Tuesday, January 25, 2011

Your State of the Union Prep: Economic Outlook for 2011

The Commonwealth Club hosted a private, off-the-record panel discussion on the U.S. and California economies, prior to the member’s-only Bank of America/Walter E. Hoadley Annual Economic Forecast luncheon on Friday, January 21, 2011. Panelists included former U.S. Representative and California State Finance Director Tom Campbell, former Semiconductor Industry Association President George Scalise, Public Policy Institute of California economist Dr. Jed Kolko, and Brian Riley, managing director of Merrill Lynch.

In light of the expected focus by President Obama on jobs and economic growth in tonight’s State of the Union address, we thought some of the ideas and observations of the panelists last Friday might be of interest. Because the session was not for attribution, we have not identified the individual sources of the observations below.
• In California, increases in output are still outpacing employment growth. The latest statistics on California unemployment rates show a recent rise: the jobless rate in the state now stands at 12.5 percent.

• The semiconductor industry experienced 30-percent growth in the past year, and technology and electronics remains California’s largest export industry. There was 10-percent growth in both the film and tech industries overall. But with the manufacturing companies mainly investing in capacity overseas, the future picture is not so rosy. In the longer term, based on decisions that have already been made and are being made, the growth and the jobs will occur outside of California and much of that outside of the United States.

• The federal budget deficit is extremely worrisome. Currently 38 percent of our budget is borrowed. The national debt has escalated to $45,000 today for each person in the United States. This is about triple what it was in the mid-1990s. Investment by business, particularly by small businesses, is driven by future profit expectations; large federal budget deficits increase uncertainty about the future stability of the economy. The result — businesses invest less and thus hire fewer workers. This, in turn, impedes the economy's recovery.

• The budget deficit must be addressed through Social Security and Medicare means-testing, probably also through cuts in defense spending. Unfunded pension liabilities must also be addressed.

• One thing the federal government could do to encourage businesses to hire employees would be a moratorium on costs to hire new employees, for a year. The cost of a new hire now is $10,585 in addition to salary, with required benefits and other costs imposed by regulation.

• The government must create incentives for companies to build their facilities and base their business in the United States. A five-year tax holiday for companies would have a dramatic impact. The economic activity caused by the resulting job creation would compensate for the lost tax revenue three to four times over.

• There is $1.8 trillion of cash on hand in the private sector. Economic policy needs to take the appropriate steps to increase confidence and certainty, such as reducing the deficit and creating incentives for businesses to expand and do it here in the United States.

• The industries that have been hurt the most will be the sites of most growth in the future – e.g. housing construction.

• Expanding sectors will include professional business services. Health care and nursing will be important, due to the aging population.

• Agriculture is still the largest industry in California, but government policy is getting in the way. The limits of access to water (federal regulations) and labor (immigration) are limiting the growth of this industry.
• The underfunding of higher education in California is a serious threat to our long-term leadership in technology, medicine and the other fields in which the United States and California have been so successful.


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