Tag: Kevin Warsh

Weekly Wrap: Fed Chair Musical Chairs, Jeff Sessions Wrong About Dreamers and Jobs, and Taxing 401(k)s

~ spotexchanges ~ Leave a comment

This was first published on Facebook. To get the Weekly Wrap hot off the press, please like us on Facebook.

Welcome to the 6th edition of the Weekly Wrap, where we won’t step down for “personal reasons” anytime soon.

Fed Chair Musical Chairs

And no, this isn’t about saxophonists Alan Greenspan or Ben Bernanke (below).

Stan Fischer, Central Banker Extraordinaire, Steps Down

Stanley Fischer handed in his resignation this week citing “personal reasons.” He will step down from the Fed’s #2 post in October. This is a big deal. First, because Fischer is considered the top authority in the world on central banking.

  • Peter Coy in Bloomberg Businessweek: “Fischer is royalty in central banking circles. He was born in Northern Rhodesia, now Zambia. As a professor of economics at Massachusetts Institute of Technology, he taught former Federal Reserve Chairman Ben Bernanke and current European Central Bank President Mario Draghi, as well as Larry Summers, a former Treasury Secretary, and Gregory Mankiw, who headed President George W. Bush’s Council of Economic Advisers. Among others. Fischer also ran the Bank of Israel from 2005 to 2013, earning an A from Global Finance magazine. (Bernanke got a B.)”

Second, what next?

  • JPMorgan Chief U.S. Economist Michael Feroli: “It adds a further element of uncertainty to policy and who will be running policy early next year. It adds to the cloudiness of the outlook for monetary policy.” (Bloomberg)

The Apprentice: Fed Chair Edition

Bettors on the online politics betting site PredictIt are now giving Kevin Warsh a 29% chance to have the top job in February. Janet Yellen is second at 27%.

Gary Cohn went from 30%+ last week to 13%, allegedly because of his comments to the FT about Trump’s response to Charlottesville. 

Warsh is a former Fed official, and has been critical of the Fed’s dovish policy in recent years.

  • In January, Warsh colorfully wrote in the WSJ: “In recent years, the rationale for the Fed’s choice to loosen or tighten policy has been as nebulous as Justice Potter Stewart’s famed definition of pornography: You know it when you see it.”
  • Warsh also criticized the Fed’s stance of “data dependence,” arguing it should instead be “trend dependent.”

This type of critique and an implicit commitment to increasing rates (labor market has been trending positively for years!) will be a slam dunk to congressional Republicans.

But what about the White House?

Don’t Count Out Yellen

As Nick Timiaros and Kate Davidson of the WSJ wrote in June, “The Republican president told Ms. Yellen he considered her, like himself, a “low-interest-rate” person, those familiar with the exchange said. During a conversation that lasted about 15 minutes, they discussed how economic policy might help the millions of U.S. citizens who felt left behind during the postcrisis recovery.”

Takeaway: Low interest rates can be a president’s best friend, especially when you want to become “the greatest jobs president that God ever created.” But remember, this has to be cleared by Congress – will the White House bend toward the prevailing sentiment in the Republican-controlled Hill and put up a more hawkish nominee?

DACA and the Economy: No, Dreamers won’t take your job

The White House’s decision to end the DACA program in six months is a political missile launch. But while the future of the program gets debated, it has huge economic impacts.

Noted economist Jeff Sessions: “[DACA] has denied jobs to hundreds of thousands of Americans by allowing those same illegal aliens to take those jobs.”

This is just plain incorrect. Economists have been fighting for decades to rid the public of the scourge of the lump of labor fallacy.

  • The lump of labor fallacy is the idea that there are a fixed number of jobs in an economy. The theory argues that if an immigrant takes a job, a native American has thus been denied a job.

The idea of a zero-sum job market has been proven incorrect. Repeatedly.

Some noted economists came out in full force at the statement:

  • Bloomberg View’s Noah Smith wrote an impassioned takedown of the idea: “It’s obvious that the number of jobs in the world isn’t fixed. Imagine if the United States deported every single American except for Jeff Sessions. Would Sessions then have his pick of any job? No, he’d be in the forest trying to eat berries to survive.”
  • Moody’s Chief Economist Mark Zandi wrote to Politico: “The dreamers are generally well educated and thus likely in jobs for which demand is strong and labor shortages are increasingly a problem. And African American and Latino unemployment rates are close to record lows. If we kick dreamers out of the country, then there will only be more unfilled positions. Repealing DACA is particularly wrong-headed economic policy.”

A quick snapshot of the labor market also quickly takes the idea out to pasture.

