Nevada Economic Sands in the Hour-Glass Economy

Nevada Income When the chatter begins about income inequality after the State of the Union address, remember Nevada is one of the states with the widening gap:

“In four states — Alaska, Michigan, Nevada and Wyoming — average income increased exclusively for the top 1% and declined for the bottom 99%. In another six states, the top 1% accounted for more than two-thirds of all income growth between 1979 and 2007, while the income of the bottom 99% grew at a much slower pace.” [Time]

So what does this mean?  Let’s start with the usual premise, “Capitalism works.”  Or, it should function better than any other economic system devised by man if the transactions for goods and services are accomplished in traditional ways.  If the “rising tide” isn’t lifting all boats, then something is plugging up the works, and plugging up the pipes has some serious consequences.

Shorter Booms.  There is empirical data from the International Monetary Fund showing that periods of economic growth and prosperity are shorter the larger the income inequality gap. [IMF pdf 2014]

Less interest from retail investors.  If people get the notion into their heads that the investment game is rigged in favor of the institutional or professional investors, there is less retail investment.  It took from 1929 to 1954 for the Dow Jones Industrial Average to climb back to September ‘29 levels.  For all intents and purposes that’s a generation of lost investors. [Time]

Greater Personal Indebtedness.  As the top 1% maintain their quality of life using their increase in average annual income, the remaining 99% use credit to make up the gaps to maintain their quality of life. This is great news for those whose job it is to package, securitize, and trade debt (mortgage, auto, credit cards, student loans…), but it is not good news for families who increasingly rely on credit to make it from one year (or one month) to the next.   The New York Federal Reserve report for 2014 tells us:

“Aggregate household debt balances increased slightly in the third quarter of 2014. As of September 30, 2014, total household indebtedness was $11.71 trillion, up by 0.7 percent from its level in the second quarter of 2014, an increase of $78 billion. Overall household debt still remains 7.6 percent below its 2008 Q3 peak of $12.68 trillion.”

We slightly better off than in Q3 2008 – when everything was falling apart, but the debt level still indicates people using credit to maintain the family lifestyle.  Non-housing debt now stands at $3.07 Trillion.

Questionable economic growth.  There is research positing that higher levels of income inequality lead to restrained economic growth, and studies indicating income inequality (depending on whose income is measured and how) may not be the crucial determining factor in economic growth.  What IS reasonably clear is that no sentient person should ignore this phenomena, and caution should be applied to any suggestions that don’t mitigate the issue. [NYT]  Perhaps some of this caution comes from the points made by the San Francisco Federal Reserve’s research which reveals that (1) the American consumer market is polarizing at both ends with erosion in the middle, (2) widening income inequality is most obvious at the local and community level, (3) analysis of the U.S. job market over the past three decades shows a labor market also polarizing into low and high paying employment with fewer opportunities for middle range income employment.

If we drill down to Nevada numbers the picture of widening income inequality shows we’re certainly not immune to the general factors listed above.  Median wages and salaries have declined over the past twenty years, median earnings for the bottom 2/3rds of the work force fell, while median earnings for the top 1/3rd increased.  The median wage for a CEO increased 63% in the decade from 1989 to 1999, up to 107% times the median wages of the average worker.  In 1970 the GINI ratio was .394, as of 2010 it was .469. In the instance of the GINI ratio, the lower the number the better. [CDCLV unlv]  When the number moves up that’s not a good sign.

It looks as though Nevada is securely fixed in what’s being called the “hour-glass economy.”  Or, as the situation was once described nationally:

“It’s not hard to understand what is happening here. The middle class, squeezed by globalization and advances in technology, is sinking backward, while the rich benefit disproportionately from gains in trade and excessively accommodative tax policy. Politically speaking, the obvious prescription would be to raise taxes on the rich and create jobs for the middle class.” [Salon]

There’s more to the squeeze that simply globalization and technology.  The loss of manufacturing jobs, the decline in union membership, and the increasing costs of education and training, should be added to the mixture.  Nor is the polarization going away of its own accord, as INC.com explains:

“Whatever you do, keep in mind that the hourglass economy isn’t going anywhere. “It’s a continuing and growing phenomenon,” McGrath says. “We’re seeing a shift in power toward owners of capital and away from owners of labor. And so many institutions would all have to change at once to reverse this trend.”

