The U.S. and World Economic Outlook

Robert Heller

The World Economy Will Grow Slowly

Overall Growth 3 ½ %Positive: Monetary Stimulus Lower Oil PricesNegative: Exchange Rate Swings Increased Regulation Military Conflicts in Middle East, Africa, and Eastern Europe

Oil Prices Drop By Half

• U.S.: Very Little Net Impact

• Europe: As Oil Importer Grows Faster By ½ %

• China, India: Potential Growth Impact: + 2 % But 1 % Accrues to Government

Exchange Rate Changes

Appreciating Currencies• U.S.: Exports Fall, Imports Up:

GDP Drops - 1 %• China: Net Exports Fall:

GDP Drops - 2 %Depreciating Currencies• Europe: Net Exports Increase:

GDP Up by 2 %• Japan: Net Export Up:

GDP Increases by 1 %Net Expansion of World GDP as US and China Drop Offset Partly by Stimulative Monetary Policy

Europe Regains Its Footing

• Growth Returns to 2 %• Low Oil Prices Stimulate

Expansion• Quantitative Easing

Supports Stock Market• Labor Markets Need More

Flexibility • Low Productivity Growth • Italy, Spain, Portugal Begin

to Recover• Greece Does Not Cooperate

Asia: The Global Growth Leader Benefits from Lower Commodity and Oil Prices But: Lower Export Growth and Higher Debt Levels

China• Growth Slows to 6 ½ %• Housing Slowdown• Investment Decrease• But Consumer Sector

Enjoys Expansion • Lower Productivity Growth

Taiwan• GDP Growth Picks Up

From 3.8 % to 4 %• Low Inflation: 4 %• Strong Current Account

Other Asia: Japan and India

Japan• From Stagnation to

Low Growth of 1 %• No Population Growth• High Retirement Burden• Consumption Tax Increase• But: QE Helps Stock Mkt.• Lower Yen Spurs Exports• Soft Oil and Commodity

Prices

India

• Strong Growth Increases From 7 % to 7 ½ %

• Lower Oil Prices Help the Poor

• Policy Reforms Lead to More Entrepreneurship

The Rest of the World

Latin America

• Stagnation Dominates• Brazil and Argentina Negative

Growth Due to Bad Policies• Venezuela is Political Disaster

Amplified by Oil Price Drop 100 % Inflation and 10 % Unemployment

• Chile, Peru, Colombia Etc. Grow Comparably Well at 3 %

Middle East• Major Conflicts Rage in Syria, Iraq

and Yemen• Oil Prices Drop• But 3 % Overall Growth

Africa• Unrest in Many Countries: Libya,

Somalia, Kenya, Nigeria• Ebola in Western Africa• Most Countries at Poverty Level• But 5 % Growth From Very Low

Levels

Global Growth OverviewBlue is Strong; Red is Weak

U.S. Slow and Tepid Recovery

• Slowest Recovery Since World War II

• Strong Fiscal Stimulus• Unprecedented Easy

Monetary Policy• BUT: Higher Tax Rates

And New Regulatory Burdens Retard Growth

• RESULT: Secular Stagnation

Record Deficits Lead to Record Debt

Fiscal Stimulus Since Recession…Leads to Sharp Increase in Federal Debt (Over 100% of GDP)

Expansionary Monetary PolicyRecord Low Fed Funds Interest Rates

Federal Reserves Holds Record Level of Assets

Federal Reserve Goals

Fed Wants to Achieve:1. 5 % Unemployment2. 2 % Inflation

Higher Wage Growth Would Make Both Possible and Janet Yellen Would be Very Happy

But Paul Volcker Would Frown:“Once the tooth paste is out of the tube -- It is hard to get it back in again!”

Recent Government Actions Retard Growth

• Tax Rate Increases• Sarbanes Oxley Act• Dodd Frank Act• ObamaCare• New Regulatory

Agencies: PCAOB, CFPA

Higher Tax Rates Slowed Growth

Average Taxes Actually Paid• Marginal Income Tax Rates: UP 24 %

• Capital Gains Tax Rates: UP 59 %

• Estate Tax Rate: UP 14 %

• Highest Corporate Tax Rate in the World: 35 %

Sarbanes Oxley Act

• “The Most Far-Reaching Reforms of American Business Practices Since the Time of FDR.”

President George W. Bush

• Established the Public Company Accounting Oversight Board

• They Audit the Auditors• Mandates Controls for

All Major Cost Items• Average Compliance

Costs: $3 Million / Year Per Company

Dodd Frank Act

“The most sweeping overhaul of the U.S. Financial Regulatory System, a Transformation on a Scale not seen since the Reforms that Followed the Great Depression” President Obama

• Established the Financial Oversight Council

• Established the Consumer Financial Protection Bureau

• Mandates 243 New Regulations – Many of which have not yet been written

Costly New Regulatory Agencies

Consumer Financial Protection Bureau -- CFPB• Established by Dodd

Frank Act• Oversight over Banks,

Credit Unions, Mortgage Servicers, Securities Firms, Debt Collectors, etc.

• Funded Off-Budget by the Federal Reserve

Public Company Accounting Oversight Board – PCAOB• Established by Sarbanes

Oxley Act• Oversight over Audit

Firms that Audit Public Companies

• SEC Has Oversight • Funded by Fees on

Accounting Firms

The Patient Protection and Affordable Care Act“ObamaCare”

• Increases Medicare Taxes by

.9 %• Imposes New 3.8 % Tax on

Unearned Income• New 40 % Tax on High

Health Insurance Premiums• New 2.3 % Tax on Medical

Devices• $ 60 Billion Annual Fee on

Health Insurance Providers• $ 27 Billion Annual Fee on

Drug Manufacturers

The Health Care Cost Problem Remains Unsolved

• ObamaCare Does Little to Reign In Costs

• More People Are Covered

• Longevity Is Increasing

• Modern Medical Technology Is Expensive

What Needs To Be Done?The German Policy Actions in 2003

• Social Democrat Schroeder Passed “Agenda 2010”• Maximum 12 month Unemployment Benefits• After 12 months, You Go On Welfare With Euro

345 Maximum Benefit per Month• Pension Age Increased From 65 to 67• Cut Maximum Tax Rate From 48.5% to 42%• Increased Health Co-Payments and

Eliminated Dental Coverage• More Open Labor Market: Easier Hire/Fire• RESULT: The Unemployment Rate Dropped From 10.6 % in 2006 to 4.7 % Now – Best in Europe

What the U.S. Should Do

• Rationalize Tax System• Reform Social Security• Lower Health Care Cost• Reduce Welfare Costs• Reduce Debt Growth• Regularize Monetary

Policy