Government Taxes and Spending Threaten Economy This Year

Earlier this year I wrote about momentum being an important factor keeping the US economy rolling along. In a subsequent post I pointed out how the current growth was very unbalanced and why that was a risk factor for sustaining the weak expansion. Today I continue that theme, but this time looking at some details about personal income growth. The bottom line is that little of the economic success experienced this year comes from sustainable gains in the private sector. Government is responsible for much of the temporary improvement last year and at the center of why there is little hope for a stronger rebound this year. The data supporting this conclusion come from a table posted by the Bureau of Economic Analysis at http://www.bea.gov/newsreleases/national/gdp/2014/gdp4q13_2nd.htm

See the bottom of this post for BEA’s Table 10 where BEA breaks down Personal Income (PI). I deleted a lot of the quarters from the original table. The table below shows you figures for the final quarter of 2013 and the percentage change since the final quarter of 2012.  Table 10 is worrisome with respect to future US growth. While most GDP figures reported are in real or deflated terms, most of what you see in Table 10 is nominal, meaning that each item is measured in current prices. The top line shows that PI in the US was about $14.3 trillion in the fourth quarter (annualized). It increased by about $230 billion during 2013. That amounted to a nominal increase of 1.6%. By historical terms that increase was very weak. 

But the story is much worse:

·        If we deflate PI for inflation what remains was a 0.6% real increase in Personal Income in 2013.

·        During that same time period real GDP increased by 2.5% and Real Personal Consumption expenditures increased by 2.1%.

·        Thus real PI is not a sustaining force when it comes to driving spending in the economy.

·        At the bottom of the table under addenda you see something called Personal Disposable Income in chained dollars (RPDI).  RPDI is a better proxy for the impact of income of spending since it removes inflation and taxes from nominal Personal Income.

·        RPDI declined by 0.2% in the past year.

I come to two conclusions. First, spending in 2013 was not being driven by real income gains. Second, spending has been driven by more debt or depletion of saving. Near the bottom of the chart you see that the rate of Personal Saving declined from 6.6% of GDP down to 4.5% in just one year. Or if you prefer dollar terms, US Personal Savings declined by $259 billion between the end of 2012 and the end of 2013.

Let’s understand better the sources of the problem. In 2013 PI rose by $230 billion. It sounds impressive that Wages and Salaries accounted for $146 billion of the increase. But also included in the gain in PI was $76 billion in government transfer payments to households. These transfers include money the government sends to us in the way of benefits for welfare, pensions, healthcare and so on. It is remarkable that government transfers were responsible for more than half as much as the entire private sector’s wage and salary growth.

So while government was a main contributor in 2013 to the gains in PI, it was also the main detractor. In 2013 households paid money to the government – money for personal income taxes and also their contributions to Social Security system – or what we call payroll taxes. The combined total of income and payroll taxes in 2013 was about $2.8 trillion – or $280 billion more than in 2012. Say what? PI increased by $230 billion in 2013 while household taxes increased by $280 billion. Now you can more easily see why RDPI decreased in 2013. Although the government is propping up income through increased transfer payments of $76 billion, they were taking it away from spending by increasing taxes by $230 billion.

Bottom line. Wages and salaries grew by $146 billion in 2013. The government added to those income gains by increasing transfer payments by $76 billion (as you can see from the table there are other sources of PI but I am intentionally ignoring that detail here).  So the sum of the increases of W&S and Government Transfers in 2013 was about $222 billion. The government wiped out that entire increase with the $230 billion increase in taxes.

And we wonder why households are not spending more. The result of course is that people have to buy things. Without sufficient income growth they borrow or run down their precious savings. This is bad for a lot of reasons. But the main point of this posting is that household spending is the core of the economy representing 70% of all spending. Our policymakers cannot handle financial planning. Our government deficit is such a problem that we must tax our households to death. To make up for that fact, they give some of us transfer payments but that does little to support spending. Worse yet, because of government debt, there is pressure to reduce transfer payments and raise taxes. Under current budget and taxation policy it is hard to see how the engine of the economy will be coming back anytime soon.

Table 10.--Personal Income and Its Disposition
[Billions of dollars; quarters seasonally adjusted at annual rates]

	2013Q4r	%Chg
Personal income1...........................	14303.4	1.6
Compensation of employees................	8968.8	2.1
Wages and salaries.....................	7232.5	2.1
Supplements to wages and salaries......	1736.3	2.1
Proprietors' income with inventory
valuation and capital consumption
adjustments.............................	1356.2	8.7
Farm...................................	112.9	51.5
Nonfarm................................	1243.3	6.0
Rental income of persons with capital
consumption adjustment..................	602.7	8.5
Personal income receipts on assets.......	2030.6	-1.6
Personal interest income...............	1240.9	1.8
Personal dividend income...............	789.7	-6.5
Personal current transfer receipts.......	2463.6	3.2
Less: Contributions for government
social insurance, domestic.............	1118.5	15.6
Less: Personal current taxes...............	1681.9	8.3
Equals: Disposable personal income.........	12621.5	0.8
Less: Personal outlays.....................	12056.3	3.1
Equals: Personal saving....................	565.2	-31.4
Personal saving as a percentage of
disposable personal income..............	4.5
Addenda:
Personal income excluding current
transfer receipts, billions of
chained (2009) dollars2.................	10997.0	0.3
Disposable personal income, billions of
chained (2009) dollars2.................	11723.1	-0.2