economic trends of june 2012

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© Copyright 2012. All Rights Reserved. Center for Trends Research and Analysis

The Economic Trends of June 2012

Michael J Price Center for Trends Research and Analysis

U.S. Economy

The jobs picture in the United States is dismal. The pace at which jobs are being created

is being negated by the rapid incline of those filing for disability and unemployment. In the

month of June 2012, the economy created just 80,000 jobs. This is far below the projected

numbers most economists forecasted. The unemployment rate stayed the same as last month at

8.2 percent. Furthermore, unemployment among blacks increased to 14.4 percent, and 85,000

workers filed for disability this month. Since June 2009, total job growth has totaled 2.6 million,

while disability claims have increased to 19 percent or 3.1 million. Furthermore, since 2009,

780,000 more women are unemployed, and the unemployment rate in June for women totaled 8

percent. These numbers are not good news to a slumping U.S. economy.

Not only has the U.S. seen very little job growth, but there are indications that the world

economy is in a slowdown. The deficit for the U.S. economy through the month of June hit

$904.2 billion, and at this pace will surpass $1 trillion at the end of the year. According to the

Associated Press, the housing sector is facing increased foreclosure risks because “banks are

increasingly placing homes with unpaid mortgages on a countdown that could deliver a swell of

new foreclosed properties onto the market by early next year.” If this occurs, the U.S. recovery

will be delayed. What’s worse is that U.S. cities are increasingly facing a fiscal brink. According

to the LA Times, California cities are slashing services to thwart off bankruptcy. The article

states “San Bernardino…became the third California city to seek bankruptcy protection in the

last month.” ABC News reported that the city of Scranton, PA is next because it is “cash-

strapped” which forced the government to “cut the pay of its municipal workers to $7.25 an

hour--minimum wage.”

These reports indicate a rising trend in cities filing for bankruptcy protection because

they have amassed high levels of debt. The common theme among these cities is 1) the cost of

pensions are so high, the city can’t afford to pay for them, and 2) debt leads to cutting the

workforce and/or public services. Most cities have property taxes as the primary source of

revenue in their fiscal budgets. But with the housing crisis of 2008, most cities experienced a

shortfall in this area, which has led to budgetary deficits. Since the housing market hasn’t

rebounded, many cash strapped states may either cut or privatize public service, or experiment

with new forms of taxes or increase the costs of fines and forfeitures. According to the West

County Times, the City of Albany, New York approved a ½ cent increase in sales tax in the

month of June and additional sources of “revenues will come from a slight increase in property

tax rates new contract with Waste Management for garbage collection, and an increase in fines

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and forfeitures.” Also, city leaders said they will be asking city employees to pay more of the

cost of benefits. Some cities have even allowed medical marijuana dispensaries to operate, which

they would tax, to gain additional revenue. The cities of Oakland, California and Denver,

Colorado have done this to help shore up their budgets. All indicators point to 2013 as a year

when the housing market will continue to slump and the U.S. economy could slip into another

recession. The trends show that many other liberal cities will experiment with medical marijuana

dispensaries to help raise revenue to help balance their budgets. Furthermore, many cities will

ask city employees to assume more of the costs of their benefits, services may be cut or

privatized, and other states could experiment with new forms of taxes, or increases in property

and sales taxes, and fines and forfeitures. When cities have to balance their budgets, they will

feel the pressure to devise ways to raise revenue to maintain service levels, which could make

many residents unhappy. Expect this trend to continue at the state and local levels.

World Economy

Recently, both European and Chinese banks have lowered interest rates, and to spur

growth, they are pumping more money into their economies. There is some speculation on my

part that the Federal Reserve will experiment with another quantitative easing or pressure

Congress to pass another stimulus bill. China for instance saw growth slow to a “three-year low

of 7.6 percent….as trade and manufacturing decelerated, putting pressure on Premier Wen Jiabao

to boost stimulus to secure a second-half rebound.” According to Bloomberg, “Wen may need to

build on monetary easing and keep increasing investment to reverse the deepest downturn since

the global financial crisis as the ruling Communist Party prepares for a once-a-decade leadership

change this year.” Furthermore, the article points out that “an extended China slowdown would

further imperil a world recovery already threatened by Europe’s debt crisis and weakening U.S.

job growth (see above on U.S. job growth and below on Europe’s debt crisis). Another article by

Bloomberg, points out that the Asian market is showing signs of a slowdown as “Singapore’s

GDP unexpectedly shrinks.” At the same time, manufacturing fell seeing the region’s output of

goods being curbed due to low demand. According to the article “the Asian Development Bank

cut its growth forecast for the region yesterday and South Korea unexpectedly reduced interest

rates as it joined the countries of Brazil and China in cutting borrowing costs in July.” This could

“put pressure on the central bank to ease monetary policy” according to Bank of America Corp.

