Defenitions:
Rich-top 20%
Middle-40-60%
Poor- bottom 20%
This post closely follows my last post, both in chronology and essence. Right now D.C is fighting a sharply divisive battle to extend the Federal debt limit. Failure to do so will mean partial U.S default, a drop in confidence in the US dollar and bonds. Bad news for America! The crux of the issue is the means to decrease government deficit to prevent further escalation of the debt limit. De-escalation of the wars and reduced spending on the US military is a partial given. I mean you could squabble on whether to keep one extra aircraft carrier or not but that’s just about it. The military spending of the United States as a percent of GDP is the same as that of a China. So ideally unless China is secretly going bankrupt, this spending seen disjointed from the whole problem should not be of major concern.
Social services are a different ball game. The entire healthcare system accounts for 38%-45% of the entire government spending and 16% of GDP. Private audits as well as most senators would agree that the system lacks in efficiency. During the general economic growth of the US, it would seem money was merely pumped into the system without any concerted effort to increase efficiency. So your doctor gets paid so much more than doctors elsewhere. On the flip side despite being the wealthiest country in the world, the United States suffers from one of the most inequitable distribution of wealth. The GINI coefficient which is a measure of income inequality paints a sad picture. Inequality in the states is worse than most of Asia, Africa and far worse than most of Europe. So when you cap the tax for the richer sections of the society you get far less revenue from taxation than you would in a country with a better wealth distribution. The logical argument has been that giving this financial freedom to the wealthy allows them to reinvest in the economy. This ensures prudent investment, better management of wealth and smaller/efficient government. Something’s going wrong though. This is a theory.
A Forbes survey (1) actually does a pretty good job of highlighting how Americans make and spend their money. Crucially you’ll observe that rich Americans do not spend the highest as a percent of their income on most things. Where they do the difference is only marginal. True, even a small percentage will have high value but so will the difference of the saving they have, compared to the poor and middle class. The question is what happens with these savings. Unsurprisingly a lot is in investment but where? In nations like India and China, banks offer a far higher rate of interest and then use the public money to do the investing. This has an advantage of ensuring the money is invested in the domestic market. Banks have an incentive to stimulate local markets to ensure their own growth. America however seems to be suffering from a flight of capital. High net value individuals seem to be investing more and more in better appreciating economies. Often even if the investment is directed to American companies, the investment is eventually pumped overseas. The fact is that as economic polarization continues (and that is irrefutable) a vast amount of the investment being made is offshore restricting US job growth, further polarizing wealth. A vicious cycle.
Another significant investment the rich in America make is in the luxury market. This can cover anything from Gulfstream jets to Mansions. The market value of these products may be high, but the positive economic impact is far less; depth wise. Simply, if the money was split and invested in other development ventures more people would've been helped. The problem maybe, that America is getting too successful. At least a section is. They chose to fund the lives and the activity of the many others. Doing so they have created a complacent workforce on a global back foot. Now as the rich choose to shrug of this responsibility and the political guns go off like loose cannons, careful planning is again ignored. Question I want to ask is how do you make sure Americans invest in their country again? How do you improve the competitiveness of existing industry and spawn new ventures to attract new investment. For now, the grand bargain is essential. No single avenue can generate enough saving to create a definite impact on debt. So increase taxes for now and look for investment patterns amongst the rich before relaxing them again. As for Medicare/aid well really you cant do much because of the insurance companies.
Thing is you can solve this problem multiple ways with strong leadership. The best way may be to incentivize the rich to invest locally. Use a part of that to modify healthcare and spawn new industry via research. Play forces of corporate insurance payers against insurance companies. Play inventors and entrepreneurs against overseas investment. Importantly try to hasten the global flattening. Promote a more equitable economy by selective reduction of social services. Divert the savings to tertiary education and saving. Promote STEM, making graduates valuable to industry as well as research. Essentially: force skill into the workforce by denying benefits to the uncompetitive but providing support to ensure upward mobility. I accept the fact that eventually India and China will become as rich as the United States, maybe even per capita wise; someday. What I cannot agree with is that the American economy must fall for them to rise.
(1) http://www.forbes.com/2006/07/19/cx_de_americanspending_11.html?thisSpeed=35000
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