As pollsters on both sides of the American
political divide point out, the standout fact
about the presidential election is the small
number of undecided voters. As Jeff Zeleny
observed in the New York Times August 15, polls
show that only 5% of voters remain undecided.
Both the Barack Obama and the Mitt Romney
camps, Zeleny adds, are fighting for the
enthusiasm of their own supporters rather than the
marginal vote from the center: Romney "is now
running a campaign more focused on energizing an anti-Obama
coalition than on trying to
expand the universe of Romney voters with an
argument that he is the most qualified economic
steward. Mr Obama has been responding in kind,
opening a deeply divisive period in the race in
which firing up hard-core partisans is taking
priority over trying to pursue relatively small
numbers of undecided voters in the middle."
Polarization of this extreme degree is not
ideological, but existential. The great split down
the center of America society is not between the
rich and the middle class, as the Obama campaign
suggests, but within the middle class itself.
This helps explain why Paul Ryan was a
smart choice for the second spot on the Republican
ticket. There are still more people paying taxes
than getting a check from the government, and
their patience with tax creep is exhausted.
The home price collapse wiped out nearly
half the median family's wealth during 2007-2010,
but the tax burden middle-class homeowners
continued to rise.
Exhibit 1: State and
Local Property Tax Receipts (12 Month Rolling Sum)
vs. Case-Shiller 20-City Home Price
Index Source:
Census Bureau, S&P
As I argued in
late last year (see The
Economics of Polarization, Asia Times Online,
November 1, 2011), the cost of supporting bloated
payrolls and pension schemes for government unions
at the state and local level forced these
governments to squeeze more out of floundering
homeowners. Homeowners now pay in aggregate almost
as much in taxes as in mortgage interest. Taxes
used to be a third of mortgage interest. The
increased tax burden has kept home prices low.
The distress of the American middle class
is unlike anything observed in the post-war
period. Home equity rose at least in nominal terms
during every five-year interval since World War
II, except the most recent.
Exhibit 2:
5-Year Percentage Change in Owners' Home
Equity Source:
Federal Reserve
For the median
American family, that translates into a 40%
reduction in wealth.
The impact on home
equity, moreover, isn't the worst of it. The
home-price bubble brought with it business
opportunities for Americans with modest skills:
construction, real estate sales, mortgage broking,
retail, and a host of other services. With the
boom in home prices came a wave of
entrepreneurship comparable to the first response
to the Ronald Reagan tax reforms of the 1980s.
A simple but robust measure of
entrepreneurship is the change in the total number
of corporate tax forms filed in the United States
each year. That reflects the number of businesses
actually operating and making money. During the
Reagan years, the number of corporations filing
taxes rose by 5% a year, reflecting the great wave
of entrepreneurship driven by a happy confluence
of economics and demographics.
Reagan cut
the top tax rate from 70% to 40%, an enormous spur
to individual initiative. The baby boomers were
just entering their 30s, starting families, and
eager to succeed. And American households were
flush with capital. As Exhibit 2 shows,
homeowners' equity had more than doubled during
the five years before the 1980 election.
Exhibit 3: Annual Change in the Number
of Corporations Filing Taxes Source: Internal Revenue Service
During the George W Bush years, this index
of entrepreneurship rose sharply; corporations
paying taxes grew by more than 4% a year in 2005
and 2006 before plunging into negative numbers in
2008 after the financial crisis. Although data are
not available for the past four years, anecdotal
evidence suggests that the number of corporations
in the US has continued to shrink.
Exhibit 4: Net Income Per
Corporation Source: Internal Revenue Service
As
Exhibit 4 shows, not only the number of
corporations operating, but the net income per
corporation, soared during the 2000s. The graph
shows "C" corporations (in which income does not
flow through directly to the owners) and "S"
corporations (where income flows directly to the
owners) separately. "S" corporations
overwhelmingly reflect small business.
Now
the baby boomers are entering their 60s after
losing nearly half their wealth, in the least
business-friendly environment the country has had
since the 1970s. Rising taxes at the state and
local level, and unprecedented deficits at the
federal level, worry the middle class, with good
reason.
Americans are concerned about the
lack of opportunity, but they are even more
concerned about the risk that they may lose what
little they have left. It's not enough to promote
entrepreneurship, as Romney does so
enthusiastically. It's also important to talk
about deficits. That is the thrust of the Tea
Party, a classic middle-class creditors' party
responding to the well-justified fear of higher
taxes and inflation.
The punditeska claims
that Ryan's presence on the Republican ticket
opens Romney to the charge that his prospective
vice president wants to cut Medicare (Ryan had
suggested a private option as an alternative to
Medicare for Americans reaching the age of 65 a
decade from now, which is quite different).
But Romney is betting that Americans are
smart enough to understand that the federal
government can't keep borrowing one out of every
three dollars it spends. The Ryan choice
highlights the divide between the Democratic
Party's core base among government employees, and
the Republicans' appeal to middle-class taxpayers.
If that's what the election is about,
arithmetic tells us that Romney should win.
Spengler is channeled by David P
Goldman, president of Macrostrategy LLC. His
book How Civilizations Die (and why Islam is
Dying, Too) was published by Regnery Press in
September 2011. A volume of his essays on culture,
religion and economics, It's Not the End of
the World - It's Just the End of You, also
appeared last autumn, from Van Praag Press.
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