May 7, 2019
Back around 1990, utopia was in sight. After centuries of struggle, capitalism had won. The Berlin Wall had fallen. A crippled East Germany was healed by joining a thriving West Germany. The Soviet Union collapsed. It was “Morning Again in America” after the malaise of the Nixon-Ford-Carter nightmare. It seemed like the “End of History” (Francis Fukayama). Capitalism stood at the “Commanding Heights” (Daniel Yergin). The best ideas had won. We understood “How the World Works” (Jude Wanniski).
But then we forget everything … all over again. More young Americans (“Millennials”) now prefer socialism (51%) over capitalism (45%). A young (29-year-old) freshman Congresswoman Alexandria Ocasio-Cortez and her ideological grandfather, Bernie Sanders, 77, are leading the New Progressives.
In 2014, a young French economist, Thomas Piketty (born this date, May 7, 1971), helped ignite this socialist time bomb with his attempt to reincarnate another economist born near this date (May 5, 1818), Karl Marx. Piketty wrote a top-selling 700-page political-economic book in 2014, called “Capital in the 21st Century,” a title that bore an intended resemblance to Marx’s three-volume sleeping pill, Das Kapital.
Piketty’s tome seemed to be on every left-leaning coffee table in the politically-charged year of 2015.The main premise of Piketty’s book is that capital growth exceeds economic growth, so the vast majority of wealth will tend to end in the hands of a very few capitalists, who will then pass their wealth through inheritance to a select few, exacerbating the division of wealth. His solution to the uneven distribution of wealth is a coordinated international attack on the rich through high (up to 80%) income taxes and an annual 2% tax on the net worth of the rich. This was thought to be radical in 2014 but it is now being put forth seriously by some candidates as the only logical and moral means to provide “social justice.”
Something so innocuous sounding as a 2% Wealth Tax could have devastating economic consequences. Many of the top 1% are business people who are invested up to the gills in equipment and people. They exist on a thin margin of profit. To sell 2% of their assets each year would involve a major downsizing in some area. Even for passive investors, it would involve a forced sale of assets, pushing asset prices down.
There are a limited number of super-rich. If you tax 80% of their income one year, you might get $100 billion, but you’ll get very little the second year, because they will find ways to shelter their income.
Using IRS data from 2016 (the last year with full data available), 150.3 million taxpayers filed personal tax returns, of which 50.2 million paid no income taxes at all. Only 16,087 made over $10 million in adjusted gross income (AGI) and 424,442 made over $1 million. The top 1% made over $500,000. This top 1% of taxpayers paid 36.5% of all income taxes – their “fair share,” I would say (see charts, below).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
From these charts, notice how the percentage of taxes paid by the richest 1% (making over $500,000) increased dramatically after President Bush’s 2003 “tax cut on the rich.” And all taxpayers making over $100,000 pay more over time – they have routinely paid about 80% of all income taxes in recent years.
How the Best and Brightest “Lie with Statistics”
A month ago, I presented a series of posts about “How to Lie with Statistics.” This is important because it impacts our portfolios. If we believe that 90% of Americans are too poor to invest, for instance, it will change our belief in whether or not this bull market has any fundamental long-term buying power left.
During the coming political year, you will hear all kinds of rhetoric about the wealth divide, with some famous economists backing up the claim with selective data. In the April 19 New York Times, Nobel Prize winner Joseph Stiglitz wrote in his opening paragraph on the editorial page that “90% have seen their incomes stagnate or decline in the past 30 years” since “the United States has the highest level of inequality among the advanced countries and one of the lowest levels of opportunity—with the fortunes of young Americans more dependent on the income and education of their parents than elsewhere.”
How can the nation’s real GDP more than double (+110% since 1989) if 90% of us are no better off?
It’s sad when economists of Nobel-caliber status succumb to bending the truth for political reasons. Ed Yardeni, once a student of Stiglitz at Yale, said Stiglitz is using “the worst data series ever,” real median income, compiled annually by the Census Bureau – “an extremely flawed measure of income, yet it is widely used by Progressives to prove their claim of widespread and prolonged income stagnation.”
Consider: (1) This data is based on surveys that focus on money income alone and relies on respondents’ honesty and memory. On its website, the Census Bureau warns that “users should be aware that for many different reasons there is a tendency in household surveys for respondents to underreport their income.” (2) This measure omits ALL noncash government-provided benefits, which have grown greatly in the last 30 years – Medicare, Medicaid, food stamps, public housing, and more. Also, (3) the Census Bureau uses the inflated CPI (not the PCED) to subtract the impact of inflation, and (4) the shrinking size of average households (now including many more single-person households) warps the per-capita income data.
While pessimists (calling themselves Progressives) sing the Sad Song of Stagnation, more realistic data shows that over the past 30 years (from March 1989 through March 2019), inflation-adjusted average hourly earnings of production and nonsupervisory workers is up 32% (chart below), using the PCED and a measure of wages that covers over 80% of payroll employment. Disposable income and consumption, compiled monthly by the Bureau of Economic Statistics on a per-household basis, are up 62% and 67%, respectively, from March 1989 through March 2019. Real GDP per household is up 54% over this period.
Yardeni concludes: “Income stagnation is a myth. Income inequality isn’t a myth but an inherent characteristic of free-market capitalism, an economic system that awards the biggest prizes to those capitalists who benefit the most consumers with their goods and services. Perversely, inequality tends to be greatest during periods of widespread prosperity. Rather than bemoaning that development, we should celebrate that so many households are prospering, even if a few are doing so more than the rest of us.”
Read the economic data skeptically, armed with “alternative views,” in the next 18-month election cycle.