Grow The Middle Class

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Not My Father’s Economy

I struggle to explain the current economy. Gone are the days of inventory-driven booms and busts. We hated the layoffs but at least the economic boom was robust and benefited everyone. It was the rising tide that lifted all boats. Now it seems that neither good or bad economic news affects the economy. We have several years of lousy retail sales growth that does not seem to matter. We are “experiencing the strongest streak of employment growth since the 1990’s” but that does not seem to matter. Almost all of our economic and job growth comes the health care sector but that does not matter. Even lower prices for gasoline do not matter. This is not my father’s economy. The doldrums we are experiencing seems to have more in common the crisis of confidence that President Carter spoke about in his “Malaise” speech but with one significant difference. Based on recent history it looks like the traditional correlation between jobs and economic growth is considerably weaker than in President Carter’s economy. I am not alone in my confusion. Lance Roberts voices similar concerns in his article, Is There A Problem With The BLS Employment Reports?

IF we were truly experiencing the strongest streak of employment growth since the 1990’s, should we not be witnessing:

  1. Surging wage growth as a 4.9% unemployment rate gives employees pricing power?
  2. Economic growth well above 3% as 4.9% unemployment leads to stronger consumption?
  3. A rise in imports as rising consumption leads to demand for goods.
  4. Falling inventories as sales outpace production.
  5. Rising industrial production as demand for goods increases.

Obviously Mr. Roberts was expecting a much stronger correlation between job and economic growth than we are seeing. The more interesting question has to be, why are businesses hiring when it looks like that hiring more people does not translate into growing sales?

Charles Smith shows in this chart the growing disconnect between jobs and economic growth has been going on for a long time.

wages-GDP5-16b

Over the last forty years we have chosen to become a country less dependent on labor. Part of this decline can be explained that global trade has encouraged countries like the United States to ship low wage jobs to countries with lower labor costs. A good portion of our textile business went over seas for this reason. Ironically this “land of opportunity” has less opportunities for low wage jobs than ever before and an even bigger problem with middle class jobs. Every developed country is desperately trying to hold on to its middle class jobs and, in some cases such as China, increase them. So if you believe financial engineering bubble is over then we are left with growing the economy in a way my father would be comfortable with, growing the middle class by encouraging product development at small and medium size businesses. The heavy hand of government regulations combined with increased cronyism seems to have been more advantageous to the firms that got most of their earnings from financial engineering rather than product development. The millennials and Hispanics need to start sifting through the policies that worked in the past and tweak them for this new generation. So if the health and wealth of America depends largely on the health and wealth of the middle class, what are the competitive advantages that will convince businesses to keep their middle class jobs in America?

 

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I Think I Know Where the Uninsured Have Gone

One of my favorite writers, Megan McArdle, asked the question recently, “Where Have All the Uninsured Gone?” It was an interesting piece to me because it chipped away at the philosophical underpinnings of our understanding of the uninsured. It must have struck a nerve with a lot of people since it had 1976 comments at last count. In that piece she says,

“Somewhere between 65 percent to 90 percent of the 2.2 million folks who bought insurance on the exchanges through late December seem to be people who already had insurance.”

One of the primary goals of the Affordable Care Act was to dramatically reduce the number of uninsured who were freeloading on the health care system. The idea was that they either belonged in Medicaid or they should be buying one of the affordable plans available through the health exchanges. This looks as American as apple pie. What could go wrong?

The problem is that health insurance must be marketed like it was a business. The Affordable Care Act took the path less traveled and that has made all the difference. The ACA focused on expanding subsidies and free health care. They assumed that the uninsured wanted health insurance and had the money to pay for it. The enrollment numbers makes it look like the Affordable Care Act supporter either forgot to talk to the customer or conveniently ignored what they said. The uninsured may care about health care but they definitely do not like paying for health insurance.

