Archive for November, 2010

No Deal: South Korea Trade

Tuesday, November 23rd, 2010

President Obama returned from his Asia trip earlier this month without accomplishing one of his principle goals: negotiating a new free trade agreement with South Korea.

Smeal’s Terrence Guay explains what tripped up the deal and what it indicates about the U.S. and global economies:

President Obama’s November trip to Asia sought, among other initiatives, to finalize a free trade agreement with South Korea. With negotiations concluded and a treaty signed in 2007, the U.S. Congress balked at ratifying the treaty. In effect, President Obama tried to persuade the Koreans to amend the treaty to allow greater access to U.S. automobile and beef exports.  His inability to do so reflects several changes in the domestic and international political economy.

First, South Korea successfully stood up to U.S. pressure to change the terms of the treaty. The Asian country refused to weaken its fuel economy regulations, which are higher than U.S. standards and impose additional costs for U.S. auto companies seeking to expand into the Korean market. Also, due to citizens’ concerns about the safety of U.S. beef (the “mad cow” phenomenon), the Korean government refused to relax its regulations on beef imports.  That two products presented an obstacle to completing a trade agreement with our seventh largest trade partner suggests that American influence on global economic matters is in decline.  For further evidence, see the inability of the United States to persuade other countries at the G20 summit this month to apply pressure on China to revalue its currency, or the nine-year (and counting) negotiations on the World Trade Organization’s Doha round of global trade talks.

Second, the failure to reach a trade deal with South Korea underscores the growing distrust of many Americans and politicians of the benefits of global trade and investment flows, especially during “the Great Recession.” The global economy played virtually no role in the recent Congressional elections, other than the simplistic campaign ads blaming China for our economic problems. And while a Democrat-controlled Congress was wary of approving trade agreements with South Korea, Panama and Colombia for a variety of reasons over the past three years—including concerns about labor and environmental issues in those countries—it is not at all obvious that a Republican-controlled House of Representatives will pursue trade agreements with any greater fervor. Most economists expect modest contributions to domestic job and economic growth should these trade deals ultimately be implemented. But with opinion polls consistently showing an American public wary of globalization, the benefits of free trade, and the increasing global influence of other countries, there is little to be gained by congressional Republicans or Democrats using political capital on an issue where the benefits are not widely acknowledged.

Tags: Economy, Globalization, Guay, International Relations, Politics, Trade
Posted in News | 18 Comments

Refocus Black Friday

Monday, November 22nd, 2010

With the holiday shopping season kicking off on Friday, retailers are falling over each other with their black Friday sales designed to get shoppers into their stores. According to Smeal’s Lisa Bolton, however, the retail industry should be trying to wean consumers off of their focus on price.

From Smeal’s Research with Impact website:

There are other elements retailers need to think about and push for in order to take some of the emphasis off price.

“Besides having the right price promotions in place, it’s critical to consider the consumer’s overall shopping experience,” Bolton says. “Retailers have to figure out ways to get beyond price and offer something that consumers are looking for.”

She adds that thinking about elements like parking, cart availability and overall atmosphere are not trivial. These details help create a pleasurable experience that may entice shoppers to come into a store, stay longer, and purchase more.

On the other hand, Bolton knows that the recession has made consumers overly sensitive to price. The continual low prices have conditioned consumers to buy on promotion, so it will be a challenge for retailers to change consumers’ mentality.

“This is a difficult problem for retailers,” she says. “If you move away from price and your competitor stays with price, then you’re at a disadvantage, so it’s almost as if the whole industry needs to figure out how to move consumers away from price.”

In an ideal world, retailers want to move away from price altogether and get consumers focusing on quality. However, Bolton thinks that this ideal world may be far off. Given the past few years, she admits it’s going to be challenging for retailers to wean consumers off sales promotions.

Tags: Economy, L. Bolton, Marketing, Retail
Posted in News | 6 Comments

Smeal Faculty on the Fiscal Commission Recommendations

Tuesday, November 16th, 2010

The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform last week released their preliminary recommendations for increasing tax revenues and reducing federal spending in an attempt to bring the deficit under control. Calling the debt a cancer that will destroy the country if not fixed, co-chairs Erskine Bowles  and Alan Simpson proposed cuts to everything from defense contracting to the White House budget to the federal workforce.

Below, Smeal faculty members Ron Gebhardtsbauer, Austin Jaffe and Anthony Warren weigh in on three of the recommendations.

Ron Gebhardtsbauer, faculty-in-charge of the Actuarial Science Program, on the commission’s Social Security proposals:

In the process of putting our fiscal house in order, the Obama Fiscal Commission also gets Social Security back in financial balance, which is great. The most important fix is indexing the retirement age to our increases in longevity, which makes Social Security sustainable, and encourages people to work longer.  Without indexing, Social Security’s finances go out of balance as we live longer.  And it’s not draconian at all.  They very slowly raise the normal retirement age for full benefits to age 68 in 2050 and around age 69 in 2074.  This won’t affect older workers, and middle age workers won’t be affected much.  Older workers in physically demanding jobs will be able to get disability benefits under an easier disability definition. 

I also like that they are finally making Social Security truly universal by covering the remaining state and local government workers (although that will be tough to get through Congress, as the large states have lots of power). 

