Monday, October 29, 2007

The Coming Perfect Economic Disaster

I had posted before, why I thought the Democrats would be in trouble starting in 2010. But when you combine what Carol has to say about the problems with our local housing market with what I heard on Montana Public Radio on the same subject tonight, I think that we are in for bigger problems than anyone wants to acknowledge. People have been using the unjustified rise in sale value, as opposed to real value to take out home equity loans to buy all sorts of toys. One realtor that I knew told me of her client at a closing, having just purchased a house, inquiring when she could take out a home equity loan. How much equity in a home that you haven't even made a payment on yet?
As the expert on KFUM pointed out, we had been using our homes as a sort of ATM to draw cash out to buy things, which in turn spurred the economy. Now, there is no easy access to cash, and those who aren't being foreclosed on are sitting on their houses unwilling to sell until prices come back up to their expectations.
So, if you reduce the amount of money that was being injected into the economy (albeit false value, since the increase was driven more by speculation than actual improvements) will there not be a general slowing of the economy? After all, our spend, spend, spend habits are no longer sustainable.
Surely Congress is going to do something about this right? Unfortunately, yes they are. Dubbed the “Mother of All Tax Bills” by Rangel and embraced by House Speaker Nancy Pelosi, D-Calif., who told reporters last Thursday that she “certainly” supports the tax increase, this monstrosity would raise taxes on everyone: from the very poor to the very rich and everyone in between. Well, there you go, Tax hikes for the wealthy, oh, and everyone else too.
Now as I understand it, Pelosi, et al., are shooting for a 50% marginal tax rate on those who earn $500,000 per year. Speaking selfishly, it seems as though the only impact that I am going to see is the increase in the rate that I pay now, and a return of the marriage penalty which will probably net a reduction in my disposable income of around 7%. And I don't make $500,000 a year. But 7% isn't so much is it? Except it's 7% that I won't be spending downtown.
Of course the kicker, is the proposal to increase the capital gains from 15% to 40%. It almost makes you wonder if it wouldn't be worthwhile to cash in your IRAs at the 25% penalty to avoid being hit with a jump in taxes by the time you retire. In addition, you can bet a whole lot of people are going to be bailing on the stock market with that kind of rate increase. Take that much money out of the market, and businesses have less money for improvements or hiring workers, resulting in even more of an economic slowdown. It will also result in a concomitant reduction in improving productivity, and as a result, further erosion in the value of the dollar. Thus making imported goods even more expensive, further reducing the amount of available money. Do you see where I am going here?
What about the people making $500,000 a year, they don't need all of that money do they? After all, there are people getting by on a lot less. But what happens to the money of the higher earning family? Right now, when you combine their federal with state and local taxes, they are probably netting around $250,000 per year, or roughly $20,000 per month. Well, that's quite a lot of money isn't it? Yes, but what do they do with it? So long as they aren't stuffing it in a mattress, they are buying things, which keeps businesses going, allowing them to hire workers. Or maybe they are investing, which allows businesses to invest in new technology and become more efficient, thus reducing the costs for everyone, not just the rich. But hey, this is about greed, not efficiency right? If Chairman Rangel's tax plan goes into effect, there will be even less money available to them.
So what you say? Well consider a plasma television set. Prices have plummeted dramatically in the last few years. Why? Could it be that the infusion of capital into research and development has led manufacturers to design, build and sell a better product at a lowered cost while still making a profit? Reduce that amount of capital, and the prices don't drop as much because it is harder to develop the research to improve the products.
So, the moral of the story is that the Republicans need to say that Democrats don't want you to have a 52" plasma TV. Of course, under Rangel's plan, even if you wanted one, you couldn't afford because you would be unemployed because your employer went out of business.
But at least you will have your unemployment check.

1 comment:

John said...

One thing you missed on your article, we don't have to worry about purchasing a 52" plasma TV mainly because,I can't make enough money due to 1.American companies leaving the country 2.Because Rep. and Dems. made it easy for them to leave 3.Cheaper Labor coming into the country(Mex and Ind. etc.) The only thing the working guy can expect here In the good ole USA is to work for LOWER wages anyways!!!