Leaning Left 1/27/2011

Leaning Left

Jim Fitzgerald

It can be so easy to get caught up in daily squabbles that the big picture can get lost. The big picture that I am referring to here is the future of our quality of life. In the past I have written about free trade and open global markets with the conclusion that our quality of life has only one way to go, down. If you are on top of your game and the playing field suddenly gets leveled, the law of gravity quickly redefines your position.

In the US, we have led the world in almost any area you can think of – especially in consumption and debt. As we opened our markets, sometimes unfairly, our companies moved their factories overseas where the labor was cheaper. Most of the Fortune 500 companies are international corporations now and their loyalty resides less with the US and more within the countries where they have operations. This was predictable and it was also predictable that the middle class was going to be hit the hardest, and it has.

Here is the problem as I see it. The changes we are undergoing appear to be permanent. Everybody seems to think we are headed back to the spot we fell from but I do not think that will be the case. I think we will settle into a place that is many notches below 2000. In other words, I think this country is going through a significant readjustment downward and that this readjustment is not temporary. People will have to learn how to live on less. Our consumption has decreased and I do not think it will increase to pre-crash levels. What we have been witnessing for the last decade – which incidentally has been a “lost” financial decade as any retirement plan will attest – is a permanent shifting of wealth from the middle class to the wealthiest among us. The wealthy are far less likely to spend their money than the middle class. As a result, I suspect the Fair Tax is dead on arrival. Any tax based on consumption will fail to produce the kind of income that has been projected.

So what am I basing my fears upon? The Wall Street Journal (1/11/11) headline reads: “Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages.” The article looked at the employment status of long-tenured displaced workers and found that 48.8% were now employed full time, 36.1% remained unemployed, and 15.2% dropped out of the work force. Now here is the most important finding. Of the 48.8% who found employment, 54.9% are earning less than they did at their previous job. Of that 54.9%, 35.8% are earning a full 20% or more less than they did before losing their job. When you take a 20% pay reduction, you learn to live on less. You spend less, you pay fewer taxes, and you consume less. The wealthy are not going to make up the difference in taxes. Voters are praying that reducing tax on the wealthy will result in job creation but study after study has suggested this will not be the case.

Our standard of living has decreased and is unlikely to return to pre-free trade levels. We have witnessed a 24% increase in the number of 18-to-29 year olds moving back with their parents. We have seen an increase of 85% in the poverty rate (43.6 million). Florida, as one example, has seen a 58% increase in food-stamp recipients. There has been a 50% increase in personal bankruptcies and a 57% increase in foreclosures. As important, we have witnessed a 68% decrease in consumer spending; one reason states are in dire financial straits.

Let us hope that I am wrong in thinking this economic readjustment downward will be permanent.