Economic Roundtable

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There are reports that we have reached the bottom of the recession. Join Ted Simons as he hosts an economic roundtable with Arizona State University W.P. Carey School of Business Dean Robert Mittelstaedt, ASU economist Dennis Hoffman, and real estate expert Ben Sage.

TED SIMONS: Good evening, and welcome to "Horizon." I'm Ted Simons. A setback today in the battle of the budget. The senate appropriations committee this morning failed to pass the first of 12 budget bills. Several conservative Republicans voted against the first bill, with senator Ron Gould expressing concerns that he only had a 20-minute briefing on the revamped budget. G.O.P. leaders are having a rough time getting support from rank-and-file members for a proposed one-cent increase in the state sales tax being pushed by Governor Brewer. That tax increase is part of the budget package. The house decided to hold off on a vote today and try again tomorrow; this, because of a lack of votes. Lawmakers have until tomorrow to pass a budget for the fiscal year. The gross domestic product shrank a little less than first thought in the first quarter of this year, I should say. And jobless claims? They slowing down a bit nationwide. Does that mean there's a slowdown to the slowdown? Here to talk about that is Robert Mittlestaedt, dean of the W.P. Carey School of Business at Arizona State University. Also here is Dennis Hoffman, an A.S.U. economist. And Ben Sage, a real estate expert with the firm Metro Study. Thank you for joining us on "Horizon."
TED SIMONS: Bob, let's start with you. Is there a hint of an economic turnaround somewhere in the breeze?
ROBERT MITTLESTAEDT: There may be hints but I'm not sure they're hints people are going to like. And that's because of the conversation about whether it's a V-shaped or L-shaped recovery, says to me, with all the data that we see, that this is a U that's a very wide U. We see a decrease in the unemployment rate, the growth of the unemployment. We see decreased consumption and other things that aren't going down as fast as they were, but still aren't coming up. I think we're going to bounce around the bottom for some time here.
TED SIMONS: Dennis is it a free fall that's not falling quite so fast?
DENNIS HOFFMAN: I wish there were more signs of life in the economy than what we're seeing so far. -- Q2 looks like it's going to close in terms of spending patterns in a year over year basis worse than Q1, if that's even possible. Unthinkable rate of decline. I've been calling it a consumption depression.
TED SIMONS: I know you focus on real estate. I want to get to real estate a little bit later on in the program. But from where you sit, home buying and foreclosure activity, is there any light at the end of the tunnel?
BEN SAGE: I think in the real estate market there is. On the economy, we did see consumer confidence a little bit stronger than anticipated. Still low. And the stock market has recovered a little bit more than people anticipated. On the real estate side, most of the energy, at least in Arizona, particularly Phoenix, is on the resale side. There's quite a bit of volume. There were 9,000 sales in May. Just short of the number of sales we had in May in 2005 when the market was really peaking. The difference would be in the price ranges that are most active.
DENNIS HOFFMAN: So Ted these are the green chutes, these are the green shoots that we're hearing about. And I keep waiting to see this in real time primarily retail sales, consumption data. Because one would imagine if these new homes are being transacted. It's time for furniture, for fixtures. You know, some consumption activity usually accompanies more robust transactions and he's absolutely right. We transacted homes at a pace that compared very favorably with the peak period. A lot lower prices, of course, but we did so in the last month in really pretty healthy fashion. It just is not manifesting itself in some of the things we've seen historically in terms of consumption behavior.
ROBERT MITTLESTAEDT: But that's exactly the problem, Dennis, when you said that Q2 was worse than Q1, you're looking at it from the standpoint of tracking state revenue that is based on sales taxes and that means retail. When I said we saw hints of recovery that we may not like, I think the hint is that we're going to see permanently reduced consumption nationally. And we argue about why Arizona is a little different perhaps but I think nationally we are going to see permanently reduced consumption because people have been scared into hearing something they had never heard before. I heard with my parents and grandparents when I was growing up as a kid in the 50's that, boy, the great depression was horrible but I didn't live through it. But I heard all those stories and it influenced the way I lived my life economically because I heard that. And now you have a generation of people who have never experienced this and the recovery that has to come, I believe, that people have to spend less. We had reached a point where debt nationally was 125% of consumer income and that's simply not sustainable. So if we stop that, get back in balance, if consumers get back in balance, that means they're going to spend less going forward. What that means is a rather permanent adjustment in our economy and how the states adjust their budgets to live within that is a very serious problem. But I think that's the first hint of a recovery is that consumers are actually saving, so in the first six months of this year we saw the savings rate jump from virtually nothing to the last I heard, 5.5% to 6%. That's a big deal in terms people saving money.
TED SIMONS: That sounds like a paradigm shift. That almost sounds generational. You mentioned the depression and that generation and what followed may have saw things a little bit differently. But they also heard the stories. And it sounds like we're circling back a little bit here and people are changing not just for now, but for a few years, if not longer. How does Arizona fit into all of this?
