The Old -- New Middle-class
I have written a couple articles trying to explain the problem with the economy for the middle-class in America. If you listen to the current rhetoric, now apparently from both sides of the isle, you would come to believe that it is the fault of either the political right working to give the rich an unfair proportion of all the money, or it is the fault of the political left in America for running up the debt and increasing significantly the expenses of government.
Of course there are many other flavors of the arguments but, they all center on how someone else is causing the plight of the middle-class and only our side is looking out for you. Oh yea, one more point…. they do it on purpose because they don’t like you and they want to hurt you, or they just don’t care about you! Have you heard this drivel recently? Do you really believe that any leader in America is only looking out for one class of people? If you believe this, I have to say. I feel sorry for both you, and America, as we have lost all reason, understanding, and any opportunity for compromise through tolerance.
I want to tell you that unequivocally I believe, all the crap you are hearing is simply not true!
Why is the Middle Class Suffering Then?
This is the key question isn’t it? And, since we agree this is the “key” question being raised by both parties now, ad naseum, have you happened to notice the issue is not focused as much on the poor? Hum??? Wonder why this is?
Being Poor in America
Well the poor in America have many programs already doing a great job of redistributing income back to them to help them survive. Before, you guys start to say that it is really bad to be poor — I agree it is not a good thing to be poor. But if you are going to be poor, it is better to be poor in America at this time, than any other place, or time, in history.
The U.S. “givernment” and all our states have many, many, programs to help people classified as poor. The definition of poor used to be people earning below the federal poverty level (FPL) which today is roughly less than $25,000 per year. But, this is mostly a myth. Many programs, if not all programs — I can’t verify that any programs work only at the federal poverty level — start their eligibility levels as 200 to 300 percent of FPL. While you may not be legally designated as poor from the FPL definition, practically you are treated as poor if you earn $50,000 or in some cases $75,000 per year. And due to the fact that these programs are not mandated to coordinate their care and benefits across any and all sources, somewhere between 20 and 40 percent of the money for services is paid to program participants more than once for the same need. Meaning, in plain English, they double dip. In some cases, this is nothing more than gaming the system — purposeful fraud. In other cases, it is because they just don’t realize it — hard to believe, but true non-the-less.
A hidden redistribution program!
Few people know, and even fewer people understand, that the government, both state and federal, requires drug manufacturers to pay back to the government rebates on all drugs purchased through most state and federal programs. This is just one example of subversive hidden taxes that we get hit with every day. How can a rebate cost us money you ask? Well in this case it is because the price you are paying is where the rebate dollars come from in the first place. So what happens with drug pricing is this: There are various prices for any given drug, unlike most other industries which have Manufacturer Suggested Retail Prices (MSRPs), all the various drug prices are based on an arbitrary number like Average Wholesale Price (AWP) or Wholesale Acquisition Cost(WAC).
On top of this, there are rebates – rebates for distributors, rebates for pharmacies, rebates for others, and most importantly rebates to the state or federal government. It is the governmental mandated rebates that are the main problem. In other industries rebates paid in the retail path to the customer are checked by the MSRP and the customer’s willingness to buy. Government rebates simply inflate the price paid. And where does this money go? It goes back to the government, sometimes to the programs, and is reallocated to support the government costs or the programs that generate the fee in the first place. So you are paying more in prices that flow back to the government so it can distribute the money back to the people it wants to give it to. It is simply one of the many hidden taxes, perhaps more hidden than most. It also helps the government have flexibility in the disclosure of the real cost of the programs they offer.
These rebates are inflationary, they obscure transparency, and they are not, by any means, the only mechanisms that redirect your hard earned money to others that you just do not know about.
I have documented this in earlier posts, but as a reminder; we are now at a point that almost 50 percent of the population is getting almost one-half of their income from some form of federal subsidy — directly, or indirectly. This is one half of the important facts we all need to consider as we try to move the country forward.
Being Rich in America
How about the other half? While it makes for great copy to vilify the rich as somehow taking the food out of the mouths of the poor in America it is just not true. Sure, there have been people who have gained illegally and profited on the suffering of others. But these despicable people do not represent the norm for rich in America. The title Rich itself is a very frangible determinant. If you are truly poor, meaning you earn at the FPL, then someone earning $75,000 per year could seem rich. But, this person you see as rich is often now just as eligible as you are for federal subsidies. So are they rich?
