The dangers of fiscal dominance

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From American Public Media, this is Marketplace.

I'm Kai Risdahl.

It is 24 July today, Thursday.

Good as always to have you along, everybody.

The President went to the Federal Reserve today.

That's it.

That's the news.

The rest is all subtext of the president's well-documented desire to have either Fed Chair Jay Powell gone and or, he's not picky, lower, sharply lower interest rates.

We here are not going to dwell on the former, but the latter, interest rates and where the president would have them set, does have actual economic import.

And as we do when we need somebody to lay it out for us in plain English, we have called Neil Irwin.

He's the chief economics correspondent at Axios.

Neil, it's good to have you back on the program.

Thanks for having me, Kai.

Let's do some building blocks here.

First of all, what is monetary policy for?

Well, the idea is you adjust the supply of money in the economy in ways that try and maintain a stable footing, to try and stabilize the ups and downs of the economy.

What you want is when there's a recession, you want cheaper money so that people will spend more.

When there's inflation, you want tighter money, less money out there so that inflation comes back down.

Aaron Powell, and it is, of course, that very famous dual mandate mandate the Fed has, right, which is price stability and maximum employment.

Now, President Trump really, really, really wants lower interest rates.

He wants lower interest rates down to 1% on the federal funds rate because he says it will save the country trillions of dollars.

Make that make sense in terms of monetary policy.

So what that suggests is shifting to a different set of priorities for the Federal Reserve and for monetary policy, making these decisions on interest rates not based on what's happening to the job market, not based on what's happening with inflation, but based on what's convenient for the federal government in terms of its debt service costs and paying its interest bills.

And so, what the President is asking for is for Jay Powell and the Federal Reserve to cut interest rates in a way that will make it cheaper for the Federal Government to pay its debts.

And that's not what you focus on when you're worried about economic stability and that role of managing the job market recessions and inflation for the Fed.

It is a thing called fiscal dominance, and I'm going to ask you for a value judgment here.

Is that a good thing or a bad thing overall and then in this economy right now?

I think it's a bad thing.

And I think if you look around the world throughout history at countries where the job of the central bank has become making things easy for fiscal authorities, worrying about the government's debt service, that's where you get into real inflationary scenarios and really dangerous situations for the economy.

Basically, if the Fed's worried about making it easy for the federal government to borrow money, it's not as worried about is there inflation, is there a recession?

And what you want is the Federal Reserve or whoever your central bank might be be be laser-focused on economic conditions, not on the fiscal side.

We are going to have come next May when Chair Powell times out of his job and President Trump puts somebody else in there.

We don't know who it's going to be, but we do know that that person will, more likely than not, be interested in lowering interest rates.

Does that increase the risk of fiscal dominance in your mind?

Look, there is a decent case for rate cuts right now.

You know, we are in a situation where the Federal Reserve has kept interest rates high, even though inflation has come way down.

There's some signs of softness in the job market.

It's not crazy to think that the Fed should cut rates now or at least in the next few months.

The question is, why are they doing it and how much do they do it?

And we've come through this inflationary episode.

Everybody hated the inflation we saw in 21, 22.

If the Fed makes a mistake, if they cut rates too much too fast, then you have a situation where inflation rears back up and everybody is miserable again because inflation has returned.

Crystal ball this for me.

The Fed meets next week, they're going to stick, right?

They're not going to do anything.

Yeah, they're probably almost certainly going to leave rates unchanged.

That said, I think there is reason to think they're going to cut rates in probably September.

I think we might get some hints from Jay Powell at his press conference that that's the more likely path of events.

Neil Irwin at Axios explaining things for us.

Neil, thanks a bunch.

Thanks, guys.

On Wall Street today, equities, that's stocks, they were mixed.

One ignores, as I say from time to time, the bond market at one's peril.

The yield on the tenure is creeping higher and higher.

We will have the details when we do the numbers.

we are in the sorry just checking here third day of stories about the trade deal with Japan that the president announced the other day on his social media feed.

And we have, as of right now, exactly as many details about what that's going to entail as we did the day the president posted it.

That said, we have been told, again, as part of the deal, that Japan is going to make $550 billion worth of investment in the United States.

What that actually means, where it might go, what might it be for?

Marketplaces Sabri Benishore has that one.

Japan is already the number one foreign investor in the U.S.

with $754 billion invested as of last year.

And that number has grown by 50% since 2018.

But $550 billion

more is a lot.

This is a meaningful promise.

Christy Govella is Japan chair at the Center for Strategic and International Studies.

And especially the fact that it will be directed in areas that apparently can be influenced to some extent by President Trump and the U.S.

government is something different than what we've seen

So, where might the money go?

