directly. They measure something called “Owner’s Equivalent Rent” (OER).

So where do the benchmarks get that OER number? They do a monthly phone survey. Respondents are asked if they own or rent their home. Renters state how much they pay. 

Easy enough. Homeowners are asked what they “would” charge someone else to live in their same home, if it were empty and unfurnished.

See a problem? This is completely subjective. Have you done the market research to see what you would charge to rent your home? Have you actually tried to rent it at that price? Probably not. 

So OER is uninformed guesswork from the start. Nonetheless, the survey responses go into a giant formula that looks like this…


Source: BLS


… from which they derive the monthly change in OER for a given area. The “sixth root” of this relative number is the one-month change in OER. 

Simple, unless you have a swimming pool or other complications, in which case they make adjustments.

I believe the wonks who calculate all this are smart, dedicated public servants. They want to get it right. They have unfortunately been given a difficult and maybe impossible task. 

Adjusted subjective opinions of how much rent a given residence in a given place would fetch in a given month are a huge part of our inflation measures.

As an aside, the BLS typically sends out price checkers to verify prices for the various items they measure. But lately, due to COVID, they have not sent humans but instead relied on phone calls and estimates, as noted in their February release. How big a distortion is this? 

No one really knows.

There is no reason to think these inputs reflect reality, and many reasons to suspect they don’t. This has consequences.

Assumed Supply

Housing prices have no direct influence on our inflation measures. They do have indirect influence via the imputed, subjective “owner’s equivalent rent” methodology. Its accuracy is questionable at best.

What’s not questionable, though, is that home prices have a direct impact on the homeowner’s spending power. The mortgage payment is a function of the home’s purchase price and, if higher, reduces the amount the homeowner can spend on other goods and services. 

The impact varies, of course. Maybe you got a great deal on your house years ago, then prices rose even more in your area. 

You have a lot of equity which raises your net worth and probably makes you confident enough to raise other spending. But it can go the other way, too.

In any case, the size of your mortgage payment (even if it is zero because you don’t have one) certainly affects the amount you would want to rent your home to someone else. 

So do other factors: property taxes, expected maintenance costs, the tax impact of having rental income. Furthermore, your mortgage payment itself may be a moving target if you have a variable rate.

There’s more. If, hypothetically, you are going to move out of your home and rent it to someone else, where will you go? How much will it cost? 

Have you even thought about it? Maybe not. 

But you would have to consider all these things to properly estimate your OER.

Econ 101 also tells us cost doesn’t set prices. Supply and demand set prices. In this case, though, you are told to simply assume you would supply your home for rent, and estimate a price at which you would do so. 

That’s not how real life works. You can’t instruct people to imagine doing something that may be inconceivable to them and expect to get any kind of reliable answer.

Yet that’s how we arrive at a number that is the largest single input into (arguably) the single most important economic data point, which a committee at the Fed looks at when setting the single most important price in the world. See the problem?

Broken Inflation

Central banks all over the world, including the Federal Reserve, have an aspirational goal of 2% inflation. If you are age 30–40, that means every dollar you save today will lose half its value by the time you need it for retirement

And that’s what passes for planning by a committee. They literally plan on destroying the value of your dollar. The only real debate is over how fast to destroy it.

But forget that for a moment. The problem is we would already have 2% inflation, and probably more, if we correctly measured housing in the PCE and CPI with the actual cost of homeownership instead of imputing it via OER, as is done in both CPI and PCE.

Despite all the issues described above, housing prices and OER actually stayed fairly close for many years. I remember writing about OER in 2005 when it was much closer to being an acceptable measure of housing price inflation. Up until about 2000 or so, home prices and OER moved more or less in in tandem most of the time, though with OER far less volatile.

I argued back then it didn’t matter which measure you used as long as you were consistent. That is no longer the case because OER and housing prices are no longer consistent. 

And they diverged because home prices took off higher when Greenspan kept rates artificially low, creating a housing bubble which led to a subprime bubble. Bernanke piled on (remember subprime is under control?) and then Yellen and now Powell.

Mish Shedlock has a great chart showing the disconnect between CPI, OER, and housing prices.


Source: MishTalk


Starting about 2000, and becoming increasingly severe, there was a huge divergence between housing prices and OER. The gap shrank as the Great Recession unfolded, but took off again as it became clear the Fed wouldn’t tighten policy. The 2013 “Taper Tantrum” looks like a turning point in that regard.