Many try to classify the rich as millionaires and billionaires. But this is a very problematic determination in itself. There is a 1,000 fold difference between a millionaire and a billionaire. Further many millionaires do not earn a million dollars a year in income. This represents what they have in equity, home, savings, investments etc. Another problem with the designation is that, Millionaires and Billionaires make up a very small percentage of the population and our economy. Less than 5% of the population. They earn about 18% of the total income in the U.S. Sure, this is a large number but, it is not as disproportionally large as many would have thought. And, the “rich” pay over 40 percent of the taxes to the government. Much of which goes to support the programs for the other 50 percent receiving some subsidy.
Romney’s 15% Tax Rate Shows they don’t pay their fair share!
As a very quick point, as I have been working on this article, the Mitt Romney 15% tax fiasco has come to the surface. Once again the argument is false and stupid from both sides. The 15 percent rate is not all the tax paid on these earnings. For the most part, the 15 percent represents the tax paid on the earnings from the money he has invested. Where did he get the money? Well some he likely earned as ordinary income and paid taxes on it at the time of earning of between 22 and 38 percent. Some, he may have earned before as investment income and could have paid between the 15 percent and 22 percent based on when he earned it. Lets say he inherited some of it. Well he would have paid a significantly larger tax on that at the time he received it based on the estate tax (so called death tax) in effect at the time.
Because he chose to invest, or re-invest, these monies, he has paid taxes multiple times on the money. If you want to be jealous of the fact that Mitt Romney has a lot of money, OK, I support your right to be jealous. But, if that is your objection then the rest of your arguments are worthless. This is America, what makes it great is anyone has the ability to get rich. Yep, some will say this ability is not distributed equally. That’s true! But, if you make it truly equal, then no one will have the opportunity to get rich! As I pointed out in the earlier section; rich vs poor is a relative state. You see, if all are truly equal, then everyone has exactly the same — no rich and no poor. Some argue this would be a good thing because they feel that everyone would have enough. History challenges this assertion and it defies human nature. It is the opportunity for disparity, like it or not, that makes people work harder and innovation really happen.
So back to the question; why are the middle-class suffering disproportionately?
Two main points. First, the middle-class is shrinking in number. If you need to be poor to get subsidies from the government then part of the historic middle-class is being subsumed by the subsidies for the poor. You could say that they are becoming poor because they are earning less and can afford less and that they need the programs to survive. That is one way to look at it but, it is the symptom not the cause. In fact, the middle-class, like most of the rest of America, have seen their incomes grow drastically in dollars over the past 40 years. Second, The middle-class do not have the excess equity, cash or assets, to hedge their loss of buying power.
The middle-class are suffering a huge disproportionate loss of buying power in America because they are disproportionately shouldering the burden of the loss of value of the dollar – you can call it inflation or deflation, the point is the same. If you live in the middle-class, you are not eligible for subsidies and you do not have the excess assets, like the rich, to hedge your buying power against the loss of value in the dollar by investment, savings interest, and purchase of long term tangible assets. As a result over the past 40 years, while you have been getting raises, like everyone else, and seeming to live a bit better like many, for you it has been a bigger falsehood than for most others.
In 1974, there was a total of $500 billion of currency (money) in circulation when President Nixon took us off the gold standard. Today, by various estimates, there is over $16 trillion. The real value of the combined worth of the U.S. has simply not increased 32 times in 40 years. It is even harder to believe there was really any increase when you understand that during the same period we have accumulated a combined trade deficit — purchased more from other countries than we produced and sold — of over $12 trillion.
So, this means that all the things we own, all the money we made, all the stuff we buy, the wages, the prices, the stock market, etc, have been inflated to levels that simply are not real. If you are poor, the government has compensated for this by giving you more subsidies in one form or another. If you were rich, you have been able to keep some form of pace with this devaluation problem because you could invest in housing, or businesses or the stock market. And, if you were rich, the loss of buying power may have affected your discretionary purchases but often not your day to day ability to live and pay your bills.
