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    How the A.I. explosion could save the market and maybe the economy

    Nvidia earnings crystallized an important point for both markets and the economy: For better or worse, artificial intelligence is the future.
    The company guided it was expecting $11 billion in sales for the current quarter, largely driven by its leadership position in the AI chip-supplying business.
    A lopsided market reaction Thursday served as a reminder of a stratified economy in which technological benefits tend to spread slowly.

    A Nvidia logo is seen on the company’s building at an industry park in Tianjin, China, February 7, 2019.
    VCG | Visual China Group | Getty Images

    A blockbuster profit report Wednesday from Nvidia crystallized an important point for both markets and the economy: For better or worse, artificial intelligence is the future.
    Whether it’s personalized shopping, self-driving cars or a broad array of robotics uses for health care, gaming and finance, AI will become a factor in virtually everyone’s lives.

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    Nvidia’s massive fiscal first-quarter earnings helped quantify the phenomenon as the firm nears an elite cast of tech leaders with $1 trillion market valuations and clear leadership status both on Wall Street and in Silicon Valley.
    “AI is real, AI is not a fad and we’re only in the early innings,” said Steve Blitz, chief U.S. economist at TS Lombard. “Does it change the course of the economy over the next three to six months? Probably not. Does it change the economy over the course of the next three to six years? Absolutely, and in very interesting ways.”
    Some of the changes Blitz foresees are reduced demand for foreign labor, a “point of sale” effect where coding and creative writing can be done by machines instead of people and a host of other activities that go beyond what appears obvious now.
    Development of products such as OpenAI’s ChatGPT, a chatbot that converses with the user, has helped bring home the potential.
    “It’s hard for me to overstate the value or the impact of AI, and it is in keeping with my view that this coming decade is all about the broader application of technology beyond what we’ve seen to date, beyond computers and phones, and that application has tremendous upside,” Blitz said.

    Isolated effects so far

    For Nvidia, the upside already has been apparent.
    As if profit of $1.09 a share on revenue of $7.19 billion, both well above Wall Street estimates, wasn’t enough, the company guided it was expecting $11 billion in sales for the current quarter, largely driven by its leadership position in the AI chip-supplying business.
    Shares soared more than 26% higher around midday Thursday and the company’s market value surpassed $950 billion.
    Broader market reaction, however, was underwhelming.
    While the S&P 500 semiconductor index jumped 11.4%, the broader Nasdaq Composite rose a more muted 1.7%. The S&P 500 was up about 0.9%, while the Dow Jones Industrial Average slipped more than 50 points as investors continued to fret over the debt ceiling negotiations in Washington.

    At the same time, worries of an economic slowdown persisted — despite his excitement over AI, Blitz still thinks the U.S. is headed for recession — and the lopsided market reaction served as a reminder of a stratified economy in which technological benefits tend to spread slowly.
    “The spillover and the benefits that the rest of the economy will derive from AI is a multiyear, multidecade process,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Is this an incremental piece to growth or is this now diverting spending from other things because every other part of the economy, outside of spending on travel, leisure and restaurants, doesn’t seem to be going that well?”
    Boockvar pointed out small-cap stocks, for instance, were losing big Thursday, with the Russell 2000 off about 0.8% in early afternoon trading.

    ‘Serious holes in the economy’

