2006 Economic Outlook About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post.
His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer. His column archive is online here. Fairfax, Va.: Since the tax reform commission released its report late last year, I haven't heard much about tax reform because of other pressing stories in the news. I was wondering if congress would even consider legislation to overhaul the tax system this year? Steven Pearlstein: As it happens, I inquired about this very thing this morning at the White House. I'm a big fan of using the recent tax reform commission report as a starting point for a comprehensive discussion about taxes this year. I think it provides a way out of the stalemate that seems to have developed, politically, over the extension of the Bush tax cuts. But with the Republicans in such disarray in the House, and the President a bit on the ropes politically, I'm not sure they are going to opt for reframing the tax issue in this way. It would be a gutsy move, but it runs the risk of making the issue more complex politically and legislatively. Indianapolis, Ind.: My husband is 60 yrs old, I am 54 yrs old our home is paid for, 3 adult children still live at home but my husband and I want to sell our home and move to Maryland (all of my family is there and hopefully it might get those boys out of our house!) In order to sell the house we need to do some major repairs, roof, gutters, some wood work, paint inside and out etc. nothing fancy just make the house presentable to sell. I hate the thought of another mortgage payment, we paid this home off in 15 years. Do we go for the new type loan of just paying the interest, which is what most lending places want to do or a conventional type mortgage for 15 yrs with the thought of paying off that mortgage when we sell the house and using whatever proceeds left on a down payment for another home in Maryland? I realize we will not be able to have jimmy choo black and gold the type home in Maryland as we do here in Indiana but hopefully it will just be my husband and I. Steven Pearlstein: Its probably not a good idea for me to give personal financial device. But as a matter of simple logic, if you are planning to sell your house soon after your repairs are made, a simple home equity loan may be the best solution. The first year rates on those are often very attractive, below market rates. Sterling, Va.: I have relocated to N. Virginia from Texas. I am in the market for a new house, when is the good time to buy. Shall I wait and see how the market will be in the spring 2006? Please provide some details on the future housing market as I am not comfortable spending around $600,000 $700,000 for a house and take a dip in prices in the coming two years. Steven jimmy choo trainer boots Pearlstein: Ah, more requests for advice. If you have the possibility of a flexible rental, I'd stay there at least until May and see how the market shapes up in the spring. The risk that prices will rise much is pretty low, and there is a good possibility that there will be another leg down, particularly in the new home market in that area. Thanks for a dose of reality on the economic front. Perhaps you could also link David Broder's column from 9/11/05 on the inevitability of economic calamity. 11, 2005 Steven Pearlstein: The twin deficits are more symptoms of the problem than the problem itself, namely an addiction to debt financed living standard. They can't persist. I'm not sure the consequence of not dealing with them is calamity, although that is a possibility. More like, it will result in a slow, at times imperceptible, decline in our relative standard of living and control over our own destiny, a bit like what has been going on in Europe for the past couple of decades. Annapolis, Md.: Steve the interest rate curve recently inverted, but has now flattened out. What is the long term affect of an inverted interest rate curve? Steven Pearlstein: There is no long term effect of what is normally a short term phenomenon. Again, it is more a symptom than a cause. In the past, it has usually been a signal of investor's expectation of slow economic growth in the future, which usually is accompanied by price disinflation. But in today's globalized financial markets, its not that simple. A lot of it now has to do with supply of capital looking for relative yield, and it may be that the low rates at the long end of the curve have more to do with this supply effect than any consensus about future inflation. The short end is obviously being pushed up by the Fed. If it persists, an inverted yield curve traditionally has an impact on bank profits and thus bank lending (banks, if you think about it, borrow short and lend long, so an inverted curve is bad for business). But in today's financial markets, banks can now more easily adjust their sources of funds, and mitigate the impacts of an inverted curve. So in and of itself, it may not be so worrisome. Still, I think we all ought to be careful about ignoring signals from markets. Steven Pearlstein: The energy market will continue to be very bumpy, so get used to it. A lot of speculation. A lot of world events, like the Russian Ukarian gas spat, that affects short term price swings. A lot of major users considering shifts from one fuel to another, which has a