2012
May 
23

This Week’s Peak Performance Coaching Report and Current Economic Outlook

Filed under: GENERAL — Kerry Johnson @ 3:17 pm  

BANC – MESSINA Combo
If you have done a BANC and the Messina monthly events, you already know how many referrals you can get. One client, Steve Hansen, just reported $270K in commissions by doing a single BANC and only 2 Messina meetings. The beauty of these client events is the level of affluent clients you are able to attract. These HNW clients will never go to a public senior seminar. Actually, the only way they will be available to you is through a referred lead. Yet while many clients are reluctant to give you individual referrals, they will bring their HNW friends to a dinner. 60% of your clients will come to your event. 60% of clients will bring their affluent friends and 60% of these affluent guests will book appointments with you. The only “non-60” result are your clients. 35% of your clients will book appointments with you for new business.

The European Crisis
Greece was thought to be only plausibly likely to leave the European common market and currency. But now it looks highly probable. The European Central Bank (ECB) has spent more than $750 Billion in an attempt to rescue Greece. The thought was that if Greece failed, Spain, Italy and Portugal would be next. But it now looks like Greece isn’t willing to keep their part of the rescue bargain. Greece has fired only 15% of it’s public workers in the midst of massive protests. But now Greeks are on the verge of electing a Socialist government. The new likely political elect has made it clear that if the Central European bankers stop making loans, they won’t pay them back. Sort of like how Charles DeGaulle told JFK in 1962 if the US stopped giving France money, they wouldn’t pay back what they already owed.

Since 20% of the US Economy is based on exports to the EU, the current EU recession will put a damper on an already anemic US recovery. Currently the US GDP is crawling at a 1.8% growth rate. But a Greek failure will put that rate at sub 1%. Unemployment is now at 8.1% and adding only 115K jobs a month. The GDP needs a growth rate of 3% just to maintain 8.1% unemployment.  The only reason unemployment isn’t above 10% is that 3 workers have given up looking for employment for every one that claims unemployment insurance. Currently, only 65% of the work force has a job, the lowest level in 60 years.

The US Economic Outlook
The outlook for the near term until January 2013 is volatililty and more of it. The US had 6 days of 4% market swings in the last 12 months, the most in the last 40 years. But the real crisis will occur in January. The Bush tax cuts will sunset and $600 Billion of spending cuts in the military will trigger at the same time. Most economists predict for every 1% increase in taxes, economic growth will decrease by .3%.

Economic Recovery: Government spending vs tax cuts and private growth
The Obama administration’s policy has been to add jobs through government spending. The supply side economics crowd popular in the Reagan administration focused on economic prosperity through tax and spending cuts spurring small business growth. Unless you follow these policies, you may not know the difference. The article below from the Wall Street Journal explains the difference between Romney and Obama economic proponents. This treatise from Stanford’s Edward Lazear will give you talking points for your 3 month client calls.

Discussion of the so-called fiscal cliff—the combination of tax increases and spending cuts that will come in 2013 if Congress and the president don’t act—confuses a number of different issues. The evidence suggests that we should fear the tax hikes, but not necessarily the spending cuts.Anyone who uses the term “fiscal cliff” accepts a Keynesian view of the economy, knowingly or not. Both tax increases and constrained spending are assumed to be bad for the economy.

But there are two other views: that of the budget balancer and that of the supply-sider. Rather than term the impending changes that will occur in 2013 a “fiscal cliff,” the budget balancer thinks of this as “fiscal consolidation.” Tax increases reduce the deficit, as do cuts in government spending. Both are austerity measures that make the government more responsible and, therefore, both are conducive to long-run economic growth.

Those who support the Simpson-Bowles plan subscribe, at least in part, to this view. Various proponents of the plan may place different weights on the tax-increase side or the spending-decrease side because they believe the economic consequence of one or the other is more adverse. But fundamentally, the target is to decrease the deficit. The budget balancer regards both tax increases and spending cuts as moves in the right direction.

The supply-sider has a different view from both the Keynesian and the budget balancer. Fundamentally, supply-side advocates focus on the harmful effects of tax increases. Raising tax rates hurts the economy directly because tax hikes reduce incentives to invest and because they punish hard work. As such, tax increases slow growth. But budget cuts work in the right direction by making lower tax revenues sustainable. If spending exceeds revenues, then the government must borrow and this commits future governments to raising taxes in order to service the debt.

Consequently, the supply-sider thinks of 2013 primarily as a tax increase and fears what that will do to the economy. The spending cuts are a positive. Unlike the Keynesians who view the fiscal cliff as being bad on two counts, or the budget balancer who views it as being good on two counts, the supply-sider scores it one-and-one. The tax increases have negative effects on the economy; the controls on spending are a positive side effect of the 2013 sunsets.

Which of the three views is correct? Until recently, most economists believed that fiscal policy was inappropriate for business-cycle management, and that if stimulus was needed at all, monetary policy was the best way. Spending “stimulus” does not have a strong track record in recent decades. There is more ambiguity now about the choice between monetary and fiscal policy, in large part because with interest rates near zero, the effectiveness of monetary policy is thought to be more limited.

But even if a fiscal stimulus has some benefit, the cost of fiscal policy is likely to be very large. In order to stimulate the economy, growth in—not high levels of—government spending is required. To provide a stimulus in 2013 comparable to the 2009 legislated stimulus, we would need to increase government spending by about $250 billion.
But the Keynesian view implies that keeping spending constant at the higher level in 2014 would generate no stimulative growth effect for 2014. Despite the higher level of spending in 2014, we would get no additional growth because there is no increase in spending over the 2013 level. Were we to retreat to current levels of spending, there would be a contractionary effect on the economy as government spending decreases. If we want to delay our day of reckoning, we must keep spending at a higher level for each year that we want to postpone the negative consequences for growth. Given the state of the labor market, this could mean a few years. If we waited four years, we would spend $1 trillion to get $250 billion in stimulus.

On the tax side, there is strong evidence that supports the supply-siders. Christina Romer, President Obama’s first chairwoman of the President’s Council of Economic Advisers, and David Romer document the strong unfavorable effect of increasing tax rates on economic growth (American Economic Review, 2010). They report that an increase in taxes of 1% of gross domestic product lowers GDP by almost 3%. The evidence on government spending also suggests that high spending means lower growth.

For example, Swedish economists Andreas Bergh and Magnus Henrekson (Journal of Economic Surveys 2011) survey a large literature and conclude that an increase in government size by 10 percentage points of GDP is associated with a half to one percentage point lower annual growth rate.

The evidence suggests that we should move away from worry over the impending “fiscal cliff” and focus more heavily on concern about raising taxes. And although some Keynesians may view this as not the best time to control spending growth, promising to change our ways in the future is as credible as Wimpy’s promise to pay on Tuesday for the hamburger that he eats today.

Kerry

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