In this week's article, I will address questions recently posed to me on the topic of the economic recovery. Please send me your business questions at bcuomo@comcast.net.
Why are employers so slow to increase their hiring?
Employers make their hiring decisions based upon their sales expectations. The key to an improved employment outlook lies in the behavior of the consumer. The U.S consumer is responsible for approximately 70 percent of economic activity. If employers perceive that consumer confidence is low and that consumers are uncertain with regard to their spending decisions, then they will be conservative in their hiring decisions. With the high unemployment rate and increasing foreclosures, the consumer is in a weakened state. We will need to see a significant slowdown in the foreclosure rate and an improvement in the housing market before we see a meaningful improvement in consumer spending and an increase in hiring.
Why is the Federal Reserve buying Treasuries, i.e., mortgage securities?
The Federal Reserve is buying Treasuries in order to provide "liquidity" to the housing market. By buying Treasuries, the Federal Reserve allows banks to take loans off their books and provides banks with funds to make additional housing loans. The intent is to increase the demand for housing and cause housing prices to increase. This will increase the equity that households have in their home and ultimately lead to an increase in consumer spending, a necessary condition for the recession to come to an end.
Is the "Great Recession" coming to an end, or is there a risk for a "double dip" recession?
There is a diversity of opinions on this. My personal view is that there is a very low probability of a double dip recession, i.e., 20 percent. The economy is slowly but steadily improving. Much will depend upon what happens in the international economy. If the major economies improve and do not sputter, then there is a very low probability of a double dip recession. On the other hand, if the major economies experience recession, then the probability of another recession increases. Corporate earnings will also be a factor. If corporate earnings increase, then business spending and hiring will increase. This will contribute strongly to an economic recovery.
What is the impact of sales tax holidays? Do they really work?
The evidence on this is not clear. Some would argue that a sales tax holiday will cause consumers to increase their spending. Others would contend that a sales tax holiday merely causes consumers to shift their spending to a different time period and that the impact is a decrease in government tax revenues with no beneficial impact on the economy. Empirical studies have shown mixed results. In some states, consumer spending has increased, and in some states, it has not. In the final analysis, it appears that limited sales taxation is the best approach to encourage consumer spending.
Is the U.S. government justified in extending jobless benefits to 99 weeks, given that the U.S budget deficit is at $1.4 trillion?
Answering this question requires an analysis of how one views the purpose of government spending. Some would argue that providing unemployment benefits indefinitely discourages initiative and leads to long-run dependence on the government. On the other hand, in the face of the worst recession since the Great Recession, it may be necessary to provide the unemployed additional time to find a job so that they can increase their spending and contribute to the economic recovery. It is my belief that the job benefits extension is valid in this instance. However, I would not recommend any further extensions.
Should there be another round of stimulus spending to speed the economic recovery?
It is questionable as to whether or not the stimulus spending programs have had a significant impact in fostering an economic recovery. Data on how much stimulus spending has taken place and where it has been spent has been hard to come by. A number of surveys have indicated that in a number of instances stimulus spending has gone disproportionately to less deserving states. This runs counter to the purpose of stimulus spending. Also, it is clear that much of the designated stimulus funding has not been spent. It appears that the government spending bureaucracy has been unable to create a system to assure the timely and efficient distribution of stimulus funds. Based upon the above factors, I would not recommend another round of stimulus spending.
What is the impact of illegal immigration on the U.S. economy?
This subject has obviously been the source of rancorous debate. There are 12-13 million illegal immigrants in the U.S. To the extent that illegal immigrants are working, they are making a positive contribution to the U.S. economy. They provide employers with a productive source of labor and contribute taxes to finance government expenditures. Some would argue that illegal immigrants perform jobs that U.S. workers do not want. There are those, however, who would argue that illegal immigrants take jobs away from U.S. workers. This may be true, but there have not been any definitive studies that have shown this. The net economic impact of illegal immigration is unclear, i.e., is the positive impact on the production of goods and services and tax revenues greater than the displacement of U.S. workers?
Many cities and towns in Massachusetts are financing their spending by increasing taxes. Is this justifiable? If not, what should be done?
A meaningful answer to this question depends upon one's view as to what goods and services cities and towns should provide and how the resulting expenditures should be financed. In some cases, cities and towns have decided to provide the desired level of goods and services and finance their spending by Proposition 2-1/2 overrides, meals taxes, hotel/motel taxes, and user fees. Many cities and towns have decided not to impose higher taxes and user fees, but to decrease their spending. In some cases, this has led to painful layoffs. In the long run, cities and towns must learn to live within their means. Otherwise, they will enter into a cycle of never ending tax increases. In the end, priorities need to be established.
The government reports the unemployment rate to be 9.5 percent, yet some economists indicate that the true unemployment rate is 16.5 percent. Who is right?
It depends upon how you define unemployment. If you consider the unemployed those who are actively seeking employment and do not have a job, then 9.5 percent is an accurate assessment of the unemployment rate. However, if you define the unemployed to include those who are discouraged and have dropped out of the labor force and those who are in part time jobs, then the unemployment rate is closer to 16.5 percent.
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Robert. J. Cuomo, Ph.D., is the president of Decision Support Associates, a North Andover consulting firm. He is the former dean of the Girard School of Business and International Commerce at Merrimack College. He can be reached by e-mail at bcuomo@comcast.net.