The White House has highlighted some sectors, ones the U.S.

sees as critical to national security and is looking to tariff.

Kate Kalutkowitz is senior managing director at McCarty Associates.

Things like semiconductors, pharmaceuticals, shipbuilding, and critical minerals.

These are all things that the U.S.

government is trying to sort out a policy approach that gets more companies here.

In this case, it may be Japanese companies that bring with them expertise.

There are some other likely options for Japanese investment.

Drew DeLong is head of geopolitical dynamics at Kearney.

It would not surprise me at all if it's at some level connects into the sovereign wealth fund.

The Treasury Department is still working on getting set up right now.

There's also a liquefied natural gas plant and pipeline being developed in Alaska that DeLong suspects would be a likely target of Japanese investment to.

He says this kind of investment promise may offer a lifeline to other countries in the throes of negotiation with the Trump administration.

Now countries can say, okay, look, if we pledge additional investment into the U.S.

following what Japan has done, we can close that gap.

For Ryan Young, senior economist at the Competitive Enterprise Institute, this deal, where the president allegedly directs investment, sets a different kind of precedent.

This is one person directing it without input from Congress or agencies, without any check or balance.

But so much about this deal is in the details, the timing, the exact form of the investments, who truly has control over them, details that may not have been worked out yet, details that could change.

In New York, I'm Sabri Benishore for Marketplace.

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It's going to be a while, years, honestly, before the full effect of a lot of the provisions of the GOP's big tax cut and spending law land on this economy.

of the healthcare changes, for instance.

One that is going to hit pretty quickly, though, is what's in there about tips and overtime pay, specifically no taxes on them.

More specifically, a tax break on that kind of income running from the start of this year to the end of 2028.

It was very big in the campaign, if you remember.

But even though the idea did have pretty broad bipartisan support, and as with virtually everything about the tax code, it is not as simple as it might sound.

Marketplaces' Kristen Schwab helps us sort who qualifies and who doesn't.

It's that odd time of day at Havana Centrale in Midtown Manhattan, the lull between lunch and happy hour.

Orlando Amaya is making cocktails.

I like making mojitos.

My favorite one is coconut.

Coconut mojito, oh my lords.

Just delicious.

Amaya has been working full-time at this Cuban restaurant for three years.

As a bartender, he earns the tipped minimum wage.

That's $11 an hour in New York City.

His income is usually close to $70,000, and the majority of it, nearly $50,000, is from tips, which makes him very excited about the no tax on tips law.

Without it, his take-home pay is $40,000.

Now?

So I expect to see maybe $60,000 at least a year.

That would be way better.

I'm going to do some not so subtle foreshadowing here and say Amaya's expectations do not line up with the reality of this law.

And honestly, who could blame him?

By name alone, no tax on tips and overtime sounds simple.

But the thing about tax law is it is wonky and in the weeds.

And we don't have all the details of this yet.

Andrew Lautz is director of tax policy at the Bipartisan Policy Center.

The next step in this process is for the Treasury Department to start writing regulations.

Which can take years, but in this case, it needs to be done in months because the law covers income starting from the beginning of this year.

Here's what we do know, and it's complicated, so stick with me.

This is a federal tax break.

Amaya will pay Social Security and Medicare taxes, and likely state and local taxes, too.

And the law has limits.

It doesn't cover all of Amaya's tips.

As a single taxpayer, the deduction limit is $25,000, or $12,500 for those on overtime.

This starts to phase out once a worker makes $150,000 a year.

And to make the calculation even more confusing, the value of the tax credit is actually based on what tax bracket you're in.

Meaning how much money you'll see depends on how much you earn.

So if you're in the lowest tax bracket, a $100 deduction means that you'd have a $10 reduction in actual taxes paid.

If you're in the top tax bracket, that same $100 deduction would mean a $37 reduction in taxes paid.

Also, how you make money matters.

Heidi Scherholtz, president of the Economic Policy Institute, says people who work multiple jobs won't necessarily get the overtime deduction.

Like if somebody works 50 hours a week at one job, they get overtime for those 10 extra hours.

But for someone who has like two jobs at 25 hours each, they get no overtime pay.

And no tax advantage.

If the law is renewed or becomes permanent, and there's a chance it may, Scherholtz worries it could shift workplace dynamics.

Some workers may ask for more overtime, and employers might encourage it so they can hire fewer employees and spend less on benefits.

Schearholtz also says the law could further incentivize tipping over paying a guaranteed wage.

So this is just not going to be the kind of game changer for working people that I think it's been touted as.

It's certainly not the game changer bartender Orlando Amaya thought it would be.

Remember, he thought he'd see $20,000 more a year because of the law.