    That happened even though it seems those companies would benefit from the cost-saving aspects of AI such as the ability to reduce staffing expenses. Nvidia’s chief competitor in the chip space, Intel, also was getting slammed, down 6.2% on the session. Quarterly tech earnings overall declined 10.4% heading into this week, according to FactSet, though some of the biggest firms did beat Wall Street’s lowered expectations.
    “There are some serious holes in the economy that we can’t ignore here,” Boockvar said. “If the AI craze cools, people will see that the underlying business trends of Microsoft, Google and Amazon are clearly slowing because we all breathe the same economic air.”
    AI hasn’t been a winner for everyone, either.
    DataTrek Research looked at nine big AI-related companies that came to market through initial public offerings over the past three years and found their collective valuation is down 74% from their debut levels.
    The group includes UiPath, Pagaya Technologies and Exscientia. Their stocks have rallied in 2023, up an average 41%, but the seven-largest tech companies, a group that includes Nvidia, have surged an average 58%.
    “So far, Big Tech has collectively benefited most from the buzz around gen AI. We think this trend will continue given their ability to leverage their global scale and large competitive moats when utilizing this disruptive technology,” DataTrek co-founder Nicholas Colas wrote. “Gen AI may end up making US Big Tech even bigger and more systematically important, rather than allowing upstarts to play the classic role of disruptive innovators.”
    Indeed, market veteran Art Cashin noted without the big seven stocks, the S&P 500 would surrender all of its 8% gain this year.
    “You know, supposedly, the high tide lifts all boats,” the director of floor operations for UBS said on CNBC’s “Squawk on the Street.” “This is a very selective tide. And I’m not ready to throw out the confetti yet.” More

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    New York City Moves to Regulate How AI Is Used in Hiring

    European lawmakers are finishing work on an A.I. act. The Biden administration and leaders in Congress have their plans for reining in artificial intelligence. Sam Altman, the chief executive of OpenAI, maker of the A.I. sensation ChatGPT, recommended the creation of a federal agency with oversight and licensing authority in Senate testimony last week. And the topic came up at the Group of 7 summit in Japan.Amid the sweeping plans and pledges, New York City has emerged as a modest pioneer in A.I. regulation.The city government passed a law in 2021 and adopted specific rules last month for one high-stakes application of the technology: hiring and promotion decisions. Enforcement begins in July.The city’s law requires companies using A.I. software in hiring to notify candidates that an automated system is being used. It also requires companies to have independent auditors check the technology annually for bias. Candidates can request and be told what data is being collected and analyzed. Companies will be fined for violations.New York City’s focused approach represents an important front in A.I. regulation. At some point, the broad-stroke principles developed by governments and international organizations, experts say, must be translated into details and definitions. Who is being affected by the technology? What are the benefits and harms? Who can intervene, and how?“Without a concrete use case, you are not in a position to answer those questions,” said Julia Stoyanovich, an associate professor at New York University and director of its Center for Responsible A.I.But even before it takes effect, the New York City law has been a magnet for criticism. Public interest advocates say it doesn’t go far enough, while business groups say it is impractical.The complaints from both camps point to the challenge of regulating A.I., which is advancing at a torrid pace with unknown consequences, stirring enthusiasm and anxiety.Uneasy compromises are inevitable.Ms. Stoyanovich is concerned that the city law has loopholes that may weaken it. “But it’s much better than not having a law,” she said. “And until you try to regulate, you won’t learn how.”The law applies to companies with workers in New York City, but labor experts expect it to influence practices nationally. At least four states — California, New Jersey, New York and Vermont — and the District of Columbia are also working on laws to regulate A.I. in hiring. And Illinois and Maryland have enacted laws limiting the use of specific A.I. technologies, often for workplace surveillance and the screening of job candidates.The New York City law emerged from a clash of sharply conflicting viewpoints. The City Council passed it during the final days of the administration of Mayor Bill de Blasio. Rounds of hearings and public comments, more than 100,000 words, came later — overseen by the city’s Department of Consumer and Worker Protection, the rule-making agency.The result, some critics say, is overly sympathetic to business interests.