Klepper: Economy needs ‘Positively Happy Index’
By William Klepper
Back in the late 1970s and early 1980s, we had a misery index. This was a combination of the unemployment rate and the inflation rate. In the late ’70s and early ‘80s, this index topped out at almost 20 percent.
Although no longer tracked, the misery rate would be about 6 percent today.
We should be jumping for joy.
Help-wanted signs are popping up everywhere and freeways are packed at all hours. Even at 2 a.m., the 405 has a steady flow of traffic, and Disneyland, the Happiest Place on Earth, is packed no matter what day or what hour you arrive.
Most consumers sense we are in a good economy. We now have six months with the federal tax overhaul under our belt. Tax cuts are boosting consumer spending and business investment. Companies are repatriating large dollars. We only have to look at Apple’s $285 billion of in-flowing funds. One-time tax revenue from all repatriated funds could approach $200 billion-plus in the U.S. Treasury coffers.
There is ongoing debate on whether the tax cuts are hurting or helping the economy. The proof is in the markets. Markets are apolitical. No restaurant removal. No protests. No tweets. Markets react based on pure profit motive.
We are coming off a double-digit, low-volatility stock market year for 2017. Generally speaking, when you have a low-volatility year, it is usually followed by a high-volatility year. The volatility, while unsettling, is actually quite normal. The S&P 500 is in positive territory after increasing almost 22 percent in 2017.
Corporate earnings continue to expand and the gross domestic product for the quarter that just ended is predicted to be between 3.5 and 4 percent of real growth.
Corporate tax rates have now decreased to 21 percent from a high of 35 percent. Repatriation, although a one-time event, may bring an estimated $1 trillion in earnings back into the U.S. Even if those funds sit in a bank and are not used, it still helps the economy. Banks make money by lending. Banks will loan out the funds, which will create more opportunities in the economy from housing to businesses.
While we see discussion on the fact that it is not being used to increase wages, there is a direct link between capital investment and improved wages. The lowering of the corporate tax rate is structural and ongoing. We would be hard-pressed to see a 14 percent reduction in the corporate tax structure as a negative for the economy.
The personal tax cuts are also substantial.
Probably the biggest benefit of the tax-cut act is the raising of the income threshold for the alternative minimum tax calculation. This was an additional tax created in 1969 to capture revenue from the super wealthy. The problem was the income threshold back then was $250,000, a very high number, but it was never adjusted for inflation so eventually, in today’s dollars, it included middle-income taxpayers. So, each year it captured more and more middle-income families.
When most individuals had their 2017 tax return professionally prepared, they were informed of how the 2018 tax cuts act affected them. Most went away feeling a little better about the future.
The trade spat could become a full-blown trade war with higher prices for all, or it could bring about negotiating points to have lower tariffs abroad for increased exports, further helping corporate earnings.
Interest rates at the 10-year mark continue to be below 3 percent. Gold continues to be under $1,300 per ounce. All this indicates that inflation is not to be feared.
With unemployment possibly heading southward and inflation at 2 percent, maybe the misery index is in need of updating to the Positively Happy Index. Enjoy this moment in time.
• William Klepper is a certified financial planner and a senior adjunct faculty member in the California Lutheran University School of Management.