[OPE-L] Train Wreck

From: glevy@PRATT.EDU
Date: Fri Nov 11 2005 - 08:53:16 EST

The article below from 'MSN Money' by Scott Burns about the US
economy concludes:

"Bottom line: Unless there are some real wage gains for working
stiffs -- soon --  we're heading for a recession."

While the statistics cited below are important, I don't quite
understand how the conclusion -- the "bottom line" -- follows from
those statistics.  What have I missed?  Aren't there some assumptions
by Burns which are unstated?

In solidarity, Jerry


MSN Money - Earn under $57,343? Watch out

              The Basics
                  Earn under $57,343? Watch out

                  Rising inflation and interest rates put the bottom 75%
of Americans behind the financial eight ball.

                   By Scott Burns

                  A visit to the glitzy section of any city in America
will give you the idea that we don't know what to do with all the money we
have. You get the same impression at any high-end mall in suburbia.

                  In fact, income thins out pretty quickly. According to
the most recent (2003) IRS statistics on tax returns,
households needed at least $295,495 to be in the top 1%,
$130,080 to be in the top 5%, $94,891 to be in the top
10% and $57,343 to enter the top 25%.

                  Yes, you read that right. If your household income is
over $57,343, you're well toward the front of the line
when the checks
are handed out. If your income is below $29,019, you sink into the bottom
50%.Don't let retirement sneak up on you.

                  Train wreck
                  Increasingly, those in the bottom 75% -- households with
incomes below $57,343 -- are starting to look like a
long, slow train wreck. Without recognition of the
problem, the entire country could find itself in dire
straits pretty quickly.

                  Let me show you why.

                  In the 10 years from 1993 to 2003, income has continued
to concentrate. While the bottom 50% of earners had
14.92% of income in '93, they had 13.99% in '03.
Similarly, the top 25% have enjoyed an increased share
of total income, rising from 62.45% in '93 to 64.86% in
'03. This is pretty much what you'd expect over a period
of rapid change. Those with leverage increase their
incomes. Those without leverage don't.

                  Over this period the dividing line income for the bottom
50% has risen from $21,179 to $29,019, rising 4.3% a
year. Had the income line risen only with inflation it
would have risen to $26,504. And that's an important
fact: Even the bottom of the income scale has gained
some purchasing power over the period -- about $2,515
(see table below).

                  Combine that additional income with recent low interest
rates on home mortgages, a period of weak-to-declining
rents for apartments, a multitude of low-interest and
no-interest offers from stores and car manufacturers,
and the people who do a lot of the heavy lifting in our
society have been getting along.

                  Better to be on top
                  Those with earning power have done a lot better than
just get along. Earners at the top 1% line have gained
$63,040 in purchasing power. Earners at the top 10% line
have gained $12,198 in purchasing power, while seeing
the portion of income they spend on income taxes decline
from 20.2% to 18.5%. Earners at the top 25% line have
gained $5,570 in purchasing power.

   The vulnerable bottom of the income pyramid
   Top 1 % Top 10 %  Top 25 % Bottom 50 %
   1993 Income (1) $185,715 $66,077 $41,210 $21,179
   2003 Income (2) $295,495 $94,891 $57,343 $29,019
   1993 Income Adjusted for Inflation (3) $232,415 $82,693 $51,573 $26,504
   Gain (1)-(3) $ 63,040 $12,198 $ 5,570 $2,515
   % of Income Taxes Paid 34.27% 65.84% 83.88% 3.46%
   Average Tax Rate as % of Income 24.31% 18.49% 15.38% 2.95%

                  Source: The Tax Foundation

                  That isn't the case for those in the bottom 50%. Their
entire $2,515 purchasing power gain since 1993 may
already be history. Skeptics should consider this brief
                    a.. With the typical household consuming about 1,000
gallons of gas a year, an increase from $1.50 a gallon
to $3 a gallon means a purchasing power loss of

                    b.. Rate increases for electricity and natural gas.

                    c.. Rising medical co-pays and other out-of-pocket
expenses for health care, plus rising employee
health-care insurance premium costs. Premium costs
were up 10% in 2004 alone.
                  Another way to see the same thing is to examine wage
gains. In 2004 the average weekly earnings of private,
nonagricultural workers rose by only 2.2%. The Consumer
Price Index rose by 3.3% over the same period. This year
has been a replay -- year-over-year wage gains are
running less than 3% while inflation has ramped up
toward 4%. And all this assumes we believe the CPI is an
accurate reflection of the inflation we experience.

                  Can the politicians work magic with tax reform?

                  No way. If the federal income tax was simply eliminated
for every household in the bottom half, it would only
liberate about 3.46% of their income -- less than
inflation for one year.

                  Bottom line: Unless there are some real wage gains for
working stiffs -- soon -- we're heading for a recession.

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