Disney and the Economy, Part II

by Ray Keating

Analysis

DisneyBizJournal.com

August 2, 2018

Disney and the Economy, Part I highlighted the good news on second-quarter economic growth, what that means for the Walt Disney Company, as well as noting how some longer-term economic trends have affected Disney.

More good news about the current economy was served up yesterday in the Federal Reserve’s Federal Open Market Committee statement. That opened with a very positive take on the state of the current economy, basically saying that economic growth, business investment, consumer spending, and job creation were solid, while inflation remained tame. That’s an ideal combination.

In Part I of this series, however, we noted that throughout this poor economic recovery/expansion period, which started after the Great Recession ended in mid-2009, the issue with occasional quarters of strong economic growth has been sustainability. Real economic growth topped 4 percent in the second quarter (4.1 percent) of this year, but that had occurred in a few previous quarters over the past nine years (the fourth quarter of 2011, and during the second and third quarters of 2014), with growth then backtracking notably.

The question is: Can strong growth now be sustained?

Looking at the factors in play, two changes have shifted key areas of public policy from an anti-growth position to more pro-growth. Specifically, the previous presidential administration ranked as one of the most regulatory in history, and also was disposed toward advocating for and imposing higher taxes, as was the case at the start of 2013 and in the ObamaCare law. The economics of increased taxes and regulations are fairly straightforward in that they raise costs and create disincentives for productive economic activity.

The current Congress and administration have shifted in a different direction. Deregulatory efforts have moved ahead, and at the close of last year, business tax reform and relief was made law.

These measures are positives for businesses, workers, and consumers, with firms like The Walt Disney Company and the overall economy benefitting accordingly. Among key tax changes were reducing the corporate income tax rate from 35 percent – one of the highest rates in the world – to 21 percent; allowing expensing (that is writing off capital spending in the year it’s made rather than depreciating such expenditures over an extended time) of certain investments, like machinery and equipment, for five years and then phasing it down over the following five years; and eliminating the corporate alternative minimum tax.

In terms of responses, consider, for example, the announcement that Disney made shortly after the tax relief measure was passed and signed into law:

“Robert A. Iger, Chairman and Chief Executive Officer, The Walt Disney Company, today announced, more than 125,000 eligible employees will receive a one-time $1,000 cash bonus. The Company will also make an initial investment of $50 million in a new and ongoing education program specifically designed to cover tuition costs for hourly employees. The two new initiatives are a result of the recently enacted tax reform and represent a total allocation of more than $175 million in this fiscal year.”

Indeed, these tax changes, along with the regulatory relief, incentivize business investment. As noted in the Part I analysis, business investment is crucial for current and future economic growth.

So, these policy changes will work in favor of sustaining stronger economic growth.

However, there also are policy measures working against sustained robust economic growth, and creating potential problems for Disney. We’ll touch on those in Part III.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of the Pastor Stephen Grant novels, with the two latest books being Reagan Country: A Pastor Stephen Grant Novel and Heroes and Villains: A Pastor Stephen Grant Short Story. He can be contacted at raykeating@keatingreports.com.