Then the Affordable Care Act supporters committed the ultimate marketing faux pas and ignored what the paying, healthy customers wanted. The problem is that un-subsidized health insurance costs are so much higher than last year that your best customers are freaking out. Freaked out customers is bad for business and encourages talk about the collapse of the health exchanges. Now we have a situation in which the uninsured are questioning why they should make the effort to acquire a health insurance through the exchange if the exchange is doomed to fail. The sad truth is that the people who are getting free or heavily subsidized insurance are not nearly as important to the insurance companies and the exchanges as the customers they can make a profit on. It is this profit that pays for the subsidies to the poor! If health insurance is a business then you must have a clue what the paying customers want and what they are willing to pay for.   I can’t say I didn’t warn you. The only people who care about health insurance and health exchanges is the middle class. Last year I wrote in Health Care Reform for the Forgotten Man:

Health insurance was a product created for the middle class and paid for by the middle class. The rich do need it and the poor do not have the money to buy it. Do we really want to go down the path in which health care insurance reforms do not make sense to the man and woman who are ultimately paying the bill? Are we really asking the most price sensitive people in the health insurance market to bear a disproportionate share of society’s burden for un-insurables and hope that it turns out okay?

Health insurance for the uninsured is much ado about nothing. All the poor want is someone to pay their hospital bills and they already have that. They just do not care about health insurance!

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Things That Make Me Go Hmm… Startup-NY advertising in Ohio?

Migration Map 2010Recently Start-Up NY has been advertising heavily in Cincinnati touting New York as a great place to start a business. Cincinnati has a small but interesting start-up business. Most of the buzz has been about Cintrifuse. Although there have been some successes, no one has confused Cincinnati with the start-up meccas like Silicon Valley. Start-ups in Cincinnati and Northern Kentucky largely remain a work in progress. When we look from New York’s perspective the grass sure looks greener over Ohio’s septic tank. The recently released United Van Lines 2013 migration study press release says that New York has the third highest ratio of traffic moving out of state. The reason for the high outbound ratio is complicated but it is hard to ignore the business climate’s consistently low ratings. The 2013 version of the ALEC-Laffer State Economic Competitiveness Index has New York ranked 49th. The year before they were ranked 50th. So why would a budding start-up move from a state like Ohio who is ranked 26th to a state ranked 49th? Cincinnati may not have the cachet of Silicon Valley but it has a better business environment and a lower cost of living than New York.

New York has a difficult marketing problem and from their perspective at the back of the pack, the Cincinnati start-up market is a more appealing target to attract businesses from than Texas or California. Their plan is to create tax free zones in which “businesses can operate 100% tax-free for 10 years. No business, corporate, state or local taxes, sales and property taxes, or franchise fees.” This is an interesting offer but it is restricted to areas located primarily on SUNY campuses around New York City. Their idea was to pair up high tech businesses, low taxes, and college campuses. This might eventually work with Columbia university but I am skeptical of its usefulness at the SUNY campuses. Even if this plan happens to be successful at a major university, what is going to stop Kentucky and Ohio from setting up similar plans at the University of Cincinnati, Xavier, Miami, or Northern Kentucky? In the grand scheme of job migration their plan is a nice employment solution for high tech, college students but it really does not address the much larger unemployment problem with the low education, low skill job market. They may save a few jobs for college graduates but the rest of the people are going to have to look for jobs elsewhere. To fix that problem we have to learn how to grow low and medium tech companies again. We tried to fix the problem by encouraging the growth of the service industries at the expense of manufacturing companies. Now we have learned that the service industry is not the magic bean that will grow the low education, low skill job market. “To grow middle class wealth you must be making things bigger, better, faster, or cheaper.” That will take a different mindset. A mindset that made New York city great a long, long time ago.

When I think of New York City I think of this poem. From huddled masses to high tech college students, it is amazing how the vision of who we are has changed. It is hard to embrace a return to the optimistic vision of the poem when a poor business climate is undermining that vision at every turn. In a very provincial sense I feel like Samuel Gerard in “The Fugitive” who kept telling Dr. Kimble, “I don’t care”. I have a job to do, New York has a job to do, and it is very likely that never shall the twain meet. I hope local start-ups will look at the numbers and stick with Cincinnati. That is the smart decision. Regardless of their decision my life is unaffected. However there is a deeper issue in play. Like Samuel Gerard who finally admits that he does care, I want New York to be successful again.  When I root for New York’s success I am not rooting for a more optimistic future for all of us and the success of New York is part of it. I am rooting for the unbridled optimism of the poem.