And here we are. OER is the single biggest component in CPI at 24%. It rose 2% in the last year. The Case Shiller Home Price Index is up over 10% in the same period. 

Substituting the Case Shiller index for OER, as Mish did in this next chart, shows 3.5% total inflation, not the 1.4% that the CPI suggests, and which is even less in the PCE measure.


Source: MishTalk

Painful Solution

Now, imagine an alternate universe in which, ahead of the Great Recession, the Fed had looked at inflation based on housing prices instead of implied OER. Instead of cutting rates to stimulate growth, they would have likely raised rates to fight the obvious inflation.

You can go back even further. If Greenspan had raised rates because of rising inflation starting about 2003–4, there would have been no housing bubble, no subprime crisis, no overheated stock market, and no stock market crash. We would not have had the worst unemployment numbers since the Great Depression. Retirees and everyone else would have been able to earn reasonable yields on fixed income instruments.

Wouldn’t higher rates have killed the stock market? I don’t think so. It might have risen less, but based on productivity and profits instead of irrational exuberance. I think most investors would prefer reasonable growth and no market crashes.

People hail Greenspan and Bernanke as some kind of maestros who orchestrated an economic symphony. 

I disagree. I think their actions were the root cause of the Great Recession, just as Yellen and now Powell and his successor will cause the next crisis. 

Artificially low inflation benchmarks, due in large part (though not exclusively) to the housing mismeasurement, give them the justification they need to give Wall Street (and increasingly Main Street) what it wants.

The data is very clear to anybody who wants to look, and especially to the Fed. They simply refuse to pay attention because it doesn’t fit the narrative they want everyone to believe.

You could argue that the Fed should normalize rates based on the above measurement. Paul Volcker in the 1970s was the last Fed chairman willing to do that. There is zero appetite at any central bank in the world to embrace such a philosophy.

Thanks to years of mistakes, Powell is locked into a policy trajectory that leads nowhere good but also can’t be changed without enormous pain.

What Will Inflation Be?

Inflation in February was benign. But starting with March, because of the COVID effect, the year-over-year comparisons will begin to show higher inflation. If you go back two years inflation will still look benign, but that is not what the BLS or the media will do. 

They will focus only on one-year change. And for March through June/July, the comparisons will probably show inflation rates well above 2%. Before the end of summer, combined with the recent stimulus package, it could actually approach 3%.

I believe this will be transitory, but the bond markets will see those numbers and want to push interest rates higher. 

The Fed will tolerate higher interest rates on the 10-year bond up to a point. 

They have said they would be willing to accept 3% inflation for a time, but they also want to keep interest rates down. Without actually implementing Yield Curve Control, per se, they can simply modify their bond buying to include longer maturities, and/or increase the volume of US government bonds they buy.

The previous administration was certainly willing to run up the deficit. The current administration is going to do so on steroids with infrastructure and other programs, on top of the just-passed COVID relief. 

The Federal Reserve’s balance sheet is around $7.5 trillion now, and rising some $120 billion per month.


Source: Federal Reserve


The fiscal 2021 US deficit will certainly be more than $4 trillion and approaching $5 trillion, and the Treasury has more debt that has to be rolled over. 

The US government simply can’t afford higher interest rates. Financing costs would overwhelm the budget. Further, we are beginning to see Treasury auctions coming in “weak,” meaning investors demand higher yields.

The Federal Reserve is going to become the buyer of last resort, exactly like the central banks in Japan, the ECB, and to some extent the UK are. I expect the consequences will be much the same: lower GDP growth.

I’m asked all the time, how long can this go on? 

Probably longer than we can imagine. It will continue until it doesn’t. 

The Federal Reserve will continue to hold rates down, punishing savers and retirees. 

Their policies will aggravate wealth and income differences but no one will deal with the actual causes.

In summary, nothing is really going to change in terms of Federal Reserve policy. 

It will keep using broken data to justify its loose monetary policies, the monster deficits will require them to purchase even more Treasury bonds and, given their presuppositions, they really have no choice

They will continue on that course until there is a crisis, and then they will double down. There is absolutely no way to know when that will happen. Japan and Europe have gone on for a long time. 

There is no reason to think the US can’t. Powell and whoever succeeds him will echo Mario Draghi’s “Whatever it takes” line.

I don’t want you to fight the Fed, but at the same time you don’t have to play the game. You have alternatives. 

