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Its Still the Economy, Stupid

Is it Iraq or the Economy? That's the question the MSM seems to be focused on. The obvious answer is being overlooked:

How about both.

Most pundits, politicians and economists have yet to figure out what the public long ago came to realize: We now have a dual economy -- one that distributes gains and losses in a very uneven manner.

The lowest economic strata have seen tremendous job creation, particularly in China, India, Malaysia, Viet Nam, Taiwan, and parts of Eastern Europe. And any owners of hard assets:  real estate, energy, precious metals, as well as global equities, have seen their fortunes move up.      

So while the media drones on about whether the GOP will suffer from Iraq in tomorrow's elections, or prosper from the "strong" economy, you can be sure they know not what they say. While those of us in the top percentiles are doing very nicely indeed, the rest of the country is scraping by.

The economy, despite good overall data and record high corporate profitability, does not exactly imbue to the incumbent's advantage.

Evidence for this can be found in a recent study, titled "The Evolution of Top Incomes," by University of California-Berkeley economist Emmanuel Saez. Consider the following info from the study about the nation's richest income gainers. This top 1% of all American households -- 719,910 of them -- had:

• an average annual income of $326,720 in 2004;

• this represents 19.8% of the entire nation's pretax income; That's up more than 10% (from 17.8%) from 2003;

• In 2004, the top 1/10 of that 1% -- 129,584 American households  -- reported income equal to 9.5 percent of national pretax income.

• Between 2001 and 2004,  median, or midpoint, family income rose only 1.6 percent.

• Median family real net worth - a family's gross assets minus liabilities - rose only 1.5 percent during those four years.

Compare the recent sluggish income-growth with the four years between 1998 and 2001:

• Median family income grew by 9.5 percent and median family real net worth grew by 10.3 percent.

• Over 2000-05, workers with four-year college degrees saw their inflation adjusted wages fall 3.1%

• Only two groups, who together make up just 3.4 percent of the workforce, saw inflation-adjusted wages rise:  workers with doctoral degrees or specialty degrees, such as medicine or law, according to the U.S. Census Bureau.

• Soaring pay enjoyed by top CEOs, athletes and entertainers has also added to the widening income divide.

• The median value of stock holdings for the wealthiest 10 percent of Americans was $110,000 per household in 2004, according to Morgan Stanley, the banking giant. The value of stocks held by the other 90 percent of Americans averaged $8,350.

Those numbers are precisely why the Middle Class rates the economy only fair to poor, despite the data showing overall (but diminishing) strength.

Depending upon the elections results tomorrow, the Middle Class might force some changes -- in both the economy and the stock market. A minor realignment would produce gridlock, and that would be a good thing: it would act as a check on the profligate spending, and force some of the more heinous lobbying abuses back to merely egregious.

A major shift would reflect a full blown political re-alignment, and that could cause all sorts of mischief as far as markets are concerned. Its more than Iraq, the budget surplus deficit, earnings and inflation. We can expect to hear questions raised about fundamental fairness, given how the benefits of the tax cuts have accrued primarily to the top percentile.

Individual income tax rates were lowered, most especially the highest brackets, down to 25, 28, 33 and 35%. The big cuts in the way capital gains and dividends are taxed also fell to the wealthiest Americans. Indeed, much of the market run from 2003 is in large part predicated on tax policy that made it cheaper/more profitable to be a stockowner. (And I personally benefited from all of these changes).

I expect all of these 2003 tax cuts to be revisited in the event of a major GOP loss.

Former Treasury Secretary Lawrence Summers takes note of the way various economic classes have been impacted by the recent changes. Writing in the Financial Times, he notes:

"Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world’s economy from growing faster in the past five years than in any five-year period in recorded economic history...

Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.

Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered." (emphasis added)

That pretty much sums up the upper and lower strata -- but its in the great middle where we see all sorts of angst coming out of this "new era."

