Yellen’s Balance Sheet Baloney

Of the many questions reporters asked Janet Yellen on Wednesday, at her press conference following the FOMC’s decision to raise the Fed’s policy rates, my favorite was the very first, posed by the Financial Times’ U.S. Economics Editor, Sam Fleming.

Here is Mr. Fleming’s question:

[You’ve stated that the Fed wants to delay*] balance sheet normalization until [interest rate*] normalization is well under way. Could you give us some sense about “what well under way” means, at least in your mind — what kind of hurdles are you setting, what kind of economic conditions would you like to see, is it a matter of the level of the short term federal funds rate as being the main issue? What kind of role do you see the role of the balance sheet playing in the mobilization process over longer term? Is it an active tool or passive tool? Thanks.

And here is Chair Yellen’s response:

Let me start with the second question first. We have emphasized for quite some time that the committee wishes to use variations in the fed funds rate target or short term interest rate target as our key active tool of policy. We think it’s much easier, in using that tool, to communicate the stance of policy. We have much more experience with it, and have a better idea of its impact on the economy. So, while the balance sheet asset purchases are a tool that we could conceivably resort to if we found ourselves in a serious downturn where we were again up against the zero bound, and faced with substantial weakness in the economy, it’s not a tool that we would want to use as a routine tool of policy.

Mr. Fleming didn’t ask a follow-up question, so naturally I had no way of knowing what he thought of Yellen’s answer. I did, however, know just what I myself thought of it, which was, not much.

Making a Good Budget Great

President Trump’s 2018 budget takes a meat cleaver to many federal programs. In my issue areas–transportation, housing, and public lands–it would end the Federal Transit Administration’s New Starts program; end funding for Amtrak’s long-distance trains; eliminate HUD community development block grants; and reduce funding for public land acquisition.

Trump calls this the “America First” budget. What it really is is a “Federal Funding Last” budget, as Trump proposes to devolve to state and local governments and private parties a number of programs now funded by the feds. In theory, the result should be greater efficiency and less regulation. However, in most of the areas I know about, Trump could have gone further and produced even better results.

Transportation: I applaud the elimination of New Starts, the program that encourages cities to waste money on obsolete transit systems, but am disappointed that Trump would continue to fund projects with full-funding grant agreements. There are several insanely expensive projects, including the Maryland Purple Line and the Minneapolis Southwest Line, that have such agreements but haven’t started construction and should be eliminated. A number of streetcar and bus-rapid transit projects also fall into this category. If Congress is willing to live with no more full-funding grant agreements, it should allow the administration to also review and eliminate projects that haven’t yet begun construction or have made only token construction efforts.

The proposal to eliminate Amtrak long-distance trains is politically problematic. Since Amtrak’s other trains reach just 22 states, while the long-distance trains add 26 more, this proposal will look like it is favoring some states over others. As an alternative, I would have suggested that the federal government offer to cover 25 percent (or less) of the fully allocated costs (including depreciation) of each train or route, including the Northeast Corridor. If fares don’t cover the other 75 percent, then state support would be required or the trains would be cut. This is much more fair, especially because some state-supported trains actually require subsidies per passenger mile that are much larger than many of the long-distance trains.

Three other transportation proposals look good. One would transfer air traffic control to an independent, non-governmental organization, which would quickly install new equipment and increase airline capacities and safety. A second would eliminate the so-called Essential Air Service program, which subsidizes airports in smaller communities. Trump also proposes to eliminate the TIGER grant program, a relic of the 2009 stimulus bill, that has funded streetcars and other ridiculous projects.

House Moves Forward On Tort Reform — And With A Nod To Federalism

As I note in a post at Overlawyered, the House of Representatives has been moving quickly on litigation reform, both on perennial measures long stymied by Democratic opposition and on others of newer vintage (more). Of particular interest, two measures track recommendations Cato scholars have been making for years, while a third has been scaled back in a way that at least nods to concerns Cato scholars have expressed.

