Wes Moss: Washington’s affect on economy is limited

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB.

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB.

Is your wallet ready for Nov. 6? The presidential race has dominated conversations in our media, kitchens and workplaces. It’s practically the only thing clients and callers to my radio show want to talk about: What’s going to happen to my money, post-election? (Among my recent posts: How a “fiscal cliff” would affect you and Can the economy predict the election?)

This obsession with the election is understandable. We’re angry that Washington — paralyzed by unparalleled partisan gridlock –- seems unable to make  headway on our economic problems. It’s no surprise public approval of Congress has fallen to just 10 percent — the lowest level since Gallup started keeping track in 1974.

But here’s the thing: The economy and the stock market seem oblivious to the wrangling and bungling in Washington. The economy is still in fragile “comeback mode” while the stock market continues to post gains — up a robust 15-plus percent so far in 2012.

How can that be? Isn’t the federal government central to our economic life? Not really. Think of our economy as an ocean. There are 300 million people out there buying things, selling things, saving money, investing in stocks, hiring people, starting businesses, developing new products. That’s a deep, wide, powerful, swirling sea of activity that’s nearly impossible to control.

The economy has its own rules and whims

Washington, on the other hand, is like a circus on a pier that juts into the sea. The circus and the pier may have a minor impact on the nearby waters — mostly by marring their natural beauty and flow — but it has little to no influence on the ocean as a whole.

So why do we pay so much attention to the federal government’s role in money matters? Because it does, of course, have some impact, most notably via its tax policies. But Washington also has a circus-like ability to dazzle and distract us with lights, music and illusions that scream, “Look at me!”

Regardless of what happens Nov. 6, the economy will continue to ebb and flow according to its own rules and whims. A new administration and Congress will make their presence felt. But those 300 million people will still produce and innovate, all of them striving for a better life for themselves, their families and their country.

Let’s imagine Washington somehow could end the gridlock. What would you want Congress and the president do to help the economy — both in the short term and for the long run?

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– Wes Moss, for AJC Atlanta Bargain Hunter blog

7 comments Add your comment

Progress

October 29th, 2012
8:06 am

Wes makes the point that tax policy is one way for government to affect the economy. Since 1948 until today, there has been an inverse relationship (statistically significant negative correlation) between the top marginal tax rates and the national unemployment rate. When tax rates have been higher, unemployment rates have tended to be lower, and when tax rates have been lower (like now) unemployment rates have tended to be higher. That’s a mathematic fact.

The most likely explanation for that relationship is that when tax rates are higher, revenues are higher, which helps those millions of people with public sector jobs. There is money to pay teachers, police officers, fire fighters, sanitation workers, transportation workers, etc. There are fewer layoffs in those areas and raises may be available. Since those types of workers normally don’t make that much money and tend to have limited savings, they immediately spend that extra money they have available. This, of course, in turn benefits private businesses that compete for their services. More products get sold. All this is good for the economy.

Contrast this to when top marginal tax rates are lower, which means wealthy individuals pay less in taxes and overall revenues are lower. There are fewer jobs and fewer raises in the public sector so that money doesn’t get spent in private industry. Instead, the wealthy have more in their bank accounts because they’re paying less in taxes. But their spending habits don’t change because of that. They don’t spend any extra money than they would have otherwise because they don’t need to. They put the extra money in savings or invest it where it has little to no benefit to private business.

This inverse relationship between top marginal tax rates and unemployment exists not only in a year-to-year comparison for the last 64 years, but it also exists when tax rates for a given year are compared to unemployment rates for one, two, three, and four years later, suggesting that the negative influence of low top marginal tax rates has an extended effect.

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Ronin

October 29th, 2012
9:13 am

The comment made by Progress maintains that taxing the wealthy at a higher rate will eliminate our debt issue.
I’d have to disagree with that comment. If you taxed the top wage earners 75% of the income, it would only cover a small percentage on of the federal deficit.

What we have is a spending crisis, not a lack on tax revenue.

The current tax policy wages class warfare. Who pays enough, pays to little or too much. It allows Washington to manipulate policy trends and reward what is viewed as favorable behavior.

The best way to solve the political manipulation is to institute a flat tax 10% on lower incomes and 20% on those who make over X number of dollars. No deductions, just a flat tax on income and dividends. The other alternative would be a consumption tax, or fair tax, as some have labeled it. Under this proposal, even illegal aliens, foreign travelers would contribute to our tax base.

