Posts Tagged ‘debt’

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Most Americans are not loading sixteens tons of coal. But they are, even in the midst of the recovery from the Second Great Depression, sinking deeper and deeper into debt.

According to a recent analysis by Reuters [ht: ja], the bottom 60 percent of income-earners have accounted for most of the rise in consumption spending over the past two years even as their finances have worsened.* The data show the rise in expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years through mid-2017, while the middle 20 percent has just about stayed even. However, the upper 40 percent—especially the top fifth—has increased its financial cushion, deepening income inequality and leaving those at the bottom in an increasingly precarious financial position.**

It is this recovery’s paradox.

A booming job market and other signs of economic expansion encourage rich and poor alike to spend more—to pay for transportation and housing, put their kids through college, to cover medical bills—but the combination of rising prices and stagnant wages for most middle-class and lower-income Americans means they need to dip into their savings and borrow more to do that.***

In other words, the U.S. economy relies on individual consumption to sustain the economic recovery but doesn’t pay most Americans enough to cover their expenditures without going into debt.

What that means, of course, is that in 2017 many Americans—71 million (or 31.6 percent of adults with credit records), according to the Urban Institute—had debt in collections, thus putting their financial futures at risk.

It also means that many Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president. According to the Wall Street Journal,

They have high average debt, are often paying off children’s educations and are dipping into savings to care for aging parents. Their paltry 401(k) retirement funds will bring in a median income of under $8,000 a year for a household of two.

In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement. . .That is around 15 million American households.

Finally, it means that the United States is heading for a level of income inequality that hasn’t been seen since 1928. Already, the richest residents in fives states and 30 cities have surpassed that threshold.

EPI

According to the Economic Policy Institute,

Income inequality has risen in every state since the 1970s and, in most states, it has grown in the post–Great Recession era. From 2009 to 2015, the incomes of the top 1 percent grew faster than the incomes of the bottom 99 percent in 43 states and the District of Columbia. The top 1 percent captured half or more of all income growth in nine states. In 2015, a family in the top 1 percent nationally received, on average, 26.3 times as much income as a family in the bottom 99 percent.

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In the most unequal states—New York, Florida, and Connecticut—the top 1 percent had average incomes more than 35 times those of the bottom 99 percent!

Merle Travis had it right. But these days, the iconic American worker isn’t loading sixteen tons of number nine coal—although they may be packing and shipping the equivalent in Amazon goods. Nor do they owe their soul to the company store—just to the employers who pay them so little and the sellers (of housing, cars and trucks, their children’s education, and healthcare) whose prices keep rising.

As a result, most Americans are either just getting by or finding themselves deeper in debt, falling further and further behind the tiny group at the top. All the while they, like their coal-mining predecessors, are imploring St. Peter not to call them ’cause they just can’t go.

 

*The top 40 percent of earners usually drive U.S. consumption growth. But 2016-17 was the first two-year span in at least two decades that the bottom 60 percent accounted for about half of the growth in consumption, and that appears to have continued in the first quarter of 2018.

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**The Reuters study divides Americans into five groups based on their median before-tax income, as illustrated in the chart at the top of the post.

***Even as the official unemployment rate (the blue line in the chart below) has plummeted, workers’ wages (the green line, for production and nonsupervisory workers) have barely stayed ahead of inflation (the red line, for the Consumer Price Index) in recent years.

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The result is a precipitous decline in the labor share of national income, which remains perilously close to its lowest level in 50 years:

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Tax cuts and spending increases enacted by Republicans over the past four months will lead to wider than previously expected budget deficits, according to the Congressional Budget Office. The federal budget deficit would total $804 billion this year, 43 percent higher than it had projected last summer, and exceed $1 trillion a year starting in 2020.

Larger deficits will, of course, add to the national debt: debt held by the public will hit $28.7 trillion at the end of fiscal 2028, or 96.2 percent of gross domestic product, up from 78 percent of GDP in 2018.

Those estimates assume current law will remain in effect, meaning Congress would allow some tax cuts to expire and spending caps to take effect again in the coming years. If Congress extends the tax cuts, as many Republicans want to do, the CBO predicted higher deficits and publicly held debt of about 105 percent of GDP by the end of 2028—a level exceeded only once in U.S. history, in the immediate aftermath of World War II.

So, what do these escalating deficit and debt numbers mean?

Clearly, in the first instance, the Republican deficit hawks have gone the way of moderate Republicans and all other extinct species of politicians and other mammals. They existed for decades, always in an attempt to cut entitlement programs and other public expenditures for poor and working-class Americans. But once it was possible to pass massive tax cuts for corporations and wealthy individuals and boost military spending, the deficit hawks on the Republican side of the aisle simply disappeared into the walls of Congress.*

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But there’s a second, perhaps even more important, angle we need to take into account: wealthy individuals and large corporations—the chief beneficiaries of the Tax Cuts and Jobs Act—would rather lend money to the government, at interest, than pay taxes on the surplus they receive. As federal deficits and debt grow, they end up receiving, not paying for, a larger and larger share of federal expenditures.

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I have illustrated the structure of federal debt over time in the chart above. By the end of 2017, the federal debt (the red line) had reached $20 trillion, of which $14.5 trillion was held by the public (the green line).** Private investors (the blue line) own the bulk of debt held by the public (about 83 percent), while foreign investors (both private and public, the yellow line) hold less than half (43 percent) of U.S. public debt.

As we can see, private holders of U.S. public debt—mostly wealthy individuals and large corporations—the majority of whom are based in the United States, are the ones who stand to gain. They have been granted lower tax rates and, at the same time, will receive a mounting share of the interest that is paid out on the growing debt ($310 billion for fiscal year 2018).

In the current political economy of the United States, nothing can be said to be certain, except growing debt payments and lower taxes—all for the benefit of wealthy individuals and large corporations.

 

*But, as Michael Hiltzik [ht: sm] explains, the species of Republican economists and politicians who aim to cut entitlements, such as Medicare and Social Security, is still thriving.

One would have thought that after saddling the U.S. economy with a tax cut costing $1.5 trillion over 10 years, conservatives and their patrons in corporate America would soft-pedal the usual attacks on Social Security, Medicare and Medicaid.

One would be wrong.

**The difference between federal debt and debt held by the public is made up of intergovernmental holdings, Government Account Series securities held by government trust funds, revolving funds, and special funds (as well as Federal Financing Bank securities).