Disincentives...an Update

Written by Jeff Thredgold, President, Thredgold Economic Associates

July 13

Our Tea Leaf issue dated January 27, 2010 reviewed a handful of the major disincentives emanating from Washington DC that were currently sending shock waves through American businesses…and very likely to stifle solid levels of U.S. job creation in coming months and years.

Job creation has been substandard during the past six months, with seemingly not much improvement ahead.  The following is an update of where we stand at this point.

Business owners and managers of any size company see a number of major impediments to new hiring 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.  Almost weekly, new and higher estimates of the costs of Obamacare to the business sector are released, either by various government departments or via private sector studies.  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.  This is one more issue to keep managers awake at night.  The good news here is that a weakened Administration and Congress are unlikely to move quickly in this area.  At the same time, however, talk of a Democratic “surprise” to pass new onerous “cap & trade” legislation, as well as other items in December—between the November 2 election day and the date new members of Congress take office in early January—continues to rise.  This could be particularly likely if Republicans regain control of the House of Representatives or the Senate, or both, in early November

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?

4) Many states and local communities are imposing or 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

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 their children and grandchildren.  Aggressive government spending and associated massive budget deficits can be “justifiable” at times of great economic weakness.  However, excessive ongoing government spending and projected budget deficits of $1 trillion annually for years to come are simply too much

My simple definition of economics is “people respond to incentives.”  The disincentives to add jobs in this country remain formidable.

Still Gaining

The estimated net worth of the American household rose again during the first quarter of this year.  This marks the fourth quarter in a row that total household wealth increased…following seven consecutive quarters of declines. Total household net worth now stands at $54.6 trillion, an increase of $1.1 trillion ($1,100,000,000,000) versus the prior quarter’s $53.5 trillion total.

Net worth is derived from the Federal Reserve’s quarterly flow of funds report.  The total represents the difference between all household assets, including stocks, mutual funds, real estate, CDs, etc., minus all debts, including home mortgages, consumer debt, bank loans, etc.
 
The first quarter increase was driven by rising stock values.  Stocks owned by households gained an estimated $330 billion in value, a 4.4% rise, during the January to March period.  The Dow rose 428 points (up 4.1%) to 10856 during the first quarter, but fell sharply during the second quarter to close at 9774 on June 30, before rising again in recent days.  Household net worth for the second quarter (to be released in September) will be negatively impacted by the poor performance of the stock market during the April to June period.

Real estate owned by American households declined in value by 0.4% during the first quarter, shaving $65 billion from total net worth.  Household real-estate holdings had been gaining in value during the previous three quarters and had added $888 billion to net worth before the first quarter decline.

In addition, households reduced total debt at a 2.9% annual rate during the first quarter, with reductions in both mortgage debt and consumer credit.  Consumers have been aggressive, where possible, in paying down debt during the past few years in response to serious recession, painful job cuts, and higher levels of anxiety.