Jobs Are Steady Drizzle When Downpour Needed

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A look at June’s labor market shows no change in the unemployment rate of 7.6 percent, but there was an increase of 195,000 jobs created last month.  This marks thirty-three consecutive months of positive job growth.  Even though most of the job creation were in leisure and hospitality and retail trade (over 57 percent),  this total did exceed the expectations of economists, who were expecting growth of only 155,000.  Therefore, markets reacted positively.

Even though most of the job growth occurred in seasonal sectors, there were positive signs to draw in the broader measure of unemployment.  The U-6 unemployment rate fell from 14.8 percent to 14.3 percent over the last year.  This measure looks at those individuals, who are underemployed.  For example, an engineer, who loses his $80,000 job, but continues working part-time as a substitute math teacher at a fraction of that salary, would still count as being employed within the official figures.  However, earning a substitute teacher salary is a far cry from pay of a typical engineer.  Therefore, the U-6 rate would still count the engineer as unemployed.  Based on this rate decline, we can say that the labor market is brightening even when accounting for the normal seasonal gains.

As for the plight of the long-term unemployed, there was also some relief.  Of those unemployed, 36.7 percent have been looking for work for 27 weeks or more.  That is down from 41.7 percent last year.  While that is a positive sign, it is far from the 17.4 percent recorded in December 2007 when the Great Recession began.  This remains a concern because people who are out of a job for such a long period of time are more likely to experience diminished employment prospects well into the future.

On the downside, there was very little change in construction and manufacturing.  Large gains in construction infers that housing should be on the uptick.  More housing starts mean people will be buying more homes and that will lead to a multiplier effect where consumer spending will rise as they stock up on household and consumer items.  An increase in manufacturing activity is a sign that businesses are looking to expand and start adding to their payrolls.

While we can be comforted by the steady drizzle of job growth, a downpour of job creation will be needed to return to normalcy.  The Economic Policy Institute estimates that it will still take five more years before we will reach the pre-recession unemployment rate if current conditions are maintained.


Tax Burden In U.S. Rates Low Among Peers

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While attention is paid to marginal tax rates, the true measure of what an individual pays in taxes is the effective tax rate.  This is what individuals pay after taking out tax credits and deductions.  Even though Canada has a lower  top marginal tax rate of 29% compared to the U.S. rate of 39.6, the U.S. has a much lower effective tax rate.  The G-7 is my primary group that I am using in comparing the United States.  Those countries include the Canada, France, Germany, Italy, United Kingdom, Japan, and United States

Information comes from a 2012 Annual Survey performed by KPMG International, which covered 114 countries.  It should be noted that this survey took place before the increase in individual tax rates for individuals making over $400,000.  However, the scope of this review wouldn’t cover that range anyway.

From this survey, we learned that the U.S. effective tax rate for individuals making $100,000 is 18.7%, compared to Canada’s 27.4%.  The only rich country with a lower effective tax rate would be Japan at 15.2%.  Here are the rankings:

  1. Italy:  35.6%:
  2. Germany:  28.3%
  3. Canada:  27.4%
  4. United Kingdom:  24.1%
  5. France:  20.0%
  6. United States:  18.7%
  7. Japan:  15.2%

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When looking at individuals making $300,000, the U.S. effective tax rate increases to 26.8%, while Canada, is at 39.8%.  Of the rich countries, Japan is the closest to matching the U.S. in effective tax rates, but it is higher too at 30.7%.  Here are the rankings:

  1. Italy:  41.8%
  2. Canada:  39.8%
  3. Germany:  39.0%
  4. United Kingdom:  38.5%
  5. France:  34.0%
  6. Japan:  30.7%
  7. United States:  26.8%

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This analysis should quiet critics, who believe that the U.S. tax system is burdensome.

U.S. Deficit Projected At Lowest Level in Five Years

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Talks of expanding deficits and President Obama should take a reprieve with the latest report released by the U.S. Treasury Department.  According to Jeffrey Sparshott of the Wall Street Journal, we can attribute the improvement to the expiration of the payroll tax, higher taxes on households earning more than $400,000, and rising incomes.  Right now, the deficit is projected to fall by 26% to $642 billion and could shrink to $378 billion by 2015, according to Congressional Budget Office projections.