Think in terms of an absolute return strategy, combined with value-oriented companies and more active management. 

Friends don’t let friends buy passive index funds. Not in these times.

What’s in Your Investment Kitchen?

To that point, a brief commercial. In a world of high valuations, zero-bound Treasury rates, and junk bonds yielding 4.1%, what does an investor do? 

You look for new portfolio ingredients. 

At CMG and our partners (like my old friends at Alphacore who have joined the Mauldin Team), we now have scores of offerings designed to help you meet your personal goals. 

Cash flow/income strategies in the mid-to-high single digits, absolute return strategies uncorrelated with market fluctuations, highly targeted dividend strategies, and exciting growth opportunities from my network of relationships. 

We have begun to refer to all of the above as the Mauldin Kitchen. To show you what’s in our kitchen, whether you need an appetizer (a single idea) or a full portfolio meal, I have prepared a short special report called “What’s in Your Investment Kitchen?” 

Simply click on the link to get your copy. 

I would be very surprised if some of the ideas in my kitchen don’t tempt your investment palate. 

And I’ll be making a few calls myself to get a feel for what it is that you are really thinking about, what’s important to you, and what you need. So don’t be surprised if you get a call from me.

Puerto Rico and the Future of Travel Plus SIC

I am still here in Puerto Rico, enjoying the gym and beaches and my unusual research/writing, visiting with friends, but I am so ready to get back on a plane and travel a little bit. 

The key words in that last sentence are “a little bit.” I’ve been talking with numerous friends who prior to the pandemic did a lot of traveling for both business and pleasure. Without exception, every one of them says that, while they are looking forward to traveling for pleasure, they anticipate significantly less business travel.

While all the “futurists” told us that we would be doing more videoconferencing instead of travel, the predictions in 2019 were that that future would arrive somewhere in the middle of the 2020s. We would gradually get used to it. 

The pandemic forced it on us faster. And the reality is that where in the past you might go to see a client and talk to 10 people, now you will probably find three in the office and the rest patched in by video. You might as well do a video unless a face-to-face meeting is required.

I fully intend to start traveling again after my second vaccine shot and SIC. 

First up will likely be a trip to New York City, for both business and pleasure. I have so many friends there and I enjoy the conversations around the dinner table. Plus media and business. Over the last decade I averaged around 200,000 air miles per year. 

I’ll bet I struggle to get 100,000 in the future. It is going to be a long time before I travel to in-person conferences in Europe and Asia. 

It is basically the same with my friends—though I think leisure travel may actually increase for a few years. People are ready to get out.

I’ve been spending a great deal of time filling out the final sessions for the Strategic Investment Conference. 

This is clearly going to be the best ever. If you have attended SIC before, you know what I mean Of course it will be virtual, and you can sign up here

It will be five days over May 5–14, with the most powerful lineup and panels we have ever had. You’re going to want to join us. You can watch it live or at your convenience, plus get transcripts and bonuses. We are doing this right.

With that, let me hit the send button and wish you a great week.

Your looking forward to the future with optimism analyst,



John Mauldin
Co-Founder, Mauldin Economics

What central banks ought to target

Amid a wide range of options, inflation targeting remains the simplest and least bad

Martin Wolf

    © James Ferguson


What should central banks target? 

Since the early 1990s the answer has increasingly been “consumer price inflation”. 

But this has never been unchallenged. 

Today, there are four alternative positions. 

One thinks central banks should target asset prices. 

Another thinks they should target a “just” interest rate. 

Yet another thinks they should target real activity. 

The last thinks they should target some other nominal goal, such as the price level or nominal gross domestic product. 

These are important debates. But the reality remains: central banking is art, not science. 

The art must be guided by sensible goals coupled to deep awareness of uncertainty.

Since the early 1990s, the dominant view among central banks and economists is that the best target is inflation. 

The approach was pioneered in New Zealand in 1990 and quickly followed by Canada and the UK. 

The US Federal Reserve followed in 2012. 

The European Central Bank is also effectively an inflation targeter, though its target is a ceiling of 2 per cent and so not symmetrical. 

According to Paul Fisher of the Warwick Business School, 67 central banks had inflation targets in 2018.


The rationale for inflation targeting has three components. The first is that one instrument — in this case, monetary policy — can only be aimed at one goal. 

The second is that a central bank can only target a nominal goal of some kind. 

The third is that inflation is a comprehensible and politically acceptable aim.

