The United States of Economic Coincidence
It shouldn't surprise anyone to learn that Americans have embraced the world of make-believe. After all, eight of the top ten highest-grossing movies of 2005 took place in far-away galaxies, starred personified animals, or revolved around alien invasions. Even the two non-fiction movies to grace the list--Wedding Crashers and Mr. and Mrs. Smith--don't exactly excite the realists among us. If this bothers you, don't worry. By collectively proving our ability to suspend reality, we are simply practicing for this year's elections when we will be bombarded with even more make-believe. Sadly, this time it won't be entertainment, but an attempt by Conservative Congressional incumbents to explain away record-high gas prices, stagnant wages, and the ballooning Federal deficit in the face of war-time tax cuts.
MORE BELOW THE FOLD:
"It's Just the Free Market at Work"
Understanding the dynamics behind gas prices is not a simple task--even for economists. However, there are a few undisputable facts. First, gas prices are the highest they've ever been in the United States. Second, oil companies are showing their highest profits ever. In fact, Exxon Mobil, the world's largest oil company, made more money last year than any other company in the history of the world. More money than the Bill Gates-led 1990's Microsoft, more than assembly line master and automotive pioneer Ford in the 1920's, even more than the Andrew Carnegie, J.P. Morgan, and Charles Schwab monopoly-aided U.S. Steel in the early 1900's. Any way you look at it, oil companies are having an extraordinary run. And (in the words of Jerry Seinfeld), "not that there's anything wrong with that." If for no other reason than an improved retirement portfolio, most rational people want American companies to do well. The problem is that these record profits are being made directly on the backs of the American people themselves.
Most Conservative Congressmen act as though the record profits are purely a coincidence; not directly tied to the $3.00 a gallon we are paying at the pump. Their popular refrain of (usually recited with their arms spread, shoulders shrugged, and palms pointed to the heavens); "this is the free market at work; there's really nothing we can do about it," is laughable. A new oil refinery, where crude oil is converted into usable gasoline and heating oil, has not been built in the United States since 1976. Why? CAFE standards, the Congressionally-mandated average miles per gallon a car or truck "gets," is lower in 2006 than it was in 1986. Why? The easy answer to both questions is because oil companies do not want increased supplies of gas or more fuel efficient cars and trucks--even if it means less dependence on foreign oil for America, and in turn a more secure future for our families. Simply put, it would mean fewer profits for their companies. After all, oil companies are looking out for their own hides. Would you expect differently?
What should not be expected or tolerated is having a Congress that not only does nothing to stop this rip-off, but is complicit in it. Just last year, the Republican-controlled House approved an energy bill that gives $8.1 billion worth of new tax breaks to oil, gas, and other utility companies over the next 10 years. Talk about bad timing. This corporate giveaway might just have something to do with the fact that the oil industry has given over $420 million to lobbyists, political parties, and politicians since 2000. That's right around $70 million per year. Is it any wonder then, why Congress has done absolutely nothing to stem the tide of rising gas and home oil costs? Don't hold your breath, either. It's like expecting a bought off referee to turn around and make a call against the "home" team. It's just not going to happen. This Republican Congress is too beholden to the oil companies for them to push through any significant relief on gas prices.
"Stuck in Neutral"
While it may be hard to find any two economist to agree upon the reasons behind record gas prices, most economists agree that low unemployment rates lead to higher personal income levels. It's a case of supply and demand. If a company is hiring, and the available pool of workers is relatively small, they have to pay more for the workers they want. If the company waits or tries to lowball a prospective employee, he or she will find work elsewhere, usually at a higher wage. The worker has leverage. This is where the U.S. economy should be right now because according to government figures, unemployment is at 4.7% (April, 2006) and averaged 5.1% for 2005. Historically speaking, that's incredibly low and welcome news for workers looking to change or find new jobs.
Here's where we are forced to suspend reality. You see, adjusted for inflation, the average U.S. worker is taking home right about the same amount, sometimes even less in 2006 than they did in 2001. During this period, wages have gone up around 15%. Unfortunately, inflation has gone up around 14%. What this means is that wages have actually only increased 1%. Since most inflation estimates do not even include the costs of energy, it's fair to say that most people have less money to spend now than they did five years ago. Throw in spiraling health care costs, rising interest rates on home loans, and credit card and college debt into the mix, and it's easy to see why a lot of people yearn for the 1990's economy.
