Yellen Spooks Investors With Talk of Rate Hikes
Treasury Secretary Janet Yellen suggested in an interview with The Atlantic that interest rates may have to rise to keep the economy from overheating if President Joe Biden’s spending plans are enacted.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” Yellen said In a prerecorded interview that aired Tuesday. “So it could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive. I think that our economy will grow faster because of them.”
Interest rate policy is set by the Federal Reserve, not the Treasury Department, and current Fed chair Jerome Powell has said repeatedly that the central bank is not close to raising rates and believes that any rise in inflation will be short-lived. “We’ve been living in a world of strong deflationary pressures - around the world, really - for a quarter of a century, and we don’t think that a one-time surge in spending leading to temporary price increases would disrupt that," Powell said in testimony before Congress in March.
Still, the remarks by Yellen, a former Fed chair, appeared to contribute briefly to a stock market dip Tuesday, given that they “seemed to suggest that White House officials were acknowledging that inflationary pressures were a growing concern,” as The Washington Post put it. Asked about Yellen’s comments, the White House said that it was closely monitoring inflation. “We take inflationary risk incredibly seriously,” White House Press Secretary Jen Psaki said.
Some analysts cautioned, though, that Yellen was likely commenting on basic economics rather than monetary policy, and that her remarks should not be taken as a signal of any coming policy shift. “She was actually asked about the growing share of government spending to GDP and she was asked a very economist question and she answered in a very economist way, where interest rates to yields might have to rise a little bit for the reallocation of resources and the market read that as rates will have to rise,” Gennadiy Goldberg, interest rate strategist at TD Securities, told Reuters. “But I think they’ve already risen. They’ve gone from 1% to where we are now, so it’s certainly quite a bit already.”
Yellen clarified in a Wall Street Journal interview later in the day that she does not see Biden’s plans overheating the economy and was not predicting or recommending higher interest rates. She also reiterated that she does not expect inflation to become a problem. “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it,” she said.
Biden Sets a New Goal for Covid Vaccinations
President Joe Biden said Tuesday that he wants 70% of the adult population in the U.S. to have received at least one Covid-19 vaccine dose by July 4, up from the current level of 56%.
Some experts believe that the spread of Covid-19 could slow dramatically once the population hits the point of about 70% vaccination.
“Get vaccinated,” Biden said in remarks at the White House. “In two months, let’s celebrate our independence as a nation, and our independence from this virus.”
Biden also said that he is aiming to have 160 million people fully vaccinated by that date, which would require about 100 million doses to be administered over the next two months.
Slowing down: The new goal comes as the pace of vaccination has slowed, and Biden said his administration was working on programs that aim to reach more Americans, including walk-in appointments at pharmacies, pop-up clinics and mobile vaccination units.
The federal government is also changing the rules for shipping vaccines. If a state does not order its full weekly allotment, the unused doses can now be sent to other states that request more, rather than reserved for future use by the first state.
Drug store losses: Waste is also a worrisome problem. According to a report by Kaiser Health News Monday, 182,874 doses of vaccine had been thrown out as of late March. Two national drug store chains accounted for about 70% of the total, with CVS and Walgreens throwing away about 128,500 shots.
“CDC data suggests that the companies have wasted more doses than states, U.S. territories and federal agencies combined,” KHN said. “Pfizer’s vaccine, which in December was the first to be deployed and initially required storage at ultracold temperatures, represented nearly 60% of tossed doses.”
Although it’s not clear why the drug stores wasted so many doses, some critics say the problem dates back to the chaotic, early days of the vaccination program, when the Trump administration relied on the two national chains to deliver doses to long-term care facilities.
Health officials hope that those initial problems have been resolved, leading to lower wastage rates moving forward. It could be hard to tell, however, since the data is far from perfect. “Months into the nation’s vaccination drive, the CDC has a limited view of how much vaccine is going to waste, where it’s wasted and who is wasting it, potentially complicating efforts to direct doses to where they are needed most,” KHN said. “Public health experts say having a good handle on waste is crucial for detecting problems that could derail progress and risk lives.”
Five Former IRS Chiefs Say Biden’s Plan Would Make Tax System ‘Far Fairer’
Five former Internal Revenue Service commissioners said Tuesday that President Biden’s proposal to boost the agency’s budget and step up enforcement of tax laws “would restore our tax administration system to make it far fairer and more effective.”
In an opinion piece published by The Washington Post, the five former IRS chiefs — Lawrence Gibbs, Fred Goldberg, Margaret Richardson, Charles Rossotti and John Koskinen — say that budget cuts over the past decade have left the agency “starved for resources” and resulted in worse service for taxpayers and sharp drops in audit rates for millionaires and large corporations.
