Death, Taxes, and Both

by: Dr. Lynn Reaser

Inheritance-tax_2476151b-460x288The U.S. House of Representatives has voted to repeal the inheritance tax, which currently taxes assets of $5.4 million or more of an individual who dies before they can be passed on to a family member. This often forces an individual to sell the property, business, or farm since it may be difficult to pay the necessary amount.

The inheritance tax fundamentally penalizes savers versus consumers. Specifically, if one chooses to spend his wealth during his lifetime, he is not taxed, but if he saves for his heirs he is. The tax encourages tax avoidance, evasion, and other non-productive activities.

The tax currently affects only about 5,500 families. The overall revenue or deficit reduction impact is also small, adding only about $269 billion to federal coffers over a ten-year span. This amounts to only about one-half of a percentage point of total spending estimated over the next decade.

While the exclusion rate of $5.4 million might be raised, inflation will force more people to be caught in the inheritance tax net over time. This negative influence on incentives to create and preserve entrepreneurships and businesses should be abolished.

Should You Be First in Line to Buy an Apple Watch?

By: Dr. Lynn Reaser

apple watch

U.S. consumers bought over one million Apple Watches last Friday, maxing out pre-order sales. Prices ranged from $349 to $17,000. Does it make economic sense to be an “early adopter” of such new technologies?

Four primary factors would argue “no.” First, prices will decline as competition enters the field or improved versions are developed. Second, the product still may have bugs, kinks, and defects that need correcting. Third, there may be a gap between marketing hype and reality, which will be revealed as consumers use and review the product. Fourth, apps may initially be limited.

Still, all these negatives may be outweighed by your desire to own the next “cool” thing. Indeed, it is tempting….

Business and Politics—Should They Be Linked?

By: Dr. Lynn Reaser

As issues such as race discussion and religious freedom have again surfaced, questions regarding the proper role of business in taking strong positions on social and political issues are relevant. How socially/politically active should a corporation be?

Some political activism, such as that leading to a better education system, can yield economic dividends. However, corporate activism may often primarily reflect the chief executive officer’s (CEO’s) political preferences. According to a study done by John C. Coates IV of Harvard Law School, companies that had created political action committees and engaged in other political activities showed an 8% worse performance than other firms after the 2008 recession. Activism can frequently distract a company from its strategic focus, according to the study, and lead to poor investment choices.

A company is accountable to its employees, its customers, and its shareholders. This does not mean that it should ignore its responsibilities to the community or its obligation to safeguard the environment. It does mean that considerable care must be taken to avoid pursuing paths that may not be in the best interests of its constituents.

Shadow Banking

By: Dr. Lynn Reaser

This week the Federal Reserve Bank of Atlanta is hosting a seminar on bank regulatory issues, attended by policy officials, academics, and representatives of the private sector. Much of the focus is on the shadow banking sector and the risks that it may pose. A shadow bank is defined as an institution that performs credit or deposit functions outside of the regulatory confines of banks. Today, approximately 40% of credit creation in the United States is conducted through these shadow banks. These include institutions as diverse as money market mutual funds, hedge funds, and insurance companies

The Federal Reserve is determined that a financial crisis, such as took place in 2008, not be repeated. While it believes it has enough controls on banks, shadow banks could pose a bigger threat. The Fed is monitoring activities of those institutions closely. The government also has the power to declare an institution “systemically important” or in a position to threaten the overall financial stability of the economy. That designation then allows the Federal Reserve to exercise its various regulatory tools, such as increased capital or liquidity requirements.

Policy officials clearly no longer believe that the market will police the financial system to avoid the possibility of collapse. It is far from obvious that another financial crisis can be avoided, but the Federal Reserve is certainly deploying a “full court press” to avert its recurrence.

Utility Bills and the Environment—Cost and Benefits

by: Dr. Lynn Reaser

San Diegans are probably unhappy every time they receive their utility bills. Although we typically use less electricity to cool and heat our homes because of the mild climate, rates are high. This is a statewide problem.

According to the U.S. Energy Information Administration (EIA), electricity rates averaged 14.54 cents per kilowatt-hour (kWh) in December, 2014, a 44% premium over the national average. This was even greater than the 33% premium paid just a year earlier. This is another factor boosting the cost of living and the expense of doing business in the state.Blog photo utility bill

Much of the differential reflects the public’s endorsement of efforts to focus on alternative sources of energy. Specifically, utilities must generate one-third of their electricity from solar, wind, geothermal, or biomass sources by 2020. This clearly puts us at a disadvantage when the price of natural gas, along with oil, has plummeted.

This may be critical to achieving a reduction in our emissions of greenhouse gases, but it does come at a cost.

Fast-Tracking in Congress

By: Lynn Reaser

The Obama Administration is asking Congress to adopt “fast track” legislation that would facilitate the approval of international trade agreements. By allowing only a “yes or no” vote on trade bills, the logjams that seem to consistently strangle bills in the House and/or Senate could be avoided in the consideration of key trade agreements that the U.S. has negotiated with other countries.blog post photo. Fast track

Expanding international trade and investment is one of the best economic polices a country can pursue both for its own interests and those of the world at large. Because trade agreements usually face a long and tortuous negotiations process, avoiding another series of roadblocks in our own Congress by only allowing an “up-or-down” vote would be beneficial. If Congress were to instead make various modifications, the entire negotiating process would have to restart with other nations.

The United States is at a critical juncture in terms of two multinational trade agreements—one with the European Union and one with the Pacific Rim. Easier access to markets in Europe, Latin America, and Asia would be a major win for San Diego companies and jobs.

Jobs and Interest Rates—Good News for Main Street, Bad News for Wall Street

By: Dr. Lynn Reaser

mmj-jobs

February’s jobs report brought some great news.  Despite record snow levels on the east coast and port stoppages on the west coast, companies added nearly 300,000 new jobs.  The jobless rate fell to 5.5%, a level many economists have pegged as representing close to full employment.

Financial markets were not happy.  Both stocks and bonds sold off over fears that the Federal Reserve might be moved to quickly boost interest rates.  How close might a rate hike be?

The Fed has indicated that no rate hike will occur before June. The first increase seems likely between then and September. February’s jobs report was robust, but wage growth is still sluggish, inflation is well below the Fed’s 2% target, and growth in real gross domestic product (GDP) appears to have been soft this quarter. The economy rarely moves in a straight line. Momentum appears to be building but could be derailed by lagging productivity, a stronger dollar, or weak conditions abroad.

Higher interest rates seem probable this year, but the Fed will be cautious in launching the first hike.