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Fletcher: Families still struggling while economy isn’t helping

September 25, 2012
Stephen Fletcher , The Alpena News

I've been asked about the lack of a column last week. The explanation has nothing to do with ruthless editorial suppression but rather I went hunting. I'm reminded of the crookedly hung sign on the door of the barber shop which says "Gone fishin'."

Speaking of opinions, it's my opinion that folks earning less than $50,000 adjusted gross income for tax purposes are getting absolutely battered in this economy.

The data from the Michigan Department of Technology, Management & Budget reports that the state's unemployment rate for July is up to 10.3 percent, or a little better than a 10 percent increase over June. In Northeast Michigan (Thunder Bay Country) the rate is now at 10.8 percent, or 5 percent greater than June of 2012. This really isn't too bad when compared to Detroit which is up 17 percent or Flint, which has 12 percent more unemployed.

Of course the report doesn't reveal any demographics but I'm guessing that many were not making a lot of money even before they went on unemployment. With the IRS data from 2009 tax returns, we know that at that time, two or more years ago, that one half of all individual tax returns filed showed an AGI of $32,396 or less. AGI is your income less legal deductions like mortgage interest, installment interest, IRA contributions and the like.

In the last four years, average family income has dropped 8 percent from $54,000 to $50,000. However, the CPI index as a measure of inflation, has increased 8 percent. If you total the two, the result is a rough measure of purchasing power for a family. In other words, purchasing power for all tax returns has diminished about 16 percent, not counting the price increases in food and fuel which are not included in the CPI calculations. If you are living near the bottom of the economic heap, the effect of changes in income is magnified. Without much income, you don't have much financial room for any errors or decreases in purchasing power before you get into real trouble. Housing and food are important and increases in food and fuel costs hurt worse at the bottom than in any other place on the economic spectrum because so much of your income is devoted to just those two items.

This is pretty bad enough, but there is more. The "wealth" part of your money is the sum of all of your bank accounts, stocks, retirement funds, house, cars and all of the total value of all that you own less all that you owe. On average, in the United States, that number is down 40 percent for the average family due primarily to the decline in the market value of your home. The drop in the value of your retirement funds due to the drop in the stock market in 2008 is probably still a loss for most of us as well, even if stocks are faring better these days.

What really helps change a situation like this is for jobs to start being created again. In order to create jobs, you must have a structure which encourages the private sector to grow. We have been trying to increase economic activity for four years by manipulating interest rates (monetary policy) and income redistribution, to no avail. I believe the use of fiscal policy (tax rate decreasing) is necessary to encourage growth. Since the top half of taxpayers ante up 86.5 percent of the AGI in the U.S., by definition, those are the guys who should get the break in order to turn the economy around.

If you're out of work, you don't expect a job from someone who doesn't have the funds to start or expand a business. The three legs of the economic stool are raw materials, labor, and capital. Washington has given labor a break for four years of income redistribution stimulus with no result. It's time to give capital a break.

We know that this will work because when President Ronald Reagan did it, the country enjoyed prosperity. Conversely, we know that concentration on labor side stimulus put us into the Great Depression for the 12 years between 1929 and 1941. It's past time for a change.



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