GDP fell 0.3% due to a decrease in consumer spending.
(CNN) Consumer spending, which makes up more than 70% of GDP, declined at an annual rate of 3.1% in the quarter, according to Thursday's report. It was the first time consumer spending fell since 1991 and the largest drop since early 1980.
What impact does this have on economies of scale? Consider that big screen TVs, surround sound stereo systems, and multi-core computers are made possible by economies of scale. There are many millions of American consumers, creating vast markets for a wide variety of goods to be sold.
Lately, middle class consumers' disposable income was supplemented by increased housing prices, which allowed them to use their homes as an ATM. The housing bubble has burst now, so where do consumers get new disposable income to help provide the scale necessary to make those new toys that we like so much? Credit cards are out of the question, given the credit crunch. Barack Obama's tax plan seems like a nice way to keep money in consumers' pockets.
Now, some people are whining because that tax plan amounts to socialism. This is totally bogus, but even if it weren't, the rich should stop to consider that in the absence of a middle class with disposable income, how will companies achieve economies of scale? Do you think that the rich can pick up the slack when consumer spending is 70% of GDP? If businesses lose the scale they have now, prices for goods will shoot up, and the wealthy might learn exactly what debt they owe to the existence of the middle class consumers.
If no one has any money to buy your stuff, do you think you'll still be rich? Go ask the auto-makers.
The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October.
“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”
This is what happened during Japan's lost decade. They didn't just write everything down and get on with it, instead they slowly and continually lost money.
There's been a lot of noise regarding Senator Obama's tax plan as wealth redistribution/socialism. There's also some noise about a radio show Senator Obama was on in 2001, but almost no one bothers to point out that he was lamenting the narrow-minded focus on court-mandated change, as opposed to a more proper focus on legislative-mandated change. I imagine that those against "judicial activism" should agree with him, but I digress.
(Gov. Palin) Alaska—we’re set up, unlike other states in the union, where it’s collectively Alaskans own the resources. So we share in the wealth when the development of these resources occurs
I could go on about redistributing wealth to your cronies. For example, no-bid cost-plus contracts to the company which the Vice President is the former CEO of. The bailout for companies like Goldman Sachs, engineered by the former CEO of...Goldman Sachs. And so on.
Second, his plan is not a hand-out, but rather a hand up. Those who do not pay taxes are not going to get extra money back. Money will not be given to "lazy welfare bums" or "those who don't want to sacrifice and sweat."
(page 2) the “Making Work Pay” credit will provide a refundable tax cut of $500 for workers or $1,000 for working couples
Emphasis mine. By definition, working people are not on welfare.
Third, much of the noise regards "punishing the successful." I don't think anyone can honestly say that a higher tax rate will make someone reject a raise, so long as an increase in pay never means that you actually take less money in dollars home. Besides, if you don't like your tax rate, donate to charity or pay your employees a better wage and you can lower yourself to whatever tax bracket you want.
Don't we tax work more than we tax wealth? Are any of them advocating raising inheritance taxes? After all, the best way to get rich is to be born into it; this is not working hard, nor success, but aristocracy. Why not tax inheritance at a rate determined by the increase in the national debt during the lifetime of the individual?
The answer is because "punishing the successful" is a red herring. A progressive tax is not about punishing the successful, but about compensating for people who might not know when the concentration of wealth is causing a detriment to society. We rise and fall as one nation, and when your neighbor does better, you do better too. Remember, the Good Samaritan who helped and paid for the care of an injured stranger was credited by Jesus as more worthy than the Pharisee who simply walked by because the stranger was a pagan to him.
Fourth, the tax rates are comparable to the rates under Clinton. Yet no one was calling Clinton a socialist. In fact, I suggest going back almost 100 years and looking at the tax rates in World War I, World War II, after World War II, and during the Cold War. For the highest bracket, they are in the neighborhood of 70-94%. But we weren't socialists back then, were we?
Put another way, Senator Obama is not proposing new taxes; he is proposing old taxes, most of which were legislated to expire sooner or later anyway. Taxes would just return to what they were previously, just a few years ago, for only the upper few brackets.
Fifth, what is so bad about taxes?
(Colin Powell) Taxes are always a redistribution of money. Most of the taxes that are redistributed go back to those who pay them, in roads and airports and hospitals and schools. And taxes are necessary for the common good. And there's nothing wrong with examining what our tax structure is or who should be paying more or who should be paying less, and for us to say that makes you a socialist is an unfortunate characterization that I don't think is accurate.
"Socialist", "communist", and "Marxist" stifle and suppress honest, open debate. It is just fear-mongering, meant to activate the amygdala and shut down the critical thinking regions of the brain.
Consider that taxes allow roads to be built and maintained, enabling the successful people to connect with consumers so that they can become rich in the first place. Taxes pay to maintain schools and for teachers to educate the workforce so that those successful people can hire competent employees. Taxes pay for health inspectors to make sure you don't get E. Coli when you go out to eat, to make sure that the plane you're flying in doesn't crash due to neglect, to make sure the home you live in meets public safety standards.
Who gets greater prosperity from the existence of roads and schools; the upper class, or the middle class? If our infrastructure falls apart, how will products be shipped to malls for consumers to purchase? Who will run cash registers if no one can do basic arithmetic? Doesn't it make sense that those who benefit most from government spending ought to contribute more of their income to it? Senator John McCain believed that back in October of 2000.
