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David Kruse

The CommStock Report

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an agriculture commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the internet. CommStock Investments is a registered CTA, as well as an introducing brokerage.

Who benefits from GDP growth?

Thursday, March 14, 2019

The U.S. Commerce Department says that the economy grew by 2.9 percent last quarter and 2.6 percent for last year. President Donald Trump was disappointed. Anything less than 3 percent "was not his fault." He set the economy up for faster growth with a tax cut as fiscal stimulus and then the Fed pushed on the brakes with higher interest rates countering the fiscal stimulus with monetary policy. This caused the president to threaten the tenure of Fed Chairman Jerome Powell. First quarter 2019 is unlikely to show strong growth given the season and government slowdown. So, Trump stepped on 2019 GDP growth himself with the government shutdown and of course with his trade wars.

His tariffs have cost the economy over $4 billion per month. The tariffs function as tax increases, offsetting a portion of the benefit of his tax cuts. There is no growth in the agriculture sector according to the Creighton University Main Street Rural Index. When the economy grows, do all Americans benefit? Yes, I suppose that they do ... just not to the same degree. Wage earning Americans get a job, but in terms of real wages (wage growth minus inflation) they have not grown significantly for decades. According to the PEW Research Center, their purchasing power today is nearly the same as in 1973.

Unemployment levels have improved markedly since the Great Recession but wage improvement is only starting to tick up after recording record corporate profits, rising stock markets, and tax cuts primarily benefiting the wealthy. Wage growth has been the last thing to improve in this recovery and expansion cycle. The irony is that the U.S. economic cycle is closer now to a recession with a majority of economists predicting one by 2020. That means that by the time that real wages start to improve to the degree that workers can participate in the benefit of economic growth, the party will be over.

The vast numerical majority of Americans do not own appreciable commercial assets, they do not own stocks or bonds or even have $400 in savings. They live paycheck to paycheck so the only way they benefit is when real wage incomes improve. This stagnation of income growth appears to be expanding up the economic strata of Americans so that even the level of education no longer separates the haves from the have nots. The cost of that education leaves students over a trillion dollars in debt that is hampering their family development and is not being fully offset by higher salary compensation. For students, 20-30 years after graduation they are still making payments on their student loans. Car dealers report it becoming more common that those needing a vehicle for a job are unable to qualify for a car loan because of delinquent student loans. This shrinks the demand pool for new homes and ensures that families need two incomes. They are not paying enough taxes to the degree that a tax cut will benefit them to the point of being celebratory, with benefits from tax cuts primarily going to the top 10 percent in income in this country.

A wealthy stock market financier once lamented after a huge surge in the DOW that "the pitch forks are getting closer," referring to the disparity of wealth in this country. A majority of Americans are not participating in the "greatest economy ever in the history of the world" as described by DJT. Ironically, many in this class are Trump voters believing that getting a ride across the river on the fox's nose will improve their lot in life. It is hard to see them not being eaten by the Carl Icahn's in Trump's camp who profit $189 million from things called RIN Waivers that the general public cannot begin to understand.

The bottom line here is that the rising tide of this economic recovery has failed to lift the boats of the average American up off the mudflats enough to notice that they are floating. Ironically, Trump understood and used that knowledge to appeal to that electorate portraying himself as a common guy ... a populist ... someone they would like to have a beer with. They bought it. There is a populist progressive element gaining traction in our politics that is pointing out that wealth disparity is increasing at a faster rate. Whatever little bit of improvement registered for wage earners, there has been many multiples of that wealth accumulation enjoyed by the 1 percent. Wealth is power and the minority of wealthy has it.

I am not a socialist but I am not blind either. The idea that the wealth can continue to concentrate into the hands of a few so that the top 400 wealthiest families in the U.S. control 62 percent of the nation's wealth ... as much wealth as 80 million families, sets up conditions for a populist revolt. The richest families own 93 percent of the stocks. The poorest 47 percent of Americans essentially have no wealth. All of the advertising on TV showing vacations at Sandals Resorts, new Audis, overseas airline travel and such are irrelevant to a simple majority of Americans.

Millionaires tend to think of themselves as rich but being rich has been refined as it required wealth of over $10 million to reach the 1 percent bracket in 2017. The median family net worth was $97,300 in 2017. The 1 percent own 40 percent of the nation's wealth. The top 20 percent own 90 percent of the wealth. The bottom 80 percent own the remaining 10 percent. Of additional note is the upward trajectory of wealth in the U.S. The concentration of wealth is accelerating. The richest 1 percent now own more of the nation's wealth than any time in the past 50 years.

The new tax law gave estates of the lowest qualifying 1 percent family the ability to transfer their wealth ($11,400,000 in 2019) until it sunsets in 2025. If this is a democratic populist country, then the disparity of wealth will eventually bring on socialism and the pitchforks.