Plunging Oil Prices—The Irony and the Ecstasy

By: Dr. Lynn Reaser 

Oil prices have sank from around $112 a barrel in June to less than $87 a barrel in mid-October in terms of the Brent benchmark for crude petroleum. This sharp decline has come despite rising hostilities in the Middle East. Continued increases in oil production have combined with projections of slower global economic growth to send prices lower.

The drop represents a significawill-peak-oil-save-planet_44nt windfall for the U.S. economy. Despite the dramatic climb in domestic energy output, we still consume much more than we produce. This year, we are likely to consume about 19 million barrels a day of gasoline, distillates, and jet fuel, while we produce about 12.5 million barrels per day of crude oil, natural gas liquids, ethanol, and biodiesel.

Lower gasoline prices will boost consumer spending by raising household buying power. Lower energy expenses will also help company profits outside of the oil sector. The downside is that our march to energy independence could be stalled as more expensive exploration and drilling activities for oil and natural gas are curtailed. Alternative energy projects could also be put on hold.

Overall, however, this is a welcome gift as the U.S. essentially receives a wealth transfer from the net energy producers of the world.

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Not All California Jobs Are Going to Texas

By: Dr. Lynn Reaser

News reports of companies being lured to Texas would suggest that California’s economy is under direct attack and must surely be shrinking.  The latest jobs report for August might come as a big surprise.

According to data from the Bureau of Labor Statistics, California last month created more jobs than any other state with an increase of 44,200 positions.  This gain was about twice that of number two, Florida (+22,700), or number three, Texas (+21,100).

California’s job gain was its seventh consecutive monthly rise.  In contrast to a slowing in job growth experienced in the nation as a whole last month, California’s growth accelerated.  The state also outperformed the rest of the country as a whole for the 30th consecutive month in terms of year-over-year job gains.  California’s job increase relative to August 2013 was 2.1% versus the national average of 1.8%.

The state’s unemployment rate held steady at 7.4%.  Both the labor force and employment expanded, which represented some good news as both more people were encouraged to look for work and more people found jobs.  The jobless rate in California has also now dropped five full percentage points from its peak of 12.4% reached in October 2010.  We now need even faster growth to drive the jobless rate further downward.

The gain in payrolls of companies outside of agriculture was also widespread in August.  The largest gain, abstracting from seasonal factors, was posted in construction (nearly 14,000 additional jobs).  This speaks to the rebound in the housing market.  Other sectors also contributed to the overall rise in jobs.  These included manufacturing, health care, professional services (ranging from engineers to scientists to accountants), tourism, education, and government.  Retail trade was the largest negative during the month (a loss of nearly 5,000 jobs), a sector which continues to face the disruptions from the shift to e-commerce.

On balance, although future risks remain, California’s August jobs report represented another positive sign that the state remains on a firm track of economic recovery.

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The Airlines and Leg Room

By: Dr. Lynn Reaser

AirplaneAnyone on a long, or even short, airline flight probably was not thrilled with the experience.  Some have suggested that regulations should be made dictating the amount of seat space and leg room.  This is a bad idea.

Surely federal regulators have better things to do than dictate how many inches of leg room should be allowed beyond safety requirements.  The amount of “adequate” leg room varies across passengers and depends on its cost.

If more space per passengers is required, airline fares will rise.  Competition and the marketplace will determine the average amount of seat space and ticket prices.  Passengers wanting more room should and will pay more.

There is no need for taxpayers to pay for additional rules and enforcement as a part of “Big Brother services.”

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A Silly Monopoly

By: Dr. Lynn Reaser

San-Diego-TaxiSince 1984, the City of San Diego has capped the number of taxis that can operate on the streets. To operate a taxi, you have to purchase one of a limited number of “medallions.” Medallions were last issued in 2007 at which time only about 25 were offered at a price of about $3,000 each.

Making the taxi industry into a monopoly by selling a limited number of medallions makes no economic sense (except if you are a taxi driver owning a medallion.) Restricting the number of taxis in the face of strong demand artificially drives up prices to the detriment of the public. It is no surprise that medallion holders are selling those monopoly rights in the “gray market” at prices that now range about $10,000, or around three times the amount of the medallion’s original cost. It is also no surprise or that cheaper alternatives, such as Uber and Lyft, are appearing.

If one is worried about safety, taxi drivers or “taxi-like” drivers can be forced to carry insurance, while meeting certain safety requirements for their vehicles and themselves. This monopoly should have never been created. It now needs to end.

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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.

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