A subset of those who think central banks should target asset prices agrees there must only be one goal. 

But they want them to target the price of a commodity, usually gold. 

Maybe, at some point, they will want them to target bitcoin as the ultimate reserve asset instead. 

The objection to a gold standard is it eliminates discretion, which has proved intolerable. 

Today, the “gold bug” view has become a curiosity.


A more widely-shared view nowadays is that central banks should target the growth of debt or a range of asset prices, such as those for houses or equities. 

The New Zealand government has, for example, just told its central bank to target house prices. 

People who think this often assert that explosive rises in asset prices feed inequality and create macroeconomic instability.

There are at least four strong objections to targeting asset prices. 

First, since asset prices are volatile, targeting them would make monetary policy highly volatile and so generate great macroeconomic instability. 

Second, nobody knows what the “right” equity or house price or level of private indebtedness should be. 

Third, central banks must in any case take asset prices and debt growth into account in assessing the state of the economy. 

Last, if central banks want to influence asset prices or leverage, they should use a wide range of regulatory tools instead.



Perhaps the most grotesque argument is that over wealth inequality. 

It is absurd to argue for tighter monetary policy and so higher unemployment, which is painfully real for its victims, in order to lower wealth inequality, which is merely a ratio.

In 2020, wealth at the 20th percentile of the US income distribution was $6,400 and at the 40th $67,500. 

The top 0.1 per cent started at close to $43m. 

What difference would it make to those with next to nothing if the latter were to double? 

If people want less wealth inequality, they should argue for wealth and inheritance taxes.

A view that is not unrelated to the above is that the central bank should target a positive real interest rate. 

The implicit belief is that we know what the real interest rate ought to be and that the central bank has been responsible for setting it so low for so long. 

Neither is justified. 

The appropriate interest rate depends on economy-wide conditions, especially savings and investment. 

Moreover, the central bank has to set a rate that is consistent with a macroeconomic equilibrium. 

Thus, underlying realities ultimately shape what it can do.



Using monetary policy to target asset prices, rather than merely take them into account, is folly. 

Yet it is not absurd to consider real activity. 

Indeed, the Fed is already mandated to consider unemployment. 

Happily, inflation-targeting is consistent with making real activity the ultimate goal. 

The weaker the relationship between inflation and unemployment, the more the bank’s aim must be maximum employment, subject to the inflation constraint. 

Recently, the Fed has even shifted towards targeting average inflation. 

This will allow it to target real activity more aggressively, by compensating for a long period of below-target inflation with one of above-target inflation. 

Price-level or nominal GDP targeting could reinforce such an objective.

In sum, today’s broad approach to central banking is clearly the least bad. 

That does not mean it is easy to operate.


It is quite likely that the monetary policy needed to generate maximum employment and stable inflation is consistent with all sorts of crazy activity in the financial system. 

We are surely seeing plenty of that now. 

But no sane central bank would deliberately create recessions in order to save finance from itself. 

Rather, it must save the economy from finance by tough regulation, especially of leverage.

Similarly, it is possible that an exceptional crisis, such as the pandemic, will generate policy mistakes, including unexpectedly high inflation. 

Andy Haldane, the Bank of England’s chief economist, has stressed just this risk in a thought-provoking recent speech.

Central banks must always be alert. 

But nobody should imagine there exists an alternative regime that will solve all the difficulties. 

Central banks will make mistakes. 

But they must keep it simple.

Brazil virus variant found to evade natural immunity

Studies ‘urgently needed’ to check efficacy of current vaccines against strain, researchers say

Anna Gross and Clive Cookson in London

The research found that the P.1 variant was between 1.4 and 2.2 times more transmissible than other variants circulating in Brazil © Leandro Ferreira / Avalon


The P.1 Covid-19 variant that was identified in Brazil is about twice as transmissible as some other virus strains and is more likely to evade the natural immunity usually conferred by prior infection, according to an international study.

The research, conducted by a UK-Brazilian team of researchers from institutions including Oxford university, Imperial College London the University of São Paulo, found that the P.1 variant was between 1.4 and 2.2 times more transmissible than other variants circulating in Brazil. 

It was also “able to evade 25-61 per cent of protective immunity elicited by previous infection” with another variant, the researchers found, a sign that current vaccines could also be less effective against it.

International concern about the P.1 variant has escalated as more than 25 countries have detected the variant, including Belgium, Sweden and the UK, which has identified six cases.

