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.

Photo Credit: Expat Money Watch

The Children from Central America

By: Lynn Reaser

Thousands of children are being sent to the United States from Central America in hopes that they can escape violence and poor conditions in their home countries and find safety and a better life here. While many may be sent back, thousands will stay. What will be the long-term impact?

plane Although there will be additional demands on the social services and communities receiving these children, the real impact will be on the children themselves. The absence of a family structure in the United States will place many of these children at risk. They may have difficulty finishing school and be drawn into gang activity. They may become permanently dependent on government support for food, housing, health care, and other services. Without some major intervention, their offspring could face a similar plight.

The abandonment of these children into the U.S. is a real human tragedy.

California’s Minimum Wage Jumps to $9 an hour

By: Dr. Lynn Reaser 

California’s minimum wage will rise from $8.00 an hour to $9.00 an hour on Tuesday, July 1.  This 12.5% jump will be followed by another 11% hike in 18 months.  On January 1, 2016, the minimum will advance to $10.00 an hour.

Who will be the winners and the losers?  What will be the overall impact on the economy?

The rise will help low income families whose breadwinners earn only the minimum wage.  It will also help teenagers of high income and wealthy households.  As a result, it is an inefficient means of helping the poor, the people whom sb10064290g-001the wage hike is supposed to benefit most.  The increase is likely to bolster spending by minimum-wage workers, although this potential boost to economic activity will be offset by less hiring by firms affected or reduced spending by consumers facing price hikes by affected firms.

Those companies unable to raise prices to cover higher labor costs can be expected to invest in labor saving devices and reduce their hiring rates if they are growing or cut staff levels if they are not.  The boost in the minimum wage could have ripple effects in labor rungs above the minimum, raising those average pay levels and impacting jobs in those positions as well.  Meanwhile, the hike in the minimum wage is likely to encourage more people to enter or re-enter the workforce.   As a result of slower job growth and more labor force gains, the unemployment rate can be expected to fall at a slower pace.

The minimum wage hike is likely to raise the amount of discrimination in the workplace.  If there are too many potential workers available at the wage firms can pay, remain profitable, and stay in business, firms will use other criteria to select who is chosen for the position.  This will make it even more difficult for individuals with a previous criminal record, language difficulties, little education, limited or no experience, and other characteristics to reach even the first step of the job ladder.

Photo Credit: Techyville

Community Colleges and Four-Year Degrees

 

By: Lynn Reaser

Many states allow community colleges to grant 4-year degrees and California is considering a pilot program, including one for the San Diego area.  Is this a good idea?

The answer would appear to be “no.”  The mission of community colleges is to provide vocational and academic training for younger and older students not inclined or currentlWhat-a-Junior-Collegey prepared to enter a four-year institution.  This mission already is aggressive and should not be further expanded.  The instruction in English as a second language is a vital function of community colleges.  Community colleges should be the venue for addressing knowledge gaps for those desiring to earn a four-year degree.  The workplace is demanding vocational skills, the area where community colleges can add particular value.

The unique role of California’s community colleges should be reinforced, not diluted.

Image Credit: Community Colleges Directory 

IRAQ AND THE WORLD ECONOMY


By: Dr. Lynn Reaser 

As conflict rages in Iraq, questions are developing regarding not only political stability in the region but what will be the impact on theWP-Gas-Pump-1 global economy.  The Middle East is always one of the primary risks facing the economic outlook and the current situation is clearly a threat.

Even if world oil production is not substantially affected, fears of future supply disruption have already pushed prices higher.  Those price increases will dampen household purchasing power and raise productions costs for many firms.  Stock prices, already at levels vulnerable to a downturn, could drop as investors become anxious over a splintering of Iraq.  Gasoline price hikes are one of the most damaging factors affecting consumer confidence.  Further gains in the dollar, favored as a safe haven, could impede U.S. exports.

On balance, at a minimum, recent developments could challenge the consensus forecast of stronger economic growth in this year’s second half.

Image Credit: The Energy Spot 

To the Rescue of Student Debt Holders?

 

By: Dieter Mauerman and Dr. Lynn Reaser

President Obama announced this week an Executive Order to try to help Americans struggling under the burden of student debt.  A total of 39 million individuals now hold college loans, which totals $1.2 trillion.

The President’s action would extend the number of student borrowers who could quality for the Pay As You Earn program, by including those assuming loans prior to November 2007.  This progblogram caps monthly loan payments at 10% of income and forgives loans after 10 years if employment is in the government or in a nonprofit organization and after 20 years if employment is in the private sector.  So far, only about 1.2 million people have signed up because of a lack of effective marketing and the complicated process involved in enrollment.  For the President’s initiative to have a substantial impact, a campaign to raise awareness will need to be accelerated while the sign-up process will need to be vastly streamlined.

Even with an improvement in participation, there are some significant drawbacks in this approach to reduce the burden of student debt payments.  Holders of student debt can see negative amortization, with their loan balances growing if their resulting payments are too low.  While this was possible before the Executive Order, generating more avenues for students to be in a negative amortization scenario creates a reliance on the forgiveness aspect of this expanded program.  Reduced loan payments and/or loan forgiveness also represent only a transfer of income or wealth from taxpayers to student debtors, not a generation of new wealth or income for the economy at large.

The overall economy would benefit more by subduing the spiraling cost of higher education, by achieving higher graduation rates among college attendees, and by delivering more degrees in fields with better earnings potential.

 Image Credit: Deferred 

 

Fixing the VA Mess

By: Dr. Lynn Reaser

picThe scandal surround the Department of Veterans Affairs has prompted calls for fundamental reform.  Could giving veterans vouchers to fill their health care needs from private doctors and providers be an answer?

The answer is “yes.”  The existing VA health system is likely to continue to be overwhelmed by veterans needing mental and physical attention.  The answer may not be only money as the system appears to have fundamental flaws.  Offering veterans more choice to seek either private or public (VA) providers could boost the number of suppliers and health care providers.  By opening up new competition the VA would also be under greater pressure to improve its systems and its service.

The nation owes our returning service men and women the best and we should offer them the ability to secure the care they need.

Image Credit: Quicken Loans