Category Archives: Economics

Miscellaneous economy stuff

Fed Rate Cut

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The Federal Reserve is at a fork in the road, and a great American philosopher once said that, having arrived at one, it’s necessary to take it. Unfortunately, the Fed is at the wrong fork, so no matter what it does, it’ll be in the longer term counterproductive, even if it’ll near-term benefit stock or bond traders, depending on which fork it takes.

The fork: cut rates tomorrow by a quarter point or a half. Greg Ip favors the latter, without recognizing where the Fed, or he, is.

The case for a bigger cut starts by examining why the Fed’s short-term rate target is now 5.25% to 5.5%, the highest since 2001. The Fed pushed it there last summer because underlying inflation was well above 3% and, with the labor market overheated, the Fed was afraid it would get stuck there. It was willing to cause a recession to prevent that.
Fast forward to today, and some key underlying measures of inflation are below 3%, some within range of the Fed’s 2% target. The labor market is cool, if not actually cold. A recession now serves no useful purpose.

The Fed’s rationalization for boosting its benchmark to 5.25% to 5.5% ignores the fact that ever since the dotcom panic and especially the Panic of 2008, the Fed has artificially suppressed interest rates—all the way to nearly 0% after the Panic, only allowing them to rise slightly off that low. It’s been only in the last couple of years that the Fed has raised its benchmark to its current level. For all of those 20+ years, including the last couple, the Fed has ignored market forces regarding the cost of money (interest rates lenders charge businesses in the latter’s quest for operating capital and capital for other uses) and continued to try to manipulate those forces.

That’s entirely appropriate when our economy is in extremis, as it was immediately after the dotcom bust and again in late 2008 through early 2009. After those two brief periods, though, with those suppressed interest rates, our economy was denied its normal rapid recoveries, with declining real wages, slow growth, and high unemployment that only slowly recovered to pre-Panic (much less to pre-Wuhan Virus Situation) levels. Those re-Wuhan Virus Situation levels, in fact, were the first time our economy was growing soundly, with increasing real wages, even a narrowing wealth gap, since that prior bust.

The fork the Fed should be taking is the decision whether to lower its benchmark rates at all or to stand pat.

With the Fed saying that its target inflation rate is nearly reached (I argue that the difference between current inflation and those 2% is just the noise of normal market fluctuation), it’s time for the Fed to say further that it’s going to leave its benchmarks in their current 5.25%-5.5% range, that it’s going to leave its benchmarks there for the foreseeable future, and that it’s then going to sit down and be quiet.

The current benchmark levels are historically consistent with 2% inflation, albeit it’s a noisy relationship. That noisiness, though, is the normal operation of an open and free market, and it’s time for this instrument of the Federal government to get out of the way of our open and free market. Inflation will bounce around in a range, and interest rates, if left alone, will bounce around commensurately as the two, along with other forces in the market, all work to correct each other back to this rough level.

Wrong Response

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As usual. And as usual, the wrongness of the response is due to mischaracterizing the problem.

The Treasury Department on Thursday released 603 pages of proposed rules for the corporate alternative minimum tax, or CAMT, reaching a milestone in this exceptionally complex endeavor for regulators and corporate tax executives. The proposal comes more than two years after Congress passed the law creating the tax and more than 20 months after it took effect.

The rationalization is offered by the Biden-Harris’ Deputy Treasury Secretary Wally Adeyemo:

This is about tax fairness. The ability to use accountants and lawyers to reduce tax bills down to zero gives billion-dollar corporations a competitive advantage over smaller businesses.

They don’t understand what’s fair. Here’s what’s fair: make the problem irrelevant by simplifying the corporate tax code, rather than complexifying it, by reducing the corporate tax rate to that paid by those ill-treated small businesses. Even fairer, and not just for businesses, would be to reduce the corporate tax rate to zero for all businesses. That way, large corporations, with their accountants and lawyers, won’t have any “unfair” advantage over smaller businesses.

And there’d be no need to write 603 pages of regulation to implement a simple-sounding and wrong-headed tax rule. Which would reduce the need for all those Treasury bureaucrats whose jobs center on writing arcane, excessively complex regulations.

Another Reason to Shift

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Boeing and union leaders reached a tentative labor deal that includes:

  • 25% pay increase over four years
  • bolster retirement benefits
  • lower healthcare costs
  • commit Boeing to building its next plane in the unionized Pacific Northwest

The rank-and-file object. They want a 40% pay increase over four years, and they’ve characterized it as a hard line. They’re also still upset that Boeing dared set up an aircraft production plant in the non-union south. They voted Thursday to reject the contract and then to strike beginning that night at midnight.

The strike will halt most of Boeing’s aircraft production, and that would occur

at a time the aerospace giant is bleeding cash and piling up debt….
A prolonged work stoppage could further strain the industry’s supply chain and exacerbate jet shortages for airlines struggling to meet resurgent travel demand.

A strike—telling company management that if the union doesn’t get its way, it’ll destroy the company by preventing it from operating at all—is nothing more than legalized extortion.

This is one more reason to move even more aircraft production to right-to-work States.

With unions having monopoly power over business labor, and this Boeing branch of the International Association of Machinists and Aerospace Workers union (among so many other unions) so blatantly abusing its monopoly power, this also is one more reason to rescind the special status of unions as being exempt from antitrust laws.

Here’s a Thought

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The article opens with this subheadline and lede:

There might be better ways to help low-income families than vastly expanding the child tax credit
The child tax credit is one of the few government entitlements that both political parties want to make more generous.

The problem with the child tax credit, though, is that rewards folks for not working—the credit is fully refundable, meaning that families get the full handout credit even if their income is lower than the credit.

My thought is this: switch to a low, flat income tax rate regardless of the source of income. That will leave more money in the hands of all American citizens—more than just the credit’s value—it’ll leave that money in our hands throughout the year, instead of our having to struggle through all twelve of the months of the current year, plus tax time, in order to get the money back in the following year (only a fraction of the credit is handed out in installments).

And it’ll encourage getting more work, or at the least reduce the government’s handout-induced discouragement of work, by leaving that erstwhile tax money in the hands of folks who work and pay taxes. Further, that erstwhile tax money already is coordinated [sic] with income; there’s no need to play games with indexing.

The problem with that, though, is strictly political. The move directly challenges the Progressive-Democratic Party’s addiction to constantly raising taxes. The move also would greatly reduce Party’s ability to curry favor and buy votes with credits and circuses’ handouts.

She Contradicts Herself

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Progressive-Democrat Vice President and Party Presidential candidate Kamala Harris does this with some regularity. Here’s her latest self-contradiction:

If you earn a million dollars a year or more, the tax rate on your long-term capital gains will be 28% under my plan, because we know when the government encourages investment, it leads to broad based economic growth[.]

Capital gains are the stuff of investment, both its goal and the source of funds for further investment as well as for initial investment in different directions.

Thus: Harris would “encourage” investment by taking investment funds away from investors via her higher taxes.

That’s some investment encouragement.