Economic Crisis and Upward Mobility

No response to the financial market turmoil has provided a quick and easy answer to quell the general apprehension out on the street. Obama and McCain stuck to their brands, with varying and questionable success.

Obama, ever cautious, deliberated — preferring to address the “worst financial crisis since the Great Depression” as a bench warmer. Obama’s nuanced views apparently rendered him incapable of providing his supporters with the “common sense, practical leadership, & economic stewardship” that they needed. His criticism of McCain & the Bush Administration - doing “nothing as the crisis hits” - would be leveled at Obama’s own reaction by conservative critics.

And McCain? His maverick persona may have gotten the better of him this past week. McCain certainly was no shrinking violet. And supporter or no, rightly or wrongly, McCain puts his position out there for voters to sink their teeth into - as many in the media did this past week.

As we all know, the financial crisis isn’t a band-aid fix, and taxpayers will bear the brunt of any solution passed. Therefore, it is especially vital to consider economic and tax policies of both candidates with the inevitable burden of the financial market bailout. NBC did a brief rundown earlier this year:

Obama’s fairness doctrine, which Biden famously muddied with patriotic language, is income redistribution and welfare advancement on a scale we haven’t seen in decades. But it’s nothing new - America has taken this pony ride before. Stephen Moore’s article looking at income mobility in America points out our past:

Q. Are high tax rates on the rich a good way to redistribute income?
A. No. History teaches us that high tax rates are the worst way to redistribute income to the poor and the middle class. I recently reviewed IRS tax return data by income group going back to 1972. The results are jaw-dropping. In 1972, when the highest tax rate on the rich was 70 percent and the top capital gains tax rate was 35 percent, the richest 1 percent of Americans paid 17 percent of the income tax burden. Today, with a top income tax rate of 35 percent and capital gains at 15 percent, they pay 39 percent. With higher income tax rates the rich shelter more of their income through tax carve-outs, they invest less in the United States and more abroad, and they work less. The Robin Hood strategy has almost always failed because it means less income, not more, to take from the rich and give to the poor.

Contrary to what Obama (and some Democrats) would have us believe, the “poor” are not stuck in poverty, and the “middle class” are not on the verge of collapse. Quality of life and consumption standards have improved across all economic strata.

Q. Have the income gains by the rich come at the expense of the middle class and the poor?
A. Since 1983, every income group has seen an advance in after-tax income (see graph 1). Yes, the gains of the very rich have increased the fastest. But that is in part because of a statistical illusion. When poor people earn more over time, they move into the middle class or the upper class and are no longer  classified as poor. Consider someone who was earning $20,000 a year and saw her income move to, say, $50,000 as she moved up the career ladder. That 150 percent gain in income isn’t apparent, because we no longer categorize her as poor. But every penny of income gain by a rich person is counted, because there is no higher income class she can move into.

Another problem with comparing the distribution of income from one point in time with another is that up to 1.5 million new immigrants enter the United States every year. A fairly high percentage of these immigrants start at the bottom of the income ladder, replenishing the people who are at the bottom rungs. This creates the impression that poor people do not make significant progress in the American labor force.

Q. Is there really a ‘war against the middle class’ in America as claimed by people such as CNN’s Lou Dobbs?
A. Well, if the middle class is fighting a war, they’ve been winning. Graph 2 shows the income range needed to be considered in the middle class in the United States (between the 40th and 60th percentiles in income for families). In 1967 the average middle-class pre-tax income was about $40,000; in 2005 it was about $60,000. And this does not include the increased generosity of non-wage and non-salary benefits such as healthcare, pensions, flexible workweeks, and more family leave, vacation, and holidays.

Most economists agree that when these income numbers are adjusted by a more accurate inflation measure—one that takes full account of the improved quality of the products we now have access to, such as cell phones, laptop computers, and new medical technologies, for example—the purchasing power of the American middle-class family is about one-third higher today than in the 1970s.

The Census Bureau family income data indicate that in 1967 one in 20 families had an income of $100,000 or more (in today’s dollars). In 2005 one in six families did. There are three times as many families earning more than $75,000 a year today than there were in 1967.

The challenge for the future administration is to provide real economic growth. The tax burden of the financial bailout cannot be alleviated through mere tax increases. In this fragile economic period and highly sensitive consumer confidence, the economy cannot afford to withstand the sophist’s “fair” and “patriotic” tax policy totally devoid of historical perspective.

Technorati Tags: class warfare, Economy, McCain, Obama, tax policy