Progress

October 29th, 2012
9:38 am

Ronin appears to be having reading difficulties. Nowhere in my post did I mention the debt or the deficit, let alone suggest anything about either one. I discussed a statistical analysis that compared two variables- top marginal tax rates and unemployment. The debt/deficit is a completely separate issue from unemployment, although some conservatives can’t seem to differentiate between them. I don’t think Ronin has the background to understand the statistics I cited.

In my post above I highlighted a statistical relationship, a mathematical argument based on numerical facts, not a political argument. Ronin instead submits speculation and unsupported hypothesis. We should base decisions, particularly important policy decisions, on facts rather than unsubstantiated opinions.

Ronin

October 29th, 2012
10:28 am

Progressive, what I’m saying is that what you are writing in your first entry is UTTER NONSENSE.
I hope you have to mental capacity to understand that.
If not, I’ll spell it out for you: “words or language having little or no sense or meaning.”

Your comment: “The most likely explanation for that relationship is that when tax rates are higher, revenues are higher, which helps those millions of people with public sector jobs. There is money to pay teachers, police officers, fire fighters, sanitation workers, transportation workers, etc. There are fewer layoffs in those areas and raises may be available. Since those types of workers normally don’t make that much money and tend to have limited savings, they immediately spend that extra money they have available. This, of course, in turn benefits private businesses that compete for their services. More products get sold. All this is good for the economy.”

*****************************That’s the dumbest comment I’ve read in at least a week. “The most likely explanation?” Gads man and you were lecturing to me on reading skills? and mathematics? Teachers not having any money saved so they spend it? to stimulate the economy? You just stated, they have little money to spend, how can that stimulate the economy, Simply put, it can’t.
A better question might be, why they haven’t saved six months of earnings as a emergency fund?

Your second comment” Instead, the wealthy have more in their bank accounts because they’re paying less in taxes. But their spending habits don’t change because of that. They don’t spend any extra money than they would have otherwise because they don’t need to. ***********************
That’s pure RUBBISH. Banks pay about .05%,( that’s one half of one percent). You’ll NEVER make any money going that route. In fact, you’ll lose value to inflation. The only way that wealthy people can beat the rate of inflation is capital investment in stocks (which need workers to build products) or start their own business to provide a product or service. Both of those actions create private and public sector jobs. If you want long term capital growth, you’d have to be obtuse to put $20,000,000.00 in bank C.D.’s.

Increasing tax rates is the death nail to the economy.
Liberals love to raise taxes to buy votes.

Basic analysis of your comments indicate that you simply don’t know finance or economics, at all.
I manage funds for high net worth individuals and none of them made the money they have hiding their money in a bank CD.

Maybe you can find a blog that needs an expert as a “progressive community organizer”.

Progress

October 29th, 2012
12:02 pm

More unsubstantiated opinion from Ronin, except now she’s angry and defensive.

Let’s look at some of those reading difficulties. I didn’t say that those public sector employees don’t have much money to spend (just as I never said anything about the debt or the deficit). I said they don’t earn much, so whatever money they have coming in gets spent immediately. And yes, that’s good for private industry. Spending habits of the wealthy don’t change when they pay less in taxes. They spend the same amount either way, so tax decreases for the wealthy do nothing for the economy.

Ronin claims that higher taxes are bad for the economy. But the historical data going back to the end of WW II refute that claim. If she was worth her salt as a “financial analyst”, “economist”, or “money manager” (read: ponzi scheme runner), she would be able to address the basic facts I laid out- there is a statistically significant negative correlation between the unemployment rate and top marginal tax rates since 1948. When tax rates have been high, unemployment has been low. And when tax rates have been low (like now) unemployment has been high (like now). Anyone who can’t understand a Pearson product-moment correlation and historical data has no business around people’s money.

But let’s see some more of her irrational rants. Pretty soon she’ll be spewing terms like “socialism”, “nazi”, “pinko”, “communist” et al.

Philip

October 29th, 2012
8:06 pm

Government is more like the a circus pier that now impedes 25% of the US economy…. on track to block another 16% of this sea you speak of.

If water metaphors are to be used….I would say it’s more like the Hoover Dam halfway built blocking the Colorado River…..