big impact on demand. And the jimmy choo sparkly shoes weather has become more severe, in case you haven't noticed, due to global warming, which also affects short term prices. I think it is fair to say, however, that you're not going to see much gas below $2 per gallon going forward. : This is a broader question but on my mind of late: there are several seasonal economic patterns that seemingly are misrepresented in news coverage. Namely, every summer employment numbers jump for summer work and home sales go up, while the reverse happens in winter months. While summer home sales are credited to that season, the other variables often seem to generate implications of doom in reporting. For example the recent coverage of a housing 'slump' jimmy choo jimmy choo jimmy choo in the last couple months, likewise every summer we get falsely celebrated employment numbers. Am I wrong, nuts, too much time on my hands, reading the wrong paper (WashPost)? Steven Pearlstein: You're not nuts. The seasonal adjustments take years to catch up with structural changes in various markets labor markets, housing markets, etc. So you have to look at three month moving averages, or year over year changes in some of this data to get a fuller picture. In any case, people should not put much emphasis on one month numbers, as they shouldn't put too much emphasis on corporate quarterly reports. The reason is fairly obvious 25 years of economic policies directed at improving the return on capital at the expense of the return on labor have concentrated wealth in the hands of the people who have lots of it. Ordinary Americans have been financing their lifestyles through their homes, and since you can't borrow any more when your equity declines and your variable mortgage rate goes up, we're about to stop spending. I think we're entering 1974, and its going to take us half a decade to climb out, at which time the baby boomers start retiring. The only question is whether the next political wave favors workers or Social Security recipients. Steven Pearlstein: I'm not normally given to class oriented economic analysis, but it appears there has been a shift in the share of national income going to capital rather than labor, which heretofore had been a remarkably stable number (allowing for adjustments depending on what portion of the business cycle you are in). Capital income is even more unevenly distributed than labor income, so this trend is increasing pre tax income inequality. That's probably not a good thing. So we need to consider both policy tweeks to reverse that trend in pretax income(reform of labor laws to make it possible to organize unions again, raises in the minimum wage, mandated catastrophic health coverage) as well as making the tax and benefit structure a bit more progressive than it now is. The Republicans refuse to have a conversation about this reality, so the only hope for relief here is a change in control of the White House and the Senate. I am planning to shortly buy a second home for investment at Hilton Head. No plans to flip in fact I plan to hold, rent out on an annual basis, and hopefully keep it for 5 or more years. Am I nuts? It's a fairly new home, (an actual house with garage and yard, not condo) and the area is booming/growing from what I can tell. I'm hearing from a few people don't do it, we are heading for a recession, you will be stuck holding the bag, what if you can't rent it out, etc etc. The house has appreciated about 25% since it was built 3 years ago and I'm not looking to flip it. Is this still a good idea or should I just sit tight and wait? currently, I can manage both my own home mortgage and the second one if it indeed never rents, which is unlikely. Steven Pearlstein: If you are planning to open a boutique, don't worry about the economy. Either you will offer clothes that fill a need that is not being met now, and therefore you will be taking market share from others, or you won't. But the size of the overall pie won't matter much. You would be too small a player for that to matter much. Silver Spring, Md.: So if corporate profits are so high that they are struggling to find ways to spend it all (you mentioned stock buybacks and questionable acquisitions), why not pass a little of that down to the rank and file? Corporations can say that they are shoring up their customer base by increasing their employees' spending power. Or they could call it upgrading their human capital. Isn't that how tinkle down, er, trickle down, theory is supposed to work? Steven Pearlstein: That's not how the world works. No employer is big enough so that what he/she does re: employee pay can affect overall aggregate demand in the economy. And companies are in the business of maximizing profits, not looking out for the long term welfare of the American worker. Just as you look to pay as little as possible for the things you buy, so do companies, including labor. Pay too little, and you get a loss in quality.
But at some point, there is a diminishing return to paying compensation that is too much above market, and in the long run risks making the firm uncompetitive if the economy were to slow. In theory, companies could reduce compensation in hard times. In reality, it makes workers very upset and so is very hard to do.
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