The Impact of Political Party on the Economy
The buzzing confusion of political dialogue
In this continuing series on the Challenges to Capitalism, which I have researched and written about for many years, I take a deep look at the challenges of making Capitalism work for us. There are ideologies, but no hard and fast rules. Capitalism is what we make of it. My point of view is unbiased, believing that capitalism does make a better world for us, but it can also run over us like a steamroller. To make Capitalism work effectively, you have to know how it works, which you judge by analysis and results.
The 2012 election is largely about the economy and jobs. What we do know is that various problems in the financial sector got us into this recession, similar to what happen during the Dot.com bust, similar to what happened during the Great Depression. Many of those problems are being addressed by the government, however, many of these problems, like bubbles, are likely to recur.
All political parties claim that they know best how to get us out of a deep recession. Which one is correct? If the past is the best predictor of the future, a look at the 60 year record is an evidence based inquiry that should answer the question. But the future is ours to change, by either party, or the people.
"I see in the near future a crisis approaching that unnerves me and cause me to tremble for safety of my country; corporations have been enthroned, an era of corruption in High Places will follow, and the Money Power of the country will endeavor to prolong its reign by working upon the prejudices of the People, until the wealth is aggregated in a few hands, and the Republic destroyed." - Abraham Lincoln What Lincoln Foresaw. On Notable Quotes at www.notable-quotes.com
The challenges to our economy today are daunting. We went from what seemed to be a golden era of prosperity in the 1990s, to near desperation today as many lose their homes and the National Debt appears untamable. Some believe, myself included, that we didn't see the warning signs in the 1980s and 1990s. Below I lay out the 5 challenges that I believe are particularly relevant.
Challenge 1: U.S. Federal Debt by President/Political Party
Image displayed under the Creative Commons License. Source, and for more information, visit: www.truthfulpolitics.com: U.S. Federal Debt by President/Political Party
The US National Debt wasn't much of a problem until President Reagan. Partly due to inflation, it then assumed a ski-slope trajectory. Personal debt continued to increase. President Clinton got the National Debt under control, and it showed every indication of decreasing. Under Bush II, partly because of the Dot.com bust recession, it again took off, but this time it achieved a near exponential trajectory that is nearly impossible to tame. Despite cutting spending more than any President in history, Obama has not been able to tame the debt.
Can reducing government spending stop the increase in the National Debt? While stopping unwarranted and wasteful spending is a worthwhile goal, even if you stop absolutely all non-entitlement government spending, it hardly does anything for the National Debt. This means an increase in revenue is required, either through more tax-paying jobs, higher wages, additional taxes, or higher taxes on someone. You can use the New York Times interactive tool to see for yourself what it would take to balance the budget and eliminate debt, if you were in charge.
What is likely to occur in the newly-elected Congress is that the Republicans and Democrats will not be able to agree on extending the Bush era tax cuts, because even if one party controls both Houses, it takes 60% agreement in the Senate to approve legislation. This will increase government tax revenue. They may be able to agree to a tax cut for the middle class, which will avoid political suicide for most members. There will be a lot of finger-pointing.
Challenge 2: GDP growth by political party (economic growth)
Image displayed under the Creative Commons License. Source, and for more information, visit: Dave Naffziger’s Blog
"For the twenty years for which Republican presidents submitted budgets, the average rate of GDP growth was 2.94%. For the twenty years in which Democratic presidents submitted budgets, the average rate of GDP growth was 3.92%." Source, and for more information, visit: Impact of Political Party and Economic Growth
Business expansion results in increased production, which is measured by GDP (Gross Domestic Product). Our primary source of jobs comes from small business expansion (80%). Our primary source of government revenue comes from taxes paid by wage earners. Since 2001, the increase in jobs has not kept up with the increase in available workers. This also means that government revenue has also not kept up with the needs of a growing population, resulting in an ever growing deficit.
Challenge 3: Real Disposable Personal Income Growth (after tax income)
Real Disposable Personal Income Growth - that is, the amount we have left after taxes, per year from 1953-2001 was 3.65% under Democratic presidents and 3.08% under Republican presidents. Source: Truth In Politics: Impact of Political Party and Employment and Income Growth.
My own calculations, which you can check below in the Reference section, indicate that the average under Republican Presidents was 3%, and the average under Democratic Presidents was 3.4%. How much difference does this .4% make? Over a period of 60 years, your total wage earnings would be $300,000.00 more. That's enough to pay for a house or a couple of college educations for your kids.
Challenge 4: Government spending by political party
Image displayed under the Creative Commons License. Source, and for more information, visit: U.S. Federal Government Size, as Measured by Spending, by President/Political Party
"...the average increase in government spending was 3.1% under a Democratic President and 2.1% under a Republican President." Source: U.S. Federal Government Size, as Measured by Spending, by President/Political Party
Government spending under Obama is 1.4%, and will be falling 1.3% in 2013. http://articles.marketwatch.com/2012-05-22/commentary/31802270_1_spending-federal-budget-drunken-sailor
Challenge 5: Private sector U.S. Job Creation by President/Political Party
Image displayed under the Creative Commons License. Source, and for more information, visit: U.S. Job Creation by President/Political Party
Job creation under Obama, which is low, has almost reached pre-recession levels. Under Bush II, following the dot.com bust, the economy did not produce enough jobs to keep up with growth, for his entire 8 year term.
The Bottom Line
Statistics don't tell everything about a given situation, such as the economy, and they are often correlations that have many factors that drive them, so they have to be taken with a grain of salt. But when evaluated over a period of 60 years or more, they paint a good picture of the effect certain things have.
Republicans do spend slightly less than Democrats. Despite the lower spending, the National Debt soars under Republicans, yet fewer private sector jobs are created, and personal income does not rise as quickly.
