Taking a chomp out of the mess that is US politics, one issue at a time...

Saturday, March 22, 2008

I'm Sick of Paying $3+ For A Gallon of Gas!

Strictly speaking a recession is defined by economists as two consecutive quarters of declining GDP (or negative growth). So by definition, the United States has yet to enter a recession, technically it has yet to even enter the first quarter of a recession. However, the numbers tell a different story.

The average consumer is experiencing a substantial rise in commidity prices due to inflation. And this inflation has extended beyond luxury commidities to items like gas, food, and medicine. Coupled with stagnated pay (when 85,000 people have lost jobs in 2008 alone, it would be foolish to expect a salary raise), this inflation creates a significant problem for low to middle class consumers. The practical side of this can be seen in the dramatic decrease in spending for the average American. (CNN)

And interestinly enough, this idea of inflation spurring a lack of spending can cause a cyclical pattern, entrapping our economy in borderline recession. A rise in prices in the food and oil industries cripple spending not just in those economic realms, but in luxury goods as well. Because the average American is spending more money on gas, they are spending less money on games, large cars, and traveling. This in turn continues to cripple any possible economic growth as a result of increased consumer spending. Hence the advice that Americans continue to spend even while in a recession.

The housing market is another large part of our current virtual recession. Because the economy is doing so poorly and inflation is on the rise, less families are purchasing homes. This leads to a decrease in value for houses currently on the market because there is less of a demand. And the decrease in value leads to an increase in foreclosures. Basically, home owners go into debt like this; they originally take out a loan for lets say 75% of the total price of the house. However in the current housing market, that original value has dropped by 30%, making that original loan now more than the actual value of the house. So if a person in this situation was forced to sell their home, they would owe the bank money even after the sale.  As Frankly My Dear says, this whole idea of sub-prime loans is a "fall-out" from "the burst of the housing U.S. market" in 2006.  Unfortunately, the dramatic decrease in house values that this fall-out created as perpetuated the problem two years later.

So what does our declining economy have to do with politics? Everything. This "recession" is not affecting the upper class. While their monthly bills may be tallying up to a higher dollar amount, they continue to drive Hummers and large SUVs without having to worry about the affordability of gas prices. Taking this into account, how much sense does the Republican trickle down theory have in our current situation? Tax breaks for the wealthy may spur spending in the upper crust of society, but eight years of this has obviously not led to a trickle down of wealth to the lower classes. If anything, it has only served to widen the gap between the rich and poor and we obviously need to approach this national problem from a different angle. The economy should be a major battleground in the presidential campaigns of both parties and I look forward to hearing some solutions and changes that will aid the average man of achieving the "American Dream".


Nunya. said...

In your post you mentioned that since the economy is doing so poorly less families are purchasing homes. In my research the reason that the economy is tanking is because too many were taking out mortgages for homes they couldn't afford. Thus the subprime mortgage crisis, and the global credit crunch we face today.

Rex345 said...

I by no means refute the fact that the mortgage crisis was a factor in our current predicament. I was merely commenting on the fact that now more than ever people have loans out for homes that are actually worth more than their actual house. This in turn leads to even greater economic panic for those lower to middle class suburban families.

Tall Asian Guy said...

Thanks for yet another great blog. Here are a few friendly comments & corrections.

Statement:"This "recession" is not affecting the upper class."
Comment: well, inflation--which you mention as a major component to the recession--is known to hurt the rich the most through their savings, investments, and assets. Lenders (savings) lose during an inflation because while borrowers may be paying back the nominal value of the pre-recession loan of, say, $1,000, the real value of money the borrowers are paying post-inflation will be $952.38 ($1,000/1.05), assuming a 5% inflation (since average annual inflation is around 3% and we're talkin about recession-time inflation). So basically the borrowers (usually, lower class and middle class people) benefit from an inflation and the rich get shafted. Same concept applies to bonds, stocks, and assets like houses. So yeah, as you said, the rich will still have their physical assets they can hang onto, but inflation itself does hurt the rich the most in magnitude.

Statement:"Tax breaks for the wealthy may spur spending in the upper crust of society, but eight years of this has obviously not led to a trickle down of wealth to the lower classes. If anything, it has only served to widen the gap between the rich and poor"
Comment: Tax breaks for the wealthy don't really spur spending in the upper class. Rather, the point of tax breaks for the wealthy is for the rich to invest--through entrepreneurship, stock investment, corporate debt investment, etc.
And I think it's really hard to say or prove that it is "obvious" that 8 years of tax breaks did not have a trickling down effect because the increase in investment through tax breaks for the rich is usually achieved in the long-term economy, meaning around after 5,6 years and so forth. Consumer goods are as a result cheaper than they would otherwise have been without tax breaks; yes, there is inflation and prices are high, but without those tax breaks, prices of things would have been even higher.
But even with all these annoying lectures ;) I agree with you that the bush tax cuts "served to widen the gap between the rich and poor", and thus serves to disturb the social cohesion of the society.

I just wanted to clarify some stuff. Thanks.

Rex345 said...

Thanks for elucidating some of those ideas. Just a few comments though.

When I said this "recession" is not affecting the upper class I wasn't talking about the literal definition of recession, considering the fact that technically we're not in one. What I meant was that a $1.00/gallon increase in gas is not causing legitimate financial hardship for someone with a yearly salary of $300,000+. However, taking inflation as a whole your argument is definitely valid that it hurts the lenders much more than the borrowers.

And while "obvious" may have been an exaggeration I think the numbers alone (house foreclosures, employment rate, etc.) make it apparent that the lower classes are not experiencing an overall increase in wealth. Regarding the longterm benefits, we've had eight years of the Bush administration's economic policies.