I had Andrew Lautz do some back-of-the-napkin math on his taxes, and he thinks the no tax on tips law means Amaya will take home about $3,500 more a year, or $67 a week.

When I told Amaya, he said, hey, it's better than nothing.

In New York, I'm Kristen Schwab for Marketplace.

Coming up.

Anything that we buy, we don't know what it'll end up costing by the time it gets to the United States.

I mean, do I have to say the word?

First, though, let's do the numbers.

Dow Industrial's down 316 today.

That's points.

7 tenths is how many percent that is.

Finished at 44,693.

Did the blue chips?

The NASDAQ rose 37 points, about 2 tenths percent, 21,000 to 57.

The SP 500 gained four points.

We'll call that flat rep the day at 63.63.

Fourth, count it fourth record close in as many days.

United Health says it is complying with requests from the Justice Department, which is investigating the healthcare giant for its Medicare business practices.

Shares in United Health, down almost 5% today.

Elsewhere in healthcare, CVS Health also down 5%.

Cigna gave back 3%.

HCA healthcare retreated 3% as well.

Job search firm Indeed says 40% of Americans are seeing a decline in real pay.

That is to say, they lag inflation.

Indeed's wage tracker says it's likely lower and middle-income workers are the ones being squeezed by inflation, which is, I am sorry to have to tell you, the way it always works.

Bonds down, as I mentioned, yield on the 10-year T-note rose to 4.40%.

You're listening to Marketplace.

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This is Marketplace.

I'm Kai Rizdahl.

We have talked, oh, gosh, I don't know, a time or two, maybe, about the stubbornness of the American housing market right now.

Homeowners who've got mortgage rates in the very low single digits, 2%, maybe 3%,

who were reluctant to sell because, honestly, who wants to trade up to a 30-year fixed at north of 6.7%.

Anyway, I mentioned that because we learned from the Census Bureau today that the inventory of new homes for sale in this economy was up 8.5%

in June.

That's from a year ago.

But, and however, the number of actual new homes that sold was down 6.5% over the same period, which is to say, more houses are coming on the market, but a lot of them are just sitting there.

Daniel Ackerman explains.

In the home real estate market right now, business is a little bit different.

It's still a little slow compared to the last couple of years.

But there's no question that deals are harder to pull together.

Those were realtors Tiffany Russell in Austin, Texas, Susan Chaffee in Tampa, Florida, and Michael Orbino in Bellevue, Washington.

Russell says, in the peak COVID times of low interest rates, a rush of people moved to Austin and pushed home prices a little too high.

They were putting in offers, you know, $30,000 and $50,000 over ask

and essentially over-inflating our market.

Some of those buyers are now looking to sell and they're finding they just can't make their money back.

So I've been showing my buyers homes that are effectively out of their price range and we've been negotiating them into their price range.

In Tampa, Susan Chaffee says this skyrocketing cost of insuring a home is keeping some buyers on the sideline.

I think the hurricane last year hurt because we never had a hurricane like that in this area.

In Bellevue, Washington, Michael Urbino says a lot of the homes he sees just sitting and waiting for a sale tend to be the fancier ones.

The luxury market has definitely swelled with more inventory.

And I would say that's upwards of 25 to 30 percent year over year.

But he says home buyers looking for something more modest in the area are still out of luck.

The entry level is very scarce, and it's as bad as it's ever been.

One thing that Russell, Chaffee, and Orbino all agree on.

We have a lot of buyers who are scared of the interest rates.

I think they'll come out more if the interest rates drop a little more.

Certainly, it would give it a lift.

Those interest rates are very important to the affordability, especially in that kind of mid-tier and entry level.

The average 30-year fixed mortgage rate rose above 6% in 2022, and it stayed there.

I'm Daniel Ackerman from Marketplace.

I'm going to mix my corporate slogans here, but American Airlines is definitely not flying the friendly skies.

The carrier told investors today it expects to be in the red this quarter, higher labor costs and lower-than-expected leisure travel, the most salient reasons.

But while vacationers might be shying away, businesses are apparently still willing to let their people travel.

Delta and United have predicted stronger corporate business in the months ahead, and that kind of spending overall, and this is from the corporate travel manager, Navon, is up 15% year over year.

Marketplace's Matt Levin has more on the business of business travel.

Let's say you're head of supply chains for an American company that does a lot of its manufacturing in China.

I weep for your inbox.

Anyway, now is probably a good time to book that flight to India or Mexico or Vietnam to see if you can maybe do your manufacturing somewhere slightly less tariffy.

So we are seeing accelerated growth more on the international side versus the domestic side.

For example, overseas hotel spend grew 17% year over year.

Amy Butte is CFO at Navon.