Biden has proposed providing $80 billion for the IRS over 10 years, with the money going toward a technology overhaul, new hiring and training of personnel and increased enforcement focused on top earners. The Treasury Department projects that such reforms will generate an additional $700 billion in revenue over 10 years — and other estimates, including from two of the former IRS commissioners, say the gains would be far greater, as high as $1.4 trillion.
The former commissioners say that Biden’s plan “would benefit everyone who pays their taxes. It would produce a great deal of revenue by reducing the enormous gap between taxes legally owed and taxes actually paid — much of it through increased voluntary compliance. And it would improve taxpayers’ interactions with the IRS.”
Jeff Bezos’s Heirs Would Pay Some Mighty Big Tax Bills Under Biden Plan
Under current law, the cost basis of assets passed onto heirs is “stepped up” at death, eliminating capital gains taxes on the appreciation of those holdings. An enormous boon for wealthy families, this wrinkle in the tax code costs the U.S. Treasury about $43 billion a year in lost revenues, according to estimates from Congress’s Joint Committee on Taxation.
In his quest for both fairness and funds to help pay for his ambitious spending plans, President Joe Biden has proposed ending this “step-up in basis” and requiring large estates to pay taxes on the assets they possess, with the gains pegged to the original purchase prices.
Such a change would mean much larger tax bills for the heirs to some of America’s great fortunes. Amazon founder Jeff Bezos, for example, is sitting on roughly $180 billion worth of his company’s stock, which according to Bloomberg’s Caleb Melby and David Kocieniewski he acquired in 1994 for $10,000. Under current rules, the increase in the value of the stock would disappear upon Bezos’s death, eliminating the tax liability for his heirs. Under Biden’s proposal, the capital gains on the Amazon shares would be taxed at 20%, producing a tax bill of roughly $36 billion.
Biden has also called for doubling the capital gains tax rate for the very wealthy, to 39.6%. If both provisions were to become law, Bezos’s eventual heirs would have a tax bill of about $72 billion, based on today’s prices.
While Biden’s proposed tax law changes are far from a sure thing, there’s little doubt that they would have a significant effect. Untaxed capital gains are worth hundreds of billions of dollars per year, and about half of those gains belong to the top 1% of households, according to the Federal Reserve. And 40% of the total wealth of that rarified group is now made up of unrealized capital gains.
“Ending [the step-up in basis] practice and raising the rate would amount to the biggest curb on dynastic wealth in decades, altering an American economic landscape dominated by a few wealthy families,” Melby and David Kocieniewski say.
Quotes of the Day
“We are particularly optimistic for a global agreement on corporate income taxation in 2021. And it is urgently needed to avoid, down the road, the risk of spiraling into a chaotic tax or trade war where everyone loses.”
– International Monetary Fund Managing Director Kristalina Georgieva, calling on countries to fix their tax systems and agree to global standards for corporate income taxes in order to avoid potentially harmful conflicts. The Biden administration is pushing to end a global “race to the bottom” on corporate tax rates and calling for an agreement on a global minimum tax rate.
“If you take the corporate tax from 21% to 28% it’s about $1 trillion over the time frame that the President’s looking at. It’s hard for me to see that they don’t try to go after that, given the need for revenue and the few number of places you can really get it. That one looks to me like a bit of a honeypot.”
– Greg Fleming, head of wealth adviser Rockefeller Capital Management, in an interview with Bloomberg. Fleming added that it will take quite a bit of time to work out the details of a tax hike. “There’s a lot of wood to chop before we get to any bill,” he said.
- Yellen Is Right to Hint That Higher Rates Are on the Horizon – Ron Insana, CNBC
- A New Deal, This Time for Everyone – Binyamin Appelbaum, New York Times
- Biden Isn’t Pursuing Socialism. He’s Just Trying to Catch Up with Other Wealthy Democracies – Max Boot, Washington Post
- Biden’s Tax-and-Spend Plans Are Big, But Wealth Gaps Are Bigger – Katia Dmitrieva, Bloomberg
- Is the US Economy Recovering or Overheating? – J. Bradford DeLong, Project Syndicate
- The FDA can save 8 Million Lives With This One Big Step – Washington Post Editorial Board
- Supply Chains Are Our Most Critical Infrastructure – Robert C. O’Brien, Bloomberg
- Biden and the Future of the Family – Paul Krugman, New York Times
As the GOP Hatches Another Lucy-and-the-Football Scam, Democrats Prep a Response – Greg Sargent, Washington Post