DENNIS HOFFMAN: Well, you know, Bob and I agree on a lot of things and disagree on other things. Time will tell, obviously, about how much we actually do really change our overall behavior. You know, the period from 1929 to 1932 was horrible. It was a downward spiral. Part of the reason it was horrible, was nothing was done to lean against the depressionary tendencies of the time. Credit remained tight or non-existent. Jobs were allowed to go away, industries allowed to fail. It was a liquidationist kind of era all the way from 1929 to 1932. Of course, the position that the government has taken against this particular downturn is completely different, arguably overdone. And we can talk about that. But there's massive amount of stimulus available and credit at historical lows but the fascinating thing, is that we're still having a tough time rekindling confidence in the minds of individuals. As Bob has said, we certainly appear to have a paradigm shift under way right now in terms of consumption behavior. But who knows how long it will last.
TED SIMONS: How do you shift the paradigm back a little bit to where folks -- and granted it may be a good thing that they're saving, but still they're not spending the way they were. How do you get them to take the leap and get the house down the street?
BEN SAGE: Well there's kind of the perfect storm that would encourage people to buy and one would be the $8,000 tax credit good through the end of November. Interest rates are very low. They've come back up a little bit in the past few weeks but they are a little above 5%, certainly below 6%. And then affordablity. The prices, if you owned a home, bad news, the prices have come down, but the good news, it has restored affordability to where it is as high as perhaps it has ever been in the Phoenix area.
TED SIMONS: Is Arizona simply too dependent on sales taxes?
ROBERT MITTLESTAEDT: Well, we clearly are too dependent on sales and income tax given those two things constitute virtually all of the income for the state. And both of those are not only cyclical, but they are correlated. They go up at the same time and down at the same time. So we have to find a system that reduces the dependence, or volatility in those sources. And to this issue of whether people spend or not, they can't spend indefinitely beyond their means and that's what we were doing as a country. And so that's why I say that yes, there's a hint there's a recovery, but if they save too much, then we also don't get a recovery. Because you have to have some consumption. If you look at the makeup of different countries, I mean, a country like Japan where consumers reduce their consumption dramatically and have had deflation for the last 10 years because they were excessive savers and China worried about the same thing because they are traditionally excessive savers. So we're the highest consumption country in the world. Not only in total dollars but in terms of the percentage of G.D.P. that is driven by consumer consumption. I think that has to come down some to be healthy for a variety of reasons and that's the beginning. Arizona is dependent on that consumption and Arizona as a state has to come to grips with the fact that we have to find different ways to afford what we want to do then run on the back of consumption.
TED SIMONS: Is one of those different ways a flat tax being debated at the capitol?
DENNIS HOFFMAN: Could be, Ted. Flat taxes are popular in some states. We've looked at it. Actually Bob and I have looked at it and wrote a paper on it this spring. The poster child perhaps is Pennsylvania. A broad base for tax. Broad incomes. You don't even get to deduct your retirement, don't get deduct for dependents, or normal exemptions or credits. Forget all of that. Take your income and multiply it by 3.07%. That's your tax rate. Very simple, broad based and far less volatile.
ROBERT MITTLESTAEDT: I actually learned to love this. When I first moved to Pennsylvania 30 some years ago from California, I thought, wow, what's this horrible tax system? No deductions and nothing. Over time, it's simple. Short returns. If you have nothing but your earned income on a W2, it's taken out at work. You have to file a return but you're not going to owe or get anything back and brings a stability to the revenue stream and it also brings more people into understanding and caring about tax. So in many states like this one, if the exemptions are too high, if you have all kinds of special deals and you have a huge proportion of the population that doesn't pay tax. Dennis, correct me if I'm wrong, I don't know the exact number but I've heard something like 40% of people in Arizona don't pay income tax.
DENNIS HOFFMAN: It is a high percentage.
ROBERT MITTLESTAEDT: Whatever the number is, it's a fairly high percentage. If you have a broader cross section of people paying some tax, then they all have an appreciation that they care how it's spent and more likely to vote on it and to vote what's important and what isn't. That's the theory behind it.
TED SIMONS: The criticism though of a flat tax is it helps the very rich and it's regressive as far the relatively poor.
ROBERT MITTLESTAEDT: I'm not sure that that's as true as some people would like you to believe. If I take at my own situation and look at what a flat tax in Arizona would be for me versus the current tax structure that we have, it would be a few dollars less but it's not an awful lot. And the reason is because I lose all of my deductions. So people who are making more money typically have more deductions as well. Because they own a larger home and their paying interest and other sorts things. And yeah there will be some cases where wealthy people would pay less, but on the whole, it is going to spread it across a broader base, but a lot of people are going to be pretty close to what their paying.
