Higher Rock Education - Economics Blog

Wednesday, January 10, 2018

10. Surge in Bitcoin

A bitcoin could be purchased for $1,000 on January 1st, 2017 and sold for $14,377 on December 31st, yielding over a 1,338% return. The currency took a dip at the end of the year. Had an investor sold at its peak of $20,089 on December 17th, her return would equal 1,909%! Bitcoin is a digital currency that has an electronic payment system. It was created in 2009 and has sparked increasing interest as more retailers choose to accept bitcoin for payment. To learn more about Bitcoin, visit our free lesson, What is Money?

9. Natural Disasters

2017 seemed to have more than its fair share of natural disasters in the United States. First Hurricane Harvey battered the coast of Texas from August 17th to September 1st. It made landfall near Corpus Christi as a Category 4 storm and traveled up the coast before stalling near Houston where the storm dumped over 50 inches of rain causing massive flooding. The Department of Health Services reported that Harvey took the lives of 88 people and caused (The Texas Tribune) approximately $180 billion in damage. Virtually everyone in the country was impacted by the higher gasoline prices resulting from the temporary shut-down of 10 refineries. (The Wall Street Journal)

Ten days later Hurricane Irma hit the Florida Keys after pummeling many Caribbean islands including Puerto Rico. High winds and flooding contributed to the deaths of over 70 people and billions of dollars in damage. Hurricane Maria devastated Puerto Rico less than two weeks after Irma had passed causing further loss of life and destruction.

The National Center for Environmental Information is responsible for assessing the damage of weather related disasters. Damage from natural disasters is estimated at $1.5 trillion! In its fourth quarter publication it summarized 2017.

In 2017, there were 16 weather and climate disaster events with losses exceeding $1 billion each across the United States. These events included 1 drought event, 2 flooding events, 1 freeze event, 8 severe storm events, 3 tropical cyclone events, and 1 wildfire event. Overall, these events resulted in the deaths of 362 people and had significant economic effects on the areas impacted. The 1980–2017 annual average is 5.8 events; the annual average for the most recent 5 years (2013–2017) is 11.6 events. The total cost of these 219 events exceeds $1.5 trillion.

8. Increase in Streaming

Consumers are increasingly leaving cable. My family is spending more time watching streamed shows from Netflix, Hulu, and Amazon and less time watching traditional television. The use of streaming has gained momentum because these companies offer quality shows like Stranger Things, The Handmaid’s Tale, The Crown. We are not alone. On January 5th, The Wall Street Journal reported that streamed shows increased 30 percent in 2017. The networks are responding by streaming their shows. The trend should continue, but it will be influenced by the rescinding of net neutrality. (See # 5 below.)

7. Problems in Retail

This holiday season many of us preferred shopping on-line to avoid the crowds and search for more options at a better price while having the package delivered to our door within a couple of days. The trend has not been restricted to the holiday season. More than 8,053 stores shut down in 2017, according to Business Insider. Eighteen retail companies filed for bankruptcy including Payless and Toys “R” Us.   

On-line sales accounted for 9.1% of total sales in the third quarter of 2017 (US Department of Commerce). E-commerce is expected to increase its share as delivery times shorten and more consumers become comfortable with the process. Dan Bell has documented the demise of many malls in his Dead Mall series on YouTube.

Retailers are focusing on providing shoppers with an enjoyable experience, rather than the good or service being sold. This provides shoppers with a reason for visiting stores that on-line stores cannot. For example, Ulta Beauty has thrived because it has created a salon-like experience in its stores. In an effort to attract people, malls have added restaurants, movie theaters, bowling alleys, and even ice skating rinks. Malls have leased space to churches, medical clinics, and universities to gain foot traffic.

6. Identity Theft

On December 27th, the Identity Theft Center reported over 174 million records were exposed in 1,339 breaches. The table below proves that no group was immune.

Source: Identity Theft Center

Equifax alone had over 145 million records breached (which skewed the pie chart)! Stolen information included: names, addresses, social security numbers, birth dates, and driver’s license numbers. In many cases credit card information was stolen. This provided the hackers with enough information to open accounts in the victim’s name. Unfortunately, you may be impacted even if you have never done business with Equifax, because Equifax gathers information from almost every financial institution to produce credit reports. Some consumers will suffer the consequences into 2018 and later.

5. Net Neutrality

On December 17th, the Federal Communications Commission voted 3-2 to end net neutrality.

Should broadband suppliers be allowed to decide who to block or slow down internet access, or should all content on the internet be treated equally? For example, should my internet provider be allowed to deny or slow my access to streaming companies like Netflix? During President Obama’s term net neutrality was required.

Net neutrality requires all consumers to have equal access to the internet. Internet service providers (ISPs) are forbidden to manipulate the content or speed of access, regardless of the source. Picture a highway. With net neutrality, all web site applications move at the same speed, whether they are provided by small companies like Higher Rock Education, or massive companies like Facebook. Removal of net neutrality could result in the ISPs offering their services at different speeds. They would be free to charge companies to be placed in the “fast” lane. ISPs could block someone from viewing a show. This may occur if your ISP failed to reach an agreement with the company providing the material.

Opponents of net neutrality believe everyone will benefit from reduced regulation. Presently there is little incentive for technological innovation or widening internet access. Why would a company improve the speed if companies are not allowed to charge a premium for faster service? This is one reason the United States ranks 28th in internet speed. (Recode) Consumers and businesses will benefit from improved technology. Competition and anti-trust laws would deter ISP companies from increasing fees too much or not providing popular content.