The European Central Bank cut interest rates to a “record low 0.75 percent on Thursday

(July 5th

) and so “almost exhausted its normal ammunition.” According to a CNBC report, “some

economists expect another cut in the main interest rate to 0.5 percent but after that, the ECB must

essentially employ its balance sheet to help the euro zone economy.” This means “buying

government bonds” which is opposed by Germany’s Bundesbank (ECB’s largest stakeholder), or

offer “more cheap loans and exposing the bank to risks that many of its policymakers already

find worryingly high.” According to the Associated Press, France sold short-term government

bonds at negative interest rates (July 9th

), which was the first time this has happened. To stabilize

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Spain, the EU approved a “€100 billion bank bailout plan” according to the Washington Post,

which “grants the country an extra year to cut its budget deficit.” The size of Spain’s economy is

estimated to have been at $1.5 trillion (4th

largest economy in the Eurozone).

Spain and Italy

According to the Financial Times, as part of the deal, the Spanish government “unveiled

€65 billion worth of tax increases and public spending cuts” in order to “secure European aid to

rescue its banking system.” This action led “thousands of miners to march on the Centre of

Madrid to protest against austerity measure.” This is the same country that voted out Prime

Minister Jose Luis Rodrigues Zapatero when he increased the retirement age. Italy is also facing

financial woes. Prime Minister Mario Monti “unveiled a program of tough measures to rein in

public spending in the deeply indebted nation.” One of the measures was to increase the

minimum retirement age for men from 62 to 65. According to the Washington Post, this move

“leaves many as 390,000 older Italians” without pensions, and because of the “ballooning

deficits and debts, government spending on pensions has become a popular target.”

Furthermore, Moody’s recently downgraded Italy’s debt rating 2 notches (Baa2 to A3)

“on concern that deteriorating financial conditions in Europe will lead to a sharp rise in

borrowing cost.” This sharp increase in borrowing cost will make it difficult for Italy to borrow

money because it will pay more in interest. This puts further financial strain on the country to

address the debt issue. Prime Minister Monti has no choice but to find ways to either cut

expenditures or raise revenues. Either way, this will make Italians unhappy. In heavily indebted

countries such as Spain and Italy, making cuts to entitlements such as pensions will be furthered

debated and pursued, but all this will do is make Italians and Spaniards upset. Since Spain took a

bank bailout from the EU, Spain has to address its budget deficit within the year. Expect the EU

to keep a keen eye on Spain since it is the 4th

largest economy in the Eurozone.

Retirement Age

By 2050, fourteen countries-such as Italy, Spain, Greece and Ireland, are looking to

increase retirement ages to between 67 and 69. The article points out that the IMF has

“recommended raising the retirement ages to ease the financial burden associated with rising life

expectancy.” This has been met with stark opposition since Greeks took to the streets in Athens

to protest the Greek austerity measures which included increasing the retirement age. In Spain,

Prime Minister Jose Luis Rodrigues Zapatero was voted out of office in December, when he

increased the retirement age from 65 to 67. In France, President Sarkozy was ousted when he

backed a proposal to increase the retirement age from 60 to 62, which ushered in Francois

Hollande, who has vowed to “roll back the measure.” His Socialist Party even saw huge gains in

the National Assembly as they won and became the majority party. This move shows that France

has shifted to the left due to attempted austerity measures.

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The retirement age was set in the post-World War II era when industrial workers did not

live as long as they do now. With the advances in medicine and the shift from labor intensive

work to less strenuous activity, people are living longer. According to a study by the National

Institute on Aging, in the U.S., there are “approximately 35 million people age 65 or older,

accounting for about 13 percent of the total population. In 1900, the number of older Americans

was about 3.1 million.” Furthermore, NIA pointed out that “with the aging of baby boomers,

born between 1946 and 1964, America’s older population will double by 2030, reaching some 70

million.” According to the CIA World Factbook, Americans, have an average life expectancy of

77.85 years, which ranks 48th

in the world. This means Americans are living an average of 12.85

years longer than the retirement age. On the other hand, the average life expectancy of those in

the EU is 79.76, which ranks 36th

. What all this means is that this adds stress to social safety nets

which is compounding the debt because people are living longer than the set retirement age. Not

only are they living longer, but a higher percentage is living past 65 years. According to

SocialSecurity.gov, life expectancy at birth in 1930 “was indeed only 58 for men and 62 for

women, and the retirement age was 65.” This means fewer people were expected to reach the

retirement age. They estimated that approximately 54 percent would reach the age of 65 and

collect an estimated 13 years of social security. But every decade, the percentage of those who

reach 65 years has gone up. Between 1940 and 1990, the percentage of the population surviving

from age 21 to 65 has increased 18.4 percent. Also, women are outliving men. The SSA

concluded that:

“Increases in life expectancy are a factor in the long-range financing of Social Security;

but other factors, such as the sheer size of the "baby boom" generation, and the relative

proportion of workers to beneficiaries, are larger determinants of Social Security's future

financial condition.”

If people are living longer past the retirement age, they are draining more from retirement

funds than expected. The problem though is that this move is not politically advantageous, and

changing the social compact with the population will not be easy. However, it is necessary in

order to cut deficits and to keep the program solvent. This trend indicates that as financial

pressure becomes too intense, such austerity measures will be pursued in other countries as a

way to shore up their growing budgetary deficits. Expect increased protests as a result, but don’t

be surprised if some leaders avoid addressing the need to increase the retirement age purely to

remain politically acceptable.