And, if we are to believe what members of this group are actually saying to pollsters, its that same middle that is likely to impact the mid-term elections in the United States . . .

<>

Sources:
THE EVOLUTION OF TOP INCOMES: A HISTORICAL AND INTERNATIONAL PERSPECTIVE
Thomas Piketty, Emmanuel Saez
January 2006http://elsa.berkeley.edu/~saez/piketty-saezNBER06AEAPP.pdf

THE EVOLUTION OF TOP INCOMES
NBER WORKING PAPER SERIES
NATIONAL BUREAU OF ECONOMIC RESEARCH, January 2006
http://www.nber.org/papers/w11955

The rich are getting much richer, much faster than everyone else
Kevin G. Hall
McClatchy Newspapers, Thu, Nov. 02, 2006
http://www.realcities.com/mld/krwashington/15912820.htm

The global middle cries out for reassurance
By Lawrence Summers
FT, October 29 2006 18:48
http://www.ft.com/cms/s/89aac4dc-6777-11db-8ea5-0000779e2340.html

Monday, November 06, 2006 | 06:48 AM | Permalink | Comments (58) | TrackBack (1)
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"It's a great time to buy or sell a stock!"

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Today’s interest rates are comparable to 40-year lows, offering stockbuyers a once-in-a-lifetime opportunity.

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Don’t Delay

Now is a great time to buy or sell a stock. If you delay, you run the risk of paying more for a new stock.

I couldn't resist

Posted by: blam | Nov 6, 2006 7:54:30 AM

"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
-- Henry Ford

Posted by: HAZWOPER | Nov 6, 2006 9:06:11 AM

Excellent slicing of that troublesome "unhappiness".
Do we need to remind ourselves that the bigger trouble (wars) is usually preceded by socio-economic conditions that are then ignited by some accident? [Chaos theory and those troublesome initial conditions come to mind.]
So this disparity in income distribution and wealth distribution , although innocuous in appearance, can be ignored for only so long...as Chamberlain I'm sure would surely confirm...but perhaps Giffen less so.

OIL, CASH AND CORRUPTION

Posted by: calmo | Nov 6, 2006 9:44:54 AM

Comparing 2001-2004 to 1998-2001 is rather rediculous given that 1998-2001 was an entirely false economy due to dot com euphoria, fed liquidity in preparation for y2k and corporate fraud. People were leaving solid decent paying jobs to go get jobs with internet start-ups that paid 50% more. Now they complain they can't make what they made in 1999. All I can say to that is .... DUH!

"Individual income tax rates were lowered, most especially the highest brackets, down to 25, 28, 33 and 35%"

COME ON!!!! The 15% bracket was expanded to a much larger dollar value and the 10% bracket was added and the child credits were increased to large amounts and the standard deduction for married couples was expanded. You aren't going to make the argument that the rich got a larger dollar tax cut are you? Because that is the lamest argument but one that atleast a market economist should know better than to make. In percentage terms the lowest brackets got by far the largest tax cuts.

You want to roll back the tax cuts. OK, lets hear you propose rolling them all back. Child tax credit goes from 1000 back to 600. 10% bracket goes back to 15% and the cutoff for the 15% bracket for married couples drops from the current value around 60,000 back to around 45,000. And then you can take the tax cuts back from the other brackets too.

So all those in the lower brackets who would like to sign up for a complete repeal of the tax cuts, ALL THE TAX CUTS, please raise your hand?

How about a little honesty about this.

If its so terrible out there why are not the Republicans going to be thrown out by wide margins. If its the 90% who are feeling the crunch it should be easy to throw them all out except in the redest of red districts.

Instead the Democrats will gain a slight majority in the House and probably have a split Senate.

I fear what I am seeing here is the same mistake Warren Buffet made when he bet against the dollar because he felt Bush was incompetent. That political gamble made in currency markets cost him a few billion dollars. Is your bearishness based on your belief that Republicans have screwed over the peasants? Because if so its not valuable insight. And if not then why the constant bashing of conservatives and the class warfare that gets posted on here (this is far from the first class warfare post here).

