AN ECONOMIC FORECAST AND POLICY PROSPECTS

The economy is stagnating today because everyone is waiting for someone else to restart the recovery. Consumers are deferring major purchases until job prospects are rosier. Businesses are pushing down their inventories and payrolls until their order books surge. In essence the economic fundamentals are sound, but at this point, we need a new catalyst for recovery. It is time to implement policies that directly stimulate investment including a self-financing equipment tax credit for productive equipment purchases, adjustment of Federal Reserve and Treasury market activities in order to lower bond rates, initiation of a bounty for scrapping old cars, and the channeling of a higher proportion of public funds to public investment in health, education, sCience, and advanced infrastructures

Is inflation dead?

In the past few years the United States has enjoyed the unique economic duet of very low unemployment and declining price inflation. For decades, we have come to associate tight labor markets with accelerating wages and prices. But in 1997, the unemployment rate sank below 5 percent, and neither wage nor price inflation became a problem. Have our inflation processes fundamentally changed for the better? Are we in a new era of permanently better economic performance due to new behavior by our citizens? Or are we simply enjoying good luck in the form of positive supply shocks? A careful reading of the full inflation story reveals that nominal wage inflation has been subdued by exceptionally modest price inflation, according to the author. Real, or price-adjusted, wage inflation has been increasing in response to low unemployment, just as in past decades. Price inflation has been held down by a set of "supply shocks," including a strong dollar, falling energy prices, and a cost-reducing regime shift in the healthcare industry. Inflation is not dead, and as supply shocks shift to neutral or worse, tight labor markets will create a traditional inflation problem.Inflation (Finance)

Fiscal Realities for the State and Local Governments

The U.S. economic slump of 2008, as usual for all economic slumps, has taken a dramatic toll on state and local government revenues and budget surpluses. As predictable as this is when properly modeled, states in particular have been even less well prepared than normal. Therefore, it appears that government budget officers, policymakers and their economic advisors, and private-sector economists need help in understanding the external and internal drivers of budget outcomes. A primary goal of this study is to quantify the highly regular, cyclical revenue patterns that emerge when actual revenues are purified of legislated changes. This should assist policy formulation today—as states consider higher tax rates or borrowing—by promoting an understanding of what is temporary and what is permanent in the current revenue weakness. Moreover, if these lessons are learned, future revenue forecasting and budget planning at the state and local levels should be materially enhanced. A second goal is to examine the true sources of the exceptional expenditure growth that precluded the normal buildup of a solid surplus during the economic boom of 2003-2007. The principal culprit is shown to be state and local government pay inflation that has far exceeded private sector norms for the past three years rather than an exceptional medical care burden, as some might think.Business Economics (2008) 43, 55–62; doi:10.2145/20080206

Optimizing Tax Strategies to Reduce Greenhouse Cases Without Curtailing Growth

Increasing federal gasoline taxes is one of the policy options available for reducing gasoline consumption and the resulting carbon dioxide (CO2) emissions that contribute to global warming. At the request of the U.S. Environmental Protection Agency (EPA), DRI/MeGraw-Hill (DRI) estimated the levels of gasoline tax that would be necessary to stabilize CO2 emissions from the light-vehicle fleet over a 20-year period, and the economic impacts of such a tax. Three options for utilizing the revenues generated are examined: a reduction of the federal budget deficit, a reduction in personal and corporate income taxes, and a reduction in the emnployer paid portion of payroll taxes. Each option would yield markedly different levels of economic performance: while the first two options would result in reductions in economic growth, the third option (a reduction in the employer-paid portion of payroll taxes) would result in relatively slight negative economic impacts in the short term and positive economic impacts in the long term.