Tag Archives: political economy

Just a Few Clarifications

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Janet Yellen, the Biden-Harris administration Treasury Secretary had an op-ed in Sunday’s Wall Street Journal that is full of gaslight claims, and so I offer here some clarification on some of them.

When President Biden and Vice President Harris took office, thousands of Americans were dying from Covid-19, and the unemployment rate was 50% higher than it is today.

Fifty percent more than a small number still is a small number. Aside from that, unemployment already had been starting down, sharply, and had reached roughly 6.5%—down from a peak of 10%-11% at the height of the shutdown—and was continuing to fall rapidly as our nation reopened in the latter half of the last year of the Trump administration.

We vaccinated millions to save lives and allow businesses to reopen safely.

Aside from the fact that businesses already were reopening—hence the already rapidly falling unemployment—those vaccinations occurred with vaccines developed under a Trump administration crash program. Production and distribution of those vaccines had already begun, and one of the first actions of the Biden-Harris administration in early 2021 was to delay delivery of those vaccines to the distribution centers.

[W]e made critical investments in infrastructure and manufacturing—from clean energy to semiconductors….

The Biden-Harris administration allocated those dollars; a large fraction of them, three-plus years later, remain unspent.

The US labor market recovered faster from the 2020 recession than from previous recessions. Economic growth surpassed private-sector predictions of a modest recovery.

Our economy already was in a steep, rapid recovery, beginning in late summer 2020—the last year of the Trump administration. Oh, and the labor market already was rapidly reemploying the work force.

[T]he US has outperformed many other advanced economies, with greater real gross domestic product growth and a faster decline in inflation while maintaining a strong labor market.

This is an especially large bit of gaslighting. Our economy doing better than “many other advanced economies” is a non sequitur. We aren’t those other nations; our citizens live here in the United States, and we operate here in our American economy. Too, that so much bragged about inflation decline is from a high peak caused by Biden-Harris policies, not least of which was the Inflation Reduction Act enacted in the Biden-Harris first year that threw trillions of dollars into our economy without an associated increase in production. Yellen also carefully ignored the fact that prices remain higher today, by double digit accumulated inflation, than they were in the final stages of the Trump administration. Those higher prices are an especially serious problem given that real wages have shrunk over Biden-Harris administration, with only recent periods of wage increases exceeding the same period inflation.

And that GDP growth? That’s compared to the exceptionally low GDP growth experienced during the depths of the Wuhan Virus situation.

10-Year Notes, Coupons, and Yields

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The Fed cut its benchmark rate last week, and the stock market spiked up in response. Whether that’s a long-term response or just a sucker’s sandbag is yet to be seen. The effect on interest rates in the private economy in which most of us operate is…inconsistent. And it will continue to be for a long time, regardless of any subsequent Fed moves.

Yields on longer-term US Treasurys have ticked higher since the Fed approved a 0.5 percentage point rate-cut last week. The yield on the benchmark 10-year US Treasury note, which helps set interest rates on everything from mortgages to corporate bonds, settled Friday at around 3.73%, up from 3.64% the day before the Fed’s move.
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[R]ates on a lot more debt are driven primarily by swings in Treasury yields. Those are set by where investors think the Fed’s short-term rates will go in the future, rather than where they are now.

“Investors” are speculating with that, and banks IMNSHO contribute to the speculation by setting their rates on short-term costs and incomes rather than taking the longer view (banks aren’t the only ones, and financials aren’t the only industry, where this short-term, or perhaps shortsighted, prevails) of setting their longer-term rates based on the longer-term incomes of the actual coupons those longer-term instruments pay.

The speculation is made possible by the difference between yield and coupon. A 10-year Treasury Note (for instance, the following definitions apply to all debt instruments that are bought and sold) has a market price, a (market) yield, and a coupon. The Note, once sold, has a coupon, which is the amount of interest the Note issuer (here, the Fed) commits to pay the Note holder (who won’t necessarily be the original buyer) each period for the entirety of those 10 years (in our example). That interest rate, that coupon rate will be paid at the appointed time regardless of the market price of that Note at the time the payment comes due.

The Note, once sold, also has a yield that is separate from the coupon, and that yield is created by the Note’s market price, and that price is driven by short-term trader investors’ aggregated speculation of where interest rates will be tomorrow and by long-term investors’ aggregated speculation of where interest rates will be by the end of those 10 years. In either case, if the aggregated speculation is that interest rates will be higher, then the next-issued Note will have a commensurately higher coupon—guaranteed interest payout rate. To make current Notes, issued with those smaller coupons, marketable, those Notes’ market prices must fall, raising their coupon rates relative to their market prices to match that next-issued coupon. The opposite happens if the next-issued Note is expected—from those aggregated speculations—to have a smaller coupon.

