Income Inequality, an Old Political Scam (2)

Income Inequality is NOT the reason millions of Americans suffer insufficient incomes or are unable to access economic opportunity.  One person does not, by earning a high income, cause other people to earn low or no income.

The reason joblessness and middle class misery have been worse since the recession ended in 2009 than in any previous post-recession recovery is captured in this chart.  It compares “Private Domestic Investment” during the recession and booming, post-recession economy of the 1980s with the recent recession and our current anemic, post-recession economy.tracking-private-investment“Private Domestic Investment” (PDI) (displayed in the chart) is a component of Gross Domestic Product (GDP) as measured and reported quarterly by the Bureau of Economic Analysis.  PDI is the sum of expenditures on capital goods, for productive, business activities.  These investments include land, buildings, machinery, vehicles, computer technology, software, and equipment. NOT included in this measure are purchases of stocks bonds, and mutual funds.

Thus this statistic measures the heartbeat of a free market economy.  These are the key job creation investments. These investments plus the work of entrepreneurs, owners, managers and employees provide all the goods and services we consume.  Without capital investments there would be no consumer products or services, and there would be no jobs.

Like President Obama, President Reagan inherited a severe recession.  By some measures the 1981-82 recession was worse than the 2008-09 recession.  The unemployment rate was higher.  Interest rates on mortgages and business loans soared into double digits.  Home prices fell and there were waves of foreclosures.

But President Reagan’s economic strategies, based on his commitment to liberty, were exactly opposite of Obama’s.

  • Sweeping income tax rate reductions.  Every tax bracket rate from top to bottom was reduced by at least 25%.  Tax cuts left capital in the hands of entrepreneurs and investors who had earned it and thus were best equipped to invest in job creating enterprises;
  • Deregulation released the creative and productive energies of The People from the restraints of government interference.

President Obama and the Democrats in Congress did the opposite. Even though the economy was already over-regulated compared to the prosperous 1980s, they enacted additional, major, investment disincentives and barriers:

  • Obamacare, increasing health insurance costs and imposing expensive mandates and hiring disincentives on employers,
  • Dodd-Frank, an opaque, staggeringly large (2,300 pages) piece of legislation that created new regulatory agencies and tens of thousands of pages of new regulations restricting the financial sector,
  • Tax increases that fall mostly on entrepreneurs and business owners.

The results of these opposite strategies are captured clearly in the chart above. PDI always declines during a recession. But as the chart shows Reagan’s policies generated the beginning of an investment increase even before the recession ended.  In the third quarter of the Reagan era recovery PDI had come back to the prerecession level.  But in the Obama era PDI wasn’t restored to prerecession levels until the seventeenth recovery quarter. 

March 2015 was the end of the 23d recovery quarter and PDI was 7% above the prerecession level.  But in the 23d quarter of the 1982-88 recovery PDI was 31% above prerecession levels.

Progressive or liberal politicians who tell middle class voters their lack of sufficient income is caused by others earning high incomes are the same politicians who are responsible for the expansion of government that has resulted in anemic private investment during the Obama era.  They deliberately obscure the real problem, lack of investment, with emotional rhetoric about inequality, hoping to attract votes by generating anger and resentment against the very people who always fund nearly all of the private domestic investment tracked in the chart above, the rich – or the 1% – who got that way via business success. 

With more robust, continuous growth in domestic investment, as there was in the 1980s, there would be more demand for employees which would result in more more jobs, and higher wages.

 

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