Posted by Shyam Moondra
The latest Census Report for 2010 includes some startling and yet not totally unexpected statistics on income distribution in the United States. Below are the highlights from this report:
• In 2010, the number of American households living under poverty (i.e., earning less than $22,113 per year) increased by 2.6 million to 46.2 million, the largest increase in the last 50 years. These families accounted for over 15% of the population.
• The median income of the U.S. households declined for the third straight year since the recession began in 2007 and stood at $49,445. The Blacks and Hispanics suffered the biggest losses.
• Among the various income groups, the top 5% of households saw the smallest decline in income in 2010, while the bottom 20% of households saw the biggest decline of 38%.
• The richest 20% of the population accounted for more than half of the 2010 pre-tax income, while the bottom 20% got only 11%.
The above data suggests the following:
• The cherished middle class has steadily lost ground relative to the affluent upper-class over the last decade. The decline of the middle-class began with the presidency of George W. Bush, who showered the rich individuals with income tax cuts and special deductions and credits and gave away tax subsidies to corporations that ultimately benefited the rich people more than the average Americans.
• The rich got richer and poor got poorer, with the gap between the rich and the poor widening to the point that there is legitimate worry about a possible popular revolt against the government policies and resentment against the rich and powerful.
We have near zero interest rates and low inflation, and yet the economy is not getting a lift. It seems as if the old proven economic theories don’t work any more. In general, plentiful money supply, low interest rates, and increased government spending should boost the economy, but not this time. Here are the plausible reasons why we are having such a hard time in recovering from the 2007 recession that officially ended in June of 2009:
• The demise of the middle-class, the backbone of the U.S. economy, has reduced the spending capacity of the average consumers, which, in turn, is making it harder for the economy to recover. The Republicans say that businesses create jobs, which is true only if consumers spend. So, ultimately, it's the robust middle-class that will pave the way for job creation.
• The continuing weakness in the housing sector, caused by contradictory and often confusing government policies on home foreclosures, is contributing to the economic sluggishness. The government bailed out the financial institutions burdened with the collapse of the mortgage-based securities market, but more recently entities such as Freddie/Fannie and AIG, partially owned by the federal government, are orchestrating to recover the losses they sustained on their investments in those securities. Also, State Attorney Generals are pushing for huge monetary penalties on the banks for faulty procedures used by the banks to foreclose the properties. The State AGs are asking for expensive remedies such as forgiving part of the mortgage loans and/or reducing mortgage interest rates. The government’s uncoordinated actions are pushing the banks towards another financial crisis; unfortunately, thanks to the new financial regulations bill passed by the Congress, the banks cannot be bailed out any more. This raises the specter of another round of credit freeze that will devastate the economy. These government’s not-so-well-thought-out approaches are also prolonging the misery of the homeowners and thus making it difficult for the housing market to recover.
• Recent regulatory regimes adopted by the Congress for the financial sector and for health care have created a lot of uncertainty and that’s why the corporate world is not aggressively spending their cash hoard of $2 trillion on new capital projects and they are not hiring new employees. Without new hiring, the unemployment rate is stuck at an uncomfortable level of over 9% and consumers are holding back, creating a vicious cycle that is making it harder for the economy to gain traction.
The Republican Party’s focus on cutting government spending is ill timed. Most of their targeted spending cuts will affect the struggling middle-class people, which means no economic recovery and a wider gap between the rich and the poor. The stalled economy definitely needs a stimulating jolt, but the Republicans are resisting new stimulus spending, e.g., on infrastructure projects. At the same time, our budget deficit keeps growing and national debt reaching to dangerously high levels. Because of the ideological divide, we are at a cross road with no clear path to prosperity. Republicans want to balance the budget by cutting spending (which will decimate the middle-class and economy and the unemployment rate will go up) and Democrats want to balance the budget by increasing taxes (that will also negatively affect the economy).
Clearly, neither approach is correct. What we need is a balanced approach that will provide stimulus in the near-term to boost the economy but also put us on a long-term path to fiscal sanity. We need to provide some stimulus now (meaning more government spending) and, at the same time, have a long-term plan to cut spending (including reforms of entitlement programs) and enhance tax revenues. Right now, the American people desperately want more jobs; they don’t care about the deficit and debt.
The Congressional Super Committee has been tasked to come up with a $1.5 trillion plan to reduce deficit by November. Such a plan is just a first step. The financial markets are actually looking for a grand plan to reduce deficit by $4-5 trillion over ten years that consists of spending cuts (mostly in later years) and net tax revenue enhancement via tax law reforms to reduce the overall tax rates and eliminate all special interest deductions and credits. The rich people and corporations must pay their fair share of taxes. I believe the American Jobs Act, proposed by President Obama, achieves the desired balanced approach. Republicans must work cooperatively with Obama and Congressional Democrats to move swiftly on this bill right now rather than wait until after the 2012 election which is fourteen months away.