The new 8th edition Cato Handbook for Policymakers contains a chapter on tort and class action law prepared by Robert Levy, Mark Moller, and me. Its first federal-level recommendation is that “Congress should restore meaningful sanctions for meritless litigation in federal court.” On March 10, by a largely party-line vote of 230-188, the House passed the Lawsuit Abuse Reduction Act (LARA), H.R. 720, which would restore the regime of strong Rule 11 sanctions in federal litigation that were gutted in 1993 (committee report here). LARA has been proposed in one form or another for many Congresses and has passed the House more than once before stalling in the Senate; more on it here.

Our handbook chapter also recommends that Congress “implement further reforms for class actions that cross state lines,” a type of suit that often enables state courts to assert their power over transactions and parties in other states. While our recommendations are multi-faceted, many of them overlap with provisions in the pending H.R. 985, the Fairness in Class Action Litigation Act (committee report; passed the House March 9, 220-201). FICALA in turn adds other provisions of its own; attorney Andrew Trask, author of multiple essays on class action law for the Cato Supreme Court Review, takes a relatively favorable view of its overall impact.

Trump Budget: A Good Start on Domestic Cuts

The White House released President Donald Trump’s first budget today. In the opening message, the president says, “Our Budget Blueprint insists on $54 billion in reductions to non-defense programs. We are going to do more with less, and make the government lean and accountable to the people.”

I would rather that the government do less with a lot less, but I appreciate that Trump is proposing to fully offset to his defense spending increases. His Republican predecessor in office pushed for large increases in defense, education, health care, and other spending without sufficient offsets, thus putting us on our current path of endless deficits and rising debt.

Budget director Mick Mulvaney has assembled a thoughtful array of cuts, including:

  • Ending the Community Development Block Grant.
  • Ending the Economic Development Administration.
  • Ending the Minority Business Development Agency.
  • Ending Essential Air Service (EAS) subsidies.
  • Cutting an array of K-12 subsidies.
  • Moving air traffic control to the private sector.
  • Cutting the EPA budget by almost one-third.
  • Cutting subsidies for local water and sewer.
  • Cutting rural subsidies.
  • Ending various energy subsidy programs.
  • Ending the Low Income Energy Assistance Program (LIHEAP).
  • Ending the Community Services Block Grant.
  • Cutting pork-barrel transportation grants.
  • Cutting Amtrak subsidies.
  • Cutting job-training subsidies.
  • Ending the Weatherization Assistance Program.
  • Cutting funding for the United Nations and the World Bank.
  • Ending funding for the National Endowment for the Arts, the National Endowment for the Humanities, and the Corporation for Public Broadcasting.

Nearly all of these cuts have been recommended by DownsizingGovernment.org.

Many of them would remove the federal government from activities that are properly state, local, and private. So while liberals and lobby groups will complain, individual states can fund programs such as LIHEAP and EAS themselves. If EAS really is “essential,” then local businesses and governments in affected communities will have a strong incentive to raise their own funding for it.

Kudos to Mulvaney and his team for proposing such a broad range of reforms.

American Family Incomes Reach Record High

Prevailing wisdom holds that this is a time of stagnating incomes and economic struggle for American families. That is indeed a reality in many homes. But as economist and HumanProgress.org advisory board member Mark Perry recently pointed out, most American families are doing better than the prevailing wisdom might have them believe. 

After adjusting for inflation, it turns out that median income for families reached a record high in 2015, the last year for which the U.S. Census Bureau has data. Families that include married couples, particularly those where both spouses participate in the labor force, did even better and also saw their incomes break records in 2015. The Census Bureau defines a family as “a group of two people or more … related by birth, marriage, or adoption and residing together.”

 U.S. median income graph

Please note that median family income is not the same thing as median household income, as the latter includes non-family households.  Median household income has been more stagnant. It was 56,516 dollars in 2015, around 14,000 dollars less than median income for family households. Interestingly, 65 percent of U.S. households were family households in 2016, the most recent year of data.

