The economic challenge


obama.jpgDM CONFIDENTIAL — President Obama has not quite held office for two months, yet judging by the political wrangling it would seem as though he either has been in office much longer or didn’t win with nearly as much support as he did. In politics as in criminal investigations, money so often plays a key role in people’s motivations.

In the case of Presidential politics, it turns out that, Obama the majority of the wealthiest Americans went against their stereotypical voting habits and voted for Obama even though he explicitly stated his desire to raise their taxes. As the WSJ reports, it will be interesting to see how that support holds-up especially as the ”theoretical tax pain” becomes closer to reality.

The president’s plan includes a high federal income tax for those earning more than $250,000, a lower rate at which they can deduct mortgage interest payments, and paying more in capital gains. This proposed tax pain, set to take effect in 2011, doesn’t include the in office tax decisions which look to have a potentially retroactive impact on certain employees of the already crippled financial community.

Watching the battle unfold on Capitol Hill reminds us a little of the similar struggle that occurs within our industry. A majority of wealthy Americans voted for Obama, theoretically supporting his vision to have them shoulder an increased burden for bailing out the rest of the country, but that doesn’t mean he has their support when it comes time to enact those ideals. Sounds to us not much different from those in the performance marketing community who talk about a cleaner space and doing right by the consumer, but when the rules change limiting how marketers can promote products, i.e., when people start seeing it more difficult to make money, the conversation starts to take a different tone. We all know it is the right thing to do, but the consequences of it are so much more demanding than it seems in theory. Yet, if it seems like those in our industry have it tough, just think about trying to solve the problems of the nation. Look at median income as a starting point.

From 2000 to 2007, an economic period encompassing the recovery from the tech bubble bursting, median income among households headed by those under 65 fell by $1,951 (as reported in Obama’s 2009 budget), the first such time this has happened since World War II. In other words, according to the budget, existing government policies made inequities in income distribution worse. As written in the opening lines of the budget, “There’s nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few.”

Taken together, these points make for a compelling case that America as we know it needs a little fixing, that the system doesn’t hold true to the ideals which have made this country so popular for others in the past hundred years. Given that the data points to too few making too much, or put another way, too many not seeing their earnings grow enough, the question naturally focuses on how to create a more level playing field where all can succeed. Hard to think of anyone who would disagree with equality in success, but forced distribution of wealth might not be the answer. Our suggestion is a simple one; the wealthy must reinvest, much like people with certain real estate gains who when moving must buy or pay fees. That at least offers choice, which even when faced between two unattractive choices makes the decision more palatable.

Compounding the current situation is a second problem. The rich don’t feel so rich anymore and the younger, non-rich, could easily end up feeling more distrust in “the system” along with building resentment towards those with money. No one does well in an environment full of resentment, and it is even more problematic when each side resents the other – the wealthy feel resentment towards having their money go towards programs they don’t believe in and those who have experienced their own wealth degradation who not only resent the “have’s” but who also don’t trust the system in which they live. In other words, both sides feel the same emotion but for different reasons. Most of the haves have lived through challenging economic times before and deep down have some confidence that the system will restore itself.

The same cannot be said for those who are experiencing a lagging economy for the first time. Says Joseph Brusuelas, economist at Moody’s and reported in the Journal, “I worry we’ve lost a generation of investors, which will make it much more difficult to fuel the expansion in the corporate sector necessary to dig our way out of this.” It’s a good point, especially if this is your first experience with the market. Why put your good money to work after bad money? What assurances or reasons have the market given you given for you to trust it? Needless to say, this isn’t an enviable problem to solve.

For those who remember the tech-bubble bursting, it is perhaps hard to believe that the market could do a related nose dive so few years after recovering. This past week, the financial sector celebrated a not so proud milestone, losing more in value than tech stocks did from 2000 to 2002. It unfortunately shows just how ephemeral the gains were, built not out of principle but hype, just as the tech stock valuations were years ago.

The real loss, as mentioned above, though comes from the longer lasting impact the financial collapse has, not so much on the markets, but mentally; it leaves an emotional scar. And, unlike the tech sector where the gains felt too good to be true, those in the financial sector were too complex to really know whether we should doubt them. While many of the loans to people seemed suspect, few would have expected the financial institutions to leverage themselves so completely that our entire system would find itself teetering on the brink of existence. It’s no wonder that we are left with no constituents truly happy.

The rich resent their burden (many have thought about relocating outside the States) and those not technically rich feel just as disenfranchised albeit with fewer options but plenty of blame. The true audacity of hope in this case is not getting stuck in the rhetoric of hope.

Courtesy of the DM Confidential editor

— Express your opinion, comment below.


Please enter your comment!
Please enter your name here