“What could have been a landmark law was watered down to lose effectiveness,” said Alexandra Givens, president of the Center for Democracy & Technology, a policy and civil rights organization.That’s because the law defines an “automated employment decision tool” as technology used “to substantially assist or replace discretionary decision making,” she said. The rules adopted by the city appear to interpret that phrasing narrowly so that A.I. software will require an audit only if it is the lone or primary factor in a hiring decision or is used to overrule a human, Ms. Givens said.That leaves out the main way the automated software is used, she said, with a hiring manager invariably making the final choice. The potential for A.I.-driven discrimination, she said, typically comes in screening hundreds or thousands of candidates down to a handful or in targeted online recruiting to generate a pool of candidates.Ms. Givens also criticized the law for limiting the kinds of groups measured for unfair treatment. It covers bias by sex, race and ethnicity, but not discrimination against older workers or those with disabilities.“My biggest concern is that this becomes the template nationally when we should be asking much more of our policymakers,” Ms. Givens said.“This is a significant regulatory success,” said Robert Holden, center, a member of the City Council who formerly led its committee on technology.Johnny Milano for The New York TimesThe law was narrowed to sharpen it and make sure it was focused and enforceable, city officials said. The Council and the worker protection agency heard from many voices, including public-interest activists and software companies. Its goal was to weigh trade-offs between innovation and potential harm, officials said.“This is a significant regulatory success toward ensuring that A.I. technology is used ethically and responsibly,” said Robert Holden, who was the chair of the Council committee on technology when the law was passed and remains a committee member.New York City is trying to address new technology in the context of federal workplace laws with guidelines on hiring that date to the 1970s. The main Equal Employment Opportunity Commission rule states that no practice or method of selection used by employers should have a “disparate impact” on a legally protected group like women or minorities.Businesses have criticized the law. In a filing this year, the Software Alliance, a trade group that includes Microsoft, SAP and Workday, said the requirement for independent audits of A.I. was “not feasible” because “the auditing landscape is nascent,” lacking standards and professional oversight bodies.But a nascent field is a market opportunity. The A.I. audit business, experts say, is only going to grow. It is already attracting law firms, consultants and start-ups.Companies that sell A.I. software to assist in hiring and promotion decisions have generally come to embrace regulation. Some have already undergone outside audits. They see the requirement as a potential competitive advantage, providing proof that their technology expands the pool of job candidates for companies and increases opportunity for workers.“We believe we can meet the law and show what good A.I. looks like,” said Roy Wang, general counsel of Eightfold AI, a Silicon Valley start-up that produces software used to assist hiring managers.The New York City law also takes an approach to regulating A.I. that may become the norm. The law’s key measurement is an “impact ratio,” or a calculation of the effect of using the software on a protected group of job candidates. It does not delve into how an algorithm makes decisions, a concept known as “explainability.”In life-affecting applications like hiring, critics say, people have a right to an explanation of how a decision was made. But A.I. like ChatGPT-style software is becoming more complex, perhaps putting the goal of explainable A.I. out of reach, some experts say.“The focus becomes the output of the algorithm, not the working of the algorithm,” said Ashley Casovan, executive director of the Responsible AI Institute, which is developing certifications for the safe use of A.I. applications in the workplace, health care and finance. More

