US Vs World Economy
A friend sent me a link which is the "Income Inequality" assertion in a YouTube video. This is a "left" assertion that has a lot of traction in the country. I of course searched for the contrarian view from the American Enterprise Institute, where I'm headed with my business partner in two weeks to interview two key players, one who worked for the US Treasury and another who was a Senior VP with Fannie Mae, to gain deeper insight into the Great Housing Recession for a book we are co-authoring. Both links are below at the end of the article.

Since real estate makes up about 1/3rd of the US economy in the aggregate, with allied goods and services, we have continually been required to explore economic ramifications beyond just a strict real estate perspective. Following are my own views and NOT that necessarily of my co-author for this project. Some of this is anecdotal and some is based on facts as I view them and my own experience as a businessman of nearly 40 years.

America the Beautiful
The American economy has undergone vast changes we could not have foreseen even 30 years ago. Beginning in the late 70's and early 80's modern computers that were accessible by the average person began to appear in earnest. Technology has exploded on a vast scale, unseen since humankind first began to walk the planet. This has created a vast knowledge network that connects the planet, certainly some much better than others but even poor 3rd world countries now have cell phone coverage, which are mini computers, and access to the 3rd world is growing rapidly. This access has created tremendous productivity gains.

Historically huge productivity gains have increased consumption of goods and services and lowered their price on a per unit cost.

After WWII the US was pretty much alone in having its shores and infrastructure relatively unscathed, where Europe, Britain and Russia were devastated landscapes filled with rubble. Those few countries that were unscathed, like Spain, which had earlier had its own civil war and Switzerland had few resources to resurrect Europe. Likewise the powerhouse of the far east, Japan had been equally devastated. China was in the middle of a civil war between Mao Tse Tung and western backed Chiang Kai Shek. Dedicated communist Mao won. Stalin retained power in Russia and kept the country under another communist iron fist.

During this period only the US had the resources to help resurrect Europe through the Marshall Plan, fought yet another war in Korea containing Chinese and Russian mischief in the rest of Asia. Japan took the next 30 - 40 years to become an economic powerhouse. Notably it was under a Republic form of government. Russia and its forcefully allied Eastern European nations remained under strong-armed socialist/communist rule until 1991, when it all essentially broke down through bankruptcy really. They turned to an authoritarian form of crony-capitalism. It nearly failed until strongman Putin righted the ship, with proxy Medvedyev as a placeholder for Putin to return. Russia under its form of capitalism and the leadership of Putin has stabilized itself, and is just now reasserting itself seriously on the world stage in a less than a 15 year period. China's unique brand of authoritarian capitalism nominally refers to itself as a socialist state, but in fact is another hard line authoritarian capitalist state with a communist autocracy. Japan, with its limited resources has maintained its status as one of the top 3 economies for decades under its Republic form of government.

Not So Free Trade Begins
Over the years the US has granted various forms of "favored nation" status for political and/or trading advantage. Beginning with President George H.W. Bush political dialogue and culminating with the full force of treaty under President Clinton, the US really opened its world-trade barriers wholesale to the rest of the world for the most part. Though Ross Perot tried to warn America that this would hurt Americans on the job front, the country fell for the "feel good" new-world dialogue of the UN and candidates Bush/Clinton. This strategy has been hugely successful for the world, especially China, India, the Asian "tigers," and now major South American economies and Europe...especially for the Eastern European USSR satellite nations, because of their low labor costs and technology adoption.

Many commoditized goods and services that can be performed by humans or computers are now done by the lowest "price point," which is foreign labor. Today, many "American" companies have vast production and service resources in less expensive places to do business. This has resulted in continued low prices that have helped to contain inflation. I recently purchased a jacket that cost me less than I would have paid in the 1970s, when it would have likely been made here. Not all products are the same, cars for instance, but cars now routinely run 150,000 miles or more, whereas in the 1970s and much of 80s after 50,000 miles you needed to be either a mechanic or trade your vehicle. Gas mileage was about 10 to 12 miles a gallon, and today is nearly 4 times that much with less emissions. These things occurred also because of technological advances, government policy, and industry collaboration, the latter helped along by the Japanese who built more efficient and superior quality cars. That perception remains today. Like it or not, competition allows for better and cheaper products and services.