The scientists are expected to release a paper describing the research on Tuesday. The study has not yet been peer reviewed.

Dr Nuno Faria, lecturer at Imperial College and associate professor at Oxford, the lead author on the study, said: “We can confidently say that P.1 has altered the epidemiological characteristics of the virus in Manaus but whether that is true in other settings we don’t yet know.

He added: “We have no evidence so far that P.1 won’t respond to vaccines, at least for preventing serious disease.”

Whether P.1 or another variant, B.1.1.7, which was first identified in the UK, is more transmissible “is a really important question that needs to be addressed”, Faria said.

The researchers have dated the emergence of the P.1 variant to November 6, 2020, around one month before cases began to surge for the second time in the Brazilian city of Manaus. They found that the proportion of cases classified as P.1 in Manaus increased from zero to 87 per cent in the space of seven weeks. 

The paper concluded: “Our results further show that natural immunity waning alone is unlikely to explain the observed dynamics in Manaus, with support for P.1 possessing altered epidemiological characteristics.”

“Studies to evaluate real-world vaccine efficacy in response to P.1 are urgently needed,” it added.

The researchers also found that infections were 10 to 80 per cent more likely to result in death in Manaus after the emergence of P.1. However, the authors cautioned that it was not possible to determine whether this meant the variant was more lethal or whether it was a result of increased strain on the city’s healthcare system, or both. 

The P.1 variant has over 17 mutations, which alter its genetic sequence from the virus originally identified in Wuhan, including 3 changes to the spike protein that it uses to enter human cells.

Researchers in Brazil have been using genetic sequencing technology developed by Oxford Nanopore in the UK to identify and track the variant. The technology was first used in Brazil during the Zika outbreak in 2015.

Dr Leila Luheshi, director of applied and clinical markets at Oxford Nanopore, told the Financial Times that while the B.1.1.7 variant in the UK had similar properties of high transmissibility to P.1 — it is thought to be around 1.5 times as transmissible as variants that preceded it — there was no evidence to date that it evaded past natural immunity in the same way. Studies have also shown that current vaccines retain their efficacy against B.1.1.7.

Luheshi said that “because [P.1] has these mutations around the spike . . . the hypothesis is that the vaccine will be less effective”. But she added that there is not yet definitive evidence to support this theory. 

COVID-19 and the American Climax

Thoughts in and around geopolitics.

By George Friedman 


On Tuesday, I received my first COVID-19 vaccine dose by driving over 100 miles to Waco, Texas, to a CVS Pharmacy where the vaccine was available and where I was able to get an appointment. 

On the way home, the radio announced that Texas Gov. Greg Abbott had ruled that Texas would abandon the precautions, including wearing face masks and other social distancing measures that had been in place. 

All businesses are free to open at 100 percent or whatever capacity they chose. 

This comes a couple of weeks after Dr. Anthony Fauci, the president’s chief medical adviser, said in response to a question that Americans may still need to wear masks in 2022, despite the fact that all who want the vaccine would have been vaccinated by then. 

At the same time, a controversy is raging over opening schools. 

Some argue that keeping children out of school for an extended period disrupts their social development – that without in-person interactions with other children, youths will suffer social dysfunction. Teachers unions argue that reopening schools would leave teachers vulnerable to infection and endanger lives.

It has now been more than a year since the first reported COVID-19 death in the United States and since officials, lacking either an effective treatment or a vaccine for the disease, attempted to craft a solution. 

The solution they came up with was to dramatically change our behavior toward one another. 

It didn’t work very well, as half a million people died in the United States. 

Proponents argue that had the public universally and rigorously followed the protocols, it would have worked far better. 

But the public didn’t follow the protocols, and there was no chance they would. 

The American public tends to resist government instructions and has a robust sense of distrust. 

The American public is very good at breaking the rules to find new ways of doing things. 

This is its virtue, and it – as with most virtues – is likely to become a vice.

The solution proposed was never going to be more than a poorly honored stopgap. 

At the same time, the medical establishment had nothing else to offer. 

No reliable treatment and no vaccine meant that the behavioral shift, running as it did against the grain of American non-conformism, would not prevent massive casualties, though it did limit them. 

A half-million dead is just mitigation, but we can imagine even more catastrophic numbers had even less been done.

Now, one year in, the medical community is proposing that masks continue to be worn after the vaccine renders you near-immune to the disease and nearly unable to transmit it. 

