New Fed Chair Weighs In on Trump‘s Tax Cuts and the Economy

By Yuval Rosenberg and Michael Rainey What the New Fed Chair Said About the Trump Tax Cuts and Fiscal Policy New Federal Reserve Chair Jerome Powell testified before Congress Tuesday for the first time since being sworn in as the central bank’s leader. In his [prepared remarks]( Powell sounded upbeat about the economy, saying that the outlook “remains strong” and that “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds.” He noted that “fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory.” Here’s more from Powell: On inflation and interest rates: Powell said that he expects inflation to rise this year and stabilize around the Fed’s 2 percent annual target rate “over the medium term,” adding that “wages should increase at a faster pace as well.” Markets heard some hawkish notes in the testimony, with federal-funds futures signaling a higher chance that the Fed will raise rates four times rather than three this year. On the debt ceiling: “It is very important that the federal government and government generally be on a sustainable fiscal path, meaning as the Baby Boomer generation retires we’ll need to address the significant fiscal issues that are coming to us over time … and I think it’s important that Congress do that. At the same time, the debt ceiling should be something that we always raise in a timely fashion. There’s no other country in the world that has a separate vote over whether to pay bills that we’ve already agreed to incur, and I think the United States has never defaulted on a principal or interest payment and never should, and I think doing so would be something I’d really hate to see and could bring very significant consequences.” On fiscal policy: Powell sounded much like his predecessors in warning about the country’s fiscal future. “[W]e really need to get on a sustainable fiscal path and the time to really be doing that is now,” he said. “And the second thing I’ll say is that when fiscal changes are made it’s important that to the extent possible they be directed at enhancing the productive capacity of the economy. We [at the Fed] can’t affect productivity other than through keeping prices stable and regulation on a balanced basis. And productivity is the thing that allows per capita incomes to rise over time. So we don’t control the potential long-run growth rate. You [in Congress] have much more authority over that, and I think to the extent fiscal policy can focus on way to increase attachment to the labor force, create incentives for more skills and aptitudes among our labor force and greater investment in R&D and that kind of thing, that’s a healthy thing.” On the effects of the new tax law: “My personal view would be that there will be a meaningful increment to demand at least for the next couple of years” from the combination of the tax cuts and spending increases passed by Congress, Powell said. When asked how much of the tax cut will go into salaries and wages versus corporate share buybacks and investments, Powell said the Fed doesn’t have an estimate for what that number would be. Chart of the Day: Who's Funding the Deficit? Via [Global Macro Monitor]( The Battle Over Corporate Buybacks Corporate stock buybacks have hit [record highs]( and dividends are rising too, according to Tuesday’s [Wall Street Journal]( driven upward by both strong earnings and the $1.5 trillion tax cut Congress passed in December. Critics have highlighted the wave of buybacks as proof that the tax overhaul was a gift to stockholders, with few long-term benefits for workers beyond a handful of heavily promoted bonus payments. But Republicans and pro-business groups have pushed back on the idea that buyback and dividend increases are serving only the interests of the rich. Scott Greenberg of the conservative Tax Foundation summed up the general argument in a recent tweet saying that it’s too early to tell if the tax overhaul is working, regardless of the buyback surge. “High levels of buybacks could mean a lot of things,” he [wrote]( including the movement of capital from lower to higher productivity sectors. Kevin Hassett, who leads President Trump’s Council of Economic Advisers, recognized last week that many companies are focused on buying back their own shares, but said things would look different in the long run. “Right now we’re going to have an adjustment where you see probably more dividends and share buybacks than wage increases. But going forward we’re going to see a lot of capital formation and wage growth,” [Hasett said](. And as