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Capitalism is a dynamic system, driven above all by the private pursuit of profit. Contemporary business decisions, supported by government polices, have been very successful in generating high rates of profit. They have also led to slow and unstable growth. One consequence is the now widely recognized problem of income inequality.
Significantly, this income inequality is reshaping our economy in ways likely to be self-reinforcing. This is highlighted by the concentration of consumer spending in ever fewer hands and the business response.
According to a study discussed in a recent New York Times article,
The top 5 percent of earners accounted for almost 40 percent of personal consumption expenditures in 2012, up from 27 percent in 1992. Largely driven by this increase, consumption among the top 20 percent grew to more than 60 percent over the same period.
Thus, by 2012 the top 5 percent of earners were responsible for approximately the same share of personal consumption expenditure as the bottom 80 percent.
If we focus on the post-recession period, the spending dominance of those at the top is even more striking. As the article notes, “Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.” More broadly, the top 20% of households accounted for approximately 90% of the total increase in real consumption spending over the years 2009 to 2012.
Not surprisingly, this trend has triggered major changes in the economy. In particular, businesses that cater to “middle-income” earners are in decline while those selling to high and low income earners are rapidly expanding:
In Manhattan, the upscale clothing retailer Barneys will replace the bankrupt discounter Loehmann’s, whose Chelsea store closes in a few weeks. Across the country, Olive Garden and Red Lobster restaurants are struggling, while fine-dining chains like Capital Grille are thriving. And at General Electric, the increase in demand for high-end dishwashers and refrigerators dwarfs sales growth of mass-market models. . . .
In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.
“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Mr. Maxwell [head of the global retail and consumer practice at PricewaterhouseCoopers] said. “You don’t want to be stuck in the middle.” . . .
The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.
As for the self-reinforcing nature of this development: luxury spending tends to have the highest profit mark-up, thereby boosting the incomes of those at the top. And low-end businesses prosper only because they underpin their low prices with ever lower wages. In sum, structural changes are well underway that, if not opposed, are likely to lock-in this growing income inequality to the detriment of most working people.
The British economy is a disaster. Oddly enough most analysts find it difficult to explain why.
Actually the reason is quite simple. The British government responded to its own Great Recession by cutting spending and raising taxes. The result, which is anything but mysterious, is that the county remains in deep recession.
Matthew O’Brien, writing in the Atlantic, describes the situation as follows:
public net investment — things like roads and bridges and schools, and everything else the economy needs to grow — has fallen by half the past three years, and is set to fall even further the next two. It’s the economic equivalent of shooting yourself in both feet, just in case shooting yourself in one doesn’t completely cripple you. Austerity has driven down Britain’s borrowing costs even further, but that’s been due to investors losing faith in its recovery, rather than having more faith in its public finances. Indeed, weak growth has kept deficits from coming down all that much, despite the higher taxes and slower spending. In other words, it’s economic pain for no fiscal gain.
Below is a chart taken from the Atlantic article. It shows that:
Britain’s stagnating economy has left it in worse shape at this point of its recovery than it was during the Great Depression. GDP is still more than 3 percent below its 2008 peak, and it hasn’t done anything to catchup in years. At this pace, there will be no recovery in our time, or any other time.
In other words, while the British economy suffered a deeper decline during the Great Depression period of 1930 to 1934 than to this point in the Great Recession which started in 2008, the economy recovered far more quickly then than now. In fact, it doesn’t seem to be recovering now at all.
Perhaps the most surprising thing about the situation is that political leaders appear determined to stay the course.
Considering the enormous time spent debating tax policy, it is easy to imagine that the U.S. must have one of the high tax rates in the world. Well, that is not the case.
The following graph is one of them. It shows the personal tax rate paid by people making the equivalent of $100,000 a year in 2012. The U.S. is the 55th ranked country out of 114 in terms of tax rates.
The next graph shows the same thing but for those earning the equivalent of $300,000 a year. The U.S. ranking is similar for this upper income group, 53rd highest out of 114.
Moreover, as Derek Thompson, the author of the Atlantic post, notes:
But these numbers might understate how low taxes have been in the U.S. Unlike most advanced economies, the U.S. don’t supplement personal income taxes with a national sales tax, or value-added tax (VAT). Consumption taxes accounted for about a fifth of total U.S. revenue in 2008 (mostly at the state and local level) compared to an OECD average of 32 percent. In other words, the U.S. relies uniquely on personal tax rates to raise revenue — and we have relatively low personal tax rates.
Finally, here is a look at the U.S. ranking among OECD countries for taxes as a share of GDP in 2008.
So, given that the U.S. doesn’t seem to be a high-tax rate country, why is tax policy so contentious? No doubt the answer has a lot to do with who actually pays the taxes and, perhaps even more importantly, what the revenue is used for.