All posts by Gofishing

Income Inequality and how the middle class has been screwed

Income Inequality and how the middle class has been screwed

Most of us believe that our citizens are entitled to a living wage. In my mind that should include adequate nutrition, acceptable housing and affordable healthcare at a bear minimum. Overall the US is the wealthiest country in the world, by far, and yet fully 1/3 of our families could not afford the average cost of healthcare if they had to pay for it. The average cost per person (regardless of age) is approaching $11,000 per year. A young family, with both husband and wife working at minimum wage would not only not have enough to pay for healthcare, but they would have nothing for food, housing, utilities, etc.

It was recently reported the top 400 wealthiest persons have a worth in excess of fully ½ of the population at the bottom end. There are top executives in companies that are earning 500 times the average wage of rest of their workers below the executive level.

The United States has the 4th worst income inequality among all the industrialized nations. The only countries that are worse are Turkey, Mexico & Chile.

It’s hard to imagine the United States being so high on this list, but truthfully, the US hasn’t seen such large income disparity since 1928. And if you thought some of the other countries had it bad in regards to numbers, these numbers will no doubt serve to shock: From 2009 to 2012, the top 1% in the U.S. claimed 95% of gains from the economic recovery. And the rest of country, the other 99%? They only saw income growth of 0.4% while their richer counterparts saw their incomes rise by over 30%. While the economy is superficially showing recovery from the Global Financial Crisis, the reality is that the lower classes are not recovering nearly as fast as that top 1%.

The following chart is another view of the inequality. It is from 2003 and the current numbers are much worse. The adjusted average adjusted gross income for ½ of the tax payers is less than 14%. Obviously, the recent tax cut will only serve to increase the disparity as almost 2/3rd of the proceeds went to high income folks.. How can anyone think this is fair?

More on this topic in next week’s post

Income Group Number of Returns AGI ($ millions) Income taxes paid ($ millions) Group’s share of total AGI (%) Group’s share of income taxes (%) Average tax rate (%) avg income
All taxpayers 128,609,786 6,287,586 747,939 100% 100% 11.90%  $        48,889
Top 1% 1,286,098 1,054,567 256,340 16.70% 34.27% 24.31%   819,974
Top 5% 6,430,489 1,960,676 406,597 31.18% 54.36% 20.74%  $     304,903
Top 10% 12,860,979 2,663,470 492,452 42.36% 65.84% 18.49%  $     207,097
Top 25% 32,152,447 4,078,277 627,380 64.86% 83.88% 15.38%  $     126,842
Top 50% 64,304,893 5,407,851 722,027 86.01% 96.54% 13.35%  $        84,097
Bottom 50% 64,304,893 879,735 25,912 13.99% 3.46% 2.95%  $        13,681

More on this topic next week

The Economy

The Economy

The U.S. economic outlook is healthy according to the key economic indicators. The most critical indicator is the gross domestic product, which measures the nation’s production output. The GDP growth rate is expected to remain between the 2 percent to 3 percent ideal range. Unemployment is forecast to continue at the natural rate. There isn’t too much inflation or deflation. That’s a Goldilocks economy. The average growth rate for the past 60 years has fluctuated quite a bit but the overall average has been in this range.

President Trump promised to increase economic growth to 4 percent. That’s faster than is healthy. Growth at that pace leads to an overconfident irrational exuberance. That creates a boom that leads to a damaging bust. The factors that cause these changes in the business cycle are supply, demand, capital availability, and the market’s perception of the economic future.

U.S. GDP growth averaged 2.4% in 2017, will average 3.1 percent in 2018, 2.5 percent in 2019, and 2.0 percent in 2020. That’s according to the most recent forecast released at the Federal Open Market Committee meeting on September 26, 2018. This estimate takes into account Trump’s economic policies.

The unemployment rate dropped to 3.7 percent in 2018, and will drop to 3.5 percent in 2019 and 2020. That’s lower than the Fed’s 6.7 percent target. But former Federal Reserve Chair Janet Yellen admitted a lot of workers are part-time and would prefer full-time work. Also, most job growth is in low-paying retail and food service industries. Some people have been out of work for so long that they’ll never be able to return to the high-paying jobs they used to have. Structural unemployment has increased. These traits are unique to this recovery.

Yellen admitted that the real unemployment rate is more accurate. It is double the widely-reported rate.

