Stimulus Package
One needs only to watch the morning news to get a sense of the anxiousness over the economic stimulus package going before Congress. Discussions of a monstrous $819 billion (or more) economic stimulus package targeted to make it to the President’s desk by mid-February has the country buzzing about what it will include, for whom, and whether or not it is really appropriate. From “Wall Street” to “Main Street,” all await the actions that will be set forth by the government under this new package. Communities across the nation are developing “wish lists” of projects they’d like to pursue with the help of some of these funds.
While statistics (led by mounting job losses and a plummeting financial market) clearly show an overall economy out of sync, the apprehension about government intervention is clearly displayed through media outlets and common office talk over the water cooler. Even as nervousness in today’s economy is certainly understood, from an economic standpoint, history has shown that government intervention during times of severe recession is not at all the socialism it may be labeled. It is, in fact, a necessary tool helping capitalism work right.
The truth of the matter is that markets are wonderful, but they absolutely do not self regulate. Furthermore, as John Maynard Keynes, perhaps the foremost economist of all time, suggested decades ago, capitalism can get into a “liquidity trap” where fear and lack of trust can stall economic activity despite low (even 0%) interest rates. From the plunging housing market to falling retail sales and consumer confidence, it is clear that America’s markets are experiencing the above. During such times, the government must come in and stimulate the economy, adding jobs and restoring confidence once again.
Complicating matters is the change in leadership. However, entering office in this time of economic crisis, the current administration has history on its side. When Franklin Roosevelt took office in the 1930s, the prominent theory was that budget cuts and tax increases accompanied by wage cuts and lower interest rates would help the economy. Yet Roosevelt did not see the return he expected by enacting classical methods of recovery. It was deficit spending (partially necessitated by World War II) that ultimately brought sustainable recovery. Even the modest measures (by current standards) passed last year with the support and encouragement of the Bush administration helped to boost activity in the second quarter. In other words, a government-backed stimulus package, whether presented by Republicans or Democrats, has historical precedent on its side.
It is important to remember, however, that any stimulus package is not without its long-term issues. Deficit spending by the government today will certainly carry consequences down the road. During times of expansion, ideally, a government would use some of the revenue to reduce the deficit spending that must occur during times of prolonged contraction. Whether this happens or not, spending of the magnitude needed to reinvigorate the American economy will most certainly lead to more debt in the long run. The stimulus package will not solve all problems or undo damage already done. It will not immediately replenish retirement accounts or erase the recent corruption of top executives. What it does do is get the economy moving relatively quickly, which is imperative in the short term. It is certainly not a free lunch and is a rather bitter one to consume. It is a repast, however, that we must endure to prevent starvation.
The stimulus package is expected to total at least $819 billion including (among other things) billions in proposed tax cuts for working families and businesses, infrastructure investments, and continued infusion in the financial sector. The details of the package will undoubtedly change over the next several weeks, and much political debate will take place over how much to spend and where to spend it. Yet from an economic standpoint, history has proven that some stimulus package is better than no stimulus package, and that in reality “Wall Street” and “Main Street” don’t exist as two separate entities. When financial markets falter, small businesses and individuals suffer. Unpleasant as it may be, we simply have to hit the street (whatever you choose to call it) and make the journey.
posted @ 07:55 AM CST [link]
Friday, January 23, 2009
Bad News, Good News
The newly announced state sales tax revenue for December was another indicator of Texas’ current position in the national economy. Comptroller Susan Combs announced a 2% increase in December 2008 sales tax revenue over the previous year with the collection of $1.86 billion last month. Like other economic indicators seen throughout the state, what in prior years may have come as “bad,” or at least disappointing, news to Texas is currently “good,” or even outstanding, news in light of a sluggish and challenging national economy.
The latest sales tax increase is far less dramatic then the increases Texas experienced in recent years and even recent months. The state collected $1.98 billion in November, at the time increasing revenue 4.7% over November 2007. December’s gain seems paltry by comparison. Moreover, other important sectors such as construction have shown slight declines. The modest year-over-year growth experienced entering 2009 certainly indicates that the Texas economy, in terms of growth, is slowing down.
While not as low as the nation, the Texas and surrounding states experienced a 45.6% fall in the regional consumer confidence index over the past year. Tighter consumer spending is often (but not always) a harbinger of continued decreases in sales tax revenue, a major contributor to State funds.
The expected slowdown is, thus, also reflected in the lower 2010-11 biennial revenue estimate, meaning there will be less money available for Texas legislators to divvy up among various needs. The projected funds available for general-purpose spending ($77 billion) are down 10.5%, equaling a $9 billion drop from two years ago.
A slowdown is also expected in employment. The Comptroller is basing revenue estimates on job losses in 2009 after an amazing 221,200-job gain for the state in 2008 (which may be revised downward in March). My forecasts call for better days as soon as mid-year, but mounting evidence demonstrates that Texas is not immune to the national sluggish economy.
