Lead Story…. This is Part I of a three part series that I’m writing about tax reform and why it is so difficult to achieve in today’s environment.
There is a new tax reform proposal making it’s way around Washington which means that the silly season for misinformed statements about what constitutes “the middle class” is upon us. This debate has been going on for years and, over the next few weeks you are about to hear how every aspect of the tax reform proposal or today’s current tax structure either helps or screws the middle class. An unsolicited word of advice for all of you: ignore the rhetoric that is being spewed on this issue. Why? First off, it’s almost all politically charged nonsense primarily because there really is no middle class – at least not in the sense that the politicians would have you believe.
What makes me say that? Primarily about regional inequality. There was once a national middle class but, in today’s world, the concept doesn’t work very well on a national level. Let’s look at things on a historical basis first. I’ll use California and Ohio as examples. I’m also going to use housing as the first example. As early as the 1950s median home prices in California were only 15% greater than those in Ohio. Even as late as the 1970s the median California home was only 31% more expensive than the median Ohio home. However, today, those numbers are far different. Per Zillow, current median home value in Ohio is $128,700 and current median home value in California is $509,600, a whopping 296% premium. Keep in mind that these numbers are state averages and become much more dramatic if you were to look at a region like San Francisco or LA where median prices are nearly double the statewide average versus, say Cleveland.
What about median household income? I was only able to get data that went back to 1989 but in this case I was able to get a bit more state specific by comparing San Francisco County, CA to Cuyahoga County (Cleveland), Ohio thanks to The St. Louis Fed’s excellent FRED economic research tool. In 1989 median household income was around $28,262 in Cuyahoga County and $30,166 in San Francisco County, a difference of around 7%. By 2015 households in San Francisco were making a median $90,527 while Cuyahoga residents were making only $45,506 or a difference of 99%. My broader point here is that it was far easier to craft tax policy that centered around helping the middle class in the 1950s through the early 1990s because regional differences were relatively minor. Any Federal tax reform impacted your average San Franciscan and average Clevelander roughly the same. That isn’t close to the case today.
Heather Long of the Washington Post took one of the more honest and straight forward looks at the middle class question in an article entitled Is $100,000 middle class in America? (emphasis mine):
The majority of Americans — 62 percent — identify as “middle class,” according to a Gallup poll conducted in June. It’s the highest percentage of people feeling that way since 2003. But a lot of Americans are like Osegueda: They feel middle class, but they aren’t sure what it means.
Just who exactly is middle class is in the national spotlight again as President Trump and Republicans in Congress craft tax cuts for individuals and corporations that they say will primarily benefit the middle. Vice President Pence called the plan, which is still being fleshed out, a “middle class miracle” this week. But amid this discussion, the middle class has been defined in different ways. Gary Cohn, Trump’s top economic adviser, recently discussed how a “typical family” making $100,000 a year would benefit. Trump has espoused the value of the plan to truckers, who make around $41,000 a year.
So what is the middle class? In America, an income of $59,000 a year (before tax) is smack dab in the middle, according to the U.S. Census. But it’s not that simple.
There is no exact definition of middle class, and a deep look at the data shows a wide variety of individuals could be part of it, depending on where they live and how big their family is. The middle class in San Francisco, where Osegueda lives, is not the same as it is in Peoria, Ill.
The WAPO article contains a tool where you can put in your annual household income and county of residence and it will spit out the range of what could be considered middle class for that region. The results are quite striking: middle class in the lowest income counties ranges from $18,138 – $66,250 in household income. However, in the highest income counties it ranges from $43,402 – $127,633 and goes up substantially more than that in regions like San Francisco and New York. With spreads that large, it’s no wonder that politicians are so comfortable making claims about what helps or hurts the middle class – pretty much every argument is technically correct depending on what regional demographic they are referring to. In other words, it’s a magnet for bullshit.
The United States has always has some degree of regional inequality but it has reached extreme levels in recent years. It’s nearly impossible to craft effective Federal tax policy that doesn’t advantage someone in Cleveland over someone in San Francisco or vice versa. What’s worse is that a lot of this was avoidable. Sure, dynamic economic engines like San Francisco, NY and LA were always going to draw more people in today’s dynamic global economy at the expense of old rust belt cities like Cleveland but there are certain aspects that could be handled much better to avoid the point that we have arrived at today. That will be the topic of part II of this series.
Beyond Repair? The historical relationship between unemployment and inflation, known as the Phillips Curve, has broken down in recent years.
Timely Reminder: “When volatility is low, risk is actually rising because people are more emboldened to take on higher leverage and to move to riskier assets.” – Richard Bookstaber
Clear Ahead? Macro data is still showing relatively low risk of an imminent recession.
This Will Not End Well: The restaurant boom, largely heralded as a savior for the beleaguered retail sector has fizzled out:
Customers continue to spend a large share of their food budget in restaurants, but they’re spreading the money across a larger number of establishments, so profits are split into smaller individual pieces. Yet the industry — particularly chain restaurants — continues to expand, a strategy that both masks the problem and makes it likely that more places will falter.
See Also: Food delivery apps have led to the rise of virtual restaurants with much more sustainable cost structures than legacy competitors, a potential source of demand for light industrial and another hit to retail.
Uh Oh: The GOP tax plan could hit the country’s most expensive housing markets hard thanks to a lower mortgage deduction cap and the elimination of state and local tax deductions.
Shrinkage: New Seattle apartments have shrunk almost 30% in size over the last 15 years.
It Was the Best of Times, It Was the Worst of Times: Generally speaking, it’s a great time to be a multi-family or single family landlord in coastal California. Not so much if you’re a tenant.
Welcome to the Futures: The CME announced plans to launch Bitcoin futures last week after dismissing the idea just a month earlier, likely meaning that ETFs are not far behind. See Also: One bitcoin transaction now uses as much energy as your house in a week.
Arbitrage: Meet the 28-year old who founded a company that is making millions buying clearance items from Walmart and re-selling them on Amazon. Somehow I don’t think I’d want this publicized if I were doing it in any sort of scale.
Me IRL: New research has shown that people like dogs more than they like other humans.
No Kidding: Southern California ranked as the nation’s most stressful region for commuters in a recent study.
Chart of the Day
I can’t believe they went there. Dumbest. Chart. Ever.
Giddy Up: A woman was arrested for DUI after riding a horse on a busy road because, Florida (h/t Beth Salamon)
The Fun Police: A court ruled that kids will no longer be able to swim with crocodiles anymore at a German zoo. Children are way too sheltered these days, IMO.
No Justice, No Peace: A man who shot himself in the junk by accident while robbing a hot dog stand was denied bond.
What’s In A Name? P-Diddy changed his name for the 15th time. He will now go by Brother Love. Reminder: when you’re poor it’s called crazy. When you’re rich it’s called eccentric.
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