Tuesday, August 9, 2011

We can fix our economy if we are willing to do so. Here's how.

Anyone with even a basic knowledge of economics and/or who has followed blogs and news reports on the state of our economy over the last few years knows what is wrong with the U.S. economy and what we need to do to fix it.  Let me summarize.

We have two problems with regard to our economy.  First, we have a short-term (three to five year) problem with regard to demand caused by a reluctance and/or inability of businesses and consumers to spend largely due to widespread uncertainty about the future of the economy.  Second, we have a long-term (twenty to thirty year) problem having to do with the increasing costs of health care and entitlements largely due to an aging population.  This problem is made worse by a tax system that fails to generate the level of revenues as a percent of GDP that our government needs if it is to provide services and social systems expected of a modern society.

Both of these problems have logical solutions.

In order to fix our short-term problem of diminished demand, we need a large, short-term two-part investment by the federal government in the economy.  Part one of this investment should consist of income support (unemployment compensation, WPA-type public jobs programs, etc.) and education/training programs for the unemployed, particularly the long-term unemployed.  These programs would be scaled down and phased out as the private job market improves.  Part two of this investment should consist of large numbers of government contracts with private firms for infrastructure improvement (roads, bridges, high-speed rail, etc.)  Priority should be given to projects that will employ the most people in the shortest timeframe.  These short-term investments could be paid for by repealing the Bush tax cuts for those with incomes over $250,000 per year, implementing a 5% surtax on incomes over $1 million, eliminating corporate and individual tax loop holes, and eliminating or reducing the mortgage deduction for high-income households particularly those for a second home, and other tax increases that would not result in a significant drain on demand.  Congress and the President must restore the confidence of American businesses and consumers that  the federal government will take any and all necessary steps to create jobs and restore the economy.  Dramatic action is required and required immediately to remove fear and uncertainty.

In order to fix our long-term problem with the increasing cost of health care and entitlements, we need a three part plan.  Part one of this plan should be a revision of the 2009 health care reform to make Medicare our national health insurance system, available to all Americans regardless of age.  This new, expanded Medicare should be given wide-ranging ability to negotiate prices with drug companies and health care providers and authority to create its own national network of publicly run Medicare health clinics for primary care staffed by salaried medical personnel if the private sector is unable or unwilling to meet demand for primary care at a reasonable cost.  We are never going to make meaningful strides toward reining in health care costs until we get everyone covered under a national health care system.  Part two of this plan should involve steps to fix Social Security by raising or entirely lifting the income cap on the SSA/Medicare payroll tax, gradually raising the retirement age, heavily taxing benefits of high income recipients, and creating a new measure of inflation for Social Security cost-of-living increases that accurately reflects the increased cost of living of low-income recipients over time. Part three of this plan should include overall tax reform designed to simplify the tax code, eliminate loop holes that allow individuals and corporations to escape tax liabilities, maintain a progressive tax system, and peg average tax collections at between 20% and 25% of GDP.

Obviously, many will disagree with the specifics of the above.  But, as I said, anyone who understands the situations will admit that we do have two problems—one short-term and one long-term and that fixing the short-term problem requires federal government investment to create demand while fixing the long-term problem requires efforts to rein in the cost of Medicare, Social Security and other entitlements without destroying them or significantly diminishing their protections.

These are the things we need to do.  Unfortunately, Congress and the President are doing just the opposite.  They seem determined to cut spending in the short-term which will further reduce demand thereby prolonging the economic slump and, very likely, result in a second recession.  Long-term the proposals they are consider either will do little to fix the deficit problem and/or will destroy or significant harm entitlement programs.  Tax reforms being considered in most cases will NOT achieve the level of taxes as a percent of GDP required to support a modern society and/or will make the tax code less progressive.  Worse, the bickering and infighting we have been witnessing in Congress coupled with the President's seeming unwillingness to propose bold action and exercise aggressive leadership increases uncertainty and further erodes the confidence of businesses and consumers that Washington will take any meaningful action to make the situation better.  The Congress and President continue to violate the first rule of governing:  First do no harm.

We are not going to solve our short-term or long-term problems until we take the logical steps to do so.  We know what we need to do.  We just need a Congress and President who are willing to take the necessary steps.  Keep that in mind next year when you go to the polls.  

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