My favorite remaining institutions: the justice system and the Fed

March 16th, 2017 at 11:17 am

There are at least two American institutions that remain venerable, albeit vulnerable: the justice system and the Federal Reserve.

On my way in this morning, I learned some details about the Hawaiian judge’s rejection of President Trump’s travel ban v2.0. While team Trump believed they’d removed the problematic language from their first run at this executive order, the judge disagreed, in part—and this is what really moved me—due to Trump’s unequivocal anti-Muslim rhetoric during the campaign.

From the NYT, my bold:

Judge Watson flatly rejected the government’s argument that a court would have to investigate Mr. Trump’s “veiled psyche” to deduce religious animus. He quoted extensively from the remarks by Mr. Trump that were cited in the lawsuit brought by Hawaii’s attorney general, Doug Chin.

“For instance, there is nothing ‘veiled’ about this press release,” Judge Watson wrote, quoting a Trump campaign document titled “Donald J. Trump is calling for a total and complete shutdown of Muslims entering the United States.”

So, what Trump said still matters in the justice system. Contrast this with the laugh Trump’s spokesman Sean Spicer got from the press corps the other day when he said now that Trump’s president and the numbers are favorable, the jobs data are, at least for now, believeable. Or Trump’s claim that there’d be no cuts to Social Security, Medicare, and Medicaid, given that the latter gets gutted by 25 percent by 2026 in the Republican’s Obamacare replacement bill he’s now supporting.

I’ve long held that societies that abandon facts can glide on momentum for a while, but eventually, an economy, environment, and government built on lies cannot survive. While it is often imperfect, the pursuit of truth remains the heart of the justice system. I only hope it can stay there.

As for the Fed, as I wrote yesterday, they’re calling it like they see it on the economy, projecting trend growth rates of 2 percent, and not buying into the administration’s phony claims that tax cuts and deregulation will generate 3-4 percent growth rates.

To be clear, I’m not saying the Fed’s policy path is the only sensible or defensible one, nor am I saying their decisions are free of outside influences, including political ones. Like everyone else who follows their work, I often hear Fed governors say things with which I disagree.

I’m saying that they’re trying to meet their mandate of full employment and stable prices through economic analysis, without spin and without yielding to political pressures, ones that I forecast will pick up in coming months.

Obviously, a key factor these two institutions have in common is political independence. Again, no institution is free from political influences, and in fact, with two, soon to be three, open seats on the Fed’s board of governors, and one seat open on the Supreme Court—all of these seats are presidential appointments (with Senate confirmation)—the afore mentioned vulnerability to political pressure is real. But for now, there are still at least two places where facts can still show up without fear of being assaulted.

Trump’s 2005 tax return: I’m more worried about his tax reform than his tax return

March 15th, 2017 at 8:39 am

Just a quick note on the Trump tax return from 2005, the first few pages of which were released by the White House last night in advance of the much touted release on MSNBC.

To me, the thing smells like the dangle-the-key move–“look over here, not over there!”–I’ve come to expect from the Trump admin when things aren’t going their way. The House Republican’s health plan, which Trump was aggressively backing, is looking like a real dud (a “trap,” according to some fellow R’s), and I can see why the White House would like to quickly change the subject, as is their wont.

But isn’t his tax return a politically dangerous subject for President Trump to point at? Not in this case, because the pages he released do not appear to incriminate him much at all. He reportedly paid $38 million on income of $150 million ($185 million in today’s dollars), for an effective rate of 25%. As is typical of returns from people at these income levels, there’s a lot of steps to get to that AGI, including a claim of $100 million in real estate losses (likely a carryover from an earlier loss), along with reported income from business sources, capital gains, royalties, etc.

But the reason this smells funny to me is that most people will surely find “nothing to see here, so move along, folks.” No zero tax rate, no Russian loans/investments, and while 25 percent is below the effective rate paid by those in the top 1%–31% for families with kids in 2005, according to CBO–it’s not far below, and most people who hear he paid almost $40 million in taxes will not see anything like a smoking gun here.