We probably don’t need to be quite this pessimistic.  Modifying the “excessively  accommodating tax policy” might be a good place to start.  This isn’t an impossible task if we focus on reality and avoid imprudent and extravagant ideological rhetoric.

Tax policy should be pinned to the Golden Mean, or Aristotle’s old maxim of doing the greatest good for the greatest number.  This requires a realistic definition of a Small Business.  The Small Business Administration has a set of size standards by industry sector; in this set of standards the number 500 stands out as qualifying in many sectors as a “small business,” and a fund, trust and financial vehicle with an average of $32.5 million in average annual receipts qualifies as a “small business.” 

And in the real world, there are approximately 28 million small businesses, and over 22 million are self employed with no additional payroll or employees. 52% of all small businesses are home-based, and there are 22.5 million “nonemployer” firms in 2011 – a figure which increased by 2% from 2010.  19.4 million nonemployer firms are sole proprietorships, 1.6 million are partnerships, and 1.4 million are corporations. The fastest growing sector in 2011 included auto repair shops, beauty salons, and dry cleaners. Nonemployer firms had average revenues of $44,000.  [Forbes]

The new Senate Finance Committee Chairman Orrin Hatch (R-UT) presents a tidy illustration of what’s been problematic about tax reform (“he’s all for it”) and the definition of a small business.

“This plan that we’ll hear about tonight appears to be more about redistribution, with added complexity, and class warfare, directed at job-creating small businesses, than about tax reform, which is unfortunate, because we’re going to need real leadership from the White House —not just liberal talking points — if tax reform is going to be successful,” Hatch said.” [TheHill]

Lets assume that Nevada, like its 49 other cohorts, is in the hour-glass economic phase, and like in all the other states those repair shops, dry cleaners, salons, etc. do create more jobs than the Big Boys.  So, in this context here are problems with the analysis from the Senate Finance Committee Chair.

1. In this context, “redistribution” is not a dirty word.  Given the polarization of the labor market, any effort which yields more income for the middle income earners will help smooth out the Low/High graph, and put more disposable income into the hands of those more likely to spend it.  Likewise, any effort which places more income into the middle income earner’s pocket will increase the possibility that the person will be less inclined to resort to personal debt to finance his or her quality of life – like going to the auto repair shop or the dry-cleaners.

2. “Added complexity” isn’t something most small business owners in Nevada have ever advocated, nor have their cohorts in other states. Those tax breaks, tax loopholes, tax havens, and tax avoidance schemes are the province of those who can afford to hire a battery of high priced accountants and tax attorneys whose task it is to find ways to alleviate, mitigate, or otherwise avoid paying corporate taxes. Advocating tax breaks for those earning less than, say, $250,000 or less isn’t adding all that much complexity to the system – it’s merely adding a break which may come at the expense of the corporations who are truly gaming the system.

3. “Class warfare,” is a term hauled out when a person carrying water for the top 1% thinks the other 99% might get something – for example that truly small business owner taking in the national average of  $44,000 per year in receipts, or the median household in Nevada in which the income is $52,800. [Census]

4.Directed at the job-creating small businesses,” is aimed in the wrong direction.  The job-creating small businesses are the ones taking in that average $44,000 – they are not the hedge funds and private equity firms, which at tops may employ 200 people after they are well established, nor are they those same private equity managers who excel  in carving up firms and outsourcing the jobs.  It’s true, those very real small businesses described above are the source of job creation.  It’s not true that private equity firms, hedge funds, and lobby shops play a huge role in that employment.

Before Nevada gets squeezed much further into the hour-glass shaped economy, it would be well if we acknowledged the position we are in, dropped the ideological and vague rhetoric protecting the interests of the top 0.1%, and advocated for the REAL small business owners in the state.

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