Benefits of the Great New Economy – Illusory or Selective?

Remember my May 4th blog – A Really Uneasy Feeling – It’s the Stupid Economy? The one about how the President is bragging about how everyone is working (“JOBS, JOBS, JOBS” went the tweet), taxes have been cut, the stock market is soaring, average wages are rising, and GDP growth is solid? The one that tells us that the tax cut really was a deficit boost with real tax savings only for the mega rich. Where we learned that “averages” are highly distorted by the disproportionate high earnings at the top of the economic ladder, but that those at the bottom had a mere 14% chance of moving up the social ladder and those in the middle had not seen an increase in buying power in four decades. Where we saw that costs are rising faster than wage gains. Where debt is soaring – from credit cards to student loans. 

And now we can add the new Trump federal sales tax: tariffs for the stuff we use most. Plus a new threat from China to use rare-earth metal exports as leverage in the trade war with the U.S. These 17 metals are not abundant elsewhere in the world and are essential components for so high-tech applications, from magnets and instrument displays to components that go into everything from iPhones to missiles, electric vehicles and LED lighting. 

Think: American jobs. We have deep stockpiles, but they do have a limit. Oh, and Mr. Trump is now adding Mexico to the tariff list as punishment for their not stopping undocumented families from crossing the border seeking asylum. More consumer taxes from the President. He so deeply does not understand the economic principles behind tariffs.

There’s definitely a boom out there, but only for those in the top five or so percent of the economic ladder. There may be more jobs, but pay has hardly kept up with costs, and job security is pretty much relegated to the history books. Trump’s trade wars, particularly with China, could have hard and deeply dire consequences for most of us. What’s worse, that infrastructure legislation has been put on hold by a president who doesn’t like being investigated, and federal support for scientific research has become the new budgetary sacrificial lamb… along with federal assistance and support for education. Does it bother you that as patent filings in the U.S. decline, Chinese patent filings are soaring… and they have more patents circling artificial intelligence than the United States and the European Union combined? Patents are the real job creators.

Even a neutral Congressional research report suggests that Donald Trump’s much-“self”-touted 2017 massive tax cut legislation as having grown only our deficit. “You may remember all the glowing predictions made for the December 2017 tax cuts by congressional Republicans and the Trump administration: Wages would soar for the rank-and-file, corporate investments would surge, and the cuts would pay for themselves.

“The nonpartisan Congressional Research Service has just published a deep dive into the economic impact of the cuts in their first year, and emerges from the water with a different picture. The CRS finds that the cuts have had virtually no effect on wages, haven’t contributed to a surge in investment and haven’t come close to paying for themselves. Nor have they delivered a cut to the average taxpayer…

“Corporate shareholders, however, have made out great. The repatriated earnings mostly have been used for ‘a record-breaking amount of stock buybacks, with $1 trillion announced by the end of 2018.’ As the CRS notes tactlessly, the same phenomenon occurred in 2004, when a one-time tax holiday allowed companies to bring back earnings stashed abroad at a lower rate. That tax holiday had been promoted as a spur to investment and wage growth too. Never happened.

“Indeed, government statistics show that shareholder dividends fairly exploded in the first quarter of 2018, immediately following the tax cut enactment, while reinvestments of those repatriated funds cratered. (Both figures returned to levels close to their historical averages soon afterward.)” Michael Hiltzik writing for the May 30th Los Angeles Times.

But nothing brings home the frailty of the economic condition of a very large segment of the U.S. population than numbers, numbers based on government research from the Federal Reserve: Nearly 40% of households would struggle to pay for an unexpected $400 expense, Fed says… Many U.S. households are in a fragile position financially, even in an economy with an unemployment rate near a 50-year low, according to a Federal Reserve survey… Despite boom, many in U.S. are financially shaky.

“The Fed’s 2018 report on the economic well-being of households, published Thursday [5/23], indicated ‘most measures’ of well-being and financial resilience ‘were similar to, or slightly better than, those in 2017.’ The slight improvement coincided with a decline in the average unemployment rate to 3.9% last year, from 4.3% in 2017.

“Despite the uptick, however, the results of the 2018 survey indicated that almost 40% of Americans would still struggle in the face of a $400 financial emergency.

“The statistic, which was a bit better than in the 2017 report, has become a favorite rejoinder to President Trump’s boasts about a strong economy from Democratic politicians, including 2020 presidential candidate Sen. Kamala Harris of California.

“‘Relatively small, unexpected expenses, such as a car repair or replacing a broken appliance, can be a hardship for many families without adequate savings,’ the report said. ‘When faced with a hypothetical expense of $400, 61% of adults in 2018 say they would cover it, using cash, savings, or a credit card paid off at the next statement,’ it added… Among the remaining 4 in 10 adults who would have more difficulty covering such an expense, the most common approaches include carrying a balance on credit cards and borrowing from friends or family,’ according to the report.

“Based on a survey of 11,000 people in October and November 2018, the report showed that a quarter of Americans don’t feel like they are doing ‘at least OK’ financially. That number was higher for black and Latino respondents, at roughly one-third for both. For those making less than $40,000 a year, the share who felt they weren’t doing well was 44%.” Matthew Boesler writing for the May 24th Los Angeles Times.

There are still plenty of medical bankruptcies as 20 Republican states fight to have the remaining vestiges of the Affordable Care Act declared unconstitutional… with zero back-up plans. We haven’t seen homelessness at anywhere near current levels since the Great Depression in the 1930s. Contract work – the gig economy with no benefits – is becoming normal, and plants and factories are still shutting down or moving overseas – out of tariff war range – when that just shouldn’t be happening anymore.

Rural communities, less reliant on government services, are doing better than their urban counterparts. “‘We continue to see the growing U.S. economy supporting most American families,’ Fed Gov. Michelle Bowman said in a news release accompanying the report… ‘At the same time, the survey does find differences across communities, with just over half of those living in rural areas describing their local economy as good or excellent compared to two-thirds of those living in cities,’ Bowman said. ‘Across the country, many families continue to experience financial distress and struggle to save for retirement and unexpected expenses.’” LA Times. 

Even rural communities struggle when it comes to medical costs, I might note. We just don’t seem to care about most of us… unless you just happen to be at the top of the economic food chain. Back in the 1970s, the differential between mean employee pay and that of a CEO of a larger company was about 20 to 1. Today, it is over 300 to 1, with some CEOs pulling down 1200 to 1400 times what their middle-paid workers make. Routinely. Yeah, there is something a bit uneasy about all this “good news.”

              I’m Peter Dekom, and history tells us that societies with these levels of distortion are unsustainable.