In fact, the most salient part of this episode so far is the point that Trump’s return shows the importance of the Alternative Minimum Taxes for complex returns like his that claim large losses.

The AMT snagged him for $31 million that year; without it, he would have paid a 5% effective rate. The punchline: the president’s tax reform plan gets rid of the AMT. Unless they’re willing to also get rid of all the special privileges that enable wealthy taxpayers to write off much of their liabilities, which they’re not (they may get rid of some, but they’ve also proposed others), that’s a very bad idea.

Anyway, I don’t see why he wouldn’t have released this information to the public a long time ago. I was frankly surprised to see the 25% effective rate, and assumed that he was hiding a much lower rate. I guess the return suggests he’s not the multi-billionaire he claims to be, but various leaks already led me to believe that to be the case. And surely there’s more “interesting” information on the many more pages we’re not seeing.

David Cay Johnston, the tax expert who anonymously received the document and then presented it on the Rachel Maddow show, apparently wondered if it had been leaked to him by the White House in the first place. That sounds plausible to me.

What I’m left with here is something I’ve thought for a long time but haven’t said. Sure, I’d like to see a full release of Trump’s recent returns–I suspect there’s a lot more incriminating stuff in there then we learned about today. But I’m far less worried about Trump’s tax returns than Trump’s proposed tax reforms.

Hey, no fair! Governing is hard!

March 14th, 2017 at 10:19 am

First, over at WaPo, check out my latest summary of the CBO score of the Republican’s just downright nasty, greedy “health care plan.”

Next, I agreed with David Leonhardt’s useful bit of history here, wherein he deconstructs the corner into which Republicans have painted themselves:

How did the party’s leaders put themselves in this position? The short answer is that they began believing their own hype and set out to solve a problem that doesn’t exist.

I agree, but I also think there’s something more prosaic going on here, and that is that it’s just way easier not to govern. That’s especially the case with health care, of which the politics are just wholly unforgiving.

Given today’s political dynamics, it is so much easier to be in permanent campaign mode, stoking your base, throwing endless spitballs at the folks trying to legislate. Moreover, these are precisely the things contemporary Republicans are good at: endless spin, endless shade throwing, fact-free opposition research, and very effectively–much more so than Democrats–applying those tools to getting elected.

You see the problem, however. Once you get so good at these techniques that the voters you’ve hoodwinked put you in power, you have to govern. That requires policy chops, real facts, and political compromise, all of which go in exactly the opposite direction of what got you into power in the first place.

I’m not sure where this ends, but my hope is that enough people in the electorate eventually decide they’ve had enough of the blatant contradictions to which they’re being subjected, e.g., “we’re going to give you an awesome health care plan that provides everyone with better, cheaper coverage” or for that matter, pretty much any other campaign pledge other than cutting taxes for the wealthy.

But until then, we will continue to be subjected to governance by those who are masters of the campaign but have no idea what to do when they win.



Spinning out of control

March 13th, 2017 at 10:52 am

Over at WaPo. One expects a certain amount of Sunday AM spin from politicians selling, in this case, the Republican health care plan. But this is a really bad plan–a hugely regressive tax cut attached to a bill that will leave millions uninsured. It is as if the problem they set out to solve is a) the rich need higher after-tax incomes, and b) the poor need less insurance coverage.

Speaking of spin, while I’m happy to crack wise all day, I’m with Paulie Walnuts Krugman on this incident with Sean Spicer on jobs day last Friday. Spicer told the press corps that his boss thought the jobs report “may have been phony in the past, but it’s very real now.” This just cracked up the press corps, who chortled at Spicy’s quip. But it got under my skin. Watch the video.


Jobs Report: Strong report shows we’re closing in on full employment but not quite there yet.

March 10th, 2017 at 9:42 am

In the latest edition of a long series of solid job reports, payrolls posted a strong 235,000 job gain last month, as the unemployment rate ticked down slightly to 4.7 percent and wages accelerated a bit.

Federal Reserve officials, many of whom had already been talking about getting back to their “normalization” campaign–raising the benchmark interest rate they control back up to more normal levels–sooner than later, will find very little in today’s report to wave them off a rate hike at their next meeting later this month.

