Everyone played the blame game in this election. Did Obama deliver the change in Washington he promised? Both conservatives and progressives are unhappy with the slow growing economy; and jobless rate still hovering around 10 percent. And no one is quite sure who to blame—Obama or Dubya Bush; too much government, or too little?
But in fact, there is really only one underlying cause of the lingering high unemployment and slowness of this recovery. Real (after inflation) household incomes have been declining since the 1970s for all except the top 20 percent of income earners. And that is because most of the income went to the top 1 percent, who took in 23.5 percent of pre-tax income in 2007, vs. just 8 percent in the 70‘s.
So the rest of the middle and lower classes have had to borrow anywhere they could to keep up their standard of living. There are lots of books to explain the tremendous redistribution of wealth—from Robert Reich’s high tech revolution in “The Future of Success”, to the corporate takeover of our political system in Professors Jacob Hacker and Paul Pierson’s new book, “Winner Take-all Politics”.
The bottom line is that paying down debt has become the priority for most Americans because they don’t have the income to do otherwise. This happened in Japan as well, so that Nomura Securities’ Richard Koo has named such down turns ‘balance sheet’ recessions. And the high debt leveraging won’t go away until income distribution again becomes more equitable. This really means bringing tax rates back to the 1970’s more progressive levels, when the top 1 percent had rates one-third higher than they are today, according to New York Times’ Frank Rich in his latest Op-ed column.
In fact economist Paul Krugman maintains that letting the above $250,000 Bush II tax cuts expire would save revenues equivalent to the social security shortfall over the next 75 years! That is to say, such wealth redistribution would also help the federal budget deficit, the US dollar, and therefore our trade deficit (and keep down commodity prices).
So where are consumers these days in rebalancing their balance sheets? Consumers are becoming thriftier, with the personal savings rate up to 5.8 percent from below 1 percent in 2003; and they have begun spending again.
The consumer sector is continuing to prop up the recovery-maybe even giving it a modest strengthening, says Econoday. October Motor vehicles & parts led the way, jumping 5.0 percent. And apparently, households are fixing up homes as building materials & garden equipment posted a 1.9 percent boost, in spite of the housing recession. Gains were also seen in food & beverage, gasoline stations, clothing, sporting goods & hobby, general merchandise, nonstore retailers, and food services & drinking places.
Overall retail sales in October jumped 1.2 percent after gaining 0.7 percent in September. The latest number sharply topped analysts' projection for a 0.7 percent increase. Excluding autos, sales posted a still healthy 0.4 percent increase, following a 0.5 percent advance in September and coming in a little higher than the median market forecast for a 0.4 percent boost.
This is mainly because personal incomes are again growing. Year on year, personal income growth for September came in at up 3.1 percent, down slightly from 3.2 percent in August. Personal Consumption Expenditures’ growth increased to 3.7 percent in September from 2.8 percent in August, a very large jump.
And we know average hourly earnings gained 0.2 percent in October from the October unemployment report, after rising 0.1 percent in September, while the average workweek for all workers edged up to 34.3 hours from 34.2 hours. In fact, the workweek has been on a rebound since mid-2009. Between the gains in temp workers and average workweek, one should expect a pickup in hiring as these two series typically rise before overall employment.
Frank Rich blames both political parties for the economic damage caused by catering to the richest in their quest for campaign donations. “The bigger issue is whether the country can afford the systemic damage being done by the every-growing income inequality between the wealthiest Americans and everyone else, whether poor, middle class or even rich.”
In fact, economists are discovering that much of the financial markets’ instability has resulted from such inequality. The cheap money and lax financial regulation caused everyone to over leverage, not just consumers, resulting in the twin real estate and financial market bubbles that had to burst.
But there is some good news on the wealth redistribution front. Forty billionaires led by Warren Buffet and Bill Gates have pledged to donate one-half of their wealth to philanthropic causes. From Ted Turner to George Lucas, these 40 billionaires join Warren Buffett and Bill Gates in making the pledge as part of their The Giving Pledge, a campaign launched earlier this year "to urge wealthy individuals to give the majority of their money to charities of their choice either during their lifetime or after their death," said one headline. If only more of the superrich would follow their example.
Harlan Green © 2010
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