Ayn Rand worshipers say the Fiscal Cliff will collapse the economy by taxing the wealthy. Others say not.
What is the real answer?
You must understand money and the Bush Tax Cuts before you can answer that question. The following will take place when the Bush Tax Cuts expire:
- Unemployment benefits for 2 million will expire
- Average tax will increase $2,400 per family
- Pink slip for 100,000 government employees and contractors
Expiring unemployment benefits for 2 million will cause about 1 million more vacant dwellings due to increased foreclosures after 90 days.
The tax increase will reduce consumer demand enough to eliminate 5 million jobs and create 2 million more unoccupied dwellings. Unemployment will rise 0.2 million if the tax increase is limited to people earning over $250,000/year.
These effects will begin to have a real effect the economy in April 2013 if no agreement is reached.
What data supports this estimate?
How about the root cause for the Great Recession?
The value of American money and our employment rate is determined mostly by real estate since the Great Depression (US Census Bureau).
- Mortgage Interest
- Income - $381 trillion
- Population - 335 million
- Dwellings - 133 million
First, lets look at interest.
Mortgage interest rates are determined mostly by the Prime, which is what the government charges banks that lend money printed by the US Mint. Mortgages are typically 2% above Prime (Federal Reserve).
American wealth is produced when about 1/3 of our income goes to mortgages that purchase real estate during our working years. That allows us to retire when we grow old. Average income produces more wealth depending on mortgage interest rate.
- Rate . . . Wealth
- 2% . . . . $102K
- 4% . . . . $82K
- 6% . . . . $66K
- 8% . . . . $55K
- 10% . . . $47K
- 12% . . . $40K
High interest destroys the value of the dollar. Interest contributes no economic value beyond providing future earnings to fund consumer demand (creates no jobs directly).
The fiscal cliff has nothing to do with interest, but the prime is almost 0% so this recovery method has been maxed out.
Next, lets looks at income.
Education has now become the dominant factor driving American wealth. Education spending produces more tax revenue than the cost in every category. This began with the following (League of Women Voters).
- 1785 - Federal Public Education
- 1890 - Land Grant Colleges
- 1944 - GI Bill
- 1958 - Federal Student Loan program
- 1965 - Pell Grants
- 1992 - Federal Direct Student Loans
Average income is determined by education attainment, and that determines how much money can be accumulated as wealth (US Census Bureau).
- Education . . . Income
- Under HS . . . .$0.6 Trillion
- . . . . . HS . . .. $3.2 Trillion
- Associate . . . $0.9 Trillion
- Bachelors . . . $1.8 Trillion
- . Masters . . . $0.9 Trillion
- . . Higher . . . $0.5 Trillion
The fiscal cliff will reduce income about $500 billion. This is the equivalent of 6 million workers, so unemployment could increase 4% by April 2013 if congress does not act.
Next, lets look at population.
Population decline collapses real estate prices by creating unoccupied dwellings.
- 311 million citizens, up 2 million from 2006
- . 13 million documented immigrants, down 4 million from 2006
- . 11 million undocumented immigrants, down 3 million from 2006
In 2006, the population was 342 million, which created demand for 133 million dwellings (family size 2.58). There were 128 million dwellings at the time. That created a shortage of 5 million dwellings, and that shortage is why prices increased steadily until 2008.
Approximately 7 million left the US between 2006 and 2010, while 2 million more were born and 4 million additional dwellings were constructed.
335 million Americans now demand 129 million dwellings. The United States now has 132 million dwellings. Construction workers, realtors, and mortgage lenders that created 2 million new dwellings are no longer employable.
That leaves 3 million unoccupied dwellings that cannot be sold because occupants do not exist. Birth rates that normally cause population to increase would compensate, but our population is declining. New occupants will not be created no mater how low prices go (Joint Center for Housing Studies).
Those long-term real estate vacancies are why US wealth declined 40% between 2006 and 2011.
Economic stimulus in the form of 8 million new long-term immigrants is the only way left to compensate for these effects.