Numberscruncher: The Poorer Americans

Written by Current Events, Numberscruncher

With pure obviousness, the U.S. Census Bureau reported that median household income in the United States fell to $50,303 in 2008, a 3.6 percent decline from 2007. Adjusted for inflation, that is the biggest one-year decline in 40 years. Also, 39.8 million Americans now live in poverty, and 46.3 million Americans lack health insurance. The poor getting poorer, alas, does not make news. What’s interesting is that the rich got poorer, dragging the numbers down more than might otherwise be expected and reversing a decades-long trend.

To put it another way: the Bush tax cuts did not trickle down, nor did they create a rising tide that lifted all the boats. All they did was increase the Federal deficit. (And people think Franklin Delano Roosevelt was a class traitor? FDR had nothing on GWB.)

Professor Richard Green at the University of Southern California, who follows the real estate market, combined the census data with his knowledge of the housing market, and he reached an interesting conclusion: Americans can’t afford the houses on the market now, so real estate prices have further to fall.

One trope trotted out at the beginning of every recession is the idea that certain businesses will do just fine either because the customers are so rich that they won’t be affected by the recession or that the price is so low that people will always be able to fit it into their budget. As the millions of American children who now eat store-brand macaroni and cheese with Hunt’s ketchup can attest, this is not always the case.  Price is not always in line with value.

Some high-end customers never were rich; they were spending money they did not have, possibly borrowed against their houses. Some rich people are not so rich anymore, and not just because they invested with Bernie Madoff. Some rich people are also very smart, so even though they have the money, they know that the Mercedes dealer is hurting and median housing values are falling and thus expect a deal. And some rich people don’t think it is wise to flaunt their wealth during a time when so many people are hurting.

Meanwhile, the tax cuts that were supposed to cure all, that many persist in believing will cure all, didn’t. The so-called Laffer Curve, known as the taxable income effect, says that at some increased level of taxation, government revenues fall because people have no incentive to work. But what tax level is that? Since the 2003 tax cut, the highest rate in the United States is 35%. In 1980, it was 70%.

One way to think about taxes is that it is the price of being employed in America. Of course there is a price; we want things that the government provides, ranging from national defense to national parks. This nation has more opportunities for employees and entrepreneurs than many others, and that comes with some cost. But what is that price? If you owned a retail store that sold jeans, you might try pricing them at $1000 per pair. But at that price, no one would buy them and your revenue would be zero. You could give the jeans away, but then your revenue would also be zero. But what price within that range would not only cover your costs, but maximize your profits? Is it $30 per pair? $300? Who knows? It will depend on who your customers are and what they want.

I’m not arguing that a tax increase would increase incomes, but I can’t rule it out. It’s possible that higher taxes might force people to work harder so that they have enough money to buy what they want after the government gets its cut. It’s also possible that a tax increase would trample on the tiny green shoots of recovery that we may be seeing now. But I do know this: the Bush tax cuts did not lead to prosperity. We are saddled with a deficit from the tax cuts and spending on two wars, made worse by a stimulus package needed to bring us out of a nasty recession.