–Comparative Inefficiency of Health Care Delivery Main Driver of US Debt
–Patiently Allowing the Data and Balance of Risks to Evolve
By Denny Gulino
THE CAPITOL (MaceNews) – Federal Reserve Chairman Jerome Powell’s low-voltage appearance Tuesday before the Senate Banking Committee had one exchange that momentarily had everyone in the hearing room at least figuratively holding their breath and when the moment passed the semiannual testimony devolved into much traveled terrain.
That there would be no surprises was prefigured by last Friday’s Monetary Report to Congress, which sets the boundaries for what the chairman can say in his twice-a-year testimonies, unlike in his other appearances during the year when he can say whatever he wants.
Nevertheless, those boundaries and the ones Powell imposes on himself were approached right at the beginning with the question from Ohio’s Sen. Sherrod Brown, a Democrat who last month announced he is running for president.
“Yesterday your predecessor Janet Yellen said she doesn’t think President Trump has a grasp of macroeconomic policy. Is she right?” Sen. Brown, posing the question in his gravelly voice, didn’t expect any elaborated response and he didn’t get one.
“I wouldn’t have any comment on that. Senator,” Powell answered, a hint of a smile in his voice.
“I guess I’m not surprised,” Brown said.
The spike in hearing room electricity instantly dissipated and Powell spent the rest of his testimony repeating the Fed is in “no rush for judgment” and prepared to be “patient” as the “balance of risks evolves.”
Yellen had been asked in a radio interview on the public radio program “Marketplace,” “Do you think the president has a grasp of macroeconomic policy?”
She bad replied simply, “No, I do not,” eschewing any of the buffering qualifications that would be a more typical response from someone schooled in the fuzzy wordcloudiness for which the Fed is renowned, at least up until Powell’s ascension.
That was just the beginning.
“I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability,” the diminutive labor economist continued. As an aside, Trump reportedly remarked Yellen was too short to continue to be Fed chair.
“He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade,” she said. “And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy, and appropriate policy goals.”
As to Trump trade moves, they’re “creating a lot of uncertainty for businesses, and I think my own view is that those shifts are likely to be adverse for the U.S. economy” although she acknowledged the outcome “could be positive,” something that’s “a big ‘if.’”
“When I continually hear focus by the president and some of his advisers on remedying bilateral trade deficits with other trade partners, I think almost any economist would tell you that there’s no real meaning to bilateral trade deficits, and it’s not an appropriate objective of policy,” she said.
That was Yellen, now an economist at the Brookings think tank and free of Fed constraints. President Trump, perhaps busy beginning his trip to Hanoi and talks with the North Korean leader, did not favor Yellen with any counterattack tweet as he has for so many other critics.
Back to Powell, who made some points repeatedly about wages and growth during his hours of testimony. Throughout there were no blockbusters, no Greenspanian heaily freighted phrases that would leap into the headlines. In fact, t hearing room audience thinned out and even committee member chairs emptied as the hours went by.
Powell’s main point: “When I say we’re going to be patient, what that really means is that we’re in no rush to make a judgment about changes in policy,” Powell said. “We’re going to be patient. We’re going to allow the situation to evolve – and also the balance of risks and allow the data to come in. And I think we’re in a very good place to do that.”
Wages, he said, are growing at a rate appropriate to the economy’s lackluster productivity growth to which they are linked yet could not be described as growing strongly. At one point he sketched the recent history of the labor portion of economy activity in the United States, noting how its growth slowed abruptly about a decade ago when China was joining the World Trade Organization and accelerating its shipments.
The consequence is, he said, that the level of wages – as opposed to their recent renewed growth of around 3% – is much lower than it would be had that sharp deceleration and subsequent stagnation not occurred.
Powell also seemed a bit more firm in his views on the nation’s large – and rapidly growing much larger – debt load. He said it is wrong to say deficits do not matter and that the nation will have to curb spending and-or raise more revenue.
The big driver of debt, he said, is the inefficiency of the delivery mechanisms for health care, so that it’s costing Americans 17% of GDP to get roughly the same outcomes as other developed economies get with 10% of GDP. It was a distinction between delivery and the cost of the underlying product itself that is not often drawn when health care costs get the blame for deficits.
He refused to take the bait, offered several times by Democrats, and ally himself with proposals in Congress to legislate some curbs on share buybacks, saying that’s the kind of company decision traditionally not a subject of legislation.
Brexit, Powell said is an “event risk” that “in the end” should not have a big impact on the U.S. economy. In two different responses he said the slowing of global growth is a “headwind” for the U.S. economy which is blowing in the wrong direction now. Yet he repeated the outlook for the “strong” U.S. economy as “favorable,” the banking system as “strong” and that there are no big problems that seem to be imminent although there are always risks.
Though he emphasized again, as he always does, that the Fed wants to stay in its lane” and not advise Congress on fiscal policy or the administration on trade policy, he did say that housing finance reform is the last big piece of post-crisis unfinished business. He said the Fed would be happy to work with Congress on devising the future for Fannie Mae and Freddie Mac.
Powell also conceded that perhaps the Fed is not as concerned as it should be with climate change, and how it might be affecting the long-term value of coastal property and its mortgage backing. He said he’ll consider doing more and that already Fed regulators require banks to take into consideration natural disasters that may be related to climate.
Asked to forecast long-term growth rates, Powell repeated his two-factor formula, that growth depends on hours worked which in turn depends on the population’s growth and that there also needs to be growth in efficiency usually attributed to capital investment. Now the population is growing only about half a percent a year and if immigration is restricted, will grow even slower, he said. The other big factor, the growth of productivity, is anemic and could use some congressional focus.
Powell also lamented the labor market’s comparatively low participation rate, well under what other comparably developed economies enjoy. Labor participation, he said, is a great way to spread the wealth. Yet there are several factors impeding its growth in the United States, including, he suggested, the opioid crisis, the lack of skills training, the lack of rural access to jobs outside of manufacturing and the structure of the tax system. He refrained from heaping blame, as have his last two predecessors, on the retirement of Baby Boomers.
Another factor impeding labor force participation is that those receiving jobless benefits have to give them up upon earning the “first dollar” in a paycheck, what he said is a disincentive to rejoining the work force.
When Democrats asked the inevitable question about whether anyone in the White House had contacted him about interest rates – in the context of tweeted criticism of the Fed for raising rates – Powell predictably said he couldn’t comment. He repeated reassurances that he is “confident” the Fed will continue to fashion monetary policy without regard to political influence.
Powell reassured, as he did in the new conference following the most recent Federal Open Market Committee meeting and the end of January, that, “I do think the baseline outlook if a good one, a favorable one,” Powell said.
“There are always risks, though,” he added. “And as I mentioned I do see the foreign risks as particularly relevant right now. So global growth has slowed. It’s slowed in China. It’s slowed particularly in the advanced economies, particularly in Europe.” Those headwinds are having an effect, but are not debilitating.
Powell testifies Wednesday to the larger House Financial Services Committee, his first there since the committee switched to a Democratic chair, Maxine Waters.