For the medical community, this is a minor inconvenience, an add-on preventative. 

But in real life there is a price. My glasses fog up while reading. 

More important, humans do not simply communicate with words. 

They communicate with smiles and frowns and an endless array of expressions that cannot be readily seen through a mask. 

And it is those unsaid but eloquent facial gestures, gestures using our mouths, that reveal so much. 

Masks hide them and they cloud my vision, so wearing a mask is not without costs.

On the other hand, the United States has lost half a million lives, and if we keep it to only that there is a victory. 

We have been warned about the danger of abandoning the safety protocols, however imperfect. And it is a reasonable thought. 

But we have been in this condition for a year, and Dr. Fauci is speaking of being in it for another year. 

There is of course a massive economic effect, which is frequently brushed off as the necessary price for safety. 

But the economic crisis is not merely a discomfort. It is something that has destroyed the fabric of the lives of many of the poor or those not so poor. 

Vast portions of our society fight every day for their livelihoods and for the futures of their children. 

Many lost that fight last year. There are no statistics about lost hopes. You can live yet have lost the hope that fueled you.

There is the social cost of increased family violence, of psychological failure, of grandparents not able to visit grandchildren, of children not learning to play with each other, of people not meeting the one who would have been their spouse. 

The list goes on, and it is more than an abstraction. 

There is death, and there is the diminished and distorted life. 

Both are real, and neither is trivial.

The medical experts have done their best. 

I do not for a second doubt it. 

They found a temporary solution, created vaccines in staggering time and risked their lives in hospitals filled with the infected. 

There was nothing else they could do. 

It takes nothing away from the medical establishment when we say that there was a real and sometimes unseen cost to the only solution we had. 

Nor does it take anything away from them to say that the pressure to move on is surging.

Doctors may not sense this but politicians do. 

That is why we have them. 

They are the invaluable seismograph not only of the public mood but of public necessity. Texas is an unruly state, and Texans are surly to those who impose rules against their will. 

They are, or some are, reckless. 

Abbott governs this state, not Massachusetts, which is as culturally different from Texas as many nations are from each other. 

Abbott knew something that the governors of other states and the medical experts didn’t grasp, which is that for many, time and patience are running out. 

And he knew, as I have seen, that in Texas, masks and social distancing are being discarded, and that reimposing the rigors of the past was not an option. 

Resisting the rising tide of those who loathe the steps taken to save lives, he decided to lead something that was going to happen anyway. 

He declared that next week, virtually all the disciplines of the past year would end.

Abbott spoke of declining case numbers and of vaccines (though still rare), and of the fact that the worst is over. 

He may be right – epidemics die out, and he is looking at the numbers to make this claim. Or cases and deaths may surge in Texas. 

But the claim is not the key. 

The key is that we have spent a year hunkered down and it can’t go on – or at least that is the emerging public view, of the economically and socially devastated as well as of the impatient few. 

The truth will emerge in a few weeks, and I certainly don’t know what it will be.

Humans divide into two camps. 

There are those who, when in danger, are certain that they will die. 

And there are those who, when in danger, are certain others will die but they won’t. 

The fear of death is the mystery of human life, as is the sense of invincibility. 

The fear of death motivates people to get the vaccine and continue the protocols to fight the disease. 

The belief in invincibility motivates those who will not take the vaccine to deny the danger. 

And then there are those who crouch and wait for instructions. 

Dr. Fauci said we might be waiting another year. 

Abbott said the time is now. 

Both are good men, doing jobs that must be done. 

And as this crisis ends, we will be looking at all the victims of the disease who did not catch the virus.

In the end, COVID-19 will not be annihilated. 

We will live with it as we live with all other diseases and dangers. 

It will have made a spectacular entrance and will resolve itself as one of the many things we have to worry about. 

Empty Office Buildings Squeeze City Budgets as Property Values Fall

A looming hit to tax revenues puts pressure on Congress to deliver relief.

By Alan Rappeport


WASHINGTON — At a meeting with Treasury Secretary Janet L. Yellen last month, Jeff Williams, the mayor of Arlington, Texas, laid out his grim economic predicament: Heavy spending on coronavirus testing and vaccine distribution had dwarfed dwindling tax revenue, forcing the city to consider painful cuts to services and jobs. 

While sluggish sales and tourism were partly to blame, the big worry, Mr. Williams said, is the empty buildings.

