Kick start the Economy

To get out of this mess, you have to recognize how we got here. Typically, growing the economy needs a couple of fundamentals.

1. Job volume growth. The more people the country has, the greater the supply of workers and consumers. The number of jobs available must keep up with the growth in population.
2. Wage increases. Wages need to keep pace with inflation. If wages fall behind the pace of inflation, then the consumers have less purchasing power. If wages increase faster than inflation, then the increased wages will themselves be a cause of inflation.

As we’ve heard President-elect Barack Obama state on the campaign trail, during the Clinton Presidency job wages increased $7500. During the same length of time for the Bush Presidency, job wages decreased $2000. I have no reason to question those numbers. However, one must wonder why the economy appeared to be growing from 2000 through 2006.

American homeowners saw that their wages purchased less and less. However, they were sitting inside a house that was growing in value quickly. For many, their home equity value growth outpaced their wages. For example, a family making $50,000 a year in wages was also making another $50,000 in Equity. This effectively doubled their income. As their wages decreased in relation to inflation, they turned to their equity to supplement the shortages.

The Department of Labor tracks useful information enabling us to see the big picture, albeit they don’t make it easy to find. The historical data paints an ugly picture. Almost no jobs were created for Bush’s first 4 years in office. The next 3 years in office found job creation, although weaker than his predecessor, but this is followed with 2008’s job loss in every single month. In fact, by October of 2008, more jobs were lost than were created the entire year of 2007. Effectively, this means that during the last 8 years, anemic job growth occurred for just two of those years.

So let’s summarize the obvious. We’ve had anemic job growth over 2 of the last 8 years, and those jobs have come with declining wages. The remaining 6 years we created zero jobs. Homeowners turned to home equity to supplement their wages, but as of the last two years that pot of gold has dried up.

Conventional conservative wisdom has been to increase the wages of the wealthy (e.g. cut their taxes) so that they’ll have more money to spend which should create jobs. The theory has been tried for 20 of the last 28 years with dismal results.

I think the tax policies that Obama is selling are on the right track. However, I do not think it goes far enough to change the tide as fast as it needs to be changed.

I propose a ONE YEAR moratorium on taxing an AGI under $200,000 a year. I propose that we increase taxes on those with AGI above $250,000 a year to compensate for the tax revenue’s of those with the tax break.

This program would not give immediate help to those who don’t currently pay taxes. However, it would give a significant, though temporary, raise to a large population base with the breadth of consumption necessary to turn the tide. This consumption would then help the bottom of the income scale secure jobs.

This is the seed money the common folk needs to help kick start the economy. It does not tackle the gorilla in the closet. That gorilla is health care costs. It’s not hard to find American’s that spend more on health care than they do the historical number one cost of housing. This is a burden other first nation citizens do not face. But, this is a problem that must be solved before the end of the first year. It, alone, is capable of relieving the budget of Americans enabling them to have that extra income they didn’t get in wage increases, and of which the one year moratorium on taxes gave them.

Wait one minute! Before I hear the whining of those making over $250,000 because of the extra burden, because they think they’ll have to lay off people…. Please think first. If you were fortunate enough to be in this category, what would you do? You make a million dollars in Revenue as reported on Schedule C. Your costs of doing business are just $700,000. Okay, you have profits of $300,000 that will be carried over to the 1040 form. That’s not good because you’re going to get hit with more taxes than normal. Ah, but all you need to do is spend more on the business to stop that from happening. You can hire another $50,000 in labor and actually accomplish more things. Or, you can invest that $50,000 into more facilities to expand your business. Either way, the long term impact is that you’re investing to grow your business. Sure, your personal life will have to suffer at just $250,000 AGI. As most of the population makes less than that, you’re not going to find much sympathy. And that investment pushes the trickle down economics theory into motion.