What Tax Cuts Really Do

The stock market clearly has been shaken by the battle between a Republican Party following a new Tea Party line and Democrats struggling with a constituency that does not accept massive program cuts. Standard & Poor’s has downgraded the US credit rating to AA+ from its previously unassailable AAA status… citing an unwillingness in the government to take all the necessary steps to control the federal deficit, including a strong perceived need to raises taxes rather than just imposing spending cuts. Faith in the global economy has fallen through the floor. Double dip may already be here. A last minute Congressional debt bill did little to comfort the global markets, which plunged on August 4^th/5^th (because of the time difference) by the largest single day loss since 2008, and though the markets have stopped the panic slide, instability reigns supreme. While Moody’s still accords AAA for US debt (as long as the US is solid in its repayment ability), clearly the world is not the same.

Despite claims that the GOP-originated stimulus package, adopted under the Bush administration in late 2008 and continued and enhanced under Obama shortly thereafter, actually prevented a depression and saved millions of jobs, both the President and the Congress reached the conclusion that the deficit was such a burden on our future that it had to be dealt with… even as the recession seemed to want to reignite. While the actual cost-cutting in 2012 will be miniscule, the ten year projection of $2.1 trillion in cuts will be massive, with Congress mandated to increase this slice further in the coming years.

The further bad news is that with the government’s withdrawing its “stimulus” presence from the US economy, there is no real remaining “demand” left to drive the markets. Consumers seem to be pulling back: “A more cautious consumer is a key reason for the sluggish period. Americans cut their spending for the first time in 20 months in June, the government said [August 2^nd]. For the entire April-June period, consumer spending rose only 0.1 percent, the worst showing since the recession ended.” Los Angeles Times, August 4^th. Want to know exactly how consumers are behaving, particularly at the bargain end of the spectrum? “[Wal-Mart’s] U.S. sales, particularly at stores open at least a year, are in big trouble. ‘Those Wal-Mart stores had 82.8 million fewer visits through the first five months of the company's fiscal year than a year earlier, says the [confidential] memo,’ Bloomberg reports.” DailyFinance.com, August 4^th.

News on the jobs front is also anything but reassuring: “[T]he stink of a sour economy loomed over layoff numbers that were also announced [August 3^rd]. Job cuts surged to a 16-month high in July as 66,414 employees found themselves out of work, according to consulting firm Challenger, Gray & Christmas Inc… The number of cuts was up more than 60% from June and up nearly 60% from the same period in 2010, according to the report. Industries such as pharmaceuticals and retail that previously seemed immune to heavy bloodletting were hit hard… Though the pace of layoffs this year is still lower than 2010, the ‘sudden and unexpected burst in private-sector downsizing’ suggests that it’s catching up, according to the study.” Los Angeles Times, August 3^rd.

While the Labor Department’s reported unemployment rate for July improved slightly (9.2% to 9.1%), most that improvement was in the lower-paying small businesses sector. Unemployment claims have stabilized, but the job picture is showing weakness particularly among big-ticket employers: “Many large companies have cut jobs in recent weeks. Pharmaceutical giant Merck & Co. said last week that it will eliminate 13,000 positions worldwide by 2015, about a third of them in the U.S… Cisco Systems Inc., the world's largest maker of computer-networking gear, last month said it is eliminating 6,500 positions, or about 9 percent of its worldwide work force of 73,000. And Lockheed Martin said in June that it will cut 2,700 jobs… Employers are pulling back as the economy struggles… The economy grew at an annual rate of only 1.3 percent in the April-June period after barely expanded in the first three months of this year. Growth was less than 1 percent in the first half of the year, the weakest stretch since the recession officially ended…

“Manufacturers expanded at their slowest pace in two years in July, a private trade group said [August 1^st]. The Institute for Supply Management also said that expansion among retailers, restaurants, financial services and service industries slowed to a 17-month low in July.” LA Times, August 4^th. As real earnings have not kept up with increased costs, primarily in oil and other commodities, a dropped US credit rating suggests that we may all be paying more in direct or indirect costs attributed to higher interest rates generated from the reduced credit rating. The recession has ended?

But as the ideological struggle in Congress continues, the big dividing line between the parties remains: increasing taxes for the wealthy is still “off the table” in the current stalemate, primarily under the discredited “trickle-down theory” that more retained money at the top will generate jobs and money flow throughout. We’ve had low taxes for the wealthy for some time, and the above jobs/consumer spending reports speak for themselves. The richest corporations are laying off workers. Without an increase in consumer spending, there is no reason the wealthy believe that they should deploy their retained cash to hire new folks to create products and services for which there is no demand.

Wal-Mart’s not having a good time, and most people that rely on traditional employment structures are worried, but are the rich tightening their purse strings too? The August 3^rd New York Times answers that question in dramatic style: “Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy. Luxury goods stores, which fared much worse than other retailers in the recession, are more than recovering — they are zooming. Many high-end businesses are even able to mark up, rather than discount, items to attract customers who equate quality with price.

“The luxury category has posted 10 consecutive months of sales increases compared with the year earlier, even as overall consumer spending on categories like furniture and electronics has been tepid, according to the research service MasterCard Advisors SpendingPulse. In July, the luxury segment had an 11.6 percent increase, the biggest monthly gain in more than a year….Tiffany’s first-quarter sales were up 20 percent to $761 million. Last week LVMH, which owns expensive brands like Louis Vuitton and Givenchy, reported sales growth in the first half of 2011 of 13 percent to 10.3 billion euros, or $14.9 billion. Also last week, PPR, home to Gucci, Yves Saint Laurent and other brands, said its luxury segment’s sales gained 23 percent in the first half. Profits are also up by double digits for many of these companies.

“BMW this week said it more than doubled its quarterly profit from a year ago as sales rose 16.5 percent; Porsche said its first-half profit rose 59 percent; and Mercedes-Benz said July sales of its high-end S-Class sedans — some of which cost more than $200,000 — jumped nearly 14 percent in the United States… The success luxury retailers are having in selling $250 Ermenegildo Zegna ties and $2,800 David Yurman pavé rings — the kind encircled with small precious stones — stands in stark contrast to the retailers who cater to more average Americans.” Even if you were to accept a trickle-down theory of “increased demand” luxury items, take a good look at where the hot products noted above come from; virtually all of that spending was on goods made somewhere other than the United States. I have absolutely no problem with folks getting rich – it is the American way – but when the country is in trouble, and we need cash to reduce our deficit and fund education as well as infrastructure for growth, it’s really not asking too much for those at the top of the ladder to contribute just a little bit more… maybe give up a shopping day at Dior or Channel!

I’m Peter Dekom, and at some point maybe Americans might realize that we are in this mess together and need to solve our issues together… again.