So why isn't low unemployment leading to increased wages like it normally does? There are two main reasons. First, the way the official unemployment rates are calculated is misleading. It only counts people that are still "actively" searching for a job. That leaves out the thousands (possibly millions) of people that have stopped looking altogether. That's why the job market may not be as "tight" as it needs to be in order to increase wages. Secondly, the new jobs that many people are finding do not pay as well as the job they may have just lost. Call it the "Wal-Mart" effect. People losing well-paying manufacturing jobs usually end up finding work in the low-paying service industry. Combined with a globalized economy that places a premium on cheap labor and the lessening influence of labor unions, all of this means less take-home pay and a lower standard of living in the long run for the average American worker. While neither outcome is very appealing, what's even worse is the current response coming from Conservative incumbents. Their silence is deafening.
"Tax Cuts Pay for Themselves"
The most widespread Conservative economic belief is that "tax cuts stimulate economic growth." You've heard it, "the more money people have in their own pockets, the more they will spend. In turn, the more people spend, the more that will help American businesses and the overall economy in the long run." Easy enough, right? While it's debatable whether this approach has ever worked, it's easy to see that it's not working now. Collected Federal tax revenues were almost 7% lower in 2005 than they were in 2001. Translation: The government is taking in less money. Yet, Federal discretionary spending was up almost 50% in that same period. Translation: The government is spending like drunken sailors. To top it off, the Federal deficit increased over 40% in these five years alone. Translation: Congress is doing what many Americans do best--they're just charging the difference between income and spending on the national credit card. While the average American realizes that credit card debt must be paid off at high interest rates down the road, it appears Congress doesn't care.
Look at it this way. A parent loses his job, leaving only one breadwinner in the family. But, instead of cutting back on unnecessary expenses, the family decides to not only buy a new car, but also go on a Caribbean vacation. Not surprisingly, they end up in a world of debt. That's what our government is doing right now. With the No Child Left Behind education mandate, the war in Iraq, the new prescription drug Medicare plan, and the cleanup of Hurricane Katrina, the Federal government is spending like a college kid headed to Spring Break with his first credit card. It's fun while it lasts, but what happens when the bill has to be paid? Confronted with this fiscal cold shower earlier this year, the geniuses in Congress chose to cut one of the few government programs that actually leads to economic growth--college loans.
According to the Wall Street Journal, "$12.7 billion will be cut from student-loan programs over the next five years." It is the largest cut to student aid programs ever. Because of the cuts, students and their parents will have to pay significantly higher interest rates on loans--costing both groups thousands of dollars in added interest over the life of the loan. This comes as college tuition continues to go through the roof--raising faster than inflation in each of the last 10 years. What's troubling is these Congressmen know how important it is for our economic well-being to have a well-educated workforce. After all, the average college graduate will out-earn non-graduates by up to a million dollars over the course of his life. Short-sighted thinking at its best, Congress has once again failed to account for the fact that more college graduates means more government revenue (higher taxable wages) and less government spending on entitlement programs (Medicaid, food stamps, etc...).
While slashing college loan programs, Congress just voted to extend $70 billion in tax cuts over the next five years. Finally some good news for the middle class, right? Well, according to a Washington Post analysis, a family earning between $50,000 and $75,000 will see an average tax savings of $110 a year. Those families earning over $1 million annually, will see a $41,977 tax reduction. $110 versus $41,977. That's the difference between a nice steak dinner and a starter home in the suburbs. I guess this is Congress' idea of fiscal responsibility. Don't just take my word for it either. Senator Olympia Snowe, one of only three Republican Senators to vote against the tax cuts, said: "The point is the preponderance of these revenues will go to upper-income people, people who make a million dollars or more. It's a question of priorities." Massive tax cuts for America's wealthiest during the middle of a war, out of control spending, and the one place where they choose to cut spending is student loans. I think we all can see where Congress' priorities lie.
Don't be fooled this summer when you hear the same canned responses coming from Conservative incumbents that you've heard for the past six years. Ask them if it's just a coincidence that gas prices and home heating prices are the highest they've ever been at the same time oil and utility companies are making the most money they've ever made. Hmm... Ask them if it's just a coincidence that our country is in the greatest debt we've ever been in while we give away ridiculously huge tax cuts to the richest of the rich. Hmm...Ask them if it's a coincidence that their crazy spending habits just happen to coincide with a 40% jump in the Federal deficit. Hmm...Ask them if it's just a coincidence that they are greatly reducing student loans at a time when the vast majority of the well-paying jobs out there require a college degree. Ask them something; otherwise they'll just keep on doing what they're already doing. Most importantly though, be careful. I hear there's a nasty case of the economic coincidences going around.