Daily Ticker

Why the U.S. Economy Is Friendliest to the Rich

Daily Ticker

By Michael Santoli

Despite proclamations by the White House and Republicans, the U.S. economy today continues to be friendliest to the wealthiest.

The restoration of the 2% payroll tax at the start of the year was already squeezing the typical wage-earning household before the automatic “sequester” government-spending reductions took effect. Some economists estimate a potential loss of 700,000 current and future jobs as a result of the $85 billion in annual forgone spending.

Meantime, the stock market hovers near all-time highs, corporate profit margins remain near record levels and upper-income consumers have realized a disproportionate share of the income gains produced by the nearly four-year-old economic recovery.

Breakout’s Jeff Macke says it all adds up to some “unintended consequences happening there on the stick-it-to-the-rich tax plan.”

The high-end consumer is going along just fine,” Macke notes, with the 2% skimmed off their take-home pay viewed more as an annoyance than a reason not to shop.

The big retailers that supply ordinary households such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) are suffering as a result. Executives at these companies have told investors that customer traffic is light and shoppers aren’t spending freely so far in 2013.

Rich Americans have seen their personal wealth grow since the financial crisis and Great Recession ended. Central banks’ cheap-money campaigns to revive growth and support the financial system have allowed corporate profits and world stock markets to recover, while productivity-obsessed and risk-averse corporate leaders resist hiring and investing too aggressively. As companies continue to hoard cash, wages have stagnated to the point that labor income as a proportion of company earnings is near an all-time low.

One tool available to Congress to prod big business to deploy some of its $1 trillion-plus in idle cash is a conditional tax break on repatriating foreign profits. As Macke notes, the United States imposes a higher tax on its companies bringing overseas cash back home than most any other country. Allowing companies, especially global technology firms, to recycle their foreign-domiciled cash in manufacturing facilities and employees in the States could be a win-win.

Whether that happens or not, cyclical forces alone should begin turning things a bit more in favor of workers, assuming the economy continues to grow as expected. Capitalism doesn’t allow for business owners to keep profits fat indefinitely without having to compete for labor or cut prices to gain market share.

“The economic cycle trumps all,” Macke insists. Citing the old saying that God heals the patient but it’s the doctor who collects the bills, he notes that whoever occupies the White House tends to get the credit or blame for whatever the economic cycle was bound to deliver in any case.

We might now be entering that fortunate part of the economic cycle when the imperatives of messy capitalist behavior broaden prosperity out beyond the corporate sector, high earners and the investor-owning crowd.

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