Had we as a country retained high tariffs and protected our markets, our costs for goods and services would be much higher and of less quality, as the American auto industry demonstrated when they had the market to themselves with no real competition. American auto manufacturers used to target a 5% "lemon" rate where the Japanese targeted a 0% rate for "lemons." The price we pay for cheaper goods and services is exported manufacture, partial manufacture and services from abroad at the cheapest price.

Enacting tariffs, abrogating our free-trade treaties could move manufacturing back to the mother country but at a huge price...huge price increases to accommodate current American wages. Doubling American wages would likely quadruple prices for many goods and services very quickly, meaning less consumption and more unemployment. This scenario is highly unlikely unless there is huge economic or political upheaval in the world.

Capital now moves freely around the world, and seeks its most profitable place. Cheap labor, goods and services is where capital flows. The US is already the 2nd highest corporately taxed country in the world. Raising the rates will make us less competitive. Companies will just register in "less taxing" places. The shareholders want returns. Our own 401k, pensions, insurance plans, and IRA fund managers are charged with getting US, you and I, higher returns. If they do not get high returns compared to others, then we as individual investors complain to our fund managers to get us competitive to the returns that others are receiving. If you have a pension, and IRA or insurance annuity you are pressuring your fund managers directly or indirectly through your employers to get better returns.

That is how merciless the free market and free trade is. The alternative is old China, USSR, Cuba, or Europe? The old China and USSR are gone, having moved toward their own forms of capitalism. If their proletarian revolutions would have worked, their people wouldn't have been starving, seeking our wheat for survival during the height of the Cold War. Now, they do not seek food aid. They buy it, or raise it. Under the socialist collective system they couldn't grow enough food because there was no incentive to excel. Therefore, workers in all categories did the LEAST amount of work because it did not pay to work harder when your neighbor in the job was not working very hard. This is the essential complaint of conservatives against the "welfare" state. When half of your work efforts produce for those who won't work, there is no incentive for those who do work to excel. Eventually they stop working or reduce production because it does not profit them to do otherwise. Read "Atlas Shrugged," or see the movie.

There is some sense of inherent "goodness" in many people to "help" those less fortunate, but when the less fortunate are not really handicapped or incapacitated in some way, and the disincentive of work itself becomes less than what the "state" will pay to sustain you, the system begins to break down. We are already there in my opinion.

Very Taxing
Let's talk taxes. If you taxed ALL corporations 100% (no profits), it would only account for about our ANNUAL deficit. This year's annual deficit will amount to about $800 billion, which we have to borrow. Total corporate earnings were about that last year. How long would the companies left remain in America if we taxed them 100%? Not long. France discovered that by taxing incomes over $1,000,000 at 75%. Within a year they had a huge exodus on their hands, and with their flight of millionaires, the capital and jobs left with it. Already local elections are bringing the right back into power in France because the people have realized how disastrous this policy is in the new free-trade world.

Yes, countries have figured out taxes too. American millionaires are beginning to renounce their citizenship and move to more tax-friendly havens. In 2012, Eduardo Saverin, co-founder of Facebook renounced his American citizenship just before Facebook's IPO where he netted almost $4 billion, he was inspired to do so because of the hundreds of millions he saved in taxes. Singapore welcomed him with open arms. It is interesting to note that Singapore is rated #2, just behind Hong Kong #1 (now part of China), while the US is ranked #10 by the Cato Institute for business freedom. This is a very telling and compelling illustration of the new world economy, and is being enacted in less notable, but nonetheless hugely impactful scenario, every day.

