Jerome Powell and Dangerous Words

Below are some of the words I lifted from the Wall Street Journal, quoting the head of the US Federal Reserve, Jerome Powell

May 14, 2020 8:43 am ET | WSJ PRO

Good day. The Dow Jones Industrial Average dropped more than 500 points yesterday after Jerome Powell said more stimulus from Washington could be needed to support the U.S. economic recovery. The Fed Chairman said the economic outlook is “highly uncertain and subject to significant downside risks." 

Note: The 14th was a while ago. But in his remarks since then Powell has been a consistent pessimist about the economy and has urged the government to spend more and more -- there doesn't seem to be enough stimulus no matter what the government or the Fed does.

I’ve been writing and criticizing the Fed lately, but this went beyond my usual need to spout off. This is about him, not the system. Even while some of his lieutenants are predicting a relatively quick return to growth, Powell is shoveling gloom and doom on us.

Why is this dereliction of duty? Because the Fed is supposed to be a bastion of honesty, and it should be about doing and saying what is necessary to heal a weakening economy.

Since when is spreading gloom and doom part of the Chairman's job? Since when is spreading gloom and doom part of his tools to improve the economy? I don’t really care if the stock market swooned after his thoughtless and baseless statement. What I care about are the millions of people who will act on the fact that the head of the world’s most respected and powerful institution told people they should act in ways to protect themselves from a horrible economy. It’s like the fireman arriving at the fire scene telling people to jump out of the windows on the 99th floor.

What do people do when they are made to be surer that the economy is going to hell? They hunker down. They don’t spend; they save. They don’t borrow and invest. They hold money or gold. They don’t seriously look for a job. That’s what Jerome Powell told all these folks. Hunker down. How can that be good for the economy? Were there no upside risks for him to talk about? Apparently all the risks worth his time are downward. 

Does he have a crystal ball that lets him be so sure? And what about his colleagues at the Fed that hold different opinions? What about all those other economists who are talking about the different shapes of the recovery? What about those people who see a V-shaped recovery? Did he talk about that? No – he said jump from the 99^th floor.

Let’s suppose a recession has already started and will probably last a while. Is that news? Does the head of the Fed need to remind us of that? Why can’t the head of the Fed educate us about the facts that recessions – even severe ones – come and go? Why couldn’t he balance the gloom and doom with some positive realism? Or maybe it is political? Maybe he’d like to be working with a different President next year?  

He also advised more stimulus from Washington. He already said he would do whatever is necessary to flood the economy with money. That’s terrible enough but then two minutes after the government has already legislated how many trillions of new spending and tax cuts, he is advising that the government should do a lot more. A lot more? We have not had more than a moment to know the effects of the new trillions in spending – and he wants trillions more? Where do we get these guys from?

Apparently, he drinks the Kool-Aid that says that that there is no limit to how much money, deficits, and debts our country can absorb. I wish we could go back to Paul Volcker.

Covid Business Tax Cuts

As a card-carrying macroeconomist, I can proudly admit that I am not an accountant and I am definitely not a tax accountant.  Just as I am not an epidemiologist, I am among the rest of you who must try to understand everything that is going on because of Covid.

I just read an article in the Wall Street Journal about corporate tax changes under Covid. As I read it I had several reactions.

The first reaction is that one must be a tax accountant to understand and comply with these new laws. You say pasha Larry – companies are supposed to hire people to do their accounting. What’s the big deal? Well the big deal is that companies might know how to read these new laws but even companies won’t fully understand them. Nolan wanted me to play Pokemon with him. I could play checkers or War with him but Pokemon? I have no idea how to do that. He thinks grandpa is pretty dumb. I think our tax accountants will feel the same way.

Okay so companies don’t know exactly what to do. But worse yet, if you have gotten a new driver’s license lately and interacted with government, are you sure that there are enough  government workers trained in tax accounting who will be able to audit what companies turn into them? Imagine the load of tax returns coming in with huge tax advantages that must be audited. Is government really up to that task? Will Arthur Anderson have enough surplus employees they can loan to the government? At what price? What will guarantee that the work is done with quality?

Sound doable? Maybe. But let’s think about incentives. What are the incentives for most companies under the new laws? What do companies ALWAYS do when it comes to their taxes? What they ALWAYS do is lie and exaggerate the truth for one purpose – to reduce their taxes and increase their after-tax profits. This is a law of behavior more famous than Pavlov’s dogs who salivate every time they hear the name Trump.

What is cute about the current situation is how many new lies they can tell. Think about it. Let’s suppose a tax break is related to how many workers they pay for not working. Imagine how many workers they might be able to claim which might include the neighborhood dog walker. Who is going to audit all that?

