Tax Revenues Surging - Economy Still Strong - Minimum Wage Going Up

The Washington Post is reporting that tax revenues are up 8.2 percent over last year - far outpacing inflation which was up only 2% for the 12 months ending in November.  These high tax revenues over the first three months of the budget year have caused the federal deficit to fall to it's lowest rate for that period since 2002.

The government says that sales for December were up a strong 0.9% which beat out the expected gain of 0.7%.  Average wages are up 4.2% over last year - again far outpacing inflation.  The government is also reporting that 167,000 new jobs were added in December which keeps the unemployment numbers at a low 4.5%.  The new jobs in December bring the total new jobs added in 2006 to 1.8 million.

All in all the economy is doing pretty well with the stock market near an all time high, low inflation, low unemployment, and rising wages.

Despite all these good numbers all is not perfect.  The new job total for 2006 was 200,000 shy of jobs created in 2005.  While still good, it's a trend in the wrong direction.  Also, even with tax revenues on the increase the Bush Administration is still predicting a deficit of over $300 Billion for fiscal 2007.  It should be noted however that this number is likely to be revised down once the administration posts it's 2007 budget numbers.

Government spending is up only 0.7% over the same quarter last year but it should be noted this number is affected by $15 billion in government airwave auctions.  The House of Representatives has passed bill that has some harsh earmark reform that should curb Congressional spending to some extent.  It remains to be seen if the Senate will follow suit or will pass a much tamer version of the bill.  Controlling earmarks is a big step towards controlling spending and reducing the deficit.  Another factor is the cost of the war in Iraq.  Increased troop levels will undoubtedly cost more in the short term but if it can in effect cause reductions in troop levels by this time next year we might be able to see further cuts into the deficit for fiscal 2008.

The obvious hope is to continue to nourish the strong economy while reducing government spending in hopes of achieving a balanced budget.  Democrats have hinted at increasing taxes via one form or another - perhaps by reimplementing some of the things cut during the Bush tax cuts.  The impact on the economy will largely depend on how taxes are increased.  Regardless of which, a negative impact can be expected which will in effect reduce tax receipts into the Treasury although that is simply speculation at this point.

An increase in the minimum wage has passed the House and can also be expected to pass in the Senate and be signed by President Bush.  The expected increase will go from $5.15 currently to $7.25 under the new legislation.  The impact on the economy is hotly contended.  Critics claim the increase would have a profound effect on small business owners, restaurant owners, etc. and may cause an increase in the cost of goods and services to reflect the increased costs of employees.  They also claim it may lead to employers hiring fewer employees to curb the additional costs.  Supporters claim that these are just scare tactics and that business owners will easily be able to foot the additional wages without having to increase prices.  They also say that the increased wages will help America's poorest families. 

The US Dept of Labor reports that minimum wage earners tend to be young - with about 1/2 of them being under the age of 25.  Also, married workers are less likely to earn minimum wage or less.  And workers earning minimum wage or less are more likely to be part-time employees than full-time employees.  So the assertion by the Democrats that an increase in the minimum wage will "help America's poorest families" is likely a bit off target.  It might help some of America's poorest families is maybe a more accurate statement.  Mostly it appears it will help America's part-time youth.  The impact that will have on business owners and the economy as a whole remains to be seen.

It would appear that this increase in minimum wage is more a victory of political appearance than a victory for the economy regardless of how you cut the details.  This will be a moral victory for Democrats with those who assume that increasing the minimum wage is good for the little guy.  Even if it ends up increasing costs to the poor in the end.