September 28, 2015

 

This data is from Adviser Perspectives, advisers to wealth managers. The data is verifiable through many other sources.

Wealth Advisers explains: “Note that this is a gross income number that doesn’t include any tax withholding or other deductions. Disposable income would be noticeably lower. Latest Hypothetical Annual Earnings: $35,402, Down 14.6% from 42 Years Ago…That’s a 14.6% decline from the similarly calculated real peak in October 1972. In the charts above, we’ve highlighted the presidencies during this timeframe…. We will point out that the so-called supply-side economics popularized during the Reagan administration (aka “trickle-down” economics), wasn’t very friendly to production and nonsupervisory employees.”

This very day, September 28, 2015, Don Lemon of CNN interviewed Trump’s business advisor and also the infamous Grover Norquist, whose claim to fame is that he extracted from everyone on the Conservative side of our political spectrum, a pledge not to increase taxes–ever, for any reason! It’s in writing. They all signed it.

Erin Burnett interviewed Trump today. His new tax plan proposes to reduce taxes on everyone, including the wealthy. He suggests he will punish only hedge fund managers, but examination suggests that even they will see net tax decrease. Of course, tax reductions for the middle class and the poor are welcome. But…how is the resultant shortfall in government revenue going to be made up? How is he going to pay for his Wall, and for his expanded military?

All three on the Trump/Conservative side interviewed, essentially reverted to the old adage–that tax reductions will increase economic growth, and that economic growth will “trickle down” to all, including the middle class and the poor.

There are only two problems with all this:

(1) It’s not evident that cutting taxes will automatically increase growth. Essentially, when my taxes are reduced, I don’t necessarily invest the savings in new productive capacity for the economy. That’s the faulty claim. And, I don’t even necessarily spend it to buy goods of production or services. That might increase demand. I might just save it by buying a new home, a new boat, some stocks, or a larger savings account, etc. This is especially true when effective tax rates on corporations and the wealthy (loopholes included) are already low and there already exists sufficient motivation for all to invest.

(2) And, even if there is improved economic growth, it does NOT automatically translate to well being for the middle class and the poor. Under Reagan, the icon of Conservatives, economic growth was indeed strong (by US standards), during the last 6 of his 8 years, averaging 3.8%. There was job growth. However, there was NOT wage growth. Take another look at the chart at the beginning of this post. Note that real wages declined under Reagan, notwithstanding the improved GDP growth. One obvious proof that economic growth does not necessarily improve the plight of the middle class and poor can be found by a quick look at China’s recent history. Across the last 35 years, China has enjoyed economic growth of about 10%. During this time, the Gini index (primary measure of inequality) has steadily risen to peak levels, equal to that of the US (below). The benefits of that growth have largely gone to the wealthy. Same is true in the US.

Regrettably, under both Republican and Democratic administrations since 1972, wage growth has been stagnant. Worse–it’s been down.

The Conservative policies initiated under Reagan have steadily expanded across the 40 years since, under both administrations. The result of those policies have been very good to the top 10%.

Source: New Yorker

But, it hasn’t been very good for workers.

In summary, reduced taxes does not automatically increase economic growth–and, economic growth does not necessarily result in improved life style for the middle class. Growth is necessary, but not sufficient.

Very simply, capitalism is the best economic system, but left to itself, its natural evolution is to excess, without much concern for the workers. Government engagement in the process, control of the excesses, with protections for the underprivileged is necessary.

And, without that, even the wealthy will someday pay a high price.