Both sides denigrated each other stating that the other side was hampering the economy with their stubborn positions.  For Democrats, they were frustrated that Republicans did not acquiesce to further tax increases from the rich and used the threat of substantial cuts to national defense to drive conservative to the table.  On the other hand, Republicans were bargaining for more spending cuts to domestic spending, including Social Security and Medicare.  So far, neither side was able to fully advance their agenda, but that may be a good sign.

While Republicans were able to thwart higher taxes that could have stunted our economic progress, Democrats were able to prevent severe reductions to domestic spending.  One could argue that either proposal could have incurred more damage to the economy and that this watered-down approach that combined policies advocated by both parties ended up being more beneficial to the economy.

We are still near the midpoint, so we will see if the momentum continues.  If we look to Federal Reserve Chairman Ben Bernanke, then there is reason for optimism.  Talk of slowing the purchase of U.S. Treasury bonds by the Federal Open Market Committee hints that they are more confident of a stronger economy in the future.  If they were pessimistic, then they would have maintained the same aggressive monetary policy that keeps interest rates down, but can spark inflation if the economy picks up steam.  Therefore, that speaks to possible better times.

On the other hand, the delayed effect of the sequester and the looming October fiscal fight in Congress should be cautionary signs that our economy is still not out of the woods.  The unemployment rate still remains very high at 7.6% as of May 2013 and economic growth has only broken the 3% barrier twice since twice since 2010, which is a historical barometer of average growth.  Both are indicators that our economic recovery remains fragile.

Trying too hard to raise revenues through higher tax rates could actually increase the deficit, if businesses decide to curtail hiring and economic activity.  Conversely, pursuing significant spending cuts could also have an unintended consequence of bulging deficits.  That would be due to lower economic activity arising from less government support on the economy.  In fact, Europe is a prime example of how pursuing austerity through higher taxes and government spending cuts led them to another recession.

It is essential that we find the right mix of enhanced revenues and restrained spending in order to maintain the momentum of lower deficits.

When A College Degree Is Not Valuable

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PIMCO Managing Director William Gross offers his opinion that college degrees might be overvalued and it is a valid point.   Now that might be odd since I’m an educator, but let me explain.  The global marketplace has radically changed over the last decade and it is placing more value on math and science, rather than the liberal arts.  Therefore, the value of a college degree varies based on area of discipline and  academic rigor.

In today’s educational environment, there is more focus on ensuring that all segments of society matriculate through the K-12 system.  The primary objective is to lower dropout rates, which is an admirable and worthwhile goal because it has the potential of decreasing crime and boosting productivity.  However, achieving that goal by lowering expectations and not insisting students meet key academic requirements has severe consequences for the rest of the student body.

Human behavior revolves around tying action to consequences.  There is a perception that many school districts are giving a free pass to unruly or disengaged students.  By not intervening at an early stage, there is no incentive to change these self-defeating acts.  Not only is this damaging to the low-performing student, it affects the morale and productivity of the rest of the classroom.

If this perception is true and students are leaving high school and entering college without a good foundation, then they are not equipped to fully take advantage of the benefits of a college degree.  In a global economy that is placing greater emphasis on math and science, students are avoiding those rigorous disciplines in favor of liberal arts where evaluation is more intrinsic and subjective.

It is certainly not my intention to denigrate liberal arts because there is great value in possessing strong communication and critical thinking skills.  However, it is easier to meet minimum requirement in the liberal arts than nursing, engineering, math, and economics, since the later disciplines require quantitative competencies that are more objective and not subjective.  In fact, a superior liberal arts students will remain in great demand because they will have a strong foundation in critical thinking that will prepare them for a variety of disciplines.

What is needed is higher standards for not only students and teachers, but also parents.  While there are some who believe that will result in more students falling through the cracks, it is my belief that our youth will rise to the challenge of higher expectations.

As an advocate for broad-based economic growth and minimizing income inequality, we must change our paradigm to properly equip all segments of society to deal with the needs of the global economy.

Asia’s Challenge to U.S. Economic Dominance Is Overplayed

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While not agreeing with all of the points made by Paul Ferrell of MarketWatch, his editorial on U.S. and Asia economic prospects was thought-provoking.  Mr. Ferrell’s premise is that the intransigence of our U.S. Congress is affecting our future economic competitiveness due to lack of investment in infrastructure and insufficient public education.  While agreeing with that, he might be overplaying the long-term strength of Asia’s economic prowess.

