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Friday, July 27, 2012

The Funnel

GDP is out. This one contains revisions back through 2009. Headline growth for Q2 is 1.5% - not bad for an aging cracker, huh? 

But it's all an illusion. Here's why:
  This chart is of real personal income excluding current transfers (blue) and real disposable personal income. These are aggregates rather than per capita numbers. 

Ex current transfers, real personal income is back to about 2006 Q4 levels. Crikey. 

We've made it about back to beginning 2008 levels for real personal disposable income (price-adjusted income less taxes). However most people actually take home less real income that they consider disposable, because of things like higher payments for insurance.

And this is not sustainable, because of the funnel.

This chart shows government social benefits to persons less domestic contributions for government social insurance. 

As the gap between the two widens, any hope of containing the US' inexorable rise in Debt/GDP ratio collapses. 

In the beginning of 1990, the ratio between benefits/payments for benefits was 554/404 = 1.37, or inverted, 0.73. That means that non-income tax payments to the government accounted for 73% of social benefits. At the beginning of 2000, the ratio was 1038/697, or 1.49, or 67% of social benefits. Currrently the ratio is 2,310/947, or 2.44%, or 41%. 

Somewhat obviously, we cannot come close to closing that gap through raising income taxes, especially if we are not going to raise them on anyone but the rich. The total income of the rich isn't near 2 trillion. 

How about all those dividends? This quarter, the annualized TOTAL investment income (interest plus dividends) is 1.741 trillion. Even if we confiscated every last cent of unearned investment income, we couldn't close the gap this year. If we raised taxes a net 10%, heavily distributing that to the upper end incomes, we'd only net 174 billion extra.

What about filthy rotten slumlords? Total rental income is 455 billion. Hardly a stinking drop in the bucket, even if we take it all.  

Personal current taxes are 1.474 trillion. Our net deficit is running close to a trillion before we consider the 2014 bust of the Medicaid/individual insurance subsidy impact. So we would have to raise tax rates by about 67% (2/3rds) to come nearly back into balance. The impact would throw us into a massive recession, so we can't do that. 

It's obvious that neither candidate is willing to talk honestly about the future. It's also obvious to me that Obama doesn't have clue, so that leaves Romney who will be less of a pox upon our economy. But it's blindingly clear that Congress is what matters. They will have to get themselves moving within a few years, or we get to enjoy a European fate, and it's not looking good.

To go back to the first graph, we need to grow that blue line. The only way to do that is to adopt a growth agenda, and it has to include some very large shifts in policy. 

We are now in the government spending bubble. Its demise is as certain as the credit/housing bubble's demise was. Its size is approximate to that of the credit bubble's contribution to PCE.



Comments:
The only way to do that is to adopt a growth agenda, and it has to include some very large shifts in policy. <<

I think I hear a helicopter warming up--Benron version of "growth."

The US dolla is about ready to be taken to the woodshed (again).
 
The problem is that there are an enormous number of otherwise reasonable people who simply think that economic growth has nothing to do with governmental fiscal policy. Taxes and spending don't affect business. I had a rather in-depth conversation last week with a tax attorney, for crying out loud, who insisted that the top-bracket income tax rates do not affect investment. To him, tax rates really are all about "fairness", and the whole of any tax increase must come from the top bracket.

What can you do with a mentality like that?
 
The only way to do that is to adopt a growth agenda, and it has to include some very large shifts in policy.

Bingo.

Unless we change corporate income tax to at least match Canada's, the best place to invest new plant and equipment in North America will be Canada, not the US.

US corporate tax rate : 35%
( states charge their own rates)
Canada's corporate rate: 16.5%
( and provinces can't tax corps!)

Fred Smith of FedEx has talked about this many times, and its impact on job creation in the US.
 
But it's all an illusion.

I'm thinking of a word that begins with the letter P.

Nope. Drawing a blank here. ;)
 
Headline growth for Q2 is 1.5% - not bad for an aging cracker, huh?

It puts us right on the "new normal" trend. Yay. Sigh.

Real GDP Growth per Capita
 
Ah, but Mark, she just got done telling us that the new normal is a bubble - a government spending bubble. Try figuring out where the new normal will be in 2020 after that bubble pops.
 
