Real Time Economics: The Fed | Chinese Trade Politics | Jobs Guarantee – Real Time Economics


In today’s issue, the Federal Reserve isn’t afraid of inflation, Chinese trade politics are more complicated than Americans think, New York’s new tax loophole finds few takers, and the pros and cons of a federal jobs guarantee.

FED: WE’RE NOT SWEATING INFLATION, NEITHER SHOULD YOU

Inflation is rising, but the Federal Reserve isn’t bothered. It left its interest rate target at 1.5% to 1.75% Wednesday, though still on course to raise it in June.  In their statement Fed officials noted inflation has finally risen to their target without belaboring the fact. They expect it to run near their “symmetric 2% objective over the medium term.” The word “symmetric” led some to speculate the Fed wants inflation to overshoot its target to compensate for undershooting for so long. Not so, says WSJ Fed reporter Nick Timiraos. Rather, it means they won’t overreact if it goes a bit over 2% (as seems likely) just as they didn’t when it fell short last year.

Comments or suggestions for Real Time Economics? Write to Greg Ip at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest.

WHAT TO WATCH TODAY

Just in time for U.S. officials to arrive in China for trade talks, the U.S. trade deficit for March will be released at 8:30 a.m. Economists think it narrowed to $49.7 billion from $57.6 billion in February.

Other indicators also out at 8:30: productivity is seen rising 1%, up from zero in the fourth quarter; initial jobless claims probably rose last week to 223,000 from the previous week’s 209,000; and factory orders in March are seen rising 1.2% from February.

Markit releases its non-manufacturing purchasing managers index at 9:45 a.m. and the Institute for Supply Management follows suit at 10 a.m.

TOP STORIES

EUROPEAN INFLATION DROPS

While U.S. inflation is back to its 2% target, it’s going in the opposite direction in the eurozone. Eurostat said today it fell to 1.2% in April from 1.3% in March. More worrisome the core rate, which excludes energy, food, alcohol and tobacco, dived to 0.7% from 1%, hitting its lowest in a year, Paul Hannon reports. This will pose a dilemma for the European Central Bank which halved its monthly bond purchases in January, believing a pickup in economic growth would help raise inflation. It must now decide whether to extend the program beyond September, when it was tentatively supposed to end.

NOTE TO U.S.: CHINA HAS POLITICS, TOO

The American delegation that arrived in Beijing today may think it’s entirely in president Xi Jinping’s power to relax discriminatory trade practices since he doesn’t answer to legislators or voters. That might be a serious miscalculation. Chun Han Wong writes that for Xi to give up subsidies and protection of strategic sectors would meet resistance from influential ministries, local governments and business. “Even in China, you can’t just snap your fingers and change the tariff rate on cars,” says Christopher Balding, a professor at HSBC Business School in Shenzhen. Compromise is politically risky: Chinese state media is full of accusations that President Donald Trump wants to suppress China’s rise. (See related item in What Else We’re Reading)

HANGING UP ON CHINESE SMARTPHONES

The U.S. is weighing restrictions on sales of Chinese-made telecommunications equipment as a potential national security risk, John McKinnon reports. Like other moves aimed at Huawei and ZTE, this one reflects worries Beijing could order Chinese manufacturers to hack into their products to spy or disable communications. (Huawei and ZTE have said that would never happen.) But national security isn’t the only motive: like the tariffs on aluminum and steel, which were also supposedly for national security but were really meant to bolster U.S. manufacturers, the restrictions on Huawei and ZTE also give the U.S. a leg up in the competition for technological leadership.

A TAX LOOPHOLE NO ONE SEEMS INTERESTED IN

After the new tax law capped the deduction for state and local taxes, some high tax states looked for workarounds. New York lets employers pay a payroll tax in lieu of employees’ income tax. But the Wall Street Journal contacted all of the state’s largest employers and none plan to use the provision, Richard Rubin and Mike Vilensky found. They’re worried about compliance costs, interactions with union contracts, complexity across state lines and  explaining to workers why they’ll get a smaller raise but more money.

A GUARANTEED JOB WOULD BE GREAT, EXCEPT …

A federal job guarantee has been kicking around since the 1940s, but it’s gotten a new lease on life lately. Vermont Senator Bernie Sanders, who will probably run for the Democratic presidential nomination in 2020, plans legislation guaranteeing a job that pays $15 per hour plus benefits to anyone who wants one. As Greg Ip writes, the price would be high but not astronomical: perhaps 1% to 1.5% of gross domestic product. The real problem is that millions of workers, instead of producing things consumers really want, from cappuccino to lawn mowing, would be doing jobs of marginal value purely to meet federal job creation goals.

QUOTE OF THE DAY

Some overshooting of the inflation target would be a good thing. We can only hope we don’t get too much of a good thing.–Joseph Gagnon, Peterson Institute for International Economics

WHAT ELSE WE’RE READING

“Most Americans & Europeans alive today have never experienced a true economic depression first-hand.” So begins a tweetstorm by Steven Bodzin of REDD Intelligence from Venezuela. “There used to be frequent (if crowded & uncomfortable) private buses but there are none any more. Even on the biggest avenues, buses just aren’t running. No spare parts and a controlled price too low to make it worth turning on the engine. This might seem strange but the most surprising thing is the near absence of taxis and moto-taxis. These were everywhere. They gave the city its mobility and its danger. They’re basically gone. Where are they? Where is everyone?”

Marco Rubio still supports the tax cut, but would target it better. Walking back his withering appraisal from an earlier  Economist interview, the Republican senator writes in National Review: “Targeting corporate tax cuts at new investment in the United States, instead of mere stock-market presence, would be a better guarantee for high-growth American companies and their workers. A territorial tax system that limits the ability of multinationals to arbitrage in low-tax foreign countries would be a better guarantee for reducing the American trade deficit.”

Even authoritarians face gridlock: That’s the conclusion of Princeton University’s Rory Truex after studying the delays and obstacles to lawmaking in China. On average, “48% of laws are not passed within the period specified in legislative plans, and about 12% of laws take more than 10 years to pass.” For example, a new food safety law was hobbled by “turf wars among the relevant ministries, leading to a rather weak initial draft law that failed to consolidate the fragmented bureaucracy.”

At the Milken Global Conference, Axios’ Dan Primack observes: “So much optimism, about nearly everything. If Mike Milken had decorated the Beverly Hilton with rainbows, it wouldn’t have been out of place. Someone actually said to me yesterday that the rules of economic cycles may no longer apply, and this was a senior capital markets professional with a head full of gray.” (Wonder if Dan lent him his copy of Carmen Reinhart and Ken Rogoff’s This Time is Different: Eight Centuries of Financial Folly.)

UP NEXT: JACKSON HOLE FOR HAWKS

The conservative Hoover Institution’s monetary policy conference begins Thursday night and runs through Friday. It doesn’t have the cache of the Fed’s own conference in Jackson Hole, Wyo. but it nonetheless attracts a growing roster of big economic names, some with a skeptical take on mainstream central banking. Sitting Fed officials who will speak Friday include John Williams, Raphael Bostic, Esther George, and Robert Kaplan, presidents of the San Francisco, Atlanta, Kansas City and Dallas reserve banks respectively, and Randal Quarles, vice-chairman of regulation. Kevin Warsh and John Taylor, Hoover scholars who were also candidates for Fed chair last year, are also speaking.


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Real Time Economics: The Fed | Chinese Trade Politics | Jobs Guarantee – Real Time Economics

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