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Keeping the Middle Class Down

Written by Geoffrey Pike
Posted December 11, 2015

Without getting too deep into politics and campaigns, there is no question that things are a little different in this presidential election cycle. One year ago, there weren’t many people who would have expected strong polling numbers for Donald Trump and Bernie Sanders.

Sanders probably won’t win the Democratic nomination, and we can’t even be certain that Trump will win the Republican nomination. Still, there are some lessons to be learned from their unexpected success up to this point.

While people have various reasons for supporting these candidates, I believe one of the main reasons is their acknowledgement of the struggling American middle class. Trump says we need to make America great again. Sanders talks about the top 1% doing so well while everyone else struggles.

While these may just be slogans, there is a certain truth to them.

These two candidates in particular are doing well in the polls just because they are acknowledging the struggles of the middle class. Many of their solutions are completely wrong. In fact, with Sanders, his so-called solutions would just make everything worse.

But what is wrong with the other candidates that have not tapped into the discontent with the American populace? They are living in their own world, and they really don’t understand what the average guy is going through.

We can hear statistics all day long about unemployment rates falling, positive GDP growth, higher stock prices, a recovering economy, etc. But they don’t mean anything to the average person who is struggling to pay the family bills.

We enjoy luxuries in today’s world that could only be dreamed of in previous generations. We have a wealth of information at our fingertips. We also have smartphones and tablets so we can access this information almost anywhere.

At the same time, the average American family can barely keep its head above water. Money just doesn’t go as far. The bills are higher. Health insurance premiums and health care costs overall are much higher.

What are the reasons for this?

No Slowdown for Big Government

When the big economic downturn happened in 2008, many state and local governments had to contract. The lower tax collections, in many cases, forced politicians to reduce spending. The lower housing prices also led to lower property taxes in some areas.

Meanwhile, the federal government grew like crazy with bank bailouts and trillion-dollar deficits. 

Overall, government spending has surprisingly increased quite mildly under Obama. The problem is that the spending was skyrocketing just as Obama entered into office. It never went back down. The federal government got bigger and stayed bigger.

The Congressional Budget Office (CBO) just released its estimates for the first two months of fiscal year 2016. The fiscal year begins on October 1, so these numbers are estimates for October and November.

Compared to the same period last year, there was an increase in federal spending, an increase in federal tax collections, and an increase in the deficit.

The estimated tax receipts are $416 billion, while the estimated spending for those two months is $616 billion. That leaves a deficit of $200 billion over just a two-month period.

While the CBO didn’t include government regulation in its report, we can be reasonably certain that the number of laws and regulations have increased since last year, as they do every year.

When we consider that the federal government alone (not including state and local governments) is spending between $3.5 trillion and $4 trillion per year, it quickly becomes clear why Americans are struggling to get by.

Every penny that is spent by the government is money diverted out of the private sector. It is money that is not being put into savings or capital investment. It is not going towards meeting consumer wants and needs as determined by the free market.

To be sure, some of the money is being redistributed back to average Americans outside of government. But overall, it is a horrendous waste and misallocation of resources. Wealth is being diverted from satisfying consumers to politically driven projects. 

When you consider state and local government spending on top of federal spending, some people are forking over half or more of their earnings in some way or another to the government. Is it any wonder we aren’t feeling prosperous?

Future Generations and Current Generations

While many people look at tax rates or the overall tax burden, we really have to look at overall government spending. This includes spending that is financed by debt. 

The national debt is fast approaching $19 trillion. If you divide the national debt by the number of American households, each household “owes” about $160,000. Do you have $160,000 sitting around that you would like to contribute to paying off the national debt? 

When the issue of deficits comes up, some people will say that we shouldn’t burden future generations with debt. But this analysis falls short of the consequences. Of course, it is much better than the people who say we shouldn’t worry about the debt because we can grow our way out of it. 

Running up the national debt hurts future generations in the sense that there is less capital investment today, and it will result in less innovation and less compound growth over time.

Imagine if the U.S. government had taken 25% or more in taxes from the 18th century until now. Do you think we would have as much wealth and advanced technology as we do? Would the Industrial Revolution have taken hold in America if government at all levels had been spending nearly half of GDP in the year 1800?

In terms of actually paying the debt, it is less of a concern for future generations. They can always decide to default if they choose. But at that point, paying the debt is a redistribution from taxpayers to those holding the bonds.

The key thing that is most misunderstood is the effect of debt right now. It is our current generation that is suffering from debt overload. 

When the government issues debt and spends the money, it has to get that money from somewhere. It is either coming from investors or from newly created money. Regardless, it is diverting wealth out of the private sector. It is wealth that is not being used for savings and capital investment, which are the basis for production and economic growth.

I don’t want to burden children and grandchildren with debt in the future. But I also don’t want to burden children and grandchildren now who have to witness the stress of their parents trying to figure out where all of their money went.

Something Has to Give

Sometimes it is hard to grasp that the current status quo will not always be the status quo. When things look unsustainable, they probably are. As individuals, we know we can’t just keep spending money and going further into debt in order to live the good life. It will come to an end at some point.

The same holds true for the government. The government has a digital printing press that can delay the inevitable, but not forever. 

Wages are not keeping up with the cost of living. Health care costs are completely out of control. Health insurance premiums alone are eating up any raises that workers are getting. 

Meanwhile, the national debt will be close to $20 trillion by the time Obama leaves office. And the unfunded liabilities are currently estimated to be as high as $200 trillion or more. Promises are going to be broken at some point.

The federal government can’t keep spending close to $4 trillion per year. The American people simply can’t afford it.

The answer isn’t to collect even more taxes from high-income earners as Bernie Sanders proposes. This just sucks more money out of the private economy and into government. It also stifles entrepreneurship.

The answer is to drastically reduce the size and scope of government — particularly the federal government — so that we can have the savings and investment needed to increase production and real wages.

The economic downturn of 2008 should have been a correction. While recessions are extremely painful, it is the market economy’s way of flushing out bad investment and realigning resources to meet consumer demand.

But the federal government never allowed this correction to fully take place. It has now only made things worse. Unfortunately, the next correction may be even more painful. We should at least be mentally and financially prepared for the possibility of this.

The government is up, and the American middle class is down. Something has to give.

Until next time,

Geoffrey Pike for Wealth Daily

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