Tax Cuts—Answer To An Economy Still Wavering?

By: Dr. Lynn Reaser

The U.S. economtax-cut-graphicy seems to be doing better, but we have followed a “zigzag” pattern for the past five years, with periods of faster growth followed by slowdowns. Monetary policy has pulled out “all the stops” and is now starting to gently pull back.

Approximately 10 million people are unemployed while another 7.5 million have only been able to find part-time work in the United States. Employees with full-time positions have seen their wages only barely keep pace with inflation during the past year.

Is it time for fiscal policy to address the issue of slack in the labor market? One thought might be to pare back income tax rates across the board, putting money in the pockets of all workers.  Reductions in personal income tax rate cuts always increase economic activity as they lead to higher incentives to work, spend, and invest. Economic activity would receive a boost.

The question regarding the advisability of such cuts involves two major issues: financial sustainability and equity. While the deficit has fallen from over $1.0 trillion to about $500 billion, this is only a brief respite. Increases in social security, medicate, and general health care spending will soon start to balloon the deficit, which could be exacerbated by large tax cuts. Lower tax rates for the rich could also inflame social tensions about income inequality.

As a result, with political capital short in Washington, tax reform might be a better hill to scale.

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Can The U.S. Do It Alone?

By: Dr. Lynn Reaser 

The U.S. economy has been in an official recovery now for five years, although many might dispute that fact. Growth has been disappointing, averaging only 2.2% in terms of real gross domestic product (GDP). Recently, inspired by a second quarter jump following the harsh weather earlier in the year and a series of better jobs reports, expectations have improved. Most economists are now forecasting that the U.S. economy is finally moving onto a stronger growth track. The general view is that real GDP growth could average around 3.0% or slightly better in the seconflagsd half of 2014 and into 2015.

Signs of slowing in Asia (including China and Japan), Europe, and Latin American could threaten that forecast. Conditions overseas can impact the U.S. economy through exports and/or stock prices. While exports account for only about 13.5% of U.S. GDP, they have contributed about one-third of the average growth in real GDP during the past five years of recovery. A sharp downturn could hurt the U.S. economy as it did in 2008-09, adversely affecting shipments, production, and jobs.

A substantial economic downturn abroad or even fear of such a slump could also pummel U.S. stock prices. Many large firms rely on international business for as much as 50% of their sales and earnings. That would, in turn, damage consumer and business spending.

A severe downturn overseas appears unlikely, but sluggish growth could prevent the sustained pickup in U.S. economic activity we all have longed to see.

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San Diego, Small Business, and the Minimum Wage

By: Dr. Lynn Reaser

San Diego Mayor Kevin Faulconer vetoed the City Council’s proposal to boost the minimum wage from its current $9.00 an hour to $11.50 by January 1, 2017. With the Council almost certain to override the veto, the business community is considering mounting a referendum to halt the legislation from taking effect.

The proposed hike wouldSmall-Biz-Sat-1127
put many of our businesses at a significant competitive disadvantage. The San Diego measure would produce a 44% rise in the wage floor in just 2-1/2 years. The statewide minimum wage went from $8.00 to $9.00 on July 1 and would move up in the City of San Diego another $2.50 by January 1, 2017.

This increase would undoubtedly weigh on the profitability, if not viability, of many firms. A faster rise than the state would also put San Diego’s minimum wage 8% above that of its neighbors as of next January 1.

San Diego was recently ranked as 78 out of 82 cities in its friendliness to small business. Let’s not make the situation worse.

Image Credit: nbcsandiego.com

More Jobs, but Should and Can We Do Better?

By: Dr. Lynn Reaser

Job growth has recently been sizable both nationally and locally. U.S. nonfarm payrolls have expanded by 2.5 million persons over the past year, while San Diego County has added about 35,000 jobs.

However, across the country, nearly 10 million people are still out of work, with one-third of them without a job for six months or longer. About 5% of job holders have been forced to accept part-time work, which is double the proportion seen in the 2000-2001 period. Wages are just barely keeping up with inflation.

What can be done to cjobs-sign-chamber-dcreate more jobs? Policymakers desperately need to reform the corporate tax code. They need to listen to businesses and reduce the redundancies or conflicts in various regulations. They also need to find better ways to achieve the goals desired by the public but at a much lower cost in terms of lost jobs.

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“Tax Inversion” and Patriotism

By: Dr. Lynn Reaser

There has been a flurry of mergers and other transactions in recent weeks, with a number of companies reincorporating overseas. This shift allows firms to receive the lower tax rate of the foreign country (“tax inversion”) on that portion of their earnings generated overseas.

Many, including U.S. Treasury Secretary, Jack Lew, have criticized this behavior as “unpatriotic.” President Obama pointed blog picout that companies benefit from the education system and infrastructure in the United States and should help pay for those advantages. However, all companies pay for the part of their earnings generated in the United States.

The spotlight needs to be shifted to Capitol Hill. Companies that have domiciled abroad are only following their responsibilities to their shareholders and employees to be competitive and profitable. If incentives are in place that cause behavior we do not like, we need to change policy, not punish those legally reacting to those incentives.

We are the only major country that taxes earnings from foreign sources and have the highest corporate tax rate of 35%. Congress desperately needs to reform U.S. tax law to remove the handicaps confronting companies, their employees, and all of us.

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Comic-Con Lands in San Diego

By: Dr. Lynn Reaser

The buzz and excitement is all about Comic-Con this week as the event gets bigger and bigger each year. It is hard to imagine summer in San Diego without the crowds of excited fans descending on the famous event, but would the region’s tourist industry go “dark” without it?

The answer is clearly “no.” Comic-Con boosts tourism each July, but the event only lasts four days. San Diego’s various attractions, beaches, facilities, and weather are a major draw for tourists in their own right. The tourist season in San Diego begins well before Comic-Con and extends thereafter. Job gains in recreation and tourism actually are the largest in April, May, and June, but continue through August. Comic-Con is a bright asset in the region’s tourist portfolio, but it is only one piece.

My Favorite Superherosan-diego-comic-con-2010

Since this is the week of the “superhero,” who is mine? Honestly, I would say it is a tie between Dilbert and Garfield the Cat. Dilbert earns high marks for his ability to survive, although certainly not thrive, in the bureaucracy and politics of the office. Garfield is a superhero because of the orange cat’s ability to put everything and everybody in its or their proper place.

Photo Credit: geektyrant.com

Should We Prepare for Higher Interest Rates?

By: Dr. Lynn Reaser

The Federal Reserve has indicated it intends to end its program of
buying Treasury and mortgage-backed securities before year-end. This
represents a clear signal that it wants to exit from the policy of
extraordinary ease it has followed for the past six years. Its bond-buying spree has ballooned its balance sheet to around $4.5 trillion.

The FedInterest-Rate-300x300 has emphasized that the first explicit interest rate hike
with a boost in the overnight federal funds rate, is unlikely to occur until several months after the last dose of quantitative easing has
been applied. Long-term interest rates, including mortgage rates, and
many other market-determined rates will not wait that long. With the job
market and inflation rates firming, interest rates will be driven higher.

The precise timing of the upward push in interest rates may be in
question, but the trend is not.

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