Asia is a region that still has significant challenges.  Japan has been in a rut for the last couple of decades with deflation wrecking their growth prospects.  Even with China enjoying remarkable growth, they have encountered some issues recently.  Their economy still remains under significant government control with private financing access limited.  They also have done a poor job in protecting intellectual property rights, so they must continue to resort to espionage and stealing of commercial secrets in order to maintain their competitive edge.  In my mind, that’s not a sustainable strategy.

While both India and China’s urban and coastal areas have experienced great prosperity, there remains large swaths of land where people live in grinding poverty.  Their living standards are below the world average and rectifying this from the state level will be very challenging.  In China, we are starting to see some chinks in their armor as Chinese workers are starting to demand higher wages.  As they transition to a middle-income country, they must find a way to maintain productivity gains as their labor costs rise.

Reverting back to the U.S., it is obvious that Mr. Ferrell is not a fan of the military buildup over the past decade as we try to fight the endless war on terrorism.  However, we must realize that military spending is an economic driver and job creator.  It also enables us to influence and protect our economic interests abroad that can be compromised if non-market friendly regime emerges.  Having said that, it is true that budgetary pressures and other demands within our borders means that we do have to be smarter and more efficient with our defense dollars abroad.

As for infrastructure, this is a point that I most agree with Mr. Ferrell.  Our transportation system is in need of more attention and encouraging more investment in natural resources and technology will be a key to maintaining our competitive edge globally.

On the other hand, there have been successes in energy for the U.S.  In contrast to Europe whose large investments in alternative energy have yet to pay off, the U.S. has been very successful in natural gas production, which is significantly cutting our energy costs for industry and households.

Mr. Ferrell is also right to be concerned about the state of education, but its solution goes beyond funding.  Correcting the culture toward intellectual curiosity and addressing the breakdown in family structures are socioeconomic challenges that must be addressed first before we can see improvement in educational outcomes.  Lack of male role models and the prominence of single-parent households are proving to be difficult obstacles to overcome.  With demands at work, it appears that child development has suffered as a result when the parental roles are not shared.  As a result, the skill gap between the low- and middle-income households relative to high-income households is a major threat to having a diverse, healthy economy.

Even though America’s global economic dominance is starting to wear off, it is too premature to assume that Asia will be able to fully capitalize on it.

U.S. Southeast Unfortunate Standout in Food Stamps

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Phil Izzo of Wall Street Journal’s Real Time Economics posted a comprehensive map of food stamp enrollment of all 50 states and D.C. since 1990.  What we have seen is a dramatic rise that can be attributed to changing requirements of a new economy and a steep recession of 2008-2009.  Food stamp enrollment has more than doubled since 1990 with a 140 percent increase.

If we were to evaluate the U.S. in eight regions, Southwest, Far West, Plains, Great Lakes, Southeast, Rocky Mountain, Mideast, and New England, the Southeast has the greatest proportion of its population that are on food stamps.  When looking at the U.S. average of 15 percent of citizens being on food stamps, the Southwest also stood out in ways not desired. Here’s the overall rankings by region (most to least):

  1. Southeast – 18.7 percent
  2. Southwest – 17.3 percent
  3. Great Lakes – 15.8 percent
  4. Far West – 15.3 percent
  5. Mideast – 15.2 percent
  6. New England – 14.7 percent
  7. Plains – 11.7 percent
  8. Rocky Mountain – 10.6 percent

Note:  Regional calculations were based on data collected by the U.S. Bureau of Economic Statistics and Wall Street Journal’s Real Time Economics.

From reviewing this regional ranking, there are a few market forces at play.

The Southeast was hampered by a collapse of real estate markets and financial systems, which greatly impacted Florida, Georgia, and North Carolina.  They are also facing a competitive disadvantage when it comes to educational attainment and innovation capacity.  As a result, they were the only region where every state showed state had populations where food stamp enrollment exceeded the U.S. national average of 15%.  Although, it should be pointed out that their lower cost of living make it easier for people to qualify, so this can be a misleading indicator when comparing other regions.