DENNIS HOFFMAN: Ted, I want to make two points before we leave this subject. First of all in a state like Pennsylvania, they have recognized you can mitigate regresivities which is what you are concerned about here in other ways. They don't tax food at any level. Not at the city level or state level. In Pennsylvania, and they don't tax clothing, so --
ROBERT MITTLESTAEDT: I go to Nordstrom every time I go back to Pennsylvania --
DENNIS HOFFMAN: Some of the staples consumed in high proportions of income by lower income people are simply exempt from tax and the second point - now I think it is very important -- I want to make, the tax that's been proposed and the bill that's been advanced in the legislature doesn't look anything like Pennsylvania's, from our view.
TED SIMONS: Is that a good or a bad thing?
DENNIS HOFFMAN: Well, we like Pennsylvania's.
TED SIMONS: No deductions. What does that do to the real estate industry?
BEN SAGE: No deductions? What do you mean?
TED SIMONS: Well, the flat tax with no deductions, what would that do?
BEN SAGE: Well, I'd mainly want some tax structure that is better than California. Because Arizona benefits so much from people who are leaving the environment that's in California, so anything that's better than that, I think I'm for.
ROBERT MITTLESTAEDT: The primary issue is the federal tax deduction not the state tax deduction. So within the state it's not going to affect it that much.
TED SIMONS: Let's talk about other things that get deductions. Be they charities or other things along these lines.
DENNIS HOFFMAN: That's what they're trying to retain. They're trying to retain dependent exemptions and charitable deductions and of course school tax credits. You've got to have those. You've got to have everything and that's what they are trying to retain.
ROBERT MITTLESTAEDT: But that's part the problem we have nationally with our tax system is we've over-complicated it and there's too many times we're trying to mix social and economic objectives and it rarely works. In fact my story from Dennis Hoffman, before I ever came to Arizona 7 or 8 years ago with the electric cart programs. There was a big program to give people rebates for electric carts and people bought electric carts and got these rebates and donated them to charities and got a tax deduction and the state lost what, $300 million?
DENNIS HOFFMAN: It is still in the data, you can still see it. We've left a permanent imprint.
ROBERT MITTLESTAEDT: So you have to be careful when you mess with the tax system too much. Issues of fairness are important, but at the same time, issues of inequities that are unintended consequences that distort the entire system is part of the problem that we have now.
TED SIMONS: Let's get to real estate. Where are we? Foreclosures seem like they continue but they are slowing a bit.
BEN SAGE: The number, it's up and down and varies upon bank policy's approach towards foreclosures and moratoriums they set or government policies that could affect the timing. The number of homes that are pending in foreclosure, the number of households in default has been growing consistently. What has changed a little bit would be the number that go on to foreclosure. So if a homeowner gets 60, 90 days behind on rent, they can get a notice of trustee sale. So that's when it's in default, at any time you have that number and it's gone up to 45,000 now. Just in Maricopa County, that doesn't even include Pinal. The number of foreclosures sold at the county courthouse steps averages about 4,000 a month. That's been a little more steady. As far as the average goes, and it's been up and down as it goes from month to month.
TED SIMONS: And that suggests a continuing decline of price, correct?
BEN SAGE: It could, it depends on the price range. At the lower range it seems there's enough volume that the consumers have put their stamp of approval on the home values there. So when you have $50,000, $60,000, homes, I don't think there's much room to go down. The concern going forward would be the middle and higher priced homes. We had the wave of subprime loans and now we're getting into the five-year option arms that are starting to reset this year because they've reached their cap limit and those could affect higher prices.
TED SIMONS: Last question on this. I know there is some concern out there, but you tell me, are banks doing enough to help modify loans?
BEN SAGE: Well, it's a big problem to address. I mean, clearly, you think they could do more when you have 45,000 homes pending and you have 4,000 a month. It's negative equity. There's been studies that say as many as a third of all homes have negative equity. The government has set forth some programs but they don't seem to be designed to overcome large, thousands, tens of thousands of dollars that homeowners may have in negative equity.
TED SIMONS: The housing crisis, how much does it affect Arizona's economy? I think we all have a pretty good idea that there is a pretty big impact. But do we really know the full impact?
DENNIS HOFFMAN: Well we have got a confluence of events here recently. Housing was the most important catalyst certainly for the downturn. As Bob has articulated here, I think the consumption bonanza we had for years was partially fueled by this notion that you had wealth in your house, you have wealth in your stock portfolio and wow that's vanished overnight. But simultaneously, we told a lot of folks in this state and a lot of folks who have worked pretty hard to produce a lot of goods and services and build a lot of homes and provide a lot of services, we told a lot of folks that they're not welcome in Arizona anymore and so we've got this confluence of telling undocumented workers they're persona non grata coupled with this consumption decline. So actually one of my fears, or concerns, let put it this way is that if you look at the data Arizona typically accelerates out of a downturn. It may be a long one like the late 80's. But once we get it going we fly. One of the reasons we fly, snap your fingers and you're loaded with workers willing to build homes, to -- you know, to apply their services. We've told those folks they're not welcome in Arizona. So the question is going forward, where's the labor going to come from when we really need it?