It could be, for example, that companies are looking for new places for manufacturing.

Butte's data suggests while companies may be happy to send one employee abroad to scout a new factory site, they're less inclined to fund the let's get everybody together to do some trust falls retreats that were in vogue in the early days of remote work.

We're seeing greater increase in personal meals than we are necessarily seeing in team events and meals.

While business airline travel does appear to be relatively healthy this year, it's still not at pre-COVID levels.

Airline industry analyst Henry Hartevelt at Atmosphere Research Group says if the economy starts weakening, If sales aren't materializing, if there are concerns about recession, if there is trade uncertainty, Business travel is one of the first areas everybody goes to in an organization to cut the spending to save money.

And it's one of the last to be restored.

Hartevelt says that while business travel still accounts for 30 to 45 percent of a given airline's profits, carriers are increasingly relying on so-called premium leisure travelers, those willing to splurge for extra legroom or an airport lounge pass.

Not sure you can expense those to the corporate card anyway.

I'm Matt Levin for Marketplace.

The Federal Reserve Bank of Richmond released its monthly report on capital expenditures this week, a measure of whether companies are hanging on to their cash or investing in their company's future.

And let's just say, the future is looking kind of so-so.

Quoting the report here, businesses do not appear to be investing at levels that signal broad-based optimism, but the report goes on, they also aren't behaving as though the economy is in recession.

So how to read that, especially as the, as of right now, anyway, tariff deadline of August 1st is staring this economy smack in the face.

We call Todd Adams.

He's the president of Senatube.

That's a steel and aluminum tubing importer.

We are in the same boat as everybody else.

We're getting used to this kind of volatility, and we've basically accepted that there is going to be a risk.

You know, anything that we buy, we don't know what it'll end up costing by the time it gets to the United States.

Even anything we make, you know, we don't know exactly what our raw material cost is going to be, but the only peace that we can find within is the fact that everyone is in the same boat and

everybody's facing the same costs so we're just kind of living in a new age of of less certainty than than we've had in the past and you know in our entire existence and we've had to sort of just add a risk premium to our pricing

a risk premium is not just some academic term it comes from reality people are feeling uncertain about the market so they are going to charge a little more and that goes that goes for our customers as well.

They are also feeling uneasy and they're going to kind of cover their bases because they don't know what lies around the corner.

So, whether they recognize it or not, everybody is building in this risk premium.

It's a natural reaction, and I think you know that that does lead to inflated prices.

But it's not simply because they're being greedy, it's because they feel uncertainty and they're stockpiling for a rainy day, which could be tomorrow or it could never happen.

We need to maintain our inventory just as we've always done.

The only constraint being cash.

Obviously, higher tariffs mean our inventory costs more.

And, you know, it's easy to throw around 50%, 25% tariff on steel, but that means real money that we have to have in our bank to pay for this material.

So that's really our only limiting factor.

We've just had to be more conservative with cash, but it's just a little bit more difficult because everything is now more expensive.

We always are interested in growing and

we continue to look at opportunities to grow, but I have to say, based on the fact that we are being more conservative with cash, it's a lot more difficult to invest in other new longer-term initiatives.

So our growth right now is essentially focused on, you know, maintaining and conservatively growing inventory.

Whereas, if you would have spoken to me a year ago, that wouldn't really have been an issue.

We've already kind of budgeted out our inventory needs, and we'd be looking at investing in enhanced manufacturing capabilities or investing in new facilities, new equipment, new people.

None of that is happening at the moment.

None of that is happening.

Think about that for a second.

Todd Adams, he's the president of Santa Tube.

They do stainless steel tubes and valves and fittings too.

This final note on the way out today.

You remember when Intel was the be-all and end-all of American chip companies?

Yeah, maybe not, because it was a while ago, far, far back in the haze of NVIDIA and the AI chip revolution.

I mention it because the one-time Silicon Valley Powerhouse is trying to get back in the game, but there is going to be some pain along the way.

Intel announced today it's going to lay off 15% of its workforce and retool itself to get back into artificial intelligence.

Our daily production team includes Andy Corbin, Nicholas Guillain, Maria Hollenhorst, Iru Ekbenobi, Sarah Leeson, Sean McHenry, and Sophia Terenzio.

I'm Kai Risdahl.

We will see you tomorrow, everybody.

This is APM.

Hey everybody, I'm Kyle Rizdahl, the host of Marketplace.

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We're going to break down how the acceleration acceleration of climate change is going to disrupt jobs and entire industries, even our daily lives.

But it's not all doom and gloom.

We're also going to dive into the solutions that are giving us hope right now.

Thanks so much to Odu for sponsoring this free webinar.

And you can sign up today at marketplace.org/slash climate.