Proponents of net neutrality argue consumers will pay more because the ISP’s are being granted increased monopoly powers. Most consumers do not have access to many ISPs, making it difficult for them to switch.

Expect a great deal of discussion on net neutrality in 2018.

4. Tax Reform

On December 22nd, President Trump signed into law a huge tax overhaul. Virtually all taxpayers will be affected. The big winners are US corporations. The highest marginal corporate tax rate has been reduced from 35% to 21%. High tax rates have obstructed competition with international firms. (See our blog US Corporate Tax Rates – Are They Too High?)

Eighty percent of families will benefit, according to the Tax Policy Center. Lower marginal tax rates will offset the elimination of the personal exemption and limitations of many tax deductions. The standard deduction has been increased to $12,000 if you are single or $24,000 if you are married, which means fewer tax payers will benefit from itemizing their deductions. For taxpayers who have itemized in the past and continue to itemize, taxable income will be higher because the exemption has been eliminated. Families with children will benefit from an increase in the child tax credit.

The deduction for state and local taxes will be capped at $10,000. This includes income and property taxes. This will hurt wealthy home owners in highly taxed states such as California and New York. Home equity lines of credit are popular among many middle-income families. The interest on these loans is no longer deductible.

The new tax bill also repeals the health care mandate, thereby eliminating any penalties suffered by individuals who do not carry health insurance.

Will the tax bill pay for itself, or will the national debt increase at a faster rate? Tax cuts affect economic growth in two ways. First, aggregate demand is increased when households have more disposable income, which is spent on goods and services. Second, business expenses are lowered, increasing the economy’s aggregate supply resulting in more goods and services being offered at lower prices. Most economists believe that the tax code changes will increase growth, but not enough to pay for the reduction in tax revenues. Estimates of the deficit increase range from $1 to $1.5 trillion over the next decade. Stay tuned!

3. US Stock Market Surges to Record Levels

On January 3rd, 2017, the Dow Jones Industrial Average opened at 19,872.86. On December 29th, it closed at 24,719.22. It had surged more than 24%. It closed at record highs 70 times during 2017. Higher corporate earnings, growing exports, reduced regulations, expected tax cuts, and other favorable outlooks propelled the market. Corporations frequently used excess cash to buy back shares. Low interest rates discouraged many investors from investing in bonds.

2. Continued Growth in the US Economy

Economic growth exceeded 3% in the second and third quarters of 2017, according to the most recent Bureau of Economic Analysis report. It is likely the trend has continued through the fourth quarter and into 2018. Personal incomes are increasing. Inflation is low. The economy remains strong. Only the 1961 - 1969 and 1991 - 2001 expansions have been longer. However, economists are beginning to see signs we are nearing the end of the economy’s record expansion. Labor markets are getting tighter. In December, unemployment equaled 4.1%, its lowest level since 2000. In the third quarter the economy passed the Congressional Budget Office’s estimate of sustainable growth. When this occurs, companies begin having trouble hiring and retaining their employees and must increase wages to retain or attract workers. How long can the current US business expansion last? That’s the big question for 2018. The recently passed tax overhaul should help, but companies will not invest just because their taxes are lower. There must be an accompanying increase in demand – especially when there is an increase in the price level.

1. World – Wide Nationalism and Trump’s Presidency

The Trump Presidency has contributed directly and indirectly to many national and international changes. Some of the economic events included in our list resulted from policy changes. However, President Trump’s influence has been more far reaching. He is the leader of the Republican party which is not as concerned about free markets as it was several years ago. Instead it is more populist and nationalist. He is part of a global movement. Groups favoring nationalism gained strength in recent elections in the United Kingdom, France, and Germany. Citizens of the UK voted to leave the European Union. Read about Brexit in our blog Brexit – The Votes are In. Marine LePen favored leaving the EU. She didn’t win France's recent presidential election, but for the first time she was one of the leading candidates. (Read France’s Historical Election) Over 12% of Germans voted for the radical, nationalistic AdF party, which gained a seat in the Bundestag for the first time. The results contributed to Angela Merkel’s challenge in forming a coalition government in Germany. (Read The German Economy – Now and Post Election.) Listed below are several of President Trump’s protectionist policies.

More Protectionist Trade Measures

  • Withdrew from the Trans-Pacific Partnership – The TPP would have been a 12 nation agreement with Pacific nations representing approximately 40% of the world’s output.
  • Increase import tariffs (See Has Outsourcing Contributed to the Loss of American Jobs.)
  • Possible withdrawal from NAFTA (North American Free Trade Agreement)

Withdraw from the Paris Agreement in 2020 The Paris Agreement is an environmental agreement to reduce greenhouse gasses. The agreement was signed by 172 countries. (UN Treaty Collection)

Threaten NATO This has prompted many European countries to increase their military spending.

Limit Immigration

  • Build a wall along Mexico’s border to stifle illegal immigration.
  • Reduce the number of refugees allowed to enter the United States to 45,000.
  • Deport “Dreamers”, or undocumented immigrants who grew up in the United States.
  • Establish a merit based immigration system that rates applicants by their skills. The plan would cut immigration by approximately 50%.

2017 proved an interesting and prosperous year. 2018 will prove just as interesting (and hopefully as prosperous). The Federal Reserve, with newly appointed Chairman Powell, will be challenged to maintain growth without inflation. Read Jerome Powell - Who Is He? What Can We Expect? The conflict between reducing the deficit and fiscal stimulus will probably increase as mid-term elections approach – especially if economic growth slows. Stay tuned!

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