The International Monetary Fund has stated that a healthy and prosperous middle class is the key to a strong economy. Jack and Jill Average are the critical cogs in the global economic wheel. Their spending drives both the domestic internal economy and international trade. The middle classes are also essential to global tourism.
For the Virgin Islands, the lesson is to not just cater for the global wealthy — the one percent — to grow tourism. The growth of VI tourism means catering for western consumers earning between $25,000 and $75,000 per annum: blue-collar whites, small business owners, clerical workers, public workers, midlevel administrators, and middle managers.
In fact, there is evidence that the middle classes are greater spenders than the frugal rich. This derives from the simple fact that there are hundreds of millions more poor and middle class people than wealthy people. There is a multiplier effect when the middle class feel prosperous, and that leads to strong economic growth.
The discerning traveler visiting regional cities such as Las Vegas, Orlando and Bournemouth, and the great capitals such as London and Paris, will swiftly learn if they choose to observe that tourism in these cities is driven by middle-class visitors. The majority of jobs in the hotel, leisure, and tourism market globally are maintained by middle-class spending.
Tourism in the VI remains the biggest employer, but jobs in tourism are not secure. This is due to two factors: the seasonal nature of the industry and the limited access the North American and Northern European traveler has to these islands.
Airport expansion
That is one key reason why this commentator called for extending the runway at the Terrance B. Lettsome International Airport and integrating the USVI tourism economy with VI tourism in years past. Direct access into the territory from the world’s largest cities via airline is crucial to growing VI tourism, with over four resorts lying idle in the territory this August 2016. Then add the conundrum that financial services remains under negative global administrative pressure.
There can be no valid reason why many thousands more US mainland travelers into the USVI and Puerto Rico cannot be further directed into the VI and cleared at VI front desks in these places first. There should be a VI immigration, customs and police presence at Cyril E. King and Luis Munoz Marin airports — and then guests could enjoy a seamless journey on to Road Town, Spanish Town, Virgin Gorda and Jost Van Dyke. This is an option that requires aggressive investigation by a “super committee” set up by the powers that be. It is not impossible to implement, as many in the know have stated.
Australian article
In a June 30, 2015 article titled “Pressures on the middle class,” West Australian Economics Editor Shane Wright wrote on how the IMF was asserting that trickle-down was dead. The IMF was particularly concerned about “the squeeze on the global middle class.” The organisation viewed the middle class as crucial to the world’s economic health since World War II.
But with the middle class being squeezed, inequality is causing real economic damage. In fact, research shows that when the income share of those at the top increases, gross domestic product growth actually declines. On the other hand, an increase in the income share of the bottom is associated with higher GDP growth.
The IMF has further discovered that the poor and middle classes actually matter the most for economic growth, and raising their income share boosts growth. Paradoxically, the IMF pinpointed technology as one of the biggest factors in the decline of the middle class. There is a wealth effect from having great skills. However, if a worker lacks specific skills, such as IT skills, that individual misses out on wage growth or on a job altogether.
Economic rents including incomes paid to company chief executives are accruing to the top end of the income distribution. Another matter of interest is the fact that research released by the Organisation for Economic Cooperation and Development warned that further growth in the financial sector would actually hurt economies. It was economically defective when wage growth in the financial sector was ahead of wage growth in other areas of the economy.
In fact, better economic outcomes are achieved with tax cuts to those with middle and low incomes. The stimulus effects of income tax cuts are largely driven by tax cuts for the bottom 90 percent. On the other hand, the link between job growth and tax changes for upper income earners is weak to negligible. Findings show that business groups back cuts to the top marginal tax rates. On the other hand, these groups rarely dwell on those at the bottom. That is very shortsighted.
Those backing cuts for the one percent argue the need because of international competition. But they are wrong. And there is more on inequality. A look at individual savings shows that the disparity between the haves and have nots is stark. The best paid 20 percent of the US have average savings of $1.3 million each, which includes superannuation; the bottom 20 percent just $6,000. The richest 20 percent possess a third of all income and hold three quarters of total savings.
Tax system
The rich are very smart at using the tax system. High income savers got to that point in the wealth metric by holding assets in tax advantaged trusts and similar vehicles. Inequality is mainly capital driven, not wages driven. These capital type assets grew by 87 percent between 2005 and 2015. This was the fastest asset growing class.
Between 2005 and 2015 money placed in tax advantaged trusts grew better than cash sunk into a business, by as much as 80 percent, and much better than shares, which grew by 63 percent. That is a major reason why the world is experiencing slow economic growth. The miserly wealthy are sucking up the cash the poor and middle classes spend.
Austerity and trickledown destroy consumer confidence in an economy, as both economic cultures lead to fear and uncertainty, especially in the middle class. This is a perverse dynamic that leads to weak spending, further leading to sluggish economic growth. Austerity impacts businesses worldwide for the worse. When Jack Average stops spending, the economic consequences are frequently dire. The fallout may be part of the reason for sluggish growth in Caribbean tourism this August 2016.
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