That price variation, and the associated yield variation, is good for debt instrument traders and speculators, but it does little for interest rate stability, which is important for those who depend on fixed income instruments, like Notes (and Fed bonds, which have even longer lifetimes), for their income. Those folks include more than just the retired or the stereotypical widows and orphans, and they comprise no small fraction of us Americans.

Scrambling for pennies by trading on yield—by trading on the instrument prices, which move in the opposite direction of yield (and which movement is the core of the speculation and the creator of the associated yields)—granted those pennies accumulate, lend to volatility in a milieu that would benefit greatly from more stability.

Such coupon-based stability might facilitate more than yield-based relative volatility the ability for banks to avoid mis-matching short-term risk with long-term risk mistakes of the sort a bank in California and another in New York made not so long ago that cost them their existence and severely damaged their depositors.

A Misapprehension

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This one is, surprisingly, on the part of The Wall Street Journal‘s editors. In an otherwise cogent editorial with several sound points regarding former President and Republican Party Presidential candidate Donald Trump’s offers of specially targeted tax cuts, the editors closed with this mistake:

Mr Trump is now proposing to narrow the base, so [tax] rates will have to be higher.

Not at all. Alternatively, and far more optimally, with a narrower tax base, spending will have to be lower. That’s universal, too. With reduced (tax) revenues for any reason, spending would need to be lower. With current government spending, in fact, even with flat revenues, spending badly wants reduction.

It seems the august editors have lost sight of the cause of our nation’s deficits and debt, the cause extant throughout our history.

Tax Deductions

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Progressive-Democrat Vice President and Party Presidential candidate Kamala Harris wants to expand the start-up business tax deduction from $5,000 to $50,000 [sic].

However, in typical Party duplicitous fashion, she gives with one hand and takes away far more with the other. She wants to raise taxes on us citizens and our businesses so much that that deduction increase would disappear in the flood.

  • Increase the corporate income tax rate from 21% to 28%
  • Increase the corporate alternative minimum tax introduced in the Inflation Reduction Act from 15% to 21%
  • Quadruple the stock buyback tax implemented in the Inflation Reduction Act from 1% to 4%
  • Make permanent the excess business loss limitation for pass-through businesses
  • Further limit the deductibility of employee compensation under Section 162(m) [currently limiting public companies’ tax deduction for compensation of covered executives to $1 million per individual]
  • Increase the global intangible low-taxed income tax rate from 10.5% to 21%, calculate the tax on a jurisdiction-by-jurisdiction basis, and revise related rules
  • Repeal the reduced tax rate on foreign-derived intangible income

How about cutting out the intrinsic contradictions of deductions here and tax rate increases there to pay for them? How about, instead, simply lowering tax rates across the board—begin, say, with a rate reduction equal in effect to the sum of all the subsidies and credits—Harris’ latest small business “deduction,” for instance and both Harris’ and Trump’s child tax credit, along with the myriad welfare subsidies?

Let the resultant vast growth in activity in the private economy pay for the tax rate decrease. The Jack Kennedy large tax rate deduction, the Reagan nearly as large tax rate reduction, and the Trump tax cuts all led to economic expansion that produced a net increase in revenues to the Federal government—all those cuts were paid for by the responding expanded economic activity.

But Progressive-Democrats are incapable even of saying the words “tax rate reduction.”

Mistaken “Tradition”

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It is a Federal Reserve “tradition” to not adjust its benchmark interest rates in the final months before an election.

The Federal Reserve has historically left interest rates alone in the months before a presidential election. …
Since 1990 the Fed has cut rates in the final two months of a presidential campaign only three times. Each case shows why rate cutting in the homestretch of the political season is exceptional.

Call it two elections, since two of those three cuts occurred during the same election end game. Still, in these 34 years there are nine Presidential elections. Twice in nine opportunities works out to be a skosh under a quarter of the time, or a skosh over a fifth, depending on one’s perspective. That’s a pretty weak tradition.

More important is this remark by then-Dallas Fed chief Robert McTeer:

[W]e’re within a month of the election…it was conventional wisdom we weren’t supposed to act so close to an election.

Except that a decision to not act is an action itself, and choosing not to act on interest rates when the situation otherwise calls for action has its own influence on an upcoming election.

The Fed should make its interest rate moves when the economic environment says it should, regardless of the politics of the moment. Otherwise, the Fed isn’t acting independently on economics, as its DOC requires it to do, but in active response to politics.