All family types saw a somewhat notable median income uptick in 2015, allowing each type to outperform pre-Great Recession income levels. Of course, some families have done better than others. Families headed by single women (simplified to “single mothers” in the above graph) have seen their incomes rise only slowly, while families headed by single men (“single fathers” in the graph) have seen their incomes essentially stagnate since the 1970s.

However, most families fall into the categories that have made impressive real income gains. 73 percent of family households include married couples, while 19 percent are headed by single women and only 8 percent are headed by single men. Moreover, both spouses now work in over 60 percent of married couple families, placing them in the highest-earning category of family.

The median income for all U.S. families was only 28,144 dollars in 1947, compared to 70,697 dollars in 2015. That is an increase of 151 percent. Again, that is after adjusting for inflation.

So despite the popular narrative of economic decline pushed by some politicians and newspeople, the American family is earning more than ever before recorded.

Wrong Lessons from Canada’s Private Currency, Part 1

I’ve referred often in these pages to the virtues of Canada’s late-19th century currency system, with its heavy reliance upon circulating notes issued by several dozen commercial banks, most of which commanded extensive nationwide branch networks. I’ve also lamented the fact that so few monetary economists today, let alone members of the general public, seem aware of that arrangement, the superiority of which, both absolutely and compared to its U.S. counterpart, was once widely celebrated. For I’m certain that, if more people were aware of it, the scales might drop from their eyes, plainly revealing the gigantic blunder our nation (and most others) committed by entrusting the management of paper currency to a government-sponsored monopoly managed by bureaucrats.

So you might expect me to be jumping for joy after seeing this new Bank of Canada Staff Working Paper by Ben Fung, Scott Hendry, and Warren E. Weber, on “Canadian Bank Notes and Dominion Notes: Lessons for Digital Currencies.”  But no such luck: instead, after reading it, I’ve been in a blue funk.

How come? Because, instead of drawing badly-needed attention to the substantial merits of Canada’s private currency system, Messrs. Fung, Hendry, and Weber focus on its shortcomings, claiming that it suffered from serious flaws that only the government could fix. They then go on to argue that government intervention may also be needed to keep today’s private digital currencies from displaying similar flaws. In short, according to them, Canada’s experience, instead of casting doubt on the desirability of special government regulation of private currencies, supplies grist for regulators’ mill.

Is their perspective compelling? I don’t think so. As I plan to show, and as even a cautious reading of Fung et al.’s own assessment will suggest to persons familiar with other nations’ experiences, the imperfections of Canada’s private banknote currency were minor ones, especially in comparison to those of the concurrent U.S. arrangement. Nor is it even clear that they were genuine flaws, in the sense that implies market failure. The reforms that eventually eliminated the imperfections were, in any case, not imposed on Canada’s commercial bankers against their wishes, but instigated by those bankers themselves. Finally, the suggested analogy between Canada’s 19th-century banknotes and modern digital currencies, far from supplying solid grounds for supposing that unregulated digital currencies are likely to exhibit the same (real or presumed) shortcomings as their 19th-century Canadian counterparts, is so forced as to be utterly unconvincing. For all these reasons, those seeking to draw useful lessons from Canada’s private currency experience will be well-advised to look for them elsewhere.

Based on His Leaked 2005 Tax Data, Donald Trump Should Move to Italy (or the Isle of Man)

The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.

Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected—including me in the column I wrote on this topic last year for Time.

Some Trump supporters are even highlighting the fact that Trump’s effective tax rate that year was higher than what’s been paid by other political figures in more recent years.

But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.

Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.

But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.

Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.

Here’s how the reform was characterized by an Asian news outlet.

Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.

Here’s how Bloomberg/BNA described the new initiative.

Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.

Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the charming people at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?

Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.

But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.

There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate.  In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.

Though there are other options, as David Schrieberg explained for Forbes.

Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.

Though all of these options are inferior to Monaco, where rich people (and everyone else) don’t pay any income tax. Same with the Cayman Islands and Bermuda. And don’t forget Vanuatu.

If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.

In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.