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    McCarthy Renews Call for Spending Cuts as Debt Talks Grind On

    With a potential default just over a week away, a resolution remained elusive and Republican leaders told lawmakers they could return home for the holiday break.With a potential federal default just over a week away, a resolution to the debt limit crisis remained out of reach on Wednesday as White House and top Republican negotiators reported no breakthrough in another marathon day of discussions and members of Congress prepared to leave the capital for the holiday weekend.Negotiators met for roughly four hours on Wednesday afternoon at the White House and were silent upon leaving, which some regarded as a hopeful sign after days of public posturing from both sides. Representative Patrick T. McHenry, Republican of North Carolina and a key bargainer, rushed past reporters at the Capitol saying: “No news.”Speaker Kevin McCarthy stayed uncharacteristically close-lipped after the meeting ended, leaving the Capitol on Wednesday night without speaking to reporters. But he expressed cautious optimism, telling Fox Business that “things are going a little better.”“I think today they would say they’re making progress,” Mr. McCarthy said of the negotiators.With no deal imminent, Republican leaders told lawmakers they were free to return home for the Memorial Day weekend, but could be summoned back on short notice to vote. The announcement made clear that Mr. McCarthy and his deputies did not expect a resolution to avert a default to materialize until next week, just days from the projected June 1 deadline.At the same time, the speaker sought to reassure the markets that a deal could be reached.“I would not, if I was in the markets, be afraid of anything in this process,” he said. “I wouldn’t scare the markets in any shape or form. We will come to an agreement worthy of the American public, and there should not be any fear. Money is coming in every day.”Before the meeting, Mr. McCarthy sought to pressure President Biden and congressional Democrats to accept spending cuts to domestic programs in exchange for raising the debt limit and allowing the Treasury Department to avoid missing payments.“You have to spend less than you spent last year,” Mr. McCarthy said at a news conference in the Capitol as Biden administration and Republican negotiators gathered at the White House. “That is not that difficult to do. But in Washington, somehow that is a problem.”The administration has resisted cuts and instead pushed for a freeze on current spending levels. With Republicans insisting there be no cuts to defense or veterans’ programs, the brunt of the reductions would affect social programs that Democrats favor.Right-wing Republicans have vowed to oppose any compromise that retreats from cuts that were part of their debt-limit bill, which was approved last month along party lines, so Mr. McCarthy is likely to need a substantial number of Democratic votes to pass any agreement. But congressional Democrats are resisting cuts in the overall budget.Representative Pramila Jayapal of Washington, the chairwoman of the Progressive Caucus, said at a news conference that White House officials told her on Tuesday night that House G.O.P. negotiators had rejected proposals that could have reduced the deficit by $3 trillion, including closing tax loopholes and imposing new taxes on the highest earners. Mr. McCarthy has repeatedly said that Republicans will not accept any tax increases.“We will continue to call out and reject this reckless hostage-taking from extreme MAGA Republicans,” Ms. Jayapal said.In an effort to pressure Mr. McCarthy and other Republicans not to accept any deal that falls short of the House-passed bill, Representative Chip Roy of Texas, an influential hard-liner, released a memo asserting that every measure in the legislation was “critical.”“None should be abandoned solely for the quest of a ‘deal’,” Mr. Roy wrote.Many Democrats, too, were arguing against any compromise. Their leaders announced on Wednesday that the final two members of their caucus had signed a discharge petition aimed at bypassing Republican leaders and forcing debt-limit legislation to the floor. With their 213 signatures, Democrats would need at least five Republicans to break ranks and sign the petition for it to trigger such a vote. Democratic leaders called on Republicans to show that they are not allied with the most extreme wing of their party and help advance the petition to avert an economic catastrophe.“It does appear increasingly likely that House Republicans want a dangerous default, they want to crash the economy and they want to trigger a job-killing recession,” said Representative Hakeem Jeffries, Democrat of New York and the minority leader. “It’s my hope that five Republicans from New York or California or other moderate districts throughout the country can prove me wrong.”The House is set to begin a weeklong Memorial Day recess on Friday. Representative Steve Scalise of Louisiana, the No. 2 Republican, advised lawmakers on Wednesday night that they should be prepared to return to the Capitol within 24 hours to approve a compromise bill. Mr. McCarthy has vowed to give lawmakers 72 hours to review any plan.Treasury Secretary Janet L. Yellen has warned repeatedly that the government could exhaust its ability to meet all of its obligations by June 1. More

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    Fed Officials Were Split Over June Rate Pause, Minutes Show