I have appreciated many of your other market calls but this kind of stuff really makes me question if your judgement is clouded by the political spectrum with which you view the entire system.

~~~

BR: This was an economic discussion, and a look as how this may impact politics -- not a market discussion.

But that's okay -- QBall wouldnt be Qball w/o trying to muddy up the waters and distract from the actual issue at hand.

I'm kinda impressed, I've been assigned my own rotating trolls by the RNC!

Posted by: Q-Ball | Nov 6, 2006 9:49:55 AM

As long as President Bush the veto pen, there will be no rollback in tax policy.

Posted by: OkieLawyer | Nov 6, 2006 10:00:09 AM

Just a thought, but it seems to me that a very large portion of any increases in the net worth of individual Americans for almost 10 years now have been a result of extreme asset price inflation, or asset bubbles. This coupled with a negative savings rate would make for a precarious situation.

Posted by: cButler | Nov 6, 2006 10:02:38 AM

YES .... I am in the lower bracket

roll back every tax break.

Posted by: MarkTX | Nov 6, 2006 10:03:01 AM

>>> "Only two groups, who together make up just 3.4 percent of the workforce, saw inflation-adjusted wages rise: workers with doctoral degrees or specialty degrees, such as medicine or law, according to the U.S. Census Bureau"

I think it's totally normal during globalization. The income of average American was well above international mean for the last 100 years. I see no reason for this to continue. The wages have to go down, this is fair and this is normal. Why workers in China and India should earn less than in Detroit? They should not.

The conclusion about education is also quite simple. Any dog or his dogwalker can get a bachelor degree those days. The real men must have a graduate degree. This is totally normal, too.

Posted by: bob | Nov 6, 2006 10:05:19 AM

Q Ball,

I am in one of he higher brackets.

I want spending on BS war cut before you raise any taxes.

I want general BS spending cut.

I do not want to hear you voted against a poor kids entitlement while you vote for a trillion in subsidies for the drug companies.

I want to see income taxed, not employment.

If my 15% bracket is wider okay as long as the money is not wasted.

And give me T Bills for the SS trust fund now.

Posted by: ilsm | Nov 6, 2006 10:14:08 AM

MarkTX,

You make 1. I would love to put that to a national vote.

And you say you are in the lower bracket. I would like to know how much the roll back would hurt you. Perhaps you are in a low enough income bracket that it wouldn't actually cause you to pay much more tax. I don't know that. Perhaps it would actually significantly increase your taxes which would make your statement a very strong statement of belief that the tax cuts were a mistake and would be quite impressive. But if you are in a situation where you already paid little to no taxes anyway then your statement does not count for much.

As I said, would love to put that question to a national vote. Think you can get even 25% to vote for such a thing? Only those who would be so low in the tax charts as to not really pay much of any tax anyway would vote for this and a very very slim margin of those who would face significant tax increases but who who stand on pure principle of not lowering taxes.

Posted by: Q-Ball | Nov 6, 2006 10:16:31 AM

To Q-Ball:

All's fair in love and class warfare. Why would the typical voter want to roll back his own tax cuts? It makes more sense to tax the rich because, as they say, that's where the money is.

There is a big reason Americans believe workers in America should have a continued advantage in the standard of living. Much of the newly minted prosperity in China, India, etc. is the result of American wise stewardship and benevolence of the global system. Many of us, myself included, have put our lives on the line defending and expanding freedoms in this world. We have along history of hardwork and sacrifice in America and it is wrong to ship that overseas for short term gain of a very few criminals.

There are two ways to globalize: a race to the bottom, and a race to the top. I, and most Americans prefer the latter and our voices will be heard.

Posted by: Paul Jones | Nov 6, 2006 10:21:13 AM

When you ask someone to raise their hand,
and they do...then don't give a backhanded speech that
may or may not prove anything.

Do you really think congress would allow
a national vote on income taxes?