Smart millionaires are realizing there is tremendous pressure to increase taxes to alleviate the addiction we have to deficit spending, and they fear, rightly so, government actually taking money from bank accounts at some point. It has happened in Poland and Cyprus and may soon happen more in Europe. We may have a severe financial "cold," but much of Europe has pneumonia. It may be fatal to some. We are not even talking about the $17 trillion, soon to be $20 trillion dollar deficit, and $85 trillion in unfunded liabilities yet facing the country over the next 20 years.

China and other relatively healthy economies are pushing for a new world currency to replace the dollar, which would throw our economy into a tailspin. A doubling of interest rates to keep financing our debt would also double our annual deficit. We would be forced to make even more drastic cuts than we should be making now to cover the 1/3rd of our budget we borrow each year. We should actually be living on 2/3rds of what we're now spending. Imagine the screaming we would hear if we cut our budget 1/3rd across the board as we SHOULD be doing.

Let's assume we taxed our corporations only at 40% the highest of the major economies, we're now at 39%. State taxes are on top of that. That would bring in about $80 billion, about 10% of our annual deficit, not much. Plus it would make us that much less competitive in the world, so for the companies we might drive away, would it be worth it? Maybe, but it's still a drop in the bucket.

What They Are NOT Telling You
There's another phenomena we will be facing soon. Though there had been some tampering with the CPI (Consumer Price Index) over the years, beginning in 1994 it got pretty serious when President Clinton and then Speaker Gingrich cut a deal to exclude certain items from the CPI, which is the basis for measuring inflation. In addition they "weighted" items differently. The goal was to artificially reduce government reported inflation. In this manner Speaker Gingrich could obtain long-term entitlement cuts, while President Clinton could maintain his budgetary spending at the time. Now, nearly 20 years later we are beginning to feel the effects of this "smoke and mirrors" sleight of hand.

Reported government inflation is less than 2%, but with transportation costs excluded from the theoretical "basket of goods" that the CPI is supposedly based on, and "inconvenient" weighted items "adjusted" favorably for the government's CPI reporting, we are in the dilemma that we are actually experiencing more like 7% inflation in reality, yet our social security, entitlements and wages are being indexed at 2%. This year social security recipients will receive 1.5% increase, yet experience about a 6.5% "real world" inflation rate. Don't think so? Check out your grocery bill compared to 4 or 5 years ago. Do you actually think it's only gone up 2% a year? There is a place on the internet that actually tracks this, called shadowstats.com. It has a wealth of information. What does this mean? It means that while giving 2% raises and benefit increases while the real cost is 7% for inflation, means that purchasing power is DECLINING by 5% a year, or 50% in 10 years. That's what the average person does not realize but "feels" something is wrong. Purchasing power is eroding and consumers are beginning to feel its effect in earnest, and it will get worse. THAT is the secret to how the government has intended it for 20 years to address social security and benefit inflation: don't pay the real rate of inflation, but pay based on an artificially low reported "official" rate. This policy has been in effect for both democrats and republicans for 20 years.

The REAL Reality Show
So, why is this happening? This is how poor our political system now is under perennially elected politicians who care more about retaining the perks and power of their political careers than the good of the country. Every election, the rhetoric sounds laudable and plausible, yet nothing changes. The game is rigged. Each side knows in any given election the incumbent has the advantage of being re-elected. Almost never does a majority exceed 60% for the winners compared to 40% for the losers in either the house or the senate, and usually is much closer.

After election, the Kakbuki dance begins. Obfuscation, frothy rhetoric for the voters and endless blame of the other side to cover up your own shortcomings and failure to execute continues. Endless kicking the can down the road until the NEXT election, hoping for an incremental shift to your side to actually do something that is "safe" so they can retain their spot in congress.

In this environment there have been very few who actually made an honest attempt to address the big issues, but usually they have paid through failed re-elections or close elections, because we ourselves do not WANT to address the serious issues. WE don't want to take the pain we need to face. We want someone else to. The typical scapegoats are the "fat cats" and "corporations." We don't want to admit that we ourselves are the enemy. We want. We want. We want, yet we want someone ELSE to pay. Like I stated earlier, taxing corporations at 100% would ONLY take care of one year's deficit and result in the migration out of the corporations to sunnier climes for their capital.