    In the Federal Reserve’s last meeting, “several” participants thought rates may have moved high enough to get inflation under control.Federal Reserve officials were unanimous in their decision to raise interest rates earlier this month, but were conflicted over whether additional increases would be necessary to bring inflation under control, according to minutes from the Fed’s last meeting released on Wednesday.The Fed voted to raise interest rates by a quarter-point on May 3, to a range of 5 to 5.25 percent, the 10th straight increase since the central bank started its campaign to rein in inflation last year. Although officials left the door open to further rate increases, the minutes make clear that “several” policymakers were leaning toward a pause.“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” the minutes said.Still, some officials believed “additional policy firming would likely be warranted at future meetings” since progress on bringing inflation back to the central bank’s 2 percent target could continue to be “unacceptably slow.”Policymakers believed that the Fed’s moves over the past year had significantly contributed to tighter financial conditions, and they noted that labor market conditions were starting to ease. But they agreed that the labor market was still too hot, given the strong gains in job growth and an unemployment rate near historically low levels.Officials also agreed that inflation was “unacceptably high.” Although price increases have shown signs of moderating in recent months, declines were slower than officials expected, and officials were concerned that consumer spending could remain strong and keep inflation elevated. Some noted, however, that tighter credit conditions could slow household spending and dampen business investment.Fed officials believed the U.S. banking system was “sound and resilient” after the collapses of Silicon Valley Bank and Signature Bank this year led to turbulence in the banking sector. Although they noted that banks might be pulling back on lending, policymakers said it was too soon to tell how big of an impact credit tightening might have on the overall economy.One source of concern for policymakers was brinkmanship over the nation’s debt limit, which caps how much money the United States can borrow. If the cap is not raised by June 1, the Treasury Department could be unable to pay all of its bills in a timely manner, resulting in a default. Many officials said it was “essential that the debt limit be raised in a timely manner” to avoid the risk of severely damaging the economy and rattling financial markets.The central bank’s next move remains uncertain, with policymakers continuing to leave their options open ahead of their June meeting.“Whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks,” Christopher Waller, a Federal Reserve governor, said in a speech on Wednesday.The president of the Minneapolis Fed, Neel Kashkari, said in an interview with The Wall Street Journal last week that he could support holding rates steady at the June 13-14 meeting to give policymakers more time to assess how the economy is shaping up.“I’m open to the idea that we can move a little bit more slowly from here,” he said.Officials have reiterated that they will continue to monitor incoming data before reaching a decision. On Friday, the Commerce Department will release a fresh reading of the Personal Consumption Expenditures index, the Fed’s preferred gauge of inflation. Early next month, the federal government will also release new data on job growth in May. More

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    Yellen Warns of Missed Payments if Debt Limit Is Not Lifted

    The Treasury secretary said the Biden administration would face “very tough choices” if Congress did not act.Treasury Secretary Janet L. Yellen said on Wednesday that it was “almost certain” that the United States would not have enough cash to continue to pay all of its bills on time beyond early June and that she would soon provide Congress with a more precise update about when the nation could default if the debt limit was not raised.The comments, made at a WSJ CEO Council event, came as negotiators for the White House and House Republicans raced to reach a deal to raise the debt limit and reduce government spending that Congress can pass before June 1. The Treasury secretary reiterated her warning that a default would inflict severe damage on the U.S. economy and made the case that she would be left with no good options to contain the fallout.“Treasury and President Biden will face very tough choices if Congress doesn’t act to raise the debt ceiling and if we hit the so-called X-date without that occurring,” Ms. Yellen said. “There will be some obligations that we will be unable to pay.”Ms. Yellen declined to elaborate on how exactly she would proceed if the debt limit was not lifted, but she dismissed the idea that “prioritizing” certain payments that the government was required to make would be an easy solution. She noted that government payment systems were devised to pay bills on time, not to decide which ones to pay.“Prioritization is not really something that is operationally feasible,” she said.This week, Ms. Yellen notified Congress that the federal government could run out of cash as soon as June 1. Her projections have been met with skepticism by some House Republicans, who have been calling on her to produce an analysis that details the Treasury Department’s cash reserves to prove that the deadline is real.Ms. Yellen said on Wednesday that there was considerable uncertainty associated with tracking government payments and receipts but that she planned to provide as much clarity as possible in her next update.The Treasury secretary said she was already seeing “the beginnings” of stress in financial markets due to the brinkmanship. However, she said she had not been engaging with investors about what would happen if the debt limit was not lifted.“We are committed to not having missed payments and raising the debt ceiling,” Ms. Yellen said. “We are not involved in planning for what happens if there is a default.”Despite her concerns, she said that she was hopeful the negotiations would be successful and that the Biden administration had been committed to policies that would reduce deficits.“I think a deal is possible,” Ms. Yellen said. “They’re working toward an agreement that could command bipartisan support.” More

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    Potential Debt Ceiling Deal Would Barely Change Federal Spending Path

