Monday, March 8, 2010

A No-Brainer: Stimulate Job Creation

By Dr. Jason White
Director of Investments
Family Investment Center

With one-sixth of 2010 already behind us – can you believe that?! – and Spring at our doorstep, I think it is a fitting time to again take a look into the economic crystal ball for emerging forces that will drive the domestic and global economy and markets.

Central bankers in the United States have their hand gripping the monetary tightening lever but have yet to give it a yank. The 25-basis point increase in the discount rate, the rate of interest that the Federal Reserve receives on loans to commercial banks, had many chicken-littles in the business media screaming that inflation must be coming in higher than forecast and that higher interest rates for businesses and consumers are coming soon.

In fact, this 0.25 percent increase was little more than a technical adjust by the Fed, with little broad monetary policy implications. Kansas City Federal Reserve President Tom Hoenig is voting for tighter monetary policy, but thus far, he is the only Fed policy-maker to go on the record with this view.

Don’t be surprised if interest rates remain where they are for all of 2010. This is a Congressional election year, and the Federal Reserve has tried very hard in past election cycles to remain monetarily-neutral as to avoid the appearance of favoring one party or another.

Inflation remains tame and unemployment high. These conditions support the thesis that easy money and low interest rates will be with us for the “foreseeable future” as Fed officials have stated.

Job growth has finally clawed its way near the top of the Congressional legislative agenda. Placing divisive health care proposals on the back-burner and coming up with an economic incentive bill for business hiring would make the President considerably more popular AND also be the best use of the legislative agenda at this time. The economy is still losing jobs, as unemployment numbers on Friday will likely show. We need a spark in the private sector, and I don’t think that a health care bill that doesn’t take full effect for several years is going to provide the juice.

A private sector job tax credit makes the most sense to me. Many firms I work with are on the fence with regard to hiring. They are nervous to add to their labor costs but also aware that the economy is growing and product demand will rise soon. A job tax credit for employers lowers the risk of hiring workers, gets people off unemployment and puts more spendable income in their wallets.

Corporate down-sizing has already wrung about as much cost-savings as we are likely to see, which has been reflected in higher than expected corporate earnings. Reduction in leverage and interest expense has also helped, but we are now at the stage in the economic cycle where businesses need top-line sales revenue growth, and that will come sooner rather than later – especially if a job stimulus tax credit is put into effect soon.

Politicians have the power to reduce unemployment, accelerate the economy recovery, and pay for it all from the higher tax revenues (not rates!) that will flow into the Treasury if a jobs stimulus bill is enacted and quickly signed to into law. My next bit of writing will be “Dear President Obama….” It can’t hurt to try!

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