We cannot afford all the "feel good" things we would like. We haven't been able to afford them for some time but have continued to spend and increase spending on borrowed money as if we could in a world that is imminently more competitive than we had even 20 years ago. Not only is labor, goods and services competitive, but capital itself is competitive. We cannot afford endless undocumented aliens who inordinately use sparse resources that will ultimately become more and more apparent as our seniors retire over the next 20 years...all 65 million of them. Spending these resources on an illegal immigrant population in the tens of millions will mean less and less for retired seniors who paid their taxes, worked hard and expected certain minimal services and care that they will be receiving in eroded inflationary dollars. Continuing along this path will mean less and less for our own citizens.

A recent adjudication by the courts has made the debts of a retired parent's care the "filial responsibility" of the children, and forced the children to pay the bill for their parents because "they had the means to pay." This is not an entirely new precedent, but adding those bills along with the $100 trillion indebtedness we are leaving them and our grandchildren will be too much for them to pay, when by 2035 there will only be 3 workers for every retiree to pay for social security and other entitlements. This is unrealistic at best and catastrophic at worst. There is no easy way out!

Expatriation Coming Soon
Another issue we will begin to face more and more is the actual migration of citizens to other less costly countries. Latin America, low cost Asian countries, Central and South American countries are all loosening their residency and citizenship requirements, INCLUDING reduced taxes to attract Americans with reduced incomes in their own country, but with sufficient income in their expatriate country to add to that country's economic health. This of course will be a further burden on America if this becomes a strong movement. While $15,000 in social security may not go far in America, a husband and wife with a $30,000 combined income can live quite well in countries like Ecuador, Panama or the Phillipines. If this phenomenon is multiplied by hundreds of thousands, then that will be that much less consumption in America that we can ill afford at that time, including lost tax revenues at least to the states they otherwise would have retired to.

Most of our national politicians know the real issues. They don't speak frankly with us because we don't want to hear it. When we hear the truth, it results in anger and blame of everyone but ourselves. What we need is an HONEST assessment and dialogue for the sake of the entire country. Neither side has been willing to do this honestly, because when they have, the opposing side immediately takes advantage with the "rhetoric of opportunity" telling us what we want to hear rather than the reality, so no one levels with us, except for the occasional "rebel," which the "status quo" quickly relegates to the fringes in order to disempower the "bad news."

Plea For Sanity
This is the current reality. Can it be changed? I'm not sure it can be changed because these liabilities are so huge. If it was just the upcoming $20 trillion deficit, maybe, but with $85 trillion in unfunded liabilities, probably not likely without hyperinflation. Hyperinflation might wipe out a good portion of the debt but would also cause wholesale bankruptcy, much worse than the Great Depression of the 1930s because today most of us do not live in such a way that we could survive as subsistence-level farmers. We might think so, but the harsh reality would be much different. Yet, I am not one to give up, no matter the odds. I believe a strong dose of honest national conversation about the reality of our problems, an honest dialogue with our creditors, a shared burden that's fair with a flat tax system would go a long way to resolving these serious problems.

We've still got a chance. There's always a chance, but we need new leadership not afraid to face the issues, and I fear the only way this will occur is to have a constitutional convention to replace the entire congress and hold new elections with term limits for all elected with real penalties for politicians that fraudulently tell us one thing and do another. We should also limit congress' benefits to the same as it is in the public sector average, and tie pay to a multiple of the minimum wage. This would eliminate career politicians and put them on notice that we are serious about our country, our freedom and our responsibility. If we fail, we will fail our country and we will lose what freedoms we have left because in order to retain power when we are finally faced with forcible cuts, the government will of necessity have to become more ruthless to retain its power.


The "Income Inequality Assertion"

http://www.youtube.com/watch?v=QPKKQnijnsM,

The "Income Parity Assertion"

http://www.aei-ideas.org/2011/10/5-reasons-why-income-inequality-is-a-myth-and-occupy-wall-street-is-wrong/Wealth Inequality in America




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