Give me your tired,
your poor,
Your huddled masses
yearning to breath free,
The wretched refuse
of your teeming shore.
Send these, the homeless,
the tempest-tost, to me,
I lift my lamp beside
the golden door!

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The Winter of Our Discontent

A couple of days ago I read a Reddit column that reminded me of my regrets  about the second war in Iraq. Saddam Hussein was an evil and corrupt man who deserved to be forcibly removed from power. The question was how. Part of me was skeptical that any well intentioned regime change by an outside power would ever work. The US needed to win not only the war but the hearts and minds of the people. Everything had to work perfectly in a place beset with almost intractable political problems. It sounded like a job that was too big and complicated to work. Despite the odds I put my faith that our government could make things right.

Not very long ago we had some well intentioned people in business and government who wanted everyone to have the chance to own their home. Their policies lead to a real estate bubble so big that when it collapsed, it threatened the entire financial system of the United States. Most people felt the financial companies should feel the pain by fixing the problems they created but the problem was so big it threatened the entire financial system. So with reluctant skepticism we embarked down a different path of subsidizing and consolidating the banking system. We combined banks and other financial institutions we would never allowed to happened in normal times. As part of this grand bargain we hoped the money spent on the banks would trickle down to the people who trying to own their home. These were the people whose troubled assets were the focal point of the law. When we fixed this problem the jobs would come back, too. Like most people I put my faith that our government. I wanted this plan to work.

Then there is the Affordable Care Act. It is the centerpiece of the Obama legacy and the greatest accomplishment of progressive politics in the last fifty years. It was supposed to not only expand the health insurance system to more people but it would make health care and insurance more affordable. We were constantly reminded that very few people would be affected by the changes and that if we liked our health insurance and doctors, we could keep them. Once again I felt the pangs of skepticism. Although I wanted this plan to work, it sounded to good to be true.

I look with regret at these three decisions. Even now the general population views them with a mixed sense of success and failure. We do not like to dwell on past failures. In hindsight each decision failed to accomplish its objective so we did something else. With each failure I have become more skeptical that our government can finesse its way through poorly thought out policies. Weapons of mass destruction were not found. Middle class families had their homes and dreams foreclosed on. Affordable health care is still a dream. One of the greatest features of American exceptionalism was our government’s ability to transform bad political policies into workable policies that grew middle class wealth. We took our eyes off of the ball.

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Things That Make Me Go Hmm… The Continuing Bull Market

I have been unwilling to invest more money into the stock market for the last couple of years because the stock market has this uneasy, codependent relationship with the expansion of the Fed’s balance sheet. Every time the Fed threatened to cut off the purchases the stock market had a temper tantrum. I hate this market psychology. As an old school MBA type I am much more comfortable with a market that goes up when the unit sales goes up. As a result I missed out on the stock market gains in 2013. Jeff Sauts makes a very good argument on BussinessInsider that the stock prices will continue to go up for the same reason it has since 2009.

…there has been a very tight correlation (R2) between the expansion of the Fed’s balance sheet and stock prices since 2009. If the Fed expands its balance sheet by another 12% over the coming year, it is conceivable the SPX could increase by another 12%

His argument is solid so despite my qualms I will probably test the investment waters in 2014. I would be much more optimistic about investing in the stock market if our government was reducing the policy risk on small and medium sized businesses. This is MBA advice you would have gotten in the 1980s. The government needs to get out of way so businesses can get back to their running their business. The Affordable Care Act and the increased regulations are a distraction that has increased the risks to small businesses. It is hard to grow your business with all of these meaningless distractions. I have said it before. If we want to grow middle class wealth we have to focus on making things bigger, better, faster, or cheaper.