The middle-class, as I laid out before, do not have the assets to offset the increases in the amount of currency without an increase in real value of what they own, and they did not get subsidies either. So the issues of taxes comes to the front now. The rich have been paying much more in real taxes — revenue to the government – during this whole period.
The middle-class have heard over and over how they were getting a tax cut! How come you say the middle-class are bearing the burden? Well, the truth is, that there are Taxes and there are taxes…. Taxes are those things assessed by the government that we pay to support government programs directly through taxation. “taxes” are those things we pay that indirectly are increasing the price of goods and services, increasing the prices in the economy to artificially inflate the amount or money we can claim is in circulation. So you get paid more in wages, your company charges more for its goods and services and the economy appears to rise in value. You get more benefits, you get more vacation days, etc, and each of these things translates in some way to an increase in prices or spending and therefore the economy supposedly was growing. All that is necessary is for the government to be able to print more of that green-stuff to allow you to count it.
But, there is a fly in the ointment. It is a zero sum game. We are not making money as a country we are spending money as a country. So, as you thought that you had more money to buy new cars, new homes, take vacations, get more stuff, and the government has encouraged to do this– and on top of it borrow as much as you can to buy as much as you can — these new dollars were actually reducing in value. The good news is that we are not alone. Most of Europe has been doing the same thing in one form or another. If you were a net exporter, like China, it was not a problem. If you convert natural resources to high margin goods like much of the Arabian peninsula — no problem either. If not? Oh Well– bad for you!
As long as we were buying, most recently houses, and having the prices continue to go up, we could print more money, and no one was the wiser. But, due to increasingly dumb decisions we finally made the mistake of over doing it and it all fell apart. The values we think we have are far different from the real values that we have. Looking at median home prices from 1974 to today, with and without the gold standard, is is clear that we are still 20 to 30 percent too high in real values of homes. If you look at the economy it is much worse. We have $16 trillion in currency circulating in what is really a $5 trillion, maybe $6 trillion, economy.
The middle-class is, and has been getting hosed for a long time. Those in the middle-class have suffered from not enough to be rich and protected, and too much to be poor and subsidized. Further, as prices have risen, they have paid more with less real value and as such have indirectly, and disproportionately, paid for the programs for the poor.
And who is to blame for this? All of us! We have been asleep at the switch for too long. We have allowed all of our administrations, and elected officials to do dumb things — things that defied our own common sense. We allowed it because we all felt we were gaining. In the end, and once again, we will learn there is no free lunch!
Republicans, Democrats, Socialists, and Independents have all been elected to our government in the past 40 years and all have continued to perpetuate these myths and underlying problems. Were they doing this consciously? No more than any of the rest of us! It is not a Tax Problem alone, it is not a spending problem alone, it is a systemic problem.
We need to stop diversion to prurient, ad hominum, vilification of others ideas, and focus on a pragmatic solution founded in tolerance more than compromise. In the end, we must all face the reality that, it will only be a broad based mutual solution that will solve the problems underlying the economic disaster we are now in.
- We need to become competitive in the world from a total costs, benefits, and wages perspective
- We need to get back to manufacturing in the U.S. products for the U.S. and others to consume
- We need to stop subsidizing the existence of such a large portion of our population based solely on the desire to keep them thinking they are doing so much better and that the products we make are competitive and affordable. (subsidizing production to make it affordable so we can pay inflated prices to support inflated costs and wages so we all feel good is not a good thing.)
- We need to eliminate government redirection of monies to support hidden redistribution schemes. (Example: mandated Drug rebate programs see sidebar)
- We need to solve the problem with home equity, home mortgages and home prices in one holistic and complete fashion balancing the problem equally for all parts of society and the economy
- We need to get back to primary production from our own natural resources.
- We need to reduce what we purchase from other countries and buy more here – but this cannot be subsidized to make it affordable or our economy remains false.
I believe it is fixable! It is going to take a fundamental shift in what we all expect and, to some extent, how we view ourselves as Americans. We needed to start this five years ago. It may not be too late now, but it very likely will be in another four or five years.
Since the power of our government is derived from the people in this constitutional republic we call America: It is up to us!