Sunday, August 24, 2008

It's the Economy Stupid!

As I look at the state of our Economy, it’s incredible how much has changed in 8 years, and not for the better. This is not only my opinion, but the opinion of countless Americans. From the various polls that have been mentioned and discussed, we know that a majority of Americans believe the country is headed in the wrong direction. In fact, when it comes to the Economy, more Americans believe by a significant majority, that Obama is more qualified to tackle the issues on Economy, Taxes, Health, and Energy (Gas).

The economy is an important issue facing Americans today. It impacts them on a micro level – personally, in terms of their ability to literally have a home, to buy necessities, and save.

From the Wall St. Journal, we can see the declining trends in income, during the Clinton Administration, we saw a real (inflation adjusted) and steadily increasing rise in income. But in 6 years since Bush has taken office, we’ve seen a drop in income for median Middle Class Income.

And while Bush has lowered Taxes, the middle class has seen the value of their tax cuts being eaten away by inflation, represented in higher food and fuel prices. Furthermore, it’s visibly shocking to see the decline in National Savings Rate. So Americans are consuming, but using debt to drive consumption!

In addition, I had mentioned in an earlier posting, that the Tax Cuts that the Bush Administration has put in place, effectively benefited the top 1% of the earners more than the middle class.

To give you an idea of what that means, we look at the 2006 income distribution as referenced by US Census Bureau.

Median Income Ranges
1st Quintile $ 0 - $ 26,999
2nd Quintile $ 27,000 - $ 46,999
3rd Quintile $ 47,000 - $ 71,199
4th Quintile $ 71,200 - $109,150
5th Quintile > $109,151
Top 5% Income $191,060 – and higher

Essentially, 22% of the population, on average for 2006 incomes, make more than $191,000.

However, what’s striking to me is 51% of the population, in 2006, made less than $72,000, many having families. Given the rising costs of fuel, food, and housing, it is no wonder that many families continue to struggle. In addition, excluding the top 5% Income, we have, on average ,about 78% of the population making $191,060 or less.

When we talk about our personal economy, we can not ignore the impact of Taxes. Everyone dreads paying taxes, and it is a large factor driving disposable income. So let’s put it all on the table, once and for all. McCain continually puts out false information on who is hurt and benefits between the two candidates Tax Plans. What puzzles me is that Average Americans continue to be deluded that McCain is going to go to bat for them! He doesn't understand nor does he care about the middle class, otherwise his policies would reflect his priorities.

From the Washington Post (a conservative newspaper), they put in a nice chart to compare average impact of the two candidates’ tax policies. This is coming from the Tax Center Policy of the Brookings Institute. I have read the tax analysis, and have come up with slightly different numbers depending on the year 2009 vs 2012.

However, the Washington Post does give a fairly accurate comparison.

My one problem with Washington Post's chart, is that it does not further breakout the $603,403 to $2.87 million income bracket, because it gives a false impression that people making $603,403 an increase of $115,974 in taxes under Obama's plan. One has to keep in mind that it's an average, and that of course the incremental tax will be vary for those making $603,403 vs. $2.87 Million.

On a blanket statement, yes we can say McCain’s tax plan does in total give a higher tax cut than Obama. However, the devil is always in the detail, and if you look to see how much the Top 5% and top 1% Earners benefits vs. the middle class, it is very clear that Obama’s tax plan would benefit the majority of the population, more than McCain. McCain provides a disproportionate tax cut to an income bracket, to whom it has less an incremental impact, than to the middle class.

Paul Krugman noted economist, provides an layman’s perspective on the tax hoopla, and the McCain Lies regarding tax-cuts.

Why do I care so much about the other people’s income? Simply put, without average American incomes being sufficient to purchase goods and everyday consumer items, I am out of a job. I work for a Large Consumer Packaged Goods Company, we place a lot of emphasis on brand, quality, and performance of our products, but our products are not on an infinite price elasticity curve. At some point, consumers will turn away, and buy cheaper knockoffs.

Henry Ford had it right; he is recognized with being the father of modernizing industrial assembly and production, as well as recognizing the benefits and efficiency of improving the quality of his employees, thereby reducing turnover and improving productivity. Although he can not be by any stretch of imagination labeled a socialist, as he opposed unions, he did however advocate “welfare capitalism”, and had a policy to pay his workers a wage, where they could also afford to buy the very items they produced.

There is a cycle in our capitalistic economy. Wages and Income are tied to consumption rates, and in turn, those consumption rates grow our GDP, and when our GDP and overall incomes rise, everyone benefits.

Obama understands this, this is why his focus is more on increasing Average American's disposable income, and truly growing the economy, rather than focusing on the deficit, which was what Bill Clinton did. Bill Clinton and Robert Rubin, felt that the key to the economy, was to get the deficit undercontrol, and they were right. However, we are in a period of both a recession and an inflation, and the primary focus is the get the economy back on track, and here Obama's Chicago Economics background comes very much in play.

McCain with his "I don't know much about Economics" mentality, has been poorly advised by his economic advisors. But with such people like Phil Gramm famous for castigating Americans as "whiners" and saying the recession is all in our heads, and who sits on the board of UBS, one of the major banks involved in the mortgage and securities investigation, I'm not surprised at McCain's cluelessness.

I’m not done on the subject of Taxes, but we need to also take a look at Macro issues, such as the Deficit!
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