With the budget battles coming back to the fore, president Obama is once again talking about income inequality and how it is getting worse. So, why is that happening? After all, Obama has been in office for five years now. Obama got much of what he wanted from the Stimulus, to Obamacare, to Dodd Frank, to tax increases on the wealthy. With all these moves, then, why is income inequality getting worse? Why is it that the rich are getting richer, but essentially everyone else is seeing their incomes go down? And how is it that Obama can still complain about this when his policies have been in place for five years and things are not any better?
The answers to these questions are not difficult. Simply put, the economic policies that the federal government has been following have the inevitable result of favoring the rich. Let me explain:
1. Since the crash five years ago, the Federal Reserve has been pumping cash into the economy. This has kept interest rates low. The hope of the Fed, at least at first, was that this ocean of new money would be put into investments in plants and other capital goods that would grow the economy, create jobs and push the growth rate up to the high levels typically seen after a recession. That result, however, did not come to pass. As more and more cash was pushed into the economy by the Fed, much of that cash ended up in very safe investments like treasury securities. Banks, in particular, like the idea of borrowing from the Fed at rates like 0.2% and investing the funds in treasury bonds that paid between 1.5 and 3%. It was a sure return with no risk.
Another big portion of the extra cash went to fund speculative investments that had no current returns. If one buys oil for future delivery, there are no dividends paid; one profits only if the price of oil goes up. In normal times, there is a cost to holding the oil and waiting for the price to go up. That cost is the interest that must be paid on the funds used for the purchase. By pushing interest rates so low, the Fed got rid of essentially all of the cost of holding these sorts of commodities. Simply put, the Fed action created the basis for a sustained rise in commodity prices.
The last big portion of the cash that the Fed pushed into the economy went into the stock market. People who borrowed funds for very low rates wanted higher returns which typically come from stock. While they held the stock, there were very low interest costs, so they could keep their money in stock much longer, a practice that led to higher prices.
2. While the Fed was pumping money into the economy, president Obama was taking actions that discouraged creation of new businesses and expansion of existing ones. Obamacare alone has created major uncertainty as to the future costs to be incurred in connection with employees. We have all watched as full time work has morphed into part time employments for millions around the country. Firms with 45 employees did not want to grow to the point of needing 51 employees because then they would fall under the umbrella of the Obamacare mandates. This led to foreign investment. A company with 2000 employees in China does not have any obligations under Obamacare.
Then there was Dodd-Frank. Under this Obama program, the ability of banks to make loans to small businesses was drastically reduced. Obviously, not all small businesses qualify for loans, but when the government moves 60 or 70% of those who did qualify into the group that no longer qualifies, the effect on the economy is dramatic.
There was also the endless threat of tax increases. From 2009 to 2013, we went through a nearly constant period during which Obama talked of huge increases of taxes on the wealthy. For the most part, this targeted small business owners and those businesses themselves. The uncertainty that Obama put into the economy regarding taxes surely prevented billions and billions of dollars of investment that would have grown the economy and created jobs.
There were also the flood of new regulations and the threat of even more. If you own a business and you want to know what Obamacare will cost you, you need to see the regulations describing your obligations. The federal government under Obama has missed more than half of the deadlines for issuing regulations of this sort. Economic activity is partially frozen because business owners are waiting to see what their obligations will be. And let's not forget those environmental regulations. Whole regions of the country that depend heavily on coal production have been frozen in place because of the ongoing threat from Obama to destroy the coal industry. Energy costs have also risen as Obama has forced coal fired power plants to shut on environmental grounds. Even now, when the basis for global warming theories is literally falling apart, Obama continues with his assault on coal.
3. When you put all this together, you find that the policies of the federal government have helped those who get income from financial investments like bonds, stock or commodity trading. You also find that the policies of the government hurt those who make their livings from working for American businesses. To be clear, that means that it is the very policies followed by Obama that are making the rich richer and everyone else poorer. It is the rich who have the funds to invest in the stock market, commodities and bonds. To be sure, the various pension plans around the country also make these sorts of investments, but that really does not help the income of individuals. The average middle income family has had to deal with an uncertain job market and rising prices resulting from the increased commodity prices (gasoline went from $1.83 per gallon to $3.61 so far under Obama).