Posted by: MarkTX | Nov 6, 2006 10:24:57 AM

Q-Ball,
If the economy were the only issue, you bet that every republican in both houses would be sitting on their rear ends on the steps of the capitol come Wednesday morning, but it is not. We still have a few hangers on who support our involevment in Iraq, and ignorants who don't understand that the only reason terrorists are in that country is because we opened the doors when we invaded. You have a huge group of religious right, or even religious moderates who are scared to death that gay marriage will threaten their sexuality, maybe give straight people funny ideas, and all the other hog wash that comes from these types who oppose stem cell research and any form of progress that may conflict with their literal interpretation of the Bible.
These are the only reasons why the middle classes may be tempted to stick with the republicans. As for the rest of us, well, I hate to say it, but most of my colleagues are just too greedy, and I am not afraid to tell them so.

Posted by: Stephen L. McKay | Nov 6, 2006 10:25:41 AM

Wow, a Henry Ford quote on the banking system! Of course, you do know who ol' Hank blamed for WW II, don't you?

Perhaps yours was just a sardonic commentary on the prejudices of some in middle America. Hope springs eternal.

Posted by: Ollie | Nov 6, 2006 10:29:23 AM

No I don't think congress would allow a national vote on taxes. I was just saying that I don't expect a very positive response to such a hypothetical vote.

I was also just trying to ascertain if such a change in tax law would hit your pocket book by a thousand dollars or 50 dollars?

If I am asked to be in favor of something that negatively affects 80% of Americans but has no impact on me, it doesn't really mean much if I am in favor of it. However if it has a big negative impact on me and I am still in favor of it, that is standing on principle and means something. That is all I was saying, and I don't know which is true in your situation. If it is the latter then I have great respect for your raising your hand. You didn't say what the impact would be to you if such a roll back happened so I don't know which group you are in.

Posted by: Q-Ball | Nov 6, 2006 10:51:23 AM

To the others who commented on other things, yes other issues do matter too. But the pocket book is a huge issue and it tends to matter more than other issues to a majority of people. So if the economy was so terrible for the vast middle it should result in a great backlash at the ballot box.

I don't agree that it is so terrible. It isn't the go go 90s thats for sure. And I am sure for some it is actually pretty bad. But I believe for most it is just the usual steady economy with small pay increases and stable employment. Thats what normal economies usually do. This idea of comparing things to where people were at in 1999 is rediculous. Not only that but the numbers posted in this entry are comparing 1998-2001 to 2001-2004. Thats comparing the height of the boom to the valley of the pull back. And that data is 2 years old. And even in 2004 when it was worse it didn't result in negative results for Republicans at the polls. Now its 2 years later and the economy and recovery is better. The numbers would look better if it was using 2006 numbers instead of 2004.

Its always the economy stupid. And the economy is fine. Which is why that has nothing to do with this vote. This vote is about Iraq and the war and all its ramifications. For the most part thats what is sinking the republicans.

Posted by: Q-Ball | Nov 6, 2006 10:56:55 AM

The trend towards oligarchy or plutocracy -- owners of capital over labor -- is just that, a trend, something to analyse and consider. If mentioning it in polite society is to be forbidden -- images of a maiden aunt insisting that what the dog left on the carpet was an unsightly mess rather than a pile of shit come to mind -- then call it what you will; it's still there and increasingly hard to ignore.

Whether that makes the putative middle of the electorate more inclined to clean house or not is the question to be asked and answered currently I suppose. However, in the same metaphorical vein, I suspect most are still focused on that undercooked Iraqi turkey they've were served for dinner and are deciding whether they should insist it be removed from the room (possibly along with the doggie doo) or whether they should continue to be polite, eat it and puke later.

