February 21, 2017
Let’s see if there are any movie junkies out there who can guess what this topic is about through the intro…. “Anyone? Anyone? Anyone seen this before? The Laffer Curve”…while the intro bares a very vague resemblance to the actual topic, one should never pass up an opportunity to quote Ferris Bueller’s day off. Donald Trump garners a lot of publicity, but our brokers know he can’t overrule basic economics, nor can lenders and borrowers. Orion’s experienced brokers believe that it is good for their borrowers to know what is going on with the economy and rates.
The Laffer curve ties together taxes and economic activity. Simply put, if people pay less in taxes, they will have more money, and spend some portion of it. And how much they spend impacts interest rates. Fiscal stimulus has made its way to the forefront as the primary policy factor for promoting growth through tax cuts and/or infrastructure/defense spending. In theory, if stimulus were to be enacted, aggregate demand would be promoted through lower personal income taxes, which would drive gains in consumer spending and housing. Increased personal spending would improve the outlook for jobs as well as wages & salaries and thereby increase income. Many of our brokers’ clients live in areas that have seen wealth gains due to home price appreciation – this tends to reinforce consumer spending.
And business investment and structure spending would be promoted by lower business taxes as well as any movement toward business expensing of equipment. We would need direct federal spending—on both defense and infrastructure projects and if it was thoughtfully pursued, it would add to the fiscal stimulus. On its own, however, this would create a very short term gain with no long-term stability.
Increased business investment and better labor education and training would be one solution to improve productivity. We need a long-term outlook with focus on the fundamentals of economics if we want long term growth. And our broker’s clients should be aware that growth typically leads to higher rates as the economy heats up. Don’t be caught unaware.