The Wall Street Journal’s Richard Rubin [pointed out]( Tuesday, “Wage increases via corporate tax cuts were always a long-run story.” Critics of the tax cuts say the historical data indicates that since the 1980s, companies have used tax windfalls almost entirely for buybacks and dividends, and that the wage thesis is purely theoretical and unlikely to play out. Heitor Almeida, a professor of corporate finance at the University of Illinois at Urbana-Champaign, told [The New York Times]( Tuesday that buybacks may themselves result in lower investment overall. “We have some causal evidence that because of short-termism companies are doing some stock repurchases that maybe they shouldn’t do. And maybe that’s causing them to reduce investment,” he said. Even some of the tax cut’s proponents admit that increased capital formation and higher wages may not be in the cards. The Tax Foundation’s Greenberg said that, while it’s too soon to tell one way or another, the buybacks could indeed end up being a bonanza for the already rich: “it could indicate an increase in the consumption of high-income households, if the money from buybacks isn't reinvested by households into U.S. businesses that increase real investment. I agree this is the scenario to be afraid of.” Send Us Your Tips and Feedback: Email Yuval Rosenberg at yrosenberg@thefiscaltimes.com and follow me on Twitter [@yuvalrosenberg](. Follow The Fiscal Times on Twitter [@TheFiscalTimes](. Apple Is Opening Medical Clinics for Its Employees Apple is preparing to open a group of health clinics for its employees and their families, [CNBC reports](. The clinics, called AC Wellness, will launch this spring as “an independent medical practice dedicated to delivering compassionate, effective healthcare to the Apple employee population,” according to [their website](. The site includes job postings for a primary care and acute care doctor, nurse practitioner and nurse coordinator, clinical exercise coach and “health partner,” who will work with patients to “improve their health and wellness through sustainable behavior change.” CNBC reports that, based on LinkedIn search results, former Stanford Health Care employees have been affiliated with the new clinics for at least five months, and that the company is also looking to hire “designers” to help with programs for disease prevention and promoting healthy behavior. Nevada Cashes In on Pot Sales Marijuana sales became legal — and taxable — in Nevada last July, and the state collected a bit more than $30 million in tax revenue during the first six months, well ahead of projections. A 10 percent retail tax generated $19.5 million of the total, while a 15 percent wholesale tax produced $10.8 million. Total marijuana sales in the state came to $195 million, suggesting annual sales in the $400 million range for the first year. According to [Forbes]( “a good chunk” of the tax money will be used in the state’s education system, though details are a bit hazy. News - [As GOP Tax Cuts Take Hold, Democrats Struggle for Line of Attack]( – Washington Post - [Starbucks’ Howard Schultz: Trump’s Tax Cuts ‘Robbing from the Future of Young People’]( – Fox Business - [Dimon Says He’ll Fight for Tax Breaks Amazon Gets for HQ2]( – Bloomberg - [One Simple Way Trump Can Get the Economic Growth He Wants]( – The Atlantic - [Senators Unveil Bipartisan Bill to Fight Opioid Epidemic]( – The Hill - [Treasury Secretary Mnuchin Faces a Tough Crowd at UCLA]( – Marketplace - [Right Warns GOP Agenda Can’t Stop at Trump’s Tax Law]( – The Hill - [Trump Strikes $3.9 Billion Deal with Boeing for New Air Force One]( – CNN - [A Closer Look at the Wage Growth That Shook Markets]( – Wall Street Journal - [Tax Reform Shakes Up the Muni Market Landscape]( – Morningstar - [New Jersey Senate Passes SALT Workaround as GOP Raises Concerns]( – Politico - [Wealth of Congress: Richer Than Ever, but Mostly at the Very Top]( – Roll Call Views - [US Prescription Drug Costs Are a Crime]( – Bloomberg View Editors - [Corporations Stop Pretending to Help Workers, Go Back to Enriching Themselves]( – Bess Levin, Vanity Fair - [Trump’s Sneaky Backdoor Obamacare Repeal Is Working]( – Catherine Rampell, Washington Post - [No Matter What You Call It, Government-Run Health Care Will Never Work]( – Hadley Heath Manning, The Hill - [Why Are US Interest Rates High and Rising?]( – Martin Feldstein, Project Syndicate - [Breaking Down the Numbers in Trump's Proposed Cyber Budget]( – Ross Nodurft, The Hill - [In Defense of Centrists]( – Alice M. 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