ROBERT MITTLESTAEDT: One my fears is that we continue to perpetuate the idea that people always come to Arizona because of the sun and all good living and all of these sorts of things. And, yes, we're too dependent on homebuilding, but people forget that homes only get built when folks have jobs to buy them or they get bought when folks only have jobs to buy them. And we need to look very carefully at the long-term development in this state. Because we're not known as the business friendly in the country. We need to do things that will change that view. And what happened here that's different in other parts of the country -- I lived in the east before came here five years ago, the east can absorb - old areas east or west coast - can absorb lots of new workers and industries and companies coming in without dramatically increasing the housing stock because a lot of if it is being recycled. So not every neighborhood goes to nothing and is torn down. The city of Philadelphia, the downtown was rehabbed and had a renaissance went from old homes in bad repair, and people repairing them then people began to move in. And here there isn't an old area that's going to get rehabbed. If more people come here, you have to build new housing stock. That got distorted because people thought the rate was going to continue for a long period of time. That's just part of the difference in a new era, in a new economy, in a new area that's different from older areas. But we have to focus on bringing the jobs here first or we will never regain that big upslope Dennis is talking about.
TED SIMONS: Are we going to get to those jobs here? The jobless rate continues to climb in Arizona, it continues to climb around the country. We're still relatively well off, I guess. Although you talk to some folks and so many have stopped looking for jobs. And as you mentioned a lot of folks have left the state, whether documented or not. It seems like we've lost folks, certainly more than we have in the past.
TED SIMONS: What turns it around?
DENNIS HOFFMAN: Well manufacturing jobs, we talked about this a few moments ago, manufacturing jobs are at levels today that we haven't seen since 1992. Fortunately, we're flat. A lot of states are losing manufacturing jobs and trending way down. We had expansion and manufacturing through 2000 and then we lost it. We've got to think strategically here. We've got some very important strategic sectors for the state. Be they semi-conductor sectors, kind of the high-tech manufacturing sectors - aerospace and defense. They're very very mportant for Arizona. We've go to worry about sustaining those positions. They've really weathered this downturn very well so far. But it's not clear that -- you know, my guess is that they have concerns going forward. We need to continue to articulate their value. We need to look at new technologies and jobs that will be driven by innovation. There's discussion about green jobs and renewable energy jobs, that kind of thing. I prefer kind of a focus on energy independence jobs. Maybe because of the risk we have where the sources of oil are in the Middle East. Maybe we'd be strategically more prudent to focus on domestic production of energy even if it is more inefficient than current sources. And that might promote some job creation.
TED SIMONS: We're running out of time so I want to get your opinions relatively quickly here. I ask this almost every time we have someone of an economic mind-set on the program. We have perfect weather, pretty close, except for today. But we've got some pretty nice weather here. We have new minds, young thinkers, adventurous folks who want to move here - we've got all this going. Why is Arizona not an economic powerhouse?
BEN SAGE: Fair question. Maybe it's just too new on the scene. Five million plus people compared to larger cities in the east. But I do think the solar, or alternate energy, has great potential for Arizona. It seems like it's a city that wants to be but just haven't been able to make it thus far.
TED SIMONS: Why are we not an economic powerhouse? It is pretty nice out here. A lot of people want to move here.
DENNIS HOFFMAN: People want to move here climate, lifestyle, affordable housing and they can get a job. Historically, they haven't really worried about the quality of that job. Historically, though it's been driven by the fact they can sell their house somewhere else. You mentioned we've got to have a wedge in our income tax against California, I certainly agree. Of course we could double ours and we'd still be lower than theirs. Not suggesting that, Bob, just pointing it out.
TED SIMONS: I've got to stop you there because I want to hear from Bob before we run out of time. How come we're not the Saudi Arabia of everything?
ROBERT MITTLESTAEDT: Because we haven't made a really aggressive case to make this very attractive for businesses to come here. We are an out of the way place, I liken this to when I was in the Navy and we lived on Oahu. It is like Hawaii. There might as well be an ocean out there, instead of sand. We are not connected, we need an aggressive economic development program as a state to get industries to come here.
TED SIMONS: We'll stop it right there. Great discussion, thank you so much for joining us on "Horizon."
DENNIS HOFFMAN: Thank you, Ted.

Robert Mittelstaedt:Dean, W. P. Carey School of Business, ASU;Dennis Hoffman:ASU economist;Ben Sage:real estate expert;

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