May 5, 2011
Host: Ted Simons
Economic Outlook Luncheon
- Find out what local economists had to say at the Annual Economic Outlook 2011 luncheon presented by the Economic Club of Phoenix.
- Dennis Hoffman - Professor of Economics, ASU
- Robert Mittelstaedt - Dean, W. P. Carey School of Business, ASU
Ted Simons: Arizona State University economists spoke at an annual economic forecast luncheon today in Scottsdale. The panel addressed the latest on a variety of economic issues. Joining us now, on "Horizon's" continuing look at economic development, are two of today's panel members -- ASU economics professor Dennis Hoffman. And Robert Mittlestaedt, dean of the W.P. Carey School of Business. Good to see you both here.
Dennis Hoffman: Good to be here.
Ted Simons: Dennis, start with you. Are things getting better? If so, how much?
Dennis Hoffman: Well, most of the consensus is that we're going to have a lot of head winds going forward in a pretty sluggish -- continued sluggish recovery. I'm talking about consensus; personally, I'm seeing a few rays of sunshine in some of the revenue numbers I look at. I'm talking about taxable retail, the purchases of consumer durables and in the pace of estimated payments, in the income tax receipts. So I think there's a possibility that we could surprise a little bit here on the upside. I am certainly hopeful.
Ted Simons: Do you think we could see a surprising upside here or both locally, nationally, things going to be sluggish for a while?
Robert Mittlestaedt: I think sluggish for a while. As long as ago as a year ago, I thought we would have a sector-driven economy and by that I mean sectors will do well and certain sectors will remain in the tank for a very long time. And in particular as it relates to Arizona, the housing industry, we have mass have massive excess supply - nationally and in Arizona. That sector is not going to do as well. Right now, you see multi national companies that export overseas doing extremely well because the rest of the world is growing too. But, well domestically, I think we have problems.
Ted Simons: Dennis, talk to us about the housing situation. How much of a drag is that on the entire economic picture?
Dennis Hoffman: Oh! In Arizona, it's a tremendous drag. Any recession we've had in the post-war period Ted, has been very V-shaped. This one not at all V-shaped. Just a long drawn out bottom. I'm seeing signs of bounce off that bottom, but -- but why have people been so hesitant to consumption and buy things? It's housing wealth and the evaporation of housing wealth and it's a huge headline on the economy.
Robert Mittlestaedt: And this has a psychological effect,a big one. We've never had a recession in modern times where we had this big of a drop in housing across the entire country. In the past, it's been local. The wealth effect Dennis talks about is well documented by socialists and economists. Even if you have a job, even if you have an income coming in - if you don't feel as wealthy, you’re not likely to spend.
Dennis Hoffman: The wealth erosion this time is far greater than wealth erosion in '29.
Robert Mittlestaedt: Yeah.
Dennis Hoffman: We know what happened after that one.
Ted Simons: As far as Arizona housing picture, talk about in-migration and the fact that people aren’t moving here that much. First of all, is that just a national snapshot of the housing industry? You can't sell a house in Michigan so you can't move to Arizona?
Robert Mittlestaedt: I think that’s true. But it’s different in different parts of the country. And anecdotally, you see people commuting long distances to jobs because they can't sell their homes; they are living separately from the rest of their families. It's real, it's people-anchored, I think.
Ted Simons: Are these folks gona be coming back, and if so, when? I thought I saw on the report someone predicted maybe 600,000 new folks here by 2015. 2015?
Robert Mittlestaedt: Right.
Dennis Hoffman: That would be on pace with what we've observed in the past. So I think -- here's the challenge, Ted. We have to decide, you know, are all of the old dynamics and metrics irrelevant? That's what people thought in '89 and '90 and '91. We will never come back. Nobody will ever want to move here. I'm of the mind we have some of the basic fundamentals in place, that still maintain our position of people magnetism. We have demographics working in our favor, there are a number of retirees eyeing a move to Arizona for some time. What's holding them back? It's the wealth in their portfolios, their ability to retire and ability to sell houses where they are. The whole driver for Arizona historically, great climate, great place to be, great quality of life and affordable housing. All of those are in place right now.
Ted Simons: Ok. Another thing we need to worry about, whether or not this is in place – jobs. And we have a couple of graphics here to look at the nation as a whole and where Arizona stands. As far as job growth is concerned, the graphic shows we're 47th in the country, what's going on here?
