The Fed Policy Statement

Here is the statement I would like to see the Federal Open Market Committee issue on January 28 on conclusion of its first meeting of 2015:

Information received since the FOMC met in December confirms that economic activity is expanding at a moderate pace. Inflation has continued to run below the Committee’s longer-run objective, primarily reflecting a decline in energy prices. That decline appears to be principally a consequence of improving technology in oil and natural gas production and is, thus, a change in relative prices that has no long-term implications for the aggregate rate of inflation.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. To support continued progress toward these goals, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.

To minimize uncertainty over the course of policy, the Committee judges that the process of normalizing interest rates should begin in June. However, the exact timing is data dependent and might be adjusted as necessary.

The Committee also judges that it is now appropriate to begin the process of normalizing its open market portfolio. Effective immediately, the Federal Reserve will cease to reinvest interest on the portfolio and maturing principal.

Several FOMC members have suggested that midyear will be the appropriate time to begin to raise policy rates. The FOMC itself has been vague. No member of the leadership team–which I would define as Chair Janet Yellen, Vice Chair Stanley Fischer, and William Dudley, President Federal Reserve Bank of New York–has ruled out the midyear timing. In general, it is not good practice to announce a future date for a policy change, but such an approach makes sense at this time given that policy rates have been near zero since December 2008. Announcing a June date will not be a shock to the market, as market commentary widely suggests that June is the time the FOMC will act. It is, of course, always possible that economic conditions will change dramatically before June, requiring a change of plan. Nonetheless, it is time for the FOMC to clear the air by stating a plan.

Listen to China to Confront North Korea

One of Washington’s greatest policy failures is North Korea.  Apparently, Pyongyang’s most recent provocation was hacking Sony Pictures in retaliation for the movie ‘The Interview.’  More fundamentally, the Democratic People’s Republic of Korea remains determined to create a sizeable nuclear arsenal.

Successive administrations have sought China’s aid to restrain the DPRK, but have failed to listen to Beijing while lobbying Chinese officials for their support.  If Washington hopes to win support from the People’s Republic of China, American policymakers must respond to the PRC’s concerns.

Understandably distrustful of Pyongyang, the United States has insisted upon de-nuclearization before delivering substantial aid to the North.  However, when approached by Washington for assistance, China has responded by blaming America for creating a sense of insecurity which encouraged the DPRK to develop nuclear weapons. 

In 2013, Wang Jiaru, head of the Chinese Communist Party’s International Department, met with several China specialists in Beijing.  I asked him about North Korea.  He criticized the United States and South Korea for contributing to increased tensions through such policies as regular military exercises.  He contended that while “the United States believes talks should start after the North abandons nuclear weapons, nuclear weapons should be abandoned through talks.”  He explained, “If the United States does not act, it cannot rely on China to solve the problem.” 

In Beijing’s view, the DPRK will not yield its nukes so long as it feels insecure.  Of course, Pyongyang might not do so in any case.  But it almost certainly is true that the Kim regime will not give up what looks like the ultimate security guarantee if it believes its future is at risk. 

Cato Scholars Respond to the 2015 State of the Union

Cato Institute scholars Alex Nowrasteh, Aaron Ross Powell, Neal McCluskey, Mark Calabria, Bill Watson, Chris Edwards, Gene Healy, Chris Preble, Julian Sanchez, Pat Michaels and Trevor Burrus respond to President Obama’s 2015 State of the Union Address.

Video produced by Caleb O. Brown, Austin Bragg and Tess Terrible.

Mr. President, Tell HealthCare.gov Enrollees about King v. Burwell and the Risks to Their Coverage

Tonight, President Obama will deliver his annual State of the Union address to Congress. He will no doubt boast that his administration has enrolled 6.8 million individuals in ObamaCare plans in the 37 states with federal Exchanges – i.e., through HealthCare.gov – and a couple million more in the few states that established their own Exchanges. The State of the Union would also be a good time for the president to be honest with those HealthCare.gov enrollees, especially the roughly 6 million of them who are purchasing coverage with the help of federal subsidies, about the risks to which he has exposed them.

The Patient Protection and Affordable Care Act, which the president himself signed, expressly provides that those subsidies are authorized only “through an Exchange established by the State.” Since majority of American people have never supported ObamaCare, about three quarters of the states now have refused or otherwise failed to establish Exchanges.

If the president were following the law, he would not be issuing subsidies to any HealthCare.gov enrollees. Indeed, if the president had followed the law – if he had all along admitted he has no authority to subsidize HealthCare.gov enrollees – then enough of the country would have seen the full cost of ObamaCare coverage that Congress would have reopened and likely repealed the statute by now. It would have happened even before anyone lost their coverage in the “if you like your health plan you can keep it” debacle of late 2013.

Instead, President Obama insisted on violating the express language of his own health care law. The result is that he put millions of Americans in jeopardy of losing their health insurance – again.

On March 4, the Supreme Court will hear a case called King v. Burwell, one of four challenges to those illegal subsidies, and the illegal taxes that those subsidies trigger. The Court will likely issue a ruling by June. The fact that the Supreme Court agreed to consider King at all means that at least four justices believe the Fourth Circuit’s ruling for the government in King merits review.

If the justices agree with two other lowercourts, they will hold that the president is breaking the law and will put an immediate end to those illegal subsidies. Such a ruling would free the plaintiffs and more than 57 million individuals and employers from being illegally subjected to the aforementioned taxes – ObamaCare’s individual and employer mandates.