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Health Care Reform for the Forgotten Man

As a person who purchases their health insurance in the individual insurance market place I do not feel sorry for the Affordable Care Act supporters. I am keenly concerned with what I call Health Care Reform for the Forgotten Man will look like. I was recently reminded in a post by Harold Pollack on the Incidental Economist blog than the supporters of the Affordable Care Act are in a pissing match with the insurance companies about covering people who are both uninsured and un-insurable. Asking insurance companies to take customers they are going to lose money on is a dumb way to run an insurance company but that is the Affordable Care Act’s supporters big idea. As a healthy person I did not ask to be involved in their idiotic debate but in their perverted political logic they decided that healthy people like me can be coerced into helping them solve the problem with the un-insurables. This is the Forgotten Man scenario outlined by William Graham Sumner and made famous by the Amity Shlaes book, The Forgotten Man: A New History of the Great Depression. I thought we learned our lessons after a decade of failed grand ideas in the 1930’s. Good policies have to make sense to the people paying for them. Health insurance was a product created for the middle class and paid for the middle class. The rich do need it and the poor do not have the money to buy it. Do we really want to go down the path in which health care insurance reforms do not make sense to the man and woman who are ultimately paying the bill? Are we really asking the most price sensitive people in the health insurance market to bear a disproportionate share of society’s burden for un-insurables and hope that it turns out okay?

So where do we go from here? Once again Harold Pollack reminds us that there is no room for debate. Recently he dismissed a fairly modest proposal for individualized health insurance plans as a non-starter. As a healthy person I think that an individualized health insurance plan is the next logical step for health care reform. In fact I will go one step further. My perfect health care plan is an individualized health care plan issued from my local hospital that includes my local doctor. The perfect plan for the business I work at is a defined contribution plan. If we combine both of these together we arrive at the conclusion that if health care is to evolve to a more perfect system then it will be primarily a local solution with possibly some state-wide or regional features. This local focus does make you wonder how a federal program became the big player in an inherently local problem. If health care is to evolve into a better system then the Affordable Care Act looks like a step in the wrong direction. My second choice is a plan similar to the one they offered when I first started working in 1976. Everyone signed up for the plan because it was inexpensive and inclusive. When the third party payer system is working right and large group plans are cheaper than individual plans, this type of solution is a no-brainer. Unfortunately we have strayed far from the path since 1976. Since most large group plans are more expensive than the individual plans it is easy conclude that the third party system is already dead and that businesses will enter into a defined contribution arrangement as quickly as possible. My third choice would be to keep my existing plan and rates. Every time a supporter for the Affordable Care Act says that there are no alternatives I grit my teeth. It is bad enough that my rates are rising rapidly but now my insurance company, Aetna, has announced that they are not going to participate in the state exchange. All of this uncertainty and fear was not supposed to be happening to healthy people who had health insurance. If the plan by the Affordable Care Act supporters was to make everyone miserable, they have succeeded. Yea, I am pissed. So I am left with my fourth choice, the Affordable Care Act. It does nothing for me except cost more. The supreme irony of the Affordable Care Act is that it is littered with so many failed programs, delayed mandates, and confusing regulations that it is the poster child for smaller government. I doubt a libertarian could have deliberately screwed up the Affordable Care Act as well as its well intentioned supporters have. The best way to judge the Affordable Care Act reforms is to see whether the reforms can stand on their own or whether they require the IRS to enforce them. Most of us can still remember when we had perfectly good health care plan without IRS involvement. The supporters of the Affordable Care Act are now arguing that although there are some flaws in the Act this is a good first step for health care reform. From what I have seen of the reforms that is akin to throwing a grenade into a crowded room and saying that is a good first step at getting people to exercise more. At some point we have to start realizing that the Affordable Care Act is not a creative destructive force of good but a plain old, well intentioned, destructive force. This is something that the unions and the general population agree on. We have seen the future of health care and it looks a lot like Detroit.

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The First Law of Growing Middle Class Wealth

To grow middle class wealth you must be making things bigger, better, faster, or cheaper.

