The Misery Index
Written by Jeff Thredgold, President, Thredgold Economic Associates
October 25, 2011
I wrote a Tea Leaf entitled “Disincentives” 21 months ago (dated January 27, 2010) noting President Obama’s frustration with weak new job creation despite all the new government programs about to unfold and all that massive new government spending about to enter the American economy. I provided an update of the piece roughly six months later (dated July 13, 2010), noting the disincentives were still in place. An additional update 15 months later seems appropriate.
Business owners and managers of any size company see a number of major impediments over the next few years…
1) Higher and higher health care costs for their employees, with more and more complex and costly government mandates to come. No real change here, other than the recent elimination of the CLASS program. Health and Human Services Secretary Kathleen Sebelius announced recently that the agency was shelving the Community Living Assistance Services and Support program, or CLASS, because it could not find a financially sustainable model for it. What that means in English is that no credible forecasting model could be twisted enough to come up with the cost savings that initially supported the program.
The entire "Obamacare" package is likely to visit the U.S. Supreme Court during the height of the 2012 election season. Currently, new information about all of the “hoops” that need to be jumped through by employers in order to avoid penalties or fines makes it simpler to look to shed workers, rather than to add new employees.
2) Potential “cap & trade” legislation to boost business costs. I wrote a Tea Leaf entitled “Cap & Trade” dated March 31, 2010 suggesting…
…I don’t think it will happen
…I don’t think it really matters
The point was that business people and consumers around the globe have largely embraced the idea of using energy more wisely, of building LEED-qualified buildings, of driving more fuel efficient cars, of using towels again in a hotel by hanging them up instead of throwing them on the floor.
This voluntary effort is much more powerful than having government tell us what to do. In addition, the ability of the Administration to get such legislation through the Senate and the House was and is somewhere between zero and none.
3) Employers see sharply higher taxes on the horizon, one more impediment to new job creation. Successful employers see higher income tax rates coming, higher dividend tax rates coming, higher capital gains tax rates coming, and a variety of new taxes on investment income. Why bother to knock yourself out? No change here, other than the discussion of even more new taxes on those who invest and those who create jobs.
4) Many states and local communities are imposing and will impose greater costs on local businesses as a means of generating greater “fee” income to help offset declines in sales taxes, property taxes, and income taxes. Many already high-cost states will simply drive their most valued businesses across state borders to more “business friendly” environs. No change here other than some successes in select states in getting a handle on reducing massive budget pressures down the road.
5) Business owners and managers are fearful of government out of control when it comes to budget deficits, and fear the longer-term implications on our children and grandchildren. The government announced in recent days a budget deficit for fiscal year 2011 just ended of $1.3 trillion, slightly exceeding the deficit of the prior year. That results in a budget deficit of roughly $150,000,000 every 60 minutes! Deficits exceeding $1 trillion annually exist for as far as the eye can see.
My simple definition of economics is “people respond to incentives.” The disincentives to add jobs in this country remain formidable.
Despite frequent reassurances from Federal Reserve Chairman Ben Bernanke, inflation has yet to diminish in the U.S. In fact, recent price pressures were the highest in three years. The Chairman’s expectation that oil prices will decline in coming months, leading overall energy and gasoline prices lower, may or may not develop. In the meantime, consumers deal with prices rising faster than incomes.
The Consumer Price Index rose 0.3% in September, with prices up 3.9% during the past 12 months. The 3.9% rise was the largest since September 2008. Higher gasoline prices contributed to the rise.
The “core” measure of consumer inflation…that which excludes volatile food and energy costs…rose 0.1% in September and was up 2.0% over the past year. Some would suggest this inflation measure is for those who don’t eat or drive.
Unfortunately, average hourly earnings for all employees on private nonfarm payrolls rose only 1.9% during the most recent 12-month period. The disparity suggests rising pressures upon American households to stretch dollars.
Social Security Impact?
One positive development in the eyes of millions of Social Security recipients is that a 3.6% cost-of-living increase will soon take effect, the first increase since 2009. While enjoying the increase, many will see a rise in the premium paid for Medicare Part B, likely to be announced in coming days.
This measure of price changes at the “wholesale” level…for example prices paid by manufacturers and others for goods and materials…jumped by 0.8% in September. The rise over the past 12 months is an ominous 6.9%. The 0.2% September rise in “core” prices led to a 2.5% rise over the past 12 months, the largest gain since June 2009.
Inflation pain felt across the U.S. is also felt around the globe. The United Kingdom reported a greater-than-expected 5.2% rise in consumer inflation during the past 12 months. Euro zone inflation is currently running near 3.0%. China is dealing with inflation running near 6.0% annually, while India deals with near double-digit annualized price gains.
Those Central Banks
Rising global inflation pressures could trim the sails of those central banks…including our Federal Reserve…intent on providing even more monetary stimulus. Rumors abound that the Fed is considering a third round of “quantitative easing”… another effort to push long-term interest rates, primarily mortgage rates, even lower than current rates near 4.00% for a 30-year fixed-rate conventional mortgage.
Unfortunately, the major new hassle in obtaining a mortgage (compliments of the government’s new Dodd-Frank financial reform legislation) and low confidence levels of tens of millions of Americans, largely offset any enticement of even lower mortgage rates. Washington has no clue.