4. The craziest thing about this entire subject is that Obama's plan to reduce income inequality is "more of the same". Obama has no plan to shift his focus to economic growth. Obama will surely talk about reducing inequality, but remember talk is cheap.
The answers to these questions are not difficult. Simply put, the economic policies that the federal government has been following have the inevitable result of favoring the rich. Let me explain:
1. Since the crash five years ago, the Federal Reserve has been pumping cash into the economy. This has kept interest rates low. The hope of the Fed, at least at first, was that this ocean of new money would be put into investments in plants and other capital goods that would grow the economy, create jobs and push the growth rate up to the high levels typically seen after a recession. That result, however, did not come to pass. As more and more cash was pushed into the economy by the Fed, much of that cash ended up in very safe investments like treasury securities. Banks, in particular, like the idea of borrowing from the Fed at rates like 0.2% and investing the funds in treasury bonds that paid between 1.5 and 3%. It was a sure return with no risk.
Another big portion of the extra cash went to fund speculative investments that had no current returns. If one buys oil for future delivery, there are no dividends paid; one profits only if the price of oil goes up. In normal times, there is a cost to holding the oil and waiting for the price to go up. That cost is the interest that must be paid on the funds used for the purchase. By pushing interest rates so low, the Fed got rid of essentially all of the cost of holding these sorts of commodities. Simply put, the Fed action created the basis for a sustained rise in commodity prices.
The last big portion of the cash that the Fed pushed into the economy went into the stock market. People who borrowed funds for very low rates wanted higher returns which typically come from stock. While they held the stock, there were very low interest costs, so they could keep their money in stock much longer, a practice that led to higher prices.
2. While the Fed was pumping money into the economy, president Obama was taking actions that discouraged creation of new businesses and expansion of existing ones. Obamacare alone has created major uncertainty as to the future costs to be incurred in connection with employees. We have all watched as full time work has morphed into part time employments for millions around the country. Firms with 45 employees did not want to grow to the point of needing 51 employees because then they would fall under the umbrella of the Obamacare mandates. This led to foreign investment. A company with 2000 employees in China does not have any obligations under Obamacare.
Then there was Dodd-Frank. Under this Obama program, the ability of banks to make loans to small businesses was drastically reduced. Obviously, not all small businesses qualify for loans, but when the government moves 60 or 70% of those who did qualify into the group that no longer qualifies, the effect on the economy is dramatic.
There was also the endless threat of tax increases. From 2009 to 2013, we went through a nearly constant period during which Obama talked of huge increases of taxes on the wealthy. For the most part, this targeted small business owners and those businesses themselves. The uncertainty that Obama put into the economy regarding taxes surely prevented billions and billions of dollars of investment that would have grown the economy and created jobs.
There were also the flood of new regulations and the threat of even more. If you own a business and you want to know what Obamacare will cost you, you need to see the regulations describing your obligations. The federal government under Obama has missed more than half of the deadlines for issuing regulations of this sort. Economic activity is partially frozen because business owners are waiting to see what their obligations will be. And let's not forget those environmental regulations. Whole regions of the country that depend heavily on coal production have been frozen in place because of the ongoing threat from Obama to destroy the coal industry. Energy costs have also risen as Obama has forced coal fired power plants to shut on environmental grounds. Even now, when the basis for global warming theories is literally falling apart, Obama continues with his assault on coal.
3. When you put all this together, you find that the policies of the federal government have helped those who get income from financial investments like bonds, stock or commodity trading. You also find that the policies of the government hurt those who make their livings from working for American businesses. To be clear, that means that it is the very policies followed by Obama that are making the rich richer and everyone else poorer. It is the rich who have the funds to invest in the stock market, commodities and bonds. To be sure, the various pension plans around the country also make these sorts of investments, but that really does not help the income of individuals. The average middle income family has had to deal with an uncertain job market and rising prices resulting from the increased commodity prices (gasoline went from $1.83 per gallon to $3.61 so far under Obama).
4. The craziest thing about this entire subject is that Obama's plan to reduce income inequality is "more of the same". Obama has no plan to shift his focus to economic growth. Obama will surely talk about reducing inequality, but remember talk is cheap.
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