The jobs day smoother, which averages out monthly noise over 3-, 6-, and 12-month periods, shows payroll growth at around 200,000 jobs per month at each one of these averages. Given the size and growth of the labor force, this healthy pace of employment growth is strong enough to continue putting downward pressure on the jobless rate and upward pressure on wage growth.

Source: BLS

Speaking of wages, the pace of growth of workers’ paychecks is sending a signal that the tightening job market is providing workers with a bit more bargaining clout. In tight labor markets, which have been the exception in the US job market in recent decades, employers typically must bid compensation up to get and keep the workers they need.

We’ve already seen some of this dynamic in recent job reports, as the figure below reveals. From about 2010 to 2015, average hourly wages grew at about 2 percent, year-over-year. But around mid-2015, as unemployment hit 5 percent, heading for rates with a ‘4’ handle, wage growth accelerated. It held at around 2.5 percent for a few months, but as the figure shows–note the smooth trend line–has accelerated further in recent months, increasing 2.8 percent in February.

Source: BLS

The question for the Federal Reserve, however, is not just “are wages accelerating?” Their dual mandate is full employment at stable prices, not stable wages. Moreover, wage gains for middle- and low-wage workers have been long awaited in this recovery, so the decision to tap the brakes on growth by raising the interest rate–which could push back on this favorable, accelerating trend–cannot be taken lightly. The questions much be a) how much slack is left in the job market? and b) most importantly, is wage growth fueling faster price growth?

Re ‘a’, (are we at full employment?): Not quite. The underemployment rate, a broader measure of slack, fell from 9.4 percent in January to 9.2 percent last month, but it is still elevated due to 5.7 million involuntary part-timers, though that number is down 300,000 from a year ago. Still, at full employment, I’d like to see an underemployment rate of around 8.5 percent.

The other indicator that still has some room to run is the employment rate of prime-age workers. At 78.3 percent, it’s still below its pre-recession peak of 80.3 percent (see figure). However, at its low point, this rate was at 74.8 percent, meaning these workers have clawed back 3.5 percentage points, or about 2/3’s of the decline. That decline was stronger for men–their employment rate fell 7.6 points from its peak, but they’ve made back about 5 points, also about 2/3’s. Women were down 4.1 points and have made back about 3 points.

Source: BLS

These gains seriously challenge a common narrative that goes something like this: some number of prime-age workers are “ungettable,” meaning they can’t be pulled back into the labor market because of “supply-side” problems–they’re disabled, they’re addicted to drugs, they’re too busy playing video games. I do not at all dismiss these problems and that supply-side number isn’t zero, for sure. But as labor demand has strengthened, the progress we’ve seen in prime-age employment is telling us something important about these men and women that we shouldn’t ignore. Most of them will work if they can find gainful employment.

On wages and prices, the figure below shows:
–the unemployment rate is right about at what the Fed thinks is full employment;
–as shown above, wage growth is picking up a bit;
–the Fed’s inflation gauge, core PCE, is growing a touch faster but remains below the Fed’s target inflation rate of 2 percent, a miss that’s been persistent in recent years.

Sources: BLS, BEA, Federal Reserve

Summarizing, we’re edging closer to full employment but the risks remain at least somewhat asymmetric for the Fed: the risk of slowing demand too soon is probably still a bit greater than the risk of un-anchored price inflation. But I admit it’s a closer call than in past months and can see their rationale for a quarter-point hike.

A few other notable indicators:

–The 58,000 jobs gained in construction were partly due to unseasonably warm weather in February. The non-seasonally-adjusted gain of 61,000 was the largest on record since 1968.

–The 28,000 gain in manufacturing, its best showing since January 2016, was also very welcomed, especially given the increased strength of the dollar, which makes our manufacturing exports less price-competitive in international markets.

All told, the US job market continues to post solid gains, and the tighter job market is delivering wage gains to working families, and not just at the top, but across the wage scale. The data may well push the Fed to raise rates a bit, but if so, their best move would be one-and-done, at least for awhile, while they make sure their actions do not interrupt some of these favorable, ongoing trends.