(I would like to point out that at just after 2 minutes, McCain admonishes the crowd for booing the speaker; imagine that, encouraging an open and honest discussion...)
In this video, McCain advocates a progressive income tax. Even Adam Smith (the "invisible hand" guy) advocates a progressive tax in The Wealth of Nations.
(Adam Smith) It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.
McCain moves on to discuss loopholes and how they affect the effective tax rate. So let's look for some examples.
(Reuters) The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.
Also, check out this graph. Although the maximum tax rate is 35% in the US right now, not even the richest actually pay more than 31%.
Further, consider that capital gains are taxed at 15% for the upper bracket. So if you're a rich CEO and you get paid in stock options, you're effectively getting less than half of the normal income tax rate on that income. Even Warren Buffet denounces the system where his tax rate is less than his secretary's. The truly insidious twist to this is that our 401(k)'s are taxed as regular income, and not capital gains, despite being in the stock market.
The rich are not only getting richer but they're also paying less in taxes. And for the super-rich there are quasi-legal ways to avoid paying some taxes altogether. It's not worth most people's time to itemize their taxes. Rich folks can also afford accountants who exploit tax breaks and exemptions for their clients, off-shore tax shelters like Ireland, or tax breaks that you can pay lobbyists to put into legislation.
McCain ends by saying that rich people are already doing well, and the people who really deserve a tax cut are lower income families who are trying to raise and educate their children.
Personally, I go even farther. Consider that "tax cuts for the rich" is an implementation of supply-side economics, which John Kenneth Galbraith likened to the horse and sparrow theory; if you feed the horse enough oats, some will pass through to the road for the sparrows.
More money for the middle class means more people going out to eat, to the movies, or the mall. It means more people going to the dentist or the eye doctor and buying glasses or contacts. It means deliveries of products to those places doing more business. It means big-screen TVs and surround sound stereo systems and multi-core computers made possible by the economies of scale provided by a large and vibrant middle class.
Ultimately, the owner of the company will make more money because he will have more business from a middle class who has more disposable income. He could make so much more money that it offsets the extra taxes that he's paying. Call it "trickle up" or "demand-side economics".
There is in fact some evidence of this. The table below shows that family income growth, after adjusted for inflation, is greater for everyone under Democrats than Republicans. Further, under Democrats, income inequality narrows, while under Republicans it grows. A growing inequality gap is one of the reasons American cities have economic inequality that rivals African cities.
Finally, I would like to tackle the "wealth creation vs. wealth redistribution" myth that is being peddled right now. Inflation adjusted wages for the lower 50% of Americans are pretty much the same as they were 40 years ago. Inflation is class warfare, allowing companies to give the illusion of higher pay without actually giving their employees more purchasing power, while officers in the company get extravagant pay packages, pensions, stock options, and so on. In order to continue consuming goods the middle class usually takes on huge debts using mortgages and credit cards. Sometimes the lower class (who has no connections with which to get a good job) must buy groceries or pay the electric bill with a credit card just so they can survive. Eventually those lower class citizens slide so far into debt that they must file bankruptcy.
How pervasive is our national debt? It's now over $10 trillion. $10,000,000,000,000. That's over $30,000 for every man, woman, and child in America. It grows by $1 million per minute. Last year, it cost $430 billion just to service the interest on the debt. This is what happens when you cut taxes and go to war at the same time - Treasury must sell billions of dollars of Treasury notes, and the biggest purchasers as of August 2008 are countries like Japan ($586 Billion), China ($541 Billion), the UK ($307 Billion), OPEC ($147 Billion), among others.
Someone must pay the debt sooner or later. If not this generation of Americans, then their children. For all of the noise about "tax and spend Democrats", people sure don't mind the "tax your children and spend" policy that pays for the wars in Iraq and Afghanistan. Such behavior is anything but patriotic.
(Reuters)Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets
"I'm shocked, shocked!, to find that pimping Adjustable Rate Mortgages while interest rates are at rock bottom leads to an increase in defaults after interest rates return to normal!"
(Reuters)"this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said
(NYT)Many Republican lawmakers on the oversight committee tried to blame the mortgage meltdown on the unchecked growth of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were placed in a government conservatorship last month. Republicans have argued that Democratic lawmakers blocked measures to reform the companies.
Uh-huh. It's all Fannie and Freddie's fault, despite the fact that Ginnie Mae (the government-owned mortgage securitizer) is just fine. Despite the fact that Bear Stearns fell first. Despite the fact that Fannie and Freddie's debts are all insured by the government now that they're under conservatorship, and yet AIG went down. No one else except Fannie and Freddie needs to be regulated.
Greenspan is, thankfully, not as shallow. He acknowledges that Fannie and Freddie are part of the problem. Keyword: part. Yes, they did some extremely shady things, but they have been shady for over a decade, throughout the Presidencies and Congresses controlled by every combination of both parties.
(NYT) But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”
(Reuters)"Without the excess demand from securitizers, subprime mortgage originations -- undeniably the original source of crisis -- would have been far smaller and defaults, accordingly, far fewer," he said.
A surge in demand for U.S. subprime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added.
The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act . But it took little action during the long housing boom, and fewer than 1 percent of all mortgages were subjected to restrictions under that law.
