Thursday, November 12, 2015

Supply side economics and the one per cent.

The Gross National income of the US in 2014 is $17,601,119,000,000.

The gross national income (GNI) is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP) plus factor incomes earned by foreign residents, minus income earned in the domestic economy by nonresidents. (Wikipedia).

One does not have to a brain surgeon like Ben Carson to understand why supply side economics will never work in the United States. The top quintile or 20 per cent of Americans now earn half the income. The the top one per cent rake in 23 per cent of the GNI.

Admittedly the affluent live in better home and drive better cars, travel more and take international vacations, but most of their income is surplus. Indeed, the affluent can take some of this surplus income and convert it to capital by buying stock, bonds and mutual funds. However, the top 10 per cent of Americans own more than 80 per cent of this market already. The top one per cent own more than 38 per cent of he stock and bond market.

As the Motley Fool points out:

Wealthy people don't own stocks because they're wealthy; they're wealthy because they own stocks.

The size of the U.S. bond market is just under $37 trillion, finance professor Torben Anderson at the Kellogg School of Management says in “Volatile Assets” in July 2012. In comparison, the market capitalization of the U.S. stock market is about $21 trillion.

The top decile (10 per cent) of income has a direct participation rate of 47.5% and an indirect participation rate in the form of retirement accounts of 89.6% in the stock and bond market. In the top decile, mean value of all holdings fell from $982,000 to $969,300 in 2007

U.S. corporate bond sales swelled to an annual record as a late-year rush by borrowers to lock in low interest rates pushed offerings for 2014 past $1.5 trillion.

Data compiled by Bloomberg. Internet commerce company Alibaba Group Holding Ltd. which sold $8 billion in bonds in one month, helping push this year’s bond volume past the previous high of $1.494 trillion set in 2013.

In 2014 a lot of mutual funds were converted to bonds and bond sale outpaced stock sales. The point here is that many stock, bond and mutual fund sales are conversions rather than new purchases.

The top 1 per cent of Americans earned $76,526,604,347,826 in 2014. Even if the one per cent purchased $ 5 trillion in stocks, bonds and mutual funds, which represents most of the US securities market in 2014, such a capital investment would represent a trivial amount of the income the 1 per cent received that year.

This is why tax breaks for the 1 per cent or even the top 10 per cent are pointless. Such tax breaks will do little for the economy. These tax break would at best provide packet change to the one per cent. The per cent of annual income the affluent invest in the stock market is not large enough to be stimulative.

The Democratic party uses a more direct approach to stimulate the economy. Programs like unemployment compensation food stamps (Supplemental Nutrition Assistance Program) and school lunches for women, Infants and children (WIC) provide direct aid to the middle class and the working poor.

Any funds these program provide are usually quickly spent. The funds do not sit in US or foreign bank accounts as is the case for many upper income Americans.

The middle calls is the basis of the US economic engine, not the one per cent. As the AFL-CiO noted:

The middle class is the great engine of the American economy, but that engine is sputtering.

As one business man explained it, tax breaks at the end of the years are great, but it's customers that make or break a company. The middle class provides the customers to small and larger businesses that drives the US economy.

Supply side economics is blind to the middle class economic engine with its top down approach. Unfortunately America is hearing that same old supply side song from most the Republican candidates for president.


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