Dana Peterson, an economist at Citi; Lance Christensen, a tax partner at Margolin, Winer Evens, and John Rogers, an attorney at Herrick Feinstein, spoke at the Long Island City Partnership economic breakfast October 2 on the third floor of the Citibank Tower. They looked over the weak economic picture; talked mainly about the need for politicians to deal with the expiring tax cuts and the “trigger” effect that could occur as 2013 begins; or turned from economic analyses and forecasts to address small business owners and how they must face the possibility of what are known as “extraordinary events”.
Peterson began by calling the economic outlook in the United States “sustainable but not substantial”. With growth being no better than two and a half percent, she said, the recovery has been disappointing. She looked at upsides and downsides by referring to a housing recovery that is anything but certain as an example of the former, though our energy outlook may be getting better with natural gas and shale oil explorations; while as downside events she cited the deep financial crisis in Europe, with the prospect of a continental decline by as much as five percent; and our own impending crisis, the perilous possibilities of the year-end lifting of Bush administration tax cuts, popularly summarized as “the fiscal cliff”.
If, through negotiations we reach a post-crisis stage, she said, our immediate problem will be cleaning up balance sheets and drawing down debt. She characterized the Federal Reserve Bank as “extremely accommodating”, but also wondered how much monetary policy can do for us. Quantitative easing by the Fed has worked well to keep our historically low inflation from descending to deflation, but she saw it losing effect over time. Seen as a good thing was a lower rate of non-financial corporate debt in the U.S. than in Europe or the Far East; seen as bad was the weakening of optimism in our small businesses amidst complaints of uncertainty and the fact of a weak labor market.
For consumers, income growth has fallen off sharply since 2009, even with a slight rise in the midst of it, followed by a further plunge, she observed. People are paying down debts but are having trouble getting credit. She said the housing picture may actually be getting better, despite the rise in prices, while the problem of distressed houses seems to have become less of a burden on the economy.
She took her audience to the edge of the fiscal cliff to explain that the biggest danger is that everything would happen at once. The end of the Bush tax cuts and automatic tax increases for a broad amount of Americans come next New Year’s Day if better financial arrangements aren’t made by members of Congress. That was assured by the failure of the economic “super-committee” that disbanded in November 2011 when no agreements could be made among its members and the “automatic trigger”, the consequence they were warned about, was set.
Peterson said that the two years that follow could be terribly negative, with a possible five percent loss of gross domestic product and the disappearance of emergency unemployment benefits. She therefore hoped that “our wonderful politicians will see the light” and keep us from going over the cliff.
When she took questions, Peterson was quickly asked if the U.S. is becoming like Greece. No, she said, the Greeks really have no taxing authority at present, but we still have it. She said a better comparison might be with Canada in the 1990s. Our northern neighbor had to institute a program of tax reform before they could get out of the economic trench they were in at the time. Referring to Canada’s difficult situation then and ours now, she said, “Politicians in general have the capacity to be reasonable,” and that might allow our own to sit down together and work out a program to avoid disaster. She answered a question on Social Security by saying that small reforms now will have a positive effect 20 years from now. One such reform would be to raise the retirement age to perhaps 70. This, she said, would affect her generation; she is, by her admission, in her “mid-to-late 30s”.
Lance Christensen followed Peterson and hadn’t gone far before he was referring to “looming tax increases” on January 1. He said in some respects they would be a doubling of taxes. The qualified dividends tax rate would go from 15 to 39 percent. He said the trigger-pulling had better occur amongst negotiators in December or it would get pulled automatically at the very beginning of January, with bad results.
He was speaking of the results of a survey that Margolin, Winer and Evens conducted this year among executives in the tri-state area. Several of them, he said, were looking to an improving business situation and a lessening of rancor about taxation. Still, the survey showed many were deferring capital because of the uncertain health care situation.
Addressing small business owners, John Rogers said that many of them might be faced with extraordinary events and not be able even to grasp what is happening because, despite the likelihood one or more of them will occur, many businessmen don’t give them much thought. He selected three of them: (1) business divorce, (2) business succession and (3) selling a company.
Business divorce, a rift occurring between partners or associates, leading to a parting of the ways, is rarely addressed before it has to be, but it often takes a long time and causes erosion of company value, he said. He added that he speaks from personal experience with one of these situations, which happens to be currently proceeding. Failure or reluctance to name and prepare a successor to the current head of the company can also leave its activities partially paralyzed, he said, citing an actual situation.
When selling a company, he said, the principal consideration is the company’s value, something the persons involved don’t always understand.
In figuring out the selling points to present to prospective buyers, it’s probably necessary to have skilled persons around you for aid and advice. He said anyone selling a business should also be prepared for the shock of parting with it, because if it has ever been close to the seller, or held by a family or body of associates for a long time, the pain of parting can be strong.