    Negotiators have focused on a relatively small corner of the budget, shunning new revenues or cuts to the fastest-growing programsAs their debt limit negotiations with President Biden push the nation perilously close to a devastating default, House Republicans have stuck to a clear message: They must force a change in what they call the nation’s “unsustainable” spending path.Yet in talks with Mr. Biden, Speaker Kevin McCarthy and his lieutenants have focused almost entirely on cutting a small corner of the budget — known as nondefense discretionary spending — that includes funding for education, environmental protection, national parks, domestic law enforcement and other areas. That budget line accounts for less than 15 percent of the $6.3 trillion the government is expected to spend this year. It is not outsized, by historical standards. It is already projected to shrink, as a share of the economy, over the next decade.And it has nothing to do with the big drivers of projected spending growth in the coming years: the safety-net programs Social Security and Medicare, which are facing increasingly large payouts as the American population ages.Those politically popular programs have been deemed off limits in the current talks by Republicans, who came under heavy criticism from Mr. Biden for even entertaining changes that could raise the retirement age for those programs or make other changes to slow their future spending.Republicans have also refused to entertain cuts to military spending, which is nearly as large as nondefense discretionary spending. As a result, the negotiations are almost certain not to produce any agreement with Mr. Biden that would dramatically alter the course of federal spending in the next decade.Instead, they would concentrate budget cuts on education, environmental protection and a host of other government services that fiscal experts say are nowhere close to being primary sources of spending growth in the years to come.For instance, if Republicans could somehow persuade Mr. Biden to accept the full round of discretionary spending cuts contained in the fiscal bill the House passed last month, it would do little to alter the nation’s overall spending trajectory over the next decade. Those cuts would reduce federal spending by about $470 billion in 2033 and likely save about $100 billion that year in borrowing costs, according to the Congressional Budget Office.Total government spending would then be just under 24 percent of the economy — or nearly exactly what it is today.While those cuts might not make much of a dent in the overall budget, they would still be felt by many Americans. Because the cuts would be so contained to one segment, many popular government programs would shrink by as much as 30 percent under that scenario, White House officials and independent analysts have calculated.“The cuts Republicans propose would have severe impacts on education, public safety, child care, veterans’ health care and more,” the White House budget director, Shalanda Young, wrote in a memo last week.Republicans have for months cited growing federal spending and debt as the reason they have refused to raise the nation’s borrowing limit — risking default — unless Mr. Biden agrees to spending cuts.Representative Garret Graves of Louisiana, one of Mr. McCarthy’s top negotiators, said this week that the biggest gap with Biden administration officials was on spending numbers. “My interpretation of their position is that they fail to recognize or fail to see to the fact that we are on a spending trajectory right now that is absolutely unsustainable,” he said.Federal spending spiked during the Covid-19 pandemic, first under President Donald J. Trump and continuing under Mr. Biden, as lawmakers delivered trillions of dollars in assistance to businesses, people and state and local governments. It remains higher than historical norms, when measured as a share of the economy, which is the easiest way to track spending patterns as prices have increased over time.The Congressional Budget Office estimates that total spending averaged just under 21 percent of gross domestic product from 1980 through 2019, just before the pandemic hit. It surged above 30 percent in 2020 and 2021. This fiscal year, it is expected to be just over 24 percent, falling slightly over the next several years and then beginning to grow again in the waning years of this decade, climbing past 25 percent in 2033.Discretionary spending, though, is expected to decline over the decade as a share of the economy. Military spending — which Republicans have thus far refused to reduce as part of talks with Mr. Biden’s team — should tick down slightly from 3 percent of the economy. Discretionary spending outside the military is now 3.6 percent but is expected to fall to 3.2 percent by 2033.Social Security and Medicare, conversely, are expected to grow rapidly over the next 10 years, as retiring baby boomers qualify to receive health and retirement benefits. Social Security spending will rise from 4.8 percent to 6 percent of the economy in that time, the budget office projects, and Medicare will rise from 3.9 percent to 5.3 percent.Analysts say those programs are the primary reason budget forecasts have long shown federal spending increasing in the coming decades — even before Mr. Biden took office.“The entirety of the overall federal spending increase relative to G.D.P. over the long term can be accounted for by the growth in the major federal health programs (Medicare, Medicaid, and the A.C.A.) and Social Security,” Charles P. Blahous, who studies federal spending and debt at the Mercatus Center at George Mason University, told the Senate Budget Committee this month in written testimony.Conservative groups have criticized Republicans for not including the safety-net programs in debt demands. “While current debt ceiling negotiations largely concern ways to restrain the discretionary parts of the budget, any serious proposal to tackle the emerging debt and deficit crisis must also address our largest mandatory spending programs: Social Security and Medicare,” Alex Durante, an economist at the Tax Foundation, which promotes lower taxes, wrote on Wednesday.Liberal groups and the White House have criticized Mr. McCarthy and his team for neglecting the other side of the fiscal ledger: the nation’s tax system. Tax receipts briefly surged last year but are expected to fall back toward historical norms this year, stabilizing around 18 percent of the economy, the budget office projects. Mr. McCarthy has cited last year’s numbers to incorrectly claim current tax revenues are near record highs. More

