Trump: ‘Boneheads’ at the Fed Should Drop Rates to Zero 'or Less'

Plus, why health insurers aren't tougher on fraud

Trump: ‘Boneheads’ at the Fed Should Drop Interest Rates to Zero, or Lower

President Trump blasted the “boneheads” at the Federal Reserve Wednesday for failing to reduce interest rates to zero or below.

“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,” Trump tweeted.

While the president has criticized the Fed for failing to lower interest rates before, it’s been in the context of boosting the economy, and he hasn’t previously linked the issue to the cost of interest payments on the national debt.

A surprising suggestion: Trump’s comments mark the first time a U.S. president has called for negative interest rates, said MarketWatch’s Steve Goldstein. (Interest rates fell to zero during the Great Recession as the Fed sought to spur economic activity, but never went negative.) But the president’ tweets left many experts scratching their heads. While there has been some discussion in policy circles about taking advantage of low interest rates by issuing long-term bonds to build infrastructure (see this analysis at the Center on Budget and Policy Priorities), the idea of intentionally reducing rates to zero or below and refinancing the national debt is well outside the mainstream economic consensus in the U.S.

There could be some advantages: Analyst Dick Bove of Odeon Capital Group said that the reduced cost of the debt would offer obvious benefits. “From a theoretical standpoint, obviously it would be wonderful for the United States government over a period of years if it were to lengthen the maturities on debt that would have rates below 1%,” Bove said, according to CNBC.

But the benefits may be just theoretical: Economist Paul Ashworth of Capital Economics wrote in a note to clients Wednesday that while the idea of locking in low borrowing costs over a period of decades sounds appealing, “the evidence from other economies is that negative rates have provided little benefit.”

And the problems would be substantial: Among other things, reducing rates to zero or lower would be “an unprecedented action in the US that would be a sign of an economy in deep trouble,” wrote The Washington Post’s Heather Long. There are also legal issues involved, Ashworth said, that may make it difficult for the Fed to charge banks the fees associated with negative rates.

Mark Zandi, chief economist at Moody’s Analytics, said that there’s no obvious way to refinance the national debt. “It’s not viable and could be a significant problem for investors, financial markets and ultimately the economy,” Zandi told CNBC. “The debt is not prepayable. There’s a contractual relationship the Treasury has with investors. This isn’t a mortgage, this is U.S. Treasury debt. I think it would be incredibly disruptive to financial markets, and interest rates would ultimately rise, not fall.”

Trump framed the issue in part as a matter of competition with other advanced economies. “We have the great currency, power, and balance sheet … The USA should always be paying the the [SIC] lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads,” he wrote. But many economists say the negative interest rate policies in Europe and Japan are nothing to envy, and are likely harmful in the long run.

David Kotok of Cumberland Advisors said that “zero and then negative interest rates have created a monstrosity in Europe,” Politico reported. Kotok warned that Trump’s desire “to follow Europe into this quagmire would harm every saver, every insurance company, every bank.” Along the same lines, Deutsche Bank CEO Christian Sewing said last month, “In the long run, negative rates ruin the financial system.”

Trump Still Mulling Capital-Gains Tax Cut: Report

President Trump is apparently still considering a plan to cut capital-gains taxes. The Wall Street Journal’s Andrew Restuccia and Kate Davidson report that Trump was set to discuss with his economic advisers on Wednesday the idea of bypassing Congress to allow gains to be indexed to inflation.

“The president’s advisers will discuss the legal and regulatory issues associated with the move, and present the president with a range of broader options about cutting taxes,” Restuccia and Davidson write.

Indexing capital gains to inflation would reduce federal revenues by about $100 billion over 10 years, according to estimates from the Penn-Wharton Budget Model. The vast majority of the benefits would flow to the top 1% of income earners, according to that analysis, which also found that the tax cut would generate “roughly zero net additional economic growth during the 10-year budget window.”

Trump had seemingly dismissed the capital-gains tax cut a few weeks ago, telling reporters that he wasn’t looking to do it. “I think it will be perceived, if I do it, as somewhat elitist,” he said. “I want tax cuts for the middle class, the workers.” But he raised the issue again a week later on Twitter.

The National Economic Council, the Council of Economic Advisers, the Office of Management and Budget and the Treasury Department are reportedly all still looking at the tax cut.