Desperate Times Lead To Desperate Measures

The financial woes within the EU countries are not easing. According to the LA Times,

France and Germany “have launched a series of raids on the offices and homes of bank officials

and their wealthy customers in an ongoing inquiry aimed at cracking down on those who evade

taxes by using Swiss banks.” This indicates how desperate these countries are for money, as they

are tracking anyone down who owes them taxes. This indicates a possibly new trend. As

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countries can no longer sustain the increased amount of debt and have no other options left, tax

invaders will be ramped up and pursued more rigorously than usual. This could hit home in the

U.S. as well. Expect the IRS to grow in power in how they seize assets and freeze bank accounts

of suspected tax invaders.

The issue lying beneath the financial news is that lawmakers don’t know how to cultivate

a hospitable economic and political climate which would allow job creation. These lawmakers

seem to think that they have the tools to create jobs, but the fact is they only have the mechanism

or authority to create an environment where private enterprise can prosper and increase

employment. Furthermore, they can’t seem to grasp the notion that in order to create jobs, the

environment must be free from impediments which hamper the creation of jobs. Moreover, the

focus on job creation is too narrowly focused. So how is the jobs panorama narrowly focused?

Well there are two types of job creation-vertical and horizontal industry growth. Lawmakers are

focusing on vertical growth. Vertical job growth is the cultivation of jobs within one industry or

among a select few organizations, whereas horizontal growth focuses on the broad range of

industries or among a myriad of organizations. Let’s take for instance the financial industry

which is an example of vertical job growth. Since the financial industry is regulated, it reduces

competition among organizations thereby shifting itself towards vertical job growth. How is it

vertical? Well, it is not possible to start a bank without having to accrue heavy debt. In addition,

the legal and regulatory hurdles are almost insurmountable just to start this type of business.

Regulation creates a quasi-monopoly or monopoly because it restricts competition.

President Obama’s rhetoric focuses on growing jobs within the public sector which will

require taxpayers to foot the bill for this type of job creation. This is another example of vertical

growth hampering the ability to create jobs because it focuses on jobs that require taxing rather

than jobs that create wealth. More public sector workers than private sector workers, requires a

system sustained by taxation and not production. This is a counterproductive proposal and to

fend off this type of negative growth, the U.S. needs a plan and a system that creates more

private sector jobs than public sector jobs. Horizontal growth provides the greatest opportunity

for the greatest number of Americans because it cuts across multiple industries and affects the

greatest number of workers. For this reason, we advocate legislation and policies that cultivate an

economic environment focusing on a horizontal job growth strategy.

To achieve this desired horizontal job growth outcome, the U.S. must cut regulation

which favors particular businesses and industries, which limit the number of businesses

competing in any particular sector, shift the job growth strategy to horizontal, and reduce the

amount of regulations that prevents more businesses from being started. Freeing up and reducing

the amount of regulation broadens the number of businesses being started which, in turn, creates

jobs. This horizontal growth creates stability and competition-beneficial to both consumers and

job seekers.

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However, there is a political problem with horizontal job growth. Lawmakers don’t

support horizontal growth because many are beholden to special interests who have a stake in

preventing competition and who benefit from the quasi-monopoly that some enjoy in their

industries. For business leaders with this mind-set, there is nothing better than restricting

competition which forces consumers to purchase their goods or services. Quasi-monopoly

within industries is created by vertical job growth strategies and it hurts both consumers (no

competition prevents prices from decreasing thereby increasing the likelihood of collusion

amongst the select few), and job seekers (less job growth means more competition for a

restrained number of jobs which results in lower pay).

In the last ten or so years, the U.S. has seen automation replace many operations

previously completed by manual labor. This resulting economic efficiency is generally good for

production, but when automation out paces job growth, high unemployment occurs. When this

happens in any one particular industry, the local negative impacts are far-reaching and severe.

Now as automation takes over in many industries, overall job growth requires shifting from

vertical job based strategies to horizontal. Horizontal job growth will mitigate the impacts of

automation and in turn, create a stabilizing job growth force within the economy. As our

technological progress speeds up, and automation infects the entire economy, horizontal growth

MUST be a priority because it elevates the competitiveness of multiple industries instead of a

select few.

We urge the American public to challenge their elected officials in the creation of a new

job creation strategy for the nation. We urge you to demand a horizontal job creation strategy, a

plan that will create new, high paying and wealth creating jobs in areas such as manufacturing,

biotechnology, electronics, medicine, environmental science, engineering, education, and

research. The current vertical job creation strategy, affecting a limited number of industries will

result in high unemployment in many other industries and many American cities and towns.

Only a broad reaching, industry inclusive, horizontal strategy will bring new jobs, new wealth,

and new opportunity to the bulk of American workers and the greatest number of American

communities.

economic trends of june 2012

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