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    U.S. Faces ‘Elevated Risk’ of Default in Early June, a New Report Warns

    The Bipartisan Policy Center said the government would be operating on “dangerously low” cash reserves after Memorial Day in its estimate of the so-called X-date.The United States faces an “elevated risk” of running out of cash to pay its bills between June 2 and 13 if Congress does not raise or suspend the nation’s debt limit, according to an analysis released on Tuesday by the Bipartisan Policy Center, an influential think tank that carefully tracks federal spending.The analysis underscores the growing possibility that the United States will default on its debt as soon as next week. It comes amid negotiations between the White House and Republicans in Congress to reach an agreement that would also lift the $31.4 trillion borrowing cap.“Come early June, Treasury will be skating on very thin ice that will only get thinner with each passing day,” said Shai Akabas, the center’s director of economic policy. “Of course, the problem with skating on thin ice is that sometimes you fall through.”The center said that the Treasury Department would be operating on “dangerously low” cash reserves after Memorial Day and that each day in June would come with increasing risk. The department has been using accounting maneuvers known as extraordinary measures to delay a default since the United States technically hit the debt limit in January, but those are expected to be exhausted soon.The center noted that the federal government could get a reprieve if it mustered sufficient revenue to make it to June 15, when quarterly tax payments are due. That could push a default, the so-called X-date, into July.However, Treasury Secretary Janet L. Yellen said this week that she thought it was unlikely that the federal government would have enough cash on hand to make it to mid-June.In a letter to Congress on Monday, Ms. Yellen reiterated her estimate that the X-date could arrive as soon as June 1. Her warning did not come with the caveats included in her previous updates, which had suggested that the government’s cash reserves could potentially last for a few additional weeks. Instead, she emphasized the urgency of the situation.“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position and raise questions about our ability to defend our national security interests,” Ms. Yellen said.As the X-date approaches, the Treasury Department has been checking with federal agencies about the timing of upcoming expenditures. Treasury recently sent a memo to agencies to inquire if any scheduled payments could be delayed. The Washington Post reported earlier on the memo.The communication is similar to what the Treasury Department conveyed during the 2021 debt limit standoff and is part of how it manages its cash reserves.“To produce an accurate forecast around the debt limit, it’s critical that Treasury have updated information on the magnitude and timing of agency payments,” Lily Adams, a Treasury spokeswoman, said. “As in prior debt limit episodes, Treasury will continue to regularly communicate with all aspects of the federal government on their planned expenditures.” More

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    Former Fed Chair Ben Bernanke says there’s more work ahead to control inflation

    Former Federal Reserve Chair Ben Bernanke thinks central bankers still have work to do to tame inflation.
    A paper from Bernanke and economist Olivier Blanchard notes that inflation has evolved since ballooning to a 40-year high in the summer of 2022.
    In a discussion about the paper, economist Jason Furman noted that fiscal policy played a large role in boosting inflation but “the less forgivable sin, though, was monetary policy.”

    Former Federal Reserve Board Chair Ben Bernanke speaks during a discussion on “Perspectives on Monetary Policy” during the Thomas Laubach Research Conference at the Federal Reserve Board building in Washington, DC, May 19, 2023.
    Saul Loeb | AFP | Getty Images

    WASHINGTON — Former Federal Reserve Chair Ben Bernanke, who guided the central bank and the U.S. economy through the Great Recession, thinks central bankers still have work to do to bring down inflation.
    That work, he and economist Olivier Blanchard argue in an academic paper released Tuesday, will entail slowing down what has been a phenomenally resilient labor market.