The president’s Wednesday meeting was also expected to cover a broader “Tax Cuts 2.0” package that the administration hopes to eventually pass through Congress. “Exactly what would be included in such a package couldn’t be determined, though Republicans have at varying times said it would extend pieces of the 2017 tax law that are scheduled to expire, and hinted at a vague new middle-class tax cut that the administration hasn’t yet detailed,” the Journal reported.

The bottom line: With the House under Democratic control, another round of tax cuts is highly unlikely, barring a full-blown economic meltdown. And if Trump decides to push the envelope on capital-gains indexing, he’s sure to face intense political and legal blowback. Trump has made clear he’s aware of those challenges … so maybe it says something that, despite all that, the idea isn’t dead. Wednesday’s meeting wasn’t expected to result in a final decision, though.

Germany Mulls a ‘Shadow Budget’ to Add Debt

With its economy on the verge of recession and interest rates at historical lows, German officials are looking into ways to evade the strict limits placed on federal spending.

Germany’s so-called “debt brake” budgetary law allows the federal deficit to equal as much as 0.35% of gross domestic product, Reuters reports, but that translates to just an additional 5 billion euros per year right now, far less than the 138 billion euros worth of infrastructure investment experts say the country needs. New, independent public agencies focused on infrastructure improvement would be able to get around that limit by operating under a “shadow budget” that is separate from the federal budget. Such a move would allow the country to ease the conditions of austerity that have been in place since the recession.

"Norway has its oil, Germany has its credit standing. It's like a national resource," a senior official told Reuters. Noting that German interest rates are currently negative, the official added, “If managed wisely, an independent public investment agency could even make money by taking on new debt.”

Why Health Insurers Aren’t Tougher on Fraud: They Can Pass the Costs Off on You

Large health insurance companies are not aggressive in cracking down on fraud, ProPublica’s Marshall Allen reports:

“Escalating health care costs are one of the greatest financial concerns in the United States. And an estimated 10% of those costs are likely eaten up by fraud, experts say. Yet private health insurers, who preside over some $1.2 trillion in spending each year, exhibit a puzzling lack of ambition when it comes to bringing fraudsters to justice.”

Fraud “is not a top priority” for insurers because they can pass the costs off to their customers in the form of reduced benefits and higher premiums and out-of-pocket expenses. And pursuing fraud cases more aggressively would be costly, hurting the insurers’ bottom lines — and potentially threatening their relationships with some providers they might need to keep in their networks to ensure their plans are attractive to employers. “So apparently, I learned, there’s a calculation that goes on: If, for instance, you’re the only neurologist in town, your fraud may be forgiven,” Allen writes.

One veteran insurance fraud investigator told Allen that investigators ignored suspect claims worth less than $300 because the companies had determined that pursuing those cases would cost more than they could recover. But fraudsters can easily figure out where to draw the line. One scam artist from Texas billed insurers in increments of $300 or less for more than four years, Allen reports, “and it added up to about $25 million.”

Read the full report at ProPublica.

Number of the Day: Health Insurers Will Refund $743 Billion to Consumers This Month

Health insurance companies are expected to pay $743 billion in refunds to consumers this month because of an Affordable Care Act rule, according to a new analysis from the Kaiser Family Foundation. The Obama health law requires insurance companies that cover individuals and small businesses to spend at least 80% of the money they take in as premiums on paying out claims and improving quality. Large group insured plans must spend at least 85%.

The $743 billion is about four times the amount paid last year. It will go to some 2.75 million consumers, with average refund expected to be about $270, though some insured individuals could reportedly get as much as $2,000 or so.

The size of the 2019 rebates are the result of individual market insurers overpricing their plans last year, Cynthia Cox, a vice president at the Kaiser Family Foundation, told The Wall Street Journal.

The insurance rebates, which are calculated based on a three-year average, will total an estimated $1.3 billion across the individual and employer markets, according to the Kaiser foundation.

Chart of the Day

More than half of all issue advertising this year has been on health care, Axios’s Caitlin Owens and Sara Fischer report.

“Most of the top health care spenders are focused on issues like surprise medical bills and drug prices — many of which would cut into the health care industry's profits,” they write, adding that “the biggest spender by far is a dark-money group called Doctor Patient Unity,” which has spent more than $26 million on ads against a proposal to address surprise medical bills.

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