Investors should be aware that income inequality in the United States, has now reached levels not seen since the 1920’s.
What this will mean to the national economy is a slowdown in consumer spending. This will be the result of declining amounts of disposable income by an ever greater number of Americans. That will translate into slower economic growth since 2/3 of the American economy relies on consumer spending.
In relation to the GDP (Gross Domestic Product) wages in the United States are in decline. From a peak of 57.4% of GDP in 1970, wages have decreased to 42.5% of GDP today.
Corporate profits are also at record rates of return. At 10% of the GDP, the level now exceeds that of any previous time in American history.
Wages are stagnating. A national minimum wage of $7.25 USD (United States Dollar) has not increased since 2009,(from $6.55 USD) so workers have not benefited from increases in worker productivity. Wages on the lower end would be in excess of $20.00 USD if one factors in inflation.
In the United States there are now more businesses closing than are opening, a first in American history since records were being kept in the late 1970’s.
Higher wages are not readily possible in a number of industries, because of skyrocketing costs associated with new government regulations and soon mandated health care.
Corporate taxes in the United States at 35% are the second highest in the world. Japan at an official rate of just above 35% and an effective rate of 38.01%, is due to decline soon to below 30% under a new government plan. If one considers the effective tax rate the United States already has the highest corporate tax at 40%.
It is argued that if a company or corporation is able to take advantage of all the tax advantages and legal loopholes the effective tax rate is often 27.5% or even lower. If one considers domestic and offshore shelters the effective rate can be brought down to as low as 21.4% as reported in 2013. However, one needs to consider that smaller companies and businesses are often unable to take advantage of these opportunities for tax relief. It takes effort and many man hours to figure out how to comply with a very complicated tax business code. Smaller entities are less able to afford the personnel necessary to ferret out these tax savings.
The cost to comply with all the government mandates and regulations costs a smaller company or business between $10 to $12 thousand USD per worker. This is on average 36% higher than the cost incurred by a larger firm, because federal and state compliance costs are usually fixed. That is a larger concern can more readily afford the legal and accounting expertise needed to understand very complicated procedures and paperwork.
The rising costs in the sensitive energy and food sectors of the economy hit the middle class and blue collar workers much harder than other groups in the economy. The more financial resources that a typical employee has to spend on these necessitates, the less money that will be available for other purchases.
Far fewer people are launching new businesses making new jobs less plentiful. When one considers that 2 out of 3 new jobs are from small businesses this is a major problem.
Another issue is that many Americans are skilled or properly trained to fill many of the higher waged positions that are accessible. This is a failure of the American educational system and the government funded job training programs.
It is difficult for skilled labor from abroad to move to the United States in any great numbers, so a number of jobs will remain unfilled. Visas for travelers to the United States especially for those interested in possible future employment, remain problematic.
That Americans leave institutions of higher education ill prepared for the present job market is a waste of economic resources. When one considers the high and ever increasing cost of education it becomes an economic negative for the economy at large. That numerous companies are unable to fill jobs that require specific skills is nonsensical, if one considers the high rate of youthful unemployment in the United States. The reported unemployment rate for individuals aged 16 to 24 in the United States is more than twice the rate for the population at large. In 2013, it was reported to be 16.2% which translates into more than 10 million potential employees.
The high rate for youthful employment is most troubling because the lack of occupation in the beginning of an individual career, has dire consequences to long term financial success. The potential loss to the national economy of so much latent work is quite large.
By not entering the work force upon graduation, individuals face a host of troubling outcomes. The failure of these young people to service their student loans, not saving for retirement and moving back home with their parents is only the immediate effects.
A young person who delays entry into the job market just 6 months can miss out on $45,000 USD. $23,000 USD for the period of unemployment and $22,000 USD for lagging wages over the next decade as a result of the initial period of not working. Businesses as a result, will eventually suffer from reduced consumer demand, and taxpayers will feel the loss of lost revenues. There will be a corresponding greater demand for more government provided services including health care and welfare payments as well as increased crime.
The present government of the United States seems unwilling to address the issue of economic inequality except to promote a higher minimum wage which in itself will not solve the problem. Though politically popular in many circles it will fail to solve the fundamental problem. This is because without a corresponding rise in worker productivity it is inflationary. So as wages rise, there will be a corresponding growth in the CPI (Consumer Price Index).
Although there is ceaseless chatter about reforming the tax code there is a political logjam at present to make any meaningful progress in this direction.
There is no real sentiment to enact any policies that are business orientated by the American President and his Administration. Nor is there any will to tackle the failure of the education system to better prepare students for the present and future job market. Reform here would require upsetting the status-quo with teachers unions, educational district administrations and elected school boards.
With more companies considering an exit from the United States the need for reform in corporate taxes, regulations and mandates have reached a critical point. By moving corporate headquarters overseas these companies will be taxed at the foreign rate, which can amount to a substantial savings for the business.
The solution to the problem by some politicians is to punish companies who are considering this action. There are even claims that is unpatriotic to even ponder these moves. It shows an unwillingness on the part of a number of the political elite, to identify the purpose of a corporation. That is to maximize profits for the shareholders.
It seems unlikely that there will be any changes for more business orientated policies this year, given the present political configuration in the United States. Real change may only arrive after the elections of 2016 and the inauguration of a new administration in 2017. That will be too long for many American based companies and corporations whose very survival will depend on moving elsewhere. This will take even more jobs away from American workers. This can only exacerbate the issue of economic inequality in the United States. As more manufacturing and industrial jobs move overseas, it leaves behind service orientated jobs, which are traditionally lowering paying.