Inflation was 2.1 percent in 2018 and should be 2.0 percent in 2019, and 2.1 percent in 2020. The core inflation rate strips out those volatile gas and food prices. The Fed prefers to use that rate when setting monetary policy. The core inflation rate was 2.0 percent in 2018, and will be 2.1 percent in 2019 and 2020. It’s unusual that the core rate is that similar to the regular inflation rate. Fortunately, the core rate is close to the Fed’s 2 percent target inflation rate. That gives the Fed room to raise rates to a more

What is particularly interesting to me is economic performance over time and its relation to previous administrations. One might assume that it is always relative to the “party” that is in control of the government, but:

U.S. GDP by Year Since 1929 Compared to Major Events

Year  Nominal GDP (trillions) Real GDP (trillions) GDP Growth Rate Events Affecting GDP
1929   $0.105   $1.109     NA Depression began.
1930   $0.092   $1.015   -8.5% Smoot-Hawley.
1931   $0.077   $0.950   -6.4% Dust Bowl.
1932   $0.060   $0.828 -12.9% Hoover tax hikes.
1933   $0.057   $0.817   -1.2% New Deal.
1934   $0.067   $0.906  10.8% U.S. debt rose.
1935   $0.074   $0.986    8.9% Social Security.
1936   $0.085   $1.113  12.9% FDR tax hikes.
1937   $0.093   $1.170    5.1% Depression returned.
1938   $0.087   $1.132   -3.3% Depression ended.
1939   $0.093   $1.222    8.0% WWII. Dust Bowl ended.
1940   $0.103   $1.330    8.8% Defense increased.
1941   $0.129   $1.566  17.7% Pearl Harbor.
1942   $0.166   $1.862  18.9%  
1943   $0.203   $2.178  17.0% Defense spending tripled.
1944   $0.224   $2.352    8.0% Bretton Woods.
1945   $0.228   $2.329   -1.0% WWII ended. Recession.
1946   $0.228   $2.058 -11.6% Budget cuts.
1947   $0.250   $2.035   -1.1% Cold War began.
1948   $0.275   $2.119    4.1% Recession.
1949   $0.273   $2.107   -0.6% NATO. Fair Deal.
1950   $0.300   $2.290    8.7% Korean War.
1951   $0.347   $2.474    8.0%  
1952   $0.367   $2.575    4.1%  
1953   $0.389   $2.696    4.7% War ended. Recession.
1954   $0.391   $2.680   -0.6% Dow returned to 1929 high.
1955   $0.426   $2.871    7.1%  
1956   $0.449   $2.932    2.1%  
1957   $0.474   $2.994    2.1% Recession.
1958   $0.481   $2.972   -0.7% Recession ended.
1959   $0.522   $3.178    6.9% Fed raised rates.
1960   $0.542   $3.260    2.6% Recession.
1961   $0.562   $3.344    2.6% JFK’s deficit spending ended recession.
1962   $0.604   $3.548    6.1%
1963   $0.638   $3.703    4.4%
1964   $0.685   $3.916    5.8% LBJ’s Medicare, Medicaid.
1965   $0.742   $4.171    6.5%
1966   $0.813   $4.446    6.6% Vietnam War.
1967   $0.860   $4.568    2.7%  
1968   $0.941   $4.792    4.9% Moon landing.
1969   $1.018   $4.942    3.1% Nixon took office.
1970   $1.073   $4.951    0.2% Recession.
1971   $1.165   $5.114    3.3% Wage-price controls.
1972   $1.279   $5.383    5.3% Stagflation.
1973   $1.425   $5.687    5.6% End of gold standard.
1974   $1.545   $5.657   -0.5% Watergate.
1975   $1.685   $5.645   -0.2% Recession ended.
1976   $1.873   $5.949    5.4% Fed lowered rate.
1977   $2.082   $6.224    4.6%  
1978   $2.352   $6.569    5.5% Fed raised rate to 20% to stop inflation.
1979   $2.627   $6.777    3.2%
1980   $2.857   $6.759   -0.3% Recession.
1981   $3.207   $6.931    2.5% Reagan tax cut.
1982   $3.344   $6.806   -1.8% Recession ended.
1983   $3.634   $7.118    4.6% Tax hike and defense spending.
1984   $4.038   $7.633    7.2%
1985   $4.339   $7.951    4.2%  
1986   $4.580   $8.226    3.5% Tax cut.
1987   $4.855   $8.511    3.5% Black Monday.
1988   $5.236   $8.867    4.2% Fed raised rates.
1989   $5.642   $9.192    3.7% S&L Crisis.
1990   $5.963   $9.366    1.9% Recession.
1991   $6.158   $9.355   -0.1% Recession.
1992   $6.520   $9.685    3.5% NAFTA drafted
1993   $6.859   $9.952    2.8% Balanced Budget Act.
1994   $7.287 $10.352    4.0%  
1995   $7.640 $10.630    2.7% Fed raised rate.
1996   $8.073 $11.031    3.8% Welfare reform.
1997   $8.578 $11.522    4.4%  
1998   $9.063 $12.038    4.5% LTCM crisis.
1999   $9.631 $12.611    4.8% Repeal of Glass-Steagall.
2000 $10.252 $13.131    4.1% Tech bubble burst.
2001 $10.582 $13.262    1.0% 9/11 attacks.
2002 $10.936 $13.493    1.7% War on Terror.
2003 $11.458 $13.879    2.9% Iraq WarJGTRRA.
2004 $12.214 $14.406    3.8%  
2005 $13.037 $14.913    3.5% Katrina. Bankruptcy Act.
2006 $13.815 $15.338    2.9% Fed raised rates.
2007 $14.452 $15.626    1.9% Bank crisis.
2008 $14.713 $15.605   -0.1% Financial crisis.
2009 $14.449 $15.209   -2.5% Stimulus Act.
2010 $14.992 $15.599    2.6% ACADodd-Frank.
2011 $15.543 $15.841    1.6% Japan earthquake.
2012 $16.197 $16.197    2.2% Fiscal cliff.
2013 $16.785 $16.495    1.8% Sequestration.
2014 $17.522 $16.900    2.5% QE ends.
2015 $18.219 $17.387    2.9% TPP. Iran deal.
2016 $18.707 $17.659    1.6% Presidential race.
2017 $19.485 $18.051    2.2% Trump Tax Act

