Wimpy Economic Outlook – Does It Finally Matter?

Are our economic sins finally starting to matter? 

Could it be that borrowing $9 Trillion dollars is not the smartest way to fund a tax cut that gave the "bottom 80%" of Americans an average of $500 a year off their taxes and the top 1% an average of $53,000 per million off theirs?

$53,000 just so happens to be the ENTIRE median income of the fourth 20% of all American families total income, over $9,000 higher than the highest income level of the bottom 60% of all taxpaying US families.

Before you go complaining about it I will say that this represented a substantial compromise as the original Bush tax plan had the ratio at $54,480 for the top $1.3M taxpayers and just $256 for the bottom 78M (that's the plan he was elected on!) – that $347 doled out to the bottom 98.4% of the country (lazy bastards) represents a 35% increase in Republican largess.

While you were out whooping it up with your $347 (or let's assume you were in the top 4% and got a whopping $3,345 check), we racked up an extra $3.5T in additional debt to help fund those tax breaks.  I'm bringing this up today because Ben Bernanke is VERY concerned about it, even if you're not…

Have we finally choked every last dollar out of the bottom 78M American families?  Bernanke is predicting a "deficit storm" that will take up 4.5% of our GDP just to pay interest on the debt we accumulated in order to make sure Donald Trump could gold plate one more toilet seat in the purest example of trickle down economics.

What we seem to have forgotten in this orgy of elitist entitlement spending (not that we spent money on entitlement programs, rather we pillaged the entitlement programs and spent the money!) was that the $53,000 we stole, came out of the pockets of the people who ultimately made us that $1M that put us in the top 1% bracket in the first place.  Median family income actually fell $1,586 (2.3%) from 2000-2004 and that is very deceiving because the top 1% jumped in total US income from 33% in 1980 to 44% in 2000, even as the GDP grew from $3T to $8T – that means that the top 1% took home $2.5T of the $5T increase in national wealth, bringing the annual take of those 1.3M GREAT Americans from $1T in 1980 $3.5T just 20 years later.

Thank goodness our President realized that the most pressing problem facing our nation was the fact that these poor people were paying, on the average, $53,000 too much in taxes!  According to Business Week "The tax cuts for millionaires alone have reduced government revenues by $90 billion a year."

Why bring this up today?  Don't blame me, Ben started it this morning and now it's my turn to expand on his topic (he usually expands on mine).  It's important that we understand the root cause of the drop in GDP, we have taken a couple of Trillion dollars of discretionary income out of the hands of average Americans and put it into the hands of wealthy people who put it into the hands of brokers who put it into the hands of oil companies who buy back their own stock and employ no additional workers and produce nothing new other than better balance sheets!  This is not a platform for long-term economic growth!

Not only that but these economic shell games that further enrich the people at the very top (and if you're not SURE that it's you – it's not you) drive up the price of commodities (as they have become an investment vehicle), many of which are necessities that eat further into the disposable income of those shiftless 78M families whose parents didn't buy them a baseball team or even an oil company so they end up working for a living!

Since 1.3M Americans can afford million-dollar homes, builders purchase materials and labor enough to build 3 normal homes to put up as many mansions as possible.  This places a huge demand on stone and wood and cement and copper pipes etc which drives up the price of all homes, even for the people who don't need a 5 car garage.  The same goes for jewelry, autos, professional fees, medicine, entertainment….  The fact that 1.3M families have 20 times more money (in the lowest bracket) than the median family income of 78M families means that we are all just living in a very ritzy neighborhood called the United States.

Keeping up with the Joneses is hard enough but keeping up with the Trumps is what is leading this country into the Chairman's "Deficit Storm" and the whole thing can come down like a house of cards if we're not careful (or maybe even if we are – it may be too late!).  So let's not get too excited about an economic recovery just yet – we still have many hard choices to make and we need to make them soon.  That $2.5T that shifted to the very rich from 1980 to 2000 was the famous "safety net" that those 78M people were hoping to retire on and, although we have to wait for the statistics, things seem to have gotten far worse since 2000.

In the above graph you can see that the US economy grew over 300% from 1960 to 1980 (15% per year) and 166% from 1980 to 2000 (8% a year) but now we are being told we need to accept 2% as a reasonable rate of growth as well as accepting our role as a debtor nation. 

I wrote an article on this strategy called "Inflation Nation" back in November which provoked a very spirited economic discussion (see the comments) but the gist of it is that rich people like to stay rich and expanding economies with upward mobility and rising wages hurts them a lot more than it does you so they will spend whatever it takes to have the spin doctors tell you how evil inflation is and how you should thank your labor union for negotiating only a 50% cut in your benefits while you hand another $40 to the gas man.

Will it matter enough to bring the markets down?  Maybe not, those 1.3M people have to put their $3.5T a year somewhere and even Donald Trump can only plate so many bathroom fixtures in gold before he has to find something else to do with his money…

Remember that stocks are a commodity too and the only thing we have to fear is that they fall out of favor and our wealthy friends pull out their capital and head for the safe haven of bonds (which can be attractive in low-growth, low inflation environments).

Meanwhile, I continue to urge caution as we can grow our way out of this but it will require a lot of finesse, something I haven't seen much of in the last 6 years of policy decisions…