This law is an acknowledgement that financial stimulus, bubbles, and wealth redistribution schemes create a temporary sense of wealth and aggravate the problems with income inequality. The crux of the problem is that financial stimulus, bubbles, and “bad” wealth redistribution schemes increase the risk of bad and delayed investment decisions on products that have the potential to create middle class wealth. Unless we are able to perpetuate a cycle of stimulus, bubbles, and new “bad” redistribution schemes, this temporary wealth is not sustainable and eventually the bad decisions have to be paid for. The key to growing middle class wealth is making good decisions that reduce risk and encourage the investment in products that can grow middle class wealth.

The background for making this statement is that history has shown that gains from productivity increases are sustainable. The best examples of these gains are the Industrial Revolution in the 1800’s, the innovative products at the beginning at the 20th century(e.g. automobiles, telephones, steel, oil, farming, etc.), and more recently the productivity gains from computers and computerization in the 1980’s. Arguably the increased risk felt by businesses in the 1930’s with the increased regulations and wealth redistribution schemes reduced capital investment and prolonged the depression. This was an argument put forth by Amity Schlaes in her book, The Forgotten Man. A similar argument can be made about the last thirteen years. With the real estate, financial, and health care sectors leading the way income inequality has gotten worse and we have not invested in products that grow middle class wealth. Instead we created a system that perpetuates decision making that results in temporary wealth and stagnant middle class growth. At the beginning of this century it was real estate and now its stocks and health care. Arguably the biggest beneficiary to the Federal Reserve quantitative easing policy is stocks. Eventually the Federal Reserve will taper off its quantitative easing policy and our health care expenses will reduce to the rates paid by the rest of the world. We have gone from one bubble to the next and gotten more separated from the policies that help the middle class grow their wealth. Until we get back to making things bigger, better, faster, or cheaper we will be caught in a zero sum game with emerging economies we cannot win.

The first corollary to the law is:

Growing middle class wealth is the only economic tide that lifts all ships.

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The Basic Problem With Reinhart And Rogoff is …

The Business Insider highlighted a tweet from @larry_kudlow:

Trouble w/ Reinhart/Rogoff debate not stats. It’s this: Growth solves debt, not other way around.Reform taxes, spending, regs,money.

I agree with Mr. Kudlow that growth solves debt but disagree with him about his subsequent statement debt and growth. The basic Reinhart and Rogoff premise is unchanged regardless of whether you look at the original or the revised numbers, GDP growth rate goes down as you increase debt load. The revised GDP number goes down less severely than the original GDP number but it still goes down compared to lower debt levels. I think where Mr. Kudlow and I disagree is our assumptions about the potential economic growth and whether debt is relevant to potential GDP growth. He assumes that the US economy has a higher potential than it is presently showing and that a little additional stimulus will result in increased consumer spending and higher GDP growth. This is the traditional Keynesian fix for the economy. In his scenario the increased debt is not relevant because the marginal gains from trying to reach this higher economic potential are so great. My assumption is that that the economic potential is lower. Reinhart and Rogoff have shown that a higher debt level is correlated with lower growth so it is logical to conclude that the economic potential is lower, too. A country’s high debt load is not the cause of lower growth but it is a symptom that shows that lower growth factors have been in place for many years just like high blood pressure can be a symptom of heart disease. As an example let us assume that GDP growth over the last thirty years is a combination of increased consumer spending via debt and good demographics from the baby boom generation in their peak spending years. Let us further assume that the economy peaked in 2000 and we have been struggling to jump start the economy with economic bubbles and more debt. Under this scenario it is easy to see a future with maxed out consumers, young people straddled with college loans, and a baby boomer generation that is retiring. This scenario looks like a high cost, slow growth economy that is unresponsive to government efforts to stimulate spending just like the last ten years. In the last ten years we attempted to stimulate the economy into overdrive with spending on fighting two wars,  a big tax cut, and a large stimulus spending package focused on infrastructure and unemployment. It did not work. With these economic results to guide us, additional debt may alleviate the short term pain but is harmful to the economy in the long term. We tried every trick in the Keynesian stimulus book and we failed to increase the prospect for long term growth in the economy and employment. In contrast to the Keynesian stimulus solution where they encourage families to buy more more stuff they don’t need now, our economy needs the government to do no harm so that family spending can expand naturally and let the markets pick the winners and losers with less political interference. Stimulus spending by definition is designed to interfere with natural family spending decisions and get them to spend their money on something they do not want to buy now. In this context it is difficult to see the difference between an economic stimulus and a financial bubble. If a family with limited income growth is responsible for their creating their own wealth, it is natural that they will assume a more traditional viewpoint concerning debt and reject the decision making that comes from financial bubble/economic stimulus spending. Yes, families are smarter than the government when it comes to spending their money. For most of them it is a back to the basics economy in which to increase their wealth they need to do more with less. We tried to accumulate wealth with increasing amounts of debt and found out that it does not work. Now we are going back to the way my middle class parents accumulated their wealth. It worked!

