With each day we get closer to the end of the year, and to the proverbial fiscal cliff, Washington seems to be inching closer to an agreement that will avoid what many analysts say will spell economic disaster for the United States. Democrats have expressed a willingness to cut back on some entitlement programs, while Republicans for the first time are giving ground on the issue of raising taxes.
However, the devil, as they say, is in the details. Political ideologies still remain deeply entrenched as both sides refuse to give up too much ground while demanding that the other side give more.
The latest sticking point is the Plan B proposal put forth by Republicans, which calls for increasing taxes on those making over $1 million but renewing tax cuts for the rest of us. That’s in stark contrast to previous refusals by the GOP to agree to any tax increase whatsoever, but still far above President Obama’s campaign pledge to raise taxes on families making over $250,000.
While both sides continue to dig in their heels over this numbers game they may want to consider a recent report from Bloomberg, which outlines how the wealthiest Americans have continued to thrive through the recession and sluggish recovery while the rest of us have borne the brunt of the cost to fix the financial mess created by Wall Street machinations.
"Monetary policy has been indirectly, surreptitiously helping the top and hurting the bottom," Joseph Stiglitz, the Nobel Prize-winning Columbia University economist, told Bloomberg.
The Federal Reserve’s efforts to energize the economy since 2008 -- including securities purchases and the near-zero interest rate it charges financial firms -- have been credited with rousing the housing market from a six-year funk, lowering the jobless rate and putting more money in the pocket of both mortgage lenders and borrowers. At the same time, however, Bloomberg reports that Fed policy has been blamed for starving money-savers of income and boosting certain asset prices, widening the gap between the rich and the rest of the country.
Earnings rose 5.5 percent last year for the 1.2 million households whose incomes put them in the top 1 percent of the U.S., according to estimates from the U.S. Census Bureau. At the same time, income fell 1.7 percent for the 97 million households in the bottom 80 percent
-- those making less than $101,583.
The Fed’s mortgage-securities purchases have bolstered demand, and the possibility of profit, for fund managers. Hedge funds that handle mortgage securities have a 20 percent gain on average this year, according to data compiled by Bloomberg.
With money gained from Fed securities purchases, investors speculated on the future prices of commodities, helping to drive up food and energy prices for consumers. Twenty-two of the 24 commodities in the S&P GSCI Commodity Spot Index have gained since the recession ended in June 2009, with only natural gas and cocoa lagging. Corn more than doubled in price even before this year’s drought sent values soaring. Heating oil is up 77 percent and wheat 58 percent. That means higher energy and food prices for consumers.
While higher commodities prices can also fuel economic growth, that effect is undercut by the fact that the U.S. is a net importer of commodities, Stiglitz said.
"It’s redistribution from consumers to owners of these resources, from a car owner to a sheik," he said. The negative consequences fall hardest on low-income people, who spend a higher percentage of their income on food and fuel than those better-off.
The boon for the banks rankles David A. Stockman, a former Michigan congressman and director of the U.S. Office of Management and Budget under President Ronald Reagan.
"The Federal Reserve is in the tank for Wall Street," Stockman, who headed auto-parts maker Collins & Aikman Corp., told Bloomberg. "That’s why the 1 percent are thriving on financial speculation while savers, workers and retirees are getting crushed by zero interest rates and inflationary food and energy costs. It’s damn unfair, and it doesn’t work either."
The only way to make this fair is to maintain the tax breaks aimed at the majority of Americans whose incomes have fallen and who continue to struggle to make ends meet. And yet, we still have the issue of the fiscal cliff and a clock that keep ticking closer to the deadline for action. If no agreement is reached before that deadline then taxes go up for everyone and we risk sending the economy into a tailspin.
The time for political posturing is over. At this point it seems rather petty to argue over whether taxes should go up for the top 1 percent or the top 20 percent. Let’s start with the top 1 percent so we can end the uncertainty and the anxiety that is rattling markets all over the globe.