Robert Mittlestaedt: Well, what's going on is we're 47th in the country. At the luncheon today we had a quiz and asked them to guess which state was worse and everybody yelled out Nevada. So the -- you see job growth now in Michigan and Michigan has been going down for a decade but they have positive growth of the problem is that the housing industry here was such a big piece of the economy. I agree with Dennis, in terms of people wanting to come here, but the problem is we're not creating jobs that attract people from a distance. If you look at the same luncheon we had a year ago, Lee or Dennis, at the end said at least we're creating jobs, but they're in government and healthcare. And those aren't jobs that create growth in the economy. It's not that we're -- it's that we're not creating great jobs.
Ted Simons: The forecast up to 2015 shows that the red turns to green and folks will be moving here and working here and everything will be rosy?
Dennis Hoffman: Well, you're painting a picture where we'll be back to some frenzy like we were in the mid 2000's and that's not the case. Those growth rates if you look at them historically are no big deal. It's a suggestion on the part of the most logical way of putting models together is that some of that basic magnetism will come back and -- magnetism will come back and folks will move here, I like the affordable housing situation and the attraction of this state, we -- we don't have category five hurricanes, we don't have severe tornadoes, we don't have earthquakes. It's the same old magnetism we've always had.
Ted Simons: Is that going to attract high-paying jobs, bigger industries, or more small jobs, small business growth?
Robert Mittlestaedt: I think these things will attract retirees and may attract somebody young who comes here without a job hoping they're find something because they like the climate and environment. I don't think it's going to by itself going to attract the people. I mean, if you remember, jobs have to come before people. I mean, and the jobs that were here before the people in the last decade were construction jobs and that's what grew the last few years of this before the bubble burst. So what we need to look for is how many other manufacturing companies, larger service companies are going to be here to help drive the jobs that the smaller companies supply them are going to produce as well.
Dennis Hoffman: Bob is exactly right. I worry about the aerospace defense sector. We need to maintain that as a stalwart of the economy. Perhaps branch it out to serve commercial aviation as well as military pursuits. And we've got to grow semiconductors the best we can and there's a lot of pressure to take that business abroad.
Ted Simons: There's a lot of pressure to get Arizona's financial house in order in terms of general revenue. I know you've done studies. We have graphics. The first looking at tax collections and they're falling faster than income. What does that mean?
Dennis Hoffman: Well, the -- this is likely to happen due to the progressive nature of our income tax. So we -- if you look at the graphic on the upswing, we had collections exceeding income growth as -- as we got more and more hiring income people and they were taxed at higher rates, that kind of thing. People that earn $200,000 and above, Ted, paid nearly half our taxes in 2006. I'm not making up any statement about that, they can afford to pay a lot of tax. That's what you're going to get with a progressive tax system. Now, by 2009, that had dropped from $1.6 billion in pay from that group to $550 million and only paid about a quarter of our taxes.
Ted Simons: Keep that in mind as we go to the next graphic which shows revenue and expenditures looks like a huge dropoff in terms of revenue while expenditures are dropping only slightly. What is that telling us?
Dennis Hoffman: That's through 2010, you're going to have a significant drop in expenditures in 2011 and if -- if we don't do anything about our fiscal house on the revenue side, expenditures will simply adjust down to revenues and revenues going forward are about 3.5% of the economy even with the temporary sales tax. Historically, about 5% of the economy. Arizona can adjust to this. We just have to get used to having at our disposal less government as a share of the economy than what we've had historically and maybe people will be happy with that.
Ted Simons: Many people I think would be happy with that. At least at the legislature, but is that going to translate to better economic times ahead?
Robert Mittlestaedt: In the long time, it will help. Nationally and at the state level. The problem is there's a catch 22, if you cut back government, federal or state, you're laying people off. So you increase the unemployment rate to save money in the long term. Government jobs, people get their salaries and consume services and goods, but don't leverage the investment made there. We have to found a way to redirect things toward private investment.
Ted Simons: Thank you for joining us tonight.
Robert Mittlestaedt: Thank you, Ted.
Legislative Wrap-up: Business
- Experts talk about the impact of the legislative session on Arizona’s business community.
