Friday, March 11, 2011

Comparing real economic values of people by their income

In my previous article in this series, I introduced the fact that varying income levels of people has a lot to do with their impact on the economy. Understanding these differences can help people decide whether the current political policy of favoring the rich at the expense of the poor is a valid economic model.

Recent history provides an unmistakable clue to the facts: Policies of the past decade almost totally devastated our economy. We need to understand the financial realities if we’re ever going to turn things around and climb out of the recessionary hole we’ve been trapped in for the last few years.

Worth Millions, Maybe

First, consider arguments for continuing to let the rich wallow in piles of man--uh--money: When they get their fat paychecks, they dine at the finest restaurants, stay in five-star hotels, frequent luxury-car showrooms, and buy lots of real estate, from mansions to vacation homes to investment property. The economic advantage here is that lots of “little people” work at all these places, catering to the demands of wealthy patrons. That arrangement boosts employment numbers and allows some money to trickle down from the wealthy to the masses.

The rich also invest lots of money in stocks, bonds, and other financial instruments. But many of them also tend to move a significant chunk of their wealth to banks in other countries, especially places where they’re less likely to pay taxes. The combination of tax deductions, loopholes, and offshore banking means the best return, in spending, investment, and taxes, that the U.S. economy can expect from people who are worth more than a million dollars is about two-thirds of their income.

Middle Class, Middle of the Road

Next, consider the schlub who schleps to work every day so he can bring home around fifty thousand dollars a year. He can’t treat his loved ones to a meal at the Four Seasons, at least not often. McDonald’s is more his style--or Subway, if he’s watching his calories and carbs. He has one house, and these days he’s more apt to take a “staycation” than be seen sunning on a beach in Acapulco. That’s good news for The Home Depot, bad news for Hilton Hotels. And he will spend a higher percentage of his money, in taxes, groceries, rent or mortgage, insurance, and so on, than the aforementioned rich guy. In the end, this middle-class earner will return close to 90% of his paycheck directly back to the economy.

Since these middle-income earners greatly outnumber the wealthy, the value they return to the economy creates significant working capital for both the government and businesses to keep on providing goods and services for other customers. By earning money and spending a big chunk of it, this middle-income guy is a basic, average member of both the “public,” as far as the government is concerned, and the “market,” according to Wall Street’s point of view.

Poor but Valuable

Now, let’s look at the poor--and I do mean poor--fellow who barely earns fifteen thousand dollars a year. If this person has any family at all, he--or she, because many such families are headed by single women--can barely make ends meet on that amount of money. The family will usually require extra help from the government and/or private charities, such as food stamps and food banks, to make it through each month.

Then there’s the medical help. A shocking percentage of people in this range have no medical insurance. They’re more apt than the average middle-class person to have chronic health problems, especially because what care they do get isn’t the kind of comprehensive support that helps them improve and live as well as they could. Any care they do get is most likely delivered through some sort of public assistance program.

Another area where services are hit and miss is education. Schools in such low-income areas as inner cities and rural communities rarely have enough resources to serve their students as well as they should. Add the fact that a high percentage of low-income parents are likely to work long hours, if they’re around at all, and too many lack the education to provide the kind of help and guidance their children need to succeed. There are exceptions, in students, family members, and schools, but those are notable because of their rarity. That’s the biggest reason economic problems tend to continue from one generation to the next, ad nauseam.

When you consider how much of his or her income this person will spend, that is, return directly to the economy, it comes as close to 100% as anyone can possibly get. Trouble is, that contribution is usually offset by the value of the help, in cash, goods, and services, that the family requires just to survive. So, they’re more of a drain on the economy, right? Actually, not when you consider that just about every cent of the value of those payments to the poor goes directly back into the economy.

So, who’s more valuable to the economy? We’ll look at the meaning of these percentages later in this series. Before that, I’ll discuss the actual economic value of the labor of one person who doesn’t have to labor as hard as the rest of us. Watch for it!

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