Market Report – Summer 2023

Stock and bond markets rallied during the second quarter with large company stocks rising 8.7%, small company stocks up 5.2%, foreign stocks up 2.2%, while bonds declined 0.8%. As the quarter drew to a close, the U.S. economy has continued to hold up despite the Federal Reserve executing its fastest series of interest rate hikes since the 1980s. The interest rate hikes are intended to cool the economy and rein in inflation. 

During the quarter, the U.S. narrowly avoided financial crisis as the House and the Biden administration inked a last-minute deal to raise the U.S. federal debt limit in early June, just days ahead of what would have been a first-ever federal debt default.  Historically, raising the debt limit had been merely an administrative task, but the main objection of House Republicans was to the amount of government spending. True, government spending can exasperate the federal debt problem, though cutting taxes does the same. 

While Republican leaders often deride federal deficits, adding to them has never appeared to be a serious concern of the party as it has routinely supported tax cuts without corresponding spending cuts, most recently in 2017.  Such tax cuts reduce federal revenues thereby increasing the debt, leading to an inevitable collision with the debt ceiling.  

Fiscal policy — government taxing and spending — is among the most common areas of political friction in Washington. The well-known Canadian-American economist and author, Kenneth Galbraith, wrote insightfully on the decisions we make as a society about the division of our nation’s overall economic production between the share allocated for public expenditures (through taxes), and the share allocated for private wealth (after-tax incomes.)

The U.S. uses a progressive tax code, which involves higher tax rates for individuals with higher incomes. Theoretically, progressive taxation helps to reduce income inequality as a larger share of tax receipts are generated from the economic upper classes which the government spends on social programs and initiatives to benefit economic underclasses.  

Over the past 40 years there has been a significant shift in income concentration in the U.S. According to the Pew Research Center, between 1970 and 2018 the income of upper-tier households increased by 64%, middle-tier households increased by 49% and lower-tier households by 43%. So those paying higher tax rates have been making more of the income. At first glance this might appear as a benefit for tax revenues as the expanded earnings of the higher earners are subject to higher tax rates. Though over that same period, the top federal income tax rate has dropped from 70% to 37%, thereby offsetting expected federal revenue gains.  

The U.S. fiscal policy and economy are each complex and involve many variables. However, the overarching question central to our common welfare remains: how shall we divide our economic bounty between public expenditures and private wealth? Should we collect more taxes and use those resources to provide public services, support the vulnerable, fund Medicare and social security, maintain infrastructure, and provide for national defense? Or should we collect fewer taxes, and allocate a greater share to private wealth and personal expenditures?

Galbraith observes, “In a community where public services have failed to keep abreast of private consumption, things are very different. Here, in an atmosphere of private opulence and public squalor, the private goods have full sway.”

There is plenty of evidence of high-end lifestyles in the U.S., and most wouldn’t deny folks the right to spend their money in the ways they desire. Though, as crumbling infrastructure and rising economic and social distress across our country, we must ask ourselves e drumbeat for ever lower taxes has gone too far.  

SCOTT SECREST, AAMS® is an Accredited Asset Management Specialist with more than 25 years of experience in the investment industry. Scott works in portfolio management with an emphasis on renewable energy investing and retirement planning.

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