As I said I am not a tax accountant but just try to imagine how creative those very creative tax accountants will be when faced with thousands of new pages of instructions for tax compliance. Wow. That blows my mind. And what really blows my mind is to think of  government hiring zillions of new employees whose job will be to comb through all those creative stories. How many threatening letters will they write to companies? How much time and spleen will be devoted to that whole load of correspondence and the process of divining who is right?

But that is the tip of iceberg. Another truth we all know is that there always has been a war between the owners of the companies and their employees. That war will never end. A dollar comes into Joe’s Banana Foster Truck on Aurora. After sending a buck to various governments, what is left in the till is split between Joe and his employees. 

This split is the source of much discussion in America. Unions were created to protect Joe’s workers. Various laws protect Joe’s workers. But Joe still has some leeway in deciding the split. That decision is always important. Joe has nine kids and a well-dressed wife, so Joe is under pressure to get a decent share.

Under these new laws, Joe and his tax accountants might see a silver lining – maybe he can figure out a way to look like he is following the new myriad laws and end up with a bigger share of what’s left after taxes. The workers are not tax accountants and they surely do not understand the new laws. Joe has a big opportunity to go bowling more often and buy his honey a new silver heart-shaped necklace.

Clearly, once all these laws get put into place, labor will figure out that Joe is trying to screw them. A labor/owner war will ensue. Given all the unpleasantness and stress caused by Covid, this war will get ugly.

One final point before you enter that well-earned nap. All those laws and parts of laws! All those extra government employees needed to audit all those tax returns. Do you really believe that they will disappear like Zorro in the night when the economy starts improving? Government has exhibited an historical tendency to grow without shrinkage. Will we ever get back to anything approximating a normal government?

Covid: Between a Rock and a Hard Place

Not only am I sequestered with an idiot named Larry but he keeps talking to me. And I talk back.

At least I had the Internet and TV and long walks around Green Lake wherein there are hundreds of signs directing people how to walk while 6 feet apart. The funniest one says that congested parks will be closed parks. So they are telling people who are walking on the trail to not walk on the trail or they will close the whole park. Hmm…sounds like a Catch 22 to me. If no one walks, then the park is already closed. Right?

The world is full of quirks these days. The same people who wear really cool masks are the ones who don’t bother to read the many signs at Green Lake asking people to walk in the same direction. Walking the same direction is supposed to reduce the incidence of people apparently coming too close to each other and swapping spit. These people care enough to wear a mask but they don’t care enough to follow rules that prevent virus spread? Weird.

Back to Internet and TV. Both went out on me a few days ago. A tech person is supposed to come today to fix it but since I just took over a new lease the other day, they are probably going to be corresponding with a guy who had the lease before me and who lives in  Colorado.

Given all the trouble I had arranging the tech visit, I am guessing things will not go well today. You may scoff at my situation but keep in mind I moved to Seattle recently and don’t have a ton of friends who would risk death to come and sit 6 feet away and talk to me. Not having TV/Internet essentially assigns me to Larry Davidson hell.

What else? I have been reading about Covid or Corona or whatever the hell they call this thing. Correct me if I am wrong, but after all this time and all these experts, we still do not know squat about why or when it started, how it spread, or how you stop it from spreading. The key word is still don’t know. That implies we never knew. Some of you might disagree because you are persuaded by one side of one or more of the issues more than the other side. But let’s be honest. You don’t know squat and if we follow whatever it is you want to do about it – the probability of huge negative impacts is huge.

Some of you want to let us go to Target and buy cool stuff, and you are willing to let us infect each other and kill off another x thousand or so. You feel cooped up and miss shopping at your favorite stores and of course, many of you are running out of hair dye.

The rest of you love turtles and salmon and people and want even sterner signs and laws that tell us we have to stay home with our "former" loved ones who will no longer speak to us. Doing so will not only raise the murder rate within families but it will also pretty much kill off the economy. Amazon can only process so many orders.

My last point is the one some of you are going to hate. Too many of you could not avoid the temptation to blame politicians for saying or doing things wrong from the get-go. Yes, I mean Trump. Given what I said above, do you really believe Biden or Pelosi would have said perfect and brilliant things three months ago? Two months ago? Two minutes ago?

Get on your high horse if you must. But this menace is new and none of these bozos we call politicians had or have a clue about what to do. No, I don’t love Trump any more than most of you. He/we would be better off if someone taped his mouth shut and asked him to play golf all day. 

Taking a strong ideological stance now is simply wrong in my humble estimation. We need folks who are capable of dealing with facts, figures, and who can do a risk analysis of what to do with a problem whose solutions involve horrible trade-offs. We aren’t getting out of this without scars. We need real leaders who will help us decide which scars we can tolerate.