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Economy Growth Catch-22, Part One

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Vicious cycle. You hear that term a lot nowadays, as the economy dominates headlines, serious conversations, blogs and even small talk.

For those of us with careers as executives, these are vexing times and we are painfully aware of the eerie combination of catastrophic events that are pulling down our economy: housing industry and mortgage crisis, Wall Street collapse, auto industry collapse, and spiraling health care costs – to name just a few.

The government’s solution is to launch a huge recovery and stimulus program aimed at shoring up financial institutions, helping homeowners avoid foreclosure, and pumping billions into health-care reform, clean energy, education, and infrastructure. To help pay for all this, President Obama has proposed hiking taxes on families with annual incomes north of $250,000 and on individuals making more than $200,000. There’s a good chance - if you’re reading a blog called “Executive Careers” – that this means you!

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While execs like Ken Lewis and John Thain get all the attention these days - and the public isn’t feeling the least bit sympathetic about their compensation, much less their taxes – the vast majority of execs in this country are making well under seven figures but often fall into Mr. Obama’s definition of “wealthy” by earning more than $200k.

Allow me two quick, over-simplified examples:

I know a single woman who is a senior executive for a major Fortune 500 company in New York. Let’s call her Mary. Mary makes roughly $300,000 in total compensation, which by 2011, will net her less than $150,000 after she pays rapidly rising federal, state and local taxes. She had built up her retirement portfolio to $500,000 in 2007 but most of it was in equities and is now valued at $265,000 – and still falling. Mary owns a Manhattan apartment – a good investment at the time – and her mortgage, taxes and other housing payments eat up close to half her after-tax earnings and most of the rest goes to unreimbursed medical expenses, food, transportation, and other necessaries. Because of the decline in Mary’s retirement accounts, whatever small discretionary dollars survive will go into savings, not “stimulating the economy.” While she was contributing to economic growth through third quarter last year, increasingly now, Mary will not.

“Bob” is a senior manager at a mid-sized financial institution based in San Francisco. He runs the back office for a firm that has been fairly successful despite the turmoil and he is well regarded and unusually secure in his job. Bob was paid about $450,000 in 2008, but despite the firm’s success will be hard pressed to make more than $400k the next couple years. He has three children, two of whom attend private secondary schools, which sets him, back about $55,000 annually. (The President’s plan to improve Education won’t change Bob’s district public school fast enough to dissuade him from the $55k annual commitment.) When the new tax rates and more limited deductions kick in, on top of rising California taxes, Bob will be taking home $200k. The college funds for his three kids have been hammered, along with his retirement accounts, so Bob feels strongly now that every free dollar not required for basic necessities will go into savings. (He’s also listened carefully to the President’s message about irresponsible spending and lack of saving.) Bob has floated the idea of selling the house and moving into something smaller in a more modest neighborhood. Bob has told his wife and kids that he’s cancelling all vacations until further notice, except for one driving trip up to Oregon to go white-water rafting this summer. The family will be camping out – and with a clampdown on spending – Bob will not be contributing to economic growth. To the contrary, he will be putting less money into the economy for the next five years than he did for the last five.

Hey, don’t crucify my math or my economics. I’m not a mathematician, tax expert or economist. But I know how executives roll. I know how people in that bracket think and what they’re up against budget-wise. And while $200,000 certainly seems like a lot of money to a lot of Americans and politicians, everything is relative. And when Bob and Mary cut their spending, revenues drop for retail outlets, airlines, rental car companies, entertainment providers, and a whole host of industries. You think we’re in a vicious cycle now …?

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Erik Sorenson is chief executive officer of Vault.com, Inc. Mr. Sorenson, 52, oversees the strategic direction of the global, New York-based media company. He is widely regarded as an expert on media strategy and industry trends, with experience spanning radio, local and network broadcast television, cable and syndicated TV, and the Internet. From 1998 through 2004, Mr. Sorenson served as president of the MSNBC cable news channel. He has won more than twenty Emmy awards as a writer, producer, and television executive.

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