Those dormant offices, malls and restaurants that have turned cities around the country into ghost towns foreshadow a fiscal time bomb for municipal budgets, which are heavily reliant on property taxes and are facing real estate revenue losses of as much as 10 percent in 2021, according to government finance officials.

While many states had stronger-than-expected revenue in 2020, a sharp decline in the value of commercial properties is expected to take a big bite out of city budgets when those empty buildings are assessed in the coming months. 

For states, property taxes account for just about 1 percent of tax revenue, but they can make up 30 percent or more of the taxes that cities and towns take in and use to fund local schools, police and other public services.

The coming fiscal strain has local officials from both parties pleading with the Biden administration and members of Congress to quickly approve relief for local governments.

Lawmakers in Washington are negotiating over a stimulus package that could provide as much as $350 billion to states and cities. The aid would come after a year of clashes between Democrats and Republicans over whether assistance for local governments is warranted or if it’s simply a bailout for poorly managed states.

On Saturday, the House passed a $1.9 trillion bill that would provide aid to cities and states and garnered no Republican support. The Senate is expected to take up the bill this week with a vote that is likely to break down along similar party lines. 

Republicans have continued to object to significant aid for states, saying most are in decent financial shape and cherry-picking data to support their argument, such as revised budget estimates that show improvement because of previous rounds of federal stimulus, including generous unemployment benefits.

“On the whole, state and local governments aren’t in fiscal crisis,” Senator Patrick J. Toomey, Republican from Pennsylvania, said at a Senate Banking Committee hearing in February.

For local officials from both parties, however, the help cannot come soon enough, and they have been making their concerns known to Treasury officials and members of Congress.

“The pandemic is raging on, and the economic impacts are very real,” said Mr. Williams, a Republican.

The pandemic has upended America’s commercial property sector. In cities across the country, skyscrapers are dark, shopping centers are shuttered and restaurants have been relegated to takeout service. Social-distancing measures have redefined workplaces and accelerated the trend of telecommuting. 

The $16 trillion commercial property sector is being stressed in ways not seen since the Great Recession of 2008.

According to Moody’s, the credit rating firm, commercial real estate values are projected to decline by 7.2 percent nationally from their pre-pandemic levels, bottoming out by the end of this year. 

The hardest-hit categories are the office and retail sectors, with values declining by 12.6 percent for offices and 16.5 percent for retailing.

American cities are facing red ink for a broad swath of reasons, but the pain is unevenly distributed. In some cases, rising residential real estate values will make up for the commercial property downturn, and some segments, such as warehouses, have been doing well as online shopping lifts demand for distribution centers. 

States that do not have income taxes, such as Florida and Texas, are more vulnerable to fluctuations in real estate values.

The overall picture is problematic, and the National League of Cities, an advocacy organization, estimates that cities could face a $90 billion shortfall this year.

Big cities are bearing the brunt of the office exodus. Figures provided by CoStar show that available office space in some of the largest markets swelled from the end of 2019 to the end of 2020. 

Unused space in San Francisco increased nearly 75 percent last year, while empty office space increased more than 25 percent in Los Angeles, Seattle and New York City.

Mayor Bill de Blasio of New York warned in January that property tax revenues were forecast to fall by $2.5 billion next year as the value of hotel, retail and office properties has fallen by 15.8 percent. 

With real estate making up about half of New York’s annual tax revenue, the city is planning to cut thousands of jobs this year.

Empty office buildings, shops and restaurants that have turned cities around the country into ghost towns foreshadow a fiscal time bomb for municipal budgets.Credit...Sarah Blesener for The New York Times


Victor Calanog, the head of commercial real estate economics at Moody’s, said that in some big urban markets, rent collection rates had fallen to about 75 percent, putting pressure on owners and landlords who need to repay their loans. 

Eviction moratoriums and uncertainty about what degree of normalcy will return to the office sector as vaccines are rolled out have made projecting the industry’s fortunes even more difficult.

“Companies were dragged kicking and screaming to the world of letting people work remotely,” said Mr. Calanog, who has been working from his home in New Jersey for the last year. “The genie is out of the proverbial bottle.”

The extent of the fiscal pain facing municipalities will be clearer in the coming months as commercial property assessments come in and owners, who view the values as inflated, contest their tax bills.