Yes, WSJ. That's the problem.

The new normal, crappy as it looks to us, is really an illusion itself. Without very strong growth trends, we can't even maintain the new normal. Achieving strong growth trends can only be accomplished by cutting a lot of our spending and raising taxes.

Furthermore, we are running out of time to adopt that agenda.

We can "take the US dolla to the woodshed" all we want, but it's not going to generate growth in the near term - too much of the economy is consumer-oriented, and as commenters have been pointing out, we can't maintain our current per capita consumption.
 
Mark - I'm thinking of the Illusion of Stagflation right about now. The 70s couldn't have persisted; this won't persist either.
 
Neil - that's why I included some of the major categories of income. It's blindingly obvious that we can't narrow the fiscal gap meaningfully from the top 20%, because the top bracket literally doesn't have enough income.

Beyond that, everyone who has ever been in business knows that as your tax rates go up, your ability to incur risk goes down. Your losses are yours and may put you out of business, and if your gains become crimes against the people which must be confiscated, how can anyone incur the risk of loss?

You might ask Wonder Dummy the Tax Attorney why he thinks credit standards for mortgages are so tight about now, and why people are willing to buy ten year bonds yielding less than the inflation rate! Maybe he'll ponder the great underlying mystery of loss reserves. Maybe not.
 
MOM,

Mark - I'm thinking of the Illusion of Stagflation right about now. The 70s couldn't have persisted; this won't persist either.

I hear that. If I had it all to do over again then I would have picked Stagnationary Mark as my name.

Although stagflationary investments have done well since I turned bearish in 2004 (oil, gold, silver, and so on), so have deflationary investments (treasuries).

Stagnation!
 
“…if your gains become crimes against the people which must be confiscated, how can anyone incur the risk of loss?”

Right. I have a business, my wife and I, and we found ways to stop bringing in more money. If our income rises anymore we lose free health insurance [Medicaid] for our entire family and also end up in a higher tax bracket. We don’t usually have federal income tax due and often get a refund because of the credits, child tax credit, etc.

To overcome the losses of making more money we would have to make quite a bit more money. It’s sort of an insurmountable obstacle for us so we stay where we’re at. There’s really no incentive to go any further.

It’s hard to imagine making more money that you’re not going to see. Right now we’re benefiting from someone else’s tax burden, I suppose, with the freebies that have worked to increase our own income. I don’t feel especially good about that; yet, to be honest, I don’t want to lose the any of the free stuff that we’re used to getting.

I thought I would write this here just to put some meat on your quote above. And frankly, I don’t think the direction we’re going in is going to change. This is the way it has been trending for years and any politician who bucks the trend is ultimately not going to succeed.

Consider this:

“Half of all U.S. wage-earners pay no income tax.
Yet that half and their families receive free education
K-12, Medicaid, rent supplements, food stamps,
earned income tax credits, Pell grants, welfare
payments, unemployment checks and other benefits.

Why should poor, working- and middle-class Hispanics,
the vast majority, vote for a party that will reduce taxes
they don't pay, but cut the benefits they do receive?

The majority of Latinos, African-Americans, immigrants
and young people 18 to 25 pay no income taxes yet
enjoy a panoply of government benefits. Does not
self-interest dictate a vote for the party that will let them
keep what they have and perhaps give them more,
rather than the party that will pare back what they now
receive?”

http://townhall.com/columnists/patbuchanan/2012/07/27/in_the_long_run_is_the_gop_dead/page/full/
 
However most people actually take home less real income that they consider disposable, because of things like higher payments for insurance.

Are the graphs based on paycheck numbers? Because that would leave out property taxes and sales taxes. Property taxes are a huge takeaway suggesting disposable income is overstated. And the leftover "disposable" income doesn't go as far even if one makes hedonistic adjustments - buying 80% ground beef at the same price as 85% ground beef was two years ago doesn't cover the fact that the sales tax on that purchase is now higher than two years ago.

If you want less of something, tax it. So we get less sales, less income, less property.... When a Tobin Tax is enacted we'll get less investment, too.
 
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