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Catching a Falling Financial Knife

Why the 98% Matter to the U.S. Economy

Economics / US Economy Dec 08, 2012 - 06:58 AM GMT

By: InvestmentContrarian

Economics

George Leong: President Obama is on a fiscal cliff campaign to show why middle-class America really needs the help. Of course, Republicans want the Bush-era tax cuts to also apply to the top two percent of income earners. This is the major sticking point holding up a deal.


I love capitalism and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is one of the richest countries in the world, with its gross domestic product (GDP) growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been widening, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution may need to be fixed.

This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.

The median family income plummeted to an inflation-adjusted $45,800 in 2010 compared to $49,600 in 2007, according to the Survey of Consumer Finances, a publication of the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into less consumer spending by the middle class as income levels fade.

What is worrisome is that the recession resulted in a greater disparity in incomes between the poor and the rich. It’s common for the CEO of a large company to earn multiples of a regular worker’s income. But according to the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), in 2011, the average S&P 500 CEO earned $12.9 million; that’s 380 times higher than the average income of a worker in the U.S., which was $33,947.

In America, the rich are getting richer while the poor are getting poorer, which is impacting consumer spending.

With more than 30 million Americans using some form of food stamps, which also affects consumer spending, there is a great disparity of income in this country. The same is true in countries like Brazil, Russia, and Venezuela among others.

The income gap is widening. In 1962, the top one percent of income earners had a net worth of 125 times the median household, according to the Economic Policy Institute. The income gap surged to 288 times the median household in 2010, and it’s getting worse. This means less consumer spending from the middle class. President Obama realizes this and wants to remedy the situation. Of course, the gap will continue to be significant, as the rich have a much larger base of wealth to work from and can accelerate the growth of their net worth much quicker. Making two percent on $10.0 million is a lot better than earning two percent on $1,000.

Whatever your views on income distribution, and there will be some that feel the current tax structure is correct, the problem is that income disparity inevitably causes societal issues; in the long run, this cannot be good for America, as it impacts consumer spending.

Source: http://www.investmentcontrarians.com/recession/why-the-98-matter-in-the-u-s-economy/1104/

By George Leong, BA, B. Comm.
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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Catching a Falling Financial Knife