Jason M. Yarbrough, a real estate lawyer in Pittsburgh, said he had been fielding a growing number of calls from property owners seeking to file their 2021 appeals. With buildings and stores sitting vacant, some owners have seen their assessed values reduced by millions of dollars after challenging their assessments — lowering their tax bills by hundreds of thousands of dollars.

“We’re seeing a very large demand from commercial property owners, who are getting hit from all sides,” Mr. Yarbrough said, noting the squeeze this also puts on city budgets. “It’s a troubling issue for municipalities because they’re pegging their tax base on property values, and you’re assuming there’s not going to be a Black Swan event.”

Lawmakers and Treasury officials have been aware of the strain on the sector. Last year, Representative Van Taylor, Republican of Texas, introduced legislation that would allow the federal government to take a small ownership stake in hotels and other companies, and the industry lobbied hard for aid. But commercial real estate has been one of the few sectors not to receive direct government support in the relief packages that Congress passed in 2020.

The Treasury Department under Steven Mnuchin struggled to come up with a support program for the sector, and rescuing rich property owners was politically untenable in Congress.

Despite the stress on the commercial real estate sector, it has proved to be relatively resilient so far. But policymakers are keeping a close eye on the potential for more problematic fallout as the pandemic persists.

Esther George, president and chief executive of the Federal Reserve Bank of Kansas City, said in a February speech that emergency lending and relief programs had largely kept rent payments flowing, preventing delinquency rates on bank loans secured by commercial properties from rising as high as some analysts had feared. However, she suggested that more might need to be done.

“A worrying scenario is that the economic impact of the pandemic outlasts the policy support programs currently in place,” Ms. George said. “Should that occur, many renters and businesses could find themselves unable to meet their obligations, forcing banks to realize losses on existing loans and weighing on credit growth and broader economic activity.”

Even some economists who have expressed skepticism about municipal aid have acknowledged that lost commercial property tax revenue is an area that could use some targeted shoring up. However, they remain concerned about Congress writing checks to cities that do not need the money with a blanket bailout.

“I’m actually quite worried about the commercial real estate sector,” said Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office who has advised Republicans. “I have no objection to there being some sort of support for that particular area.”

Many in the real estate industry have been frustrated by the restrictions that cities and states have imposed on businesses because of the pandemic, blaming them for bankruptcies and plummeting property values.

Jacob Wintersteen, a real estate developer in Texas and the finance chairman for the Houston area for the state’s Republican Party, said he feared local governments would continue with pandemic restrictions if they knew the federal government would prop them up.

“The only political solution I see is a political grand bargain of trying to bail everything out right now matched with immediately requiring every state to lift all restrictions and every municipality to lift all restrictions,” Mr. Wintersteen said.

Although the lobbying efforts of the commercial real estate industry were unsuccessful, groups that represent municipalities are using the plight of the sector to push Congress for their own relief. In a letter to members of the House and Senate in February, the Government Finance Officers Association warned that property tax revenue was facing a cliff.

A vacant storefront in Los Angeles. The impacts of the pandemic on America’s commercial property sector are stark.Credit...Philip Cheung for The New York Times


“The lack of growth and loss in property and sales taxes nationally will continue to have a chilling effect on the economic recovery from the Covid-19-induced recession,” wrote Emily Swenson Brock, director of the Government Finance Officers Association’s Federal Liaison Center. 

“Early investment in additional financial resources directed at shoring up state and local revenue streams will protect critical safety net services across the United States.”

Ms. Brock said in an interview that Ms. Yellen had been receptive to her organization’s concerns.

In the meantime, property owners are grappling with what to do with their unused space, and businesses are trying to decide what they will need in the future.

Drew Levine, a senior vice president at the commercial real estate brokerage Colliers in Atlanta, said that some tenants were looking to buy out their leases, others were trying to sublease vacant space and many were just waiting out the health crisis if they can afford it. 

Few companies are signing contracts to rent new space, however, and big corporate clients have indicated that plans for their office portfolios over the next few years remain in flux.

“Office occupiers are not ready to take the risk of going back to the office for the most part,” said Mr. Levine, who was working in a largely empty building in midtown Atlanta and has seen his commute across a city known for traffic congestion shrink to 10 minutes. 

“The streets are empty. I could park anywhere and jaywalk across Peachtree Street.”


Alan Rappeport is an economic policy reporter, based in Washington. He covers the Treasury Department and writes about taxes, trade and fiscal matters in the era of President Trump. He previously worked for The Financial Times and The Economist. @arappeport