The National Debt is an enormous challenge, and the fact that it soars under Republican administrations, coupled with the fact that personal debt has been growing since the 1970s, you do have to ask what the vaunted "trickle down economics" actually means: trickle down revenue, or trickle down debt.
So the relevant question for Republicans is: "What are you going to do differently that will stimulate economic growth, make personal incomes rise, create jobs which will create more government revenue, and lower the National Debt, besides the old useless saw of cutting spending, which doesn't work.
Keys and locks on economic expansion
Some aspects of economic expansion are very simple. If people buy more products, companies produce more to meet the demand. To produce more, they often have to hire more people. Companies also create new products for a need that they assess. This creates more jobs.
What can also happen is economic contraction. This happens when demand for products decreases. This might happen during an economic downturn when people conserve. It also happens when productivity goes up. Productivity is the measure of output for a given amount of resources. Increases in productivity happen from technological innovation, lower wages, lower prices for raw material, or increased output by employees.
Currently manufacturers are able to increase productivity by extending employee hours, changing jobs to exempt status so that time is not a factor in wages, using technological innovation, consolidating plants and administration, and shipping jobs to countries where labor rates are very low. Concurrently, investment in companies simply raises the price of stock, without a corresponding increase in expansion and output. So investment money is not working for the economy.
What happens when the above condition occurs? From my 2008 article: "Capitalism in the hands of the tight-fisted means that power and control are in the hands of those at the reigns of industry and trade. These were the industrialists late in the 1800s and first third of the 1900s who worked people to death, ignored the suffering of humanity, underpaid workers, and only put money where it would build their empires. These were the Scrooges of the world."
Are we becoming like that period of time? Here were the signs of the times in the late 1800s:
Are industrialists hoarding wealth to themselves? "In the mid-1970s... the wealthiest 1 percent of Americans owned about 18 percent of the nation's financial wealth. By the close of the twentieth century, the share owned by the top 1 percent had soared to 40 percent, the highest share in the nation's history, with the possible exception of the estimated 45 percent share reached around the turn of the century, the age of the robber barrons..." - The Battle for the Soul of Capitalism, by John C. Bogle, founder and former CEO of Vanguard Mutual Funds.
Investors aren't to blame for this problem - they aren't villains - their job is to get as high a return as possible for their clients or, like the rest of us would, for themselves. It's a systemic problem. The financial sector of our economy is essential to growth in our economy. Companies have to borrow money, whether from a bank or from investors, to finance expansion. Banks loan out up to 10x the amount they have on deposit,* giving our economy the elasticity it needs to grow, while the Fed makes sure that on average they have the money on deposit, or can get overnight loans. This is all good. But what can happen to upset the system are "Wealth Concentration," "Preferential Attachment," and "Capital Accumulation."
* Each bank keeps 10% of its deposits on reserve, and loans the rest. Loans are deposited in other banks. Each loan deposit creates another amount to loan all but 10% of it. The overall effect through the system is a 10x increase in the amount of available money.
The extreme of these occurs in three ways: The first is privileged circles, which do not permit others into capital building enterprises. The second is a large accumulation of capital by a few, and the remainder have no capital to spend. The third is called a reset. Resets in the stock market happen often when investors realize a company is overvalued, and the stock price goes down.
We are seeing these extremes today. Privilege: We are getting a large group of people without the education (privilege) to perform the work that is needed, and wages are falling dramatically as jobs disappear. This is especially true in the "knowledge economy industries," but is happening in every industry.
Accumulation: The wealthy (1 to 5%) earn money at a rate exponentially higher than everyone else, but that money can only come from everyone else, and they are losing spending power through debt and lost wages. The middle class is fading into the lower class, so that people don't have the money to buy products and services at a level that will sustain growth in employment and income.
Resets: Resets are market corrections that happen often in the stock market for individual stocks, but they also happen across the stock market when bubbles burst. Bubbles such as technology and housing develop when investors find these are high yield investments and invest in them in sufficient numbers to artificially drive up the price of the stock. They burst when they get overvalued and either investors realize they are overvalued, or something happens in the market to bring this to light, such as revealing overvalued paper in the mortgage market. When resets happen, because of the elastic nature of the system, this money just disappears. They are hell on 401Ks.
Economic problems are exacerbated by technology advancements, outsourcing, and mergers that eliminate jobs, while making investors wealthier. Eventually as the money accumulates at the top, and deserts everyone else, we will reach a point where the economy falls because people can't buy products and services at a rate that supports businesses, there will be major widespread resets, and the economy may end up in a ditch if corrective action for this systemic problem isn't taken.
These are the days that President Lincoln foresaw, mentioned at the top of this article, and quoted again here: "I see in the near future a crisis approaching that unnerves me and cause me to tremble for safety of my country; corporations have been enthroned, an era of corruption in High Places will follow, and the Money Power of the country will endeavor to prolong its reign by working upon the prejudices of the People, until the wealth is aggregated in a few hands, and the Republic destroyed." - Abraham Lincoln What Lincoln Foresaw. On Notable Quotes at www.notable-quotes.com.
Regardless of which political party gains office, we've been warned about what we need to change.
There are realistic solutions: Fiscal Cliff Infographic. Also see my articles below on Right-sizing Government, and How wealth is transferred in our economy.
Reference and Links
Other articles on the Challenges of Capitalism and Democracy, by Dorian Scott Cole
Average real personal income under political parties - an assessment by Dorian Scott Cole
Total wages earned at a 3% annual increase over 60 years: $1,150,023.00. Total wages earned at a 3.4% annual increase over 60 years: $1,451,188.00. Difference: $301,165.00.
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