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Assumed Negatives are Sometimes Positives

Tuesday, 07 Dec 2010 12:42 PM

Last Friday, numerous economists and stock-market pundits became more concerned about the future direction of the U.S. economy and stock prices after the Department of Commerce reported that during November the official unemployment rate rose to its highest level since April.

In contrast, I viewed that announcement as a positive development. That’s because I expected politicians who didn’t understand last month’s increase in the unemployment rate to assume that the increase indicated that the employment situation had deteriorated, and that those politicians would therefore agree to let all of the Bush-era tax cuts remain in effect for at least another two years in an effort to stimulate the U.S. economy.

That’s exactly what happened last night, with President Barack Obama saying that he would agree to sustain all of the Bush-era tax cuts in exchange for an extension of federal unemployment insurance and a one-year reduction in the payroll tax.

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Ironically, the November payrolls report wasn’t nearly as negative as many politicians apparently assumed. For example, last month’s increase in the unemployment rate was the result, primarily, of more people entering the labor force because they had become more confident about their job prospects.

In addition, last month’s employment report revealed that employees of U.S. companies worked more overtime hours during November than they did during each of the previous four months, and that the average number of hours worked by U.S. employees remained at its highest level since November 2008.

By the way, the number of overtime hours worked and the average number of hours worked each week are leading economic indicators, meaning that increases in those variables generally indicate that economic conditions will improve during the ensuing months.

In contrast, the unemployment rate, which is a lagging economic indicator, generally doesn’t decline until many months after the overall economic environment has improved. Fortunately, Obama and many of his supporters were apparently unaware of those facts.

Largely because of last month’s increase in the unemployment rate, Obama also proposed the creation of more than $300 billion in new tax cuts for wage-earners, wealthy families, and business owners.

Specifically, Obama proposed a two-percentage-point reduction in the payroll tax for all wage-earners and a reduction of the estate tax to a top rate of 35 percent, which applies after a $5 million tax-free allowance per individual. (That rate would be the lowest since 1931 – not counting 2010, when the rate was zero and replaced with a complicated capital-gains tax that applies when inherited assets are sold).

Lastly, Obama endorsed a Republican proposal to allow businesses to fully deduct investments in business equipment during the year that those investments are made.

If Congressional Democrats agree to Obama’s proposal, the deal would leave in place the 10, 15, 25, 28, 33 and 35 percent marginal tax rates created in 2001. It would also preserve for two years the 15 percent tax rate on most capital gains and dividends, and it would temporarily index the alternative minimum tax for inflation.

As you can see from the information presented above, the assumptions that some persons make about certain economic developments are often wrong. More importantly, those false assumptions sometimes lead to very positive developments.

Note from Moneynews:

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About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.


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Last Friday, numerous economists and stock-market pundits became more concerned about the future direction of the U.S. economy and stock prices after the Department of Commerce reported that during November the official unemployment rate rose to its highest level since...
david,frazier,employment,unemployment,obama,tax,cuts,Assumed,Negatives,Sometimes,Positives
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2010-42-07
Tuesday, 07 Dec 2010 12:42 PM
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