    The duo does not present specific prescriptions for how much unemployment needs to rise, but they do suggest it’s possible for the current Fed to orchestrate its way out of this predicament without severely tanking the U.S. economy.
    “Looking forward, with labor market slack still below sustainable levels and inflation expectations modestly higher, we conclude that the Fed is unlikely to be able to avoid slowing the economy to return inflation to target,” Bernanke and Blanchard wrote in the paper.
    Since leaving the Fed in 2014, Bernanke has been a distinguished senior fellow at the Brookings Institution. Blanchard is a senior fellow at the Peterson Institute for International Economics.

    Their paper notes that inflation has evolved since ballooning to a 40-year high in the summer of 2022. Initially, prices jumped as consumers used stimulus from Congress and the central bank to shift spending from services to goods, creating logjams in supplies and juicing inflation.
    However, they note the new phase is now being pushed by a rise in wages trying to catch up to the surge in prices. The good news is that such shocks are generally controllable, but they said the Fed needs to keep trying to address the labor situation in which the unemployment rate is at 3.4% and there are still about 1.6 open jobs for every available worker.

    “The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance,” Bernanke and Blanchard say.

    A look forward and back

    The paper, though, is as much about what caused a surge that took headline inflation as gauged by the consumer price index above 9% last year as it is what happens from here.
    Most economists agree that a combination of trillions in government spending combined with zero interest rates and nearly $5 trillion in bond purchases from the Fed flooded the economy with money and created distortions that led to soaring prices.
    In a forum Tuesday presented by the Brookings Institution, Bernanke, Blanchard and other high-profile economists and academics discussed the root causes and what policymakers should do as they review policies for the future.
    Among the considerations were the factors of supply and demand, how much Covid itself influenced consumer decisions, and whether a new policy framework the Fed adopted in September 2020 that sought not only employment that was full but also “broad-based and inclusive” played a role in the economic dynamics.
    “The quantitatively larger sin was fiscal policy, especially for the year 2021. The less forgivable sin, though, was monetary policy,” said Jason Furman, former chair of the Council of Economic Advisers and now an economics professor at Harvard.
    “I have lower expectations for fiscal policy. When they get the sign right, I’m pleasantly surprised,” he added. “Monetary policy made the error again and again and meeting after meeting. … I do have higher expectations for the Fed than just getting the sign right.”
    As inflation rose past the Fed’s 2% target, policymakers persisted in calling the trend “transitory” and did little other than to begin discussing when it would reduce its bond purchases. The Fed only began raising interest rates in March 2022, a full year after its preferred inflation gauge eclipsed the target.
    Since then, policymakers have raised benchmark interest rate 10 times for a total of 5 percentage points, taking the fed funds rate to its highest level in nearly 16 years.

    ‘An error of tactics’

    Former Fed Vice Chair Richard Clarida, who was on the Federal Open Market Committee during the inflationary surge, said the missteps on policy were not attributable to an over-adherence to the policy framework adopted in 2020, which came amid racial unrest across the country. He called the Fed’s hesitance to tighten policy “an error of tactics and not of strategy” and attributed it to the “fog of war.”
    He also noted the Fed was hardly alone: Many other global central banks chose not to raise rates amid the inflation spike.
    “No advanced economy central bank began to hike rates until inflation exceeded target,” Clarida said. “Why this happened, obviously, is a very important and interesting question that says more about the practice of inflation-targeting central banking in the sphere than it does about any particular implementation of a framework.”
    The Bernanke-Blanchard paper notes the danger inherent in central banks letting inflation go on for too long and the impact that has on expectations for prices.
    “The longer the overheating episode, the stronger the catch-up effect, and the weaker the anchoring of expectations, the larger is the effect of labor market tightness on inflation, and, implicitly, the stronger the eventual monetary contraction needed to return inflation to target, all else equal,” they wrote. More