Okay, enough of that: another cup of coffee, a pesky puppy who wants her walk, and a couple junior gold miners demand my attention. So much for this morning's prioritization task.

Posted by: RW | Nov 6, 2006 10:58:54 AM

Boy, feelings are running a little high around here.

Barry, you are right on.

My hubby and I are doing fine, will do fine. My daughter and her hubby are doing fine, for the most part. A degree for him, some college and a great job for her.

My son also has some college. But he works in a blue collar job. His wife works for Walmart. They both work hard but struggle with their bills at the end of the month. And I fear greatly for their future. And the future of my grandchildren.

And I will go vote tomorrow - probably against my best economic interests and for the future of my children, grandchildren, and my country.

Posted by: JWC | Nov 6, 2006 11:00:39 AM

Q-ball,

>> So all those in the lower brackets who would like to sign up for a complete repeal of the tax cuts, ALL THE TAX CUTS, please raise your hand?

Right here.

"Tax cuts" without spending cuts --> inflation --> a decrease in spending power

George W. has not passed ANY tax cut for the bottom 95%. Ask any one of them how much more they have to pay for gas, food, or anything non-electronic. There was no net gain in purchasing power.

>> Comparing 2001-2004 to 1998-2001 is rather rediculous given that 1998-2001 was an entirely false economy due to dot com euphoria,

So, the euphoria is gone in 2001-2006 for the masses? But, do you recognize the euphoria returned for the top 5%? That's the point.

>> Warren Buffet made when he bet against the dollar because he felt Bush was incompetent. That political gamble made in currency markets cost him a few billion dollars.

Over which time period? I read he was in the black.

>> If its so terrible out there why are not the Republicans going to be thrown out by wide margins.

Because:
- It's not easy for anyone to adjust his/her worldview in response to new data. And some people take longer than others to do it even if given the "same facts".
- Different people are exposed to "different facts" by way of differing media outlets.

-wunsacon

Posted by: wunsacon | Nov 6, 2006 11:05:11 AM

History will record that the emergence of the middle class in the US was a temporary phenomena roughly the 50 years post World War II. But that's not what I wanted to vent. Tax cuts? What tax cuts? Taxes are what the govt spends not what it collects. Besides, the Us cheats in these comparisons due to two factors; one we comapre to places with universal healtcare and two we have a strong State federation that also taxes. Live in Kalifornia where 28% Fed, 9.3% CA, 7.25% sales taxes and throw in health insurance and then compare to "high tax" developed countries. Then there's the AMT but don't get me started.

Posted by: Robert Cote | Nov 6, 2006 11:09:22 AM

Q-ball,

What people like you fail to realize is I had a great job with great income under the first time period. under the second time period my job went immediately to India. I have learned that even though you may have 4 years of grad school, if you are 55 you don't get hired period.

You also need to realize that until 2004 I generally voted republican.

Now read Fred Barnes on the WSJ editorial page today and you will find republicans are losing because they gave up and didn't wipe out social security.

You may cut taxes all you want, I pay zero in either case because there are no jobs. You need income to pay income tax.

I want the 2 Trillion you seem so willing to spend in Iraq to provide them with 2 hours of electric a day instead of thwe 22 hours a day they were used to.

Since globalization is such a great thing I want to be able to buy into Medicare.

I want pensions that are stolen, ala IBM and now Citi, to be taxed. CEOs here make 400 times more than the average worker, yet in the UK iit is only 98 times. certainly you wouldn't' agrue that the results of corporate America are superior to the UK?

So Barry is right, it is still the economy stupid. It is the wasted money in Iraq but the chickenhawk brigade lost me when Chaney said he had better things to do than serve in the military. What hypocrites, Clinton dodging bad, Chaney dodging good.

Republicans have shown themselves to be selfish, whether trashing the environment, our economy, out jobs, out nation. Yes, Sam Palmisanno of IBM says IBM should be allowed to do what it wants because they are a global company and he shouldn't be tied down by a nation's laws.

