Friday Financial Five- November 7th, 2014

Friday, November 07, 2014

Dan Forbes, GoLocalPDX MINDSETTER™

Financial ramifications of the election results

Republicans were successful in winning elections on a national level, but their Congressional majority doesn’t mean there will be significant economic policy shifts. Interest rates and inflation are low, housing has rebounded, and the unemployment rate has reduced significantly. Based on many winners’ campaign platforms, reforming pieces of the Affordable Care Act would seem to be the primary objective, as eliminating the Act entirely doesn’t seem like an achievable goal. The law negatively impacted employment, and reformation in certain areas could lead to more full time work across the country.

Four states raise the minimum wage

To combat income inequality and keep pace with inflation, several states voted to raise the state minimum wage above the federal minimum of $7.25. Alaska voted to raise the wage to $9.75 per hour, Nebraska went up to $9 per hour, and Arkansas and South Dakota moved to $8.50 per hour. In one of the wealthier and more expensive areas of the country, San Francisco, a recent vote raised the minimum wage to $15 per hour. This level of increase may not be sustainable in other areas. Just as the implementation of the health law affected employment decisions, changes to the minimum wage could have a similar effect.

Projections for future inflation

This week, former Fed chairman, Ben Bernanke, provided some insight into the Fed’s thinking under his leadership, chiding those that expected Quantitative Easing to result in much higher price increases. According to Bernanke, runaway inflation “was never a risk” and “is not a risk now”. While the Federal Reserve continues to target a goal of 2 percent interest, the bond market continues to price as if this is extremely unlikely. According to Bloomberg, the predicted annual rise in consumer prices is expected to be 1.5% annually over the next five years.

More research on ROE (Return on Education)

Two college professors have expanded on their research regarding education’s value. The original book, Academically Adrift, followed more than 2,000 college students and monitored their progress in school. The recent follow up work, Aspiring Adults Adrift: Tentative Transitions in College, attempts to chart the progress of those graduates from the first book. The results are far from inspiring. A quarter of them were still living at home and twenty three percent were unemployed or underemployed. Less than half of the graduates that were working were making $40,000 or more. While the study spanned 24 unnamed institutions, it certainly raises an eyebrow given the huge tuition costs associated with many colleges and universities.

Taxed to high heaven

Oregon and Alaska voted to legalize and tax recreational marijuana this week, but those looking to get into the business should pay attention to other states. According to a story in USA Today, an early 80’s tax provision doesn’t allow business owners to deduct any of the “costs of selling” their product, including salaries. They also get taxed at a higher federal rate. This makes it difficult for owners in Colorado and Washington to make a profit and stay in business. While there has been a push to revise the tax code, otherwise known as 280E, there doesn’t seem to be a big push in Congress to make it happen.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected].