U.S. economic data, including Friday’s positive consumer sentiment reading, has been bringing a bit of early holiday cheer to the stock market, which has been rallying steadily since Thanksgiving. But how is the economy trending longer-term?
For a big-picture view of the economy, AdvisorOne spoke with Milken Institute senior economist Armen Bedroussian (left) about risks and opportunities in the U.S. economy and the job market particularly, where he offers some ideas that could create 6 million jobs when they are totaled up.
Could you suggest some policy changes that would boost employment in America?
We need to modernize export controls. The U.S. has a competitive advantage when it comes to high tech goods, but [in too many cases] the U.S. isn’t allowed to export dual-use tech products. We need to rethink and prioritize the true national security risks out there. We can add 340,000 jobs if we capitalize on this.
The R&D tax credit is critical in attracting foreign investment. We propose to make it permanent and increase it by 25% [from its current 8%]. This would add 510,000 jobs and would have no impact on the budget deficit.
Our corporate tax system influences [corporate decisions about] where to locate their headquarters and production facilities. Our tax rate is now 35%–the second highest among OECD countries after Japan. Compare that to the OECD average of 22%. If we go down to the OECD average, that would create roughly 2 million jobs.
Another idea is an infrastructure investment bank–this was part of President Barack Obama’s jobs act. The bank would provide loan guarantees to private investors to fund projects such as a smart grid, improving roads, bridges, ports, waterways and renewable energy projects. Our analysis shows that would create 3.4 million jobs.
Any other ideas?
We should expand the size of SBA loan program. And we should lift the cap on [employment based immigrant] visas, which is currently limited to 140,000. We need to provide foreign students with a pathway to residency status to keep that talent here, and without increasing the deficit. We also need to explore how we grow our own talent here at home and encourage our students to go into STEM fields [science, technology, engineering and mathematics]. In China, [South] Korea and Singapore, they’ve been increasing the numbers of students going into STEM fields.
Negativity about the economy has reigned over the past several years. Is that attitude still justified?
There’s a lot of cause for optimism, contrary to many people’s beliefs out there. Despite low consumer sentiment and the debt crisis in Europe, there is a resurgence in business investment in equipment and software, purchases of servers and routers, communications equipment. These purchases are being made very aggressively. Natural gas is seeing increased productivity. Exports have remained a big source for growth; they grew 18% compared to a year ago. Exports of high tech products, computers and peripherals should enjoy rapid growth in the next 5 years.
What is currently the biggest risk to the economy?
The principal source of risk is no longer housing. The ongoing sovereign debt crisis is the big elephant in the room. Not only Greece, Portugal and Ireland, but now Italy and Spain are exposed to that. The biggest risk would be a possible recession in the eurozone which would likely have an effect on U.S. exports to the region.
But we’re no longer as dependent on the EU anymore. A 10% decline in exports would result in just a 0.2% hit to GDP growth and a 2% decline in our total exports.
What are you seeing on the jobs front?
We’ve added 115,000 jobs per month on average–not the amount needed to have a meaningful impact on the unemployment rate. In the last report, 315,000 workers dropped out of the labor force–that was the main cause of the unemployment rate going down to 8.6% in November from 9%.
What’s holding back employment gains?
One of the key areas to accelerate job growth is small business. Corporate balance sheets are in pretty good shape. Large companies are doing well, but small and medium companies have difficulty accessing credit. Entrepreneurs have become uncharacterisicially risk averse. There has been a 68% decline in small business hiring in this recession vs. 26% in the previous recession.
Banks are being told to start lending, but regulators are looking over their shoulders telling them to build their capital reserves. Banks are constricted by inconsistent oversight.
Friday’s consumer sentiment report was positive, but has been depressed for several years. What’s happening with consumers?
Consumer markets have actually been bright spot in the economy. We’ve seen U.S. households cut down their debt-servicing burdens. And with record low interest rates, we’ve had pretty healthy consumer spending over the past few months.
One of the main factors contributing to the sentiment index is people’s attitude toward Washington and their disdain for Congress. This feeds into these sentiment indices. So it’s watch what we do, not what we say.
There’s still shadow inventory out there. Existing sales have remained flat, but the good news is the rate at which new housing units are being built is half the rate of family formation. That will restore supply demand balance.