When comparing the Southwest and Far West regions, the Southwest was worse.  With the exception of Texas which was equal to the U.S. average of 15 percent, every other state exceeded the national average.  As for the Far West, California was below the national average with only an 11 percent on food stamps, but that’s deceptive.  California has a very high cost of living, so the income requirement for obtaining food stamps is harder to attain there.  Even though California has seen a boost in economic growth that can be mostly attributed to its highly profitably high-technology sector, they have been plagued with high unemployment and a consumer-friendly climate that scares industry.

The Rocky Mountain and Plains region were relatively unscathed by the real estate collapse, so that can partially explain its relatively low enrollment in food stamps.  With the exception of Missouri where 16 percent of its population was on food stamps which was slightly higher than the U.S. average, every other state within these two regions were below the U.S. average.  Most of these states have low populations and have less economic diversity than other regions.  While one might infer that would result in more poverty, it actually can contribute to more equality, since there is less distinction in job skill sets in these states for businesses to choose from.  Therefore, there is less pay disparities in these regions.

In summary, the Great Recession resulted in many middle-class families losing a stable income and having to resort to applying for food stamps. They have still not been able to regain their previous standard of living.  That is because technology has made it harder to attract relatively low skilled, good paying jobs.


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If Bernanke’s Superman, Then…

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The U.S. economy is his kryptonite.  Al Lewis of MarketWatch offers a satirical comparison of Federal Reserve chairman Ben Bernanke to the “Man of Steel”.  Both Lewis and my comment could be described as cheap shots to him.  However, being fair to Bernanke, his tools are limited in turning around the economy and unemployment.

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Still, if it was up to me to grade Bernanke’s performance, it would rate from a C- to C.  His best work was preventing a huge collapse of our financial system in 2008.  Even though some of his actions might have been questionable, many people do not realize how close the U.S. was to experiencing a depression.  Through creative monetary policy, he was able to create liquidity within the financial system without spurring significant inflation and for that he deserves credit.

While Bernanke’s critics have predicted that his aggressive monetary policy would result in high inflation, it has been four years now and inflation remains moderate.

Having said that, we cannot say that his efforts have not caused any negative consequences.  Some of the global instability, such as high food prices in the Middle East, Africa, and other developing nations, can be attributed to the U.S. and their efforts to keeping the value of the dollar low in order to kick-start the economy.  With U.S. dollars serving as the primary financial vehicle in the global economy, a cheaper dollar made credit more accessible not only in the U.S., but throughout the world.

On the surface, that sounds good.  When developing countries are able to access more credit, then that will lead to more investment and consumer spending.  However, the downside is that it can lead to over-investment and cause asset bubbles.  It is similar to U.S. households, who cannot resist low interest rate offers, and get into trouble by increasing their debt levels.  Even though it will enhance their standard of living in the short-run, it can result in devastating outcomes when economic conditions change.

We have seen potential asset bubbles start to emerge in China, India, Brazil and other emerging countries.  With this occurring, inflation has started to rise in all of those countries and there is concern that their economy will suffer severely as a result.  Even though that has not happened yet, its threat remains and the U.S. should bear some of that blame.

Referring back to U.S. performance, it is true that the U.S. has grown steadily since its collapse during the end of the Bush administration when our economy contracted by a staggering rate of -8.9% during the 4th quarter of 2008.  Since that time, we have shown steady improvement, but it has been very slow.  Subsequently, our economy would shrink further the next two quarters, but at a much slower rate.  But since then, our economy has grown consistently, albeit modestly.  Historically, we want to see economic growth of at least 3%.  In over four years, we have only exceeded that benchmark three times out of seventeen quarters.

When looking at unemployment, the figures are even worse.  Historically, an economy is performing at capacity when the unemployment rate is between 5-6%.  The last time that the unemployment rate fell below the 6% mark was July 2008.  While we should be encouraged by the drop in the unemployment rate from 10% in October 2010 to its current rate of 7.6%, that is still a very high number.  Another disturbing measure is long-term unemployment, which continues to be a problem.  Pew Fiscal Studies showed that 9.5% of the unemployed were searching for work for at least a year in the first quarter of 2008 and that has jumped up dramatically to 29.5% in the first quarter of 2012.  These high rates have never been close to being matched in past history.

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The economic evidence is clear.  Bernanke is no Superman.