William Dunkelberg
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1. From 1980 to 2001, the trade weighted value of the dollar increased 350 percent, making our manufactured goods and agricultural products very expensive for our trading partners. The success of our economy for the past 25 years has made the U.S. an attractive place to invest. To invest here, foreigners must sell their currencies and buy dollars. The result is a strong dollar. Only a few years ago, a euro could be had for 80 cents.
That process has started to reverse. From its high in 2001, the trade weighted dollar has declined about 20 percent, even more compared to the euro which now costs $1,40. Even so, the dollar is still more than double its exchange value in 1980.
Last quarter, our exports grew three times as fast as our imports, a direct result of the weakening of the dollar. This is good news for the economy and jobs. The bad news is that vacations in Europe are now more expensive. And, the price of imports could go up as well, although they haven't risen much so far. And U.S. firms making profits overseas get a nice bump in their profits when converted back to dollars.
The dollar will weaken further, but it's not all bad news. And there isn't much we can do about it anyway. So this summer, vacation in America. 2. The annual ritual of predicting a weak holiday season has started again. The talking heads on TV are warning of a recession which is not yet evident in the data.
The fundamentals paint a different picture. The percentage of the adult population with a job is one of the highest in history. Job creation has been strong and inflation has been modest even if a bit too strong for the fed. Economic growth for the past six months has been the strongest in years, even with a bad residential real estate market which has been weak for a year already. Gas prices are high, but have risen 900% over the past ten years, so a few more dollars won't make that much difference. It is possible that consumers will spend less now that home prices have stopped rising, but income, not balance sheets, is the primary driver of spending.
Yes, it does appear that the economy is slowing, but it grew nearly 4 percent last quarter, so a slowdown is in order. Meantime, the housing problem is winding down and exports are giving the economy a boost. So just relax and make it business as usual and the economy will take care of itself.
3. The top one percent of all income earners paid thirty-six percent of all income taxes paid in 2004, according to the most recent data from the Congressional Budget Office, a trend that has undoubtedly continued.
It appears that this is due to cutting tax rates, not raising them. In 1980, the highest marginal tax rate was 70 percent and the top 1 percent paid 19 percent of all income taxes. In 2004, the highest marginal tax rate was 35 percent, half as high. Yet, the top 1 percent of the earners paid 36 percent of all income taxes collected.
So, lower tax rates have been associated with much larger tax collections. This is not just a U.S. experience, Eastern Europe and Russia have discovered that lower tax rates indeed produce big increases in tax revenues. Low tax rates reduce the incentive to cheat or avoid taxes, so taxpayers are happy to collect capital gains on investments and pay taxes when taxes are not too high.
So, as tax rates have been reduced, tax collections, especially from the rich, have risen. Of course, this means that the share of taxes paid by the lowest 50 percent of taxpayers has fallen, to 4 percent. Keep this in mind when you vote 12 months from now. |