While sobering, all budget allocations and sales tax collections also indicate that Texas continues to fare notably better than the nation as a whole, and the dire financial straits experienced by so many states are not likely here. In fact, to achieve a net increase in sales over the relatively healthy prior economy of the year before demonstrates the resilience of Texas. For the nation as a whole, December 2008 sales were 9.8% lower than December 2007, a stark contrast to growth in Texas, however modest it may be.
The $77 billion biennial revenue estimate is a cautious one as the Comptroller exercises prudence in a time of national economic turmoil. The estimate also does not tap the Texas Rainy Day Fund (nearing $7 billion) or educational funding from the Property Tax Relief Fund (which will have accumulated $3 billion by the upcoming biennium).
Conservative planning, coupled with additional resources to draw upon if conditions worsen, will protect Texas from seeing a huge deficit. Overall, the fiscal situation of the State is fine, although not ideally where we might like to be nor where Texas was projected to be before the drop in oil prices from the peak in July this past year and the rapidly unfolding financial calamity.
Slowing growth in sales tax revenue, along with other indicators, is evidence of a slowing Texas economy. Yet the story of Texas is one of bad news, good news. The bad news is that the economy is slowing. With the type of interconnectedness experienced today, it was hardly expected that the state could avoid all effects of the larger national and global economic crises.
The good news is that even with a slowdown, the modest growth in sales tax above the previous year is a refreshing number compared to the rest of the nation. While confirmation of a slowdown increases in the state, so should confirmation that Texas is fiscally sound and will continue to outperform the nation.
posted @ 08:10 AM CST [link]
Friday, January 16, 2009
They’re Back!!!!!
There was a top 10 hit tune, recorded by numerous artists in the 1940s and 1950s, in which the chorus announced a detour that was fast approaching. The song, “Detour, There’s a Muddy Road Ahead,” emphasized the difficulties that could result from upcoming challenges.
While it’s not an exact parallel, there is some similarity to the situation facing the 81st Texas Legislature that began its biennial session this week, particularly with regard to the predicted revenue lawmakers will have to divvy up to meet pressing needs.
As the elected senators and representatives prepare a budget for State operations for 2010-2011, it appears they will have less funds with which to operate than they had two years ago—some 10.5% less—roughly $9 billion. That means budget planning for the next two fiscal years will probably begin around $77 billion, compared to $86 billion available when lawmakers convened in January 2007.
The revenue estimate includes $2 billion left over from the budget set by the 80th Legislature, but not the $3 billion previously set aside for possible needs in school spending or the almost $7 billion likely to be available in the “Rainy Day Fund” when the 2010-2011 budget period begins.
The key reason for the expected drop for the next biennial budget is diminished consumer spending on various sources that normally produce revenue for the State such as retail sales taxes, cigarette taxes, the lottery, and so on. In addition, slowing growth in the energy sector has some effect.
Judging from the proposed bills filed since the second week of November when measures were first authorized to be submitted, many of the same issues considered in past sessions will once again come before the lawmakers. They will run the gamut from proclamations honoring various people and places to matters that will greatly affect all of our lives, but economic concerns will likely be at the forefront of discussions. This is particularly true of the early stages of the session, as lawmakers try to determine what expenditures will be necessary and appropriate in order to keep the State running smoothly over the next couple of years.
Issues anticipated to garner substantial debate include transportation funding and immigration reform. Many of the State’s roadways are overly congested, and workable solutions to the problems are essential to long-term prosperity and quality of life. While immigration is primarily a Federal issue, it is still expected to generate a flurry of action and debate in the session.
Although there will likely be upwards of 6,000 bills put on the docket during the Legislature’s 140-day session, the budget is the only item that must be approved by State law because deficit spending is not allowed. Many of the proposed bills will never see the light of day, but some analysts are projecting that approximately 1,000 new laws will be passed before the session adjourns on June 1.
It will probably be April before funding decisions will be finalized, and a number of lawmakers are hoping the economic climate will show enough strength during the next few months to prevent any drastic cuts in services, a practice that several other states have already announced.
Even though Texas has not been as severely impacted by the national and global economic downturn which has been so evident over recent months, it has not escaped the national recession unscathed. While the “muddy road ahead” as the hit tune announced is not as soggy here as in California and other places, there will certainly be challenges that must be mastered for Texas’ economic future to continue to be healthy.
posted @ 08:05 AM CST [link]
Friday, January 9, 2009
The Cost of the Path Not Taken
Today’s economy is causing many people to weigh choices regarding their future. Because of the sinking economy, many who have worked in a particular field or in a specific job for long periods of time are finding themselves unemployed. Moreover, many part-time workers are finding it difficult to secure full-time positions. For some, pursuing additional education is becoming an increasingly attractive option.
Traditionally, a dwindling economy helps stimulate student enrollment. According to a recent report by Inside Higher Education, the current economic situation, coupled with the creation of new academic programs and better recruiting procedures, is enabling some colleges to see an enrollment boom. This is especially true in community colleges, as well as various graduate-level programs.
To prepare for rejoining the workforce in the future at an enhanced level, many people are returning to college to hone their skills or learn new ones. Likewise, some who already have jobs are taking advantage of education possibilities in order to remain competitive in their own professions and, thus, in the overall job market.