There are many other fixes, which I’ll discuss in a later blog. 

Austin Jaffe, chair of the Department of Insurance and Real Estate, on the possibility of eliminating the mortgage interest tax deduction:

Perhaps the “sacred cow” of U.S. housing subsidies has been the mortgage interest tax deduction. Even when consumer interest was disqualified, interest deductibility from a mortgage was preserved. Recent discussion has raised the possibility that subsidizing mortgage interest payments is no longer a worthwhile policy. The Deficit Commission has suggested limits on mortgage interest deductibility: The benefit would only be available for primary homes, no interest would be deductible from home equity lines of credit, and no deductions would be available on mortgages larger than $500,000.

Here are some areas of current debate:

1.  The costs of lost revenue are being raised over and over again these days. The Joint Commission on Taxation estimated that it cost $80 billion in 2009 alone. About one-half of homeowners claimed tax benefits were a “major reason” to buy. Yet many households do not itemize their deductions (including about 50 percent of homeowners).

2.  Poterba and Sinai’s 2010 study found that 2.8 million households with annual income over $250,000 saved about $15 billion, while 19 million households with incomes between $40,000 and $75,000, saved only about $10 billion. The savings to middle- income households amounted to $542, or $1.48 per day. This is hardly sufficient to become a homeowner.

3.  Finally, commentators are now beginning to wonder if the deduction is a destabilizing force in housing markets. Inducing homeowners to borrow for consumption of housing services may add additional volatility to house prices since indebtedness adds financial risk to the system, especially when prices are dropping. This is another example of distortions created by providing incentives via the tax code.

There are other issues including the capitalization of tax benefits into current prices before the purchase takes place, comparisons of housing markets in countries without interest deductions, violation of horizontal equity of renters, and others.

After all of these years, it would truly be amazing if this well-liked tax subsidy would be rescinded even if the benefits are not as great as is typically thought relative to the costs.

Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, on the Bowles-Simpson recommendation to merge the Department of Commerce with the Small Business Administration and cut the new entity’s budget by 10 percent:

For many years the Small Business Administration has been the poor cousin among government agencies with the result that small companies have suffered from inadequate representation in Washington.  Recently for example, the administration has supported larger corporations rather than the lifeblood of the economy, innovative job-creating small firms. Therefore there is a concern that smaller companies will now lose any voice that they may have had for the illusion of ever elusive cost cuts.  It would be better to double the Small Business Administration and half the Department of Commerce.

Tags: Economy, Entrepreneurship, Gebhardtsbauer, Jaffe, Politics, Real Estate, Social Security, Taxes, Warren
Posted in News | 7 Comments

President, New Speaker to Talk Taxes

Wednesday, November 10th, 2010

From the Los Angeles Times: “House Republican leader John Boehner signaled Wednesday that he was unwilling to compromise on a permanent extension of the so-called Bush tax cuts, saying preserving current rates is ‘the most important thing we can do to create jobs.’”

Smeal’s resident tax expert Charles Enis agrees that extending the tax cuts may boost economic growth, but there’s also that pesky deficit that needs some attention:

If we allow the tax cuts to expire and the tax rates go up, this could mean trouble for the economic recovery. Right now, you have some policy-makers declaring the recession is over, but try telling that to someone who’s out of work. That’s the problem—jobs. You can say the recession is over but that doesn’t help all those people who are out of work. Will higher tax rates hinder these people from getting back into the workforce? Possibly.

On the other hand, there are those who want to let the tax rates increase. We have a huge budget deficit. We need the tax dollars to pay down the deficit. There are a lot of people arguing that the Bush tax cuts favor the wealthy and that it’s really not a fair distribution of the tax burden.

By making the tax cuts expire, you may create a perception that the tax code is fair and may get additional revenues to pay down the deficit. On the other hand, by keeping the tax cuts, you may be able to have a quicker economic growth and be able to get people back to work.

Regardless of whether the tax cuts are extended or not, Enis says lawmakers should take the opportunity to simplify the tax code:

Congress has a good opportunity here to improve the transparency of the tax codes. For example, if they let the tax cuts expire for the upper income categories, the maximum statutory rate will rise from 35 percent to 39.6 percent. I would say let that happen, but to counter that, fix permanently or get rid of the alternative minimum tax (AMT).

Additionally, part of the Bush tax cuts was to repeal Section 68 of the code, in which high-income taxpayers lose a certain portion of their itemized deductions. This is, in effect, a tax. When you take away deductions, it detracts from the transparency of the code. It was repealed gradually and done away with finally in 2010, but the phase out of itemized deductions and exemption allowances comes back full force in 2011 if the Bush tax cuts are not extended.

The phasing out of itemized deductions and exemption allowances let that go away. They should extend the repeal advantage. In other words, you’re going to have a higher marginal tax rate, but you’re going to do away with a lot of these unobtrusive hidden-type taxes, which I think would be a great opportunity.

If you’re going to go and say to the wealthy people, we’re going to let your tax rates go up as high as 39.6 percent, then I think you should also tell these people that they no longer have to worry about their itemized deductions, exemption allowances, and the AMT.

There’s more from Enis on Smeal’s Research with Impact website.

Tags: Accounting, Economy, Enis, Politics, Taxes
Posted in News | 3 Comments