So let us start down the list of cost cutting opportunities and some of the problems. Our electrical bills should be going down since we have record low prices for natural gas and coal. It appears the savings are going everywhere but to the customer. It is interesting that the administration has stated that they would like carbon based electricity to go up in price to make solar and wind generation more affordable. Are we “tilting at windmills” in our battle against carbon dioxide? A similar argument can be made for gasoline and its relationship with ethanol. Why are we letting the price of gasoline get whipped about by ethanol? Another big ticket item for the family budget is the cost of health care. Every healthy family agrees that we are overpaying for our health care and Obamacare is a failure at controlling costs. If Obamacare is not helping healthy people get more affordable health care, it is a failure. You cannot completely ignore the needs of the majority. It was silly to expect a politics ridden organization using a command and control organizational structure to be effective at controlling costs. If this was true then Russia would have an economy greater than the United States. There is nothing like a stack of 20,000 pages and a long list of exceptions to Obamacare regulations to remind us that this was the wrong organizational structure to fix our health care problems. This recipe for disaster did not work for Tennessee and is a questionable success in Massachusetts. On one hand Massachusetts expanded health care and on the other hand they have one of the highest cost health care costs in the country. Any idiot can expand health care coverage without paying for it. The trick is making the system sustainable and that is where Massachusetts is struggling. It all comes back to cutting costs. Trying to promote the Massachusetts experience to the national level is an example of the Peter Principle in action. Since we do not have a tradition of cost effective, sustainable government services, what we probably need is a modern day Rockefeller or Carnegie to work with and against the health care institutions and insurance companies to reform our health care system into a more cost efficient system from the ground up. I was reminded that in a lecture recently that these two men achieved their success by using research and development to aggressively cut costs so that they could sell their products at lower costs. They also were very flexible to market conditions. A real health care reform is not much different than our present system but with a greater emphasis on cost control and a different management style. We tried to ignore costs and failed. Steven Brill’s 22,000 word article in TIME reminded us that health care cost accounting is a nightmare that is not going away. It is amusing to try and think what Rockefeller would say about our health care cost accounting. We tried the big political solutions to health care like Obamacare and failed. Throwing more politics and money at health care does not fix the rising health care cost problem. Maybe if we want a smaller, less political solution like the Cleveland Clinic to work on a national scale we have to encourage each community figure out how they can replicate the best hospital practices and get out of the way. I have a lot more faith in a local hospital trying to compete with the Cleveland Clinic that anything coming from the federal government. If a successful company like Proctor and Gamble can make effective decisions using the one page memo principle, maybe our government needs to embrace a more strategic management style rather than a micro managing style. The “I’m from the government and I am here to help” management style used by Obamacare is creating a bigger health care problem by breaking the health care system faster than doing nothing at all. Since all health care is local health care, all health care solutions are by definition local solutions. If we want a solution to our health care problems, we should look no further than our local health care providers.

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The Biggest Problem with the Middle Class Is?

If we believe this video that went viral on the internet, Wealth Inequality in America, the problem with the middle class is that a CEO make about 380 times more money than the average worker. This video is based primarily on the charts created by the Mother Jones article, It’s the Inequality, Stupid. The Mother Jones charts make it pretty obvious that they think the problem with the middle class is that the rich are paid too much. Their fix for the middle class is some  income adjustment on the wealthy.

