Saturday, February 27, 2016

One Percent -- As Good as It Gets

GDP for the fourth quarter of 2015 was revised up to 1 percent, as analysts and politicians cheered the upward revision.  Given how GDP is estimated, it wouldn't be very surprising if actual GDP declined during the fourth quarter. Announced GDP is always based upon a relatively small sample of the country's economic activities.  That's why the revisions are so big.  A few items in the sample can change and make a big, big difference in the final number.

But, the truth is that actual GDP growth is not much different than zero. That's what the "one percent" number means. This is an annualized number, so even the estimate is for 0.25 percent GDP growth in the fourth quarter -- barely a pulse.

Economists who work for the government think this is great.  I suppose it is a better outcome than that achieved by Venezuela.  Beyond that comparison, it isn't clear why anyone thinks this kind of economic growth is great, given historical numbers closer to four percent and post-recession numbers in the high single digits. There has never been an economic recovery in America that was this slow.  Things have definitely changed.

Meanwhile, most economists are arguing for minor tweaks in monetary or fiscal policy to spur economic growth.  All this shows is that there is not much left of objective science in macroeconomics.  The problem with the American economy and the European economy has nothing to do with "macroeconomics" and cannot be fixed with policy tweaking.

Janet Yellen and the Fed are irrelevant and so is infrastructure spending, tax cuts, and on and on.  These policies cannot rescue an economy whose politicians (and media) have demonized businesses and regulated most of America's economic entities to the point of frigidity or extinction.  Not much economic growth can ever take place in the current regulatory environment.

Bernie Sanders' candidacy is the ultimate statement of much of what has happened to the once vigorous American economy.  For Sanders to say that "Wall Street's business model is based on fraud" is simply another way of saying that free markets are based on fraud.  Sanders and now Clinton seem determined to destroy what little is left of America's free markets -- indeed, not much is left to destroy.  That's why there is no economic growth and there is none to look forward to in the future.

This is as good as it gets, as Jack Nicholson famously opined.  The golden goose of American prosperity has been killed and is not going to revive anytime soon.

None of this will impact the wealthy.  Sander's idea of increasing income tax rates will have no effect on Buffett or Clinton and Gore or Pelosi or any other super wealthy person. Wealthy people don't draw their income from wages and salaries like ordinary folk.  Wealthy folks can choose whether or not to have taxable income and, if rates are raised, wealthy folks will show lower taxable income.  Conceivably Buffett need not pay any taxes at all for the rest of his life.  All he has to do is borrow the money to live on, from year-to-year, and pay no taxes at all.  He might not even have to file a tax return.  So, naturally, Buffett and other wealthy leftists don't care if income tax rates are raised to 100 percent or more.  It doesn't affect them.

But ordinary folks cannot escape the tax man.  They don't have Buffett's wealth that enables him to maneuver away from the tax man.  They are stuck.  Not only does the average American pay income taxes but he is stuck with paying the most regressive tax in America -- the social security payroll tax, which amounts to 15 percent flat tax on all working income (this includes the 7.5 percent that the employer pays, which otherwise would be income to the working American).

With massive regulations on businesses, massive taxes on ordinary citizens (non-wealthy citizens), it is hard to see how the economy ever gets out of the mud.  So, maybe the reason that Obama and Buffett and other elite Americans are pleased with one percent growth is that they have theirs already and they don't need economic growth.

But, the average American needs strong levels of economic growth just to tread water economically.

Unfortunately, one percent is as good as it gets or will get.  Look for the middle class to continue to lose ground, while Buffett, Obama, Clinton, Gore, Pelosi and Sanders thrive in luxury.

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