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Partisan Polarization vs Progress

– Partisan Polarization vs Progress

The two-party system has real issues, in my view. When party support is more important than your country’s interest and your own personal ethics one has to wonder why? When I get confused, I can usually remedy my situation by “following the money”. If you consider politics your career (rather than service to your country) then the money that finances elections becomes extremely important. In our current system the candidate that has the most financial support, on average, will be successful.

While a standing member of the congress is not entirely dependent on financial support through his or her party, it can be a substantial element. When you add that to the pressure to support the “party” agenda then? I leave it to your personal research, but mine indicates that the vast majority of the time your elected representatives will vote as a party group. Does this really make sense? Of course not! Legislative proposals are subject to opinion so we would not expect everyone to agree. However, what are the odds that 100% of one group be in support and 100% of another group to be in opposition?

In the last several decades this trend towards partisan voting has accelerated. When you combine this with the trend of both party’s movement to their more vocal extremes it results in a lack of social and economic progress.

The fact that the majority in both groups tend to have a political agenda closer to the center pains little or no traction. Many issues that require attention go begging despite the fact that they have bipartisan support. It seems that our focus tends to be on issues that are more contentious and far less important to our well-being. And because the extremes in both political arenas are so vocal, they seem to control both the agenda and enhance the polarization.

There are many important issues that I contend would command bipartisan support including limiting deficit spending, immigration reform, security (border & others), infrastructure, climate issues and reducing the cost of healthcare.

We appear to have a Government of the parties, by the parties and for the parties. We would do well to head the words of President Washington in his farewell speech:                                   “The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries, which result, gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of Public Liberty

Without looking forward to an extremity of this kind, (which nevertheless ought not to be entirely out of sight,) the common and continual mischiefs of the spirit of party are sufficient to make it the interest and duty of a wise people to discourage and restrain it.

It serves always to distract the Public Councils, and enfeeble the Public Administration. It agitates the Community with ill-founded jealousies and false alarms; kindles the animosity of one part against another, foments occasionally riot and insurrection. It opens the door to foreign influence and corruption, which find a facilitated access to the government itself through the channels of party passions. Thus, the policy and the will of one country are subjected to the policy and will of another.

There is an opinion, that parties in free countries are useful checks upon the administration of the Government, and serve to keep alive the spirit of Liberty. This within certain limits is probably true; and in Governments of a Monarchical cast, Patriotism may look with indulgence, if not with favor, upon the spirit of party. But in those of the popular character, in Governments purely elective, it is a spirit not to be encouraged. From their natural tendency, it is certain there will always be enough of that spirit for every salutary purpose. And, there being constant danger of excess, the effort ought to be, by force of public opinion, to mitigate and assuage it. A fire not to be quenched, it demands a uniform vigilance to prevent its bursting into a flame, lest, instead of warming, it should consume.”