Similarly, for students with college degrees who are unable to find employment at the level for which they prepared and, therefore, have to accept less enticing jobs, the option is either to keep working under those circumstances or return to college to obtain an additional degree or broaden and improve their preparation.
Any time such a choice is made, any benefits that might have been gained from anything else that might have been chosen are foregone. For example, if you decide to spend your finite marketing budget on a series of print ads, you give up whatever gains a set of radio spots might have generated. An individual choosing to go to college for four years is giving up whatever wages they might have made during that time had they been in the workforce.
Though they may not be specifically quantified, any decision of this type involves a key economic concept called “opportunity cost.” Opportunity cost is essentially the value of the path not taken. When good jobs are plentiful, the opportunity cost of going to college is higher.
Another factor associated with opportunity costs is affecting students who are preparing to enter college in the fall and their families. The bear market is doing a number on their finances and college planning. A Chronicle of Higher Education report released last month indicates admissions directors are finding that because of the today’s financial conditions, more and more students are less willing to travel far from home to attend school or take on debt to pay for college expenses.
A recent college admissions counseling service survey found that a large percentage of parents are also limiting their children’s choices of colleges to the less expensive ones. As a result, instead of picking an institution far from home that may provide the specific course of study desired, more students are choosing local schools or those within their states. While the opportunity costs of such decisions will not be known immediately, they will be determined by the schools selected, the courses of study, and the job market environment and needs in the future.
Unfortunately, a limited number of students are foregoing college altogether and just searching for a job to get by. For those who chose this path, the opportunity cost could prove fairly high; without the knowledge and preparation available through college programs, their future employment goals may never be reached. Given the numerous high demand technical jobs that can be had with a relatively brief training period, the adverse effects could be serious indeed.
The historic economic slump we are currently experiencing is producing an equally historic jump in the number of individuals enrolling or planning to enroll in higher education institutions. Thus, in a unique way, today’s struggling economy is playing a major role in preparing and training individuals for jobs that will likely be instrumental in strengthening our economy tomorrow.
Every path not taken involves an opportunity cost and higher education is no exception. However, given fewer attractive current job opportunities and potential future rewards, education is emerging as the option of choice for an increasing number of Americans.
posted @ 07:41 AM CST [link]
Friday, January 2, 2009
The End of the Beginning
The date was November 10, 1942. After a series of crushing defeats at the hands of Nazi Germany, the British troops had at last prevailed on the desert sands of El Alamein, in what would come to be known as “The Battle of Egypt.” Prime Minister Winston Churchill addressed the Lord Mayor’s Luncheon with the stirring and subsequently famous words, “Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” He was quite prophetic. There would be several years of brutal war ahead before Britain and its allies (including the US) emerged victorious.
As 2008 draws to a merciful close and the perennial optimism of a new year unfurls, the world finds itself in a precarious economic situation. We have seen financial giants disappear; massive infusions of fiscal and monetary resources from around the globe; the virtual paralysis of credit markets; job losses in the millions; reams of disturbing statistics; and veritable waves of foreclosures, bankruptcies, and insolvencies. In the midst of it all, we have elected a new President and Congress that promise a still larger stimulus program.
Where does all of this brouhaha leave us? I think Churchill’s words are once again apropos. We are going to see more bad economic numbers and the human suffering they represent. The upcoming months will bring abysmal corporate profits reports, cutbacks in employment, disappointing measures of business activity, and further rounds of bad headlines (California’s woes and the depths of credit card debt are likely candidates). We will endure additional changes in policy that would have been thought impossible only a few months ago.
In the midst of all of these problems, however, some other facts are becoming apparent. Credit is beginning to flow again. The key gauges of interbank lending are looking up, which is the critical first stage in restoring a semblance of normalcy to the system. The demand for mortgages is rising, and business financing is again becoming available. Investors are beginning to see the opportunities that inevitably arise from economic disruptions and to set up mechanisms to capitalize. Even consumers are starting to spend a bit more than anticipated.
While highly encouraging, none of these modest signs in any way point to an “end” to the current malaise. We still have a lot more battles to wage before victory can be declared. There are still many potential obstacles and pitfalls before we schedule any parades. Confidence remains shaky, another batch of mortgages will reach critical status in the coming months, and hiring will be sluggish for quite some time. The impact on many emerging countries is only beginning to surface, and the credit instruments that facilitate world trade are under pressure.
Stepping back from the details and minutia of this situation that can easily (and often do) dominate my days, I am quite confident that we will see growth in output (Gross Domestic Product) by the second quarter; expansion in jobs will likely come a few months later. It will be a bumpy path at first, but one that will build momentum and accelerate over time.
I would very much like to say that the beginning of 2009 will mark the “end” of all of our recent economic difficulties. Unfortunately, I cannot do so. The mere turning of a page on a calendar does not alter underlying market patterns. What I can say, however, is that we have achieved the all important initial milestones in the journey. In other words, we have reached “the end of the beginning.” All things considered given everything that has happened of late, that is not half bad. Happy New Year!!!
posted @ 07:40 AM CST [link]