Falling Income and the Two Economies

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Today, corporate health is no longer synonymous with the health of the national economy…

There used to be a much closer relationship between the two…

Although necessary differences have always existed between management and labor…

There is a distinct separation between the two that has never been more obvious…

There is a very big reason for this…

Which we will explore in a moment…

But first, let’s look at what is happening with the economy on the ground.

In the news, a lot is being made of falling income levels in America…

And for very good reasons…

Perception and reality

According to a Thomson Reuters/University of Michigan sentiment survey…

91% of American consumers think that their incomes will fall short of or at best, only match price gains for the coming year…

Unfortunately, this is a new record for this negative consumer perception since the survey began, in 1978...

That’s going all the way back to the Carter years, folks…

What does this survey tell us?

It tells us that people adjust their behavior based upon how they think things are…

Or will be.

That is, not only as the old saying goes, is “perception reality”…

But more importantly, that perception actually becomes reality.

Perception affects reality and defines it…

Negative attitudes and consumer sentiment become self-fulfilling…

There are two parts to this phenomenon

The first part is simple…it’s a fact; income levels are dropping.

This is a function of the economic conditions on the ground today.

It is the reality.

Negative sentiment is self-fulfilling

The second part is a little more complicated…

It involves the perception among consumers that not only are conditions bad…

But that they will continue to be bad or get worse in the foreseeable future.

So, what do falling incomes levels and the expectation of low income levels in the future mean for the economy?

Falling income levels cause major problems in the economy that historically takes years, even decades to recover…

One of the most powerful impacts is on the housing market…

Negative consumer sentiment puts downward pressure on the price of houses…

This is huge because, as we know, almost every American recession recovery is driven by a recovering in the housing market…

Without a recovery in the housing market, there is no recovery…

And people don’t buy houses when their income is falling…

Or, when they are paying more taxes on what they earn…

Which, ultimately, brings them to the same result.

Not rocket science here…

Or at least, it shouldn’t be.

But it doesn’t stop there…

Negative consumer sentiment also means lower consumer spending…

People spend less, and less often…

And mainly spend money on their needs, not their wants…

Which means less demand in the economy…

Which means more layoffs…

Which means even less spending and less demand.

It’s a dangerous, downward wage-spending cycle that can lead us from recession…

Into the abyss of…depression.

But, on the other hand…

The chasm between high and low economies

Corporate profits are healthy…

Record earnings reports now seem to be the norm…

Not the exception.

How is this possible?

It is possible because there now exists a deep and widening chasm…

Between the “low economy” that is on the ground…

This is the consumer economy that actually creates and produces goods and services…

And the “high economy” that works above the low economy in every sense of the word.

The high economy does not necessarily have to produce tangible goods…

Although it can be the financial arm of those corporations that do mass produce on a global scale.

The high economy can manipulate symbols representing wealth electronically in markets throughout the world…

The high economy leverages those symbols, and reaps great financial gains through computerized trading models…

This high economy is set up for global capital movements…

Is coordinated with government financial laws…

And government taxation policies…

Because remember, individuals pay taxes…

And most of the taxes are paid by the middle class and middle class businesses.

But wait—don’t large corporations pay taxes, too?

Yes they do…

But remember, those corporations can always pass taxes through to consumers…

In the form of higher prices, firing employees, moving production overseas, and lower service levels…

As well as gaining tax offsets from government grants, loopholes, etc.

This has always been the case…

But like many things in life…

The difference lies in the level of degree.

The high economy detached from the low

Today, it is becoming more obvious that the degree to which the high economy is detached from the low economy…

And the gap between middle class economic stability and large corporate class…

Is growing bigger and more rapidly than ever before.

The result is that the high economy is globally focused…

And is in no real, meaningful way related to the low economy in any particular country…

Except in maintaining the perception that it is an “American” company or a “Japanese” or “German” company…

The low economy is a source of production units for the high economy…

Which, via stock devaluations and huge government bailouts…

Lifts much of the wealth from the low economy to the high economy…

This tells us that a qualitative change has occurred in the relationship between government and finance.

Corporations are not only financially healthier than the government…

They in effect become policy authors for the government…

Such as Apple and Cisco and others lobbying for a “tax holiday” to repatriate capital at a lower tax rate…

This wealth differentiation and transfer, as well as “corporate governance” are very unhealthy for social stability in America...

Because it is becoming more evident that…

With falling incomes and the negative sentiment we talked about earlier…

The end result is that…

The middle class in America is rapidly diminishing, leading to the impoverishment of millions of Americans.

This is not a necessary, unchangeable outcome of our current economic crisis…

But it is a very possible outcome…

Unless conditions change…

The middle class must recover.

Conditions on the ground in America therefore must change…

The high economy must be not allowed to hollow out the middle class…

And those government entitlement policies that only create dependence, not independence…

And that punish those in the middle class…

Those who take the risk of starting a business, hiring an extra worker, or even spending their spending…

All must change.

Because all of those activities will only occur when the middle class has the perception that that the economy is or will be improving…

Raising tax rates and regulation levels on economic activity shrinks productivity…

And on the corporate level…

Because although the idea of pure free trade is obsolete…

Real incentives–and penalties--need to be put in place to keep jobs in country…

Because whenever a corporation outsources jobs…

It is also outsources consumers and economic demand…

This not only hurts the employee who has lost a job…

But the surrounding economy as a whole…

And the whole middle class.

This is what’s happening in America today.

Have there always been two economies?

Of course.

Is the loss of America’s middle class a good or necessary result this fact?

Or course not.

And those are…The Gorrie Details.

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