The people with whom the president most needs to be honest are the millions of Americans who enrolled in HealthCare.gov. If the Court finds those subsidies are illegal, then enrollees receiving subsidies would see their health insurance bills quadruple (on average). They would be hit with a new tax bill of up to $5,000. Their plans could disappear, and they may not be able to find a replacement. An estimated one million of these folks left jobs with secure coverage because the president promised them secure, affordable coverage through HealthCare.gov. Only he never had that power, and by pretending he did, Obama has now made coverage less secure for millions.

Instead of warning Americans of these risks of HealthCare.gov coverage, the president and his administration have been lying to HealthCare.gov enrollees. As they lost before lower courts and even as the Supreme Court agreed to hear King just days before open enrollment in HealthCare.gov began, the White House and administration officials have repeated the mantra that “nothing has changed.” Watch HHS Secretary Sylvia Burwell say “nothing has changed” four times in 90 seconds (go to 3:40).

It is not true that nothing has changed, and the administration knows it isn’t true. The administration knows the risks inherent in HealthCare.gov coverage have increased, because the administration changed the agreements between HealthCare.gov and participating insurers to insert a clause allowing insurers to back out if the subsidies disappear:

CMS acknowledges that QHPI has developed its products for the FFE based on the assumption that APTCs and CSRs will be available to qualifying Enrollees. In the event that this assumption ceases to be valid during the term of this Agreement, CMS acknowledges that Issuer could have cause to terminate this Agreement subject to applicable state and federal law.

The administration made the change, reports Inside Health Policy, because insurers demanded it and because administration officials themselves “believe the clause is critical.” 

What does this mean? It means the president knows that millions of HealthCare.gov enrollees are facing serious financial risks, or worse. Yet his administration is actively concealing those risks from enrollees by telling enrollees “nothing has changed.” At the same time the president is protecting insurers from the risks they face by participating in HealthCare.gov, he is not even informing consumers about the risks HealthCare.gov coverage poses for them.

The president needs to put an end to the deception, tonight. He needs to warn HealthCare.gov enrollees about the risks inherent in their coverage, so they have time to prepare. If he tells them tonight, some of those who need insurance the most might be able to find jobs with secure coverage (or other access to coverage) by the time the Court rules. He needs to tell HealthCare.gov enrollees what his contingency plans are if the Supreme Court rules that he was breaking the law and playing games with their coverage.

He can blame it all on his political opponents. He can claim to be the only honest man in Washington, for all I care. But he needs to level with HealthCare.gov enrollees tonight about the risks they are facing. To keep pretending “nothing has changed” would be a reckless lie.

Obama Presidency by the Numbers

Tonight, President Obama will deliver the State of the Union address. In addition to the lofty rhetoric and self congratulations, the president will likely claim that the federal government’s budget has improved during his tenure.

It is true that  the deficit has decreased in recent years due partly to  large tax increases, which have helped the government but not the economy. Also, spending levels have stabilized, partly due to Republican efforts to slow discretionary spending growth. However, these are temporary trends. Spending is expected to explode in coming years, which will fuel larger deficits and higher levels of debt. The nation’s longer term fiscal outlook is a mess.

Comparing today’s budget situation to the situation at the beginning of President Obama’s tenure is difficult. President Obama took office in January of 2009, several months into fiscal year 2009. Spending in 2009 was $3.5 trillion, up from $3.0 trillion in 2008. Part of the higher spending in 2009 was attributable to  the Bush administration, but President Obama’s big stimulus bill passed in February 2009 also added to the increase.

The Proliferation of Ex-Im Banks

As I was reading my print copy of the Economist last week, an advertisement taken out by the African Export-Import Bank, in search of a new President and Chairperson of the Board of Directors, grabbed my attention.  No doubt the pay and perks are pretty good, but I wasn’t thinking of applying.  Rather, it made me wonder, just how many Ex-Im Banks are there in the world?  To get a sense of it, I checked out the official list compiled by the Organization for Economic Co-operation and Development (OECD) for agencies in OECD countries , as well as Wikipedia’s broader, global list

It’s quite a long list!  Which leads me to the following point.  These days, trade negotiations often seem to have veered away from their traditional focus, with a lot of time now spent on issues such as intellectual property protection and labor rights.  Subsidies were one of the original targets of trade talks, and it would be great to put them back in the mix.  How about negotiating an end to the proliferation of export subsidies by these kinds of institutions?

Obama Capital Gains Tax Proposal

President Obama’s economic policies always seem to be a zero-sum proposition with winners and losers. Usually the losers are all Americans, who suffer from slower economic growth.

The president’s new tax proposals are a case in point. One damaging item is a proposal to raise the top federal capital gains tax rate from 24 percent to 28 percent. That would come on top of his previous increase from 15 percent.

Despite what the president and his political advisors may think, low capital gains tax rates are not some sort of unjustified loophole. We’ve had reduced rates virtually the entire time we have had an income tax, and for very good reasons. Low capital gains tax rates are crucially important for spurring entrepreneurship, investment, and growth.

Recognizing that, nearly every other high-income nation has a reduced capital gains tax rate. The average top long-term rate in the 34 Organization for Economic Cooperation and Development nations is just 18 percent, according to Tax Foundation. By contrast, the U.S. rate (including state taxes) would jump to 32 percent under the Obama plan—far higher than the rate in most other nations.

For more, see my op-ed in Daily Caller today.

 

Wonk note: Data is from Tax Foundation and my Cato study. Unlike TF, I did not include the effect of the limitation of itemized deductions, which slightly increases the effective rate.