- Glenn Hammer - Arizona Chamber of Commerce and Industry
- Michelle Bolton - VP of Public Affairs, Phoenix Chamber of Commerce
- Lee Miller - Arizona Small Business Association
Ted Simons: Many in the state's business community approved of jobs bills passed by the legislature this session. But there was divided opinion over other issues, including education cuts. Here to talk about what the legislature did or did not do for business this session is Glenn Hamer, president and CEO of the Arizona chamber of commerce and industry. Michelle Bolton, vice president of public affairs and economic development for the greater Phoenix chamber of commerce. And Lee Miller, lobbyist for the Arizona small business association. Good to have you here. Thanks for joining us.
Ted Simons: Glenn, we’ll start with you. So is the jobs bill cutting corporate income tax, business property tax on equipment? Impact on business.
Glenn Hamer: It’s huge. It's a game changer. That was like winning the world series. It’s the largest business tax cut ever enacted in the state of Arizona. It will make us far more competitive when it comes from corporate income taxes. We’ll go from middle of the pack to about the 5th best in the country. It will provide something that we’ve been working on for some years now in terms of reducing business property taxes to make those taxation on businesses more equitable to homeowners. It also does some other good things for manufacturers and we also are thrilled that it recreates the Arizona commerce authority. We love what Don Carden is doing with that entity and we think it puts Arizona back on the right track economically.
Ted Simons: Much of this phases in by 2014, I believe. Is that a good thing to have it phase in like that. Some folks say if it's good, have it happen now.
Michelle Bolton: Obviously, we would like something immediate but one of the other things that the business community was asking for was budget certainty and a balanced budget so the delayed effect date for the taxes helps to ensure there isn’t an immediate impact on the budget and around 2014 we'll have a much more stable situation here in Arizona and be in a economic recovery and be able to take advantage the tax benefits.
Ted Simons: Was there enough in there for smaller businesses?
Lee Miller: There is. It's -- it's an excellent package. We worked closely with the governor's office and the legislature in putting it together. From our perspective, the most important things are the benefits are across the board and also apply to exists businesses as well as businesses moving into the state. There's some new efforts in there for rural development and re-engineering job training, all of those are terrific for small business.
Ted Simons: I know this is a moving target here, but there were predictions that it could lose $400 million by 2018. First of all, do you agree with those numbers?
Glenn Hamer: I don't.
Ted Simons: Talking about a moving target.
Glenn Hamer: It's a static prediction. We're -- I -- it's impossible to prove either way until we -- in to have a chance to be on the program in 2016, 2017. But reducing the corporate income tax, which, by the way is our most volatile tax. It puts in money to the state treasure when times are good and shrinks when times are tough. What we think will happen it will attract a lot of new businesses to come to Arizona, a lot of existing businesses to expand operation and those employees, those new jobs are going to be paying income taxes and sales taxes, and going to be paying parties. We think this is going to be net positive overall and certainly in terms of job creation.
Ted Simons: You mentioned stability is needed for businesses to understand what the playing field is about. Some would argue the financial instability at the government level is not necessarily good for businesses and with fewer revenues coming in, that could mean more financial instability in Arizona. How do you respond?
Michelle Bolton: One of our key messages to the legislature was let's create the stability so that businesses know what's happening and can plan for the future. Instability creates so much uncertainty when they look at other states to go and when there's instability at the state level, they think I'll hold on to dollars I have and won't hire that new employee and won't make that capital investment and really count on having that stable environment so they can make decisions for their businesses and employees.
Lee Miller: I think frankly the most challenging job down at the legislature over the next couple years is frankly to dissuade legislators from continuing to tinker with the excellent jobs bill we have in place now. We -- we know what to expect over the next couple years, but stick to that road and no matter what happens next year, but not veer off.
Ted Simons: Does that mean not tinkering in getting the new and expanded tax credit didn't make it this go-around. There was a big push for that. Leave it are alone? Try again?
Lee Miller: Well, I think one of the things we learned about Governor Brewer's approach to the legislative process is taxes and revenues need to be wrapped up in this package called the state budget and -- and once the state leaders have agreed on how many revenues are coming in and where we're going to spend them, that's the deal and let's not tinker subsequent to that.