Paul Caron argues that raising the Estate Tax will curb wealth inequality and spur economic growth, Using the Estate Tax to Curb Inequality and Spur Economic Growth. In his analysis the problem with the middle class is a wealth problem. The rich have too much wealth and redistributing their wealth via estate taxes is the most equitable way to fixing the middle class.

So lets see if I understand this problem correctly. The rich are paid too much and have too much wealth. For this privilege they pay the government a disproportionate share of all the income taxes collected. Okay, I get it that everyone is in favor of taking another million dollars from Warren Buffett or Bill Gates but what does that have to do with middle class wealth and income problems? Just maybe, the problem with the middle class is not the rich. It is not the poor. The problem with the middle class is the middle class. The problem with the middle class is they made bad life style decisions. Instead of saving and investing like the rich folks, the middle class took the easy way out and used long term mortgages, permanent credit card balances, and student loans to avoid or postpone tough decisions. The results are not surprising since debt seems to encourage bad decision making. If you accept the argument that this bad decision making has been going on for at least the last thirty years, then it is logical to conclude that the primary reason the rich are so rich is because the middle class has been so dumb with their money. Ploys to increase consumer spending and bubbles seem to be the favorite tools used by policy makers to extract wealth from the middle class and give it to the rich. When these ploys inevitably do not work, the follow-up strategy is to claw back some of the success of the rich. It is a never ending circle until the middle class has no more to borrow. It is the microeconomic solution to the unintended consequences of misguided macroeconomic policies. Increased consumer spending is the solution until … it isn’t!Nowadays we call it the Dave Ramsey strategy. It requires both sacrifices and tough decisions to work up the wealth and income ladder. The goals are simple, too. It is hard for a middle class family to live beneath their means but it is necessary if a family wants to pay down their debt. It is hard for a family to pay down its debt but it is necessary if they want to save the money for retirement and their kid’s college education. With a clear vision of where you are going, the hard work translates into results the middle class can see in their bank account. It does not depend on how much we tax the rich or cut the benefits for the poor and elderly. It depends on the middle class living beneath their means, making good spending decisions, and saving for the future. For those middle class folks whose parents lived through the Great Depression, they are embracing the financial strategies of their parents.

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Why There is Wealth Inequality

There is a lot of talk about fairness and income inequality in the media as they try to make wealth redistribution policies more palatable to the public. Don’t get me wrong, I do not have a problem with taking more taxes from Warren Buffet or Bill Gates. The problem starts when they start taking money away from me and I do not believe this is helping anything! When they take money away from me, I have to cut expenses elsewhere. In my case I cut my savings rate. The extra money taken from my paycheck reduces my retirement money and more dependent on social security. It is that simple!

As a country we have long since passed the point where we have a balance between spending and saving. Our defined pension plans and 401K plans are woefully underfunded and our social security system is a sham. The problem with the middle class is not income inequality or fairness. We are stupid! We make dumb decisions with our money and how we save. You hear this all the time if you listen to Dave Ramsey. Here is a quote from a John Goodman post, Why There is Wealth Inequality.

The greatest inequality of wealth holdings is among the elderly and the primary reason for that inequality is the different saving rates of people when they are young. Here is Noah Smith:

If you do the math, you discover that in the long run, income levels and initial wealth…are not the main determinants of wealth. They are dwarfed by…savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

Pointer from Arnold Kling.

Unfortunately the key idea we get from Keynesian economics is that increased spending is good for the economy and deficits are not important. Although I am skeptical that this plan ever worked, we can see that since 2000 this plan has definitely not worked. Here is the chart I created a couple months ago to show that relationship. For those unfamiliar with Mitchell’s Golden Rule, “the private sector should grow faster than the government”. I still prefer the stronger form which states the private sector should grow faster than the growth in government debt if we want to grow out of our mess. As a country if our economic policies are working, the green line would be lower than both the red and blue lines. If we look at the country as an individual investor, we need a greater return on our investment and this dependence on debt is not working!