 

June JOLTS data: There is no shortage of jobs available.
There are more job openings now than at any point since 2000. And workers continue to quit at increasing rates – an indication that those people think they can find better opportunities than what they currently have.

Take solace, or be further depressed? Using the lump of labor fallacy as a political WMD isn’t exclusive to the United States.

//platform.twitter.com/widgets.js

What’s next? Trump seemed to walk back on the idea later in the week — First, tweeting “Congress now has 6 months to legalize DACA (something the Obama Administration was unable to do). If they can’t, I will revisit this issue!”

Takeaway: According to economists, DACA is a place where “America First” nationalism and the desire to become the “best jobs creating president ever” are incongruent.

White House: Pay for tax cuts by taxing 401(k) contributions. Maybe.

Business Insider’s Josh Barro, not a fan of the politics of this possibility:

//platform.twitter.com/widgets.js

I’ll bite. Time for a round of “State Your Unpopular Opinion”: This is actually a good policy.

You might be yelling into your computer screen, “But if you tax something, then people do less of it!

That would indeed be bad – Americans clearly save far too little for retirement. But…

You could actually save more for retirement by taxing 401(k) contributions upfront

Taxing 401(k) contributions upfront would be the equivalent of treating all 401(k)s as Roth 401(k)s. Those work just like Roth IRAs: you get taxed when you contribute, but get to withdraw tax-free.

A simple example: You are going to retire next year, so you have one year of 401(k) contributions before withdrawing. You want to make the max contribution of $18,000, have a current 20% tax rate, and will earn a 6% return.

Here’s the catch: If you contribute the maximum allowable amount to a regular 401(k), you must invest your tax savings to close the gap between it and the Roth 401(k). But if you contribute well below the max – say, $5,000 a year – it doesn’t matter (assuming your tax rate is the same now and in retirement).

If you do contribute the max $18,000 to a 401(k)…

[table id=1 /]

Assuming your tax rate stays at 20% in retirement, the Roth is better by $173.

If your tax rate increases to 25% at retirement, suddenly the Roth is better by $1,116. If you’re making $18,000 annual contributions to your 401(k), moving to a higher tax bracket is a distinct possibility.

This is just over a period of one year. Compound this scenario out over 30 years, and you would have hundreds of thousands of dollars more in your account at retirement. BUT NOTE: If your tax rate were to fall in the future, the plain ol’ 401(k) could be worth more.

Takeaway: Taxing 401(k) upfront sounds bad, but it’s really not that big of a deal for you. In fact, it can be great for you. For the government, however, the math works in the opposite direction. The Treasury gets more money upfront in exchange for less tax revenue in the future. It’s just an accounting trick to make short-term deficits looks better. But it could increase deficits over the long run if personal income tax rates go up.

Other Links and Notes

Tyler Cowen, writing Tyler Cowen types of things: “But I wish to suggest that price gouging, in spite of its obnoxious-sounding name, is usually the best of a set of bad alternatives. If you are inveighing against high prices after a storm, basically you are lining up with the interests of American big business, at the possible expense of storm victims.” (Price Gouging Can Be a Type of Hurricane Aid; Tyler Cowen, Bloomberg View)

Inequality in a very human form — a janitor in the 1970s Rochester vs. a janitor in the 2010s Cupertino: “In the 35 years between their jobs as janitors, corporations across America have flocked to a new management theory: Focus on core competence and outsource the rest. The approach has made companies more nimble and more productive, and delivered huge profits for shareholders. It has also fueled inequality and helps explain why many working-class Americans are struggling even in an ostensibly healthy economy.” (To Understand Rising Inequality, Consider The Janitors at Two Top Companies Then and Now; Neil Irwin, NYT)

Hurricane Harvey and San Francisco — a great primer on the economics of land use policy: “The point is that this is one policy area where “both sides get it wrong” — a claim I usually despise — turns out to be right. NIMBYism is bad for working families and the U.S. economy as a whole, strangling growth precisely where workers are most productive. But unrestricted development imposes large costs in the form of traffic congestion, pollution, and, as we’ve just seen, vulnerability to disaster.” (Why Can’t We Get Cities Right; Paul Krugman, NYT)

Relevant to today’s political discussions — technology doesn’t kill jobs, but rather shifts jobs around to more productive firms: “This demonstrates something routinely overlooked in the anxiety about the job-destroying potential of robots, artificial intelligence and other forms of automation. Throughout history, automation commonly creates more, and better-paying, jobs than it destroys. The reason: Companies don’t use automation simply to produce the same thing more cheaply. Instead, they find ways to offer entirely new, improved products. As customers flock to these new offerings, companies have to hire more people.” (Workers: Fear Not the Robot Apocalypse; Greg Ip, WSJ)