3 Huge Risks to the American Economy

By Markets Fool.com

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Source: Flickr userwww.stockmonkeys.com.

Since the end of the Great Recession, the economy has been far more turtle-like than hare-like, but there are signs that the economy is picking up. For instance, real GDP growth of 4.6% in the second quarter and 3.9% in the third quarter marked the best six-month performance in more than a decade. While that growth is encouraging to investors, we Fools know that it's better to be prepared for the worst, rather than be surprised by it. After all, any number of things could weigh down growth in any given year. So we asked three of our analysts to tell us what they think could prove to be the biggest risk to our economy. Read on to learn what they think.

Selena Maranjian: I think that America's growing income inequality is our biggest economic risk. There's a good chance that the situation is worse than you think. If you think it's terrible that the average CEO now earns352timeswhat the average worker earns, but that regardless, you're doing sort of OK, think again. Between 2010 and 2013, those with the top 10% of incomes saw their median income grow by2%on an inflation-adjusted basis, while the other 90% lost ground. Think of it this way -- if you're collecting annual 2.5% raises and inflation is averaging 3%, which is its long-term annual average, then your income is shrinking, when adjusted for inflation.

Here's more eye-opening data from the Congressional Budget Office: Between1979 and 2007, after-tax income for the top 1% of householdsgrew275%, while it grew only 18% for the bottom fifth. According to University of California-Berkeley professor Emmanuel Saez, between 2009 and 2012, as America began to recover from our recent recession, the top 1% of earnerscollected95% of the inflation-adjusted gains in income.

This all matters a lot, because the less American households earn, the less they can save for retirement (which they increasingly need to do, given the ongoing extinction of private pensions). And also, less income means less to spend, thus presenting a challenge for American industry, which is based on selling products and services to consumers. Indeed, many fully employed Americans are being paid so little by major American companies such asWal-MartandMcDonald'sthat they're in need of public assistance. Low incomes also mean less tax revenue collected, with fewer funds available for education, infrastructure, and more. This certainly doesn't seem like the way to build a powerful economic growth engine.

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Dan Dzombak: The greatest risk to the U.S. economy are cyberattacks against our companies and infrastructure.

While theU.S. Secret Service and law enforcementare doing everything they can to protect our financial and telecom infrastructure, it's not enough. Just in the past year there have been data breaches atJPMorgan Chase,Home Depot,Apple, P.F. Chang's,TripAdvisor,eBay, andTarget, among many others, which resulted in over 500 million records stolen in the past year. And those are just the attacks we know about. As Shawn Henry, a former executive assistant director at the FBI's cyber division, said a few years ago, "What the general public hears about -- stolen credit card numbers, somebody hacked LinkedIn -- that's the tip of the iceberg, the unclassified stuff."

The greater risk to U.S. companies and the U.S. economy are trade secrets and intellectual property being stolen and put to use by competitors abroad. A2013 report from Mandiant, now a part ofFireEye, on a cyberespionage unit referred to as APT 1 found the unit compromised 141 companies over seven years in a variety of sectors.

Very few companies have gone public with accusations, so we don't know the full extent of the damage. However, this year the U.S. brought a case against five Chinese hackers for cyberespionage against U.S. companies includingAlcoa,U.S. Steel,Allegheny Technologies, and Westinghouse Electric, among others.

Leo Sun: I believe that the high corporate tax rate is a top threat to the U.S. economy. The average U.S. (combined federal and state) corporate tax rate of 40% is the highest of any developed nation and accounted for 10% of all federal tax revenue last year.

An American company owes taxes on both U.S. and overseas profits (minus foreign taxes) but can put off paying those taxes indefinitely as long as it doesn't repatriate the money back to the United States. That's why U.S. companies with overseas cash hoards, likeApple, prefer funding stock buybacks and dividends with new debt instead of cash. Therefore, many top U.S. companies keep their overseas profits out of the country or acquire an overseas company and switch their tax address via a "tax inversion." Ireland's low corporate tax rate of 12.5% makes it a particularly popular choice for such inversions.

In September, the Obama administration passed new laws stating that a company must be 40% owned (up from 20%) by foreign shareholders to move its tax address overseas. This disincentivizes some inversion activity (asShire Plcdiscovered withAbbVie), but it doesn't get to the fundamental issue, which is bringing that cash back here and using it to invest further in the American economy. Various proposals (tax holidays, a lower corporate tax rate, etc.) have been floated, and I'm hopeful that some adjustment will enable that reinvestment in the economy -- which could do a lot to help jobs and growth (and maybe stocks too).

The article 3 Huge Risks to the American Economy originally appeared on Fool.com.

Dan Dzombak has no position in any stocks mentioned. Leo Sun owns shares of Apple. Selena Maranjian owns shares of Apple, eBay, JPMorgan Chase, LinkedIn, and McDonald's. The Motley Fool recommends Apple, eBay, Home Depot, LinkedIn, McDonald's, and TripAdvisor and owns shares of Apple, eBay, JPMorgan Chase, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.