Michelle Bolton: If I can jump in. The other thing Governor Brewer said, she'd like to take a look at property tax reform and that's something we need to talk about as a state going forward. You know, we -- we do have what -- some of the most burdensome property taxes both on real property as well as business personal property and we need to take a look at that holistically. We look forward to working with the governor next legislative session on that.
Glenn Hamer: I believe in terms of her actions, there's a roadmap on the tax items that didn't make their way through and I'm confident we'll be able to work together and come together with the package that will work and as Michelle said, it's very encouraging for her to talk about business property taxes. And the corporate income tax right now is 7%, personal income tax 4.5% and when it's phased in, the corporate income tax rate will be higher. When the business property tax is phased down from 20% to 18%, it will be considerably higher than the 10% that's assessed on residential property. Let's get to an equitable situation and then talk about the breaks for businesses.
Ted Simons: Some say if we get to tax incentives and the tax rate itself, you get there and still cutting things like education, in particular, that is not going to help business at all. Talk about education cuts and how that plays into this dynamic.
Lee Miller: The small business owners, they're -- they're the -- the success of their business is entirely reflected in how much money they have in their wallet to pay their bills. We've had a very challenging economy over the last couple years, folks have less money to pay their bills. Government, including education, naturally has to shrink to reflect that there's only so much money to go around. Sure, we'd all love to have an incredibly expansive and lavish educational opportunities available for our kids but there's only so much money to go around and we have to live within those means.
Ted Simons: I think some would for go the lavishness to go to somewhere that doesn't have a 40 in it, as far as the metrics are concerned. A lot of people are saying -- Craig Barrett, the CEO of Intel, he's not sure if Intel would decide to come here anymore. Talk about education cuts and business.
Michelle Bolton: Certainly the greater Phoenix chamber members are concerned about the education cuts. We agree with lee. The problem is we don't have -- we only have so much money to go around. We see businesses helping with their donations and having conversations with the higher institutions about how we can work together and create synergies and do more with less.
Glenn Hamer: What -- our university system is a terrific system. Jewels. Every Arizonan can be proud of and we need to make sure that the universities have the resources they need to remain excellent. Last year, I would say the Arizona legislature probably did more than any legislature in the country in terms of K-12 reform. This is not just a question about dollars, we need reform and when you talk about the state rankings, until we build on the good reforms we've done and heros in Arizona, like Dr. Craig Barrett and the schools -- this is not just a case of dollars. It's making sure we have a better functioning system so that when the dollars come in they're expended in a way that improves performance.
Ted Simons: Another major piece of legislation was pension reform. Talk to me about that and the impact on business.
Michelle Bolton: You know, obviously, we supported the pension reform package, great package, great synergies between Mr. Yarborough and Adams and creating stabilization because we know if those systems are not able it pay out benefits it's on the backs of the business community and the general tax paying citizens.
Ted Simons: Was pension reform a big thing for small businesses?
Lee Miller: What was important for small businesses was the problem gets solved so that four, five years down the road, there's not such a complete implosion and -- like the federal banking system. We've got to spend hundreds of millions of dollars route here right now to bail something out. So that certainty and long-term stability is help.
Ted Simons: Sounds like critics are saying a lawsuit is likely. I think the wording; you can't diminish or reduce state pensions. Everything that comes out of there, seems like a lawsuit is likely.
Glenn Hamer: You asked a question about education. We have to make -- we're going to have to make a choice. Are public employees, they do honorable work within we want them to be fairly paid but when you have USA today and other major publications saying a number of public employees when you include the benefits are paid considerably more than private sector and the small business people and the people paying the wages, something is out of whack. We'll need to do more, but I give cue kudos to Speaker Adams and I think at the end of the day, the important reforms that the governor signed will hold up. We don't want to go the way of Greece. We want to get this under control and the legislature took a important step in that direction this session.
Ted Simons: Letter grade, as far as small business is concerned?
Lee Miller: A.
Ted Simons: A? What do you got?
Michelle Bolton: A+ .
Ted Simons: A+? All right. Glenn?
Glenn Hamer: Well, there's always more that could be done. I'll go with an A.
Ted Simons: A? Are you expecting the same thing next session or has the heavy lifting been done?
Michelle Bolton: No, still work to be done. Some additional pushes for next year.
Ted Simons: Alright, great discussion. Thanks for joining us. We appreciate it.
All: Thank you.