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Jan 25, 2019

Elizabeth Warren’s Wealth Tax, Dark Days In Davos.

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Real Time Economics
The partial government shutdown enters its 35th day with signs of progress.
Good morning. Jeff Sparshott here to take you through key developments in the global economy. We'll look at the Democrats' lurch left on taxes, the latest in Davos, why jobless claims and layoffs are diverging, housing, the Fed, and economic trouble in Europe. Let us know what you think by replying to this email.

It's Tax Time

The Democratic Party is moving to the left on tax policy. Sen. Elizabeth Warren's wealth tax is the latest and most dramatic sign. The presidential candidate's proposal would impose a 2% annual tax on household wealth above $50 million and an additional 1% tax on wealth above $1 billion. It would affect about 75,000 households and raise $2.75 trillion over a decade, according to economists Emmanuel Saez and Gabriel Zucman.
The WSJ's Richard Rubin notes that is roughly 10 times the revenue that the current estate and gift taxes are projected to rise. But Ms. Warren’s proposal on the top 0.1% isn’t just about generating money to pay for government programs. It marks Democrats’ intense emphasis on inequality as the party tries to reclaim the White House in 2020.

What to Watch Today

Follow the WSJ's World Economic Forum coverage here.
Follow the WSJ's latest shutdown coverage here.

Top Stories

Cloudy With a Chance of Brexit

The raison d’être of Davos is intelligence-gathering. Hedge funds go to chat with CEOs, CEOs go to chat with politicians, politicians go to chat with donors, and journalists go to chat with everyone. This year, all that chatting is yielding distressingly little intelligence, and that helps to explain why the mood here, and indeed over the world economy, seems so dark, Greg Ip writes.
How will Brexit be resolved? When will the federal government shutdown end? Will the U.S. and China reach a deal to avoid all-out trade war? Nobody knows. Indeed, with today’s problems you can’t even assign probabilities. That's casting a pall over Davos.

At Least They're Talking

Rival proposals to end the partial U.S. government shutdown failed in the Senate, prolonging the impasse but reigniting negotiations between the White House and Capitol Hill over a short-term fix, Natalie Andrews, Kristina Peterson and Vivian Salama report. But even with signs of a thaw in negotiations, the shutdown is expected to last into next week. That means hundreds of thousands of federal employees will miss a second paycheck Friday and disruptions for federal programs.

Air Dare

Some of the biggest U.S. airlines warned passengers would soon face worse delays and more canceled flights if the shutdown drags on further. American Airlines, Southwest Airlines, Alaska Air, and JetBlue all highlighted the impact of air-traffic controllers and Transportation Security Administration screeners missing work, Andrew Tangel and Alison Sider report.
“We are close to a tipping point,” JetBlue Chief Executive Robin Hayes said. “The longer this goes on, the longer it will take for air travel infrastructure to rebound.”

Labor Market Chugging Ahead

The labor market is one of the economy's brightest spots. A gauge of layoffs across the U.S. fell last week to the lowest level in nearly half a century. Low levels of jobless claims suggest the labor market is powering ahead despite warning signals elsewhere in the economy. But claims, which measure how many people file for unemployment benefits, ain't what they used to be. In fact, there's a growing disconnect between the number of layoffs and the number of people seeking unemployment insurance. 

That's likely a function of several factors: Fewer jobs qualify for benefits, it's harder to apply for benefits and a strong labor market means fewer people bother. So while claims are plumbing new depths, layoffs are holding fairly steady.

Homing In On the Economy

Reports on U.S. durable goods and new-home sales for December are delayed because of the shutdown. That leaves a gap in our understanding of economic activity. The private sector can help. Real-estate brokerage Redfin, for example, tracks new-home sales. The methodology is different so the numbers aren’t an exact match. But the trends are similar—and not very optimistic. Both sets of figures show new-home sales peaked near the end of 2017. Redfin’s data has sales down year-over-year for three straight months through December. "All around the country home buyers were backing off at the end of last year due to high prices and high mortgage interest rates," chief economist Daryl Fairweather said.


The European Central Bank opened the door to new stimulus measures to prop up the region’s stumbling economy. ECB President Mario Draghi acknowledged that the outlook for the 19-nation eurozone had deteriorated since December, when the ECB moved to phase out its landmark bond-buying program. Mr. Draghi blamed the changes on “the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility,” Tom Fairless and Brian Blackstone report.
Shorthand: Blame U.S. trade policy, a slowdown in China, disruptive political events such as Brexit and wild market swings.

Sentimental Journey

More evidence of Europe’s troubles: German business sentiment deteriorated sharply in January. The Ifo Institute said its business-climate index fell to the lowest level since February 2016. “The German economy is experiencing a downturn,” Ifo President Clemens Fuest said.

Another Pause

Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight. Officials are still resolving details of their strategy and how to communicate it to the public, Nick Timiraos reports. With interest-rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day policy meeting of the central bank’s Federal Open Market Committee next week.

Hawks Need Not Apply

President Trump is looking for a couple of doves to fill two vacant seats on the Federal Reserve Board. “The White House wants highly capable, competent people who understand that you can have strong economic growth without higher inflation,” White House National Economic Council head Lawrence Kudlow told reporters. The Fed’s powerful seven-member board of governors has two vacancies, Paul Kiernan and Vivian Salama report.

Waiting on a Friend

The Federal Reserve has promised to be patient with interest rates. That's giving breathing room to central banks in emerging markets, Saumya Vaishampayan writes.
Policy makers in South Korea and Malaysia this week kept interest rates on hold, following a no-change vote in Indonesia earlier this month. That's partly because the Fed is now suggesting U.S. rates will stay on hold—and the U.S. dollar might not rally again this year. That relieves pressure on Asia’s central banks, which might otherwise have needed to raise rates to stem currency weakness, even at the cost of crimping economic activity.

Quote of the Day

We are miles and miles from getting a resolution and frankly that shouldn't be too surprising.
Commerce Secretary Wilbur Ross, speaking about U.S.-China trade talks (via CNBC)

What Else We're Reading

Want to sue your boss? You’ll probably get sucked into an arcane and secretive proceeding instead. "If you have a job in the U.S., chances are good you’ve signed an arbitration agreement that will stop you from suing your bosses in court for pretty much any reason. About 60 million Americans, including workers in 2 out of 3 big nonunion companies, are bound by the agreements," Bloomberg's Max Abelson reports.
The 2007 housing market crash dragged entrepreneurship down with it. "[T]hree sets of forces came together after the mid-2000s to bring about a historic drop in the employment share of young firms. First, the collapse in housing prices from 2007 reduced the young-firm share through wealth, liquidity, collateral, credit supply and consumption demand channels. Second, secular forces continued to reduce the young-firm share. Third, a contraction in bank loan supply further reinforced the drop in young-firm employment shares during the Great Recession," Steven Davis and John Haltiwanger write in a National Bureau of Economic Research working paper.

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