So while he and Gates and Intel and the rest are destroying this country by hiring Indians, do you think Tata and Wipro are hiring as many Americans?

And that my friend is why you will wake up Wednesday to a different government, and deservedly do.

Posted by: me | Nov 6, 2006 11:17:18 AM

Q-ball

my tax bracket has varied widely the last 7-10 years (from the 0% income bracket to the 25% bracket and now somewhere in between)
I am single with no children (no tax credits)
The IRA new adjustments helped me (tax credits)
et al...

Simplifying the tax code would probably benefit me the most...if not just for the time, confussion and (the agony of defeat?) LOL

Posted by: MarkTX | Nov 6, 2006 11:19:19 AM

"Over which time period? I read he was in the black."

http://www.smh.com.au/news/business/buffett-cuts-forex-loss-after-12b-
hit/2005/11/07/1131212004579.html?oneclick=true

he cut his loses and reduced his exposure after losing 900 million US in the first 9 months of 2005. It was an admission that his bet had been wrong for all of 2005 and he needed to scale it back.

"So, the euphoria is gone in 2001-2006 for the masses? But, do you recognize the euphoria returned for the top 5%? That's the point."

Have the top 5% done better in income than the rest. Apparently so. That was not may argument. In the end if the top 5% triple their income and the middle still gains nicely it may seem unfair but it doesn't make the middle peasant slaves. My point was that the middle may be seeing no growth right now but comparing their gains to 1999 was not valid since the gains many saw from 1995-1999 were not based on a real economy but on fantasy so there is going to be a period of years where that fantasy is removed and evened out. If we continue on this path where the middle cannot make gains going forward, then serious problems will result, I agree.

Also my point was in pointing out this desire to make it look like the rich got all the tax breaks, which is just a blatant pile of donkey dung and I am tired of hearing it. Make your arguments that after inflation and gas prices the tax increase is eaten up if you like. Doesn't change the fact that more money is in the lower tiered people's pockets because of the tax cuts than without them. Independent estimates put the average middle class tax benefit at somewhere around 2100 dollars a year. I am sure no one cares about that 2100 dollars. Just give it back. Its eaten up by inflation and extra gas costs anyway so I don't want it.

Thats just not a very coherent argument.

Oh and by the way. My tax bracket is the 15% bracket get very close to the 25% bracket, just so you know. So I am not getting this great boon the "rich" are getting from the huge tax breaks they got that I didn't get baloney.

Posted by: Q-Ball | Nov 6, 2006 11:23:11 AM

Robert Cote,

I agree that inevitably taxes are what they spend because they have to get them eventually and this congress and president have been terrible on spending. That and the entitlement tsunami that is coming is what is going to wipe out the wealth of the middle class in coming decades. What is being complained about here right now is nothing compared to what is coming when our government can't even come close to keeping its promises on SS, medicare, medicaid.

There was a poster here who was upset about pensions being cut off. Thats nothing compared to the mess of the SS and medicare system in 20-40 years. Perhaps many here won't feel the pain too much if they are old enough. But our kids are going to get screwed. This is the last generation that will do better than its parents. And its not because of taxes or corporate salaries. Its because of the financial mess that is coming when the US entitlement system as currently designed and funded, collapses under its own weight. Now that will be a real pension default.

Posted by: Q-Ball | Nov 6, 2006 11:37:20 AM

Q-Ball
All right, set aside for a moment the data Barry is using and ask yourself this, when in history have dual incomes and dangerously excessive leveraging been necessary in order to live a non excessive, middle class life style (raise kids in a decent neighborhood , with decent schools, take a two week vacation once a year, and drive a late model car)? I just don’t think this can be considered a normal, steady or healthy climate. We keep raising the bar on what is necessary to achieve middle class status, and there you have the crunch.

Posted by: Stephen L. McKay | Nov 6, 2006 11:45:27 AM

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